-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AprmTAmvnhcm9kzsSBD3zYvg1IZ1wJH5Zz05sElPUHy5S7o6qJI1/DWL0tWYBQPy pssXhfNVust0VEDDY27hMQ== 0000950144-99-011693.txt : 19991018 0000950144-99-011693.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950144-99-011693 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYCOM INDUSTRIES INC CENTRAL INDEX KEY: 0000067215 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 591277135 STATE OF INCORPORATION: FL FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10613 FILM NUMBER: 99724190 BUSINESS ADDRESS: STREET 1: 4440 PGA BLVD. STE 500 STREET 2: FIRST UNION CENTER CITY: PALM BEACH GARDENS STATE: FL ZIP: 33410 BUSINESS PHONE: 5616277171 MAIL ADDRESS: STREET 1: P O BOX 3524 STREET 2: SUITE 860 CITY: WEST PALM BEACH STATE: FL ZIP: 33402 FORMER COMPANY: FORMER CONFORMED NAME: MOBILE HOME DYNAMICS INC DATE OF NAME CHANGE: 19820302 10-K 1 DYCOM INDUSTRIES, INC FORM 10-K 7/31/1999 1 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 For the fiscal year ended July 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 500, Palm Beach Gardens, Florida 33410 - ----------------------------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (561) 627-7171 ------------- Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, 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 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 28, 1999 was $1,014,674,210. 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 28, 1999 ----- ------------------------------------ Common Stock, $.33 1/3 25,688,461 2 PART I ITEM 1. BUSINESS OVERVIEW Dycom is a leading provider of specialty contracting services, including engineering, construction and maintenance services, to telecommunications providers throughout the United States. The Company's comprehensive range of telecommunications infrastructure services include the engineering, placement and maintenance of aerial, underground, and buried fiber-optic, coaxial and copper cable systems owned by local and long distance communications carriers, competitive local exchange carriers, and cable television multiple system operators. Additionally, the Company provides similar services related to the installation of integrated voice, data, and video local and wide area networks within office buildings and similar structures. The Company also provides underground locating services to various utilities and provides construction and maintenance services to electrical utilities. For the fiscal year ended July 31, 1999, specialty contracting services related to the telecommunications industry, underground utility locating, and electrical construction and maintenance contributed approximately 89.4%, 6.0%, and 4.6%, respectively, to the Company's total contract revenues. Through its 15 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., Tele-Communications, Inc., MediaOne, Inc., Sprint Corporation, U.S. West Communications, Inc., GTE Corporation, Florida Power & Light Company, SBC Communications, Inc., and Time Warner, Inc. During fiscal 1999, approximately 84% of the Company's total contract revenues came from multi-year master service agreements and other long-term agreements with large telecommunications providers and electric utilities. RECENT ACQUISITIONS In July 1997, Dycom acquired Communications Construction Group, Inc. ("CCG"), a Pennsylvania-based provider of specialty contracting services to cable television multiple system operators. In April 1998, the Company acquired Cable Com Inc. ("CCI"), a Georgia-based firm that provides construction services to cable television multiple system operators, and Installation Technicians, Inc. ("ITI"), a Missouri-based firm that provides construction and engineering services to local and long distance telephone companies. Each of these acquisitions was accounted for as a pooling of interests. See Note 3 of the Notes to the Consolidated Financial Statements. These transactions have diversified Dycom's telecommunications customer base to include a broader mix of work for cable television multiple system operators. The acquisition of CCG also created a greater geographic presence for Dycom in the Mid-Atlantic, Midwest and Northeast regions of the United States, while the acquisitions of CCI and ITI have further expanded the Company's operations in the Midwest, Upper Midwest, Rockie Mountain, and West Coast regions of the United States. In February 1999, Dycom acquired Locating, Inc. ("LOC"), a Washington State-based company which provides underground utility locating services used to map and mark utilities for cable television, multiple system operators, telephone companies, and electrical and gas utilities. In March 1999, Dycom acquired Ervin Cable Construction, Inc. ("ECC"), a Kentucky-based company which builds and installs new cable television systems and provides repair and expansion services to cable television systems in several states. In March 1999, Dycom also acquired Apex Digital TV, Inc. ("APX"), a Kentucky-based company which installs direct broadcast satellite systems and provides cable sales and repair services in several Midwestern states. In June 1999, Dycom acquired Triple D Communications, Inc. ("DDD"), a Kentucky-based company which constructs and maintains telecommunications systems under master service agreements. Each of these acquisitions was accounted for under the purchase method of accounting. The acquisition of LOC expanded the Company's underground utility locating service operations in the West Coast region of the United States, while the acquisitions of ECC, APX, and DDD expanded the Company's operations in the Midwest and Southeast region of the United States. Additionally, the acquisition of APX provided an extension into a related new business line. In connection with the acquisitions of CCG, CCI, ITI, LOC, ECC, APX, and DDD, the Company entered into five year employment contracts with certain executive officers of each of the acquired companies. 2 3 SPECIALTY CONTRACTING SERVICES TELECOMMUNICATIONS SERVICES ENGINEERING. Dycom provides outside plant engineers and drafters to local exchange carriers and competitive access providers. The Company designs aerial, underground and buried fiber optic, coaxial and copper cable systems from the telephone central office to the consumer's home or business. Engineering services for local exchange carriers include the design of service area concept boxes, terminals, buried and aerial drops, transmission and central office equipment design and the proper administration of feeder and distribution cable pairs. For competitive access providers, Dycom designs building entrance laterals, fiber rings and conduit systems. The Company obtains rights-of-way and permits in support of engineering activities, and provides construction management and inspection personnel in conjunction with engineering services or on a stand alone basis. For cable television multiple system operators, Dycom performs make-ready studies, strand mapping, field walk out, computer-aided radio frequency design and drafting, and fiber cable routing and design. CONSTRUCTION AND MAINTENANCE. The services provided by the Company include the placing and splicing of cable, excavation of trenches in which to place the cable, placement of related structures such as poles, anchors, conduits, manholes, cabinets and closures, placement of drop lines from the main distribution lines to the customer's home or business, and maintenance and removal of these facilities. In addition, the Company installs and maintains transmission and central office equipment. The Company has the capability 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 impractical. PREMISE WIRING. The Company provides premise wiring services to a variety of large corporations and certain governmental agencies. These services, unlike the engineering, construction and maintenance services provided to telecommunications companies, are predominantly limited to the installation, repair and maintenance of telecommunications infrastructure within improved structures. Projects include the placement and removal of various types of cable within buildings and individual offices. These services generally include the development of communication networks within a company or government agency related primarily to the establishment and maintenance of computer operations, telephone systems, Internet access and communications monitoring systems established for purposes of monitoring environmental controls or security procedures. UNDERGROUND UTILITY LOCATING SERVICES The Company is a provider of underground utility locating services, primarily to telecommunications providers. Under a variety of state laws, excavators are required to locate underground utilities prior to excavating. Utilities located include telephone, cable television, power and gas. Recently, excavators performing telecommunications network upgrades and expansions have generated significant growth in requests for underground utility locating, and the Company expects this trend to continue. These services are offered throughout the United States. ELECTRICAL CONSTRUCTION AND MAINTENANCE SERVICES The Company performs electrical construction and maintenance services for electric companies. This construction is performed primarily as a stand alone service, although at times it is performed in conjunction with services for telecommunications providers. These services include installing and maintaining electrical transmission and distribution lines, setting utility poles and stringing electrical lines, principally above ground. The work performed may involve high voltage splicing and, on occasion, the installation of underground high voltage distribution systems. The Company also repairs and replaces lines that are damaged or destroyed as a result of weather conditions. REVENUES BY CUSTOMER For the fiscal years ended July 31, 1997, 1998 and 1999, the percentages of the Company's total contract revenues earned were derived from specialty contracting 3 4 services related to the telecommunications industry, underground utility locating, and electrical construction and maintenance as set forth below. Year Ended July 31, ---------------------- 1997 1998 1999 ---- ---- ---- Telecommunications 90% 90% 89% Electrical utilities 5 5 5 Various - Utility line locating 5 5 6 --- --- --- 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., GTE Corporation, The Southern New England Telephone Company, and Sprint Corporation. 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., Tele-Communications, Inc., Falcon Cable Media, Time Warner, Inc. and MediaOne, Inc. Dycom also provides its services to long distance carriers such as MCI Worldcom, Sprint Corporation and AT&T Corporation, as well as to competitive access providers. Premise wiring services have been provided to, among others, Lucent Technologies, Inc., Duke University, International Business Machines Corporation, and several state and local governments. The Company also provides construction and maintenance support to Lee County Electrical Cooperative, Florida Power & Light Company, and Florida Power Corporation. While the Company's customer base has broadened in recent years, the Company's customer base remains highly concentrated, with its top five customers in fiscal years 1997, 1998 and 1999 accounting in the aggregate for approximately 63%, 65% and 60%, respectively, of the Company's total revenues. During fiscal 1999, approximately 23% of the Company's total revenues were derived from BellSouth Telecommunications, Inc., 15% from Comcast Cable Communications, Inc. and 10% from Tele-Communications, Inc. 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 generally exclusive requirement contracts, with certain exceptions, including the customer's option to perform the services with its own regularly employed personnel. The agreements are typically three to five years in duration, although the terms typically permit the customer to terminate the agreement upon 90 days prior written notice. Each agreement contemplates hundreds of individual construction and maintenance projects valued generally at less than $10,000 each. Other jobs are bid by the Company on a nonrecurring basis. Although historically master service agreements have been awarded through a competitive bidding process, recent trends have been toward securing or extending such contracts on negotiated terms. The rapid expansion of the telecommunications market and the immediate needs for upgrading existing, as well as constructing new, telecommunications infrastructure, indicate that this trend may continue. Sales and marketing efforts of the Company are the responsibility of the management of Dycom and its operating subsidiaries. BACKLOG The Company views its backlog to be comprised of the uncompleted portion of services to be performed under job-specific contracts and the estimated value of future services that the Company expects to provide under long-term requirements contracts. The Company's backlog at July 31, 1999 and 1998 was $1.078 billion and $467.7 million, respectively. As of July 31, 1999, the Company expected to complete approximately 44.3% of this backlog within the next fiscal year. Due to the nature of its contractual commitments, in many instances the Company's customers are not committed to the specific volumes of services to be purchased under a contract, but rather the Company is committed to perform these services if requested by the customer. However, the customer is obligated to obtain these services from the Company if they are not performed by the customer internally. Many of the contracts are multi-year agreements, and the Company includes in its backlog the full 4 5 amount of services projected to be performed over the term of the contract based on its historical relationships with its customers and experience in procurement of this nature. Historically, the Company has not experienced a material variance between the amount of services it expects to perform under a contract and the amount actually performed for a specified period. There can be no assurance, however, as to the customer's requirements during a particular period or that such estimates at any point in time are accurate. SAFETY AND RISK MANAGEMENT The Company is committed to ensuring that its employees perform their work in the safest possible manner. The Company regularly communicates with its employees to promote safety and to instill safe work habits. Dycom's safety director, a holding company employee, reviews all accidents and claims throughout the operating subsidiaries, examines trends and implements changes in procedures or communications to address any safety issues. The primary claims rising in the Company's business are workers' compensation and other personal injuries, various general liabilities, and vehicle liability (personal injury and property damage). The Company retains the risk, on a per occurrence basis for automobile liability up to $250,000, for general liability up to $250,000, and for workers' compensation, in states where the Company elects to do so, up to $500,000. The Company has an aggregate stop loss coverage for all claims arising in a given year of $12.0 million adjusted for certain exposures in addition to umbrella liability coverage up to a policy limit of $50.0 million. The Company carefully monitors claims and participates actively in claims estimates and adjustments. The estimated costs of self-insured claims, which include estimates for incurred but not reported claims, are accrued as liabilities on the Company's balance sheet. Due to fluctuations 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, electrical contracting industry, and utility locating industry; in which the Company operates are highly competitive, requiring substantial resources and skilled and experienced personnel. The Company competes with other independent contractors in most of the markets in which it operates, several of which are large domestic companies, some of which may have greater financial, technical, and marketing resources than the Company. In addition, there are relatively few, if any, barriers to entry into the markets in which the Company operates and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor to the Company. A significant portion of the Company's revenues are currently derived from master service agreements and price is often an important factor in the award of such agreements. Accordingly, the Company could be outbid by its competitors in an effort to procure such business. There can be no assurance that the Company's competitors will not develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to the Company's services, or that the Company will be able to maintain or enhance its competitive position. The Company may also face competition from the in-house service organizations of its existing or prospective customers, including telecommunications providers, which employ personnel who perform some of the same types of services as those provided by the Company. Although a significant portion of these services is currently outsourced, there can be no assurance that existing or prospective customers of the Company will continue to outsource telecommunications engineering, construction and maintenance services in the future. The Company believes that the principal competitive factors in the market for telecommunications engineering, construction and maintenance services, electrical contracting services, and utility locating services; include technical expertise, reputation, price, quality of service, availability of skilled technical personnel, geographic presence, breadth of service offerings, adherence to industry standards and financial stability. The Company believes that it competes favorably with its competitors on the basis of these factors. EMPLOYEES As of July 31, 1999, the Company employed approximately 5,750 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. 5 6 None of the Company's employees are represented by a labor union, except that CCG is currently a party to a collective bargaining agreement with a local bargaining unit in Philadelphia, Pennsylvania. Approximately twenty of its current employees are subject to the agreement. The Company has never experienced a work stoppage or strike. The Company believes that its employee relations are good. MATERIALS In many cases, the Company's customers supply most or all of the materials required for a particular contract; and the Company provides the personnel, tools, and equipment to perform the installation services. However, with respect to an increasing proportion of its contracts, the Company may supply part or all of the materials required. In these instances, the Company is not dependent upon any one source for the products which it customarily utilizes to complete the job. The Company is not presently experiencing, nor does it anticipate experiencing, any difficulties in procuring an adequate supply of materials. ITEM 2. PROPERTIES The Company leases its executive offices located in Palm Beach Gardens, Florida. The Company's subsidiaries operate from owned or leased administrative offices, district field offices, equipment yards, shop facilities, and temporary storage locations. The Company owns facilities in Phoenix, Arizona; Durham, North Carolina; Knoxville, Tennessee; Sturgis, Kentucky; Pinellas Park, Florida; and West Palm Beach, Florida. The Company also leases, subject to long-term noncancelable leases, facilities in West Chester, Pennsylvania; Kimberling City, Missouri; Lithonia, Georgia; Issaquah, Washington; and Greensboro, North Carolina. The Company also leases and owns other smaller properties as necessary to enable it to effectively perform its obligations under master service agreements and other specific contracts. The Company believes that its facilities are adequate for its current operations. ITEM 3. LEGAL PROCEEDINGS In September 1995, the State of New York commenced a sales and use tax audit of CCG for the years 1989 through 1995. As a result of the audit, certain additional taxes were paid by CCG in fiscal 1996. The State of New York claimed additional amounts due from CCG for the periods through August 31, 1995. In July 1999, CCG settled the tax liabilities mentioned above for $25,000. In the normal course of business, the Company and certain of its subsidiaries have pending and unasserted claims. It is the opinion of the Company's management, based on information available at this time, that these claims will not have a material adverse impact on the Company's consolidated financial condition or results of operations. 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 6 7 low closing sales prices for each quarter within the last two fiscal years as reported on the NYSE. The table has been adjusted to reflect the 3-for-2 stock split effected in the form of a stock dividend and paid in January 1999. Fiscal 1998 Fiscal 1999 ---------------------- ----------------------- High Low High Low --------- ---------- ---------- ---------- First Quarter $ 18 5/16 $ 11 $ 23 13/16 $ 17 7/8 Second Quarter 17 5/8 12 13/16 39 3/4 23 5/16 Third Quarter 19 5/16 15 5/16 47 11/16 31 1/2 Fourth Quarter 24 3/4 16 13/16 56 45 1/16 As of September 28, 1999, there were approximately 650 holders of record of the Company's $.33 1/3 par value common stock. The common stock closed at a high of $46 5/8 and a low of $30 7/8 during the period August 1, 1999 through September 28, 1999. The Company currently intends to retain future earnings, and since 1982, no cash dividends have been paid by the Company. The Board of Directors will determine any future change in dividend policies based on financial conditions, profitability, cash flow, capital requirements, and business outlook, as well as other factors relevant at the time. The Company's credit agreement expressly limits the payment of cash dividends to fifty percent (50%) of each fiscal year's after-tax profits. The credit agreement's covenants regarding the Company's debt-to-net worth, quick and current ratios also restrict the Company's ability to pay dividends. On June 30, 1999 and August 2, 1999, the Company issued 24,896 and 48,873 shares of the Company's common stock for the acquisitions of DDD and Lamberts' Cable Splicing Company, respectively. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected financial data of the Company for the years ended July 31, 1995, 1996, 1997, 1998, and 1999. The Company acquired CCG in July, 1997 and acquired CCI and ITI in April, 1998. These acquisitions have been accounted for as pooling of interests and accordingly, the consolidated financial statements for the periods presented include the accounts of CCG, CCI, and ITI. The table has been adjusted to reflect the 3-for-2 stock split effected in the form of a stock dividend and paid in January 1999. This data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.
