Dycom Industries - 10-Q quarterly report FY

 

(Mark One)

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (561) 627-7171

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ    Accelerated Filer o    Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 40,316,697 shares of common stock with a par value of $0.33 1/3 outstanding at May 21, 2006.

 

 

DYCOM INDUSTRIES, INC.

INDEX

See notes to condensed consolidated financial statements—unaudited.

See notes to condensed consolidated financial statements—unaudited.

See notes to condensed consolidated financial statements—unaudited.

See notes to condensed consolidated financial statements— unaudited.

See notes to condensed consolidated financial statements—unaudited.

     Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services throughout the United States. These services include engineering, construction, maintenance and installation services to telecommunications providers, underground locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric utilities and others. Additionally, Dycom provides services on a limited basis in Canada.

     The condensed consolidated financial statements are unaudited and include the results of Dycom and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. The accompanying condensed consolidated balance sheets of the Company and the related condensed consolidated statements of operations and cash flows for each of the three and nine month periods reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the nine months ended April 29, 2006 are not necessarily indicative of the results that may be expected for the entire year. For a better understanding of the Company and its financial statements, the Company recommends reading these condensed consolidated financial statements in conjunction with the Company’s audited financial statements for the year ended July 30, 2005 included in the Company’s Registration Statement on S-4/A (“Registration No. 333-130194-22) filed with the SEC on February 13, 2006 and the Company’s 2005 Annual Report on Form 10-K, filed on September 9, 2005.

     Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For the Company, key estimates include the recognition of revenue for costs and estimated earnings in excess of billings, allowance for doubtful accounts, accrued self-insured claims, the fair value of goodwill and intangible assets, asset lives used in computing depreciation and amortization, including amortization of intangibles, and accounting for income taxes, contingencies and litigation. While the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, actual results could differ from those estimates and such differences may be material to the financial statements.

     Restricted Cash — As of April 29, 2006 and July 30, 2005, the Company had approximately $3.9 million and $3.6 million, respectively, in restricted cash which is held as collateral in support of projected workers’ compensation, automobile and general liability obligations. Restricted cash is included in other current assets and other assets in the consolidated balance sheets and changes in restricted cash are reported in cash flows from investing activities in the consolidated statements of cash flows. For the nine months ended April 30, 2005, the Company has reclassified the change in restricted cash of $1.4 million as a component of cash flows used in investing activities to conform to the current year presentation.

     Goodwill and Intangible Assets — As of April 29, 2006, the Company had $216.2 million of goodwill, $4.7 million of indefinite-lived intangible assets and $45.4 million of finite-lived intangible assets, net of accumulated amortization. As of July 30, 2005, the Company had $194.1 million of goodwill, $4.7 million of indefinite-lived intangible assets and $28.6 million of finite-lived intangible assets, net of accumulated amortization. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” The Company’s reporting units are tested annually in accordance with SFAS No. 142 during the fourth fiscal quarter of each year to determine whether their carrying value exceeds their fair market value. Should this be the case, the value of the goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other indefinite-lived intangible assets are also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. If the Company determines the fair value of the goodwill or other identifiable intangible asset is less than the carrying value, an impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations. See Note 7.

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicates that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. If the Company determines the fair value of the asset is less than the carrying value, an impairment loss is incurred in an amount equal to the difference. Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations.

     The Company uses judgment in assessing goodwill and intangible assets for impairment. Estimates of fair value are based on the Company’s projection of revenues, operating costs, and cash flows of each reporting unit considering historical and anticipated

future results, general economic and market conditions as well as the impact of planned business or operational strategies. The valuations employ a combination of present value techniques to measure fair value and consider market factors. Generally, the Company engages third party specialists to assist in the valuations. Changes in the Company’s judgments and projections could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill.

     As a result of the purchase price allocations from the Company’s prior acquisitions and due to the Company’s decentralized structure, the Company’s goodwill is included in multiple reporting units. Due to the cyclical nature of the business, and the other factors described under “Risk Factors” in the Company’s Form 10-K for the fiscal year ended July 30, 2005, the profitability of the Company’s individual reporting units may periodically suffer from downturns in customer demand and other factors. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Company as a whole and might adversely affect the fair value of the reporting units. If material adverse conditions occur that impact the Company’s reporting units, the Company’s future determinations of fair value may not support the carrying amount of one or more of the Company’s reporting units, and the related goodwill would need to be written down to an amount considered recoverable.

