UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------------------------------------------------
FORM 8-K/A
Amendment No.2
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): o, 2003
Dycom Industries, Inc.
(Exact name of Registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation)
0-5423 59-1277135
(Commission (I.R.S. Employer
File Number) Identification No.)
4440 PGA Boulevard, Suite 500, Palm Beach Gardens, Florida 33410
(Address of principal executive offices) (Zip Code)
(561) 627-7171
(Registrant's telephone number, including area code)
Exhibit Index on page o
Item 2. Acquisition or Disposition of Assets
The acquisition of UtiliQuest was accounted for using the purchase
method of accounting. Accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and the liabilities assumed on the basis
of their respective fair values on the acquisition date. The purchase price in
excess of the fair value of the net tangible and identifiable assets acquired
will be allocated to goodwill. The purchase price allocation is not final and is
subject to changes upon completion of final valuations of certain assets.
Item 7. Financial Statements and Exhibits
This Amended Current Report on Form 8-K is filed to provide the
financial information with respect to the Acquisition required by Item 7 of Form
8-K and to amend the language of sections (a) and (b) of Item 7 of the Form 8-K
filed on December 11, 2003.
(a) Financial Statements of Business Acquired
Audited financial statements of UtiliQuest as of December 31,
2002 and for the year ended December 31, 2002.
Unaudited financial statements of UtiliQuest as of September 30,
2003 and for the nine months ended September 30, 2003 and September
30, 2002.
(b) Pro forma Financial Information
Unaudited pro forma condensed combined balance sheet of Dycom as
of October 25, 2003, which gives effect to the acquisition of
UtiliQuest and the acquisition of assets and assumption of certain
liabilities from First South as if it had occurred on October 25,
2003.
Unaudited pro forma condensed combined statements of operations
of Dycom for the year ended July 26, 2003 and for the three months
ended October 25, 2003, which gives effect to the acquisition of
UtiliQuest and the acquisition of assets and assumption of certain
liabilities from First South as if it had occurred on July 28, 2002.
2
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated as of
November 17, 2003, among Dycom Industries,
Inc., UtiliQuest Acquisition Corp.,
UtiliQuest Holdings Corp. and OCM/GFI Power
Opportunities Fund, L.P. (incorporated
herein by reference to Exhibit 10.3 of the
Form 10-Q for the Quarter Ended October 25,
2003 filed by Dycom on December 5, 2003,
File No. 001-10613).
23.1 Consent of PricewaterhouseCoopers.
99.1 Press Release, dated December 3, 2003
(incorporated herein by reference to Exhibit
99.1 of the Current Report on Form 8-K filed
by Dycom on December 4, 2003, File No.
001-10613).
3
UtiliQuest Holdings Corp.
Index to
Historical Financial Statements
Report of Independent Accountants 5
Consolidated Balance Sheet at December 31, 2002 6
Consolidated Statement of Operations for the year ended December 31, 2002 7
Consolidated Statement of Stockholder's Equity for the year ended 8
December 31, 2002
Consolidated Statement of Cash Flows for the year ended December 31, 2002 9
Notes to Consolidated Financial Statements for the year ended December 31, 2002 10
Consolidated Balance Sheet at September 30, 2003 (Unaudited) 24
Consolidated Statements of Operations for the nine months ended September 30, 2003
and September 30, 2002 (Unaudited) 25
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003
and September 30, 2002 (Unaudited ) 26
Notes to Unaudited Consolidated Financial Statements 27
4
Report of Independent Accountants
To the Board of Directors and Stockholders of
UtiliQuest Holdings Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
UtiliQuest Holdings Corp. and its subsidiaries at December 31, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
March 28, 2003, except as to
Note 16 for which the date is
December 3, 2003
Atlanta, Georgia
5
UtiliQuest Holdings Corp.
Consolidated Balance Sheet
December 31, 2002
Assets
Current Assets
Cash $ 2,013,000
Accounts receiveable, net of allowance of $535,000 12,842,000
Unbilled revenues 670,000
Prepaid expenses and other 2,500,000
Deferred tax assets 7,764,000
-----------------
Total current assets 25,789,000
Property and equipment, net 19,735,000
Goodwill 40,631,000
Intangible assets, net 18,260,000
Restricted cash - insurance trust 2,780,000
Other 625,000
-----------------
Total assets $ 107,820,000
-----------------
Liabilities and Stockholders' Equity
Current liabilities
Revolving credit line $ 8,144,000
Accounts payable 2,980,000
Accrued expenses 18,739,000
Capital lease obligations, current portion 3,795,000
Long-term debt, current portion 2,000,000
-----------------
Total current liabilities 35,658,000
Capital lease obligations, net of current portion 6,846,000
Deferred tax liabilities 4,101,000
Long term debt 24,100,000
-----------------
Total liabilities 70,705,000
-----------------
Commitments adn contingencies
Stockholders' equity
Common stock, $0.001 par value; 50,000,000 shares authorized,
41,462,000 issued and outstanding 41,000
Additional paid-in-capital 41,421,000
Retained deficit (4,347,000)
-----------------
Total stockholders' equity 37,115,000
-----------------
Total liabilities and stockholders' equity $ 107,820,000
=================
The accompanying notes are an integral part
of these consolidated financial statements.
6
UtiliQuest Holdings Corp.
Consolidated Statement of Operations
For the Year Ended December 31, 2002
Net revenues $ 119,701,000
---------------
Cost of revenues
Payroll and related cost 60,340,000
Transportation, insurance and direct operating supplies 30,198,000
Depreciation and amortization 5,324,000
---------------
Cost of revenues 95,862,000
---------------
Gross margin 23,839,000
---------------
Selling, general and administrative expenses
Salaries 6,628,000
Office related costs 12,102,000
Depreciation and amortization 3,305,000
Impairment loss on goodwill 4,917,000
---------------
Total selling, general and administrative expenses 26,952,000
---------------
Operating loss (3,113,000)
---------------
Other expense
Interest expense 2,412,000
Other 47,000
---------------
Total other expense 2,459,000
---------------
Loss before income tax benefit (5,572,000)
Income tax benefit (328,000)
---------------
Net loss $ (5,244,000)
===============
The accompanying notes are an integral part
of these consolidated financial statements.
7
UtiliQuest Holdings Corp.
Consolidated Statement of Stockholders' Equity
For the Year Ended December 31, 2002
Common Stock Additional Total
Issued and Amount Paid-in Retained Stockholders'
Authorized Outstanding (1) Capital (Deficit) Equity
---------- ----------- --------- ----------- ----------- -------------
Balances at January 1, 2002 50,000,000 36,000,000 $36,000 $35,964,000 $ 897,000 $ 36,897,000
Common stock issued - 5,462,000 5,000 5,457,000 - 5,462,000
Net Loss - - - (5,244,000) (5,244,000)
---------- ----------- --------- ----------- ----------- -------------
Balances at December 31, 2002 50,000,000 41,462,000 $41,000 $41,421,000 $(4,347,000) $ 37,115,000
========== =========== ========= =========== =========== =============
(1) The Company's common stock has a par value of $0.001 per share.
The accompanying notes are an integral part
of these consolidated financial statements.
8
UtiliQuest Holdings Corp.
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2002
Cash flows from operating activities
Net loss $ (5,244,000)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 8,629,000
Impairment loss on goodwill 4,917,000
Deferred income taxes (394,000)
Loss on sale of assets 198,000
Bad debt expense 302,000
Changes in operating assets and liabilities
Accounts receivable (892,000)
Unbilled revenues (149,000)
Income tax receivable 411,000
Prepaid expenses and other (1,005,000)
Accounts payable (553,000)
Accrued expenses (2,318,000)
-------------
Net cash provided by operating activities 3,902,000
-------------
Cash flows from investing activities
Purchases of property and equipment (1,533,000)
Proceeds from sale of property and equipment 456,000
Post acquisition settlement 3,600,000
Acquisitions, net of cash received (12,368,000)
-------------
Net cash used in investing activities (9,845,000)
-------------
Cash flows from financing activities
Restricted cash - insurance trust (1,530,000)
Net repayments on revolving credit line (2,904,000)
Proceeds from borrowings 17,582,000
Repayments of debt (8,976,000)
Proceeds from short-term loan 12,000,000
Repayment of short-term loan (12,000,000)
Payments on capital lease obligations (2,848,000)
Common stock issued 5,462,000
-------------
Net cash provided by financing activities 6,786,000
-------------
Net increase in cash and cash equivalents 843,000
Cash and cash equivalents, beginning of year 1,170,000
-------------
Cash and cash equivalents, end of year $2,013,000
=============
Supplemental disclosure of cash flow information
Interest paid during year $2,073,000
=============
Taxes paid during year $155,000
=============
Supplemental schedule of noncash investing and financing activities
Fair value of assets required 31,605,000
Less liabilities assumed (14,380,000)
-------------
$17,225,000
=============
Equipment acquired through capital lease $8,867,000
=============
The accompanying notes are an integral part
of these consolidated financial statements.
9
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements
December 31, 2002
1. Business and Organization
Business
UtiliQuest Holdings Corp. and its wholly owned subsidiaries, UtiliQuest,
LLC and Underground Technology, Inc. ("UGTI"), (collectively, "the
Company") provide a location and meter reading service primarily to utility
and telecommunication customers. A locating service places markings, above
ground, that indicate the presence of underground electric, gas, fiber
optic, cable, telephone, sewer and water facilities prior to excavation.
The Company's headquarters are in Atlanta, Georgia and has approximately 65
office locations in 18 states within the United States.
Organization
In early 1998, Byers Engineering formed Byers Locate Services LLC as a
separate operating unit. On July 30, 1998, Byers Engineering sold 74
percent of its operating unit to Enron. In conjunction with the sale, the
name of the operating unit was changed to UtiliQuest and a minority
interest was sold to Alan Robertson. Enron (74%), Byers Engineering (20%)
and Alan Robertson (6%) formed the Members of UtiliQuest ("Members"). On
November 3, 1998, UtiliQuest acquired the utility locating division of
Denver based Kelly Cable Corporation, expanding the Company's national
presence.
