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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-3797
MASTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0829355
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3155 N.W. 77TH AVENUE, MIAMI, FL 33122-1205
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 599-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
The number of shares of Common Stock outstanding as of March 26, 1999
was 27,341,385. The aggregate market value of the voting stock held by
non-affiliates of the registrant based on the $22-5/8 closing price for the
registrant's Common Stock on the New York Stock Exchange on March 26, 1999 was
approximately $304,703,626. Directors, executive officers and 10% or greater
shareholders are considered affiliates for purposes of this calculation but
should not necessarily be deemed affiliates for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders held on May 25, 1999, are incorporated by reference.
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The undersigned Registrant hereby amends the following sections of its
Annual Report on Form 10-K for the year ended December 31, 1998 to provide
revised disclosures made in connection with the filing of Amendment No. 2 to its
Registration Statement on Form S-3 on February 4, 2000:
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We design, build, install and maintain internal and external networks
supporting the Internet, Internet-related applications, e-commerce and other
communications and energy facilities for leading telecommunications, cable
television, energy and other Fortune 500 companies. Based on revenue, we are
one of the largest end-to-end telecommunications and energy infrastructure
service provider in North America. We offer comprehensive network
infrastructure solutions to a diverse group of customers, enabling our
customers to connect with their customers.
We report our operations in four segments:
/bullet/ External Telecommunications Networks,
/bullet/ External Energy Networks,
/bullet/ Internal Networks and
/bullet/ International.
External Telecommunications Networks represents our core business and is
divided into five service lines:
/bullet/ inter-exchange networks,
/bullet/ local exchange networks,
/bullet/ broadband networks,
/bullet/ wireless networks and
/bullet/ intelligent transportation systems.
Internal Networks includes:
/bullet/ switching and transmission services,
/bullet/ premise wiring services and
/bullet/ structured cabling services.
International operations are currently confined to Brazil where we operate
a 51% joint venture which we consolidate net of a 49% minority interest after
tax.
Our primary types of contracts with our customers include:
/bullet/ design and installation contracts for specific projects,
/bullet/ master service agreements for all specified design, installation
and maintenance services within a defined geographic territory and
/bullet/ turnkey agreements for comprehensive design, engineering,
installation, procurement and maintenance services.
The majority of our contracts, whether master service agreements or
contracts for specific projects, provide that we will furnish a specified unit
of service for a specified unit of price. For example, we contract to install
cable for a specified rate per foot. We recognize revenue as the related work
is performed. Turnkey agreements are invoiced on a unit basis. A portion of our
work is performed under percentage-of-completion contracts. Under this method,
revenue is recognized on a cost-to-cost method based on the percentage of total
cost incurred to date in proportion to total estimated cost to complete the
contract. Customers are billed with varying frequency--weekly, monthly or upon
milestones.
We perform the majority of our services under master services agreements,
which typically are exclusive service agreements to provide all of the
customer's network requirements up to a specified dollar amount per job within
defined geographic areas. These contracts are generally for two to three years
but are typically subject to termination at any time upon 90 to 180 days prior
notice to us. Each master services agreement contemplates hundreds of
individual projects generally valued at less than $100,000 each. These master
services agreements are typically awarded on a competitive bid basis, although
customers are sometimes willing to negotiate contract extensions beyond their
original terms without opening them up to bid. Master service agreements are
invoiced on a unit basis where invoices are submitted as work is completed. We
currently have 87 master service agreements across all segments.
Direct costs include
/bullet/ operations payroll and benefits,
/bullet/ subcontractor costs,
/bullet/ materials not provided by our customers,
/bullet/ fuel,
/bullet/ equipment rental and
/bullet/ insurance.
Our customers generally supply materials such as cable, conduit and
telephone equipment, although on some turnkey projects, we supply these
materials. General and administrative costs include all costs of our management
personnel, rent, utilities, travel and business development efforts and back
office administration such as financial services, insurance administration,
professional costs and clerical and administrative overhead.
Many of our contracts require performance and payment bonds. Contracts
generally include payment provisions under which 5% to 10% is withheld from
payment until the contract work has been completed. We typically agree to
indemnify our customers against adverse claims and warrant the quality of our
services for specified time periods, usually one year.
Our results of operations data for 1996 and 1997 have been restated to
apply purchase accounting to two 1997 transactions that were previously
accounted for as pooling-of-interests. See Note 1 to Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
NORTH AMERICA
The following tables state for the periods indicated our North American
operations in dollar and percentage of revenue terms (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998(1)
------------ ----------- ------------
(RESTATED) (RESTATED)
Revenue ..................................... $284,645 $377,047 $ 669,628
Costs of revenue ............................ 216,940 279,394 506,721
Depreciation and amortization ............... 9,942 20,452 37,284
General and administrative expenses ......... 27,554 41,168 112,530
-------- -------- ---------
Operating income .......................... $ 30,209 $ 36,033 $ 13,093
======== ======== =========
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998(1)
------------ ----------- -----------
(RESTATED) (RESTATED)
Revenue ..................................... 100.0% 100.0% 100.0%
Costs of revenue ............................ 76.2 74.1 75.7
Depreciation and amortization ............... 3.5 5.4 5.6
General and administrative expenses ......... 9.7 10.9 16.8
----- ----- -----
Operating income .......................... 10.6% 9.6% 1.9%
===== ===== =====
- ----------------
(1) General and administrative expenses include a non-recurring $33.8 million
special charge for payments to operational managers at our internal networks
and external telecommunications networks segments.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following table states revenue and change in revenue by North American
operating segments, in dollar and percentage terms (in thousands):
YEAR ENDED
DECEMBER 31, CHANGE
------------------------- ---------------------------
1997 1998 $ %
----------- ----------- -------------- ----------
(RESTATED)
External Telecommunications Networks ......... $286,814 $455,798 $ 168,984 58.9%
External Energy Networks ..................... 19,693 120,218 100,525 510.5
Internal Networks ............................ 47,285 89,687 42,402 89.7
Other ........................................ 23,255 3,925 (19,330) (83.1)
-------- -------- ---------- -----
$377,047 $669,628 $ 292,581 77.6%
======== ======== ==========
Our North American revenue was $669.6 million for the year ended December
31, 1998, compared to $377.0 million for the same period in 1997, representing
an increase of $292.6 million or 77.6%. The increase in North American revenue
was due primarily to revenue generated from acquired companies, as well as
internally generated growth. Each operating segment experienced significant
growth, excluding our other operating segment, which decreased as a result of a
corporate decision to exit the non-network construction services business.
During 1998, we completed a total of 12 acquisitions in North America of which
eight were in our external telecommunications networks segment, two in the
external energy networks segment, and two in the internal networks segment.
These acquisitions generated revenue of approximately $255.1 million,
representing 87.2% of the total increase in revenue. In comparison, during 1997
we acquired 11 companies in North America (seven in external telecommunications
networks, two in external energy networks and two in internal networks).
Our North American costs of revenue were $506.7 million or 75.7% of
revenue for the year ended December 31, 1998, compared to $279.4 million or
74.1% of revenue in 1997. The increase in costs of revenue as a percentage of
revenue was due primarily to numerous inefficiencies caused by severe weather
conditions in various regions as a result of the climatic condition known as
"El Nino," poor performance in our internal networks segment due to improperly
managed growth and losses from a non-core external telecommunications network
contract.
Depreciation and amortization expense was $37.3 million or 5.6% of revenue
for the year ended December 31, 1998, compared to $20.5 million or 5.4% of
revenue in 1997. The increased depreciation and amortization expense resulted
from our investment in our fleet to support revenue growth.
General and administrative expenses were $112.5 million or 16.8% of
revenue for the year ended December 31, 1998, compared to $41.2 million or 10.9%
of revenue in 1997. The increase in general and administrative expenses was due
primarily to three items: a non-recurring $33.8 million special charge for
payments made pursuant to employment and non-competition agreements entered into
with management of our internal networks and external telecommunications
networks segments, $1.4 million for start-up costs and charges of $4.5 million
related to our internal networks segment provision for bad debts following a
quarterly analysis of significantly past-due receivables. Our general and
administrative expenses in 1997 also included a $4.6 million provision for bad
debts. Excluding the previously mentioned expenses, general and administrative
expenses were $72.8 million or 10.9% of revenue in 1998.
The $33.8 million charge relates to up-front amounts in the form of
signing bonuses and extended non-competition payments made under the agreements
that could not be attributed to future services. Base salary and bonuses for
future performance paid pursuant to these agreements are being recognized over
the related service periods. The up-front payments were paid to these managers
to resolve issues arising from the original price paid for the acquisition of
their businesses and issues relating to these managers' roles within our
company, as well as to preserve the goodwill of the acquired businesses. These
issues arose primarily from a significant decline in the value of the MasTec
shares these managers received between the time when we bought their businesses
and the expiration of the period when they were restricted from sale of the
shares. Because neither these payments nor the agreements were contemplated,
included or required under the original terms of the business acquisitions and
could not be attributed to future services, these payments were recorded as
operating expenses in 1998, rather than deferred or amortized.
Operating income was $13.1 million or 1.9% of revenue for 1998, compared
to $36.0 million or 9.6% of revenue in 1997. The following table states
operating income and change in operating income by North American segments, in
dollar and percentage terms (in thousands):
YEAR ENDED
DECEMBER 31, CHANGE
--------------------------- -----------------------------
1997 1998 $ %
------------ ------------ ------------- -------------
(RESTATED)
External Telecommunications Networks ......... $ 44,794 $ 33,258 $ (11,536) ( 25.8)%
External Energy Networks ..................... 607 10,910 10,303 1697.4
Internal Networks ............................ 4,865 (11,460) (16,325) (335.6)
Other ........................................ (14,233) (19,615) (5,382) ( 37.8)
--------- --------- --------- ------
$ 36,033 $ 13,093 $ (22,940) ( 63.7)%
========= ========= =========
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following table states revenue and change in revenue by North American
operating segments, in dollar and percentage terms (in thousands):
YEAR ENDED
DECEMBER 31, CHANGE
------------------------- ------------------------
1996 1997 $ %
----------- ----------- ----------- ----------
(RESTATED) (RESTATED)
External Telecommunications Networks ......... $219,820 $286,814 $ 66,994 30.5%
External Energy Networks ..................... 3,773 19,693 15,920 421.9
Internal Networks ............................ 35,524 47,285 11,761 33.1
Other ........................................ 25,528 23,255 (2,273) ( 8.9)
-------- -------- -------- -----
$284,645 $377,047 $ 92,402 32.5%
======== ======== ========
Revenue from North American operations was $377.0 million for the year
ended December 31, 1997, compared to $284.6 million in 1996, representing an
increase of $92.4 million or 32.5%. The increase in North American revenue
across all segments was due primarily to revenue generated from acquired
companies. During 1997, we completed a total of 11 acquisitions of which seven
were in our external telecommunications networks segment, two were in our
external energy networks segment and two in our internal networks segment.
Our North American costs of revenue were $279.4 million or 74.1% of
revenue for the year ended December 31, 1997, compared to $216.9 million or
76.2% of revenue in 1996. The decrease in costs of revenue as a percentage of
revenue was due primarily to services that demanded higher prices in 1997 for
certain projects.
Depreciation and amortization expense was $20.5 million or 5.4% of revenue
for the year ended December 31, 1997, compared to $9.9 million or 3.5% of
revenue in 1996. The increase in depreciation and amortization was a result of
increased capital expenditures for both external telecommunications networks
and external energy networks segments ($19.7 million in 1997 compared to $7.1
million in 1996), as well as amortization of intangibles resulting from
acquisitions.
General and administrative expenses were $41.2 million or 10.9% of revenue
for the year ended December 31, 1997, compared to $27.6 million or 9.7% of
revenue in 1996. Included in our 1997 general and administrative expenses is a
$4.6 million bad debt provision which was recorded in 1997.
