MasTec, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File Number 001-08106
MasTec, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Florida
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65-0829355 |
(State or Other jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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800 S. Douglas Road, 12th Floor, |
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Coral Gables, FL
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33134 |
(Address of Principal Executive Offices)
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(Zip Code) |
(305) 599-1800
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, $0.10 Par Value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is well-known seasoned issuer; as defined in rule 405
of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
12 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 þ No o
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 registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark if 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 12-b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of
the Act.) Yes o No þ
The aggregate market value of the registrants outstanding common stock held by non-affiliates
of the registrant computed by reference to the price at which the common stock was last sold as of
the last business day of the registrants most recently completed second fiscal quarter was
$556,444,738 (based on a closing price of $13.21 per share for the registrants common stock on the
New York Stock Exchange on June 30, 2006).
There were 65,547,035 shares of common stock outstanding as of March 5, 2007.
The registrants definitive proxy statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A for the 2007 annual meeting of shareholders is incorporated by reference
in Part III of this Form 10-K to the extent stated herein.
Cautionary Statement Regarding Forward-Looking Statements
We are making this statement pursuant to the safe harbor provisions for forward-looking
statements described in the Private Securities Litigation Reform Act of 1995. We make statements in
this Annual Report on Form 10-K and in the documents that we incorporate by reference into this
Annual Report that are forward-looking. When used in this Annual Report or in any other
presentation, statements which are not historical in nature, including the words anticipate,
estimate, could, should, may, plan, seek, expect, believe, intend, target,
will, project and similar expressions are intended to identify forward-looking statements. They
also include statements regarding:
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our future growth and profitability; |
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our competitive strengths; and |
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our business strategy and the trends we anticipate in the industries and economies in which we operate. |
These forward-looking statements are based on our current expectations and are subject to a
number of risks, uncertainties and assumptions. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict, and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. Important factors that could cause
actual results to differ materially from those in forward-looking statements include:
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economic downturns, reduced capital expenditures, consolidation and technological and
regulatory changes in the industries we serve; |
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the ability of our customers to terminate or reduce the amount of work or in some cases
prices paid for services under many of our contracts; |
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market conditions, technical and regulatory changes in our customers industries; |
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the highly competitive nature of our industry; |
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our ability to attract and retain qualified managers and skilled employees; |
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the seasonality and quarterly variations we experience in our revenue and profitability; |
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our dependence on a limited number of customers; |
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expectations concerning contingent events, including the expected outcome of claims,
lawsuits and proceedings and our belief concerning regulatory compliance; |
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the outcome of our plans for future operations, growth and services, including backlog and acquisitions; |
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increases in fuel and labor costs; |
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the restrictions imposed by our credit facility and senior notes; and |
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the other factors referenced in this Annual Report, including, without limitation,
under Item 1. Business, Item 1A. Risk Factors and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations. |
We believe these forward-looking statements are reasonable; however, you should not place
undue reliance on any forward-looking statements, which are based on current expectations.
Furthermore, forward-looking statements speak only as of the date they are made. If any of these
risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our
actual results may differ significantly from the results that we express in or imply by any of our
forward-looking statements. These and other risks are detailed in this Annual Report on Form 10-K,
in the documents that we incorporate by reference into this Annual Report on Form 10-K and in other
documents that we file with the Securities and Exchange Commission. We do not undertake any
obligation to publicly update or revise these forward-looking statements after the date of this
Annual Report on Form 10-K to reflect future events or circumstances. We qualify any and all of our
forward-looking statements by these cautionary factors.
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PART I
Item 1. Business
Overview
We are a leading specialty contractor operating mainly throughout the United States and across
a range of industries. Our core activities are the building, installation, maintenance and upgrade
of communications and utility infrastructure. Our primary customers are in the following
industries: communications (including satellite television and cable television), utilities and
government. We provide similar infrastructure services across the industries we serve. Our
customers rely on us to build and maintain infrastructure and networks that are critical to their
delivery of voice, video and data communications, electricity and other energy resources.
We, or our predecessor companies, have been in business for over 70 years. We offer all of our
services under the MasTec® service mark and operate through a network of
approximately 200 locations and 9,260 employees as of December 31, 2006. Providing services to
communication industries, utility industries and government sectors, we have consistently ranked
among the top ten specialty contractors by Engineering News-Record.
Our customers include some of the largest communication and utility companies in the United
States, including DIRECTV®, Verizon, BellSouth (now AT&T), EMBARQ, Progress Energy,
Florida Power & Light, TXU, Qwest, and Dominion Virginia Power. For the years ended December 31,
2006, 2005 and 2004, 75.0%, 71.3% and 71.1%, respectively, of our revenues were from our ten
largest customers. We have longstanding relationships with many customers and often provide
services under multi-year master service agreements and other service agreements. For the years
ended December 31, 2006, 2005 and 2004, 70.9%, 66.6% and 78.7%, respectively, of our revenues were
derived under multi-year master service agreements and other service agreements.