Effective August 31, 2001, the Company entered into a Member Unit Purchase
Agreement with OCM/GFI Power Opportunities Fund, L.P. (the "Acquisition
Agreement") to acquire 100 percent of the members' units of UtiliQuest,
LLC. The cash purchase price for the Members' units was approximately $59.8
million plus acquisition expenses of approximately $1.1 million. The cash
was obtained from an issuance of common stock of $36 million and $23.8
million in debt financing. The purchase price was allocated to the assets
and liabilities acquired using the estimated fair values at the date of
acquisition. The excess of purchase price over the estimated fair values
resulted in assigning approximately $36.8 million to goodwill and $11.9
million to an intangible asset - customer relationships. Goodwill and
intangible assets acquired in this transaction are tax deductible. The
Company assumed approximately $22 million of liabilities in the
transaction.
The Company has claimed that significant liabilities associated with locate
damages, workers' compensation and auto accruals (Note 7) were not properly
accrued on the closing balance sheet. On April 9, 2002, a settlement
agreement was created to establish an escrow that would address claims in
accordance with certain criteria. As of December 31, 2002, the Company has
submitted claims in accordance with the escrow criteria. See Note 16 for
further discussion on the settlement of these claims.
The amounts received as a result of the Company's successful claim against
the previous Members of UtiliQuest, LLC will be applied as a reduction to
goodwill recorded in connection with the acquisition.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of the
Company and its wholly owned subsidiaries, UtiliQuest LLC and UGTI. All
intercompany accounts and transactions are eliminated in consolidation.
In September 2002, the Company acquired Underground Technology, Inc. This
acquisition was accounted for using the purchase method of accounting;
hence, the Company's results include the results of this entity from its
acquisition date.
10
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of three
months or less when purchased to be cash equivalents.
The Company routinely has deposits at financial institutions, which
substantially exceed federal depository insurance coverage. Management
believes maintaining the deposits at large, reputable banks mitigates any
risks associated with these excess deposits.
Restricted Cash - Insurance Trust
Restricted cash represent deposits with certain financial institutions for
collateral on auto and workers compensation claims. The Company expects
that these amounts will never be depleted as other accounts with certain
minimum funding requirements have been established to pay the Company's
auto and workers compensation claims.
Revenue Recognition
Revenues are recorded as services are performed. Unbilled revenues
represent services performed and recognized as revenue, but not yet billed
to the customer due to the time lag in the processing of invoices.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided over the estimated useful lives
using the straight-line method. Useful lives range from: leasehold
improvements - the term of the respective lease or the estimated useful
life of the improvements, whichever is shorter; new vehicles - 4-5 years;
new equipment and machinery - 4-5 years; and furniture and fixtures - 3-10
years. Expenditures that extend the economic lives or improve the
efficiency of equipment are capitalized. The cost of maintenance and
repairs are expensed as incurred. Upon retirement or disposal, the related
cost and accumulated depreciation are removed from the respective accounts
and any resulting gain or loss is recognized in the consolidated statement
of operations.
Leasehold improvements and capital leases are amortized over the lease term
(which approximates the estimated useful lives of the underlying assets).
For income tax purposes, accelerated depreciation methods are primarily
used with the establishment of deferred income tax liabilities for the
resulting temporary differences.
Effective January 1, 2002, the Company changed its accounting estimate
relating to vehicle depreciation. The estimate service life for most
vehicles was decreased to four years. The change was based upon historical
actual usage of the vehicles. As a result of the change, 2002 net income
was decreased by approximately $315,000.
Long-Lived Assets
Long-lived assets other than goodwill and indefinite life intangibles are
reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used in operations are
measured by a comparison of the carrying amount of an asset to future
undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
its fair value of the assets.
11
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
Goodwill and Other Intangible Assets
Customer contracts and related customer relationships are being amortized
over the expected duration of those assets, generally 15 years. Deferred
loan costs are amortized over the term of the credit facilities.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS No.
142 establishes new standards for goodwill acquired in a business
combination, eliminates amortization of goodwill, and instead sets forth
methods to periodically evaluate goodwill for impairment. The Company early
adopted SFAS No. 142 on August 31, 2001. On an annual basis, at December
31, or when events and circumstances occur that may indicate impairment,
management evaluates the recoverability of acquired goodwill and other
intangible assets by comparing the carrying value of the assets to the
associated current and projected cash flows; management also considers
business prospects, market trends and other economic factors in performing
this evaluation. Impairment losses are measured as the amount by which the
carrying amount of the assets exceeds its fair value.
In December 2002, the Company received notice from SBC of a decision to
bring locating and other contracted services internally throughout its
subsidiaries. Shortly thereafter, Pacific Bell and Southwestern Bell,
subsidiaries of SBC, provided notice to the Company detailing plans to
start internal performance of the contract locating work. Pacific Bell
represented approximately 45 percent of Underground Technology Inc.'s
revenue and Southwestern Bell represented approximately 1.8 percent of
UtiliQuest LLC's revenue. The Company performed a review of its reporting
units as of December 31, 2002, and identified an impairment loss on the
Underground Technology, Inc. reporting unit. The valuation performed as
part of the analysis employed a combination of present value techniques to
measure fair value corroborated by comparisons to estimated market
multiples. Third party specialists were engaged to assist in the
valuations. As a result, the Company recorded a noncash impairment charge
of $4.9 million during fiscal 2002.
Deferred Financing Costs
Deferred financing costs are amortized over a period of five years, the
term of the relating debt instruments. Amortization of deferred financing
costs for the year ended December 31, 2002, was $757,000.
Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock based
employee compensation in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. 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 pro forma disclosures required by SFAS No. 148 are reflected below. No
stock-based compensation cost is reflected in net income as all options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. Had the Company used the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), the Company's pro forma net income
would have been as follows for the year ended December 31, 2002:
Net loss
As reported $ (5,244,000)
Stock-based compensation cost
(fair value method), net of related tax effects $ 7,000
Pro forma net loss $ (5,251,000)
12
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
In applying SFAS 123, the fair value of stock options granted by the
Company was estimated using the Black-Scholes option pricing model assuming
risk free rates of 3.61 percent for 2002, with no dividend yield, no
expected volatility and an expected term of seven years. The resulting
weighted average fair value of options granted during 2002 was $0.30.
Advertising Expense
The Company expenses all advertising costs as incurred. Advertising expense
for the year ended December 31, 2002, was $132,000.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Accordingly,
deferred tax assets and liabilities are recognized at the applicable income
tax rates based upon future tax consequences of temporary differences
between the tax bases and financial reporting bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Self-Insured Liabilities
The Company is self insured on locate damage claims, workers compensation,
auto insurance and healthcare. The Company is self insured on each claim,
up to certain limits. The Company accrues for specific claims and an
estimate of claims incurred but not reported. The amounts are accrued based
on historical experience and specific analysis of the claims. The
self-insured claim liability includes incurred but not reported losses of
$2,099,000 at December 31, 2002. The determination of such claims and
expenses and the appropriateness of the related liability is periodically
reviewed and updated. Because the company retains these risks, up to
certain limits, a change in experience could materially affect results of
operation in a particular period.
Fair Value of Financial Instruments
The fair value of cash, accounts receivable and trade accounts payable and
accrued expenses are not materially different than their carrying amounts
as reported at December 31, 2002, due to the short-term nature of these
accounts. The December 31, 2002, debt balances under the credit facility
approximate the fair value on the basis of the variable interest related to
such debt.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and (or) normal use
of the asset.
13
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
The Company is required and plans to adopt the provisions of SFAS No. 143
on January 1, 2003. Upon initial application, entities are required to
recognize a liability for any existing asset retirement obligations
adjusted for cumulative accretion to the date of adoption of this
Statement. An asset retirement cost would be capitalized as an increase to
the carrying amount of the associated long-lived asset, and would be
subject to depreciation. The cumulative effect, if any, of initially
applying this Statement will be recognized as a change in accounting
principle. The Company does not believe there are any obligations meeting
the criteria of the standard.
In December of 2002, the Company elected early adoption of SFAS No. 145
Rescission of FASB Statement No. 4, 44 and 64, Amendment to FASB Statement
No. 13, and Technical Corrections of April 2002. Under the new accounting
standard, gains and losses incurred upon the extinguishment of debt may no
longer qualify for extraordinary treatment and are now included as a
component of income or loss before taxes. The Company has adopted SFAS No.
145 in the financial statements and accordingly has recorded in interest
expense $570,000 for the year ended December 31, 2002, related to the
extinguishment of debt.
In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, was issued. This statement requires the recording of
costs associated with exit or disposal activities at their fair values once
a liability exists. Under previous guidance, certain exit costs were
accrued when management committed to an exit plan, which may have been
before an actual liability arose. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31,
2002, with early adoption encouraged. The adoption of SFAS No. 146 did not
have a material impact on the Company's financial statements.
In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure was issued. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock based awards using
the fair value method. However, the disclosure provisions are required for
all companies with stock based employee compensation, regardless of whether
they utilize the fair value method of accounting described in SFAS No. 123
or the intrinsic value method described in APB Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS No. 148's transition provisions are
effective for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure provisions of SFAS No. 148.
In November 2002, FASB Interpretation No. ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, was issued. This interpretation
requires elaborating on the disclosures that must be made by a guarantor in
its interim and annual financial statements about obligations under certain
guarantees or warranties that it has issued. FIN 45 also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of this FIN are effective for
financial statements issued after December 15, 2002 and its recognition
requirements are applicable for guarantees issued or modified after
December 31, 2002. The Company has not entered into or modified any
guarantees subsequent to December 15, 2002, and the Company does not have
any material warranties.
In January 2003, FIN 46, Consolidation of Variable Interest Entities, was
issued with the objective of improving financial reporting by companies
involved with variable interest entities. A variable interest entity is a
corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights, or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. Historically,
entities generally were not consolidated unless the entity was controlled
through voting interests. FIN 46 requires that a variable
14
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
interest entity be consolidated by a company if that company is the primary
beneficiary of the variable interest entity. Primary beneficiary means the
company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. FIN 46 also sets forth disclosure
requirements for those variable interest entities to which the company is
not the primary beneficiary and therefore would not be consolidated. The
disclosures are required in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was created. The
Company does not have any interests in variable interest entities.