1995 1996(1) 1997(1) 1998(1) 1999(5) -------- -------- -------- -------- -------- In Thousands, Except Per Share Amounts Operating Data: Total Revenues $255,045 $247,295 $312,419 $371,363 $473,453 Income before income taxes 15,153 14,055 23,770 36,081 60,612 Net income 11,352 9,922 15,814 23,036 36,450 Per Common Share (2): Basic net income $ 0.61 $ 0.53 $ 0.84 $ 1.09 $ 1.58 Diluted net income $ 0.61 $ 0.52 $ 0.83 $ 1.07 $ 1.55 Pro Forma Earnings (3): Income before income taxes $ 15,153 $ 14,055 $ 23,770 $ 36,081 Pro forma provision for income taxes 6,343 4,860 9,841 14,420 Pro forma net income 8,810 9,195 13,929 21,661 Pro Forma Per Common Share (2): Basic pro forma net income $ 0.47 $ 0.49 $ 0.74 $ 1.02 Diluted pro forma net income $ 0.47 $ 0.48 $ 0.73 $ 1.01 Balance Sheet Data (at end of period): Total assets $ 81,759 $ 82,483 $112,512 $166,318 $384,550 Long-term obligations (4) $ 29,002 $ 23,778 $ 20,651 $ 21,561 $ 18,653 Stockholders' equity $ 19,871 $ 27,785 $ 42,427 $ 98,379 $287,291 Cash dividends per share -- -- -- -- --
7 8 (1) The results of operations for fiscal 1996, 1997, 1998 include a $1.1 million, $0.3 million and $0.4 million reduction in the deferred tax valuation allowance, respectively. (2) Basic and diluted earnings per common share have replaced primary and fully diluted earnings per common share, respectively, in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See Note 2 of the Notes to the Consolidated Financial Statements. (3) The provision for income taxes has been adjusted to reflect a pro forma tax provision for pooled companies which were previously "S Corporations." See Note 1 of the Notes to the Consolidated Financial Statements. (4) For fiscal 1998, certain customer advances have been reclassified as current liabilities in order to present comparable periods. (5) Amounts include the results and balances of LOC, ECC, APX, and DDD from their respective acquisition dates until July 31, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Dycom derives most of its contract revenues earned from specialty contracting services, including engineering, construction and maintenance services, to the telecommunications industry. Additionally, the Company provides similar services related to the installation of integrated voice, data and video, local and wide area networks, within office buildings and similar structures. 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 throughout the United States. The Company expects that future growth in contract revenues earned will be generated from (i) increasing the volume of services to existing customers; (ii) expanding the scope of services to existing customers; (iii) broadening its customer base; and (iv) geographically expanding its service area. Growth is expected to result from internal sources as well as through acquisitions. Other revenues include interest income and gain on sale of surplus equipment. In July 1997, Dycom completed the acquisition of CCG and in April 1998, Dycom completed the acquisitions of CCI and ITI. See Note 3 of the Notes to the Consolidated Financial Statements. Each of these transactions was accounted for as a pooling of interests. Dycom's financial statements and all financial and operating data derived therefrom have been combined for all periods presented herein to include the financial condition and results of operations of CCG, CCI and ITI. During fiscal 1999, the Company acquired LOC, ECC, APX, and DDD. Each of these transactions was accounted for using the purchase method of accounting. The Company's results include the results of LOC, ECC, APX, and DDD from their respective acquisition dates until July 31, 1999. Dycom provides services to its customers pursuant to multi-year master service agreements and long- and short-term contracts for particular projects. Under master service agreements, Dycom agrees to provide, for a period of several years, all specified service requirements to its customer within a given geographical territory. Under the terms of such agreements, the customer can typically terminate the agreement with 90 days prior written notice. The customer, with certain exceptions, agrees to purchase such services from Dycom. Materials to be used in these jobs are generally provided by the customer. Master service agreements generally provide that Dycom will furnish a specified unit of service for a specified unit price (e.g., fiber optic cable will be installed underground for a specified rate of dollars per foot). The Company recognizes revenue under master service agreements as the related work is performed. Dycom is currently party to approximately 50 master service agreements, which may be either bid or negotiated. Master service agreements are typically bid initially and may be extended by negotiation. The remainder of Dycom's services are provided pursuant to contracts for particular jobs. Long-term contracts relating to specific projects have terms in excess of one year from the contract date. Short-term contracts are generally from three to four months in duration from the contract date, depending upon the size of the project. Contract revenues from multi-year master service agreements and other long-term agreements represented 84% and 90% of total contract revenues in fiscal 1999 and 1998, respectively, of which contract revenues from multi-year master service agreements represented 48% and 49% of total contract revenues, respectively. 8 9 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 retains the risk for automobile and general liability, workers' compensation, and employee group health claims; subject to certain limits; a change in experience or actuarial assumptions that did not affect the rate of claims payments could nonetheless materially affect results of operations in a particular period. General and administrative costs include all 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. 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. 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, --------------------------- 1997 1998 1999 ----- ----- ----- Revenues: Contract revenues earned 100.0% 100.0% 100.0% Other, net 0.4 0.7 0.7 ----- ----- ----- Total revenues 100.4 100.7 100.7 ----- ----- ----- Expenses: Cost of earned revenue, excluding depreciation 79.0 77.3 74.0 General and administrative 9.9 10.0 9.5 Depreciation and amortization 3.8 3.6 4.3 ----- ----- ----- Total expenses 92.7 90.9 87.8 ----- ----- ----- Income before income taxes 7.7 9.8 12.9 Provision for income taxes 2.6 3.6 5.1 ----- ----- ----- Net income 5.1 6.2 7.8% ===== Pro forma adjustment to income tax provision 0.6 0.3 ----- ----- Pro forma net income 4.5% 5.9% ===== =====
9 10 YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998 REVENUES. Contract revenues increased $101.4 million, or 27.5%, to $470.1 million in fiscal 1999 from $368.7 million in fiscal 1998. Of this increase, $89.5 million was attributable to specialty contracting services provided to telecommunications companies, $1.4 million was attributable to construction and maintenance services provided to electrical utilities and $10.5 million was attributable to underground utility locating services provided to various utilities, reflecting an increased overall market demand for the Company's services. During fiscal 1999, the Company recognized $420.1 million of contract revenues from telecommunications services as compared to $330.6 million in fiscal 1998. The increase in the Company's telecommunications service revenues reflects an increased volume of projects and activity associated with cable television services, and an increase in services performed in the design and installation of broadband networks, telephone engineering services, telephony splicing services, premise wiring services, and revenues from services performed under master service agreements. The Company recognized contract revenues of $21.6 million from electric construction and maintenance services in fiscal 1999 as compared to $20.2 million in fiscal 1998, an increase of 6.9%. The Company recognized contract revenues of $28.3 million from underground utility locating services in fiscal 1999 as compared to $17.9 million in fiscal 1998, an increase of 58.7%. The companies acquired in fiscal 1999 contributed $30.5 million of the increase in contract revenues. Contract revenues from multi-year master service agreements and other long-term agreements represented 84% of total contract revenues in fiscal 1999 as compared to 90% in fiscal 1998, of which contract revenues from multi-year master service agreements represented 48% of total contract revenues in fiscal 1999 as compared to 49% in fiscal 1998. COST OF EARNED REVENUES. Cost of earned revenues increased $62.7 million to $347.7 million in fiscal 1999 from $285.0 million in fiscal 1998, but decreased as a percentage of contract revenues to 74.0% from 77.3%. Direct labor, subcontractor costs, equipment costs, and insurance costs declined slightly as a percentage of contract revenues as a result of improved productivity, improved safety, and the utilization of more modern equipment. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $8.3 million to $45.0 million in fiscal 1999 from $36.7 million in fiscal 1998, but decreased as a percentage of contract revenues to 9.5% in fiscal 1999 from 10.0% in fiscal 1998. The increase in general and administrative expenses was primarily attributable to a $5.9 million increase in administrative salaries, bonuses, employee benefits and payroll taxes. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $6.6 million to $20.1 million in fiscal 1999 from $13.5 million in fiscal 1998, and increased as a percentage of contract revenues to 4.3% from 3.6%. The increase in amount reflects the depreciation of additional capital expenditures incurred in the ordinary course of business and the amortization of goodwill related to acquisitions made in fiscal 1999. INCOME TAXES. The provision for income taxes was $24.2 million in fiscal 1999 as compared to $13.0 million in fiscal 1998. The Company's effective tax rate was 39.9% in fiscal 1999 as compared to 36.2% in fiscal 1998. 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, and other non-deductible expenses for tax purposes. As of the date of the merger, CCI and ITI recognized a combined deferred tax liability of $0.6 million which was included in the results of operations for the quarter ended April 30, 1998. As of the date of acquisition, APX recognized a deferred tax liability of $0.1 million. The provision for income taxes was $24.2 million in fiscal 1999 as compared to the pro forma provision for income taxes of $14.4 million in fiscal 1998. The effective tax rate was 39.9% in fiscal 1999 as compared to the pro forma effective tax rate of 40.0% in fiscal 1998. NET INCOME. Net income increased to $36.4 million in fiscal 1999 from $23.0 million in fiscal 1998, a 58.2% increase. Net income increased to $36.4 million in fiscal 1999 from proforma net income of $21.7 million in fiscal 1998, a 68.3% increase. YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997 REVENUES. Contract revenues increased $57.5 million, or 18.5%, to $368.7 million in fiscal 1998 from $311.2 million in fiscal 1997. Of this increase, $51.8 million was attributable to specialty contracting services provided to telecommunications companies, $2.8 million was attributable to construction and maintenance services provided 10 11 to electrical utilities and $2.9 million was attributable to underground utility locating services provided to various utilities, reflecting an increased overall market demand for the Company's services. During fiscal 1998, the Company recognized $330.6 million of contract revenues from telecommunications services as compared to $278.8 million in fiscal 1997. The increase in the Company's telecommunications service revenues reflects an increased volume of projects and activity associated with cable television services, and an increase in services performed in the design and installation of broadband networks, telephone engineering services, telephony splicing services, premise wiring services, and revenues from services performed under master service agreements. The Company recognized contract revenues of $20.2 million from electric construction and maintenance services in fiscal 1998 as compared to $17.4 million in fiscal 1997, an increase of 16.1%. The Company recognized contract revenues of $17.9 million from underground utility locating services in fiscal 1998 as compared to $15.0 million in fiscal 1997, an increase of 19.3%. Contract revenues from multi-year master service agreements and other long-term agreements represented 90% of total contract revenues in fiscal 1998 as compared to 84% in fiscal 1997, of which contract revenues from master service agreements represented 49% of total contract revenues in fiscal 1998 as compared to 51% in fiscal 1997. COST OF EARNED REVENUES. Cost of earned revenues increased $39.0 million to $285.0 million in fiscal 1998 from $246.0 million in fiscal 1997, but decreased as a percentage of contract revenues to 77.3% from 79.0%. Direct labor, equipment and materials costs declined slightly as a percentage of contract revenues as a result of improved productivity in the labor force and the utilization of more modern equipment. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $5.9 million to $36.7 million in fiscal 1998 from $30.8 million in fiscal 1997, and increased slightly as a percentage of contract revenues to 10.0% from 9.9% of contract revenues. The increase in general and administrative expenses was primarily attributable to a $2.4 million increase in administrative salaries, bonuses, employee benefits and payroll taxes and an increase of $1.2 million in the provision for doubtful accounts. Acquisition and merger related expenses charged to general and administrative expenses were $0.6 million and $0.4 million in fiscal 1998 and 1997, respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $1.7 million to $13.5 million in fiscal 1998 from $11.8 million in fiscal 1997, but decreased as a percentage of contract revenues to 3.6% from 3.8%. The increase in amount reflects the depreciation of additional capital expenditures incurred in the ordinary course of business. INCOME TAXES. The provision for income taxes was $13.0 million in fiscal 1998 as compared to $8.0 million in fiscal 1997. The provision for income taxes for 1998 reflects a reduction of $0.4 million in a valuation allowance relative to certain deferred tax assets. The Company's effective tax rate was 36.2% in fiscal 1998 as compared to 33.5% in fiscal 1997. The effective tax rate differs from the statutory tax rate due to state income taxes, income of Subchapter S Corporations (CCI and ITI) being taxed to their stockholders, the amortization of intangible assets that do not provide a tax benefit, other non-deductible expenses for tax purposes and the reduction in a valuation allowance relative to certain deferred tax assets. As of the date of the merger, CCI and ITI recognized a combined deferred tax liability of $0.6 million which was included in the results of operations for the quarter ended April 30, 1998. The pro forma provision for income taxes was $14.4 million in fiscal 1998 as compared to $9.8 million in fiscal 1997. The pro forma effective tax rate was 40.0% in fiscal 1998 and 41.4% in fiscal 1997. NET INCOME. Net income increased to $23.0 million in fiscal 1998 from $15.8 million in fiscal 1997, a 45.7% increase. Pro forma net income increased to $21.7 million in fiscal 1998 from $13.9 million in fiscal 1997, a 55.5% increase. 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, by bank borrowings, and internal cash flows. To the extent that the Company seeks to grow by acquisitions that involve consideration other than Company 11 12 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 historically have been from operating activities, equity offerings, bank borrowings and from proceeds arising from the sale of idle and surplus equipment and real property. For fiscal 1999, net cash provided by operating activities was $37.3 million compared to $30.6 million for fiscal 1998 and $12.8 million for fiscal 1997. The increase in fiscal 1999 was due primarily to an increase in net income. The increase was also attributable to funds advanced by a customer for materials and start-up expenses related to a long-term construction contract. The total amounts advanced at July 31, 1999 were $24.6 million, of which $15.2 million was advanced during fiscal 1999. For fiscal 1999, net cash used in investing activities for capital expenditures was $49.5 million, compared to $21.5 million in 1998 and $16.1 million in 1997. For 1999, 1998 and 1997, these capital expenditures were for the normal replacement of equipment and the buyout of certain operating leases on terms favorable to the Company. In August 1998, the Company purchased a 13.0% equity interest in Witten Technologies, Inc. ("Witten") for $3.0 million. Witten has developed, and is the owner of, various proprietary technologies and materials relating to ground-penetrating radar and the use of other electromagnetic frequencies. In addition to the equity received, the Company has acquired an exclusive license to market certain technologies within the United States and Canada. The Company's investment in Witten is being accounted for using the equity method of accounting. On February 3, 1999, the Company acquired all of the outstanding common stock of Locating for $10.0 million and various transaction costs. On March 31, 1999, the Company purchased all of the outstanding shares of common stock of Ervin for $21.8 million in cash and 258,066 shares of Dycom's common stock for an aggregate purchase price of $32.5 million before various transaction costs. On April 1, 1999, the Company issued 516,128 of Dycom's common stock with a total value of $21.4 million to the shareholders of Apex in exchange for all of the outstanding common stock of Apex. On June 30, 1999, the Company purchased all of the outstanding shares of common stock of Triple D Communications, Inc. for $1.7 million in cash and 24,896 shares of Dycom's common stock for an aggregate purchase price of $2.9 million. As part of these transactions, the Company acquired cash balances of $2.9 million. On April 27, 1999, the Company signed an amendment to its bank credit agreement increasing the total facility to $175.3 million and extending the facility's maturity to April 2002. The amended bank credit agreement provides for (i) a $17.5 million standby letter of credit facility, (ii) a $50.0 million revolving working capital facility, (iii) a $12.8 million five-year term loan, and (iv) a $95.0 million equipment acquisition and small business purchase facility. The Company is required to pay an annual non-utilization fee equal to 0.15% of the unused portion of the revolving working capital and the equipment acquisition and small business purchase facilities. In addition, the Company pays annual agent and facility commitment fees of $15,000 and $135,000, respectively. The Company had outstanding standby letters of credit issued to the Company's insurance administrators as part of its self-insurance program of $13.4 million at July 31, 1999. The revolving working capital facility bears interest, at the option of the Company, at the bank's prime interest rate minus 1.125% or LIBOR plus 1.25%. As of July 31, 1999, there was no outstanding balance on this facility resulting in an available borrowing capacity of $50.0 million. The outstanding loans under the revolving equipment acquisition and small business purchase facility bear interest, at the option of the Company, at the bank's prime interest rate minus 0.75% or LIBOR plus 1.50%. The advances under the revolving equipment acquisition and small business purchase facility are converted to term loans with maturities not to exceed 48 months. The outstanding principal on the equipment term loans is payable in quarterly installments through February 2001. There were no amounts outstanding on the revolving equipment acquisition and small business purchase facility at July 31, 1999, resulting in an available borrowing capacity of $95.0 million. 12 13 The outstanding principal under the term loan bears interest at the bank's prime interest rate minus 0.50% (7.25% at July 31, 1999). Principal and interest is payable in semiannual installments through April 2003. The amount outstanding on the term loan was $11.8 million at July 31, 1999. The amended bank credit agreement contains restrictions which, among other things, requires 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 were paid during the year ended July 31, 1999. At July 31, 1999, the Company was in compliance with all financial covenants and conditions. All obligations under the amended credit agreement are unconditionally guaranteed by the Company's subsidiaries and secured by security interests in certain property and assets of the Company and its subsidiaries. The Company's recently acquired subsidiaries, CCI and ITI, had credit facilities entered into prior to the acquisition by Dycom. CCI had a $5.2 million revolving credit facility for funding working capital and a $2.0 million term note incurred to purchase equipment. The interest rate on the revolving credit facility was at the bank's prime interest rate and the interest rate on the term loan was at 8.75%. ITI had a $2.0 million revolving credit facility for funding working capital and a $0.5 million multiple advance term facility for equipment acquisitions. The interest rate on the revolving credit facility and the multiple advance term facility were at the bank's prime interest rate. The obligations were secured by substantially all of CCI's and ITI's assets. The facilities contained restrictions, which among other things, required the maintenance of certain financial ratios and covenants and restricted the payment of cash dividends. During the fourth quarter of fiscal 1998, the Company paid off the outstanding balances of $8.1 million under these facilities with existing cash balances and subsequently terminated such facilities. The Company's recently acquired subsidiaries, ECC and APX, had credit facilities entered into prior to the acquisition by Dycom. ECC's revolving credit facility had an $8.0 million line for funding working capital. The interest rate on the revolving credit facility was at the bank's prime interest rate plus 1.0 percent. APX's revolving credit facility had a $3.5 million line for funding working capital. The interest rate on the revolving credit facility was at the bank's prime interest rate plus 1.5 percent. The obligations were secured by substantially all of ECC's and APX's assets. The facilities contained restrictions, which among other things, required the maintenance of certain financial ratios and covenants and restricted the payment of cash dividends. During the fourth quarter of fiscal 1999, the Company paid off the outstanding balances of $1.9 million under these facilities with existing cash balances and subsequently terminated such facilities. The Company concluded the public offering of 4,050,000 shares of its common stock on November 4, 1997. The Company offered 2,360,067 shares and selling shareholders offered 1,689,933 shares at an offering price of $13.33 per share. The Company received $29,736,844 on November 10, 1997 which was net of an underwriting discount of $0.73 per share. Additionally, the underwriters exercised their option to purchase 607,500 shares to cover over-allotments. The Company received $7,654,500 on November 25, 1997 as payment for the over-allotments. The total offering proceeds, net of offering expenses of $432,726, are included in stockholders equity on the July 31, 1998 balance sheet. On November 28, 1997, the Company repaid the outstanding balance of its revolving credit facility and will use the balance of the proceeds to fund the Company's growth strategy, including acquisitions, working capital and capital expenditures and for other general corporate purposes. In April 1999, the Company filed, at its cost, a registration statement for an offering of 2.5 million shares and 200,000 shares of common stock, to be sold by the Company and certain selling stockholders, respectively. The closing of the offering, at $48.50 per share, was consummated on May 19, 1999. On that date, the Company received $115.3 million in proceeds from the offering which was net of an underwriting discount of $2.40 per share. The Company incurred legal fees and other expenses for this transaction of approximately $510,000. In addition to the shares sold above, the Company and the selling stockholders granted the underwriters an option to purchase within 30 days after the offering an additional 375,000 and 30,000 shares, respectively, to cover over-allotments. 