Industry Trends
Our industry is comprised of national, regional and local companies that provide outsourced
infrastructure services to customers in the communications and utilities industries as well as
government customers. We estimate that the total amount of annual outsourced infrastructure
spending in markets that we serve is in excess of $30 billion per year.
We believe the following industry trends impact demand for our services:
Demand for Voice, Video and Data Services. Demand for faster and more robust voice, video and
data services has increased significantly with the proliferation of the internet, broadband and
advanced video services. To serve this developing market, voice, video and data service providers
are upgrading the performance of their networks or deploying new networks. Investment is
facilitated by declining equipment costs and expanded capabilities of network equipment. In
addition, the service offerings of our customers are converging as telephone and cable providers
increasingly seek to deploy networks that allow them to provide bundled voice, video and data
services to their customers. Verizon, AT&T, Qwest and numerous regional and rural telecommunication
companies are upgrading their networks from copper line to fiber optic line in order to enhance
their ability to provide full bundled service offerings. Cable companies continue to upgrade their
systems to provide for enhanced broadband services, including voice over internet protocol,
commonly called VOIP, as well as improved video offerings, including digital television, high
definition television, video on demand and digital video recording. Satellite television
subscriptions and installations have grown substantially over the last five years as the industry
has gained acceptance in part through offering attractive programming such as NFL Sunday Ticket, as
well as high definition television and digital video recorder capabilities. According to a 2006
study by J.D. Power and Associates, the percentage of U.S. households with telephones that
subscribe to satellite service has grown from 12% in 2000 to 29% in 2006.
Increased Outsourcing of Network Infrastructure Installation and Maintenance. We provide
specialized services that are labor and equipment intensive. According to a study by management
consulting firm Booz Allen Hamilton described in an article entitled Outsourcing Trends in the
North American Telecommunications Markets, more than 75% of telecommunications executives consider
outsourcing an important component of their business that allows them to better respond to market
challenges, and network installation and maintenance are among functions most likely to be
outsourced. We believe that communications companies view outsourcing as an opportunity to reduce
expenses, optimize expenditures and stay competitive.
Inadequacy of Existing Electric Power Transmission and Distribution Networks. The United
States electric transmission and distribution infrastructure requires significant ongoing
maintenance, upgrades and extensions to manage powerline congestion, avoid delivery failures and
connect distribution lines to new end users. According to a 2005 Edison Electric Institute report
annual transmission and distribution spending in the U.S. has been between $12 billion and $17
billion annually since 1980. Despite this significant spending since 1980, the pace of transmission
investment has lagged behind total electricity generation. Such underinvestment combined with
ever-increasing load demand contributed to the blackouts, brownouts and rolling blackouts
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nationwide since 2001, which have periodically left millions in the United States without
electricity. As a result, we believe that transmission and distribution spending will continue and
likely rise in the near future in order to meet the increasing needs of customers.
Increased Funding for Energy Projects. On August 8, 2005, President Bush signed the Energy
Policy Act of 2005 into law. The law was passed to develop more reliable supply chains and
distribution channels for U.S. energy resources. Among other things, the bill facilitates the
siting, environmental compliance, construction and financing of more reliable electrical grid
components. As a result, we believe that transmission and distribution spending will likely rise in
the near future in order to meet the increasing needs of consumers and businesses.
Competitive Strengths
Our competitive strengths include:
National Capability and Brand. We, or our predecessors, have been in business for over 70
years and are one of the largest companies in our industry. Through our network of approximately
200 locations and 9,260 employees as of December 31, 2006 primarily across the United States, we
offer comprehensive infrastructure services to our customers. We believe our experience, technical
expertise and size are important to our customers, which include some of the largest communications
and utility companies in the United States. Our size and national capability allow us to allocate
people, equipment and resources when and where needed. We offer all of our services under the
MasTec service mark and maintain uniform performance standards across projects, geographic areas
and industries.
Ability to Respond Quickly and Effectively. The services we provide to the various industries
we serve are similar which allows us to utilize qualified personnel across multiple industries. We
are able to respond quickly and effectively to industry changes and major weather events by
allocating our employees, fleet and other assets as and where they are needed. For example, we were
able to redeploy hundreds of our employees and assets from several project teams to areas impacted
by Hurricane Katrina within days of the storm striking Louisiana and Mississippi.