     Accounting for Stock-Based Compensation —In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” which amended SFAS No. 123. SFAS No. 123(R) requires that share-based awards granted to employees be fair valued on the date of grant and the related expense recognized over the requisite service period, which is generally the vesting period of the award. SFAS No. 123(R) became effective for the Company on July 31, 2005, the first day of fiscal 2006. Prior to fiscal 2006, the Company accounted for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25 which required recognition of compensation expense based on the intrinsic value of the equity instrument awarded. Consequently, no stock-based compensation expense for stock option grants was reflected in net income as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Beginning July 31, 2005, the Company has applied the modified prospective application of SFAS No. 123(R) and accordingly has not restated results for prior periods. As a result of applying SFAS No. 123(R) to unvested stock options at July 31, 2005, the Company’s income (loss) before income taxes was $0.3 million and $1.3 million lower for the three and nine month periods ended April 29, 2006, respectively, and the Company’s net income (loss) was $0.3 million lower, or $0.01 per basic and diluted share, and $1.1 million lower, or $0.02 per basic and diluted share, for the three and nine month periods ended April 29, 2006, respectively. Additionally, there was an immaterial effect on cash flows from operating and financing activities.

     For the three and nine months ended April 30, 2005 the Company recognized $0.3 million and $0.7 million in compensation expense in general and administrative expenses in the condensed consolidated statement of operations related to restricted stock. Pro forma information under SFAS No. 123(R) regarding stock option grants made to the Company’s employees and directors for periods prior to fiscal 2006 is presented below (dollars in thousands, except per share amounts):

     For the three months and nine months ended April 29, 2006, approximately $1.4 million and $3.3 million, respectively, in compensation expense has been recognized in general and administrative expenses in the condensed consolidated statement of operations related to stock options and restricted stock. Compensation expense for these awards is based on the fair value at the original grant date. The total tax benefit recognized related to stock options and restricted stock for the three months and nine months

ended April 29, 2006 was approximately $0.5 million and $1.0 million, respectively. During the nine months ended April 29, 2006, the Company received cash and realized a tax benefit from the exercise of stock options of approximately $2.4 million and $0.5 million, respectively.

     Comprehensive Income — During the three and nine months ended April 29, 2006 and April 30, 2005, the Company did not have any material changes in its equity resulting from non-owner sources and, accordingly, comprehensive income approximated the net income amounts presented for the respective periods in the accompanying Consolidated Statements of Operations.

     The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation as required by SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share includes the weighted average common shares outstanding for the period plus dilutive potential common shares, including time vesting restricted common stock and stock options using the treasury stock method. Common stock equivalents related to stock options are excluded from diluted earnings per share calculations if their effect would be anti-dilutive. Performance vesting restricted shares are excluded from diluted earnings per share calculations if the performance measures are not achieved during the period.

     In December 2005, the Company acquired Prince Telecom Holdings, Inc. (“Prince”) for a purchase price of approximately $65.4 million including transaction fees and $5.6 million placed in escrow. The escrowed amount is available to satisfy certain potential indemnification obligations of the sellers pursuant to the acquisition agreement. Of the $5.6 million escrowed, $3.9 million will be released to the sellers 12 months after closing, with the remaining $1.7 million released to the sellers after 24 months, so long as in either instance the amounts are not subject in whole or part to any claims. Prince provides specialty contracting services for leading cable multiple system operators throughout the United States. These services include the installation and maintenance of customer premise equipment, including set top boxes and cable modems. The Company borrowed $65.0 million under its credit agreement to fund the acquisition.

     During September 2004, the Company acquired certain assets and assumed certain liabilities of RJE Telecom, Inc. (“RJE”) for a cash purchase price of approximately $9.8 million. RJE provides specialty contracting services primarily to telephone companies.