3. Acquisition
On September 17, 2002, the Company acquired 100 percent of the common stock
of UGTI for approximately $24 million in cash and notes, plus acquisition
expenses of approximately $1 million. UGTI engages in performing
underground locating services to major utility and telecommunication
companies in California. This acquisition expands the Company's
geographical presence within the western portion of the United States. The
purchase price of $24 million was paid as approximately $17 million in cash
and approximately $7 million in notes payable to the seller. The purchase
price was allocated to the assets and liabilities acquired using the
estimated fair values at the date of acquisition. The excess of purchase
price over the estimated fair value resulted in assigning approximately $13
million to goodwill and $6.1 million to an intangible asset - customer
relationships. The Company engaged the assistance of an independent
valuation company which employed the use of the capitalized free cash flow
methodology to determine the basis of allocation. This methodology
determines the fair value of a reporting unit's assets by analyzing the
free cash flows that the business can generate, and making a determination
of what an investor would be willing to pay for this cash flow stream,
given its overall risk and anticipated growth. Goodwill and intangible
assets acquired in this transaction are not tax deductible.
The Company also acquired $4.9 million of cash classified as current assets
below. The operating results of UGTI are included in the accompanying
consolidated financial statements from September 17, 2002.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at September 17, 2002:
Current assets $10,735,000
Property, plant and equipment 1,728,000
Intangible assets 6,100,000
Goodwill 13,042,000
---------------
Total assets acquired 31,605,000
---------------
Current liabilities 7,302,000
Long-term liabilities 478,000
Notes payable 6,600,000
---------------
Total liabilities assumed 14,380,000
---------------
Net assets acquired $17,225,000
===============
The notes issued to the sellers in conjunction with the acquisition are
deferred payments that mitigate the Company's exposures to potential
liabilities related to unrecorded locate damage claims at the date of the
sale and certain potential tax liabilities. To the extent the liabilities
are discovered within the contracted time period, the face amount of the
notes will be reduced by the amounts paid by the Company on the potential
liabilities. The notes are comprised of Promissory Note A and Promissory
Note B. Promissory Note A is a three year note with a principal of
$3,000,000 and bears interest at 6 percent, payable semi-annually on March
31 and September 30. Promissory Note B is a seven year note with a
principal of $3,600,000 and bears interest at 6 percent, payable
semi-annually on March 31 and September 30.
See Note 16 for further discussion on the settlement of Promissory Note A.
15
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
The following unaudited pro forma summaries present the Company's
consolidated results of operations as if the foregoing acquisition had
occurred on January 1, 2002:
Total revenues $135,642,000
Net loss $ (6,351,000)
4. Property and Equipment
Property and equipment consisted of the following at December 31, 2002:
Capital
Owned Leases Total
Vehicles and automotive equipment $ 5,356,000 $ 11,976,000 $ 17,332,000
Locate and field equipment 4,809,000 19,000 4,828,000
Computer hardware and software 2,650,000 2,572,000 5,222,000
Furniture and fixtures 622,000 185,000 807,000
Leasehold improvements 153,000 - 153,000
----------------------------------------------------
13,590,000 14,752,000 28,342,000
Less: accumulated depreciation
and amortization
5,122,000 3,485,000 8,607,000
----------------------------------------------------
$ 8,468,000 $ 11,267,000 $ 19,735,000
====================================================
Depreciation and amortization expense was approximately $7,002,000 for the
year ended December 31, 2002. Maintenance and repairs of property and
equipment was approximately $1,940,000 for the year ended December 31,
2002. The net book value of computer software at December 31, 2002, was
$547,000.
5. Intangible Assets
Intangible assets at December 31, 2002, consist of the following:
Estimated
Useful Lives
Carrying amount
Customer contracts and related customer relationships 15 years $ 18,210,000
Debt issuance costs 5 years 965,000
-------------
19,175,000
Accumulated amortization
Customer contracts and related customer relationships (895,000)
Debt issuance costs (20,000)
-------------
$ 18,260,000
=============
Amortization expense was $1,627,000 for the year ended December 31, 2002.
Debt issuance costs of $712,000, were written off in conjunction with the
Company's new credit agreement (Note 8).
16
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
Estimated amortization expense for 2003 and each of the five succeeding
fiscal years is as follows:
2003 $ 1,440,000
2004 1,416,000
2005 1,416,000
2006 1,416,000
2007 1,400,000
-------------
$ 7,088,000
=============
6. Goodwill
A summary of changes in the Company's goodwill during the year ended
December 31, 2002, is as follows:
Goodwill
Balance, January 1, 2002 $ 36,802,000
Additions (Note 3) 13,146,000
Post acquisition settlement (4,400,000)
Impairment (4,917,000)
------------
Balance, December 31, 2002 $ 40,631,000
============
Post Acquisition Settlement
Under the Acquisition Agreement, the Company had sixty days to adjust
the preliminary balance sheet. The Company filed a working capital
adjustment during 2001 and received approximately $3.6 million in cash
and approximately $800,000 of management fees were discharged.
Goodwill Impairment
Under SFAS 142, goodwill and intangible assets with indefinite useful
lives are not amortized but instead are reviewed for impairment at
least annually and written down only in periods in which it is
determined that the fair value is less than the recorded value. SFAS
142 also requires the transitional impairment review for goodwill, as
well as an annual impairment review, to be performed on a reporting
unit basis. In connection with the Company's annual review, recorded
goodwill was determined to be impaired in the UGTI reporting unit due
to changes within a major customer contract. In the fourth quarter of
2002, the Company completed its annual impairment review of UGTI and
recognized an impairment loss of $4,917,000.
7. Accrued Expenses
Accrued expenses consisted of the following at December 31:
2002
Locate damage claims $ 9,278,000
Accrued payroll and related 4,040,000
Workers' compensation claims 2,172,000
Auto insurance claims 935,000
Healthcare claims 544,000
Other accrued liabilities 1,770,000
------------
$18,739,000
============
17
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
The Company is self insured for the first $250,000 of claims on locate
damages. The locate damages represent claims for harm to property,
persons or job overruns (time and material overruns). The Company's
customer or their representative reports damages, which are
investigated and assessed by the Company. The potential claim is
estimated and developed by the Company based on facts, circumstances
and historical evidence.
Due to the significance of the self insured portions of the Company's
insurance claims, the insurer has custody of $2,780,000 in cash
deposits at December 31, 2002. The amount is reported as restricted
cash in the accompanying consolidated balance sheet.
8. Revolving Credit Line and Long-Term Debt
On December 6, 2002, the Company entered into a revolving credit
facility and term loan agreement ("Credit Agreement"). The proceeds
from the new agreement were used to repay the previous revolving
credit line, term loan and security agreement. The Company recorded
expense of $712,000 for the remaining deferred financing costs
associated with the previous debt agreement during 2002. Long-term
debt consists of approximately $7 million in notes payable (Note 3)
and a term loan of $19.5 million.
Revolving Credit Line
The Revolving Credit Line accrues interest at a rate equal to Prime
plus 1.50 percent or 5.75 percent at December 31, 2002. The Revolving
Credit Line matures on December 6, 2007. The maximum amount allowed
for borrowing under the Revolving Credit Line is the lesser of (i)
$16,000,000 less any outstanding letter of credit arrangements or (ii)
90 percent of eligible accounts receivables plus the pre-set amortized
advance amount, referred to as total availability. The Company had an
available borrowing base of $12,869,000 under the revolving credit
facility at December 31, 2002 based on the lending formula, of which
$8,144,000 was used.
Term Loan
Principal payments are due quarterly, beginning in April 2003 and
interest payments on the Term Loan are due monthly, beginning January
2003, until January 2008. The Term Loan accrues interest at a rate
equal to Prime plus 4.25 percent, or 8.50 percent at December 31,
2002. The Company deferred approximately $965,000 of fees related to
the credit agreement, which are being amortized over its five-year
term. The Company is required to pay an annual nonutilization fee
equal to one percent of the unused portion of the credit capacity.
The credit agreement is collateralized by substantially all of the
Company's assets. The credit agreement contains certain covenants,
which are financial and nonfinancial in nature. The credit agreement
imposes certain conditions including restricting the Company's ability
to encumber assets or incur certain types of indebtedness and
maintaining a leverage ratio of not greater than 3.25, as measured at
the end of each fiscal quarter. Given the Company's recent
acquisition, anticipated cash flow and EBITDA results fell outside the
credit agreement's EBITDA covenant. Therefore, as of December 31,
2002, the Company failed to meet its EBITDA covenant. The Financial
Cure Notice included in the debt agreement allows the Company to meet
the financial covenants retroactively through an equity capital
contribution. The Company received an equity capital contribution of
$1.5 million from its largest shareholder on April 18, 2003. The
contribution was made in exchange for 1,200,000 of additional common
shares. The provision for the contribution allowed the Company to meet
compliance with all financial covenants and conditions under the
credit agreement for the year ended December 31, 2002.
18
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
Future maturities of the term debt and promissory notes (Note 3) are
as follows:
2003 $ 2,000,000
2004 3,000,000
2005 7,000,000
2006 5,000,000
2007 5,500,000
Thereafter 3,600,000
--------------
$ 26,100,000
==============
9. Income Taxes
Income tax benefit consisted of the following for the year ended
December 31, 2002:
Federal
Current $ -
Deferred (362,000)
----------------
(362,000)
----------------
State
Current 66,000
Deferred (32,000)
----------------
34,000
----------------
$ (328,000)
================
The tax benefit differs from the amount that would be calculated by
applying the federal statutory rate of 34 percent to income before
income taxes as follows:
Expected tax benefit $ (1,894,000)
State income taxes 279,000
Nondeductible goodwill impairment 1,672,000
Other (385,000)
----------------
Benefit of income taxes $ (328,000)
================
The Company's deferred tax assets and liabilities consists of the
following at December 31, 2002:
Current deferred tax assets
Net operating loss carryforward $6,156,000
Allowance for doubtful accounts 209,000
Nondeductible accruals 1,110,000
AMT credit carryforward 34,000
Other 255,000
--------------
Current deferred tax assets 7,764,000
--------------
Long-term deferred tax liabilities
Property and equipment (2,578,000)
Goodwill amortization (1,416,000)
Acquisition costs (107,000)
--------------
Long-term deferred tax liabilities (4,101,000)
--------------
$ 3,663,000
==============
19
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
Realization of the Company's deferred tax asset is dependent on
generating sufficient taxable income in the future. When determining
when to record a valuation allowance, management considers whether it
is more likely than not that the deferred tax assets will be realized.
The Company generated a net operating loss carryforward during the
year ended December 31, 2002, of $16,033,000. This carryforward is
available to offset future taxable income. The net operating loss
carryforward will begin to expire December 31, 2021.
The utilization of a portion of the net operating losses is limited on
an annual basis due to a change in ownership of UGTI. Management does
not believe that these limitations will significantly impact the
Company's ability to utilize the net operating losses before they
expire.