Operating income was $36.0 million or 9.6% of revenue for 1997, compared
to $30.2 million or 10.6% of revenue in 1996. The following table states
operating income and change in operating income by North American segments, in
dollar and percentage terms (in thousands):
YEAR ENDED
DECEMBER 31, CHANGE
-------------------------- -----------------------
1996 1997 $ %
------------ ----------- ---------- ----------
(RESTATED) (RESTATED)
External Telecommunications Networks ......... $ 36,099 44,794 $ 8,695 24.1%
External Energy Networks ..................... 566 607 41 7.2
Internal Networks ............................ 4,303 4,865 562 13.1
Other ........................................ (10,759) (14,233) (3,474) 32.3
--------- ------- -------- ----
$ 30,209 $ 36,033 $ 5,824 19.3%
========= ========= ========
BRAZIL
The following tables states for the periods indicated our Brazilian
operations in dollar and percentage of revenue terms (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997(1) 1998
---------------------- -----------------------
Revenue ............................... $74,900 100.0% $141,954 100.0%
Costs of revenue ...................... 63,266 84.5 112,667 79.4
Depreciation and amortization ......... 390 0.4 3,349 2.4
General and administrative
expenses ............................. 1,615 2.2 10,636 7.4
------- ----- -------- -----
Operating income .................... $ 9,629 12.9% $ 15,302 10.8%
======= ===== ======== =====
- ----------------
(1) Brazilian operations began on August 1, 1997.
YEAR ENDED DECEMBER 31, 1998 OPERATING INCOME COMPARED TO FIVE MONTHS ENDED
DECEMBER 31, 1997 OPERATING INCOME
Brazilian operations commenced on August 1, 1997. Our Brazilian revenue
was $142.0 million for the year ended December 31, 1998, compared to $74.9
million in 1997, representing an increase of $67.1 million or 89.5%. The
increase in revenue was due primarily to a full year of operations in 1998,
compared to five months in 1997.
Brazilian costs of revenue were $112.7 million for the year ended December
31, 1998, compared to $63.3 million in 1997. Costs of revenue were 79.4% of
revenue in 1998, compared to 84.5% in 1997. The decrease in costs of revenue as
a percentage of revenue was due primarily to the completion of certain wireless
projects in the fourth quarter of 1998.
Depreciation and amortization expense was $3.3 million for the year ended
December 31, 1998, compared to $0.4 million for the year ended December 31,
1997. Depreciation and amortization relates primarily to an intangible asset
resulting from one acquisition which is being amortized over a five year
period. Depreciation and amortization expense was 2.4% of revenue for the year
ended December 31, 1998, compared to 0.4% of revenue for the year ended
December 31, 1997.
General and administrative expenses were $10.6 million or 7.4% of revenue
for the year ended December 31, 1998, compared to $1.6 million or 2.2% in 1997.
The increase in general and administrative expenses was due primarily to costs
of establishing an infrastructure to support anticipated additional work
following the privatization of Telebras, which did not take place until July
1998.
COMBINED RESULTS--NORTH AMERICA AND BRAZIL ONLY
The following table states for the periods indicated certain combined
income statement data for North America and Brazil only and the related
percentage of combined revenue.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- ----------------------
(RESTATED) (RESTATED)
Operating income .................... $30,209 10.6% $45,661 10.1% $28,394 3.5%
Interest expense .................... (6,059) (2.1) (6,595) (1.5) (23,753) (2.9)
Interest income ..................... 2,958 1.0 775 0.2 8,488 1.0
Other income (expense), net ......... 389 0.2 7,857 1.7 1,183 0.2
Income before provision for
income taxes, equity in
earnings (losses) of
unconsolidated companies
and minority interest .............. 27,497 9.7 47,698 10.5 14,312 1.8
Provision for income taxes .......... (10,244) (3.6) (18,633) (4.1) (4,563) (0.6)
Equity in earnings (losses) of
unconsolidated companies
and minority interest(1) ........... 270 0.1 (3,184) (0.7) (4,787) (0.6)
------- ---- ------- ---- ------- ----
Net income .......................... $17,523 6.2% $25,881 5.7% $ 4,962 0.6%
======= ==== ======= ==== ======= ====
- ----------------
(1) Consists of the minority interest of our Brazilian joint venture partner.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
For a discussion of revenue, costs of revenue, depreciation and
amortization and general and administrative expenses, see "North America" and
"Brazil" above.
Interest expense was $23.8 million or 2.9% of revenue for the year ended
December 31, 1998, compared to $6.6 million or 1.5% of revenue in 1997. The
increase in interest expense was due primarily to increased indebtedness
resulting from the issuance of our 7.75% Senior Subordinated Notes due 2008 (the
"Senior Notes") in early 1998, the proceeds of which were used primarily for
acquisitions and to fund international operations investments. Minority interest
primarily relates to our Brazilian joint venture partner with a 49% interest.
Interest income includes interest income from temporary investments and
interest received from a customer.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Interest expense was $6.6 million or 1.5% of revenue for the year ended
December 31, 1997, compared to $6.1 million or 2.1% of revenue in 1996. The
decrease in interest expense as a percentage of revenue was due to increased
revenue while the average balance on debt remained basically unchanged.
Included in other income for 1997 is a $7.1 million gain on sale of our
indirect interest in an Ecuadorian cellular company.
SPAIN
The following tables state for the periods indicated our Spanish
operations, which were sold effective December 31, 1998, in dollar and
percentage of revenue terms (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996(1) 1997
----------------------- -----------------------
Revenue ................................................ $188,155 100.0% $207,493 100.0%
Costs of revenue ....................................... 135,389 71.9 153,180 73.8
Depreciation and
amortization ........................................... 2,058 1.1 3,013 1.5
General and administrative expenses .................... 30,975 16.5 39,478 19.0
-------- ------ -------- ------
Operating income (loss) ............................... 19,733 10.5 11,822 5.7
Interest expense ....................................... (5,375) ( 2.9) (4,946) ( 2.4)
Interest income ........................................ 288 0.2 1,008 0.1
Other income (loss) .................................... 380 0.2 475 --
-------- ------ -------- ------
Income (loss) before benefit from income taxes,
equity in earnings of unconsolidated companies
and minority interest ................................ 15,026 8.0 8,359 4.0
(Provision) benefit from income taxes .................. (5,347) ( 2.7) (2,311) ( 1.2)
Equity in earnings of unconsolidated companies ......... 2,728 1.4 2,897 1.4
Minority interest ...................................... 135 -- (162) --
-------- ------ -------- ------
Net income (loss) ...................................... $12,542 6.7% $ 8,783 4.2%
======== ====== ======== ======
YEAR ENDED DECEMBER 31,
-------------------------
1998(2)
-------------------------
Revenue ................................................ $237,340 100.0%
Costs of revenue ....................................... 183,724 77.4
Depreciation and
amortization ........................................... 2,680 1.1
General and administrative expenses .................... 51,070 21.5
-------- -----
Operating income (loss) ............................... (134) ( 0.0)
Interest expense ....................................... (5,827) ( 2.5)
Interest income ........................................ 605 --
Other income (loss) .................................... (6,338) ( 2.7)
-------- -----
Income (loss) before benefit from income taxes,
equity in earnings of unconsolidated companies
and minority interest ................................ (11,694) ( 4.9)
(Provision) benefit from income taxes .................. (7,987) ( 3.2)
Equity in earnings of unconsolidated companies ......... 1,291 0.1
Minority interest ...................................... (487) --
-------- -----
Net income (loss) ...................................... $(18,877) ( 8.0)%
======== =====
- ----------------
(1) Spanish operations began on April 30, 1996, the date of acquisition. We sold
87% of our Spanish operations effective December 31, 1998.
(2) Includes a total of $13.4 million of severance charges of which $1.9
million is reflected in costs of revenue and $11.5 million in general and
administrative expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
We sold 87% of our Spanish operations effective December 31, 1998. Revenue
from Spanish operations was $237.3 million for the year ended December 31,
1998, compared to $207.5 million in 1997, representing an increase of $29.8
million or 14.4%. The increase was due to acquisitions made in 1998.
Costs of revenue were $183.7 million or 77.4% of revenue for the year
ended December 31, 1998, compared to $153.2 million or 73.8% of revenue in
1997. The increase in costs of revenue as a percentage of revenue was due
primarily to increased labor costs associated with a new labor agreement and to
$1.9 million in direct labor severance costs.
Depreciation and amortization expense was $2.7 million for the year ended
December 31, 1998, compared to $3.0 million in 1997. Depreciation and
amortization expense was 1.1% of revenue for the year ended December 31, 1998,
compared to 1.5% of revenue in 1997.
General and administrative expenses were $51.1 million or 21.5% of revenue
for the year ended December 31, 1998, compared to $39.5 million or 19.0% of
revenue in 1997. The increase in general and administrative expenses as a
percentage of revenue was due to severance charges of $11.5 million resulting
from reductions in administrative personnel.
Included in other expense for 1998 is a $9.2 million loss on sale of the
Spanish operation. The effective income tax rate on a consolidated basis for the
year ended December 31, 1998 increased to 479% from 37% in 1997. This increase
was mainly attributable to the recognition of approximately $9.2 million of a
loss on sale of our Spanish operations, however for tax purposes we recorded a
tax provision of $7.8 million. Excluding the effect of the book loss on sale and
the taxable gain, the effective tax rate would have been 40.1%, which is
attributed to the non-deductibility of the amortization of intangibles and other
expenses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO EIGHT MONTHS ENDED DECEMBER 31, 1996
Revenue generated by Spanish operations was $207.5 million for the year
ended December 31, 1997, compared to $188.2 million in 1996, representing an
increase of $19.3 million or 10.3%. The increase in revenue was due primarily
to a full year of operations in 1997, compared to eight months in the 1996. We
acquired our Spanish operations effective April 30, 1996. Our Spanish
operations were negatively impacted during 1997 by a devaluation of
approximately 18% in the Spanish peseta and by work stoppages in the second
half of 1997.
Costs of revenue were $153.2 million or 73.8% of revenue for the year
ended December 31, 1997, compared to $135.4 million or 71.9% of revenue in
1996. The increase in costs of revenue as a percentage of revenue was due
primarily to lower productivity during 1997 as a result of the work stoppages.
General and administrative expenses were $39.5 million or 19.0% of revenue
for the year ended December 31, 1997, compared to $31.0 million or 16.5% of
revenue in 1996. The increase in general and administrative expenses was due to
a full year of operations in 1997, compared to eight months in 1996. The
increase in general and administrative expenses as a percentage of revenue was
due mainly to increased salaries and compensation expense resulting from
increases in base salary.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, capital expenditures,
acquisitions and investments, and debt service. Our primary sources of
liquidity are cash flows from operations, borrowings under revolving lines of
credit and the proceeds from the sale of assets held for sale.
Net cash used in operating activities was $13.9 million for the year
ended December 31, 1998, compared to cash provided by operating activities of
$15.2 million in 1997. Net cash used by operating activities of $13.9 million
was due primarily to a net loss for the year ended December 31, 1998.
As of December 31, 1998, working capital was $244.5 million ($180.4
million domestic and $64.1 million international) compared to working capital of
$124.1 million ($76.8 million domestic and $47.3 million international) at
December 31, 1997. As of December 31, 1998, working capital included $50.9
million related to financing and $46.4 million of assets held for sale included
in domestic operations and $27.3 million of receivables from the sale of our
Spanish operations included in international operations. Working capital in
1998, excluding previously described items, was $83.1 million for domestic
compared to $76.8 million in 1997. For international, working capital increased,
excluding Spanish operations, from $22.8 million in 1997 to $36.8 million at
December 31, 1998.
We invested cash (net of cash acquired of $5.0 million in 1998 and $3.3
million in 1997) in acquisitions and investments in unconsolidated companies
totaling $89.1 million during 1998 compared to $49.0 million in 1997. During
1998, we made capital expenditures of $76.4 million, primarily for machinery and
equipment used in the production of revenue, compared to $21.5 million in 1997.
The increase in capital expenditures was due mainly to fleet upgrades for
acquired companies and internal growth. Of the total invested funds in 1998,
$64.5 million was related to North American acquisitions and $71.4 million was
related to North American capital expenditures.