13 14 On June 4, 1999, the Company repaid the outstanding balance of its revolving credit facility of $33.7 million with proceeds of the May 1999 common stock offering. The remaining proceeds will be used to fund the Company's growth strategy, including acquisitions, working capital and capital expenditures, and for other general corporate purposes. On June 11, 1999, the underwriters exercised a portion of their option to purchase additional shares to cover over-allotments. The underwriters purchased 37,036 shares from the Company and 2,962 shares from certain selling stockholders. The Company received approximately $1.7 million as payment for the over-allotment. The Company foresees its capital resources together with existing cash balances to be sufficient to meet its financial obligations, including the scheduled debt payments under the amended credit agreement and operating lease commitments, and to support the Company's normal replacement of equipment at its current level of business for at least the next twelve months. The Company's future operating results and cash flows may be affected by a number of factors including the Company's success in bidding on future contracts and the Company's continued ability to effectively manage controllable costs. SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K, including the Notes to the Consolidated Financial Statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. The words "believe," "expect," "anticipate," "intends," "forecast," " project," and similar expressions identify forward-looking statements. Such statements may include, but may not be limited to, the anticipated outcome of contingent events, including litigation, projections of revenues, income or loss, capital expenditures, plans for future operations, growth and acquisitions, financial needs or plans and the availability of financing, and plans relating to services of the Company, as well as assumptions relating to the foregoing. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the 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. The Company adopted SFAS No. 131 in fiscal 1999. See Note 18 of the Notes to the Consolidated Financial Statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes standards for the accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 by one year to periods beginning after June 15, 2000. Management is currently evaluating the requirements and related disclosures of SFAS No. 133. YEAR 2000 COMPLIANCE The Company has reviewed its computer systems to identify those areas that could be adversely affected by Year 2000 software failures. The Company has verified or converted approximately 95% of its mission critical applications and 95% of support hardware and software to be Year 2000 compliant. The Company expects to complete the verification and conversion of its mission critical applications and support hardware and software by December 1999. The Company has incurred approximately $1.5 million through July 31, 1999 and 14 15 approximately $0.4 million will be incurred in the remainder of calendar year 1999 to complete the information system conversions, including the implementation and conversion cost of our recently acquired subsidiaries. Although the Company expects that any additional expenditures that may be required in connection with the Year 2000 conversions will not be material, there can be no assurance in this regard. The Company believes that certain of its customers, particularly local exchange and long distance carriers and cable multiple system operators, may be impacted by the Year 2000 problem, which could in turn affect the Company. The Company also believes that certain of its suppliers may be impacted by the Year 2000 problem. Currently, the Company cannot predict the effect of the Year 2000 problem on these customers and suppliers and there can be no assurance it will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. However, the Company believes that its capital resources together with existing cash balances are sufficient to meet its financial obligations and to support the Company's normal replacement of equipment at its current level of business should customers' payments be delayed by Year 2000 problems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at July 31, 1998. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. At July 31, 1999, the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially affect the Company's financial position, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Registrant's consolidated financial statements and related notes and independent auditors' report follow on subsequent pages of this report. 15 16 Dycom Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS JULY 31, 1998 and 1999
1998 1999 ------------ ------------ ASSETS CURRENT ASSETS: Cash and equivalents $ 35,927,307 $ 97,955,007 Accounts receivable, net 62,142,808 95,284,031 Costs and estimated earnings in excess of billings 14,382,620 32,878,667 Deferred tax assets, net 2,726,348 3,503,379 Inventories 2,066,797 10,222,964 Other current assets 947,402 1,285,297 ------------ ------------ Total current assets 118,193,282 241,129,345 ------------ ------------ PROPERTY AND EQUIPMENT, net 42,865,197 79,410,882 ------------ ------------ OTHER ASSETS: Intangible assets, net 4,529,270 59,286,827 Other 730,342 4,722,672 ------------ ------------ Total other assets 5,259,612 64,009,499 ------------ ------------ TOTAL $166,318,091 $384,549,726 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 12,182,699 $ 19,886,314 Notes payable 4,727,782 2,438,860 Billings in excess of costs and estimated earnings 437,874 Accrued self-insurance claims 2,440,303 3,728,947 Income taxes payable 2,812,144 4,375,635 Customer advances 9,396,507 24,576,700 Other accrued liabilities 14,819,181 23,161,468 ------------ ------------ Total current liabilities 46,378,616 78,605,798 NOTES PAYABLE 13,407,990 9,982,121 ACCRUED SELF-INSURED CLAIMS 7,454,849 4,823,396 OTHER LIABILITIES 697,688 3,847,832 ------------ ------------ Total liabilities 67,939,143 97,259,147 ------------ ------------ COMMITMENTS AND CONTINGENCIES, Note 17 STOCKHOLDERS' EQUITY: Preferred stock, par value $1.00 per share: 1,000,000 shares authorized; no shares issued and outstanding Common stock, par value $.33 1/3 per share: 50,000,000 shares authorized; 22,084,097 and 25,627,990 issued and outstanding, respectively 7,361,366 8,542,663 Additional paid-in capital 60,042,463 211,322,822 Retained earnings 30,975,119 67,425,094 ------------ ------------ Total stockholders' equity 98,378,948 287,290,579 ------------ ------------ TOTAL $166,318,091 $384,549,726 ============ ============
See notes to consolidated financial statements. 16 17 Dycom Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
1997 1998 1999 ------------- ------------- ------------ REVENUES: Contract revenues earned $ 311,238,108 $ 368,713,563 $470,136,925 Other, net 1,181,332 2,649,229 3,315,608 ------------- ------------- ------------ Total 312,419,440 371,362,792 473,452,533 ------------- ------------- ------------ EXPENSES: Cost of earned revenues excluding depreciation 246,025,594 285,038,220 347,719,784 General and administrative 30,808,780 36,746,614 44,977,236 Depreciation and amortization 11,814,577 13,496,694 20,143,191 ------------- ------------- ------------ Total 288,648,951 335,281,528 412,840,211 ------------- ------------- ------------ INCOME BEFORE INCOME TAXES 23,770,489 36,081,264 60,612,322 ------------- ------------- ------------ PROVISION (BENEFIT) FOR INCOME TAXES: Current 8,153,092 13,179,024 23,033,077 Deferred (196,241) (133,380) 1,129,270 ------------- ------------- ------------ Total 7,956,851 13,045,644 24,162,347 ------------- ------------- ------------ NET INCOME $ 15,813,638 $ 23,035,620 $ 36,449,975 ============= ============= ============ EARNINGS PER COMMON SHARE: Basic $ 0.84 $ 1.09 $ 1.58 ============= ============= ============ Diluted $ 0.83 $ 1.07 $ 1.55 ============= ============= ============ PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE DATA: Income before income taxes $ 23,770,489 $ 36,081,264 Pro forma provision for income taxes 9,841,081 14,419,904 ------------- ------------- PRO FORMA NET INCOME $ 13,929,408 $ 21,661,360 ============= ============= PRO FORMA EARNINGS PER COMMON SHARE: Basic $ 0.74 $ 1.02 ============= ============= Diluted $ 0.73 $ 1.01 ============= ============= SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE AND PRO FORMA EARNINGS PER COMMON SHARE: Basic 18,863,987 21,172,025 23,013,730 ============= ============= ============ Diluted 19,123,034 21,482,634 23,456,691 ============= ============= ============
See notes to consolidated financial statements. 17 18 Dycom Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
Common Stock Additional Retained ---------------------------- paid-in earnings Shares Amount capital (deficit) ----------- ----------- ------------- ------------ Balances at July 31, 1996 18,682,101 $ 6,227,367 $ 22,756,008 $ (1,198,541) Stock options exercised 319,715 106,572 670,775 Income tax benefit from stock options exercised 132,569 Pooled companies distributions (2,523,282) Adjustment for change in fiscal year of pooled company (CCG) 441,686 Net income 15,813,638 ----------- ----------- ------------- ------------ Balances at July 31, 1997 19,001,816 6,333,939 23,559,352 12,533,501 Stock options exercised 114,714 38,238 319,199 Stock offering proceeds 2,967,567 989,189 35,969,429 Income tax benefit from stock options exercised 194,483 Pooled companies distributions (4,594,002) Net income 23,035,620 ----------- ----------- ------------- ------------ Balances at July 31, 1998 22,084,097 7,361,366 60,042,463 30,975,119 Stock options exercised 207,902 69,301 1,529,654 Stock offering proceeds 2,537,036 845,678 115,600,789 Income tax benefit from stock options exercised 1,115,554 Stock issued for acquisitions 799,090 266,363 33,039,116 Fractional shares retired in 3-for-2 stock split (135) (45) (4,754) Net income 36,449,975 ----------- ----------- ------------- ------------ Balances at July 31, 1999 25,627,990 $ 8,542,663 $ 211,322,822 $ 67,425,094 =========== =========== ============= ============
See notes to consolidated financial statements. 18 19 Dycom Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
1997 1998 1999 ------------ ------------- ------------- Increase (Decrease) in Cash and Equivalents from: OPERATING ACTIVITIES: Net income $ 15,813,638 $ 23,035,620 $ 36,449,975 Adjustments to reconcile net cash provided by operating activities: Depreciation and amortization 11,814,577 13,496,694 20,143,191 Gain on disposal of assets (601,645) (375,772) (506,017) Deferred income taxes (196,241) (133,380) 1,129,270 Changes in assets and liabilities: Accounts receivable, net (18,537,042) (12,616,130) (23,228,030) Unbilled revenues, net (2,873,149) (3,454,939) (15,714,778) Other current assets (773,980) (1,047,609) (7,755,075) Other assets (135,882) (870,532) Accounts payable 6,080,835 (2,541,641) 6,038,748 Customer advances 9,396,507 15,180,193 Accrued self-insured claims and other liabilities 1,632,232 3,058,662 3,865,722 Accrued income taxes 626,228 1,777,979 2,533,809 ------------ ------------- ------------- Net cash inflow from operating activities 12,849,571 30,595,991 37,266,476 ------------ ------------- ------------- INVESTING ACTIVITIES: Capital expenditures (16,086,823) (21,492,673) (49,488,784) Proceeds from sale of assets 2,289,348 1,997,854 1,521,619 Acquisition expenditures, net of cash acquired (31,818,880) Equity investment (3,000,000) ------------ ------------- ------------- Net cash outflow from investing activities (13,797,475) (19,494,819) (82,786,045) ------------ ------------- ------------- FINANCING ACTIVITIES: Borrowings on notes payable and bank lines-of-credit 22,976,488 18,346,301 30,828,101 Principal payments on notes payable and bank lines-of-credit (17,907,051) (31,518,331) (41,326,254) Exercise of stock options 777,347 357,437 1,598,955 Pooled companies distributions (2,523,282) (4,594,002) Proceeds from stock offering 36,958,618 116,446,467 ------------ ------------- ------------- Net cash inflow from financing activities 3,323,502 19,550,023 107,547,269 ------------ ------------- ------------- Net cash outflow related to change in fiscal year of pooled company (159,555) ------------ ------------- ------------- NET CASH INFLOW FROM ALL ACTIVITIES 2,216,043 30,651,195 62,027,700 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 3,060,069 5,276,112 35,927,307 ------------ ------------- ------------- CASH AND EQUIVALENTS AT END OF YEAR $ 5,276,112 $ 35,927,307 $ 97,955,007 ============ ============= =============
19 20 Dycom Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
1997 1998 1999 ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH INVESTING AND FINANCING ACTIVITIES: Cash paid during the period for: Interest $ 2,535,600 $ 2,185,802 $ 1,685,994 Income taxes $ 8,303,108 $11,480,800 $21,469,586 Property and equipment acquired and financed with: Capital lease obligations $ 601,024 $ $ 233,618 Income tax benefit from stock options exercised $ 132,569 $ 194,483 $ 1,115,554 During the year ended July 31, 1999, the Company acquired all of the capital stock of Locating, Inc., Ervin Cable Construction, Inc., Apex Digital TV Inc., and Triple D Communications, Inc. at a cost of $10,345,449, $32,706,655, $21,446,169, and $2,864,061, respectively. In conjunction with these acquisitions, assets acquired and liabilities assumed were as follows: Fair market value of assets acquired, including goodwill $78,310,347 Consideration paid (including $33.3 million of common stock issued) 67,362,334 ----------- Fair market value of liabilities assumed $10,948,013 ===========
See notes to consolidated financial statements. 20 21 Dycom Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include Dycom Industries, Inc. ("Dycom" or the "Company") and its subsidiaries, all of which are wholly owned. On July 29, 1997, Communications Construction Group, Inc. ("CCG") was acquired by the Company through an exchange of common stock. On April 6, 1998, Cable Com Inc. ("CCI") and Installation Technicians, Inc. ("ITI") were acquired by the Company through an exchange of common stock. These acquisitions were accounted for as poolings of interests. Accordingly, the Company's consolidated financial statements include the results of CCG, CCI and ITI for all periods presented. During fiscal 1999, the Company acquired LOC, ECC, APX, and DDD. Each of these transactions was accounted for using the purchase method of accounting. The Company's results include the results of LOC, ECC, APX, and DDD from their respective acquisition dates until July 31, 1999. See Note 3. The Company's operations consist primarily of providing specialty contracting services to the telecommunications and electrical utility industries. All material intercompany accounts and transactions have been eliminated. PRO FORMA ADJUSTMENTS - Prior to the acquisition by Dycom, CCI and ITI elected under Subchapter S of the Internal Revenue Code to have the stockholders recognize their proportionate share of CCI's and ITI's taxable income on their personal tax return in lieu of paying corporate income tax. The pro forma net income and earnings per common share reflected on the Statements of Operations reflects a provision for current and deferred income taxes for all periods presented as if the corporations were included in Dycom's federal and state income tax returns. At April 6, 1998, the consummation date of the merger, CCI and ITI recorded deferred taxes on the temporary differences between the financial reporting basis and the tax basis of their assets and liabilities. The deferred tax (asset) liability recorded by CCI and ITI was $616,358 and $(11,035), respectively. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Estimates are used in the Company's revenue recognition of work-in-process, allowance for doubtful accounts, self-insured claims liability, deferred tax asset valuation allowance, depreciation and amortization, and in the estimated lives of assets, including intangibles. RECLASSIFICATIONS - Certain prior year amounts have been reclassified in order to conform to current year presentation. REVENUE - Income on short-term unit contracts is recognized as the related work is completed. Work-in-process on unit contracts is based on management's estimate of work performed but not billed. Income on long-term contracts is recognized on the percentage-of-completion method based primarily on the ratio of contract costs incurred to date to total estimated contract costs. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. "Costs and estimated earnings in excess of billings" represents the excess of contract revenues recognized under the percentage-of-completion method of accounting for long-term contracts and work-in-process on unit contracts over billings to date. For those contracts in which billings exceed contract revenues recognized to date, such excesses are included in the caption "billings in excess of costs and estimated earnings." CASH AND EQUIVALENTS - Cash and equivalents include cash balances on deposit in banks, overnight repurchase agreements, certificates of deposit, commercial paper, and various other financial instruments having an original maturity of three months or less. For purposes of the consolidated statements of cash flows, the Company considers these amounts to be cash equivalents. 21 22 INVENTORIES - Inventories consist primarily of materials and supplies used to complete certain of the Company's long-term contracts. The Company values these inventories using the first-in, first-out method. The Company periodically reviews the appropriateness of the carrying value of its inventories. The Company records a reserve for obsolescence if inventories are not expected to be used in the Company's normal course of business. No reserve has been recorded in the periods presented. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation and amortization are computed over the estimated useful life of the assets utilizing the straight-line method. The estimated useful service lives of the assets are: buildings - 20-31 years; leasehold improvements - the term of the respective lease or the estimated useful life of the improvements, whichever is shorter; vehicles - 3-7 years; equipment and machinery - 2-10 years; and furniture and fixtures - 3-10 years. Maintenance and repairs are expensed as incurred; expenditures that enhance the value of the property or extend its useful life are capitalized. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income. INTANGIBLE ASSETS - The excess of the purchase price over the fair market value of the tangible net assets of acquired businesses (goodwill) is amortized on a straight-line basis over 20-40 years. The appropriateness of the carrying value of goodwill is reviewed periodically by the Company at the subsidiary level. An impairment loss is recognized when the projected future cash flows is less than the carrying value of goodwill. No impairment loss has been recognized in the periods presented. Amortization expense was $155,088 for each of the fiscal years ended July 31, 1997 and 1998, and $1,166,499 for the fiscal year ended July 31, 1999. The intangible assets are net of accumulated amortization of $1,306,446 and $2,472,945 at July 31, 1998 and 1999, respectively. SELF-INSURED CLAIMS LIABILITY - The Company retains the risk, up to certain limits, for automobile and general liability, workers' compensation, and employee group health claims. A liability for unpaid claims and the associated claim expenses, including incurred but not reported losses, is actuarially determined and reflected in the consolidated financial statements as an accrued liability. The self-insured claims liability includes incurred but not reported losses of $5,120,000 and $4,860,000 at July 31, 1998 and 1999, 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, file a consolidated federal income tax return. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. PER SHARE DATA - Earnings per common share-basic is computed using the weighted average common shares outstanding during the period. Earnings per common share-diluted is computed using the weighted average common shares outstanding during the period and the dilutive effect of common stock options, using the treasury stock method. See Notes 2 and 14. STOCK OPTION PLANS - In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation" which was effective for the Company beginning August 1, 1996. SFAS No. 123 requires expanded disclosures of stock based compensation arrangements with employees and encourages, but does not require, compensation cost to be measured based on the fair value of the equity instrument awarded. Under SFAS No. 123, companies are permitted, however, to continue to apply Accounting Principle Board ("APB") Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company continues to apply APB Opinion No. 25 to its stock based compensation awards to employees and discloses in the annual financial statements the required pro forma effect on net income and earnings per share. See Note 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB issued SFAS No. 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 22 23 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. The Company adopted SFAS No. 131 in fiscal 1999. See Note 18 of the Notes to the Consolidated Financial Statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes standards for the accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 by one year to periods beginning after June 15, 2000. Management is currently evaluating the requirements and related disclosures of SFAS No. 133. 2. COMPUTATION OF PER SHARE EARNINGS The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation as required by SFAS No. 128.