     The Company accounted for the above acquisitions using the purchase method of accounting. Accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The purchase price allocation for the Prince acquisition is preliminary as the Company continues to assess the

valuation of acquired assets and liabilities. Purchase price in excess of fair value of the net tangible and identifiable intangible assets acquired has been allocated to goodwill. The purchase prices of Prince and RJE consist of the following (dollars in thousands):

     Management determined the fair values used in the purchase price allocation for intangible assets with the assistance of an independent valuation specialist based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and tradenames among other information. Goodwill of approximately $3.0 million is expected to be deductible for tax purposes related to the Prince acquisition. The purchase price of Prince and RJE are allocated as follows (dollars in thousands):

      The operating results of the above acquisitions are included in the accompanying consolidated financial statements from their acquisition dates. The following unaudited pro forma information presents the Company’s consolidated results of operations as if the Prince and RJE acquisitions had occurred on August 1, 2004, the first day of the Company’s 2005 fiscal year. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined companies had these acquisitions occurred at the beginning of the periods presented nor is it indicative of future results. Included in the pro forma amounts for the three and nine months ended April 29, 2006 is $6.2 million of non-recurring charges incurred by Prince prior to the acquisition which were directly related to the transaction. The charges included stock-based compensation expense related to Prince’s outstanding stock options and an advisory fee paid to an investment bank.

     Accounts receivable consist of the following:

     The allowance for doubtful accounts changed as follows:

     As of April 29, 2006 and April 30, 2005, the Company expected to collect all retainage balances within the next twelve months. Additionally, the Company believes that none of its significant customers were experiencing significant financial difficulty as of April 29, 2006.

     Costs and estimated earnings in excess of billings, net, consists of the following:

     The Company recognizes revenue for services from contracts that are based on units of delivery or cost-to-cost measures of the percentage of completion method. The above amounts aggregate these contracts.

     Property and equipment consists of the following:

     Depreciation expense and repairs and maintenance expense for the three and nine months ended April 29, 2006 and April 30, 2005 were as follows (dollars in thousands):

     Intangible assets consist of the following:

     As of April 29, 2006, the Company had $216.2 million of goodwill, $4.7 million of indefinite-lived intangible assets and $45.4 million of finite-lived intangible assets, net of accumulated amortization. As of July 30, 2005, the Company had $194.1 million of goodwill, $4.7 million of indefinite-lived intangible assets and $28.6 million of finite-lived intangible assets, net of accumulated amortization. The carrying value of goodwill changed during the nine months ended April 29, 2006 due to the addition of resulting from the Prince acquisition totaling approximately $38.5 million, the impairment loss at Can Am Communications (“Can Am”) described below of approximately $14.8 million and the adjustment to the purchase price allocation for a prior acquisition related to the expiration of an income tax contingency in the amount of approximately $1.5 million.

     During the third quarter of fiscal 2006, the Company recognized a goodwill impairment charge of approximately $14.8 million related to its Can Am reporting unit. Although Can Am provides services to significant customers, it has underperformed compared to previous expectations due to its inability to achieve projected revenue growth and due to operational inefficiencies at existing levels of work. Management determined that these factors increased the uncertainty surrounding future levels of revenue expected from Can Am. The Company recently changed the senior management at Can Am, integrating certain of its operations with another subsidiary of the Company, in order to improve operational efficiency. The combination of the above factors had the effect of reducing the expected future cash flows of the Can Am reporting unit and constitute circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Accordingly, the Company performed an interim goodwill impairment test as of April 29, 2006. As a result of the impairment analysis, management determined that the estimated fair value of the reporting unit was less than its carrying value and, consequently, a goodwill impairment charge was recognized to write off Can Am’s goodwill. The estimate of fair value of the Can Am reporting unit was based on the Company’s projection of revenues, operating costs, and cash flows considering historical and anticipated future results, general economic and market conditions as well as the impact of planned business and operational strategies. The valuation employed a combination of present value techniques to measure fair value and considered market factors.

     For finite-lived intangible assets, amortization expense for the three months ended April 29, 2006 and April 30, 2005 was $1.2 million and $0.8 million, respectively. Amortization expense for the nine months ended April 29, 2006 and April 30, 2005 was $3.1 million and $2.5 million, respectively. The customer relationships and trade name of Prince totaling $18.4 million and $1.5 million, respectively, acquired in fiscal 2006, each have an estimated useful life of 15 years. Amortization for the Company’s customer relationships is recognized on an accelerated basis related to the expected economic benefit of the intangible asset. Amortization for the Company’s other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life of the intangible assets.