Customer Base. Our customers include some of the largest communication and utility companies
in the United States, including DIRECTV®, Verizon, BellSouth (now AT&T), EMBARQ Progress
Energy, Florida Power & Light, Qwest, TXU and Dominion Virginia Power. These customers have
significant infrastructure needs and the financial resources necessary to fund those needs. We
provide services to many of our significant customers under multi-year master service agreements
and other service agreements.
Reputation for Reliable Customer Service and Technical Expertise. We believe that over the
years we have established a reputation for quality customer service and technical expertise. We
believe that we are one of the largest private label in-home installation and maintenance service
providers for DIRECTV®. A 2006 study by J.D. Power and Associates recognized
DIRECTV® for achieving one of the highest levels of customer satisfaction in its
markets. We believe that the training and performance of our technicians contributed to
DIRECTV®s high level of customer satisfaction. We also believe our
reputation for technical expertise gives us an advantage in competing for new work.
Experienced Management Team. Our management team, which includes our chief executive officer,
chief operating officer, service group presidents and financial officers, plays a significant role
in establishing and maintaining long-term relationships with our customers, supporting the growth
of our business and managing the financial aspects of our operations. Our chief executive officer,
chief operating officer and service group presidents average 27 years of industry experience and
have a deep understanding of our customers and their requirements.
Recent Developments
Sale of Substantially All of Our State Department of Transportation Related Projects and Assets
On December 31, 2005, the executive committee of our board of directors voted to sell
substantially all of our state Department of Transportation related projects and assets. The
decision to sell was made after evaluation of, among other things, short and long-term prospects.
Due to this decision, the projects that were held for sale have been accounted for as discontinued
operations for all periods presented in this Annual Report on Form 10-K. On February 14, 2007, we
sold the state Department of Transportation related projects and underlying net assets. We have
agreed to keep certain assets and liabilities related to the state Department of Transportation
related projects. See Item 1A. Risk Factors We have agreed to keep certain liabilities related
to the state Department of Transportation related projects that were sold in February 2007. The
sales price of $1.0 million was paid in cash at closing. In addition, the buyer is required to pay
us an earn out of up to $12.0 million contingent on future operations of the projects sold to the
third party. However, as the earn out is contingent upon the future performance of the state
Department of Transportation related
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projects, we may not receive any of the earn out payments. The closing was effective February
1, 2007 to the extent set forth in the purchase agreement. As of December 31, 2006, the net
carrying value of the assets and liabilities sold, including an
estimate of selling costs, was a deficit of $6.6
million. During the year ended December 31, 2005, we wrote-off approximately $11.5 million in
goodwill in connection with our decision to sell substantially all of these projects and assets. We
determined that this goodwill amount would not be realized after evaluating the cash flows from the
operations of these projects and assets in light of our decisions on future operations and our
decision to sell. During the year ended December 31, 2006, we wrote-off approximately $44.5
million, calculated using the contractual sales price for these assets and managements estimate of
closing costs and other liabilities.
Acquisition of Remaining 51% Equity Interest
On February 6, 2007, we acquired the remaining 51% equity interest in an investment which had
been previously accounted for by the equity method because we owned 49% of the entity and had the
ability to exercise significant influence over the operational policies of the company. As a result
of our acquisition of the remaining 51% equity interest, we will consolidate the operations of this
entity with our results commencing in February 2007. In February 2007, we paid the seller $8.65
million in cash, in addition to approximately $6.35 million, which we also paid at that time to
discharge our remaining obligations to the seller under the purchase agreement for the original 49%
equity interest, and issued 300,000 shares of our common stock. We have also agreed to pay the
seller an earn-out through the eighth anniversary of the closing date based on the future
performance of the acquired entity. In connection with the purchase, we entered into a service
agreement with the sellers for them to manage the business. Under certain circumstances, including
a change of control of MasTec or the entity or a termination of the service agreement under certain
circumstances, the remaining earn-out payments will be accelerated and become payable. Under
certain circumstances, we may be required to invest up to an additional $3.0 million in this
entity. In connection with the acquisition, we have agreed to file a registration statement to
register for resale 200,000 shares of the total shares issued to the seller by no later than June
1, 2007 and have agreed to use commercially reasonable efforts to cause such registration statement
to become effective.
Issuance of $150 Million Senior Notes
On January 31, 2007, we issued $150 million aggregate principal amount of 7.625% senior notes
due February 2017 in a private placement. The notes are guaranteed by substantially all of our
domestic restricted subsidiaries. We have agreed to cause to become effective a registration
statement with respect to a registered offer to exchange the unregistered notes for registered
notes with substantially identical terms. We used approximately $121.8 million of the net proceeds
from this offering to redeem all of our 7.75% senior subordinated notes due February 2008 plus
interest. We expect to use the remaining net proceeds for working capital, possible acquisition of
assets and businesses and other general corporate purposes.