1997 1998 1999 ------------ ----------- ----------- Net income available to common stockholders (numerator) $ 15,813,638 $23,035,620 $36,449,975 ============ =========== =========== Weighted-average number of common shares (denominator) 18,863,987 21,172,025 23,013,730 ============ =========== =========== Earnings per common share - basic $ 0.84 $ 1.09 $ 1.58 ============ =========== =========== Weighted-average number of common shares 18,863,987 21,172,025 23,013,730 Potential common stock arising from stock options 259,047 310,609 442,961 ------------ ----------- ----------- Total shares (denominator) 19,123,034 21,482,634 23,456,691 ------------ ----------- ----------- Earnings per common share - diluted $ 0.83 $ 1.07 $ 1.55 ============ =========== =========== PRO FORMA EARNINGS PER SHARE DATA: Pro forma net income available to common stockholders (numerator) $13,929,408 $21,661,360 =========== =========== Pro forma earnings per common share - basic $ 0.74 $ 1.02 =========== =========== Pro forma earnings per common share - diluted $ 0.73 $ 1.01 =========== ===========
3. ACQUISITIONS On July 29, 1997, the Company consummated the CCG acquisition. The Company issued 3,079,863 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, 1996, and 1997 combines the statements of operations of CCG for its fiscal years ending May 31, 1996, and 1997, respectively. The total revenue and net income of CCG for the two-month period ended July 31, 1997 were $13.1 million and $0.4 million, respectively, with the net income reflected as an adjustment to retained earnings as of July 31, 1997. 23 24 On April 6, 1998, the Company acquired CCI and ITI and issued 1.8 million and 900,000 shares of common stock in exchange for all the outstanding capital stock of CCI and ITI, respectively. Dycom has accounted for the acquisitions as poolings of interests and, accordingly, the Company's historical financial statements include the results of CCI and ITI for all periods presented. Prior to the acquisitions, CCI and ITI used a fiscal calendar year consisting of a 52/53 week time period and, as a result of the merger, have adopted Dycom's fiscal year end of July 31. All periods presented reflect the adoption of such fiscal year end as of the beginning of the period. The separate company results of CCG, CCI and ITI after the consummation date of the mergers, are included in the Dycom amounts. The combined and separate company results of Dycom, prior to the combinations for CCG, CCI and ITI, for the fiscal years ended July 31, 1997 and 1998 are as follows: 1997 1998 ------------ ------------ Total revenues: Dycom $176,204,581 $331,881,840 CCG 67,718,900 CCI 45,191,801 26,833,806 ITI 23,304,158 12,647,146 ------------ ------------ Combined $312,419,440 $371,362,792 ============ ============ Net income: Dycom $ 8,268,502 $ 19,194,623 CCG 2,950,306 CCI 2,598,254 2,711,694 ITI 1,996,576 1,129,303 ------------ ------------ Combined $ 15,813,638 $ 23,035,620 ============ ============ On February 3, 1999, the Company acquired all of the outstanding common stock of Locating, Inc. ("LOC") for $10.0 million and various transaction costs. Located in Issaquah, Washington, LOC's primary line of business is the locating, marking, and mapping of underground utility facilities for cable television multiple system operators, telephone companies, and electrical and gas utilities. On March 31, 1999, the Company purchased all of the outstanding shares of common stock of Ervin Cable Construction, Inc. ("ECC") for $21.8 million in cash and 258,066 shares of Dycom's common stock for an aggregate purchase price of $32.5 million before various transaction costs. ECC's primary service is the engineering, construction, and maintenance of cable television systems. On April 1, 1999, the Company issued 516,128 with an aggregate value of $21.4 million of Dycom's common stock to the shareholders of Apex Digital TV, Inc. ("APX") in exchange for all of the outstanding common stock of APX. APX's primary line of business is providing installation and maintenance services to direct broadcast satellite providers. Both ECC and APX are located in Sturgis, Kentucky. On June 30, 1999, the Company purchased all of the outstanding shares of common stock of Triple D Communications, Inc. ("DDD") for $1.7 million in cash and 24,896 shares of Dycom's common stock for an aggregate purchase price of $2.9 million. Located in Lexington, Kentucky, DDD's primary business is the construction and maintenance of telecommunications systems under master service agreements. The Company has recorded the acquisitions of LOC, ECC, APX, and DDD using the purchase method of accounting. The operating results of LOC, ECC, APX, and DDD are included in the accompanying consolidated condensed financial statements from the date of purchase. The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisitions of LOC, ECC, APX, and DDD had occurred on August 1, 1997: 1998 1999 ------------ ------------ Total revenues $443,401,460 $513,452,840 Income before income taxes 40,167,996 63,847,573 Net income 25,156,783 38,025,816 Earnings per share: Basic $ 1.19 $ 1.65 Diluted 1.17 1.62 24 25 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following: 1998 1999 ----------- ----------- Contract billings $58,888,421 $93,682,485 Retainage 4,133,590 4,497,307 Other receivables 1,331,775 1,233,519 ----------- ----------- Total 64,353,786 99,413,311 Less allowance for doubtful accounts 2,210,978 4,129,280 ----------- ----------- Accounts receivable, net $62,142,808 $95,284,031 =========== =========== For the years ended July 31, 1997, 1998, and 1999, the Company incurred bad debt expense related to uncollectible accounts receivable of $365,949, $1,526,385, and $1,532,784, respectively. 5. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS The accompanying consolidated balance sheets include costs and estimated earnings on contracts in progress, net of progress billings as follows:
1998 1999 ----------- ----------- Costs incurred on contracts in progress $15,056,642 $27,695,302 Estimated earnings thereon 3,387,933 8,259,242 ----------- ----------- 18,444,575 35,954,544 Less billings to date 4,061,955 3,513,751 ----------- ----------- $14,382,620 $32,440,793 =========== =========== Included in the accompanying consolidated balance sheets under the captions: Costs and estimated earnings in excess of billings $14,382,620 $32,878,667 Billings in excess of costs and estimated earnings 437,874 ----------- ----------- $14,382,620 $32,440,793 =========== ===========
As stated in Note 1, the Company performs services under short-term, unit based and long-term, percentage of completion contracts. The amounts presented above aggregate the effects of these two types of contracts. 6. PROPERTY AND EQUIPMENT The accompanying consolidated balance sheets include the following property and equipment:
1998 1999 ------------ ----------- Land $ 1,592,958 $ 3,122,155 Buildings 2,497,103 5,554,542 Leasehold improvements 1,459,543 1,304,470 Vehicles 52,287,135 80,923,822 Equipment and machinery 34,319,707 49,613,877 Furniture and fixtures 5,638,326 7,641,972 ------------ ----------- Total 97,794,772 148,160,838 Less accumulated depreciation 54,929,575 68,749,956 ------------ ----------- Property and equipment, net $ 42,865,197 $79,410,882 ============ ===========
Maintenance and repairs of property and equipment amounted to $6,843,444, $7,728,971, and $8,880,559 for the fiscal years ended July 31, 1997, 1998, and 1999, respectively. 25 26 7. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: 1998 1999 ----------- ----------- Accrued payroll and related taxes $ 3,637,611 $ 7,348,449 Accrued employee benefit costs 4,971,718 5,514,209 Accrued construction costs 2,728,568 2,701,620 Deferred tax liabilities, net 2,034,648 Accrued other liabilities 3,481,284 5,562,542 ----------- ----------- Other accrued liabilities $14,819,181 $23,161,468 =========== =========== 8. NOTES PAYABLE Notes payable are summarized by type of borrowing as follows: 1998 1999 ----------- ----------- Bank credit agreements: Term loan $14,250,000 $11,750,000 Equipment term loans 3,339,218 Capital lease obligations 60,931 233,618 Equipment loans 485,623 437,362 ----------- ----------- Total 18,135,772 12,420,980 Less current portion 4,727,782 2,438,860 ----------- ----------- Notes payable-non-current $13,407,990 $ 9,982,120 =========== =========== On April 27, 1999, the Company signed an amendment to its bank credit agreement increasing the total facility to $175.3 million and extending the facility's maturity to April 2002. The amended bank credit agreement provides for (i) a $17.5 million standby letter of credit facility, (ii) a $50.0 million revolving working capital facility, (iii) a $12.8 million five-year term loan, and (iv) a $95.0 million equipment acquisition and small business purchase facility. The Company is required to pay an annual non-utilization fee equal to 0.15% of the unused portion of the revolving working capital and the equipment acquisition and small business purchase facilities. In addition, the Company pays annual agent and facility commitment fees of $15,000 and $135,000, respectively. The Company had outstanding standby letters of credit issued to the Company's insurance administrators as part of its self-insurance program of $13.4 million at July 31, 1999. The revolving working capital facility bears interest, at the option of the Company, at the bank's prime interest rate minus 1.125% or LIBOR plus 1.25%. As of July 31, 1999, there was no outstanding balance on this facility resulting in an available borrowing capacity of $50.0 million. The outstanding loans under the revolving equipment acquisition and small business purchase facility bear interest, at the option of the Company, at the bank's prime interest rate minus 0.75% or LIBOR plus 1.50%. The advances under the revolving equipment acquisition and small business purchase facility are converted to term loans with maturities not to exceed 48 months. The outstanding principal on the equipment term loans is payable in quarterly installments through February 2001. The were no amounts outstanding on the revolving equipment acquisition and small business purchase facility at July 31, 1999, resulting in an available borrowing capacity of $95.0 million. The outstanding principal under the term loan bears interest at the bank's prime interest rate minus 0.50% (7.25% at July 31, 1999). Principal and interest is payable in semiannual installments through April 2003. The amount outstanding on the term loan was $11.8 million at July 31, 1999. 26 27 The amended bank credit agreement contains restrictions which, among other things, require maintenance of certain financial ratios and covenants, restrict encumbrances of assets and creation of indebtedness, and limit the payment of cash dividends. Cash dividends are limited to 50% of each fiscal year's after-tax profits. No cash dividends were paid during the year ended July 31, 1999. At July 31, 1999, the Company was in compliance with all financial covenants and conditions. All obligations under the amended credit agreement are unconditionally guaranteed by the Company's subsidiaries and secured by security interests in certain property and assets of the Company and its subsidiaries. The Company's recently acquired subsidiaries, CCI and ITI, had credit facilities entered into prior to the acquisition by Dycom. CCI had a $5.2 million revolving credit facility for funding working capital and a $2.0 million term note incurred to purchase equipment. The interest rate on the revolving credit facility was at the bank's prime interest rate and the interest rate on the term loan was at 8.75%. ITI had a $2.0 million revolving credit facility for funding working capital and a $0.5 million multiple advance term facility for equipment acquisitions. The interest rate on the revolving credit facility and the multiple advance term facility were at the bank's prime interest rate. The obligations were secured by substantially all of CCI's and ITI's assets. The facilities contained restrictions, which among other things, required the maintenance of certain financial ratios and covenants and restricted the payment of cash dividends. During the fourth quarter of fiscal 1998, the Company paid off the outstanding balances of $8.1 million under these facilities with existing cash balances and subsequently terminated such facilities. The Company's recently acquired subsidiaries, ECC and APX, had credit facilities entered into prior to the acquisition by Dycom. ECC's revolving credit facility had an $8.0 million line for funding working capital. The interest rate on the revolving credit facility was at the bank's prime interest rate plus 1.0 percent. APX's revolving credit facility had a $3.5 million line for funding working capital. The interest rate on the revolving credit facility was at the bank's prime interest rate plus 1.5 percent. The obligations were secured by substantially all of ECC's and APX's assets. The facilities contained restrictions, which among other things, required the maintenance of certain financial ratios and covenants and restricted the payment of cash dividends. During the fourth quarter of fiscal 1999, the Company paid off the outstanding balances of $1.9 million under these facilities with existing cash balances and subsequently terminated such facilities. In addition to the borrowings under the amended bank credit agreement, certain subsidiaries have outstanding obligations under capital leases and other equipment financing arrangements. During fiscal 1998, the Company repaid $2.6 million of outstanding balances on capital lease obligations and other equipment term loans with existing cash balances. The remaining obligations are payable in monthly installments expiring at various dates through September 2000. The estimated aggregate annual principal repayments for notes payable and capital lease obligations in the next five years are $2,438,860 in 2000, $2,232,120 in 2001, $2,000,000 in 2002, $2,000,000 in 2003, and $3,750,000 in 2004. Interest costs incurred on notes payable, all of which is expensed, for the years ended July 31, 1997, 1998, and 1999 were $2,619,191, $2,045,571, and $1,695,920, 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. 27 28 9. INCOME TAXES The components of the provision (benefit) for income taxes are: 1997 1998 1999 ------------ ------------ ----------- Current: Federal $ 6,248,234 $ 10,565,688 $19,181,889 State 1,904,858 2,613,336 3,851,188 ------------ ------------ ----------- 8,153,092 13,179,024 23,033,077 ------------ ------------ ----------- Deferred: Federal 191,765 737,355 977,368 State (134,700) (395,550) 151,902 Valuation allowance (253,306) (475,185) ------------ ------------ ----------- (196,241) (133,380) 1,129,270 ------------ ------------ ----------- Total tax provision $ 7,956,851 $ 13,045,644 $24,162,347 ============ ============ =========== The deferred tax provision (benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amount of temporary differences and changes in tax rates during the year. Prior to the acquisition by Dycom, CCI and ITI elected under Subchapter S of the Internal Revenue Code to have the stockholders recognize their proportionate share of CCI's and ITI's taxable income on their personal income tax returns in lieu of paying corporate income taxes. At April 6, 1998, the consummation date of the acquisition, CCI and ITI recorded a deferred tax liability (asset) of $616,358 and ($11,035), respectively, which was included in the third quarter results of operations. The deferred tax assets and liabilities at July 31 are comprised of the following: 1998 1999 ---------- ---------- Deferred tax assets: Self-insurance, warranty, and other non-deductible reserves $5,164,116 $4,522,568 Allowance for doubtful accounts 879,306 1,476,910 Small tools 380,153 424,414 Other 77,466 ---------- ---------- $6,423,575 $6,501,358 ========== ========== Deferred tax liabilities: Property and equipment $2,950,402 $4,620,531 Unamortized acquisition costs 248,612 245,486 Retainage 498,213 Amortization of goodwill 85,522 Other 81,088 ---------- ---------- $3,697,227 $5,032,627 ========== ========== Net deferred tax assets $2,726,348 $1,468,731 ========== ========== A valuation allowance is provided when it is more likely than not that some portion of the Company's deferred tax assets will not be realized. The valuation allowance recorded in the financial statements reduces deferred tax assets to an amount that represents management's best estimate of the amount of deferred tax assets that more likely than not will be realized. In fiscal 1997, the Company reduced the valuation allowance by $0.3 million. In fiscal 1998, the Company reversed the remaining $475,185 balance of the valuation allowance. The Company believes that it is more likely than not that the deferred tax assets will be realized based on the available evidence supporting the reversing deductible temporary differences being offset by reversing taxable temporary differences and the existence of sufficient taxable income within the current carryback periods. 28 29 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:
1997 1998 1999 ----------- ------------ ----------- Statutory rate applied to pre-tax income $ 8,319,671 $ 12,628,442 $21,214,313 State taxes, net of federal tax benefit 1,257,206 1,779,712 2,602,008 Amortization of intangible assets, with no tax benefit 52,730 54,281 159,031 Tax effect of non-deductible items 374,564 389,999 303,365 Non-taxable interest income (169,823) Valuation allowance (253,306) (475,185) Effect of income from S Corporations (CCI and ITI) (1,719,027) (1,827,023) Deferred taxes of pooled companies 605,323 Other items, net (74,987) (109,905) 53,453 ----------- ------------ ----------- Total tax provision $ 7,956,851 $ 13,045,644 $24,162,347 =========== ============ ===========
The Internal Revenue Service (the "IRS") has examined and closed the Company's consolidated federal income tax returns for all years through fiscal 1993. The Company has settled all assessments of additional taxes and believes that it has made adequate provision for income taxes that may become payable with respect to open tax years. The IRS has examined and closed the income tax returns for years through fiscal 1994 for CCG. The IRS is currently auditing the 1995 and 1996 tax years of ITI. 10. REVENUES-OTHER The components of other revenues are as follows:
1997 1998 1999 ---------- ---------- ---------- Interest income $ 215,062 $1,597,987 $2,261,082 Gain on sale of fixed assets 601,645 375,772 506,017 Miscellaneous income 364,625 675,470 548,509 ---------- ---------- ---------- Total other revenues $1,181,332 $2,649,229 $3,315,608 ========== ========== ==========