     The Company retains the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health, and locate damages. With regard to fiscal 2006, the Company has retained the risk of loss to $1.0 million on a per occurrence basis for workers compensation and automobile liability claims. For general liability claims, the Company has retained the risk of loss to $250,000, except with respect to UtiliQuest Holdings Corp. (“UtiliQuest”), a wholly owned subsidiary, for which the Company has retained the risk of loss to $2.0 million for general liability claims. For fiscal year 2006, the

Company has aggregate stop loss coverage for these exposures at a stated retention of approximately $40.5 million and an umbrella liability coverage to a policy limit of $100.0 million. Within its umbrella coverage, the Company has retained the risk of loss for automobile liability and general liability and damage claims between $2.0 million and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million. The retention amounts are applicable in those states in which the Company operates and is allowed to retain the risk.

     For claims under the Company’s employee health plan occurring during fiscal 2006, the Company has retained the risk of loss, on an annual basis, to $200,000 per participant. For fiscal 2006, the Company has an aggregate stop loss coverage for this exposure at the stated retention of approximately $27.5 million.

     Accrued self-insured claims consist of the following:

     Other accrued liabilities consist of the following:

     The Company’s debt consists of the following:

     In October 2005, Dycom Investments, Inc., a wholly owned subsidiary of the Company, issued $150.0 million of 8.125% senior

subordinated notes (“Notes”) due October 2015. Interest payments are due semi-annually on April 15th and October 15^th of each year. The Notes are guaranteed by certain subsidiaries of the Company (see Note 18). The indenture governing the Notes contains certain covenants that restrict the Company’s ability to: make certain payments, including the payment of dividends, incur additional indebtedness and issue preferred stock, create liens, enter into sale and leaseback transactions, merge or consolidate with another entity, sell assets, and enter into transactions with affiliates. As of April 29, 2006, the Company was in compliance with all covenants and conditions under the Notes. In connection with issuance of the Notes, the Company entered into a First Amendment (“the Amendment”) to its five year $300 million unsecured revolving Credit Agreement (“Credit Agreement”). After giving effect to the Amendment, the Company is required to (i) maintain a consolidated leverage ratio of not greater than 3.00 to 1.00., (ii) maintain an interest coverage ratio of not less than 2.75 to 1.00, as measured at the end of each fiscal quarter and (iii) maintain consolidated tangible net worth, which shall be calculated at the end of each fiscal quarter, of not less than $50.0 million plus 50% of consolidated net income (if positive) from September 8, 2005 to the date of computation plus 75% of the equity issuances made from September 8, 2005 to the date of computation. The aggregate proceeds from the issuance of the Notes, together with $33.0 million of borrowings under the Credit Agreement and cash on hand, were used to purchase 8.76 million shares of the Company’s common stock in October 2005 (see Note 14).

     In December 2005, the Company borrowed $65.0 million under the Credit Agreement in connection with the acquisition of Prince (see Note 3). During the nine months ended April 29, 2006, the Company repaid $87.0 million of borrowings under the Credit Agreement. As of April 29, 2006, the Company had $11.0 million of borrowings and $44.7 million of outstanding letters of credit issued under the Credit Agreement. The outstanding letters of credit are primarily issued to insurance companies as part of the Company’s self-insurance program. At April 29, 2006, the Company had borrowing availability of $147.8 million under the Credit Agreement and was in compliance with all financial covenants and conditions.

     The Company has $1.1 million in capital lease obligations and $6.3 million in other notes payable. The capital lease obligations and notes payable were assumed in connection with the fiscal 2004 acquisition of UtiliQuest and the fiscal 2006 acquisition of Prince. The capital leases include obligations for certain vehicles and computer equipment and expire at various dates into fiscal 2007. The other notes payable include a $3.6 million note due in November 2006 bearing interest at 6%, payable semi-annually on March 31 and September 30, and a $2.6 million note due in October 2006 bearing interest at 5.2%, payable monthly.

     Maturities of the Company’s debt, including long-term and current, are as follows (dollars in thousands):

     The components of other income, net, are as follows (dollars in thousands):

     In the normal course of business, there are transactions for which the ultimate tax outcome is uncertain. Consequently, judgment is required in determining the provision for income taxes and the associated income tax assets and liabilities. The Company regularly assesses its position with regard to individual tax exposures and records liabilities for uncertain tax positions in accordance with SFAS No. 5, “Accounting for Contingencies”. These liabilities reflect management’s best estimate of the likely outcomes of current and potential future audits.