10. Stock Option Plan
The 2001 Omnibus Stock Incentive Plan (the "Plan") for certain
employees (including executive officers) reserved 3.6 million shares
of common stock for future issuance upon exercise of options. The
options vest over a five-year period and expire at the earliest of (1)
the end of ten years from the date of grant, (2) sixty days following
the termination of the holder's employment, (3) immediately if
employment is terminated for cause, or (4) six months following the
death or disability of the holder.
The options are granted with an exercise price equal to the fair
market value of the stock on the grant date. The Company is accounting
for its options under APB Opinion 25 and, accordingly, no
compensation cost has been recognized for stock options in the
consolidated financial statements.
A summary of the status and changes in shares of the Company's common
stock subject to option under the option plan is as follows:
Shares Subject Average Exercise
to Option Price
-------------- -----------------
Balance, January 1, 2002 2,370,000 1.00
Granted 70,000 1.18
Exercised - -
Forfeited - -
--------------
Balance, December 31, 2002 2,440,000 1.01
==============
Outstanding Exercisable
------------------------------------------ ------------------------------
Average Average
Average Exercise Exercise
Exercise Price Range Options Life Price Options Price
------------------------------------ ------- --------- --------- --------- ---------
$ 1.00 2,390,000 9 1.00 474,000 1.00
$ 1.25 50,000 10 1.25 - -
----------- ---------
$1.00-1.25 2,440,000 474,000
=========== =========
20
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
11. Employee Benefit Plans
Profit-Sharing Plans
The Company has defined contribution plans for their employees, which
are qualified under Section 401(k) of the Internal Revenue Code. They
typically provide benefits to a broad group of employees and may not
discriminate in favor of highly compensated employees in coverage,
benefits or contributions. Under the provisions of the Plans, eligible
participants may elect to contribute up to the maximum amount of
tax-deferred contributions allowed by the Internal Revenue Code. The
Company's employees may voluntarily participate in the 401(k) Savings
Plans upon meeting eligibility requirements. The Company provides
matching employer contributions, which are vested over time. The
Company's contribution to the UtiliQuest plan is a match of 30 percent
of employee's contributions. This match is limited to employee
contributions of up to 5 percent of the pre-tax compensation. The
Company's contribution to the UGTI plan is a match of 10 percent of
employee's contributions. This match is limited to employee
contributions of up to 15 percent of the pre-tax compensation.
The investment election for the employee's contribution is
employee-driven and the company's match follows this election. The
Company contributed approximately $129,000 in matching contributions
for the year ended December 31, 2002.
Incentive Plans
To award employees for safety and to compensate employees for
performance, the Company maintains various incentive plans. Under
these plans, employees may receive additional incentive payments based
either on a percentage of salary, revenue or profit, or at
management's discretion. Under these plans, the Company expensed
approximately $1,665,000 for the year ended December 31, 2002.
12. Leases
The Company has entered into certain noncancelable operating and
capital lease agreements with respect to certain office space,
vehicles and computer equipment.
The approximate future minimum lease payments under noncancelable
operating and capital leases as of December 31, 2002, are as follows:
Operating Capital
Leases Leases
--------- -------
2003 $ 1,570,000 $ 4,630,000
2004 816,000 4,175,000
2005 344,000 3,189,000
2006 - 755,000
----------- --------------
$ 2,730,000 12,749,000
Less interest portion =========== (2,108,000)
--------------
Present value of net minimum lease payments 10,641,000
Less capital lease obligation, current portion (3,795,000)
Capital lease obligation, net of current portion --------------
$ 6,846,000
==============
Rental expense under noncancelable operating leases was approximately
$1,986,000 for the year ended December 31, 2002.
21
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
13. Commitments and Contingencies
Litigation
The Company is involved in various claims and lawsuits, which arise in
the normal course of its business. These claims and lawsuits have
arisen as a result of equal employment opportunity ("EEOC") cases,
locate damage, workers' compensation and auto claims (Note 7). The
Company estimates an accrual for settlement of damages incurred in
providing services to its customers and has accrued for any exposure
in the accompanying consolidated financial statements. The Company has
sought legal consultation and believes that the ultimate liability
related to such claims and lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
14. Concentration of Credit Risks
The Company's customer case includes large utility and
telecommunications companies located throughout the United States.
These companies result in a concentration of credit risk for the
Company. Approximately 27 percent of the Company's revenues were
derived from the largest three customers: BellSouth (11%), Qwest (8%)
and Verizon (8%) for the year ended December 31, 2002. These customers
also account for approximately 30 percent of the Company's gross
outstanding accounts receivable at December 31, 2002. The total
outstanding trade receivables from BellSouth, Qwest and Verizon were
approximately $1,858,000 or 14 percent, $1,037,000 or 7.8 percent and
$1,135,000 or 8.5 percent, respectively, of the outstanding trade
receivables.
15. Related-Party Transactions
The Company has paid $53,000 during 2002, for out-of-pocket costs to
the Company's largest shareholder.
The Company has an agreement to pay its largest shareholder $21,000
per month in management fees. The Company has accrued $333,000 for the
year ended December 31, 2002. These amounts were unpaid as of December
31, 2002.
In conjunction with the UGTI acquisition, the OCM/GFI Power
Opportunities Fund L.P. provided short term financing to UtiliQuest
Holdings for the purchase of 100 percent of the UGTI stock. The
financing was executed through a capital contribution of approximately
$5,462,000 and a short term loan for $12,000,000. The short term loan
was repaid upon the closing of the Company's new Credit Agreement on
December 6, 2002.
16. Subsequent Event
On April 18, 2003, the Company received an equity capital contribution
of $1.5 million from its largest shareholder in exchange for 1,200,000
shares of common stock.
Pursuant to the April 9, 2002 settlement agreement as discussed in
Note 1, on November 11, 2003, the Company reached an agreement with
the previous Members of UtiliQuest to settle all pre-closing claims
associated with the Acquisition Agreement. The settlement provides for
payment by the members of $1,250,000 plus release of a certain
bankruptcy obligation. In exchange, the Company will provide a global
release of all indemnity obligations associated with the acquisition.
The Company expects the related documents to be executed during the
first quarter of 2004.
On November 26, 2003, the Company entered into a settlement agreement
with the seller that renegotiated Promissory Note A. In exchange for
an immediate repayment of $2,000,000 on Promissory Note A, the seller
would be released from claims arising out of potential liabilities
incurred prior to September 17,
22
UtiliQuest Holdings Corp.
Notes to Consolidated Financial Statements (continued)
December 31, 2002
2002, the acquisition date. The Company received a release from the
remaining obligation of Promissory Note A and any accrued interest on
Promissory Note A.
Effective December 3, 2003, the Company was acquired by Dycom
Industries, Inc. for an aggregate payment of approximately $120
million in cash, including the payout of all stock options for
approximately $2.5 million.
23
UtiliQuest Holdings Corp.
Consolidated Balance Sheet
September 30, 2003
September 30,
2003
(unaudited)
Assets -----------------
Current Assets
Cash $ 1,540,000
Accounts receiveable, net of allowance of $455,000 15,090,000
Unbilled revenues 1,025,000
Prepaid expenses and other 3,351,000
Deferred tax assets 5,502,000
----------
Total current assets 26,508,000
Property and equipment, net 16,588,000
Goodwill 40,642,000
Intangible assets, net 17,414,000
Restricted cash - insurance trust 4,295,000
Other 691,000
----------------
Total assets $ 106,138,000
----------------
Liabilities and Stockholders' Equity
Current liabilities
Revolving credit line $ 5,422,000
Accounts payable 3,320,000
Accrued insurance claims 3,508,000
Other accrued expenses 16,556,000
Capital lease obligations, current portion 4,547,000
Long-term debt, current portion 2,500,000
----------------
Total current liabilities 35,853,000
Capital lease obligations, net of current portion 6,114,000
Deferred tax liabilities 2,013,000
Long term debt 22,600,000
----------------
Total liabilities 66,580,000
----------------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value; 50,000,000 shares authorized,
42,700,000 issued and outstanding 43,000
Additional paid-in capital 42,919,000
Retained deficit (3,404,000)
----------------
Total stockholders' equity 39,558,000
----------------
Total liabilities and stockholders' equity $ 106,138,000
-----------------
See notes to unaudited financial statements
24
UtiliQuest Holdings Corp.
Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and September 30, 2002
For the Nine Months Ended
---------------------------------------
September 30, September 30,
2003 2002
(Unaudited) (Unaudited)
-------------------- ---------------
Net revenues $ 102,628,000 $ 86,460,000
Cost of revenues
Payroll and related cost 52,060,000 43,388,000
Transportation, insurance and direct operating supplies 25,431,000 20,964,000
Depreciation and amortization 5,700,000 3,569,000
----------------- --------------
Cost of revenues 83,191,000 67,921,000
----------------- --------------
Gross margin 19,437,000 18,539,000
----------------- --------------
Selling, general and administrative expenses
Salaries 6,721,000 7,044,000
Office related costs 6,005,000 6,370,000
Depreciation and amortization 1,550,000 1,861,000
----------------- --------------
Total selling, general and administrative expenses 14,276,000 15,275,000
----------------- --------------
Operating profit 5,161,000 3,264,000
Other expense
Interest expense 2,737,000 1,295,000
Other 612,000 201,000
----------------- --------------
Total other expense 3,349,000 1,496,000
----------------- --------------
Income before income tax provision 1,812,000 1,768,000
Income tax provision 869,000 736,000
----------------- --------------
Net income $ 943,000 $ 1,032,000
================= ==============
See notes to unaudited financial statements
25
UtiliQuest Holdings Corp.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and September 30, 2002
For the Nine Months Ended
------------------------------------
September 30, September 30,
2003 2002
(Unaudited) (Unaudited)
------------------ -----------------
Cash flows from operating activities
Net income $ 943,000 $ 1,032,000
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 7,250,000 5,430,000
Deferred income taxes 552,000 (394,000)
Loss on sale of assets 521,000 103,000
Bad debt expense (19,000) 170,000
Changes in operating assets and liabilities
Accounts receivable (2,229,000) (3,276,000)
Unbilled revenues (355,000) 36,000
Income tax receivable -- 411,000
Prepaid expenses and other (917,000) 724,000
Accounts payable 340,000 (3,034,000)
Accrued expenses 947,000 (1,024,000)
------------------ -----------------
Net cash provided by operating activities 7,033,000 178,000
------------------ -----------------
Cash flows from investing activities
Purchases of property and equipment (4,033,000) (1,736,000)
Proceeds from sale of property and equipment 398,000 375,000
Post acquisition settlement (11,000) 3,600,000
Acquisitions, net of cash received -- (10,782,000)
------------------ -----------------
Net cash used in investing activities (3,646,000) (8,543,000)
------------------ -----------------
Cash flows from financing activities
Net proceeds on revolving credit line -- 2,122,000
Restricted cash (1,515,000) (3,462,000)
Proceeds from short-term loan 891,000 12,000,000
Repayments on term notes (1,000,000) (1,908,000)
Payments on loan origination costs (143,000) --
Net payments on lease obligations (3,593,000) (1,975,000)
Common stock issued 1,500,000 5,462,000
------------------ -----------------
Net cash (used in) provided by financing activities (3,860,000) 12,239,000
------------------ -----------------
Net (decrease) increase in cash and cash equivalents (473,000) 3,874,000
Cash and cash equivalents, beginning of period 2,013,000 1,170,000
------------------ -----------------
Cash and cash equivalents, end of period $ 1,540,000 $ 5,044,000
================== =================
Supplemental disclosure of cash flow information
Interest paid during period $ 2,706,000 $ 1,373,000
================== =================
Taxes paid during period $ 62,000 $ 85,000
================== =================
Supplemental schedule of noncash investing and financing activities
Equipment acquired through capital lease $ 3,459,000 $ 8,865,000
================== =================
See notes to unaudited financial statements
26
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
1. Business and Organization
Business
UtiliQuest Holdings Corp. and its wholly owned subsidiaries,
UtiliQuest, LLC and Underground Technology, Inc. ("UGTI"),
(collectively, "the Company") provide a location and meter reading
service primarily to utility and telecommunication customers. A
locating service places markings, above ground, that indicate the
presence of underground electric, gas, fiber optic, cable, telephone,
sewer and water facilities prior to excavation. The Company's
headquarters are in Atlanta, Georgia and has approximately 65
office locations in 18 states within the United States.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of
the Company and its wholly owned subsidiaries, UtiliQuest LLC and
UGTI. All intercompany accounts and transactions are eliminated in
consolidation.
In September 2002, the Company acquired Underground Technology, Inc.
This acquisition was accounted for using the purchase method of
accounting; hence, the Company's results include the results of this
entity from its acquisition date.
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of
three months or less when purchased to be cash equivalents.
The Company routinely has deposits at financial institutions, which
substantially exceed federal depository insurance coverage. Management
believes maintaining the deposits at large, reputable banks mitigates
any risks associated with these excess deposits.
Restricted Cash - Insurance Trust
Restricted cash represent deposits with certain financial institutions
for collateral on auto and workers compensation claims. The Company
expects that these amounts will never be depleted as other accounts
with certain minimum funding requirements have been established to pay
the Company's auto and workers compensation claims.
Revenue Recognition
Revenues are recorded as services are performed. Unbilled revenues
represent services performed and recognized as revenue, but not yet
billed to the customer due to the time lag in the processing of
invoices.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided over the
estimated useful lives using the straight-line method. Useful lives
range from: leasehold improvements - the term of the respective lease
or the estimated useful life of the improvements, whichever is
shorter; new vehicles - 4-5 years; new equipment and machinery - 4-5
years; and furniture and fixtures - 3-10 years. Expenditures that
extend the economic lives or improve the efficiency of equipment are
capitalized. The cost of maintenance and repairs are expensed as
incurred. Upon retirement or disposal, the related cost and
accumulated depreciation are removed from the respective accounts and
any resulting gain or loss is recognized in the consolidated statement
of operations.
Leasehold improvements and capital leases are amortized over the lease
term (which approximates the estimated useful lives of the underlying
assets). For income tax purposes, accelerated depreciation methods are
primarily used with the establishment of deferred income tax
liabilities for the resulting temporary differences.
27
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
Effective January 1, 2002, the Company changed its accounting estimate
relating to vehicle depreciation. The estimate service life for most
vehicles was decreased to four years. The change was based upon
historical actual usage of the vehicles. As a result of the change,
2002 net income was decreased by approximately $315,000.
Long-Lived Assets
Long-lived assets other than goodwill and indefinite life intangibles
are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used in
operations are measured by a comparison of the carrying amount of an
asset to future undiscounted cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds its fair value of the assets.
Goodwill and Other Intangible Assets
Customer contracts and related customer relationships are being
amortized over the expected duration of those assets, generally l 5
years. Deferred loan costs are amortized over the term of the credit
facilities.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS
No. 142 establishes new standards for goodwill acquired in a business
combination, eliminates amortization of goodwill, and instead sets
forth methods to periodically evaluate goodwill for impairment. The
Company early adopted SFAS No. 142 on August 31, 2001. On an annual
basis, at December 31, or when events and circumstances occur that may
indicate impairment, management evaluates the recoverability of
acquired goodwill and other intangible assets by comparing the
carrying value of the assets to the associated current and projected
cash flows; management also considers business prospects, market
trends and other economic factors in performing this evaluation.
Impairment losses are measured as the amount by which the carrying
amount of the assets exceeds its fair value.
Deferred Financing Costs
Deferred financing costs are amortized over a period of five years,
the term of the relating debt instruments. Amortization of deferred
financing costs for the nine months ended September 30, 2003 and 2002,
respectively, was $180,000 and $104,000.
Advertising Expense
The Company expenses all advertising costs as incurred. Advertising
expense for the nine months ended September 30, 2003 and 2002,
respectively, was $57,000 and $87,000.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Accordingly, deferred tax assets and liabilities are recognized at the
applicable income tax rates based upon future tax consequences of
temporary differences between the tax bases and financial reporting
bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. Deferred
tax assets are reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be
realized.
Self-Insured Liabilities
The Company is self insured on locate damage claims, workers
compensation, auto insurance and healthcare. The Company is self
insured on each claim, up to certain limits. The Company accrues for
specific claims and an estimate of claims incurred but not reported.
The amounts are accrued based on historical experience and specific
analysis of the claims. The self-insured claim liability includes
incurred but not reported losses of $1,405,000 at September 30, 2003.
The determination of such claims and expenses and the appropriateness
of the related liability is periodically reviewed and updated. Because
the company retains these risks, up to certain limits, a change in
experience could materially affect results of operation in a
particular period.
28
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
Fair Value of Financial Instruments
The fair value of cash, accounts receivable and trade accounts payable
and accrued expenses are not materially different than their carrying
amounts as reported at September 30, 2003, due to the short-term
nature of those accounts. The September 30, 2003 debt balances under
the credit facility approximate the fair value on the basis of the
variable interest related to such debt.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In May 2003, FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This statement requires certain financial instruments that
could previously be accounted for by issuers as equity be classified
as liabilities or, in some cases, assets. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not have any
financial instruments that are impacted by SFAS No. 150.
3. Acquisition
On September 17, 2002, the Company acquired 100 percent of the common
stock of UGTI for approximately $24 million in cash and notes, plus
acquisition expenses of approximately $1 million.. UGTI engages in
performing underground locating services to major utility and
telecommunication companies in California. This acquisition expands
the Company's geographical presence within the western portion of the
United States. The purchase price of $24 million was paid as
approximately $17 million in cash and approximately $7 million in
notes payable to the seller. The purchase price was allocated to the
assets and liabilities acquired using the estimated fair values at the
date of acquisition, The excess of purchase price over the estimated
fair value resulted in assigning approximately $13 million to goodwill
and $6.1 million to an intangible asset - customer relationships. The
Company engaged the assistance of an independent valuation company
which employed the use of the capitalized free cash flow methodology
to determine the basis of allocation. This methodology determines the
fair value of a reporting unit's assets by analyzing the free cash
flows that the business can generate, and making a determination of
what an investor would be willing to pay for this cash flow stream,
given its overall risk and anticipated growth. Goodwill and intangible
assets acquired in this transaction are not tax deductible.
The Company also acquired $4.9 million of cash classified as current
assets below. The operating results of UGTI are included in the
accompanying consolidated financial statements from September 17,
2002.
29
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at September 17, 2002:
Current assets $10,735,000
Property, plant and equipment 1,728,000
Intangible assets 6,100,000
Goodwill 13,042,000
-----------
Total assets acquired 31,605,000
-----------
Current liabilities 7,302,000
Long-term liabilities 478,000
Notes payable 6,600,000
-----------
Total liabilities assumed 14,380,000
-----------
Net assets acquired $17,225,000
===========
The notes issued to the sellers in conjunction with the acquisition
are deferred payments that mitigate the Company's exposures to
potential liabilities related to unrecorded locate damage claims at
the date of the sale and certain potential tax liabilities. To the
extent the liabilities are discovered within the contracted time
period, the face amount of the notes will be reduced by the amounts
paid by the Company on the potential liabilities. The notes are
comprised of Promissory Note A and Promissory Note B. Promissory Note
A is a three year note with a principal of $3,000,000 and bears
interest at 6 percent, payable semi-annually on March 31 and September
30. Promissory Note B is a seven year note with a principal of
$3,600,000 and bears interest at 6 percent, payable semi-annually on
March 31 and September 30.
See Note 11 for further discussion on the settlement of Promissory
Note A.
4. Property and Equipment
Property and equipment consisted of the following at September 30,
2003:
Capital
Owned Leases Total
----------- ------------- -------------
Vehicles and automotive equipment $ 3,306,000 $ 14,433,000 $ 17,739,000
Locate and field equipment 4,583,000 19,000 4,602,000
Computer hardware and software 2,487,000 3,363,000 5,850,000
Furniture and fixtures 546,000 185,000 731,000
Leasehold improvements 153,000 - 153,000
------------ ------------- -------------
11,075,000 18,000,000 29,075,000
Less accumulated depreciation and amortization 5,767,000 6,720,000 12,487,000
------------ ------------- ------------
$ 5,308,000 $ 11,280,000 $ 16,588,000
============ ============= =============
Depreciation and amortization expense was approximately $6,261,000 and
$4,731,000 for the nine months ended September 30, 2003 and 2002,
respectively. Maintenance and repairs of property and equipment was
approximately $1,878,000 and $1,314,000 for the nine months ended
September 30, 2003 and 2002, respectively. The net book value of
computer software at September 30, 2003 was $756,000.