11. CAPITAL STOCK On June 1, 1992, the Company approved a Shareholder Rights Plan. All shareholders of record on June 15, 1992 were issued a Right for each outstanding share of the Company's common stock. Each Right entitles the holder to purchase one-half share of common stock for an exercise price of $12 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 the Company, 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 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. 29 30 12. STOCK OFFERING The Company concluded the public offering of 4,050,000 shares of its common stock on November 4, 1997. The Company offered 2,360,067 shares and selling shareholders offered 1,689,933 shares at an offering price of $13.33 per share. The Company received $29,736,844 on November 10, 1997 which is net of an underwriting discount of $0.73 per share. Additionally, the underwriters exercised their option to purchase 607,500 shares to cover over-allotments. The Company received $7,654,500 on November 25, 1997 as payment for the over-allotments. The total offering proceeds, net of offering expenses of $432,726, are included in stockholders equity on the July 31, 1998 balance sheet. On November 28, 1997, the Company repaid the outstanding balance of its revolving working capital facility and will use the balance of the proceeds to fund the Company's growth strategy, including acquisitions, working capital and capital expenditures and for other general corporate purposes. In April 1999, the Company filed, at its cost, a registration statement for an offering of 2.5 million shares and 200,000 shares of common stock, to be sold by the Company and certain selling stockholders, respectively. The closing of the offering, at $48.50 per share, was consummated on May 19, 1999. On that date, the Company received $115.3 million in proceeds from the offering which was net of an underwriting discount of $2.40 per share. The Company incurred legal fees and other expenses for this transaction of approximately $510,000. In addition to the shares sold above, the Company and the selling stockholders granted the underwriters an option to purchase within 30 days after the offering an additional 375,000 and 30,000 shares, respectively, to cover over-allotments. On June 4, 1999, the Company repaid the outstanding balance of its revolving credit facility of $33.7 million with proceeds of the common stock offering. The remaining proceeds will be used to fund the Company's growth strategy, including acquisitions, working capital and capital expenditures, and for other general corporate purposes. On June 11, 1999, the underwriters exercised a portion of their option to purchase additional shares to cover over-allotments. The underwriters purchased 37,036 shares from the Company and 2,962 shares from certain selling stockholders. The Company received approximately $1.7 million as payment for the over-allotment. 13. EMPLOYEE BENEFIT PLAN The Company and certain of its subsidiaries sponsor defined contribution plans that provide retirement benefits to all employees that elect to participate. Under the plans, participating employees may defer up to 15% of their base pre-tax compensation. For fiscal years ended July 31, 1997 and 1998 and for fiscal year 1999 until October 31, 1998, the Company's contributions to the plans were discretionary except for CCI which has a 25% company match up to the first 5% of the employee's contributions. Beginning on November 1, 1999, the Company's contribution to the plan was a 25% company match up to the first 5% of the employee's contributions, except for ECC, APX, and LOC which made discretionary contributions. The Company's contributions, were $287,179, $398,529, and $609,093 in fiscal years 1997, 1998 and 1999, respectively. 14. STOCK OPTION PLANS The Company has reserved 1,350,000 shares of common stock under its 1991 Incentive Stock Option Plan (the "1991 Plan") which was approved by the shareholders on November 25, 1991. The 1991 Plan provides for the granting of options to key employees until it expires in 2001. Options are granted at the closing price on the date of grant and are exercisable over a period of up to five years. Since the 1991 Plan's adoption, certain of the options granted have lapsed as a result of employees terminating their employment with the Company. At July 31, 1997, 1998, and 1999, options available for grant under the 1991 Plan were 576,177 shares, 199,782 shares, and 43,958 shares, respectively. In fiscal 1998, the Company granted to key employees under the 1991 Plan, options to purchase an aggregate of 388,470 shares of common stock. The options were granted at prices ranging from $12 3/16 to $17 3/4, prices representing the fair market value on the date of grant. On August 24, 1998, the Company granted to key employees under the 1991 Plan options to purchase an aggregate of 211,932 shares of common stock. The options were granted at $21 3/16, the fair market value on the date of grant. 30 31 The Company has reserved 2,211,230 shares of common stock under its 1998 Incentive Stock Option Plan (the "1998 Plan") which was approved by the shareholders on November 23, 1998. The 1998 Plan provides for the granting of options to key employees until it expires in 2008. Options are granted at the closing price on the date of grant and are exercisable over a period of up to ten years. At July 31, 1999, options available for grant under the 1998 Plan were 1,958,530 shares. On November 23, 1998, the Company granted a key employee under the 1998 Plan an option to purchase 37,500 shares of common stock. The option was granted at $27 1/16, the fair market value on the date of grant. On March 10, 1999, the Company granted a key employee under the 1998 Plan an option to purchase 150,000 shares of common stock. The option was granted at $41 5/16, the fair market value on the date of grant. On April 8, 1999, the Company granted key employees under the 1998 Plan options to purchase 26,500 shares of common stock. The options were granted at $42 3/4, the fair market value on the date of grant. On April 19, 1999, the Company granted a key employee under the 1998 Plan an option to purchase 1,200 shares of common stock. The option was granted at $44 1/8, the fair market value on the date of grant. On May 24, 1999, the Company granted a key employee under the 1998 Plan an option to purchase 37,500 shares of common stock. The option was granted at $48.00, the fair market value on the date of grant. On August 23, 1999, the Company granted to key employees under the 1998 Plan options to purchase an aggregate of 250,000 shares of common stock. The options were granted at $39 1/8, the fair market value on the date of grant. In addition to the stock option plans discussed above, the Company has agreements outside of the plan with the non-employee members of the Board of Directors (the "Directors Plan"). On January 10, 1994, the Company granted to the non-employee Directors, non-qualified options to purchase an aggregate of 90,000 shares of common stock. The options were granted at $2 9/16, the fair market value on the date of grant, with vesting over a three-year period. On January 4, 1999, the Company granted to a non-employee Director, non-qualified options to purchase 12,000 shares of common stock. The options were granted at $36 11/16, the fair market value on the date of grant, with vesting over a three-year period. On April 1, 1999, the Company granted to a non-employee Director, non-qualified options to purchase 12,000 shares of common stock. The options were granted at $43 7/16, the fair market value on the date of grant, with vesting over a three-year period. The following table summarizes the stock option transactions under the 1991 Plan, 1998 Plan, and the Directors Plan for the three years ended July 31, 1997, 1998, and 1999: Number of Weighted Average Shares Exercise Price ---------------------------------- Options outstanding at July 31, 1996 654,218 $ 3.03 Granted 150,000 $ 9.00 Terminated (85,148) $ 3.05 Exercised (319,714) $ 2.68 ---------------------------------- Options outstanding at July 31, 1997 399,356 $ 6.88 Granted 388,470 $13.73 Terminated (12,075) $ 9.52 Exercised (114,714) $ 3.11 ---------------------------------- Options outstanding at July 31, 1998 661,037 $10.49 Granted 487,750 $32.05 Terminated (55,220) $13.26 Exercised (207,902) $ 7.69 ---------------------------------- Options outstanding at July 31, 1999 885,665 $22.86 ---------------------------------- Exercisable options at July 31, 1997 104,900 $ 3.47 July 31, 1998 130,787 $ 4.50 July 31, 1999 85,328 $ 8.14 ---------------------------------- The range of exercise prices for options outstanding at July 31, 1999 was $1.83 to $48.00. 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. 31 32 The following summarizes information about options outstanding at July 31, 1999: Outstanding Options ------------------------------------------------ Weighted Weighted Average Average Number of Contractual Exercise Shares Life Price ------------------------------------------------ Range of exercise prices $ 1.83 to $ 13.00 324,807 2.5 $10.35 $13.00 to $ 25.00 284,158 3.9 $20.15 $25.00 to $ 48.00 276,700 4.6 $40.33 ------------------------------------------------ 885,665 3.6 $22.86 ------------------------------------------------ Exercisable Options ------------------------------------------------ Weighted Exercisable Average as of Exercise July 31, 1999 Price ------------------------------------------------ Range of exercise prices $ 1.83 to $13.00 74,045 $ 6.69 $13.00 to $17.75 11,283 $17.65 ------------------------------------------------ 85,328 $ 8.14 ------------------------------------------------ These options will expire if not exercised at specific dates ranging from November 1999 to November 2009. The prices for the options exercisable at July 31, 1999 ranged from $1.83 to $17.75. 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, 1998, and 1999 have been estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected stock volatility of 58.97% in 1997, 55.36% in 1998, 46.50% in 1999; risk-free interest rates of 6.57% in 1997, 5.50% in 1998, and 6.05% in 1999; expected lives of 4 years for 1997 and 1998, and 6 years for 1999; and no dividend yield in all years, due to the Company's recent history of not paying cash dividends. The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions and changes in these assumptions can materially impact the fair value of the options and the Company's options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options. The estimated fair value of stock options granted during fiscal 1997, 1998, and 1999 was $6.98, $10.13, and $17.11 per share, respectively. 32 33 The pro forma disclosures amortize to expense the estimated compensation costs for its stock options granted subsequent to July 31, 1996 over the options vesting period. The Company's fiscal 1997, 1998 and 1999 pro forma net earnings and earnings per share are reflected below:
1997 1998 1999 -------------- -------------- -------------- NET INCOME: Pro forma net income reflecting stock option compensation costs $ 15,687,084 $ 21,858,609 $ 34,629,135 Pro forma earnings per share reflecting stock option compensation costs: Basic $ 0.83 $ 1.03 $ 1.50 Diluted $ 0.82 $ 1.02 $ 1.48 NET INCOME REFLECTING PRO FORMA TAX EXPENSE RELATED TO S CORPORATIONS: Pro forma net income reflecting stock option compensation costs $ 13,802,854 $ 20,484,349 Pro forma earnings per share reflecting stock option compensation costs: Basic $ 0.73 $ 0.97 Diluted $ 0.72 $ 0.95
15. RELATED PARTY TRANSACTIONS The Company's subsidiary, CCG, leases administrative offices from a partnership in which certain officers of the subsidiary are the general partners and the Company's subsidiaries, CCI and ITI, lease administrative offices from a corporation of which certain officers are shareholders. ITI advanced the corporation $268,860 for leasehold improvements to its administrative office building. The amount advanced was fully reimbursed by July 31, 1998. The Company's newly acquired subsidiary, LOC, leases administrative offices from a limited liability company of which a certain officer is a member. The total expense under these arrangements for the years ended July 31, 1997, 1998, and 1999 was $242,310, $304,010, and $344,778, respectively. The future minimum lease commitments under these arrangements are $387,368 in 2000, $375,368 in 2001, $315,388 in 2002, $218,908 in 2003, and $109,283 thereafter. 16. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK The operating subsidiaries obtain contracts from both public and private concerns. For the years ended July 31, 1997, 1998, and 1999, approximately 27%, 22%, and 23%, respectively, of the contract revenues were from BellSouth Telecommunications, Inc. ("BellSouth"); 18%, 24%, and 15%, respectively, of the contract revenues were from Comcast Cable Communications, Inc. ("Comcast"); 6.3%, 7.2%, and 4.1%, respectively, of the contract revenues were from GTE Corporation ("GTE"); and 0.0%, 1.4%, and 9.9%, respectively, of the contract revenues were from Tele-Communications, Inc. ("TCI"). Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. BellSouth, Comcast, GTE, and TCI represent a significant portion of the Company's customer base. As of July 31, 1998, the total outstanding trade receivables from BellSouth, Comcast, GTE, and TCI were $7.9 million or 13%, $16.9 million or 27%, and $2.3 million or 4.0%, and $1.5 million or 2.3%, respectively, of the outstanding trade receivables. At July 31, 1999, the total outstanding trade receivables from BellSouth, Comcast, GTE, and TCI were $9.0 million or 9.2%, $9.3 million or 9.5%, $2.3 million or 2.4%, and $18.8 million or 19.2%, respectively, of the Company's outstanding trade receivables. 17. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries have operating leases covering office facilities, vehicles, and equipment which have noncancelable terms in excess of one year. During fiscal 1997, 1998, and 1999, 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 15), for the years ended July 31, 1997, 1998, and 1999, was $6,732,699, $6,754,934, and $6,901,799, respectively. The future minimum obligations under these leases are $3,895,684 in 2000; $2,219,055 in 2001; $1,186,002 in 2002; $663,458 in 2003; $411,670 in 2004; and $554,449 thereafter. 33 34 In September 1995, the State of New York commenced a sales and use tax audit of CCG for the years 1989 through 1995. As a result of the audit, certain additional taxes were paid by CCG in fiscal 1996. In addition, the State of New York concluded that cable television service providers are subject to New York State sales taxes for the construction of cable television distribution systems, and by a Notice dated January 1997, asserted amounts due from CCG for sales taxes and interest for the periods through August 31, 1995, aggregating approximately $1.3 million. In July 1999, CCG settled the tax liabilities mentioned above for $25,000. In the normal course of business, certain subsidiaries of the Company have pending and unasserted claims. It is the opinion of the Company's management, based on the information available at this time, that these claims will not have a material adverse impact on the Company's consolidated financial statements. 18. SEGMENT INFORMATION The Company operates in one reportable segment as a specialty contractor. The Company provides engineering, placement and maintenance of aerial, underground, and buried fiber-optic, coaxial and copper cable systems owned by local and long distance communications carriers, competitive local exchange carriers, and cable television multiple system operators. Additionally, the Company provides similar services related to the installation of integrated voice, data, and video local and wide area networks within office buildings and similar structures and also provides underground locating services to various utilities and provides construction and maintenance services to electrical utilities. Each of these services is provided by various of the Company's subsidiaries and discrete financial information in connection with such services is not provided to management. The following table presents information regarding annual revenues by type of customer.
1997 1998 1999 ------------ ------------ ------------ Telecommunications $278,657,584 $330,609,408 $420,160,050 Electrical utilities 16,798,251 20,250,898 21,648,758 Various-Utility line locating 15,782,273 17,853,257 28,328,117 ------------ ------------ ------------ Total contract revenues $311,238,108 $368,713,563 $470,136,925 ============ ============ ============
19. STOCK SPLIT On December 14, 1998, the Board of Directors declared a 3-for-2 split of the Company's common stock, effected in the form of a stock dividend paid on January 4, 1999 to stockholders of record on December 23, 1998. All agreements concerning stock options provide for the issuance of additional shares due to the declaration of the stock split. An amount equal to the par value of the common shares issued plus cash paid in lieu of fractional shares was transferred from capital in excess of par value to the common stock account. All references to number of shares and to per share information have been adjusted to reflect the stock split on a retroactive basis. 20. QUARTERLY FINANCIAL DATA (Unaudited) In the opinion of management, the following unaudited quarterly data for the years ended July 31, 1998 and 1999 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 CCI and ITI ("Pooled Companies") on April 6, 1998. The acquisitions were accounted for as poolings of interests and accordingly, the unaudited quarterly financial statements for the periods presented include the accounts of CCI and ITI. The quarterly data for CCI and ITI after the consummation date of the mergers, are included in the Dycom data. The earnings per common share calculation for each quarter is based on the weighted average shares of common stock outstanding plus the dilutive effect of stock options. The sum of the quarters earnings per common share may not necessarily be equal to the full year earnings per common share amounts. 34 35
In Whole Dollars, Except Per Share Amounts -------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ----------- ------------ ------------ 1998: Revenues: Dycom $ 70,793,691 $62,622,353 $ 96,872,826 $101,592,970 Pooled Companies 20,638,774 18,842,178 ------------ ----------- ------------ ------------ $ 91,432,465 $81,464,531 $ 96,872,826 $101,592,970 ============ =========== ============ ============ Income Before Income Taxes: Dycom $ 6,165,432 $ 5,417,012 $ 8,807,157 $ 11,619,113 Pooled Companies 2,222,087 1,850,463 ------------ ----------- ------------ ------------ $ 8,387,519 $ 7,267,475 $ 8,807,157 $ 11,619,113 ============ =========== ============ ============ Net Income: Dycom $ 3,515,950 $ 3,246,711 $ 5,343,005 $ 7,088,957 Pooled Companies 2,222,087 1,618,910 ------------ ----------- ------------ ------------ $ 5,738,037 $ 4,865,621 $ 5,343,005 $ 7,088,957 ============ =========== ============ ============ Earnings per Common Share: Basic $ 0.30 $ 0.23 $ 0.24 $ 0.32 Diluted $ 0.30 $ 0.22 $ 0.24 $ 0.32 Pro Forma Net Income: Dycom $ 3,515,950 $ 3,246,711 $ 5,432,241 $ 7,088,957 Pooled Companies 1,298,383 1,079,118 ------------ ----------- ------------ ------------ $ 4,814,333 $ 4,325,829 $ 5,432,241 $ 7,088,957 ============ =========== ============ ============ Pro Forma Earnings per Common Share: Basic $ 0.25 $ 0.20 $ 0.25 $ 0.32 Diluted $ 0.25 $ 0.20 $ 0.24 $ 0.32 1999: Revenues: $109,302,250 $97,454,552 $122,364,864 $144,330,867 ============ =========== ============ ============ Income Before Income Taxes: $ 12,611,721 $11,164,950 $ 14,198,783 $ 22,636,868 ============ =========== ============ ============ Net Income: $ 7,494,143 $ 6,650,150 $ 8,766,460 $ 13,539,222 ============ =========== ============ ============ Earnings per Common Share: Basic $ 0.34 $ 0.30 $ 0.39 $ 0.54 Diluted $ 0.33 $ 0.29 $ 0.38 $ 0.53
As a result of the Company's independent actuary's annual analysis of reported claims and incurred but not reported losses, the fourth quarter results of operations include a pre-tax net reduction of $2.3 million to accrued self-insurance expense. 21. SUBSEQUENT EVENT On August 2, 1999, the Company acquired all of the outstanding common stock of Lamberts' Cable Splicing Company for $10.0 million and 48,873 shares of Dycom's common stock for an aggregate purchase price of $12.4 million. Located in Rocky Mount, North Carolina, Lamberts' Cable Splicing Company's primary line of business is the 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. The Company intends to record this transaction using the purchase method of accounting. The pro forma effect on consolidated results of operations, from the acquisition of Lamberts' Cable Splicing Company, is immaterial. 35 36 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of Communications Construction Group, Inc., which has been accounted for as a pooling of interests as described in Note 3 to the consolidated financial statements. We did not audit the statements of operations, stockholders' equity, and cash flows of Communications Construction Group, Inc. for the year ended May 31, 1997, which statements reflect total revenues of $67,717,326 for the year ended May 31, 1997. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Communications Construction Group, Inc. for such period, is based solely on the report of such other auditors. As described in Note 3 to the consolidated financial statements, subsequent to the issuance of the report of the other auditors, Communications Construction Group, Inc. changed its fiscal year to conform to the fiscal year of Dycom Industries, Inc. for the period ended July 31, 1997. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dycom Industries, Inc. and subsidiaries as of July 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants West Palm Beach, Florida August 30, 1999 36 37 INDEPENDENT AUDITORS' REPORT To the Board of Directors Communications Construction Group, Inc. We have audited the accompanying consolidated balance sheet of Communications Construction Group, Inc. (the "Company") as of May 31, 1997, and the related consolidated statements of operations, cash flows and changes in stockholders' equity 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 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 the 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 (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 consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. NOWALK & ASSOCIATES Cranbury, New Jersey July 23, 1997 37 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There have been no changes in or disagreements with accountants on accounting and financial disclosures within the meaning of Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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. Information concerning Thomas R. Pledger and Steven E. Nielsen is included in the Company's definitive proxy statement that has been incorporated by reference.