We entered into agreements with certain senior management personnel at
two of our operating subsidiaries. These senior managers agreed to multi-year
employment agreements and 10-year non-competition and non-solicitation
agreements. Under the agreements, we paid the senior managers compensation in
the form of cash and common stock options. The cash portion totaled
approximately $33.3 million, of which approximately $13.3 million was paid in
1998 and approximately $20.0 million was paid in the first quarter of 1999. The
up-front payments were paid to these managers to resolve issues arising from the
original price paid for the acquisition of their businesses and issues relating
to these managers' roles within our company, as well as to preserve the goodwill
of the acquired businesses. These issues arose primarily from a significant
decline in the value of the MasTec shares these managers received between the
time when we bought their businesses and the expiration of the period when they
were restricted from sale of the shares. Because neither these payments nor the
agreements were contemplated, included or required under the original terms of
the business acquisitions and could not be attributed to future services, these
payments were recorded as operating expenses in 1998, rather than deferred or
amortized.
During 1998, we provided a customer financing in connection with the
sale of construction services. As of December 31, 1998, we had $41.8 million
outstanding under this agreement. We anticipate that we will provide an
additional $8.0 million of financing under this agreement. We will terminate
financing agreement as of April 30, 1999.
Although the PCS system is held for sale, we are committed to continue
developing the system in Paraguay. We anticipate investing approximately $13.0
million for the development of this system over the next 12 months. Commercial
operation of the system must be initiated no later than May 10, 1999, unless
extended. We are seeking an extension of this date.
During 1998, we sold 87% of our Spanish operations for $27.3 million
which is recorded in other current assets in the accompanying consolidated
balance sheet as of December 31, 1998. The proceeds from the sale will be used
for general corporate purposes including reducing indebtedness.
We announced a stock repurchase program in April 1998. Through December
1998, we had purchased a total of 667,000 shares at an average price of
$20.58.
In December 1998, we increased our existing credit facility from $125.0
million to $165.0 million (the "Credit Facility"), with a group of financial
institutions led by BankBoston, N.A. Amounts outstanding under the Credit
Facility mature on June 9, 2000. Upon written request by us and at the bank's
sole discretion, the maturity date of the Credit Facility may be extended for
successive annual periods up to a final maturity date of June 9, 2002. We are
required to pay an unused facility fee ranging from .25% to .50% per annum on
the facility, depending upon certain financial covenants.
The Credit Facility is secured by a pledge of shares of certain of our
subsidiaries. Interest under the Credit Facility accrues at rates based, at our
option, on the agent bank's Base Rate plus a margin of up to .50% depending on
certain financial covenants or 1% above the overnight federal funds effective
rate, whichever is higher, or its LIBOR Rate (as defined in the Credit Facility)
plus a margin of 1.00% to 2.25%, depending on certain financial covenants.
We had outstanding $18.7 million in standby letters of credit as of
December 31, 1998.
In January 1998, we issued $200.0 million principal amount of our
Senior Notes with interest due semi-annually. The net proceeds were used
primarily for acquisitions and for other corporate purposes.
The Credit Facility and the Senior Notes contain customary events of
default and covenants which prohibit, among other things, making certain
investments in excess of a specified amount, incurring additional indebtedness
in excess of a specified amount, paying dividends in excess of a specified
amount, making capital expenditures in excess of a specified amount, creating
liens, prepaying other indebtedness, including the Senior Notes, and engaging in
certain mergers or combinations without the prior written consent of the
lenders. The Credit Facility also provides that we must maintain certain
financial ratio coverages, requiring, among other things minimum ratios at the
end of each fiscal quarter of debt to earnings and earnings to interest expense.
See Note 5 of Notes to Consolidated Financial Statements.
We expect to finance our current working capital needs, capital
expenditures, debt service obligations and other commitments from cash generated
from operations, borrowings under our existing Credit Facility and the sale of
investments and other assets. Subsequent to December 31, 1998, we have signed
letters of intent to acquire two external telecommunication networks and one
internal networks contractors, subject to a number of conditions. We anticipate
that available cash, cash flows from operations and borrowing availability under
the Credit Facility will be sufficient to satisfy our liquidity and working
capital requirements for the foreseeable future; however, to the extent that we
should desire to increase its financial flexibility and capital resources or
require or choose to fund future capital commitments from sources other than
operating cash or from borrowings under its existing Credit Facility, we may
consider raising additional capital by increasing our Credit Facility or through
the offering of equity and/or debt securities in the public or private markets.
There can be no assurance, however, that additional capital will be available to
us on acceptable terms, or at all.
We own interests in a number of foreign operations, primarily in Latin
America, which are subject to greater political, monetary, economic and
regulatory risks than its domestic operations. During January 1999 the Brazilian
government allowed its currency to trade freely against other currencies
resulting in an immediate devaluation of the Brazilian reais. The impact on the
devaluation on an operation depends on the devaluation's effect on the local
economy and the ability of an operation to raise prices and/or reduce expenses.
Additionally, the economies of other countries in Latin America could be
adversely impacted by Brazil's economic and monetary problems. The likelihood
and extent of further devaluation and deteriorating economic conditions in
Brazil and other Latin America countries and the resulting impacts on MasTec's
results of operations, financial position and cash flows cannot now be
determined. We monitor our currency exchange risk but currently do not hedge
against this risk. There can be no assurance that currency exchange fluctuations
or other economic problems will not adversely affect our results of operations,
financial position and cash flows.
Year 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of our computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure,
disruption of operations and/or a temporary inability to conduct normal business
activities.
We have undertaken a Year 2000 project which includes an assessment of
telecommunications equipment, computer equipment, software, database, data
services, network infrastructure, and telephone equipment. Our Year 2000 plan
addresses the Year 2000 issue in four phases: (1) inventory and assessment; (2)
impact analysis and implementation planning; (3) implementation and testing; and
(4) on-going and monitoring. As each phase is completed, project progress will
be tracked against planned targets, and resource adjustments made as necessary.
At this time, a majority of our information systems and embedded devices have
been inventoried and assessed, and we have begun impact analysis and
implementation planning, as well as some implementation and testing. The project
is estimated to be complete by the end of 1999, prior to any anticipated impact
on our operating systems. We believe that with upgrades to existing software,
conversions to new software and replacement of certain products and equipments,
the Year 2000 issue will not pose significant operational problems. Based on its
current assessment efforts, we do not believe that Year 2000 issues will have a
material adverse effect on our financial condition or results of operations. If,
however, necessary upgrades, replacements and conversions are not made or are
not completed on a timely basis, the Year 2000 issue may have a material adverse
effect on our business, financial condition and results of operations. Our Year
2000 issues and any potential business interruptions, costs, damages or losses
related thereto, are dependent, to a certain degree, upon the Year 2000
readiness of third parties such as vendors and suppliers. As part of our Year
2000 efforts, formal communications with all significant vendors, suppliers,
banks and clients are being pursued to determine the extent to which related
interfaces with our systems are vulnerable if these third parties fail to
remediate their Year 2000 issues. There cannot be any assurance that any such
third parties will address any Year 2000 issues that they have or that such
third parties' systems will not materially adversely affect our systems and
operations.
We continue to assess the Year 2000 issue with respect to internal
business systems, and have initiated the implementation of corrective measures
to address the issue. We are evaluating the need for contingency planning at
this time of its system and embedded devices. The assessment of third parties
external to us is underway, and may reveal the need for contingency planning
based on the progress and findings of the Year 2000 project.
We will utilize both internal and external resources to complete and
test the Year 2000 project. At the present time, we are estimating the cost of
this project. Through December 31, 1998, related costs incurred were not
material, and we do not expect that the total cost of our Year 2000 project will
be material to our financial position or results of operations. Project costs
and the targeted completion date will be based on management's best estimates,
which will be derived from utilizing numerous assumptions of future events,
including the continued availability of certain resources, the ability to locate
and correct all relevant computer codes, third party modification plans and
other factors. There can be no assurance these estimates will be achieved or
that the actual results will not differ materially from those anticipated.
Seasonality
Our North America operations have historically been seasonally weaker
in the first and fourth quarters of the year and have produced stronger results
in the second and third quarters. This seasonality is primarily the result of
customer budgetary constraints and preferences and the effect of winter weather
on external network activities. Certain U.S. customers, particularly the ILEC's,
tend to complete budgeted capital expenditures before the end of the year and
defer additional expenditures until the following budget year. Revenue in a
local currency from MasTec Inepar is not expected to fluctuate seasonally.
Impact of Inflation
The primary inflationary factor affecting our operations is increased
labor costs. We have not experienced significant increases in labor costs to
date. Competition for qualified personnel could increase labor costs for us in
the future. Our international operations may, at times in the future, expose us
to high inflation in certain foreign countries. During 1998, we generated
approximately 17.5% of our total revenue (excluding revenue generated from our
Spanish operations 87% of which we sold in December 1998) from international
operations that are susceptible to currency devaluation. Management anticipates
that revenue from our international operations will be less significant to our
operations in the foreseeable future due to our current intentions to dispose of
them, however, the likelihood and extent of further devaluation and
deteriorating economic conditions in Brazil and other Latin America countries
and the resulting impacts on our results of operations, financial position and
cash flows cannot now be determined.
MASTEC, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants .................. F-2
Consolidated Statements of Operations
for the Years Ended December 31, 1996, 1997 and 1998 ............... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1998 ......... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998 ............... F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1997 and 1998 ............... F-7
Notes to Consolidated Financial Statements ........................... F-10
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of MasTec, Inc.:
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of operations, changes in shareholders' equity and cash flows
present fairly, in all material respects, the financial position of MasTec,
Inc. and its subsidiaries ("MasTec") at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of MasTec's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Sintel, S.A., a wholly-owned subsidiary
until December 31, 1998 which statements reflect total assets of $195.2 million
at December 31, 1997 and total revenues of $207.2 million and $207.6 million
for the years ended December 31, 1997 and 1998, respectively. Those statements,
prior to adjustment, were audited by other auditors whose report dated March
31, 1999 expressed a qualified opinion thereon. The other auditor's report has
been furnished to us, and our opinion expressed herein, insofar as it relates
to amounts included for Sintel, S.A., except for the adjustment, which results
from the matter noted in the qualification of the other auditor's report and is
described in the following paragraph, is based solely on the report of the
other auditors. We conducted our audits of the consolidated financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall consolidated financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
As discussed in Note 2, for purposes of inclusion in the consolidated financial
statements, MasTec adjusted the consolidated financial statements of Sintel,
S.A., a wholly-owned subsidiary until December 31, 1998, to correct for the
effect of the improper reversal of a reserve for employee severance. We have
audited the adjustment to the Sintel, S.A. financial statements. In our
opinion, such adjustment is and has been properly applied to the financial
statements of Sintel, S.A. for the year ended December 31, 1998 for purposes of
inclusion in the 1998 MasTec consolidated financial statements.
As described in Note 1, the 1996 and 1997 consolidated financial statements
have been retroactively adjusted to apply purchase accounting to two 1997
acquisitions that were previously accounted for as pooling-of-interests, as the
result of events that occurred subsequent to the dates of the original
acquisitions.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Miami, Florida
March 31, 1999
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Sistemas e Instalaciones de Telecomunicacion, S.A. (Sintel)
1. We have audited the consolidated balance sheet of SINTEL, S.A. and
subsidiaries ("Sintel") as of December 31, 1998 and 1997 and the related
consolidated statements of income and the accompanying notes, all expressed in
Spanish pesetas which are not included herein. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
2. We conducted our audits in accordance with generally accepted auditing
standards in Spain which are substantially consistent with those in the United
States of America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
3. The framework agreement entered into with Telefonica de Espana, S.A.,
whereby the latter guaranteed a minimum level of purchases from the Controlling
Company, expired on December 31, 1998. In view of this situation, the
Controlling Company is implementing a strategy consisting of the internal
rationalization of its operating structure and the expansion and
diversification of its production activities in Spain and Latin America, as
discussed in Note 1.