     Additionally, certain of the Company’s subsidiaries have pending claims and legal proceedings in the normal course of business. It is the opinion of the Company’s management, based on information available at this time, that none of the current claims or proceedings will have a material effect on the Company’s consolidated financial statements.

     On September 12, 2005, the Company announced that its Board of Directors had approved a repurchase of up to 9.5 million outstanding shares of the Company’s common stock, at a price per share not less than $18.50 and not greater than $21.00 through a “Dutch Auction” tender offer. The final number of shares purchased under the tender offer, which expired on October 11, 2005, was 8.76 million shares. These shares were purchased at a price of $21.00 per share for an aggregate purchase price of $186.2 million, including fees and expenses. The Company cancelled these repurchased shares in the period repurchased. The tender offer was funded with proceeds from the issuance of $150.0 million in Notes, borrowings of $33.0 million from the Credit Agreement (see Note 10), and cash on hand.

     The Company’s stock-based award plans are comprised of the 1991 Incentive Stock Option Plan (“1991 Plan”), the Arguss Communications, Inc. 1991 Stock Option Plan (“1991 Arguss Plan”), 1994 Directors Stock Option Plan (“1994 Directors Plan”), the 1998 Incentive Stock Option Plan (“1998 Plan”), the 2001 Directors Stock Option Plan (“2001 Directors Plan”), and the 2003 Long-term Incentive Plan (“2003 Plan”), collectively (“the Plans”). The Company’s policy is to issue new shares to satisfy stock option exercises and restricted stock awards. The following table lists the number of shares available and outstanding under each plan:

     The 1991 Plan and the 1994 Directors Plan have expired and no further options will be granted under these plans. Additionally, no further options will be granted under the 1991 Arguss Plan. The 1998 Plan, the 2001 Directors Plan, and the 2003 Plan expire in 2008, 2011, and 2013, respectively. Under the terms of these plans, stock options are granted at the closing price on the date of the grant and are exercisable over a period of up to ten years. The options under the 1998 Plan, the 2001 Directors Plan, and the 2003 Plan vest and become exercisable ratably over a four-year period, beginning on the date of the grant. The shares available for grant in the above table represent the authorized shares available for grant as of April 29, 2006

     Additionally, the Company’s 2002 Directors Restricted Stock Plan (“2002 Directors Plan”) has authorized 100,000 shares of the Company’s common stock for issuance to non-employee directors. The non-employee directors are required to receive a predetermined percentage of their annual retainer fees in restricted shares of the Company’s common stock based on their ownership level of Dycom’s shares. The number of restricted shares of the Company’s common stock to be granted under the 2002 Directors Plan is based on the fair market value of a share of common stock on the date such annual retainer fees are payable. As of April 29, 2006, 14,129 shares had been issued under the 2002 Directors Plan at a weighted average market price of $20.47 per share.

     The fair value of restricted stock grants is estimated on the date of grant and is generally equal to the closing stock price of the Company on the date of grant. The average fair value of the restricted shares granted during the nine months ended April 29, 2006 and April 30, 2005 is $22.01 per share and $29.52 per share, respectively. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions including: expected volatility based on the historical price of the Company’s stock over the expected life of the option; the risk free rate of return based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option; the expected life based on the period of time the options are expected to be outstanding using historical data to estimate option exercise and employee termination; and dividend yield based on the Company’s history and expectation of dividend payments. The pro forma weighted average fair value of options granted during the nine months ended April 29, 2006 was $13.57 per share based on a risk-free interest rate of 4.4%, an expected life of nine years, expected volatility of 54.7% and no expected dividends. The pro forma weighted average fair value of options granted during the nine months ended April 30, 2005 was $19.89 per share based on a risk-free interest rate of 3.6%, an expected life of six years, expected volatility of 58.7% and no expected dividends.

     The following tables summarize the stock-based award activity during the nine months ended April 29, 2006:

     The aggregate intrinsic value for stock options and restricted stock in the preceding tables represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $21.91 as of April 29, 2006. These amounts represent the total pre-tax intrinsic value that would have been received by the holders of the stock-based awards had the awards been exercised and sold as of that date. During the nine months ended April 29, 2006, the total intrinsic value of stock options exercised was $1.3 million. During the nine months ended April 29, 2006, the total fair value of restricted stock vested was $0.9 million.