30
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
5. Intangible Assets
Intangible assets at September 30, 2003 consist of the following:
Estimated September 30,
Useful Lives 2003
Carrying Amount
Customer contracts and related customer relationships 15 years $ 18,210,000
Debt issuance costs 5 years 1,108,000
-------------
19,318,000
Accumulated amortization
Customer contracts and related customer relationships (1,704,000)
Debt issuance costs (200,000)
-------------
$ 17,414,000
=============
Amortization expense was $989,000 and $699,000 for the nine months
ended September 30, 2003 and 2002, respectively.
Estimated amortization expense at September 30, 2003, for 2003 and
each of the five succeeding fiscal years, is as follows:
2003 $ 990,000
2004 1,440,000
2005 1,440,000
2006 1,440,000
2007 1,328,000
2008 1,200,000
-------------
$ 7,838,000
=============
6. Goodwill
A summary of changes in the Company's goodwill during the nine months
ended September 30, 2003 is as follows:
Goodwill
Balance, January 1, 2003 $ 40,631,000
Post acquisition settlement 11,000
--------------
Balance, September 30, 2003 $ 40,642,000
==============
Post Acquisition Settlement
In connection with the UGTI acquisition (Note 3), the Company recorded
additional acquisition charges of $11,000 during 2003.
Goodwill Impairment
Under SFAS 142, goodwill and intangible assets with indefinite useful
lives are not amortized but instead are reviewed for impairment at
least annually and written down only in periods in which it is
determined that the fair value is less than the recorded value. SFAS
142 also requires the transitional impairment review for goodwill, as
well as an annual impairment review, to be performed on a reporting
unit basis.
31
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
7. Accrued Expenses
Accrued expenses consisted of the following at September 30, 2003:
2003
Locate damage claims $ 8,956,000
Accrued payroll and related 4,408,000
Healthcare claims 675,000
Other accrued liabilities 2,517,000
--------------
$ 16,556,000
==============
The Company is self insured for the first $250,000 of claims on locate
damages. The locate damages represent claims for harm to property,
persons or job overruns (time and material overruns). The Company's
customer or their representative reports damages, which are
investigated and assessed by the Company. The potential claim is
estimated and developed by the Company based on facts, circumstances
and historical evidence.
Due to the significance of the self insured portions of the Company's
insurance claims, the insurer has custody of $4,295,000 in cash
deposits at September 30, 2003. The amount is reported as restricted
cash in the accompanying consolidated balance sheet.
8. Revolving Credit Line and Long-Term Debt
On December 6, 2002, the Company entered into a revolving credit
facility and term loan agreement ("Credit Agreement"). The proceeds
from the new agreement were used to repay the previous revolving
credit line, term loan and security agreement. The Company recorded
expense of $712,000 for the remaining deferred financing costs
associated with the previous debt agreement during 2002. At September
30, 2003, long-term debt consists of approximately $6.6 million in
notes payable (Note 3) and a term loan of $18.5 million.
Revolving Credit Line
The Revolving Credit Line accrues interest at a rate equal to Prime
plus 1.50 percent, or 5.50 percent at September 30, 2003. The
Revolving Credit Line matures on December 6, 2007. The maximum amount
allowed for borrowing under the Revolving Credit Line is the lesser of
(i) $16,000,000 less any outstanding letter of credit arrangements or
(ii) 90 percent of eligible accounts receivables plus the preset
amortized advance amount, referred to as total availability. The
Company had an available borrowing base of $10,419,000 under the
revolving credit facility, of which $5,422,000 was used, at September
30, 2003, based on the lending formula.
Term Loan
Principal payments are due quarterly, beginning in April 2003 and
interest payments on the Term Loan are due monthly, beginning January
2003, until January 2008. The Term Loan accrues interest at a rate
equal to Prime plus 4.25 percent, or 8.25 percent at September 30,
2003. The Company deferred approximately $965,000 of fees related to
the credit agreement, which are being amortized over its five-year
term. The Company is required to pay an annual nonutilization fee
equal to one percent of the unused portion of the credit capacity.
The credit agreement is collateralized by substantially all of the
Company's assets. The credit agreement contains certain covenants,
which are financial and nonfinancial in nature. The credit agreement
imposes certain conditions including restricting the Company's ability
to encumber assets or incur certain types of indebtedness and
maintaining a leverage ratio of not greater than 3.25, as measured at
the end of each fiscal quarter. The Company was in compliance with all
financial covenants and conditions under the credit agreement at
September 30, 2003.
32
UtiliQuest Holdings Corp.
Notes To Consolidated Financial Statements (continued)
Nine Months Ended September 30, 2003 and September 30, 2002 (Unaudited)
Future maturities of the term debt and promissory notes (Note 3) as of
September 30, 2003 are as follows:
2003 $ 1,000,000
2004 3,000,000
2005 7,000,000
2006 5,000,000
2007 5,500,000
Thereafter 3,600,000
--------------
$ 25,100,000
==============
9. Commitments and Contingencies
Litigation
The Company is involved in various claims and lawsuits, which arise in
the normal course of its business. These claims and lawsuits have
arisen as a result of equal employment opportunity ("EEOC") cases,
locate damage, workers' compensation and auto claims (Note 7). The
Company estimates an accrual for settlement of damages incurred in
providing services to its customers and has accrued for any exposure
in the accompanying consolidated financial statements. The Company has
sought legal consultation and believes that the ultimate liability
related to such claims and lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
10. Related-Party Transactions
The Company paid $8,000 and $49,000 for the nine months ended
September 30, 2003 and 2002, respectively, for out-of-pocket cost to
the Company's largest shareholder.
The Company has an agreement to pay its largest shareholder $21,000
per month in management fees. The Company has accrued approximately
$189,000 for the nine months ended September 30, 2003. As of September
30, 2003, $521,000 of these amounts remain unpaid.
In conjunction with the UGTI acquisition, the OCMIGFI Power
Opportunities Fund L.P. provided short term financing to UtiliQuest
Holdings for the purchase of 100 percent of the UGTI stock. The
financing was executed through a capital contribution of approximately
$5,462,000 and a short term loan for $12,000,000. The short term loan
was repaid upon the closing of the Company's new Credit Agreement on
December 6, 2002.
11. Subsequent Event
On November 26, 2003, the Company entered into a settlement agreement
with the seller that renegotiated Promissory Note A. In exchange for
an immediate payment of $2,000,000 on Promissory Note A, the seller
would be released from claims arising out of potential liabilities
incurred prior to September 17, 2002, the acquisition date. The
Company received a release from the remaining obligation of Promissory
Note A and any accrued interest on Promissory Note A.
Effective December 3, 2003, the Company was acquired by Dycom
Industries, Inc. for an aggregate payment of approximately $120
million in cash, including the payout of all stock options for
approximately $2.5 million.
33
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Financial Information
On December 3, 2003, pursuant to the terms of the Agreement and Plan of
Merger, dated as of November 17, 2003, among Dycom, UtiliQuest Acquisition
Corp., UtiliQuest and OCM/GFI Power Opportunities Fund, L.P., Dycom acquired
UtiliQuest for approximately $120 million in cash.
On November 25, 2003, pursuant to the term of the Asset Purchase Agreement,
dated as of November 5, 2003, between Dycom and First South Utility
Construction, Inc., a North Carolina corporation ("First South"), Dycom acquired
substantially all of the assets of First South and assumed certain liabilities
associated with these assets, for approximately $50 million in cash and 175,840
shares of Dycom's common stock. In conjunction with the acquisition, Dycom also
paid approximately $9 million for excess working capital consisting primarily of
accounts receivable and unbilled revenue. Dycom deposited approximately $6.4
million of such amount in escrow, to be returned to Dycom to the extent such
amounts remain outstanding on April 15, 2004. Dycom paid the purchase price from
cash on hand. The acquisition of First South, previously filed on February 9,
2004 as an 8-K required disclosure, is also included herein to reflect the pro
forma financial statements of both acquisitions.
The following unaudited pro forma condensed combined financial information
present the effect of the acquisition of UtiliQuest and First South by Dycom, in
each case accounted for as a purchase. The unaudited pro forma condensed
combined balance sheet presents the combined financial position of Dycom,
UtiliQuest and First South as of October 25, 2003 assuming that the acquisition
had occurred as of that date. Such pro forma information is based upon the
historical consolidated balance sheet data of Dycom as of October 25, 2003,
UtiliQuest as of September 30, 2003 and First South as of September 26, 2003.
The unaudited pro forma condensed combined statements of operations for the year
ended July 26, 2003 and three-month period ended October 25, 2003 give effect to
the acquisition of UtiliQuest and First South by Dycom as if such acquisitions
had occurred on July 28, 2002, the first day of Dycom's fiscal year 2003. Pro
forma operations for the year end and three month periods for Dycom consist of
its results of operations for the year ended July 26, 2003 and three months
ended October 25, 2003, respectively. Pro forma operations for the twelve-month
and three-month periods for UtiliQuest consist of its results of operations for
the twelve months ended June 30, 2003 and three months ended September 30, 2003,
respectively. Pro forma operations for the twelve-month and three-month periods
for First South consist of its results of operations for the twelve months ended
June 28, 2003 and three months ended September 27, 2003, respectively. The use
of different closing dates is based on each entity having different fiscal year
ends.
The unaudited pro forma condensed combined financial statements are based
on the estimates and assumptions set forth in the notes to such statements. The
pro forma adjustments are preliminary and have been made solely for purposes of
developing such pro forma statements. The unaudited pro forma condensed combined
financial statements are not necessarily an indication of the result that would
have been achieved had the transaction been consummated as of the dates
indicated or that may be achieved in the future.