4. In relation to what is described in the previous paragraph, in 1998 the
Controlling Company restructured its operations which gave rise to an
extraordinary expense of Ptas. 1,810 million for indemnities to terminated
employees. In view of the extraordinary nature of this restructuring, the
Controlling Company's directors considered it appropriate to offset a portion
of this cost and reversed Ptas. 1,001 million of voluntary reserves with a
credit to income for the year. The recording of this transaction is detailed in
Notes 10 and 18. Although the use of voluntary reserves is unrestricted for the
Shareholder's Meeting, Spanish accounting regulations do not provide for the
reversal of this reserve and consequent recording as extraordinary revenues for
1998. Therefore, under generally accepted accounting principles, net income for
the year should be reduced, and voluntary reserves should be increased, by
Ptas. 1,001 million. However, this matter does not change the total balance of
consolidated shareholder's equity as of December 31, 1998.
5. In our opinion, except as described in paragraphs 3 and 4 above, the
consolidated financial statements referred to above present fairly, in all
materials respects the consolidated financial position of SINTEL, S.A. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations for the years then ended, in conformity with generally accepted
accounting principles in Spain.
6. Further, in our opinion, the reconciliation of consolidated net income
for each of the two years in the period ended December 31, 1998 and
shareholders' equity as of December 31, 1998 and 1997 presented in Note 21 and
Note 22 to the 1998 and 1997 consolidated financial statements, respectively,
which reconciles net income and shareholders' equity, as shown in the
consolidated financial statements, to net income and shareholders' equity, as
determined in accordance with generally accepted accounting principles in the
United States, presents fairly the information shown therein on a consistent
basis.
/s/ ARTHUR ANDERSEN
Arthur Andersen
Madrid, Spain
March 31, 1999
F-3
MASTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
--------------- -------------- -------------
(RESTATED)(1) (RESTATED)(1)
Revenue ..................................................... $ 472,800 $659,439 $1,048,922
Costs of revenue ............................................ 352,329 495,840 803,112
Depreciation and amortization ............................... 12,000 23,855 43,313
Non-recurring charge ........................................ -- -- 33,765
General and administrative expenses ......................... 58,529 82,261 140,472
--------- -------- ----------
Operating income ........................................... 49,942 57,483 28,260
Interest expense ............................................ 11,434 11,541 29,580
Interest income ............................................. 3,246 1,783 9,093
Other income (expense), net ................................. 769 8,332 (5,155)
--------- -------- ----------
Income before provision for income taxes, equity in earnings
of unconsolidated companies and minority interest ......... 42,523 56,057 2,618
Provision for income taxes .................................. 15,591 20,944 12,550
Equity in earnings of unconsolidated companies .............. 3,040 2,897 1,906
Minority interest ........................................... 93 (3,346) (5,889)
--------- -------- ----------
Net income (loss) ........................................... $ 30,065 $ 34,664 $ (13,915)
========= ======== ==========
Basic weighted average common shares outstanding ............ 24,703 26,460 27,489
Basic earnings (loss) per share ............................. $ 1.22 $ 1.31 $ (0.51)
Diluted weighted average common shares outstanding .......... 25,128 27,019 27,489
Diluted earnings (loss) per share ........................... $ 1.20 $ 1.28 $ (0.51)
- ----------------
(1) See Note 1 to Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
MASTEC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------------
1997 1998(1)
----------- ------------
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 6,063 $ 19,864
Accounts receivable, unbilled revenue and retainage, net ......... 346,596 279,015
Inventories ...................................................... 8,746 9,393
Assets held for sale ............................................. 10,782 57,238
Other current assets ............................................. 22,009 59,601
-------- --------
Total current assets ........................................... 394,196 425,111
Property and equipment, net ....................................... 86,109 137,382
Investments in unconsolidated companies ........................... 48,160 5,886
Intangibles, net .................................................. 99,890 140,461
Other assets ...................................................... 1,869 23,381
-------- --------
Total assets ................................................... $630,224 $732,221
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of debt ....................................... $ 54,562 $ 11,143
Accounts payable and accrued expenses ............................ 166,596 84,372
Other current liabilities ........................................ 48,950 74,771
-------- --------
Total current liabilities ...................................... 270,108 170,286
-------- --------
Other liabilities ................................................. 41,924 46,973
-------- --------
Long-term debt .................................................... 94,495 310,689
-------- --------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock ..................................................... 2,758 2,738
Capital surplus .................................................. 154,013 149,479
Retained earnings ................................................ 70,392 56,477
Accumulated other comprehensive income ........................... (3,466) (4,421)
-------- --------
Total shareholders' equity ..................................... 223,697 204,273
-------- --------
Total liabilities and shareholders' equity ..................... $630,224 $732,221
======== ========
- ----------------
(1) Does not include financial condition of the Company's Spanish operations,
which were sold effective December 31, 1998.
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
MASTEC, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(RESTATED)
(IN THOUSANDS)
COMMON STOCK
--------------------- CAPITAL RETAINED
SHARES AMOUNT SURPLUS EARNINGS
---------- ---------- ----------- ------------
Balance December 31, 1995 .............. 26,435 $2,643 $ 134,186 $ 5,663
Net income ............................. 30,065
Foreign currency
translation adjustment ................
Stock issued from treasury for stock
options exercised ..................... 48
Tax benefit resulting from stock
option plan ........................... 513
Stock issued from treasury for
an acquisition ........................ 8,844
Stock issued for debentures
from treasury ......................... 5,492
---------
Balance December 31, 1996 .............. 26,435 2,643 149,083 35,728
Net income ............................. 34,664
Foreign currency translation
adjustment ............................
Stock issued from treasury for
options exercised ..................... 206
Tax benefit resulting from stock
option plan ........................... 1,538
Stock issued for acquisitions .......... 1,621 162 76,219
Stock issued from treasury for
an acquisition ........................ 4,479
Stock issued for stock dividend
from treasury ......................... (75,802)
Stock issued from treasury ............. 3,007
---------
Balance December 31, 1997 .............. 28,056 2,805 158,730 70,392
Retirement of treasury stock ........... (476) (47) (4,717) --
------ ------ --------- ----------
Balance December 31, 1997 .............. 27,580 2,758 154,013 70,392
Net loss ............................... (13,915)
Foreign currency translation
adjustment ............................
Stock issued, primarily for
acquisitions and stock
options exercised ..................... 469 47 8,721
Tax benefit resulting from stock
option plan ........................... 403
Repurchase of common stock ............. (667) (67) (13,658)
------ ------ ---------
Balance December 31, 1998 .............. 27,382 $2,738 $ 149,479 $ 56,477
====== ====== ========= ==========
FOREIGN ACCUMULATED
CURRENCY OTHER
TRANSLATION TREASURY COMPREHENSIVE
ADJUSTMENTS STOCK TOTAL INCOME
------------- ------------- ----------- --------------
Balance December 31, 1995 .............. $ 1 $ (91,989) $ 50,504 $ 5,664
Net income ............................. 30,065 30,065
Foreign currency
translation adjustment ................ (803) (803) (803)
Stock issued from treasury for stock
options exercised ..................... 523 571 --
Tax benefit resulting from stock
option plan ........................... 513 --
Stock issued from treasury for
an acquisition ........................ 2,201 11,045 --
Stock issued for debentures
from treasury ......................... 6,117 11,609 --
--------- --------- ----------
Balance December 31, 1996 .............. (802) (83,148) 103,504 34,926
Net income ............................. 34,664 34,664
Foreign currency translation
adjustment ............................ (2,664) (2,664) (2,664)
Stock issued from treasury for
options exercised ..................... 979 1,185 --
Tax benefit resulting from stock
option plan ........................... 1,538 --
Stock issued for acquisitions .......... 76,381 --
Stock issued from treasury for
an acquisition ........................ 1,603 6,082 --
Stock issued for stock dividend
from treasury ......................... 75,802 -- --
Stock issued from treasury ............. 3,007 --
--------- ----------
Balance December 31, 1997 .............. (3,466) (4,764) 223,697 66,926
Retirement of treasury stock ........... -- 4,764 -- --
-------- --------- --------- ----------
Balance December 31, 1997 .............. (3,466) --- 223,697 66,926
Net loss ............................... (13,915) (13,915)
Foreign currency translation
adjustment ............................ (955) (955) (955)
Stock issued, primarily for
acquisitions and stock
options exercised ..................... 8,768 --
Tax benefit resulting from stock
option plan ........................... 403 --
Repurchase of common stock ............. (13,725) --
--------- ----------
Balance December 31, 1998 .............. $ (4,421) $ -- $ 204,273 $ 52,056
======== ========= ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ----------- -------------
(RESTATED) (RESTATED)
Cash flows from operating activities:
Net income (loss) .................................................. $ 30,065 $ 34,664 $ (13,915)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ..................................... 12,000 23,855 43,313
Minority interest ................................................. (93) 3,346 5,889
Equity in earnings of unconsolidated companies .................... (3,040) (2,897) (1,906)
Deferred tax expense (benefit) .................................... 2,574 (4,991) 6,974
(Gain) loss on sale of assets ..................................... (365) (6,848) 8,918
Changes in assets and liabilities net of effect of acquisitions
and divestitures:
Accounts receivable, unbilled revenue and retainage, net ......... (12,013) (28,809) (34,942)
Inventories and other current assets ............................. (2,448) 64 (16,759)
Other assets ..................................................... (2,102) (10,889) (27,341)
Accounts payable and accrued expenses ............................ 24,492 5,348 (2,017)
Other current liabilities ........................................ (6,706) 7,326 13,385
Other liabilities ................................................ (4,942) (4,988) 4,548
--------- --------- ----------
Net cash provided by (used in) operating activities ................. 37,422 15,181 (13,853)
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures ............................................... (7,059) (21,534) (76,445)
Cash paid for acquisitions, net of cash acquired ................... (5,034) (45,606) (75,745)
Distributions from unconsolidated companies ........................ -- 2,130 --
Investments in unconsolidated companies ............................ (1,212) (3,364) (13,384)
Repayment (advances) of notes receivable, net ...................... 1,273 565 (18,667)
Repayment of notes from shareholders ............................... -- 780 --
Net proceeds from sale of assets ................................... 9,404 29,628 5,600
--------- --------- ----------
Net cash used in investing activities ............................... (2,628) (37,401) (178,641)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from revolving credit facilities .......................... 17,476 57,328 5,032
Proceeds from Senior Notes ......................................... -- -- 199,724
Other borrowings ................................................... 21,739 19,936 35,106
Debt repayments .................................................... (70,320) (59,059) (17,946)
Proceeds from issuance of common stock ............................. 792 6,264 3,779
Stock repurchased .................................................. -- -- (13,725)
Financing costs .................................................... -- (587) (4,993)
--------- --------- ----------
Net cash (used in) provided by financing activities ................. (30,313) 23,882 206,977
--------- --------- ----------
Net increase in cash and cash equivalents ........................... 4,481 1,662 14,483
Net effect of translation on cash ................................... (803) (353) (682)
Cash and cash equivalents--beginning of period ...................... 1,076 4,754 6,063
--------- --------- ----------
Cash and cash equivalents--end of period ............................ $ 4,754 $ 6,063 $ 19,864
========= ========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................... $ 10,029 $ 8,727 $ 21,795
========= ========= ==========
Income taxes ....................................................... $ 11,676 $ 10,377 $ 6,593
========= ========= ==========
(CONTINUED)
F-7
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
Supplemental disclosure of non-cash investing and financing activities:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
------------ ----------- ------------
(RESTATED) (RESTATED)
Acquisitions accounted for under purchase method of accounting:
Fair value of assets acquired:
Accounts receivable .......................................... $248,087 $ 43,966 $ 35,184
Inventories .................................................. 2,980 1,681 2,565
Other current assets ......................................... 12,661 2,127 1,615
Property and equipment ....................................... 13,148 27,480 27,168
Investments in unconsolidated companies ...................... 9,373 -- --
Real estate and other assets ................................. 6,385 3,973 3,830
-------- -------- --------
Total non-cash assets ....................................... 292,634 79,227 70,362
-------- -------- --------
Liabilities ................................................... 162,928 32,238 20,623
Long-term debt ................................................ 78,966 8,535 18,609
-------- -------- --------
Total liabilities assumed ................................... 241,894 40,773 39,232
-------- -------- --------
Net non-cash assets acquired .................................. 50,740 38,454 31,130
Cash acquired ................................................. 1,130 3,304 4,975
-------- -------- --------
Fair value of net assets acquired ............................. 51,870 41,758 36,105
Excess over fair value of assets acquired ..................... 4,956 98,088 55,314
-------- -------- --------
Purchase price ................................................ $ 56,826 $139,846 $ 91,419
======== ======== ========
Notes payable issued in acquisitions .......................... $ 36,561 $ 130 $ 10,199
Acquisition costs, cash paid and common stock issued
for acquisitions ............................................ 18,015 129,809 81,220
Contingent consideration ...................................... 2,250 9,907 --
-------- -------- --------
Purchase price ................................................ $ 56,826 $139,846 $ 91,419
======== ======== ========
Property acquired through financing arrangements .............. $ 8,550 $ 413 $ --
======== ======== ========
Disposal of Sintel:
Accounts receivable .......................................... $137,214
Inventories .................................................. 2,774
Other current assets ......................................... 37,722
Property and equipment ....................................... 17,251
Other assets ................................................. 2,825
--------
Total non-cash assets ....................................... 197,786
--------
Liabilities ................................................... 109,448
Long-term debt ................................................ 25,013
--------
Total liabilities ........................................... 134,461
--------
Net non-cash assets sold ...................................... 63,325
Cash .......................................................... 2,234
Investment retained ........................................... (4,072)
--------
Fair value of net assets sold ................................. 61,487
Net loss on sale .............................................. (9,222)
--------
Sale price .................................................... $ 52,265
========
Assumption of debt ............................................ 25,013
Seller financing .............................................. 27,252
--------
Sale price .................................................... $ 52,265
========
(CONTINUED)
F-8
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
In 1996, we issued approximately 198,000 shares of common stock for an
acquisition. Common stock was issued from treasury at a cost of $2.2 million.