Strategy
The key elements of our business strategy are as follows:
Capitalize on Favorable Industry Trends. Many of our customers have increased spending on
their network infrastructure in order to enhance their ability to offer voice, video and data
services, deliver electric power or other energy resources. In addition, many companies are
increasing outsourcing network installation and maintenance work. We intend to increase the
percentage of business derived from large, financially stable customers in the communications and
utility industries. We intend to use our national presence and full range of services to capitalize
on these trends to generate additional revenue from existing and new customers.
Operate More Efficiently. We have taken action and instituted programs to improve our
operating efficiencies and working capital management, such as hiring additional experienced
operating and financial professionals at the service group and corporate levels, requiring
increased accountability throughout our organization, expanding the use of our Oracle management
information systems throughout our business, better managing customer contract bidding procedures
and increasing individual project profitability. We intend to improve our operating effectiveness
by allocating our resources across multiple customers and projects which will continue to increase
our utilization rates. We intend to continue to capture operating efficiencies and improve working
capital management in order to increase our operating margins and cash flows.
Improve Our Financial Strength. We have increased our cash position with the receipt of the
net proceeds from the public offering of our common stock and the offering of our senior notes.
These actions have significantly improved our financial condition. We believe these improvements to
our financial condition have enhanced our credit rating and support our ability to reduce our
collateral requirements for our surety bonds and insurance policies.
Acquisitions, Strategic Alliances and Divestitures. We intend to pursue selected acquisitions
and strategic alliances. We will focus on acquisitions and alliances that allow us to expand our
operations into targeted geographic areas or allow us to expand our service offerings in areas that
require skill sets or equipment that we do not currently maintain. Our strategy will include timely
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efficient integration to best fit into our internal control environment. We may also consider
sales or divestitures of portions of our assets, operations, projects, real estate or other
properties.
Services
Our core services are building, installing, maintaining and upgrading infrastructure for our
communications, utility and government customers. We provide each of these customers with similar
services that include:
Build. We build underground and overhead distribution systems, such as trenches, conduits,
power lines and pipelines, that are used by our customers in networks that provide communications
and power delivery. We believe our fleet of approximately 12,000 vehicles and equipment as of
December 31, 2006 is among the largest in the United States.
Install. We install buried and aerial fiber optic cables, coaxial cables, copper lines,
electrical and other energy distribution systems, transmission systems and satellite dishes in a
variety of environments for our customers. In connection with our installation work, we deploy and
manage network connections that involve our customers hardware, software and network equipment.
Maintain and Upgrade. We offer 24-hours-a-day, 7-days-a-week, and 365-days-a-year maintenance
and upgrade support to our customers. Our comprehensive service offerings include the regular
maintenance of our customers distribution facilities and networks as well as emergency services
for accidents or storm damage. Our upgrade work ranges from routine replacements and upgrades to
major network overhauls.
Discontinued Operations
In March 2004, we ceased performing contractual services in Brazil, abandoned all assets in
our Brazil subsidiary and made a determination to exit the Brazil market. The abandoned subsidiary
has been classified as a discontinued operation and its revenue and expenses are not included in
the results of continuing operations for any periods presented in this Annual Report on Form 10-K.
In November 2004, the subsidiary applied for relief and was adjudicated bankrupt by a Brazilian
bankruptcy court. The subsidiary is currently being liquidated under court supervision.
During the fourth quarter of 2004, we ceased performing new services in the network services
operations and sold these operations in 2005. These operations have been classified as a
discontinued operation and its revenue and expenses are not included in the results of continuing
operations for any periods presented in this Annual Report on Form 10-K. On May 24, 2005, we sold
certain assets of our network services operations to a third party for approximately $0.2 million
consisting of $0.1 million in cash and a promissory note in the principal amount of $0.1 million.
The balance at December 31, 2006 of this promissory note of approximately $30,000 is included in
other current assets in our consolidated balance sheet. We recorded a loss on sale of approximately
$0.6 million, net of tax, in the year ended December 31, 2005. The loss on sale resulted from
additional selling costs and remaining obligations that were not assumed by the buyer.