34
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For The Twelve Months Ended July 26, 2003
Dycom First South UtiliQuest
Historical Historical Historical Pro Forma
Fiscal Year Twelve Twelve Adjustments Pro Forma
Ended Months Ended Months Ended First Adjustments
July 26, June 30, June 30, South UtiliQuest Pro forma
2003 2003(1) 2003(1) (Note 2) (Note 2) Combined
------------- ---------------- --------------- ------------ ------------ -------------
REVENUES:
Contract revenues earned $ 618,182,653 $ 52,786,037 $ 131,657,645 $ - $ - $802,626,335
------------- ---------------- --------------- ------------ ------------ -------------
EXPENSES:
Costs of earned revenue
excluding depreciation 482,876,707 45,186,244 100,034,344 628,097,295
General and administrative 70,058,588 2,863,532 18,723,451 (425,000) h 91,220,571
Depreciation and amortization 39,073,959 2,852,312 9,149,007 (2,852,312) a (9,149,007) i 52,188,510
2,036,885 b 11,077,666 j
Impairment loss 4,917,000 4,917,000
------------- ---------------- --------------- ------------ ------------ -------------
Total 592,009,254 50,902,088 132,823,802 (815,427) 1,503,659 776,423,376
------------- ---------------- --------------- ------------ ------------ -------------
Interest, net 1,300,895 (1,550,889) (3,889,973) 1,550,889 c 2,596,150 k (3,266,688)
(770,143) d (2,503,617) l
Other income, net 2,981,164 (369,476) (270,040) 2,341,648
INCOME (LOSS) BEFORE ------------- --------------- --------------- ----------- ------------ -------------
INCOME TAXES 30,455,458 (36,416) (5,326,170) 1,596,173 (1,411,126) 25,277,919
------------- ---------------- --------------- ------------ ------------ -------------
PROVISION (BENEFIT) FOR
INCOME TAXES 13,306,167 52,950 e 38,084 638,469 f (564,450) m 13,471,220
------------- ---------------- --------------- ------------ ------------ -------------
NET INCOME (LOSS) $ 17,149,291 $ (89,366) $ (5,364,254) $ 957,704 $ (846,676) $11,806,699
============== ================ =============== ============= ============ =============
EARNINGS PER COMMON SHARE
Basic EPS per share $0.36 $0.25
============= =============
Diluted EPS per share $0.36 $0.25
============= =============
SHARES USED IN
COMPUTING INCOME PER
COMMON SHARE:
Basic 47,880,673 48,056,513 g
============= ==============
Diluted 47,886,567 48,062,407 g
============= ==============
(1) Certain amounts have been reclassified in order to conform to
Dycom's financial statement presentation.
35
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For The Three Months Ended October 25, 2003
Dycom First South UtiliQuest
Historical Historical Historical
Fiscal Year Three Three Pro Forma Pro Forma
Ended Months Ended Months Ended Adjustments Adjustments
October 25, September 27, September 30, First South UtiliQuest Pro forma
2003 2003 (1) 2003(1) (Note 2) (Note 2) Combined
------------- ---------------- --------------- ------------- ------------ ------------
REVENUES:
Contract revenues earned $ 196,021,442 $ 15,482,042 $ 35,263,165 $ - $ - $246,766,649
------------- ---------------- --------------- ------------- ------------ ------------
EXPENSES:
Costs of earned revenue
excluding depreciation 147,049,735 12,839,519 27,040,898 186,930,152
General and administrative 17,507,642 497,354 4,166,665 (106,250) h 22,065,411
Depreciation and amortization 9,334,410 635,483 2,711,810 (635,483) a (2,711,810) i 12,613,048
509,221 b 2,769,417 j
------------- ---------------- --------------- ------------- ------------ ------------
Total 173,891,787 13,972,356 33,919,373 (126,262) (48,643) 221,608,611
------------- ---------------- --------------- ------------- ------------ ------------
Interest, net 318,251 (385,582) (859,082) 385,582 c 619,985 k (654,378)
(133,944) d (599,588) l
Other income, net 845,543 (31,581) (420,578) 393,384
INCOME BEFORE
INCOME TAXES 23,293,449 1,092,523 64,132 377,900 69,040 24,897,044
------------- ---------------- --------------- ------------- ------------ ------------
PROVISION FOR INCOME TAXES 9,366,210 433,980 e 78,872 148,893 f 27,202 m 10,055,156
------------- ---------------- --------------- ------------- ------------ ------------
NET INCOME (LOSS) $ 13,927,239 $ 658,543 $ (14,740) $ 229,007 $ 41,838 $ 14,841,888
============= ================ =============== ============= ============ ============
EARNINGS PER COMMON
SHARE
Basic EPS per share $0.29 $0.31
============= ============
Diluted EPS per share $0.29 $0.30
============= ============
SHARES USED IN COMPUTING
INCOME PER COMMON SHARE:
Basic 48,028,895 48,204,735 g
============= ===========
Diluted 48,486,210 48,662,050 g
============= ===========
(1) Certain amounts have been reclassified in order to conform to
Dycom's financial statement presentation.
36
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of October 25, 2003
Historical Historical Historical Pro Forma Pro Forma
Dycom First South UtiliQuest Adjustments Adjustments
October 25, September 27, September 30, First South UtiliQuest Pro forma
2003 2003 (1) 2003(1) (Note 2) (Note 2) Combined
------------- ---------------- -------------- -------------- ------------- ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $149,794,385 $ - $1,539,764 $(60,364,327) a $(30,696,566) k $60,273,256
Investments 238,363 (238,363) b
Accounts receivable, net 124,803,409 18,066,699 16,115,499 (9,320,526) c 149,665,081
Costs and estimated earnings in
excess of billings 37,319,061 5,771,898 43,090,959
Deferred tax assets, net 9,269,856 5,501,500 14,771,356
Inventories 3,068,041 1,229,380 4,297,421
Other current assets 10,562,491 252,097 3,350,970 14,165,558
------------- ---------------- -------------- --------------- ------------ -----------
Total current assets 334,817,243 25,558,437 26,507,733 (69,923,216) (30,696,566) 286,263,631
------------- ---------------- -------------- --------------- ------------ -----------
PROPERTY AND EQUIPMENT, net 80,665,828 11,010,408 16,588,122 (708,517) b 104,866,075
(2,790,685) d 100,919 l
Goodwill, net 106,615,836 3,509,807 40,641,745 (3,509,807) e (40,641,745) m 225,759,969
41,850,977 f 77,293,156 n
Intangible assets, net 664,998 214,063 17,414,000 (214,063) e (17,414,000) m 36,284,998
2,750,000 g 32,870,000 o
Accounts receivable 21,567,480 21,567,480
Deferred tax assets, net 7,260,991 (2,013,000) (39,762) p 5,208,229
non-current
Other 7,340,333 47,784 4,985,770 (47,784) b 12,326,103
------------- ---------------- -------------- --------------- ------------ ------------
ASSETS
Total other assets 143,449,638 3,771,654 61,028,515 40,829,323 52,067,649 301,146,779
------------- ---------------- -------------- --------------- ------------- ------------
TOTAL $558,932,709 $40,340,499 $104,124,370 $(32,593,095) $21,472,002 $692,276,485
============= ================ ============== =============== ============ ============
(1) Certain amounts have been reclassified in order to conform to Dycom's
financial statement presentation.
37
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of October 25, 2003
Historical Historical Historical Pro Forma Pro Forma
Dycom First South UtiliQuest Adjustments Adjustments
October 25, September 27, September 30, First South UtiliQuest Pro forma
2003 2003 (1) 2003(1) (Note 2) (Note 2) Combined
------------- -------------- -------------- -------------- ------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $26,359,139 $4,870,028 $3,319,949 $(2,759,000) h $ $31,790,116
Notes payable 8,886 9,746,423 7,922,430 (9,746,423) b (7,922,430) q 8,886
Capital lease obligations 4,547,113 4,547,113
Billings in excess of costs
and estimated earnings 720,876 720,876
Accrued self-insured claims 11,259,228 500,000 3,508,000 (500,000) b 14,767,228
Income taxes payable 8,266,683 8,266,683
Other accrued liabilities 32,082,695 1,452,087 16,556,000 (49,000) r 50,041,782
------------- -------------- -------------- -------------- ------------- ------------
Total current liabilities 78,697,507 16,568,538 35,853,492 (13,005,423) (7,971,430) 110,142,684
------------- -------------- -------------- -------------- ------------- ------------
NOTES PAYABLE 18,355 9,646,129 22,600,000 (9,646,129) b (16,000,000) q 91,618,355
85,000,000 s
Capital lease obligations 6,114,310 6,114,310
ACCRUED SELF-INSURED CLAIMS 13,633,951 13,633,951
OTHER LIABILITIES 1,116,156 1,116,156
------------- -------------- -------------- -------------- ------------- ------------
Total liabilities 93,465,969 26,214,667 64,567,802 (22,651,552) 61,028,570 222,625,456
------------- -------------- -------------- -------------- ------------- ------------
STOCKHOLDERS' EQUITY
Common stock 16,024,416 200,000 42,662 (200,000) i (42,662) t 16,083,029
58,613 j
Additional paid-in capital 337,565,116 7,772,095 42,918,629 (7,772,095) i (42,918,629) t 341,690,792
4,125,676 j
Retained earnings 111,877,208 6,153,737 (3,404,723) (6,153,737) i 3,404,723 t 111,877,208
------------- -------------- -------------- -------------- ------------- ------------
Total stockholders' equity 465,466,740 14,125,832 39,556,568 (9,941,543) (39,556,568) 469,651,029
------------- -------------- -------------- -------------- ------------- ------------
TOTAL $558,932,709 $40,340,499 $104,124,370 $(32,593,095) $21,472,002 $692,276,485
============= ============== ============== ============== ============= ============
(1) Certain amounts have been reclassified in order to conform to
Dycom's financial statement presentation.
38
Dycom Industries, Inc.
Notes To Unaudited Pro Forma Condensed Combined Financial Statements
STATEMENTS
1. BASIS OF PRESENTATION
On November 17, 2003, Dycom entered into a definitive merger agreement
with UtiliQuest Holdings Corp. pursuant to which Dycom would acquire UtiliQuest.
The acquisition of UtiliQuest is to be accounted for under the purchase method
of accounting. Accordingly, the purchase price will be allocated to the tangible
and intangible assets acquired and the liabilities assumed on the basis of their
respective fair values on the acquisition date. The purchase price of the
UtiliQuest acquisition was approximately $115.7 million in cash. Estimated
direct transaction costs of Dycom consist primarily of fees for attorneys,
accountants and SEC filing fees.
The purchase price is derived as follows:
(in thousands)
----------------
Cash paid $ 115,110
Transaction costs 587
----------------
$ 115,697
================
The purchase price is derived as follows:
ASSETS (in thousands)
----------------
Cash and equivalents $ 1,540
Accounts receivable, net 16,115
Deferred tax asset, net 3,449
Other current assets 3,351
Property and equipment 16,689
Goodwill 77,293
Intangibles - Customer Relationships 28,000
Other intangibles, net 4,870
Other assets 4,986
-----------------
Total assets 156,293
-----------------
LIABILITIES
Accounts payable 3,320
Capitalizable leases - short term 4,547
Accrued self-insured claims 3,508
Other accrued liabilities 16,507
Capitalizable leases - long term 6,114
Notes Payable - long term 6,600
----------------
Total liabilities 40,596
----------------
----------------
Net assets acquired $ 115,697
=================
39
Dycom Industries, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements (continued)
The above purchase price allocations are based on Dycom management's
best estimate of the fair values of the acquired assets and assumed liabilities.