     Time vesting restricted shares granted to employees and officers of the Company during the nine months ended April 29, 2006 vest ratably over a period of four years in December of each year. Upon each annual vesting, 50% of the newly vested shares (net of any shares used to satisfy tax withholding obligations) of the fiscal 2006 grants are restricted from sale or transferability (“restricted holdings”). The restrictions on sale or transferability of the restricted holdings will end at the earlier of; (a) the date the holder has accumulated restricted holdings of common stock having a value equal or greater than the holder’s annual base salary then in effect, or (b) 90 days after termination of employment of the holder. The time vesting restricted stock is considered issued and outstanding as of April 29, 2006 and carries voting and dividend rights.

     The performance vesting restricted shares granted during the nine months ended April 29, 2006 were granted to employees and officers of the Company and vest over a three year period in December of each year, if certain Company performance targets are met in each fiscal year. The performance targets are based on a combination of the Company’s fiscal year pre-tax income (adjusted for certain non-cash items) as a percentage of contract revenues and the Company’s fiscal year operating cash flow levels. Additional shares, up to a maximum of 277,002 over a three year period, will also vest if certain three year cumulative results exceed targeted performance measures. The vesting of these additional shares is dependent on the number of shares that vest based upon the fiscal year performance targets. Each years performance targets for these additional shares are based on a combination of the Company’s three year cumulative pre-tax income (adjusted for certain non-cash items) as a percentage of contract revenues and the Company’s cumulative three year operating cash flow levels.

     As of April 29, 2006, the total unrecognized compensation cost related to unvested stock options outstanding under the Plans is $1.3 million. That cost is expected to be recognized over a weighted-average period of 2.3 years. As of April 29, 2006 the total unrecognized compensation cost related to unvested time-based restricted stock and performance vesting restricted stock was $3.2 million and $5.4 million, respectively, which is expected to be recognized over a weighted-average period of 2.6 years and 2.7 years,

respectively. If the performance goals are not met for performance vesting restricted stock, no compensation costs will be recognized for those shares and any compensation cost recognized previously for those shares will be reversed. Additionally, a maximum of $5.4 million in additional compensation expense could be recognized over a weighted average period of 2.7 years if certain three-year performance goals are met.

     Additional information regarding options outstanding and exercisable as of April 29, 2006, is as follows:

     The Company leases administrative offices from entities related to officers of certain of its subsidiaries. The total expense under these arrangements for each of the three months ended April 29, 2006 and April 30, 2005 was $0.3 million. The total expense under these arrangements for the nine months ended April 29, 2006 and April 30, 2005 was $1.0 million and $0.9 million, respectively.

     The Company operates in one reportable segment as a specialty contractor, providing engineering, construction, maintenance and installation services to telecommunications providers, underground locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric utilities and others. These services are provided by the Company’s various subsidiaries throughout the United States and, on a limited basis, in Canada. All of the Company’s subsidiaries have been aggregated into one reporting segment due to their similar economic characteristics, products and production methods, and distribution methods. The following table presents information regarding revenues by type of customer (dollars in thousands):

     The Company derived revenues from contracts in Canada for the three and nine months ended April 29, 2006 of less than $0.1 million. The Company had no revenues from contracts in Canada for the three and nine months ended April 30, 2005. Additionally, the Company had no material long-lived assets in the Canadian operations at April 29, 2006 or July 30, 2005.

     During the first quarter of fiscal 2006, the Company completed an offering of $150.0 million of 8.125% senior subordinated notes (see Note 10). The Notes were issued by Dycom Investments, Inc. (“Issuer’’), a wholly owned subsidiary of the Company. The following condensed consolidating financial statements present, in separate columns, financial information for (i) Dycom Industries, Inc. (“Parent’’) on a parent only basis, (ii) Issuer, (iii) guarantor subsidiaries for the Notes on a combined basis, (iv) other non-guarantor subsidiaries on a combined basis, (v) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (vi) the Company on a consolidated basis. The condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes.

     Each guarantor and non-guarantor subsidiary is wholly owned, directly or indirectly, by Issuer and Parent and the Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and Parent. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Issuer or Parent, with in the meaning of Rule 3-10 of Regulation S-X.