On December 31, 2005, the executive committee of our board of directors voted to sell substantially
all of our state Department of Transportation related projects and assets. The projects that were
for sale were classified as discontinued operations and their revenue and expenses are not included
in the results of continuing operations for any periods presented in this Annual Report on Form
10-K. On February 14, 2007 (effective February 1, 2007 as set forth in the purchase agreement), we
sold the state Department of Transportation related projects and underlying net assets. The sales
price consisted of $1.0 million paid at closing and an earn out contingent on future operations of
up to $12.0 million. We agreed to keep certain assets and liabilities related to the state
Department of Transportation related projects. We recorded $44.5 million of non-cash impairment
charges related to these state Department of Transportation projects and net assets during the year
ended December 31, 2006. See Recent Developments Sale of Substantially All of Our State
Department of Transportation Related Projects and Assets for more information.
Customers
Our primary customers are in the communications, utilities and government industries. We
provide similar infrastructure services across the industries we serve. For the year ended December
31, 2006, 74.0%, 19.8% and 6.2% of our revenues were from customers in the communications,
utilities and government industries, respectively. In the year ended December 31, 2006, we derived
approximately 37.3%, 9.5% and 8.2% of our revenue from DIRECTV®, BellSouth (now AT&T)
and Verizon, respectively.
We have longstanding relationships with many customers and often provide services under
multi-year master service agreements and other service agreements. For the years ended December 31,
2006, 2005 and 2004, 70.9%, 66.6% and 78.7%, respectively, of our revenues were derived under
master service agreements and other service agreements. While our multi-year master service
agreements
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and other service agreements generally do not guarantee a specific level of work and are
generally cancelable upon short notice, the agreements have historically been an important
contributor to our revenue and backlog.
We believe that our industry experience, technical expertise and customer service are
important to our being retained by large communications and utility companies and governments. The
relationships developed between these customers and our senior management and project management
teams are also important to our being retained.
Backlog
At December 31, 2006 and December 31, 2005, our 18-month backlog was approximately $1.1
billion and $955.9 million, respectively. We expect to realize approximately 69.5% of our 2006
backlog in 2007. Approximately 85.5% of our backlog at December 31, 2006 was comprised of services
to be performed under existing master service agreements. The balance is our estimate of work to be
completed on other service agreements. These amounts do not include revenue expected from state
Department of Transportation projects due to these operations being classified as a discontinued
operation. See Item 1A. Risk Factors Amounts included in our backlog may not result in actual
revenue or translate into profits.
Sales and Marketing
We market our services individually and in combination with other companies to provide the
most efficient and effective solution to meet our customers demands, which increasingly require
resources from multiple disciplines. Through our unified MasTec® brand and an integrated
organizational structure designed to permit rapid deployment of labor, equipment and materials, we
are able to quickly and efficiently allocate resources to meet customer needs.
We have developed a marketing plan emphasizing the MasTec® registered service mark
and an integrated service offering to position ourselves as a provider of a full range of service
solutions, providing services ranging from basic installation to sophisticated engineering, design
and integration. We believe our long-standing relationships with our customers and reputation for
reliability and efficiency facilitate our recurring business. Our marketing efforts are principally
carried out by the management of our service groups in coordination with our corporate marketing
organization. Most of our management has many years of experience in the industries they serve,
both at the service provider level and in some cases with the customers we serve. Our service group
managers market directly to existing and potential customers for new contracts and also market our
company to be placed on lists of vendors invited to submit proposals for service agreements and
individual projects. Our executive management supplements these efforts at the national level.
Safety and Insurance/Risk Management
We strive to instill safe work habits in our employees. We require our employees to
participate in internal training and service programs relevant to their employment and to complete
any training programs required by law. We evaluate employees in part based upon their safety
records and the safety records of the employees they supervise. We have established a company-wide
safety program to share best practices and to monitor and improve compliance with safety procedures
and regulations.
Our business involves heavy equipment and exposure to conditions that can be dangerous. While
we are committed to operating safely and prudently, we are subject to claims by employees,
customers and third parties for property damage and personal injuries that occur in connection with
our work. See Item 1A. Risk Factors Our business is subject to hazards that could result in
substantial liabilities and weaken our financial condition.
We presently maintain insurance policies subject to per claim deductibles of $2 million for
our workers compensation policy, $2 million for our general liability policy and $3 million for
our automobile liability policy. We have excess umbrella coverages of up to $100 million per claim
and in the aggregate. We also maintain an insurance policy with respect to employee group health
claims subject to per claim deductibles of $300,000 after satisfying an annual deductible of
$100,000. See Item 1A. Risk Factors We are self-insured against many potential liabilities. We
are required to periodically post letters of credit and provide cash collateral to our insurance
carriers related to our insurance programs. Total outstanding letters of credit amounted to $66.2
million at December 31, 2006 and cash collateral posted amounted to $6.6 million at December 31,
2006. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Estimates-Insurance Reserves.