In 1996, we converted $11.6 million of its 12% convertible subordinated
debentures into common stock. Common stock was issued from treasury at a cost
of $6.1 million.
In 1996, we purchased of an additional 3% interest in Supercanal was
financed in part by the sellers for $2 million.
In 1997, we issued approximately 1,621,000 shares of common stock for
domestic acquisitions, of which 250,000 shares were issued from treasury stock
at a cost of approximately $1.6 million.
In 1997, we converted a note receivable and accrued interest thereon
totaling $29 million into stock of Conecel.
In 1998, we issued approximately 158,200 shares of common stock primarily
as payment for contingent consideration related to 1997 acquisitions. In
addition, we issued approximately 58,600 shares as bonuses to certain employees
and fees to directors.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1--NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are one of the preeminent builders of internal and external voice,
video, data, internet and other computer and communications networks for
leading telecommunications service providers, cable television operators,
Fortune 500 corporations and power companies. We design, install, construct and
maintain aerial, underground and buried copper, coaxial and fiber optic cable
networks as well as wireless antenna networks ("external network services").
Clients for our external network services include major domestic and
international telecommunication service providers, incumbent and competitive
local exchange carriers, cable television operators, long-distance carriers and
wireless phone companies. We also provide external network services to the
electric power industry ("power") that are similar to the services it provides
to telecommunications customers. Additionally, we design, install and maintain
integrated local and wide area networks and provides systems integration and
other value added services ("internal network services") for corporate
customers and other organizations with multiple locations.
For the years ended, December 31, 1996, 1997 and 1998, revenue expressed
as a percentage of North American revenue, generated by external network
services for telecommunications service providers was 77.1%, 76.1% and 68.1%,
respectively, by external network services for electric power companies was
1.3%, 5.2% and 18.0%, respectively, and by internal network services was 12.5%,
12.5% and 13.4%, respectively. We operated in 1998 principally in North America
(the United States and Canada), Brazil and Spain (Brazil and Spain combined are
also referred to as "International"). Combined revenue generated by
International operations, as a percentage of total revenue was 39.8% in 1996,
42.8% in 1997 and 36.2% in 1998. See Note 9.
On December 31, 1998, we sold our Spanish operations, whose principal
customer was Telefonica.
In July and August 1997, we consummated two acquisitions that met all of
the pooling of interest requirements and were recorded as such. No other
agreements or commitments regarding contingent consideration or subsequent
arrangements with the selling shareholders were contemplated that would have,
under generally accepted accounting principles, precluded the accounting for
these transactions under the pooling-of-interest method. During the first half
of 1998, we advanced funds to the selling shareholders and in August 1998
commenced discussions, which culminated in the transactions described in Note
2. As a result, we revised the prior accounting to apply the purchase method.
Accordingly, the consolidated financial statements include the results of
operations from the dates of such acquisitions and prior years have been
adjusted accordingly. The change in accounting resulted in increases in capital
surplus and intangibles assets of approximately $53.0 million as of December
1997. As to the statement of income, the adjusted 1997 revenue, net income and
earnings per share are $659.4 million, $34.7 million and $1.28, respectively,
in comparison to the originally reported amounts of $703.4 million, $42.7
million and $1.44, respectively.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below:
MANAGEMENT'S ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting
F-10
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1--NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
period. The more significant estimates relate to our reserve for allowance for
bad debts, accrued workers' compensation claims, and the realizability of
certain intangibles and assets held for sale. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
MasTec, Inc. and its subsidiaries. All material intercompany accounts and
transaction have been eliminated. Certain prior year amounts have been
reclassified to conform to the current presentation.
COMPREHENSIVE INCOME (LOSS). As reflected in the consolidated statement of
changes in shareholders' equity, comprehensive income is a measure of net
income and all other changes in equity that result from transactions other than
with shareholders. Comprehensive income (loss) consists of net income (loss)
and foreign currency translation adjustments.
FOREIGN CURRENCY. Assets and liabilities of foreign subsidiaries and
equity with a functional currency other than U.S. dollars are translated into
U.S. dollars at exchange rates in effect at the end of the reporting period.
Foreign entity revenue and expenses are translated into U.S. dollars at the
average rates that prevailed during the period. The resulting net translation
gains and losses are reported as foreign currency translation adjustments in
shareholders' equity as a component of other accumulated comprehensive income.
Exchange gains and losses on transactions and its equity investments
denominated in a currency other than their functional currency are included in
results of operations as incurred.
INTERNATIONAL OPERATIONS. We own interests in a number or foreign
operations, primarily in Latin America, which are subject to greater political,
monetary, economic and regulatory risks than its domestic operations. During
January 1999 the Brazilian government allowed its currency to trade freely
against other currencies resulting in an immediate devaluation of the Brazilian
REAIS. The impact of the devaluation on an operation depends on the
devaluation's effect on the local economy and the ability of an operation to
raise prices and/or reduce expenses. Additionally, the economies of other
countries in Latin America could be adversely impacted by Brazil's economic and
monetary problems. The likelihood and extent of further devaluation and
deteriorating economy conditions in Brazil and other Latin American countries
and the resulting impacts on MasTec's results of operations, financial position
and cash flows is not known.
REVENUE RECOGNITION. Revenue and related costs for short-term construction
projects (i.e., generally projects with a duration of less than one month) are
recognized as the projects are completed. Upon completion of the projects
customers provide written acceptance. Revenue generated by certain long-term
construction contracts are accounted for by the percentage-of-completion method
under which income is recognized based on the ratio of estimated cost incurred
to total estimated contract cost. Losses, if any, on such contracts are
provided for in full when they become known. Billings in excess of costs and
estimated earnings on uncompleted contracts are classified as current
liabilities. Any costs in excess of billings are classified as current assets.
Work in process on contracts is based on work performed but not billed to
customers as per individual contract terms.
We also provide management, coordination, consulting and administration
services for construction projects. Compensation for such services is
recognized ratably over the term of the service agreement.
F-11
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1--NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
EARNINGS PER SHARE. Basic earnings per common share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding. Diluted earnings per common share include the
dilutive effect of stock options using the treasury stock method. The
difference between the weighted average common shares outstanding used to
calculate basic and diluted earnings relates to options assumed exercised under
the treasury method of accounting of approximately 425,000 and 559,000 at
December 31, 1996 and 1997, respectively.
Potentially dilutive shares, as of December 31, 1998 which have not been
included in the diluted per share calculation include 336,000 shares because
their effects would be anti-dilutive due to the loss incurred by us.
Accordingly, for 1998, diluted net loss per common share is the same as basic
net loss per common share.
CASH AND CASH EQUIVALENT. We consider all short-term investments with
maturities of three months or less when purchased to be cash equivalents. We
place our temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of the F.D.I.C.
insurance limits. We have not experienced any loss to date on these
investments. At December 31, 1998, we had cash and cash equivalent in Brazilian
REALS of approximately $9.1 million.
INVENTORIES. Inventories (consisting principally of material and supplies)
are carried at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the respective assets. Leasehold improvements are
amortized over the shorter of the term of the lease or the estimated useful
lives of the improvements. Expenditures for repairs and maintenance are charged
to expense as incurred. Expenditures for betterments and major improvements are
capitalized. The carrying amounts of assets sold or retired and related
accumulated depreciation are eliminated in the year of disposal and the
resulting gains and losses are included in income.
INTANGIBLES AND OTHER LONG LIVED ASSETS. Assets and liabilities acquired
in connection with business combinations accounted for under the purchase
method are recorded at their respective estimated fair values. Goodwill
represents the excess of the purchase price over the estimated fair value of
net assets acquired, including the recognition of applicable deferred taxes,
and is amortized on a straight-line basis over a period ranging from 5 to 40
years, with a weighted average amortization period of 22 years. At December 31,
1997 and 1998, we had recorded intangibles primarily consisting of goodwill of
$99.9 million and $142.2 million, respectively (net of accumulated amortization
of $3.5 million in 1997 and $14.9 million in 1998).
We review long-lived assets, identifiable intangibles and goodwill and
reserves for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future undiscounted net cash flows expected to
be generated by the assets. 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 the fair value of the assets or expected future
cash flows on an undiscounted basis. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
F-12
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1--NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
ACCRUED INSURANCE. We are self-insured for certain property and casualty
and worker's compensation exposure and, accordingly, accrues the estimated
losses not otherwise covered by insurance.
INCOME TAXES. We record income taxes using the liability method of
accounting for deferred income taxes. Under this method, deferred tax assets
and liabilities are recognized for the expected future tax consequence of
temporary differences between the financial statement and income tax bases of
our assets and liabilities. A valuation allowance is established when it is
more likely than not that any or all of the deferred tax assets will not be
realized.
STOCK BASED COMPENSATION. We adopted the disclosure provision of Statement
of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation ("SFAS 123") and retained the intrinsic value method of accounting
for such stock based compensation (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS. We estimate the fair market value of
financial instruments through the use of public market prices, quotes from
financial institutions and other available information. Judgment is required in
interpreting data to develop estimates of market value and, accordingly,
amounts are not necessarily indicative of the amounts that we could realize in
a current market exchange. Our short-term financial instruments, including cash
and cash equivalents, accounts and notes receivable, accounts payable and other
liabilities, consist primarily of instruments without extended maturities, the
fair value of which, based on management's estimates, equaled their carrying
values. Long-term debt is carried at face value less unamortized discount,
$199.8 million at December 31, 1998. The fair value of our Senior Notes was
approximately $195.0 million at December 31, 1998. We use letters of credit to
back certain insurance policies. The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees competitively
determined in the market place.