Executive Officer Name Age Office Since - ---- --- ------ ----------------- Thomas R. Pledger 61 Executive Chairman 1/4/84 Steven E. Nielsen 36 President and Chief Executive Officer 2/26/96 Kenneth G. Geraghty 48 Executive Vice President, 3/29/99 Finance and Administration Randal L. Martin 27 Vice President and Controller 8/23/99 Marc R. Tiller 29 General Counsel and Corporate 11/23/98 Secretary
There are no family relationships among the Company's executive officers. Kenneth G. Geraghty is the Company's Executive Vice President, Finance and Administration. Mr. Geraghty has been employed by the Company since March 29, 1999. Mr. Geraghty was previously employed by Massachusetts Mutual Life Insurance Company from 1997 through 1999 as the Senior Vice President, Strategic Finance, American Express Company from 1996 through 1997 as the Vice President, Change Management, and from 1994 to 1996 as the Executive Director, Business Planning. Randal L. Martin is the Company's Vice President and Controller. Mr. Martin has been employed by the Company since November 23, 1998. Mr. Martin was previously employed by Ernst & Young LLP from 1994 to 1998 as a Senior Auditor. Mr. Martin is licensed in Florida as a certified public accountant. Marc R. Tiller is the Company's General Counsel and Corporate Secretary. Mr. Tiller has been employed by the Company since August 10, 1998. Mr. Tiller attended law school from June 1995 to May 1998 and served as a Claims Representative for Florida Farm Bureau Insurance Company during the four prior years. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is hereby incorporated by reference for the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A. 38 39 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 for 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 relationships and related transactions is hereby incorporated by reference for the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
Page (a) The following documents are filed as a part of this report: 1. Consolidated financial statements: Consolidated balance sheets at July 31, 1998 and 1999 16 Consolidated statements of operations for the years ended July 31, 1997, 1998, and 1999 17 Consolidated statements of stockholders' equity for the years ended July 31, 1997, 1998, and 1999 18 Consolidated statements of cash flows for the years ended July 31, 1997, 1998, and 1999 19-20 Notes to consolidated financial statements 21-35 Independent auditors' reports 36-37 2. Financial statement schedules: All schedules have been omitted because they are inapplicable, not required, or the information is included in the above referenced consolidated financial statements or the notes thereto. 3. Exhibits furnished pursuant to the requirements of Form 10-K: See Exhibit Index on page 39. (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, 1999.
39 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYCOM INDUSTRIES, INC. /s/ Steven E. Nielsen October 5, 1999 - ------------------------- ---------------- By: Steven E. Nielsen Date President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Position Date ---- -------- ---- /s/ Kenneth G. Geraghty Executive Vice President, October 5, 1999 - ------------------------- Finance and Administration, and Acting Principal Accounting Officer /s/ Thomas R. Pledger Executive Chairman October 5, 1999 - ------------------------- and Director /s/ Steven E. Nielsen Director October 5, 1999 - ------------------------- /s/ Louis W. Adams, Jr. Director October 5, 1999 - ------------------------- /s/ Thomas G. Baxter Director October 5, 1999 - ------------------------- /s/ Walter L. Revell Director October 5, 1999 - ------------------------- /s/ Joseph M. Schell Director October 5, 1999 - ------------------------- /s/ Ronald P. Younkin Director October 5, 1999 - -------------------------
40 41 EXHIBIT INDEX Exhibit Number Title 3(i)(1) Articles of Incorporation of the Company are hereby incorporated by reference from the Company's Form S-1 Registration Statement filed with the Commission on October 29, 1986 (Exhibit 3.01). 3(i)(2) Articles of Amendment to Articles of Incorporation of the Company are hereby incorporated by reference from the Company's Form S-1 Registration Statement filed with the Commission on October 29, 1986 (Exhibit 3.01). 3(ii) Amended By-laws of the Company (Exhibit 3(ii), Current Report on Form 8-K filed April 29, 1999, File No. 001-10613). 4.1 Description of Capital Stock contained in Exhibits 3(i) and 3(ii) above. 4.2 Shareholder Protection Rights Agreement, dated as of June 1, 1992, among Dycom Industries, Inc. and First Union National Bank of North Carolina as Rights Agent (Exhibit to Form S-4 filed on June 24, 1992). 4.3 Registration Rights Agreement, dated as of March 31, 1999, among Dycom Industries, Inc., Gary E. Ervin, Timothy W. Ervin, Robert W. Ervin, Keith E. Walker, Robert J. Chastain, Charles T. McElroy and Penny J. Ward (Exhibit 4(i), Current Report on Form 8-K filed April 15, 1999, File No. 001-10613). 10.1 Second Amended and Restated Credit Facility Agreement, dated as of April 27, 1999 (Exhibit 10(i), Current Report on Form 8-K filed April 29, 1999, File No. 001-10613). 10.2 Second Amended and Restated Security Agreement, dated as of April 27, 1999 (Exhibit 10(ii), Current Report on Form 8-K filed April 29, 1999, File No. 001-10613). 10.3 Second Amended and Restated Guarantee Agreement, dated as of April 27, 1999 (Exhibit 10(iii), Current Report on Form 8-K filed April 29, 1999, File No. 001-10613). 10.4 1998 Incentive Stock Option Plan (Exhibit A, Definitive Proxy Statement filed September 30, 1998, File No. 001-10613). 10.5 1991 Incentive Stock Option Plan (Exhibit A, Definitive Proxy Statement filed November 5, 1991, File No. 001-10613). 10.6* Employment Agreement for Thomas R. Pledger 10.7* Employment Agreement for Steven E. Nielsen 10.8* Employment Letter for Robert J. Gluck 10.9 Stock Purchase Agreement, dated as of March 12, 1999, between Dycom Industries, Inc. and Gary E. Ervin, Timothy W. Ervin and Robert W. Ervin (Exhibit 2(i), Current Report on Form 8-K filed April 15, 1999, File No. 001-10613). 10.10 Agreement and Plan of Merger, dated as of March 12, 1999, among Apex Digital TV, Inc., Dycom Acquisition Corporation III, Dycom Industries, Inc. and Gary E. Ervin, Timothy W. Ervin, Robert W. Ervin, Keith E. Walker, Robert J. Chastain, Charles T. McElroy and Penny J. Ward (Exhibit 2 (ii), Current Report on Form 8-K filed April 15, 1999, File No. 001-10613). 11 Statement re computation of per share earnings All information required by Exhibit 11 is presented in Note 2 of the Company's Consolidated Financial Statements in accordance with the provision of SFAS No. 128. 21* Subsidiaries of the Company 23.1* Consent of Deloitte & Touche LLP 23.2* Consent of Nowalk & Associates 27* Financial Data Schedules for fiscal years ended July 31, 1997, 1998, and 1999 * (documents filed herewith) EX-10.6 2 EMPLOYMENT AGREEMENT - THOMAS PLEDGER 1 Exhibit 10.6 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement is made this 14th day of December, 1998, between Thomas R. Pledger ("Employee") and Dycom Industries, Inc. ("Employer"). 1. Employment. (a) Subject to the terms and conditions hereof, Employer hereby agrees to employ Employee as executive Chairman of the Board of Directors of the Employer (the "Board") to perform such specific duties and have such responsibilities as the Board may from time to time establish; provided, however, that such duties shall be consistent with the status, duties and responsibilities typically accorded to an executive Chairman. Employee hereby accepts employment by Employer as executive Chairman, subject to the terms and conditions hereof, and agrees to continue to devote his full business time and attention to his duties hereunder, to the best of his abilities. (b) Effective as of January 13, 2003, the Employer hereby agrees to employ Employee as Chairman Emeritus; provided, however, that prior to January 13, 2003, the Board may, by a majority vote, elect to change the status of the Employee under this Employment Agreement to that of Chairman Emeritus, effective 30 days after written notice is provided to Employee. Upon becoming Chairman Emeritus, Employee's responsibilities under this Employment Agreement shall be to render such managerial, supervisory or advisory services during the period (the "Emeritus Period") beginning on the effective date of the change in status and ending on the termination of this Employment Agreement as shall be reasonably requested by Employer and shall be in lieu of the 2 responsibilities and limitations described in Section 1(a); provided, however, that such services shall not be required for more than 10 working days in any month reasonably scheduled in advance unless Employee determines in his discretion to make a greater amount of his time available to provide such services. Employee shall not be required to perform such services in the offices of the Employer. The change in Employee's employment status to Chairman Emeritus shall not be treated as a breach of this Employment Agreement for purposes of paragraphs 5(c) and (d) hereof. Except as expressly provided herein, the remaining terms and conditions of this Employment Agreement shall continue to remain in full force and effect during the Emeritus Period. 2. Term of Employment. Employee's employment pursuant to this Employment Agreement shall commence on March 10, 1999 (or such earlier date as may be determined by the Board) and shall terminate upon the earlier of (a) termination pursuant to paragraph 5 hereof or (b) March 9, 2004, unless extended by the parties hereto. Prior to the commencement of the term of employment hereunder, Employee's employment shall continue to be governed by his Employment Agreement with Employer dated August 1, 1989, as amended on October 31, 1994 and as further amended on June 12, 1996 and the Change of Control Agreement dated March 11, 1997 (the "Prior Agreements"). 3. Compensation, Benefits and Expenses. (a) At the commencement of Employee's term of employment pursuant to this Employment Agreement, Employee shall be paid a base salary at an annual rate of $468,000. Payment will be made on the regularly scheduled pay dates of Employer, subject to all appropriate withholdings or other deductions required by law or by Employer's established policies applicable to all employees of Employer. Employer may increase Employee's salary at Employer's sole 2 3 discretion, but shall not reduce such salary below the rate established by this Employment Agreement (as it may be increased from time to time hereunder) without Employee's written consent. (b) During the term of employment, Employer shall provide Employee with an automobile substantially equivalent in value to the automobile provided by Employer prior to the date hereof or pay Employee an allowance in the amount of $600 per month, plus the costs incurred by Employee for all fuel, oil and lubrication related to the business use of Employee's automobile, including travel from Employee's home to place of employment. (c) In addition to any other compensation payable to Employee pursuant to this Employment Agreement, during the term of this Employment Agreement, Employee may be paid an annual bonus as determined by and within the sole discretion of the Board. In the event Employee's salary reaches $500,000 per annum, or Employee otherwise reasonably determines that any portion of his compensation from Employer could become non-deductible by reason of the application of Section 162(m) of the Internal Revenue Code, Employer promptly shall establish an annual cash bonus plan satisfying the qualified performance-based compensation exception to Section 162(m). (d) Except as otherwise provided herein, Employee's services under this Employment Agreement shall be performed at the principal offices of Employer in Palm Beach Gardens, Florida, subject to such reasonable travel as the performance of Employee's duties and the business of the Employer may require. (e) In addition to compensation payable to Employee as described above, Employee shall be entitled to participate in all employee benefit plans or programs of Employer as are available to management employees of Employer generally and such other benefit plans or programs as may be specified by the Board, including any stock options that may be granted by the 3 4 Board. Employer also shall reimburse Employee for an annual physical examination by a physician of Employee's choice. (f) Employer shall provide Employee with a retirement benefit equal to One Hundred Thirty Three Thousand Dollars ($133,000) for each year of employment Employee completes under this Employment Agreement, including any renewal periods. The retirement benefit shall be funded with whole life insurance contracts purchased by the Employer and owned by the Employee. (g) On a timely basis, Employer shall reimburse Employee for such reasonable out-of-pocket expenses as Employee may incur for and on behalf of the furtherance of Employer's business provided that Employee submits to Employer satisfactory documentation or other support for such expenses in accordance with Employer's expense reimbursement policy. 4. Covenants of Employee. (a) During the term of this Employment Agreement or during the term of his service with Employer, Employee shall not directly or indirectly engage in any business, whether as a proprietor, partner, joint venturer, employer, agent, employee, consultant, officer or beneficial or record owner of more than one percent of the stock of any corporation or association of any nature which is competitive with the business conducted by Employer, except that nothing herein shall prevent the Employee from owning any part of or participating in the operation of Pledger, Inc. (b) During the term of this Employment Agreement and ending on the fifth anniversary following the termination of Employee's employment with Employer, Employee shall not divulge or appropriate to Employee's own use or to the use of others any trade secrets or confidential information or confidential knowledge pertaining in any respect to the business of Employer (collectively, the "Proprietary Information"). The restrictions contained herein shall not 4 5 apply to, and Proprietary Information shall not include, any information which (a) was already available to the public at the time of disclosure, or subsequently became available to the public, otherwise than by breach of this Employment Agreement, or (b) is or becomes available to Employee after the termination of the Employee's employment with Employer on a non- confidential basis from a third-party source; provided that such third-party source is not bound by a confidentiality agreement or any other obligation of confidentiality to Employer. (c) In the event Employee breaches this Employment Agreement or if Employee's employment is terminated by Employer pursuant to paragraph 5(a) of this Employment Agreement, Employee separately agrees, being fully aware that the performance of this Employment Agreement is important to preserve the present value of the property and business of Employer, that for twelve (12) calendar months following the date of such termination, Employee shall not directly or indirectly engage in any business, whether as proprietor, partner, joint venturer, employer, agent, employee, consultant, officer or beneficial or record owner of more than one percent of the stock of any corporation or association of any nature which is competitive with the business conducted by Employer in the current geographical service area of Employer or in any other geographical service area of Employer during the term of Employee's employment, except that nothing herein shall prevent the Employee from owning any part of or participating in the operation of Pledger, Inc. Within such geographical service areas and during such 12-month period, Employee shall not solicit or do business competitive with the business conducted by Employer, with any customers, partners or associates of Employer. Notwithstanding the foregoing, in the event of a Change of Control (as defined in paragraph 5 (f) below), the Employee's obligations under this paragraph 4(c) shall terminate as of the date that a Change of Control has occurred. 5 6 (d) Employee agrees that the breach by Employee of any of the foregoing covenants is likely to result in irreparable harm, directly or indirectly, to Employer. Employee, therefore, consents and agrees that if Employee violates any of such covenants, Employer shall be entitled, among and in addition to any other rights or remedies available under this Employment Agreement or at law or in equity, to temporary and permanent injunctive relief to prevent Employee from committing or continuing a breach of such covenants. (e) It is the desire, intent and agreement of Employee and Employer that the restrictions placed on Employee by this paragraph 4 be enforced to the fullest extent permissible under the law and public policy applied by any jurisdiction in which enforcement is sought. Accordingly, if and to the extent that any portion of this paragraph 4 shall be adjudicated to be unenforceable, such portion shall be deemed amended to delete therefrom or to reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of such portion in the particular jurisdiction in which such adjudication is made. (f) Any controversy or claim arising out of or relating to this Employment Agreement shall be settled by arbitration in Palm Beach County, Florida, in accordance with the rules then in effect of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereon. The arbitrator(s) shall have the right and ability to award attorneys' fees to the prevailing party in any such arbitration proceeding. 5. Termination. (a) Employer shall have the right to terminate Employee's employment at any time for Cause for any of the following reasons: 6 7 (i) Employee is convicted by a court of competent and final jurisdiction of any crime, whether or not involving Employer, that constitutes a felony in the jurisdiction involved; (ii) (A) Employee commits any material and willful act of fraud, misappropriation, embezzlement, unethical business conduct or other act of dishonesty against Employer, or (B) Employee shall materially breach a duty of loyalty owed to the Employer or, as a result of his gross negligence, breaches a duty of care owed to the Employer; and/or (iii) Employee materially breaches this Employment Agreement or fails or refuses to perform any of his material duties as required by this Employment Agreement in any material respect, after Employee being given written notice of such breach, failure or refusal, and Employee's failure to cure the same within 30 days of receipt of such notice. (b) Unless otherwise terminated earlier pursuant to the terms of this Employment Agreement, Employee's employment under this Employment Agreement will terminate upon Employee's death and may be terminated by Employer or Employee upon giving not less than thirty (30) days written notice to the other party in the event that Employee, because of physical or mental disability or incapacity, is unable to perform Employee's duties hereunder for an aggregate of 180 working days during any 12-month period. All questions arising under this Employment Agreement as regards Employee's disability or incapacity shall be determined by a reputable physician mutually selected by Employer and Employee at the time such question arises. If Employer and Employee cannot agree upon the selection of a physician within a period of seven days after such question arises, then the chief of staff of Good Samaritan Hospital, West Palm Beach, Florida shall be asked to select a physician to make such determination. The determination of the physician selected 7 8 pursuant to the above provisions of this paragraph 5(b) as to such matters shall be conclusively binding upon the parties hereto. (c) Employee may terminate this Employment Agreement if Employer materially breaches this Employment Agreement. For purposes of this paragraph 5, Employer shall be deemed to have materially breached this Employment Agreement if (i) Employer fails to pay any portion of the compensation or provide Employee any employee benefit due Employee hereunder, (ii) Employer discharges Employee without Cause, (iii) Employer materially changes the duties and responsibilities performed by Employee, (iv) Employer relocates Employee's principal place of business by more than 25 miles without Employee's consent, or (v) Employer fails to cause a successor to assume this Employment Agreement in accordance with paragraph 8(b) hereof. If Employee shall terminate this Employment Agreement as provided in this paragraph 5(c) then, provided Employer does not also have grounds to terminate this Employment Agreement for Cause as defined in paragraph 5(a) hereof, Employee shall not be liable to Employer for any damages as a result thereof, shall not be bound by the provisions of paragraph 4(c) hereof and shall receive severance in accordance with paragraph 5(d) hereof as if Employee's employment was terminated without Cause. Notwithstanding the foregoing, if Employee terminates this Employment Agreement as provided in this paragraph 5(c) within six months after the date of a Change of Control, then Employee shall not be liable to Employer for any damages as a result thereof, shall not be bound by the provisions of paragraph 4(c) hereof and shall receive severance in accordance with paragraph 5(d) hereof as if Employee's employment was terminated without Cause; provided, however, that Employer does not have grounds to terminate Employee's employment for Cause as defined in paragraphs 5(a)(i) and 5(a)(ii)(A) hereof. 