Suppliers, Materials and Working Capital
Under most of our contracts, our customers supply the necessary materials and supplies and we
are responsible for installation, but not for material costs or material warranties. Under certain
of our contracts we acquire materials and supplies for our own account
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from third-party providers. We are not dependent on any one supplier for materials or supplies
and have not experienced any significant difficulty in obtaining an adequate supply of materials
and supplies.
We utilize independent contractors to assist on projects and to help us manage work flow. Our
independent contractors are typically sole proprietorships or small business entities that provide
their own vehicles, tools and insurance coverage. We are not dependent on any single independent
contractor. See Item 1A. Risk Factors We may choose, or be required, to pay our subcontractors
even if our customers do not pay, or delay paying, us for the related services.
We need working capital to support seasonal variations in our business, primarily due to the
impact of weather conditions on external construction and maintenance work, including storm
restoration work, and the corresponding spending by our customers on their annual capital
expenditure budgets. Our business is typically slower in the first and fourth quarters of each
calendar year and stronger in the second and third quarters. We generally experience seasonal
working capital needs from approximately April through September to support growth in unbilled
revenue and accounts receivable, and to a lesser extent, inventory. Our billing terms are generally
net 30 to 60 days, although some contracts allow our customers to retain a portion (from 2% to 15%)
of the contract amount until the contract is completed to their satisfaction. We maintain inventory
to meet the material requirements of some of our contracts. Some of our customers pay us in advance
for a portion of the materials we purchase for their projects, or allow us to pre-bill them for
materials purchases up to a specified amount.
Competition
Our industry is highly competitive and highly fragmented. We often compete with a number of
companies in markets where we operate, ranging from small local independent companies to large
national firms. The national or large regional firms that compete with us include Dycom Industries,
Emcor Group, Henkels & McCoy, Infrasource Services, Pike Electric and Quanta Services.
Relatively few significant barriers to entry exist in the markets in which we operate and, as
a result, any organization that has adequate financial resources and access to technical expertise
may become a competitor. Some of our customers employ personnel to perform infrastructure services
of the type we provide. We compete based upon our industry experience, technical expertise,
financial and operational resources, nationwide presence, industry reputation and customer service.
While we believe our customers consider a number of factors when selecting a service provider, most
of their work is awarded through a bid process. Consequently, price is often a principal factor in
determining which service provider is selected. See Item 1A. Risk Factors Our industry is highly
competitive which may reduce our market share and harm our financial performance.
Regulation
We are subject to state and federal laws that apply to businesses generally, including laws
and regulations related to labor relations, worker safety and environmental protection. While many
of our customers operate in regulated industries (for example, utilities regulated by the public
service commission or broadband companies regulated by franchise agreements with various
municipalities), we are not generally subject to such regulation and oversight.
As a contractor, our operations are subject to various laws, including:
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regulations related to vehicle registrations, including those of state and the United
States Departments of Transportation; |
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regulations related to worker safety and health, including those established by the
Occupational Safety and Health Administration; |
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contractor licensing requirements; |
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building and electrical codes; and |
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permitting and inspection requirements. |
We are also subject to various environmental laws. Our failure to comply with environmental
laws could result in significant liabilities. For example,
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Some of the work we perform is in underground environments. If the field location maps
supplied to us are not accurate, or if objects are present in the soil that are not
indicated on the field location maps, our underground work could strike objects in the soil
containing pollutants and result in a rupture and discharge of pollutants. In such a case,
we may be liable for fines and damages. |
9
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We own and lease several facilities at which we store our equipment. Some of these
facilities contain fuel storage tanks which may be above or below ground. If these tanks
were to leak, we could be responsible for the cost of remediation as well as potential
fines. |
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We sometimes perform directional drilling operations below certain environmentally
sensitive terrains and water bodies. Due to inconsistent nature of the terrain and water
bodies, it is possible that such directional drilling may cause a surface fracture
releasing subsurface materials. These releases may contain contaminants in excess of
amounts permitted by law, potentially exposing us to remediation costs and fines. |
See Item 1A. Risk Factors Our failure to comply with environmental laws could result in
significant liabilities.
We believe we have all licenses and permits needed to conduct operations and that we are in
compliance with all material applicable regulatory requirements. However, if we fail to comply with
any material applicable regulatory requirements, we could incur significant liabilities. See Item
1A. Risk Factors Our failure to comply with regulations of the U.S. Occupational Safety and
Health Administration, the U.S. Department of Transportation and other state and local agencies
that oversee transportation and safety compliance could reduce our revenue, profitability and
liquidity.
We offer services and are branded under the MasTec service mark. We do not have any patents
that are material to our business.