NOTE 2--ACQUISITIONS AND INVESTING ACTIVITIES
During 1997 and 1998, we completed 11 and 12 North America acquisitions,
respectively, which have been accounted for under the purchase method of
accounting. Accordingly, the results of operations of acquired companies have
been included in our consolidated results of operations from their respective
acquisition dates. Contingent consideration, to the extent earned, will be
recorded as additional goodwill. If the acquisitions had been made at the
beginning of 1997 or 1998, pro forma results of operations would not have
differed materially from actual results based on historical performance prior
to their acquisition by us. Acquisitions made in 1998 were: M.E. Hunter, Inc.
of Atlanta, Georgia, C & S Directional Boring, Inc. of Purcell, Oklahoma,
Office Communications Systems, Inc. of Inglewood, California, Phasecom Systems,
Inc. of Toronto, Canada, P&E Electric Company, Inc. of Nashville, Tennessee,
Lessard-Nyren Utilities, Inc. of Hugo, Minnesota, Electronic Equipment
Analyzers, Inc. of Raleigh, North Carolina, Cotton and Taylor of Las Vegas,
Nevada, Stackhouse, Inc. of Goldsboro, North Carolina, Martin Telephone
Contractors, Inc. of Cades, South Carolina, Barkers CATV Construction, Inc. of
Burleson, Texas and Fiber and Cable Works, Inc. of Roanoke, Virginia,
telecommunications infrastructure and utility contractors with operations
primarily in the western, northern and southeastern United States as well as
Canada. Of the total 1998 acquisitions, eight, two and two pertained to
external network services, power and internal network
F-13
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 2--ACQUISITIONS AND INVESTING ACTIVITIES--(CONTINUED)
services, respectively. Additionally, we made four international acquisitions
of telecommunications infrastructure contractors: CIDE Engenharia Ltda. of
Brazil, Acietel Mexicana, S.A. of Mexico, Artcom Services, Inc. of Puerto Rico
("Artcom") and Proyco Ltda. of Colombia ("Proyco"). During 1998, we sold 87% of
its Spanish operations which included Artcom and Proyco.
We entered into agreements with certain senior management personnel at
two of our operating subsidiaries. These senior managers have agreed to
multi-year employment agreements and 10-year non-competition and
non-solicitation agreements. Under the definitive agreements, we paid the senior
managers compensation in the form of cash and common stock options. The cash
portion totals approximately $33.3 million, of which approximately $13.3 million
was paid in 1998 and approximately $20.0 million was paid in the first quarter
of 1999. The up-front payments were paid to these managers to resolve issues
arising from the original price paid for the acquisition of their businesses and
issues relating to these managers' roles within our company, as well as to
preserve the goodwill of the acquired business. These issues arose primarily
from a significant decline in the value of the MasTec shares these managers
received between the time when we bought their businesses and the expiration of
the period when they were restricted from sale of the shares. Because neither
these payments nor the agreements were contemplated, included or required under
the original terms of the business acquisitions and could not be attributed to
future services, these payments were recorded as operating expenses in 1998,
rather than deferred or amortized. Additionally at December 31, 1998, we had
approximately $7.1 million due from these employees which was received during
February 1999.
On April 30, 1996, we purchased from Telefonica 100% of the capital stock
of Sistemas e Instalaciones de Telecomunicacion, S.A. ("Sintel"), a company
engaged in telecommunications infrastructure construction services in Spain,
Argentina, Chile, and Peru. In Argentina, Chile and Peru, MasTec operated
through unconsolidated corporations in which it held a 50% interest. The
consolidated financial statements have been adjusted to correct the effect of
the matter described in paragraph 4 of Sintel's auditors report. On December 31,
1998, we sold 87% of its Spanish operations to a group of investors. The
investor group included the chief executive officer of Sintel and a member of
its board of directors. We received $0.9 million (130.5 million pesetas at an
exchange rate of 142 pesetas to the dollar) on the date of closing and through
March 31, 1999 has received $10.2 million. The sale included the assumption of
our remaining indebtedness to Telefonica for the purchase of the Spanish
operations of $25.0 million (3.6 billion pesetas), for which we are not
contingently liable.
The following information presents the unaudited pro forma condensed
results of operations for the years ended December 31, 1997 and 1998 as if our
disposition of our Spanish Operations had occurred in January 1997.
PRO FORMA RESULTS OF
OPERATIONS
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1997 1998
------------- -------------
(IN THOUSANDS)
Revenue ............................ $ 451,946 $ 811,582
Net income ......................... 25,881 4,962
Basic earnings ..................... 0.98 0.18
Diluted earnings per share ......... 0.96 0.18
On July 31, 1997, we completed our acquisition of 51% of MasTec Inepar
S/A-Sistemas de Telecomunicacoes ("MasTec Inepar"), a newly formed Brazilian
telecommunications infrastructure contractor, for 250,000 shares of common
stock and $29.4 million in cash, of which $7.3 million remains outstanding.
Subsequent to December 31, 1998, we signed letters of intent to acquire
two external network and one internal network services contractors, subject to
a number of conditions.
F-14
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 2--ACQUISITIONS AND INVESTING ACTIVITIES--(CONTINUED)
Common stock issued in acquisitions is valued based upon the market price
of the common stock around the date of purchase or the date the purchase price
is determined.
NOTE 3--ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful
accounts of $3.1 million, $3.1 million, and $7.3 million at December 31, 1996,
1997 and 1998, respectively. We recorded a provision for doubtful accounts of
$1.2 million, $5.3 million and $4.5 million during 1996, 1997 and 1998,
respectively. In addition, we recorded write-offs of $0.1 million, $5.3 million
and $0.3 million during 1996, 1997 and 1998, respectively.
Accounts receivable include retainage which has been billed but is not due
until completion of performance and acceptance by customers, and claims for
additional work performed outside original contract terms. Retainage aggregated
$10.2 million and $16.1 million at December 31, 1997 and 1998, respectively.
Retainage is expected to be collected within one year. Any retainage expected
beyond a year is recorded in long-term other assets.
Included in accounts receivable is unbilled revenue of $97.5 million and
$83.3 million at December 31, 1997 and 1998, respectively. Such unbilled
amounts represent work performed but not billable to customers as per
individual contract terms, of which $49.5 million and $45.2 million at December
31, 1997 and 1998, respectively, are related to our Brazilian operations.
Unbilled revenue is typically billed within one to two months.
During 1998, we entered into a financing agreement to provide financing to
a customer. As of December 31, 1998, we had $41.8 million outstanding under
this agreement, of which approximately $30.0 million and $11.8 million is
reflected in accounts receivable and other current assets, respectively, in the
accompanying consolidated balance sheet as of December 31, 1998. We will
terminate the financing agreement as of April 30, 1999.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of December 31,
1997 and 1998 (in thousands):
ESTIMATED
USEFUL LIVES
1997 1998 (IN YEARS)
------------ ------------ -------------
Land ................................... $ 8,430 $ 7,950
Buildings and improvements ............. 9,474 9,961 5 - 20
Machinery and equipment ................ 97,727 168,484 3 - 7
Office furniture and equipment ......... 5,810 9,299 3 - 5
--------- ---------
121,441 195,694
Less--accumulated depreciation ......... (35,332) (58,312)
--------- ---------
$ 86,109 $ 137,382
========= =========
F-15
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 5--DEBT
Debt is comprised of the following at December 31, (in thousands):
1997 1998
------------ -----------
Revolving Credit Facility, at LIBOR plus 1.50% (6.96% at
December 31, 1997 and 7.06% at December 31, 1998) ................... $ 83,010 $ 106,300
Revolving Credit Facility, at MIBOR plus 0.30 (5.60% at
December 31, 1997) .................................................. 10,894 --
Other Spanish bank facilities at interest rates from 5.65% to 6.75% .. 17,438 --
Other bank facilities at LIBOR plus 1.25% (6.31% at
December 31, 1998) .................................................. -- 6,206
Notes payable for equipment, at interest rates from 7.5% to 8.5% due
in installments through the year 2000 ............................... 14,500 6,145
Notes payable for acquisitions, at interest rates from 7% to 8% due in
installments through February 2000 .................................. 23,215 3,431
Senior Notes, 7.75% due February 2008 ................................ -- 199,750
--------- ---------
Total debt ........................................................... 149,057 321,832
Less current maturities .............................................. (54,562) (11,143)
--------- ---------
Long-term debt ....................................................... $ 94,495 $ 310,689
========= =========
In June 1997, we entered into a revolving line of credit agreement with a
group of banks as amended, (the "Credit Facility"). The Credit Facility
provides for borrowings up to an aggregate amount of $165.0 million. Amounts
outstanding under the revolving credit facility mature on June 9, 2000. Upon
written request by us and at the bank's sole discretion, the maturity date of
the Credit Facility may be extended for successive annual periods up to a final
maturity date of June 9, 2002. We are required to pay an unused facility fee
ranging from .25% to .50% per annum on the facility, depending upon certain
financial covenants.
The Credit Facility is secured by a pledge of shares of certain of our
subsidiaries. Interest under the Credit Facility accrues at rates based, at our
option, on the agent bank's Base Rate plus a margin of up to .50% depending on
certain financial covenants or 1% above the overnight federal funds effective
rate, whichever is higher, or its LIBOR Rate (as defined in the Credit
Facility) plus a margin of 1.00% to 2.25%, depending on certain financial
covenants.
We had outstanding $18.7 million in standby letters of credit as of
December 31, 1998.
On January 30, 1998, we issued $200.0 million, 7.75% senior subordinated
notes (the "Senior Notes") due in February 2008 with interest due
semi-annually. The net proceeds were used primarily for acquisitions and other
corporate purposes.
The Credit Facility and the Senior Notes contain customary events of
default and covenants which prohibit, among other things, making investments in
excess of a specified amount, incurring additional indebtedness in excess of a
specified amount, paying dividends in excess of a specified amount, making
capital expenditures in excess of a specified amount, creating liens, prepaying
other indebtedness, including the Senior Notes, and engaging in certain mergers
or combinations without the prior written
F-16
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 5--DEBT--(CONTINUED)
consent of the lenders. The Credit Facility also provides that we must maintain
certain financial ratio coverage, requiring, among other things minimum ratios
at the end of each fiscal quarter of debt to earnings and earnings to interest
expense.
At December 31, 1998 debt matures as follows:
1999 ...................... $ 11,143
2000 ...................... 109,063
2001 ...................... 1,503
2002 ...................... 345
2003 ...................... 28
Thereafter ................ 199,750
--------
$321,832
========
NOTE 6--STOCK OPTION PLANS
Shares underlying stock options and exercise prices have been adjusted to
reflect the three-for-two stock split declared in 1997 by the Board of
Directors. Our only stock option plans currently in effect are the 1994 Stock
Incentive Plan (the "1994 Plan") and the 1994 Stock Option Plan for
Non-Employee Directors (the "Directors' Plan"). Under our 1976 stock option
plan, there are 5,250 shares available for grant and have been reserved for and
may still be issued in accordance with the terms of such plan.
The 1994 Plan authorizes the grant of options or awards of restricted
stock up to 2,500,000 shares of our common stock, of which 500,000 shares may
be awarded as restricted stock. As of December 31, 1998, options to purchase
1,567,695 (net of 464,255 stock options cancelled) shares had been granted
under the 1994 Plan. Options are exercisable at prices and over periods
established by the Compensation Committee of the Board of Directors and must be
exercised no later than 10 years from the date of grant.
The Directors' Plan authorizes the grant of options to purchase up to
600,000 shares of our common stock to the non-employee members of our Board of
Directors. Options to purchase 142,500 shares have been granted to Board
members through 1998. The options granted become exercisable ratably over a
three year period from the date of grant and may be exercised for a period of
up to ten years beginning the year after the date of grant at an exercise price
equal to the fair market value of such shares on the date the option is
granted.
In addition, during 1994 options to purchase 150,000 shares of common
stock at $3.83 per share were granted to a director outside the Directors' Plan
in lieu of the Director's Plan and annual fees paid to the director.
Compensation expense of $42,500 in connection with the issuance of this option
is being recognized annually over the five-year vesting period. The options are
exercisable ratably over a three to five year period beginning the year after
the date of grant and may be exercised for a period of up to ten years
beginning the year after the date of grant. In 1997, options to purchase
110,000 shares of common stock at fair market value on the date of grant were
granted to two executive officers outside the 1994 plan.
In connection with two acquisitions completed during 1997, options to
purchase 900,000 shares of our common stock at prices ranging from $17.50 to
$20.19 were granted to individuals during 1998 outside the 1994 Plan subject to
varying vesting schedules.