However, this allocation is preliminary. The final determination of the
allocation of purchase price will be determined based on the fair value of
assets acquired and the fair value of liabilities assumed as of the acquisition
date. The purchase price allocations will remain preliminary until Dycom is able
to (a) complete a valuation of property, plant and equipment acquired and (b)
evaluate the fair value of other assets, including intangibles and liabilities
acquired. The final determination of the purchase price is expected to be
completed by the end of Dycom's fiscal year ending July 31, 2004. Although Dycom
does not believe that the actual amounts allocated to assets and liabilities
will differ materially from the preliminary allocation presented in the
unaudited pro forma condensed combined financial statements there can be no
assurances that such actual amounts will not be materially different.
2. PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The following adjustments are reflected in the pro forma condensed
combined statements of operations to reflect the estimated impact of the merger
on the historical combined results of Dycom, First South and UtiliQuest.
FIRST SOUTH:
(a) To remove historical depreciation and amortization.
(b) To adjust for pro forma depreciation and amortization expense of
acquired property, plant and equipment and the identifiable
intangibles. The expected useful lives of these assets, valued at fair
market value, depreciate/amortize on a straight-line basis as follows:
Estimated Useful Annual Expense Quarterly
Life/years Expense
Buildings 25 $25,365 $6,341
Equipment and machinery/vehicles 3-5 1,634,853 408,713
------------------------------------
1,660,218 415,054
------------------------------------
Tradename 5 130,000 32,500
Covenant not to complete 5 160,000 40,000
Contracts 15 86,667 21,667
------------------------------------
376,667 94,167
------------------------------------
------------------------------------
Total pro forma depreciation and amortization $2,036,885 $509,221
====================================
(c) To eliminate historical interest expense related to First South's debt
as none of these liabilities were assumed by Dycom.
(d) To reflect reduced interest income related to the cash used by Dycom to
fund the acquisition. If interest rates were to increase or decrease by
1/8% pro forma income before taxes would change by approximately $76,000
for the year ended July 26, 2003 and $19,000 for the three months ended
October 25, 2003.
(e) To record income tax expense on First South. Prior to the acquisition
by Dycom, First South elected under Subchapter S of the Internal Revenue
Code to have the stockholders recognize their proportionate share of
First South's taxable income on their personal tax returns in lieu of
paying corporate income taxes.
(f) To record tax expense on pro forma adjustments using Dycom's statutory
rate of 40.0% for the twelve months ended July 26, 2003 and 39.4% for
the three months ended October 25, 2003.
40
Dycom Industries, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements (continued)
(g) Reflects an additional 175,840 Dycom shares issued as part of the
purchase of First South.
UTILIQUEST:
(h) To decrease non-utilization bank fees in accordance with Dycom's credit
agreement due to increased borrowings of $85 million.
(i) To remove historical depreciation and amortization.
(j) To record depreciation and amortization expense for acquired property,
plant and equipment and the identifiable intangibles based on the
allocated purchase price. The expected useful lives of these assets, at
fair market value, depreciate/amortize on a straight-line basis as
follows:
Estimated Useful Annual Quarterly
Life/years Expense Expense
---------------- ------ ----------
Leasehold equipment and improvements 1 - 4 $ 76,488 $ 19,122
Equipment and machinery/vehicles 1 - 4 9,077,844 2,269,461
----------- ----------
9,154,332 2,288,583
----------- ----------
Tradename not applicable - -
Tradename - Underground Technology 3 56,667 14,167
Customer Relationships 15 1,866,667 466,667
----------- ----------
1,923,334 480,834
----------- ----------
Total pro forma depreciation and amortization $11,077,666 $2,769,417
=========== ==========
(k) To eliminate interest expense related to UtiliQuest's debt that was
repaid by Dycom at acquisition. Also eliminated was $569,567 of deferred
financing costs related to UtiliQuest's debt agreement that was expense
when that agreement was replaced in December 2002 with a new credit
agreement. Interest expense remaining for UtiliQuest primarily relates
to debt assumed upon acquisition for capitalized leases and a $3.6
million promissory note.
(l) To reflect reduced interest income from lower cash balances as a result
of cash used by Dycom to fund the acquisition and increased interest
expense as a result of Dycom borrowing $85.0 million under its credit
agreement to finance the acquisition. The acquisition debt carries an
interest rate based on LIBOR and pro forma interest rates used were
2.43% on the first $45 million tier and 2.53% on the remaining $40
million tier. If interest rates were to increase or decrease by 1/8% pro
forma income before taxes would change by approximately $144,000 for the
year ended July 26, 2003 and $36,000 for the three months ended October
25, 2003, reflecting the related impact on interest income and interest
expense.
(m) To record tax expense related to pro forma adjustments using Dycom's
statutory rate of 40.0% for the twelve months ended July 26, 2003 and
39.4% for the three months ended October 25, 2003.
41
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
The following adjustments in the unaudited pro forma condensed
combined balance sheet reflect the estimated impact of events that are directly
attributable to Dycom's acquisition of certain assets and assumption of certain
liabilities related to those net assets of First South and the acquisition of
UtiliQuest.
FIRST SOUTH:
(a) To record the estimated cash portion of the purchase price.
(b) To eliminate assets not purchased and liabilities not assumed by Dycom.
(c) To adjust for certain accounts receivable not purchased by Dycom.
Related party account receivables $7,689,208
Miscellaneous receivables 61,170
Selected customer receivables 1,570,148
----------
$9,320,526
==========
(d) To record fair market value of property, plant and equipment acquired,
as below:
Historical net book value of property $11,010,408
Eliminate net book value of property not purchased (708,517)
------------
Net book value of property acquired 10,301,891
Estimated fair market value of property acquired 7,511,206
------------
$(2,790,685)
============
The expected useful lives of these assets valued at fair market value
depreciated on a straight-line basis is as follows:
Number of Years
---------------
Buildings 25
Vehicles 3-5
Equipment and machinery 3-5
(e) To eliminate First South's historical goodwill and intangibles.
(f) To record $41.9 million as goodwill representing the excess of the
amount paid over the fair market value of the assets acquired, including
the identifiable intangible assets, and the liabilities assumed.
(g) To record identifiable intangibles arising from the transactions. These
assets are amortized on a straight-line basis over their useful lives
and consist of the following:
Estimated Useful Life
---------------------
Tradename $650,000 5 years
Covenant not to compete 800,000 5 years
Contracts 1,300,000 15 years
----------
$2,750,000
==========
42
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet (continued)
(h) To adjust for certain accounts payable not purchased by Dycom described
as follows:
Related party account payable $1,559,000
Miscellaneous payables 1,200,000
----------
$2,759,000
==========
(i) To eliminate First South's common stock, additional paid-in capital and
retained earnings.
(j) To record the issuance of Dycom's common stock as part of the purchase
price.
UTILIQUEST:
(k) To record net cash portion of the purchase price calculated as follows:
Total estimated purchase price $115,696,566
Borrowings (see note s) (85,000,000)
-------------
Net cash outlay $ 30,696,566
=============
(l) To record fair market value of property, plant and equipment acquired,
as below:
Estimated fair market value of property acquired $ 16,689,041
Net book value of property acquired 16,588,122
-------------
$ 100,919
-------------
The expected useful lives of these assets valued at fair market value
depreciated on a straight-line basis is as follows:
Number of Years
---------------
Leasehold equipment and improvements 1-4
Equipment and machinery 1-4
(m) To eliminate UtiliQuest's goodwill and other intangible assets.
(n) To record $77.3 million as goodwill representing the excess of the
amount paid for over fair market value of the assets acquired, including
the identifiable intangible assets and the liabilities assumed.
(o) To record identifiable intangibles arising from the transaction. These
assets are amortized on a straight-line basis over their useful lives
and consist of the following:
Estimated Useful Life
---------------------
Tradename $4,700,000 Not applicable
Tradename - Underground Technology 170,000 3 years
Customer Relationships 28,000,000 15 years
-----------
$32,870,000
===========
43
(p) To record deferred taxes attributable to the tax effect of pro forma
adjustments.
Dycom Industries, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet (continued)
(q) To eliminate UtiliQuest debt paid off upon acquisition as follows:
Historical Pro Forma payoff
September 30, amount
2003 at acquisition
------------- ----------------
Capital lease obligation - short term $4,547,113 $ -
Revolver debt 5,422,430 5,422,430
Current portion of long-term debt 2,500,000 2,500,000
------------- ----------------
$12,469,543 $ 7,922,430
============= ================
Capital lease obligation - long term $6,114,310 $ -
Revolver debt 16,000,000 16,000,000
Other long-term debt 6,600,000 -
----------- -----------
$28,714,310 $16,000,000
=========== ===========
(r) To eliminate interest paid off related to payoff of the UtiliQuest
debt.
(s) To record the issuance of $85.0 million debt issued under Dycom's
Credit Agreement used to finance the acquisition of UtiliQuest.
(t) To eliminate UtiliQuest's common stock, additional paid-in capital and
retained earnings.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DYCOM INDUSTRIES, INC.
Date: February 16, 2004 By: /s/ Steven Nielsen
------------------------
Name: Steven Nielsen
Title: President and
Chief Executive Officer
45
EXHIBIT INDEX
Exhibit No. Description
------------- --------------
2.1 Agreement and Plan of Merger, dated as of November
17, 2003, among Dycom Industries, Inc., UtiliQuest
Acquisition Corp., UtiliQuest Holdings Corp. and
OCM/GFI Power Opportunities Fund, L.P.
(incorporated herein by reference to Exhibit 10.3
of the Form 10-Q for the Quarter Ended October 25,
2003 filed by Dycom on December 5, 2003, File No.
001-10613).
23.1 Consent of PricewaterhouseCoopers.
99.1 Press Release, dated December 3, 2003
(incorporated herein by reference to Exhibit 99.1
of the Current Report on Form 8-K filed by Dycom
on December 4, 2003, File No. 001-10613).
46