Financial Information About Geographic Areas
During the years ended December 31, 2006, 2005 and 2004, we operated in the United States,
Canada and the Cayman Islands. In 2003, we had operations in Brazil. In 2004, we ceased performing
contractual services in Brazil, abandoned all assets in our Brazilian subsidiary and made a
determination to exit the Brazilian market. The abandoned subsidiary has been classified as a
discontinued operation and is not included in the table below. The following table reflects
financial information from continuing operations for our U.S. and foreign operations:
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Year Ended December 31, |
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2006 |
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2005 |
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2004 |
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(In thousands) |
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Revenue: |
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United States |
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$ |
939,314 |
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$ |
836,539 |
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$ |
790,965 |
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Foreign |
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6,492 |
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11,507 |
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16,219 |
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$ |
945,806 |
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$ |
848,046 |
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$ |
807,184 |
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As of December 31, |
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2006 |
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2005 |
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(In thousands) |
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Long Lived Assets: |
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United States |
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$ |
61,212 |
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$ |
47,513 |
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Foreign |
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188 |
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514 |
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$ |
61,400 |
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$ |
48,027 |
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Our business, financial condition and results of operations in Canada and the Cayman Islands
may be adversely impacted by monetary and fiscal policies, currency fluctuations, energy shortages
and other political, social and economic developments.
Employees
As of December 31, 2006, we had approximately 9,260 employees. We hire employees from a number
of sources, including from the industry and from trade schools and colleges. Our primary sources
for employees include promotion from within, team member referrals, print and Internet advertising
and direct recruiting. We attract and retain employees by offering technical training
opportunities, bonus opportunities, stock ownership, competitive salaries and a comprehensive
benefits package.
We believe that our focus on training and career development helps us to attract and retain
employees. Our employees participate in ongoing educational programs, many of which are internally
developed, to enhance their technical and management skills through classroom and field training.
We provide opportunities for promotion and mobility within our organization that we also believe
helps us to retain our employees. We believe our relations with our employees are good.
10
Available Information
A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, are available free of charge on the
Internet at our website, www.mastec.com, as soon as reasonably practicable after we electronically
file these reports with, or furnish these reports to, the Securities and Exchange Commission.
Copies of our Board of Directors Governance Principles, Code of Business Conduct and Ethics and the
charters for each of our Audit, Compensation and Corporate Governance Committees are also available
on the Internet in the Investor Relations section of our website, www.mastec.com, or may be
obtained by contacting our Vice President of Investor Relations, by phone at (305) 406-1815 or by
email at investor.relations@mastec.com. We intend to provide any amendments or waivers to our Code
of Business Conduct and Ethics, which applies to all staff and expressly applies to our senior
officers (including our principal executive officer, principal financial officer and our
controller), on our website within four business days of any such amendment or waiver. The
reference to our website address does not constitute incorporation by reference of the information
contained on the website and should not be considered part of this report.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other
information in this Annual Report on Form 10-K. The risks described below are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial may also materially and adversely affect our business operations. If any of the
following risks actually occurs, our business, financial condition and results of operations could
suffer and the trading price of our common stock could decline.
Risks Related to Our Industry and Our Customers Industries
An economic downturn or reduced capital expenditures in the industries we serve may result in a
decrease in demand for our services.
Commencing in 2001 and through 2003, the communications industry suffered a severe downturn
that resulted in a number of our customers filing for bankruptcy protection or experiencing
financial difficulties. The downturn resulted in reduced capital expenditures for infrastructure
projects, even among those customers that did not experience financial difficulties. Although our
strategy is to increase the percentage of our business derived from large, financially stable
customers in the communications and utility industries, these customers may not continue to fund
capital expenditures for infrastructure projects at current levels. Even if they do continue to
fund projects, we may not be able to increase our share of their business. Bankruptcies or
decreases in our customers capital expenditures and disbursements could reduce our revenue,
profitability or liquidity.
Many of the industries we serve are subject to consolidation and rapid technological and regulatory
change, and our inability or failure to adjust to our customers changing needs could reduce demand
for our services.
We derive, and anticipate that we will continue to derive, a substantial portion of our
revenue from customers in the communications industry. The communications industry is subject to
rapid changes in technology and governmental regulation. Changes in technology may reduce the
demand for the services we provide. New or developing technologies could displace the wire line
systems used for the transmission of voice, video and data, and improvements in existing technology
may allow communications providers to significantly improve their networks without physically
upgrading them. Additionally, the communications industry has been characterized by a high level of
consolidation that may result in the loss of one or more of our customers. Utilities have also
entered into a phase of consolidation similar to the communications industry which could lead to
the same uncertainties.
Our industry is highly competitive which may reduce our market share and harm our financial
performance.