F-17
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 6--STOCK OPTION PLANS--(CONTINUED)
The following is a summary of all stock option transactions:
WEIGHTED
AVERAGE FAIR
WEIGHTED VALUE OF
STOCK AVERAGE OPTIONS
OPTIONS EXERCISE PRICE EXERCISE PRICE GRANTED
------------- ---------------- ------------------ -------------
Outstanding December 31, 1995 ......... 676,800 $ 6.33 $ 0.10 - $ 8.92
Granted ............................... 306,000 17.05 7.42 - 28.58 $ 9.23
Exercised ............................. (82,200) 6.38 0.10 - 8.92
Canceled .............................. (2,700) 5.29 5.29 - 8.92
------- ------ ---------------
Outstanding December 31, 1996 ......... 897,900 9.98 0.10 - 28.58
Granted ............................... 1,254,950 24.96 21.09 - 48.19 $19.97
Exercised ............................. (201,950) 5.58 0.10 - 21.83
Canceled .............................. (343,475) 23.62 5.29 - 48.19
--------- ------ ---------------
Outstanding December 31, 1997 ......... 1,607,425 17.06 0.10 - 31.63
Granted ............................... 1,234,250 19.17 12.97 - 31.88 $13.29
Exercised ............................. (101,990) 11.38 1.33 - 21.09
Canceled .............................. (110,580) 19.47 5.29 - 31.63
--------- ------ ---------------
Outstanding December 31, 1998 ......... 2,629,105 $18.32 $ 0.10 - $31.88
========= ====== ===============
The following table summarizes information about stock options outstanding
at December 31, 1998:
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
PRICES STOCK OPTIONS CONTRACTUAL LIFE PRICE STOCK OPTIONS PRICE
- ------------------ --------------- ------------------ ---------- --------------- ---------
.10 - .10 3,600 4.50 $ 0.10 3,600 $ 0.10
3.83 - 5.29 94,200 5.19 4.83 35,700 5.29
6.83 - 9.81 327,430 6.41 8.66 181,330 8.73
12.97 - 17.50 532,500 9.98 17.34 166,667 17.50
20.19 - 31.88 1,671,375 8.62 21.32 674,911 21.09
--------- ---- ------ ------- ------
2,629,105 8.49 $18.32 1,062,208 $17.82
========= ==== ====== ========= ======
We have reflected below the 1996, 1997 and 1998 earnings as if
compensation expense relative to the fair value of the options granted had been
recorded under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation." The fair value of each option grant was estimated using the
BlackScholes option-pricing model with the following assumptions used for
grants in 1996, 1997 and 1998, respectively: a five, six and five year expected
life for 1996, 1997 and 1998, respectively; volatility factors of 57%, 82% and
72%, respectively; risk-free interest rates of 6.1%, 5.5% and 4.3%,
respectively; and no dividend payments.
F-18
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 6--STOCK OPTION PLANS--(CONTINUED)
Had compensation cost for our options plans been determined and recorded
in accordance with SFAS No. 123, our net income and earnings per share would
have been reduced to the pro forma amounts as follows:
1996 1997 1998
---------- ---------- -------------
Net income (loss):
As reported ...................... $30,065 $34,664 $ (13,915)
======= ======= =========
Pro forma ........................ $29,211 $28,797 $ (28,472)
======= ======= =========
Basic earnings (loss) per share:
As reported ...................... $ 1.22 $ 1.31 $ (0.51)
Pro forma ........................ $ 1.18 $ 1.09 $ (1.04)
Diluted earnings (loss) per share:
As reported ...................... $ 1.20 $ 1.28 $ (0.51)
Pro forma ........................ $ 1.16 $ 1.07 $ (1.04)
The 1996, 1997 and 1998 pro forma effect on net income (loss) is not
necessarily representative of the effect in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1995 and does not reflect a tax benefit related to the compensation
expense given that the options are considered incentive stock options and such
benefit, if any, cannot be presently determined.
NOTE 7--INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
1996 1997 1998
---------- --------- -----------
Current:
Federal ........................... $ 10,891 $ 9,583 $(3,876)
Foreign ........................... 5,347 4,465 1,376
State and local ................... 1,536 1,670 536
-------- ------- -------
17,774 15,718 (1,964)
-------- ------- -------
Deferred:
Federal ........................... (1,965) 2,730 9,193
Foreign ........................... -- 2,040 5,430
State and local ................... (218) 456 (109)
-------- ------- -------
(2,183) 5,226 14,514
-------- ------- -------
Provision for income taxes ......... $ 15,591 $20,944 $12,550
======== ======= =======
F-19
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 7--INCOME TAXES--(CONTINUED)
The tax effects of significant items comprising our net deferred tax
liability as of December 31, 1997 and 1998 are as follows (in thousands):
1997 1998
------------ ------------
Deferred tax assets:
Non-compete ......................................... $ -- $ 6,068
Bad debts ........................................... 1,104 2,694
Accrued self insurance .............................. 2,100 4,655
Operating loss and tax credit carry forward ......... 1,565 1,186
All other ........................................... 6,446 4,762
-------- --------
Total deferred tax assets ............................ 11,215 19,365
-------- --------
Deferred tax liabilities:
Installment sale .................................... -- 7,452
Accounts receivable retainage ....................... 3,866 6,891
Property and equipment .............................. 7,536 12,737
Asset re-evaluations ................................ 6,066 5,901
All other ........................................... 5 3,328
-------- --------
Total deferred tax liabilities ....................... 17,473 36,309
Valuation allowance ................................. 1,376 211
-------- --------
Net deferred tax liability ........................... $ (7,634) $(17,155)
======== ========
The net deferred tax liability includes deferred items resulting from
acquisitions made during the period which are not reflected as part of the
deferred tax provision. Deferred tax assets of $1.2 million for 1997 have been
recorded in current assets in the accompanying consolidated financial
statements. The net change in the valuation allowance for deferred tax assets
was a decrease of $1.2 million, resulting from a purchase accounting adjustment
whose effect was to reduce an intangible asset and did not impact our effective
tax rate.
A reconciliation of U.S. statutory federal income tax expense on the
earnings from continuing operations is as follows:
L996 1997 1998
------ ------ --------
U.S. statutory federal rate applied to pretax income .......... 35% 35% 35%
State and local income taxes .................................. 2 2 10
Effect of non-U.S. tax rates .................................. (1) (1) (23)
Amortization of intangibles ................................... -- -- 58
Gain on sale of Spanish operations ............................ -- -- 329
Non-deductible expenses ....................................... -- -- 37
Other ......................................................... 1 1 33
-- -- ---
Provision for income taxes .................................... 37% 37% 479%
== == ===
No provision has been made for the years ended December 31, 1997 and 1998
for U.S. income taxes on the undistributed earnings of the foreign subsidiaries
since it is our intention to utilize those
F-20
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 7--INCOME TAXES--(CONTINUED)
earnings in the foreign operations for an indefinite period of time. During
1998, we sold our interest in our Spanish operations which resulted in a tax
liability of $7.8 million primarily due to the difference between book and tax
bases of our U.S. holding company for our Spanish operations. At December 31,
1998, undistributed earnings of the remaining foreign subsidiaries amounted to
$11.8 million. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of $0.2 million would be
required.
The Internal Revenue Service (the "IRS") examined the tax returns for the
fiscal years ended April 30, 1989 through April 30, 1993. During 1998, the IRS
concluded its examination which resulted in a payment of approximately
$150,000. The IRS is currently reviewing the tax returns filed by us for the
years ended December 31, 1995 and 1996. No adjustments have been proposed to
date related to this review.
NOTE 8--CAPITAL STOCK
We have authorized 100,000,000 shares of common stock, $0.10 par value. At
December 31, 1997 and 1998, approximately 28,056,000 and 27,382,000 shares of
common stock were issued, 27,580,000 and 27,382,000 shares were outstanding
(adjusted for the stock split), respectively, and 476,000 and 0 were held in
treasury, at cost (after giving effect to the stock split paid in the form of a
dividend from treasury stock), respectively. At December 31, 1997 and 1998,
MasTec had 5,000,000 shares of authorized but unissued preferred stock.
NOTE 9--OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS
We derive a substantial portion of its revenue from providing
telecommunications infrastructure services to Telefonica, BellSouth and
Telebras. For the year ended December 31, 1996, approximately 31% and 13% of
our revenue was derived from services performed for Telefonica and BellSouth,
respectively. For the year ended December 31, 1997, approximately 27%, 13% and
11% of our revenue was derived from services performed for Telefonica,
BellSouth and Telebras, respectively. For the year ended December 31, 1998,
approximately 19%, 7% and 8% of MasTec's revenue was derived from services
performed for Telefonica, BellSouth and Telebras, respectively. For the year
ended December 31, 1997, revenue generated from Telebras is included from
August 1, 1997 (See Note 2). For the year ended December 31, 1998, revenue
generated from Telebras is included from January 1, 1998 through July 31, 1998,
subsequent to that period Telebras was privatized and divided into more than
eight unaffiliated companies owned by private investors. Accounts receivable
from our three largest customers approximated $192.0 million at December 31,
1997.
EXTERNAL NETWORK SERVICES. Our principal domestic business consists of
external network services for telecommunications providers, including incumbent
and competitive local exchange carriers, cable television operators,
long-distance carriers and wireless communications providers. External network
services consist of all of the services necessary to design, install and
maintain the physical facilities used to provide telecommunications services
from the provider's cable head-end to the ultimate consumer's home or business.
These services include the placing and splicing of cable, the excavation of
trenches in which to place the cable, the placing of related structures such as
poles, anchors, conduits, manholes, cabinets and closures, the placing of drop
lines from the main transmission lines to the customer's home
F-21
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 9--OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS--(CONTINUED)
or business, and the maintenance and removal of these facilities. We have
developed expertise in directional boring, a highly specialized and
increasingly common method of placing buried cable networks in congested urban
markets without digging a trench. Services to many of these customers are
provided under exclusive master contracts with two to three year initial terms
expiring at various dates.
We provide a full range of external network services to its
telecommunications company customers, although certain of our customers handle
certain of these services in-house. Our customers generally supply materials
such as cable, conduit and telephone equipment, and we provide the expertise,
personnel, tools and equipment necessary to perform the required installation
and maintenance services.
INTERNAL NETWORK SERVICES. We provide design, installation and maintenance
of internal networks linking the customers' voice, video, data and internet
computer and communications networks at multiple locations. We also provide
systems integration services, which involve the selection, configuration,
installation and maintenance of software, hardware, other computing and
communications equipment and cabling to provide an integrated computing and
communications system. Internal network services is less capital intensive than
external network construction but requires a more technically proficient work
force. We provide these services to its customers nationwide, primarily on the
east and west coasts of the United States.
EXTERNAL NETWORK ENERGY. We provide external network services to power
companies, including investor-owned utilities and rural cooperatives. These
services, which are substantially similar to the external network services
provided to telecommunications companies, include overhead and underground
construction and maintenance of electrical and other utilities transmission and
distribution networks, substation construction and maintenance, right-of-way
maintenance and restoration of asphalt and concrete surfaces. The work often
involves the installation and splicing of high-voltage transmission and
distribution lines. Services to many of these customers are provided under
exclusive master contracts with two to three year initial terms expiring at
various dates, as well as on a project by project basis awarded under
competitive bidding and individual negotiations. We currently have 42 master
service agreements with power companies.
F-22
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 9--OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS--(CONTINUED)
The following table set forth, for each of 1996, 1997 and 1998, certain
information about segment results of operations and segment assets (in
thousands).