8 9 (d) In the event Employer terminates Employee's employment other than by reason of Cause as defined in paragraph 5(a) hereof or Employee resigns as a consequence of a material breach of this Employment Agreement as described in paragraph 5(c) hereof, Employee shall receive as damages for breach of this Employment Agreement a cash amount equal to three times the sum of (i) Employee's base salary then in effect, plus (ii) the highest bonus paid to the Employee during the three fiscal years immediately preceding his termination or resignation of employment (the "Severance Payment"). If such termination or resignation occurs prior to a Change of Control, the Severance Payment shall be paid to the Employee as soon as administratively practical in substantially equal payments over the 12-month period immediately following the Employee's termination or resignation of employment (the "Severance Period") in accordance with the Employer's payroll practices; provided, however, that after a Change of Control, the remainder of the Severance Payment, if any, shall be paid to the Employee in a lump sum within five days. If a termination or resignation occurs after a Change of Control, the Severance Payment shall be paid to the Employee in a lump sum within five days. In addition, during the Severance Period, the Employee and his dependents shall be entitled to continue to participate in all employee benefit plans (other than equity-based plans, bonus plans or disability plans) that Employer provides (and continues to provide) generally to its employees, provided that the Employee is entitled to continue to participate in such plans under the terms thereof. (e) In the event Employee's employment is terminated by Employer for Cause, or if Employee quits or otherwise resigns for any reason other than as a result of Employer's material breach of this Employment Agreement as defined in paragraph 5(c) of this Employment Agreement, Employee shall receive no severance pay. 9 10 (f) For purposes of this Employment Agreement, a "Change of Control" shall be deemed to have occurred with respect to the Employer if any one or more of the following events occur: (i) A tender offer is made and consummated for the ownership of fifty percent (50%) or more of the outstanding voting securities of the Employer; (ii) A "person", within the meaning of Section 3(a)9 or Section 13(d) (as in effect on the date hereof) of the Securities Exchange Act of 1934 shall acquire fifty percent (50%) or more of the outstanding voting securities of the Employer; (iii) Substantially all of the assets of the Employer are sold or transferred to another person, corporation or entity that is not a wholly-owned subsidiary of the Employer; or (iv) A change in the Board such that a majority of the seats on the Board are occupied by individuals who were neither nominated by a majority of the directors of the Employer as of the close of business on November 25, 1996 nor appointed by directors so nominated. 6. Right to Resign Following a Change of Control Notwithstanding any provision in this Employment Agreement to the contrary, in the event of a Change of Control during the Employee's employment as executive Chairman, the Executive shall have the right to resign for any reason or for no reason during the 60 day period following the date on which the Board certifies that a Change of Control has occurred. For purposes of paragraphs 5(c) and (d) hereof, such resignation shall be deemed to be a termination without Cause. The provisions of this paragraph 6 shall not apply if, at the time of resignation, Employer 10 11 is entitled to terminate the Employee's employment for Cause pursuant to paragraphs 5(a)(i) and 5(a)(ii)(A) hereof. 7. Gross Up Payments and Benefits After Change of Control (a) Anything in this Employment Agreement to the contrary or any termination of this Employment Agreement notwithstanding, in the event that it shall be determined that Employee becomes entitled to any payments or distribution or benefits under this Employment Agreement or any benefit plan or program of the Employer which would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employer shall pay Employee an additional amount or amounts (each, a "Gross Up Payment") such that the net amount or amounts retained by Employee, after deduction of any Excise Tax on any of the above described payments or benefits and any Federal, state and local income tax and Excise Tax upon payment provided for by this paragraph 7, shall be equal to the amount of such payments or benefits prior to the imposition of such Excise Tax. (b) For purposes of determining the amount of a Gross Up Payment, Employee shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross Up Payment is payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date the Gross Up Payment is payable, net of the maximum reduction in Federal income taxes which could be obtained from any available deduction of such state and local taxes. (c) In the event that the amount of the Excise Tax is subsequently determined to be less than the amount taken into account in calculating a Gross Up Payment hereunder, Employee 11 12 shall repay to the Employer (to the extend actually paid to Employee) at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross Up Payment attributable to such reduction (plus the portion of the Gross Up Payment attributable to the Excise Tax and Federal and state and local income tax imposed on the Gross Up Payment being repaid by Employee if such repayment results in a reduction in, or a refund of, Excise Tax and/or Federal and state and local income tax) plus interest on the amount of such payment at the rate provided in Section 1274(b)(2) (B) of the Code. (d) In the event that the amount of the Excise Tax is determined to exceed the amount taken into account in calculating a Gross Up Payment hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross Up Payment), Employer shall pay an additional Gross Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (e) Each Gross Up Payment shall be paid by Employer on the date on which Employee becomes entitled to the payment or benefits giving rise to such Gross Up Payment. 8. Assignment and Succession. (a) The services to be rendered and obligations to be performed by Employee under this Employment Agreement are special and unique, and all such services and obligations and all of Employee's rights under this Employment Agreement are personal to the Employee and shall not be assignable or transferrable. In the event of Employee's death, however, Employee's personal representative shall be entitled to receive any and all payments then due under this Employment Agreement. 12 13 (b) This Employment Agreement shall inure to the benefit of and be binding upon and enforceable by Employer and the Employee and their respective successors, permitted assigns, heirs, legal representatives, executors, and administrators. If Employer shall be merged into or consolidated with another entity, the provisions of the Employment Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Employment Agreement in the same manner that Employer would be required to perform it if no such succession had taken place. The provisions of this paragraph 8(b) shall continue to apply to each subsequent employer of the Employee hereunder in the event of any subsequent merger, consolidation, transfer of assets of such subsequent employer or otherwise. 9. Notices. Any notice, request or other communication to be given by any party to this Employment Agreement shall be in writing and be sent by certified mail, postage prepaid, addressed to the parties as follows: If to Employer: The Board of Directors Dycom Industries, Inc. First Union Center 4440 PGA Boulevard, Suite 600 Palm Beach Gardens, Florida 33410 If to Employee: Mr. Thomas Pledger Dycom Industries, Inc. First Union Center 4440 PGA Boulevard, Suite 600 Palm Beach Gardens, Florida 33410 or to such other address as the parties respectively may designate by notice given in like manner, and any such notice, request or other communication shall be deemed to have given when mailed as described above. 13 14 10. Waiver of Breach. The waiver by Employer or Employee of a breach of any provision of this Employment Agreement by either party shall not operate or be construed as a waiver by the other party of any subsequent breach. 11. Amendment. This Employment Agreement may be amended only by written instrument signed by all parties hereto. 12. Partial Invalidity. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. Full Settlement. The Employer's obligation to pay Employee the amounts required by this Employment Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set off, counterclaim, recoupment, defense or other right which the Employer may have against Employee or anyone else. All payments and benefits to which Employee is entitled under this Employment Agreement shall be made and provided without offset, deduction, or mitigation on account of income that Employee may receive from employment from the Employer or otherwise, except as provided in paragraphs 6(c) and 6(d) hereof, 14 15 or on account of any inability of the Employer to take a tax deduction with respect to any such payments or benefits. 14. Litigation. If litigation shall be brought to challenge, enforce or interpret any provision contained in this Agreement, the Employer agrees to indemnify the Employee for his reasonable attorneys' fees and expenses incurred in such litigation; provided, however, that any litigation brought by the Employee is brought in good faith. 15. Voluntary Limitation. Employee may elect to limit amounts payable under this Employment Agreement by notifying Employer, prior to Employee's receipt of such amounts, that Employee elects to receive either none or some portion of such amounts. 16. Governing Law. This Employment Agreement shall be governed by the laws of the State of Florida without giving effect to choice of law principles. 17. Entire Agreement. All prior negotiations and agreements between the parties hereto with respect to the matters contained herein are superseded by this Employment Agreement, including without limitation the Prior Agreements, and there are no representations, warranties, understandings or agreements with respect to the subject matter hereof other than those expressly set forth herein. 15 16 IN WITNESS WHEREOF, the parties have entered into this Employment Agreement as of the date set forth above. DYCOM INDUSTRIES, INC. By: -------------------------------- Louis W. Adams, Jr. By: -------------------------------- Walter L. Revell By: -------------------------------- Ronald P. Younkin -------------------------------- Thomas R. Pledger, individually 16 EX-10.7 3 EMPLOYMENT AGREEMENT - STEVEN NIELSEN 1 EXHIBIT 10.7 AMENDED AND RESTATED EMPLOYMENT AGREEMENT -------------------- This Amended and Restated Employment Agreement is made this 14th day of December, 1998, between Steven E. Nielsen ("EMPLOYEE") and Dycom Industries, Inc. ("EMPLOYER"). 1. EMPLOYMENT. Subject to the terms and conditions hereof, Employer hereby agrees to employ Employee as President and Chief Executive Officer to perform such specific duties and have such responsibilities as Employer's Board of Directors (the "BOARD") may from time to time establish; PROVIDED, HOWEVER, that such duties shall be consistent with the status, duties and responsibilities typically accorded to a President and Chief Executive Officer. Employee hereby accepts employment by Employer as President and Chief Executive Officer of Employer, subject to the terms and conditions hereof, and agrees to continue to devote his full business time and attention to his duties hereunder, to the best of his abilities. 2. TERM OF EMPLOYMENT. Employee's employment pursuant to this Employment Agreement shall commence on March 10, 1999 (or such earlier date as may be determined by the Board) and shall terminate upon the earlier of (a) termination pursuant to paragraph 5 hereof or (b) March 9, 2004, unless extended by the parties hereto. Prior to the commencement of the term of employment hereunder, Employee's employment shall continue to be governed by his Employment Agreement with Employer dated March 11, 1997 and the Change of Control Agreement dated March 11, 1997 (the "PRIOR AGREEMENTS"). 2 3. COMPENSATION, BENEFITS AND EXPENSES. (a) At the commencement of Employee's term of employment pursuant to this Employment Agreement, Employee shall be paid a base salary at an annual rate of $364,000. Payment will be made on the regularly scheduled pay dates of Employer, subject to all appropriate withholdings or other deductions required by law or by Employer's established policies applicable to all employees of Employer. Employer may increase Employee's salary at Employer's sole discretion, but shall not reduce such salary below the rate established by this Employment Agreement (as it may be increased from time to time hereunder) without Employee's written consent. (b) During the term of employment, Employer shall provide Employee with an automobile substantially equivalent in value to the automobile provided by Employer prior to the date hereof or pay Employee an allowance in the amount of $600 per month, plus the costs incurred by Employee for all fuel, oil and lubrication related to the business use of Employee's automobile, including travel from Employee's home to place of employment. (c) In addition to any other compensation payable to Employee pursuant to this Employment Agreement, Employee during the term of this Employment Agreement may be paid an annual bonus as determined by and within the sole discretion of the Board. In the event Employee's salary reaches $500,000 per annum, or Employee otherwise reasonably determines that any portion of his compensation from Employer could become non-deductible by reason of the application of Section 162(m) of the Internal Revenue Code, Employer promptly shall establish an annual cash bonus plan satisfying the qualified performance-based compensation exception to Section 162(m). 3 (d) Employee's services hereunder shall be performed at the principal offices of the Employer in Palm Beach Gardens, Florida, subject to such reasonable travel as the performance of Employee's duties and the business of Employer may require. (e) In addition to compensation payable to Employee as described above, Employee shall be entitled to participate in all employee benefit plans or programs of Employer as are available to management employees of Employer generally and such other benefit plans or programs as may be specified by the Board, including any stock options that may be granted by the Board. Employer hereby waives Employee's waiting period for eligibility under its medical benefits plan. Employer also shall reimburse Employee for an annual physical examination by a physician of Employee's choice. (f) Effective as of March 10, 1999, Employer shall grant Employee options to acquire 100,000 shares of common stock of Employer (the "NEW OPTIONS") pursuant to Employer's 1998 Incentive Stock Option Plan (the "OPTION PLAN"). The New Options shall (i) vest in equal 25 percent installments on each of the first four anniversaries of the date of grant, (ii) have a ten year term, (iii) have an exercise price per share equal to the closing price of a share of Employer's common stock as of March 10, 1999, (iv) be intended to qualify, to the greatest extent possible, as incentive stock options within the meaning of Section 422 of the Internal Revenue Code, and (v) shall otherwise be subject to the same terms and conditions as the options previously granted by Employer to Employee pursuant to the Option Plan. Notwithstanding the foregoing, all options granted by Employer to Employee pursuant to the Option Plan or any other option plan of Employer (including, but not limited to, the New Options) shall vest in full to the extent not already vested upon the occurrence of a Change of Control (as defined in paragraph 5(f) below). (g) On a timely basis, Employer shall reimburse Employee for such reasonable out-of-pocket expenses as Employee may incur for and on behalf of the furtherance of Employer's business provided that Employee submits to Employer satisfactory documentation or other support for such expenses in accordance with Employer's expense reimbursement policy. 4 4. COVENANTS OF EMPLOYEE. (a) During the term of this Employment Agreement or during the term of his service with Employer, Employee shall not directly or indirectly engage in any business, whether as a proprietor, partner, joint venturer, employer, agent, employee, consultant, officer or beneficial or record owner of more than one percent of the stock of any corporation or association of any nature which is competitive with the business conducted by Employer. (b) During the term of this Employment Agreement and ending on the fifth anniversary following the termination of Employee's employment with Employer, Employee shall not divulge or appropriate to Employee's own use or to the use of others any trade secrets or confidential information or confidential knowledge pertaining in any respect to the business of Employer (collectively, the "PROPRIETARY INFORMATION"). The restrictions contained herein shall not apply to, and Proprietary Information shall not include, any information which (a) was already available to the public at the time of disclosure, or subsequently became available to the public, otherwise than by breach of this Employment Agreement, or (b) is or becomes available to Employee after the termination of the Employee's employment with Employer on a non-confidential basis from a third-party source; PROVIDED that such third-party source is not bound by a confidentiality agreement or any other obligation of confidentiality to Employer. (c) In the event Employee breaches this Employment Agreement or if Employee's employment is terminated by Employer pursuant to paragraph 5(a) of this Employment Agreement, Employee separately agrees, being fully aware that the performance of this Employment Agreement is important to preserve the present value of the property and business of Employer, that for twelve (12) calendar months following the date of such termination, Employee shall not directly or indirectly engage in any business, whether as proprietor, partner, joint venturer, employer, agent, employee, consultant, officer or beneficial or record owner of more than one percent of the stock of any corporation or association of any nature which is competitive with the business conducted by Employer in the current geographical service area of Employer or in any other geographical service area of Employer during the term of Employee's employment. Within such geographical service areas and during 5 such 12-month period, Employee shall not solicit or do business competitive with the business conducted by Employer, with any customers, partners or associates of Employer. Notwithstanding the foregoing, in the event of a Change of Control, the Employee's obligations under this paragraph 4(c) shall terminate as of the date a Change of Control has occurred. (d) Employee agrees that the breach by Employee of any of the foregoing covenants is likely to result in irreparable harm, directly or indirectly, to Employer. Employee, therefore, consents and agrees that if Employee violates any of such covenants, Employer shall be entitled, among and in addition to any other rights or remedies available under this Employment Agreement or at law or in equity, to temporary and permanent injunctive relief to prevent Employee from committing or continuing a breach of such covenants. (e) It is the desire, intent and agreement of Employee and Employer that the restrictions placed on Employee by this paragraph 4 be enforced to the fullest extent permissible under the law and public policy applied by any jurisdiction in which enforcement is sought. Accordingly, if and to the extent that any portion of this paragraph 4 shall be adjudicated to be unenforceable, such portion shall be deemed amended to delete therefrom or to reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of such portion in the particular jurisdiction in which such adjudication is made. (f) Any controversy or claim arising out of or relating to this Employment Agreement shall be settled by arbitration in Palm Beach County, Florida, in accordance with the rules then in effect of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereon. The arbitrator(s) shall have the right and ability to award attorneys' fees to the prevailing party in any such arbitration proceeding. 