EXTERNAL INTERNAL EXTERNAL
TELECOMMUNICATIONS NETWORK ENERGY
1996 NETWORKS SERVICES NETWORKS INTERNATIONAL(1) OTHER(2) CONSOLIDATED
- ----------------------------- -------------------- ---------- ---------- ------------------ ------------ -------------
(RESTATED)
Revenue ..................... $219,820 $35,524 $3,773 $188,155 $ 25,528 $472,800
======== ======= ====== ======== ========= ========
Operating income (loss) ..... 36,099 4,303 566 19,733 (10,759) 49,942
Depreciation and
amortization .............. 8,718 484 523 2,058 217 12,000
Total assets ................ 106,685 16,140 2,890 311,187 46,116 483,018
Capital expenditures ........ 3,714 689 320 -- 2,336 7,059
EXTERNAL INTERNAL EXTERNAL
TELECOMMUNICATIONS NETWORK ENERGY
1997 NETWORKS SERVICES NETWORKS INTERNATIONAL(1) OTHER(2) CONSOLIDATED
- ----------------------------- -------------------- ---------- ---------- ------------------ ------------ -------------
(RESTATED)
Revenue ..................... $286,814 $47,285 $19,693 $282,393 $ 23,254 $659,439
======== ======= ======= ======== ========= ========
Operating income (loss) ..... 44,794 4,865 607 21,450 (14,233) 57,483
Depreciation and
amortization ................ 16,210 1,022 2,888 3,403 332 23,855
Total assets ................ 194,245 51,606 33,250 325,458 25,665 630,224
Capital expenditures ........ 16,387 1,113 1,223 1,879 932 21,534
EXTERNAL INTERNAL EXTERNAL
TELECOMMUNICATIONS NETWORK ENERGY
1998 NETWORKS SERVICES NETWORKS INTERNATIONAL(1) OTHER(2) CONSOLIDATED
- ----------------------------- -------------------- ------------ ---------- ------------------ ------------ -------------
Revenue ..................... $455,798 $ 89,687 $120,218 $379,294 $ 3,925 $1,048,922
======== ========= ======== ======== ========= ==========
Operating income (loss) ..... 33,258 (11,460) 10,910 15,167 (19,615) 28,260
Depreciation and
amortization ................ 24,600 1,617 10,095 6,029 972 43,313
Total assets ................ 299,952 61,185 87,181 186,023 97,880 732,221
Capital expenditures ........ 41,946 2,361 25,872 5,003 1,263 76,445
- ----------------
(1) For 1996, international includes our Spanish operations and $41.1 million in
assets related to other international entities. As of December 31, 1998
international consists primarily of our Brazilian operations. For the year
ended December 31, 1997, revenue, depreciation and amortization, and
operating profit was $74.9 million, $390,000 and $9.6 million,
respectively, for Brazil and $207.5 million, $3.0 million and $11.8
million, respectively, for Spain. As of December 31, 1997, assets and
capital expenditures consisted of $93.4 million and $0, respectively, for
Brazil, $195.2 million and $1.9 million, respectively, for Spain and $36.9
million related to other international entities. For the year ended
December 31, 1998 revenue, depreciation and amortization, and operating
profit (loss) was $142.0 million, $3.3 million, and $15.3 million,
respectively for Brazil and $237.3 million, $2.7 million and $(134,000),
respectively, for Spain. As of December 31, 1998 total assets consisted of
$117.2 million for Brazil, capital expenditures consisted of $3.5 million
for Brazil and $1.5 million for Spain, and total assets of $68.8 million
related to our other international entities, which includes a note
receivable of $25.8 million in connection with the sale of our Spanish
operations.
(2) Consists of non-core construction and corporate operations.
F-23
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 9--OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS--(CONTINUED)
There are no significant transfers between geographic areas and segments.
Operating income consists of revenue less operating expenses, and does not
include interest expense, interest and other income, equity in earnings of
unconsolidated companies, minority interest and income taxes. Operating income
is net of corporate general and administrative expenses. Total assets are those
assets used in our operations in each segment. Corporate assets include cash
and cash equivalents, investments in unconsolidated companies, assets held for
sale and notes receivable.
NOTE 10--COMMITMENTS AND CONTINGENCIES
In December 1990, Albert H. Kahn, a stockholder of ours, filed a purported
class action and derivative suit in Delaware state court against us, the
then-members of our Board of Directors, and National Beverage Corporation
("NBC"), our then-largest stockholder. The complaint alleges, among other
things, that our Board of Directors and NBC breached their respective fiduciary
duties in approving certain transactions.
In November 1993, Mr. Kahn filed a class action and derivative complaint
against us, the then members of our Board of Directors, and Jorge L. Mas, Jorge
Mas and Juan Carlos Mas, our principal shareholders. The 1993 lawsuit alleges,
among other things, that our Board of Directors and NBC breached their
respective fiduciary duties by approving the terms of the acquisition of MasTec
by the Mas family, and that the Mas family had knowledge of the fiduciary
duties owed by NBC and our Board of Directors and knowingly and substantially
participated in the breach of these duties. The lawsuit also claims
derivatively that each member of our Board of Directors engaged in
mismanagement, waste and breach of fiduciary duties in managing our affairs
prior to the acquisition by the Mas Family.
In December 1999 the parties to these lawsuits entered into a stipulation
of settlement that ends these matters without liability to us. Under the
settlement, the cases will be dismissed with prejudice and we will be released
from further liability. The settlement must still be approved by the Delaware
court before which these actions are pending.
In November 1997, Church & Tower filed a lawsuit against Miami-Dade County
(the "County") in Florida state court alleging breach of contract and seeking
damages exceeding $3.0 million in connection with the County's refusal to pay
amounts due to Church & Tower under a multi-year agreement to perform road
restoration work for the Miami-Dade Water and Sewer Department ("MWSD"), a
department of the County, and the County's wrongful termination of the
agreement. The County has refused to pay amounts due to Church & Tower under
the agreement until alleged overpayments under the agreement have been
resolved, and has counterclaimed against us and is seeking damages. The County
also has refused to award a new road restoration agreement for MWSD to Church &
Tower, which was the low bidder for the new agreement. We are vigorously
pursuing this lawsuit and believe that we will not incur any material liability
from this lawsuit.
We are a party to other pending legal proceedings arising in the normal
course of business, none of which MasTec believes is material to our financial
position or results of operations.
Federal, state and local laws and regulations govern our operation of
underground fuel storage tanks. We are in the process of removing, restoring
and upgrading these tanks, as required by applicable
F-24
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
laws, and has identified certain tanks and surrounding soil which will require
remedial cleanups. The cost of these cleanups is not expected to be material.
In connection with certain contracts, we have signed certain agreements of
indemnity in the aggregate amount of approximately $194.4 million, of which
approximately $145.3 million relate to the uncompleted portion of contracts in
process. These agreements are to secure the fulfillment of obligations and
performance of the related contracts.
During 1998, we provided a customer financing in connection with the sale
of its services. As of December 31, 1998, we had $41.8 million outstanding
under this agreement. We anticipate that it will provide an additional $8.0
million of financing under this agreement. We expect to terminate the financing
agreement as of April 30, 1999.
We have entered into an agreement to expand the telephone network of the
Nicaraguan telephone company. We are not currently rendering construction
services in Nicaragua and is seeking non-recourse outside financing for the
project before proceeding.
We have committed to continue developing a PCS cellular phone system
through its investment in Paraguay. We anticipate investing approximately $13.0
million for the development of this system over the next 12 months.
We announced a stock repurchase program in April 1998. Through December
31, 1998, we purchased a total of 667,000 shares at an average price of $20.58.
The Credit Facility restricts the amount of shares that we may repurchase up to
an additional amount of $5.5 million (see Note 5).
Our current and future operations and investments in certain foreign
countries are generally subject to the risks of political, economic or social
instability, including the possibility of expropriation, confiscatory taxation,
hyper-inflation or other adverse regulatory or legislative developments, or
limitations on the repatriation of investment income, capital and other assets.
We cannot predict whether any of such factors will occur in the future or the
extent to which such factors would have a material adverse effect on our
international operations.
NOTE 11--ASSETS HELD FOR SALE
In previous years, we recorded a charge of $23.1 million to adjust the
carrying values of its real estate investment to estimated net realizable value
based on offers received to dispose of certain real estate investments in a
bulk transaction. Included in assets held for sale in the accompanying balance
sheet is approximately $10.5 million of real estate at December 31, 1998. We
are actively marketing this real estate and expect to dispose of substantially
all these assets in 1999.
We have a 28% voting interest in Supercanal Holding, S.A. ("Supercanal"),
a holding company of numerous cable television operators predominately in
Argentina. We only had one representative on Supercanal's nine member Board of
Directors and we are one of only three shareholders in Supercanal. The other
two shareholders, holding 72% of Supercanal's outstanding common stock have
operational control over Supercanal and are parties to a stockholders'
agreement providing for voting agreement
F-25
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 11--ASSETS HELD FOR SALE--(CONTINUED)
over fundamental board and stockholder decisions. We do not, therefore,
exercise significant influence over the management of Supercanal. During 1998,
we contributed an additional $1.7 million. Based on the most recent available
financial information, for the nine months ended September 30, 1998, Supercanal
incurred losses of $53.0 million (unaudited) and reflected a shareholders'
deficiency of $5.0 million (unaudited).
In July 1995, we made a $25 million non-recourse term loan collateralized
by 40% of the capital stock of a holding company that owned 52.6% of the
capital stock of Consorcio Ecuatoriano de Telecomunicaciones, S.A. ("Conecel"),
one of two cellular phone operators in the Republic of Ecuador. In June 1997,
we converted our loan and accrued interest into the stock of the holding
company, representing approximately 40% of the outstanding stock of the holding
company. In December 1997, we sold our investment in the holding company for
$20.0 million in cash and 7.5 million shares of Conecel common stock
(representing approximately 10% of the outstanding common stock of Conecel)
valued at $25.0 million. Accordingly, we recognized a gain of $4.4 million net
of tax based on the percent of cash received to the total transaction value.
During January 1999, we engaged investment bankers to dispose of our
investments in Supercanal and Conecel which have a carrying value at December
31, 1998 of $33.9 million. We also have other international investments with a
carrying value of $5.6 million recorded as assets held for sale as of December
31, 1998. We estimate that the carrying value of such assets held for sale will
be realized upon their ultimate disposition.
F-26
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 12--QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for the
two years ended December 31, 1998. We believe that all necessary adjustments
have been included in the amounts stated below to present fairly the quarterly
results when read in conjunction with the Consolidated Financial Statements and
Notes thereto for the years ended December 31, 1997 and 1998. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods. Quarterly
results have been adjusted to reflect the application of purchase accounting to
acquisitions previously accounted for as pooling of interests (see Note 1).
1997
(RESTATED) 1998
QUARTER ENDED QUARTER ENDED
----------------------------------------------- -----------------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA
Revenue ..................... $130,143 $141,499 $184,562 $203,235 $ 186,095 $246,106 $288,606 $ 328,115
Gross profit, excluding
depreciation and
amortization ............... 36,928 39,675 41,688 44,918 33,129 59,878 $ 70,093 82,710
Operating income (loss) ..... 15,495 17,614 16,772 7,602 (13,599) 20,011 26,289 (4,441)
Net income (loss) ........... 9,287 10,826 8,498 6,053 (12,099) 9,395 13,413 (24,624)
Basic earnings (loss)
per share .................. $ 0.36 $ 0.42 $ 0.32 $ 0.22 $ (0.44) $ 0.34 $ 0.49 $ (0.90)
Diluted earnings (loss)
per share .................. $ 0.36 $ 0.41 $ 0.31 $ 0.22 $ (0.44) $ 0.33 $ 0.48 $ (0.90)
We believe that the effects of inflation have not had a significant impact
on our results of operations or financial condition. Our results of operations
have historically been seasonally weaker in the first and fourth quarters of
the year and have produced stronger results in the second and third quarters.
During the third quarter of 1997, we commenced operations in Brazil,
through our subsidiary MasTec Inepar.
During the fourth quarter of 1997, we sold at a gain of $4.4 million net
of taxes a portion of Conecel.
First quarter of 1998 was negatively affected by severe weather, $4.0
million related to provisions for bad debt recorded in our North American
operations and $13.4 million of severance expenses related to our Spanish
operations.
During the fourth quarter of 1998, we sold at a loss of $9.2 million
($17.0 million net of taxes) 87% of our Spanish operations.
During the fourth quarter of 1998, we recorded a $33.8 million
compensation charge for senior management at certain operating subsidiaries,
$4.5 million for losses on a non-core contract, $1.4 million for startup costs
and $500,000 associated with bad debts reserves.
* * * * * * * * * * * *
F-27
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
MASTEC, INC.
Date: February 4, 2000 By: /S/ CARMEN M. SABATER
---------------------
Carmen M. Sabater
Senior Vice President - Chief Financial
Officer