5. TERMINATION. (a) Employer shall have the right to terminate Employee's employment at any time for Cause for any of the following reasons: 6 (i) Employee is convicted by a court of competent and final jurisdiction of any crime, whether or not involving Employer, that constitutes a felony in the jurisdiction involved; (ii) (A) Employee commits any material and willful act of fraud, misappropriation, embezzlement, unethical business conduct or other act of dishonesty against Employer, or (B) Employee shall materially breach a duty of loyalty owed to the Employer or ,as a result of his gross negligence, breaches a duty of care owed to the Employer; and/or (iii) Employee materially breaches this Employment Agreement or fails or refuses to perform any of his material duties as required by this Employment Agreement in any material respect, after Employee being given written notice of such breach, failure or refusal, and Employee's failure to cure the same within 30 days of receipt of such notice. (b) Unless otherwise terminated earlier pursuant to the terms of this Employment Agreement, Employee's employment under this Employment Agreement will terminate upon Employee's death and may be terminated by Employer or Employee upon giving not less than thirty (30) days written notice to the other party in the event that Employee, because of physical or mental disability or incapacity, is unable to perform Employee's duties hereunder for an aggregate of 180 working days during any 12-month period. All questions arising under this Employment Agreement as regards Employee's disability or incapacity shall be determined by a reputable physician mutually selected by Employer and Employee at the time such question arises. If Employer and Employee cannot agree upon the selection of a physician within a period of seven days after such question arises, then the chief of staff of Good Samaritan Hospital, West Palm Beach, Florida shall be asked to select a physician to make such determination. The determination of the physician selected pursuant to the above provisions of this paragraph 5(b) as to such matters shall be conclusively binding upon the parties hereto. 7 (c) Employee may terminate this Employment Agreement if Employer materially breaches this Employment Agreement. For purposes of this paragraph 5, Employer shall be deemed to have materially breached this Employment Agreement if (i) Employer fails to pay any portion of the compensation or provide Employee any employee benefit due Employee hereunder, (ii) Employer discharges Employee without Cause, (iii) Employer materially changes the duties and responsibilities performed by Employee as Chief Executive Officer, (iv) any successor to Employer fails to appoint the Employee as President and Chief Executive Officer of a company listed on a North American stock exchange, (v) Employer relocates Employee's principal place of business by more than 25 miles without Employee's consent, or (vi) Employer fails to cause a successor to assume this Employment Agreement in accordance with paragraph 7(b) hereof. If Employee shall terminate this Employment Agreement as provided in this paragraph 5(c) then, provided Employer does not also have grounds to terminate this Employment Agreement for Cause as defined in paragraph 5(a) hereof, Employee shall not be liable to Employer for any damages as a result thereof, shall not be bound by the provisions of paragraph 4(c) hereof and shall receive severance in accordance with paragraph 5(d) hereof as if Employee's employment was terminated without Cause. Notwithstanding the foregoing, if Employee terminates this Employment Agreement as provided in this paragraph 5(c) within six months after the date of a Change of Control, then Employee shall not be liable to Employer for any damages as a result thereof, shall not be bound by the provisions of paragraph 4(c) hereof and shall receive severance in accordance with paragraph 5(d) hereof as if Employee's employment was terminated without Cause; PROVIDED, HOWEVER, that Employer does not have grounds to terminate Employee's employment for Cause as defined in paragraphs 5(a)(i) and 5(a)(ii)(A) hereof. (d) In the event Employer terminates Employee's employment other than by reason of Cause as defined in paragraph 5(a) hereof or Employee resigns as a consequence of a material breach of this Employment Agreement as described in paragraph 5(c) hereof, Employee shall receive as damages for breach of this Employment Agreement a cash amount equal to three 8 times the sum of (i) Employee's base salary then in effect, plus (ii) the highest bonus paid to the Employee during the three fiscal years immediately preceding his termination or resignation of employment (the "SEVERANCE PAYMENT"). If such termination or resignation occurs prior to a Change of Control, the Severance Payment shall be paid to the Employee as soon as administratively practical in substantially equal payments over the 12-month period immediately following the Employee's termination or resignation of employment (the "SEVERANCE PERIOD") in accordance with the Employer's payroll practices; PROVIDED, HOWEVER, that after a Change of Control, the remainder of the Severance Payment, if any, shall be paid to the Employee in a lump sum within five days. If a termination or resignation occurs after a Change of Control, the Severance Payment shall be paid to the Employee in a lump sum within five days. In addition, during the Severance Period, the Employee and his dependents shall be entitled to continue to participate in all employee benefit plans (other than equity-based plans, bonus plans or disability plans) that Employer provides (and continues to provide) generally to its employees, PROVIDED that the Employee is entitled to continue to participate in such plans under the terms thereof. (e) In the event Employee's employment is terminated by Employer for Cause, or if Employee quits or otherwise resigns for any reason other than as a result of Employer's material breach of this Employment Agreement as defined in paragraph 5(c) of this Employment Agreement, Employee shall receive no severance pay. (f) For purposes of this Employment Agreement, a "CHANGE OF CONTROL" shall be deemed to have occurred with respect to the Employer if any one or more of the following events occur: (i) A tender offer is made and consummated for the ownership of fifty percent (50%) or more of the outstanding voting securities of the Employer; (ii) A "person", within the meaning of Section 3(a)9 or Section 13(d) (as in effect on the date hereof) of the Securities Exchange Act of 1934 shall acquire fifty percent (50%) or more of the outstanding voting securities of the Employer; 9 (iii) Substantially all of the assets of the Employer are sold or transferred to another person, corporation or entity that is not a wholly-owned subsidiary of the Employer; or (iv) A change in the Board such that a majority of the seats on the Board are occupied by individuals who were neither nominated by a majority of the directors of the Employer as of the close of business on November 25, 1996 nor appointed by directors so nominated. 6. GROSS UP PAYMENTS AND BENEFITS AFTER CHANGE OF CONTROL (a) Anything in this Employment Agreement to the contrary or any termination of this Employment Agreement notwithstanding, in the event that it shall be determined that Employee becomes entitled to any payments or distribution or benefits under this Employment Agreement or any benefit plan or program of the Employer which would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE") or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then the Employer shall pay Employee an additional amount or amounts (each, a "GROSS UP PAYMENT") such that the net amount or amounts retained by Employee, after deduction of any Excise Tax on any of the above described payments or benefits and any Federal, state and local income tax and Excise Tax upon payment provided for by this paragraph 6, shall be equal to the amount of such payments or benefits prior to the imposition of such Excise Tax. (b) For purposes of determining the amount of a Gross Up Payment, Employee shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross Up Payment is payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date the Gross Up Payment is payable, net of the maximum reduction in Federal income taxes which could be obtained from any available deduction of such state and local taxes. 10 (c) In the event that the amount of the Excise Tax is subsequently determined to be less than the amount taken into account in calculating a Gross Up Payment hereunder, Employee shall repay to the Employer (to the extend actually paid to Employee) at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross Up Payment attributable to such reduction (plus the portion of the Gross Up Payment attributable to the Excise Tax and Federal and state and local income tax imposed on the Gross Up Payment being repaid by Employee if such repayment results in a reduction in, or a refund of, Excise Tax and/or Federal and state and local income tax) plus interest on the amount of such payment at the rate provided in Section 1274(b)(2)(B) of the Code. (d) In the event that the amount of the Excise Tax is determined to exceed the amount taken into account in calculating a Gross Up Payment hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross Up Payment), Employer shall pay an additional Gross Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (e) Each Gross Up Payment shall be paid by Employer on the date on which Employee becomes entitled to the payment or benefits giving rise to such Gross Up Payment. 7. ASSIGNMENT AND SUCCESSION. (a) The services to be rendered and obligations to be performed by Employee under this Employment Agreement are special and unique, and all such services and obligations and all of Employee's rights under this Employment Agreement are personal to the Employee and shall not be assignable or transferrable. In the event of Employee's death, however, Employee's personal representative shall be entitled to receive any and all payments then due under this Employment Agreement. (b) This Employment Agreement shall inure to the benefit of and be binding upon and enforceable by Employer and the Employee and their respective successors, permitted assigns, heirs, legal representatives, executors, and administrators. If Employer shall be merged 11 into or consolidated with another entity, the provisions of the Employment Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Employer, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Employment Agreement in the same manner that Employer would be required to perform it if no such succession had taken place. The provisions of this paragraph 7(b) shall continue to apply to each subsequent employer of the Employee hereunder in the event of any subsequent merger, consolidation, transfer of assets of such subsequent employer or otherwise. 8. NOTICES. Any notice, request or other communication to be given by any party to this Employment Agreement shall be in writing and be sent by certified mail, postage prepaid, addressed to the parties as follows: If to Employer: Mr. Thomas R. Pledger Chairman of the Board Dycom Industries, Inc. First Union Center 4440 PGA Boulevard, Suite 600 Palm Beach Gardens, Florida 33410 If to Employee: Mr. Steven E. Nielsen Dycom Industries, Inc. First Union Center 4440 PGA Boulevard, Suite 600 Palm Beach Gardens, Florida 33410 12 or to such other address as the parties respectively may designate by notice given in like manner, and any such notice, request or other communication shall be deemed to have given when mailed as described above. 9. WAIVER OF BREACH. The waiver by Employer or Employee of a breach of any provision of this Employment Agreement by either party shall not operate or be construed as a waiver by the other party of any subsequent breach. 10. AMENDMENT. This Employment Agreement may be amended only by written instrument signed by all parties hereto. 11. FULL SETTLEMENT. The Employer's obligation to pay Employee the amounts required by this Employment Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set off, counterclaim, recoupment, defense or other right which the Employer may have against Employee or anyone else. All payments and benefits to which Employee is entitled under this Employment Agreement shall be made and provided without offset, deduction, or mitigation on account of income that Employee may receive from employment from the Employer or otherwise, except as provided in paragraphs 6(c) and 6(d) hereof, or on account of any inability of the Employer to take a tax deduction with respect to any such payments or benefits. 12. VOLUNTARY LIMITATION. Employee may elect to limit amounts payable under this Employment Agreement by notifying Employer, prior to Employee's receipt of such amounts, that Employee elects to receive either none or some portion of such amounts. 13. PARTIAL INVALIDITY. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13 14. LITIGATION. If litigation shall be brought to challenge, enforce or interpret any provision contained in this Agreement, the Employer agrees to indemnify the Employee for his reasonable attorneys' fees and expenses incurred in such litigation; PROVIDED, HOWEVER, that any litigation brought by the Employee is brought in good faith. 15. GOVERNING LAW. This Employment Agreement shall be governed by the laws of the State of Florida without giving effect to choice of law principles. 16. ENTIRE AGREEMENT. All prior negotiations and agreements between the parties hereto with respect to the matters contained herein are superseded by this Employment Agreement, including without limitation the Prior Agreements, and there are no representations, warranties, understandings or agreements with respect to the subject matter hereof other than those expressly set forth herein. IN WITNESS WHEREOF, the parties have entered into this Employment Agreement as of the date set forth above. DYCOM INDUSTRIES, INC. By: --------------------------------- Thomas R. Pledger Chairman of the Board --------------------------------- Steven E. Nielsen, individually EX-10.8 4 EMPLOYMENT LETTER - ROBERT GLUCK 1 Exhibit 10.8 DYCOM INDUSTRIES, INC. 4440 PGA Boulevard / Palm Beach Gardens, Florida 33410-6542 First Union Center / Suite 600 / Telephone (561) 627-7171 Steven E. Nielsen President and COO November 3, 1998 VIA FEDEX (OVERNIGHT PRIORITY) Mr. Robert J. Gluck 3150 Equestrian Drive Boca Raton, Florida 33434 Dear Bob: On behalf of Dycom Industries, Inc., I am pleased to extend you an offer to join our company as Executive Vice President of Finance and Administration. In this role, you will report directly to me and will serve as Dycom's Chief Administrative Officer. I will ask you to assume control of our headquarters staff functions and all the personnel assigned thereto. This includes, but is not necessarily limited to, finance, information systems, legal, audit, and human resources. Further, I will ask you to work closely with Mr. Pledger and me on all our business strategy and planning issues. Compensation for this position will be as follows: BASE SALARY: $200,000 per year PERFORMANCE BONUS: Year-end bonuses are based on both company and individual performance. Presently, the performance bonuses for the individuals assigned to corporate headquarters are discretionary and determined by Mr. Pledger and me with the advice and counsel of the appropriate subordinate managers. We arrive at the bonus numbers after the close of each fiscal year, which occurs on July 31st. Checks are normally distributed prior to October 15. In future years, you will be an integral part of this process. 2 Your own bonus for the twelve months ending October 31, 1999 will be no less than $60,000.00, irrespective of aggregate or individual performance issues. Of that total, $45,000.00 will be paid as part of the normal fiscal year 1999 bonus cycle, with the remaining $15,000.00 paid no later than November 15, 1999. In all future years, of course, your bonus, as both Mr. Pledger's and mine are, will be tied to multiple measures of performance. EQUITY: Options to purchase shares of Dycom Industries stock are usually awarded on a yearly basis to select executives, managers, and other contributors to the company's performance. These awards are based on both company and individual performance. Presently, these awards are discretionary and determined by Mr. Pledger and me with the advice and counsel of the appropriate subordinate managers. We arrive at these equity awards after the close of each fiscal year, and the options are usually distributed in the fall. In future years, again, you will be an integral part of this process. Your own equity opportunity, however, will begin when you officially join our company and will entail a grant of options to purchase 25,000 shares of Dycom Industries stock. For legal and regulatory reasons, the actual grant to options to you will be made at the Board of Directors' meeting in November 1998 and will be based on the then current market price of the stock. You will be eligible for an additional grant of options to purchase Dycom Industries stock at the conclusion of fiscal year 1999 (i.e. the fall of 1999) and at the conclusion of every year thereafter as long as you are an employee of Dycom Industries. Options to purchase Dycom Industries stock vest over the course of four (4) years at the rate of 25% of the awarded options per year. In other words, 25% of your initial award will vest at the end of year one, 25% at the end of year two, 25% at the end of year three, and the final 25% at the end of year four. All vested options are exercisable for a term of ten (10) years from the date of grant. 2 3 Finally, should your employment with Dycom Industries, Inc. be terminated for any reason other than cause during your first full year with the company, you will receive either the guaranteed cash balance remaining on this contract (i.e., the remainder of your salary for the first year plus the guaranteed portion of your bonus, both defined above) or six months worth of base salary plus the guaranteed portion of your bonus, whichever is greater. You will be eligible for all corporate benefits in accordance with standard corporate policy. Tom Pledger and I are truly excited about the prospect of having you on our team, and I look forward to your starting in the near future. In this regard, I'm thinking that a start date of no later than November 23, 1998 is appropriate. I look forward to hearing from you. Best regards, DYCOM INDUSTRIES, INC. Steven Nielsen, President SEN/je 3 EX-21 5 SUBSIDIARIES 1 EXHIBIT (21) The following table sets forth the Registrant's subsidiaries and the jurisdiction of incorporation of each. Each subsidiary is 100% owned by the Registrant. ANSCO & ASSOCIATES, INC. A Florida corporation APEX DIGITAL, INC. f/k/a APEX DIGITAL TV, INC. A Kentucky corporation CABLE COM INC. A Delaware corporation COMMUNICATIONS CONSTRUCTION GROUP, INC. A Pennsylvania corporation ERVIN CABLE CONSTRUCTION, INC. A Kentucky corporation FIBER CABLE, INC. A Delaware corporation GLOBE COMMUNICATIONS, INC. A North Carolina corporation INSTALLATION TECHNICIANS, INC. A Missouri corporation IVY H. SMITH COMPANY A Florida corporation KOHLER CONSTRUCTION COMPANY, INC. A Florida corporation LAMBERTS' CABLE SPLICING COMPANY A North Carolina corporation LOCATING INC. A Washington corporation STAR CONSTRUCTION, INC. A Tennessee corporation S.T.S., INC. A Florida corporation TESINC, INC. An Arizona corporation EX-23.1 6 CONSENT OF DELOITTE & TOUCHE 1 Exhibit 23.1 Deloitte & Touche ----------------------------------------------------------------- Certified Public Accountants Deloitte & Touch LLP Suite 900 1645 Palm Beach Lakes Boulevard West Palm Beach, Florida 33401-2221 Telephone: (561) 687-4000 Facsimile: (561) 687-4061 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-46506 of Dycom Industries, Inc. on Form S-8 and Registration No. 333-72931 of Dycom Industries, Inc. on Form S-8 of our report dated August 30, 1999 appearing in this Annual Report on Form 10-K of Dycom Industries, Inc. for the year ended July 31, 1999. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Certified Public Accountants West Palm Beach, Florida October 4, 1999 EX-23.2 7 CONSENT OF NOWALK & ASSOCIATES 1 Exhibit 23.2 NOWALK & ASSOCIATES A Certified Public Accounting Firm, P.C. Richard G. Nowalk, CPA Constitution Center Dean P. Koehler, CPA 2650 Route 130 North - ----------------------------- Cranbury, New Jersey 08512 Michael G. Quinn, CPA (609) 655-4100 * (732) 246-7781 Homer T. Smith, CPA Fax (609) 655-5273 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in these Registration Statements No. 33-46506 and No. 333-72931 on Form S-8 of our report dated July 23, 1997, appearing in this Annual Report on Form 10-K of Dycom Industries, Inc. for the year ended July 31, 1998. /s/ Nowalk & Associates Nowalk & Associates Cranbury, New Jersey October 4, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DYCOM INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR ALL PERIODS PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. YEAR YEAR YEAR JUL-31-1997 JUL-31-1998 JUL-31-1999 JUL-31-1996 JUL-31-1997 JUL-31-1998 JUL-31-1997 JUL-31-1998 JUL-31-1999 5,276,112 35,927,307 97,955,007 0 0 0 49,241,590 63,022,011 98,179,792 1,029,093 2,210,978 4,129,280 12,277,114 16,449,417 43,101,631 70,336,712 118,193,282 241,129,345 83,287,399 97,794,772 148,160,838 46,951,187 54,929,575 68,749,956 112,511,881 166,318,091 384,549,726 49,434,042 46,378,616 78,605,798 31,307,802 18,135,772 12,420,981 0 0 0 0 0 0 6,333,938 7,361,366 8,542,663 36,092,854 91,017,582 278,747,916 112,511,881 166,318,091 384,549,726 0 0 0 311,238,108 368,713,563 470,136,925 0 0 0 246,025,594 285,038,220 347,719,784 11,814,577 13,496,694 20,143,191 0 0 0 2,619,191 2,045,571 1,695,920 23,770,489 36,081,264 60,612,322 7,956,851 13,045,644 24,162,347 15,813,638 23,035,620 36,449,975 0 0 0 0 0 0 0 0 0 15,813,638 23,035,620 36,449,975 0.84 1.09 1.58 0.83 1.07 1.55
-----END PRIVACY-ENHANCED MESSAGE-----