Our industry is highly fragmented, and we compete with other companies in most of the markets
in which we operate, ranging from small independent firms servicing local markets to larger firms
servicing regional and national markets. We also face competition from existing or prospective
customers that employ in-house personnel to perform some of the same types of services we provide.
There are relatively few barriers to entry into the markets in which we operate and, as a result,
any organization that has adequate financial resources and access to technical expertise and
skilled personnel may become one of our competitors.
Most of our customers work is awarded through a bid process. Consequently, price is often the
principal factor in determining which service provider is selected, especially on smaller, less
complex projects. Smaller competitors are sometimes able to win bids for these projects based on
price alone due to their lower costs and financial return requirements.
11
Risks Related to Our Business
We derive a significant portion of our revenue from a few customers, and the loss of one of these
customers or a reduction in their demand, the amount they pay or their ability to pay, for our
services could impair our financial performance.
In the year ended December 31, 2006, we derived approximately 37.3%, 9.5% and 8.2% of our
revenue from DIRECTV®, BellSouth (now AT&T) and Verizon, respectively. In the year ended
December 31, 2005, we derived approximately 31.8%, 10.2% and 10.0% of our revenue from
DIRECTV®, BellSouth (now AT&T) and Verizon, respectively. In addition, our ten largest
customers accounted for approximately 75.0%, 71.3% and 71.1% of our revenue in the years ended
December 31, 2006, 2005 and 2004, respectively.
Because our business is concentrated among relatively few major customers, our revenue could
significantly decline if we lose one or more of these customers or if the amount of business we
obtain from them is reduced, which could result in reduced profitability and liquidity. For
example, we experienced a decrease of $103.9 million in revenue from Comcast in the year ended
December 31, 2005 compared to the same period in 2004 due to the completion of the rebuild and
upgrade of their broadband networks in 2004 and we experienced a decrease of $9.6 million in
revenue for Verizon in the year ended December 31, 2006 compared to the same period in 2005 due to
timing of generating work orders. Our revenue, profitability and liquidity could decline if certain
customers reduce the amounts they pay for our services or if our customers are unable to pay for
our services. A number of our customers filed for bankruptcy protection or experienced financial
difficulties commencing in 2001 through 2003 during the last economic downturn in the
communications industry which negatively impacted our revenue, profitability and liquidity. In
2006, 2005 and 2004 total provisions for bad debts aggregated to $10.0 million, $4.9 million and
$5.1 million, respectively, of which $8.1 million, $3.3 million and $0.6 million, respectively, are
included in loss from discontinued operations. As of December 31, 2006, we had remaining receivables from
customers undergoing bankruptcy reorganization totaling $10.4 million, of which $4.1 million is
included in specific reserves for bad debts, with the remaining amounts expected to be recovered
through secured and unsecured claims and enforcement of liens or bonds.
Most of our contracts do not obligate our customers to undertake any infrastructure projects or
other work with us.
A significant portion of our revenue is derived from multi-year master service agreements and
other service agreements. Under our multi-year master service agreements and other service
agreements, we contract to provide customers with individual project services, through work orders,
within defined geographic areas on a fixed fee basis. Under these agreements, our customers have no
obligation to undertake any infrastructure projects or other work with us. A significant decline in
the projects customers assign us under these service agreements could result in a decline in our
revenue, profitability and liquidity.
Most of our contracts may be canceled on short notice, so our revenue is not guaranteed.
Most of our contracts are cancelable on short notice, ranging from immediate cancellation to
cancellation upon 180 days notice, even if we are not in default under the contract. Many of our
contracts, including our service agreements, are periodically open to public bid. We may not be the
successful bidder on our existing contracts that are re-bid. We also provide a significant portion
of our services on a non-recurring, project-by-project basis. We could experience a reduction in
our revenue, profitability and liquidity if:
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our customers cancel a significant number of contracts; |
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we fail to win a significant number of our existing contracts upon re-bid; or |
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we complete the required work under a significant number of our non-recurring projects
and cannot replace them with similar projects. |
We may not accurately estimate the costs associated with our services provided under fixed-price
contracts which could impair our financial performance.
A substantial portion of our revenue is derived from master service agreements and other
service agreements that are fixed price contracts. Under these contracts, we set the price of our
services on a per unit or aggregate basis and assume the risk that the costs associated with our
performance may be greater than we anticipated. Our profitability is therefore dependent upon our
ability to accurately estimate the costs associated with our services. These costs may be affected
by a variety of factors, such as lower than anticipated productivity, conditions at the work sites
differing materially from what was anticipated at the time we bid on the contract and higher costs
of materials and labor. Certain agreements or projects could have lower margins than anticipated or
losses if actual costs for our contracts exceed our estimates, which could reduce our profitability
and liquidity.
12
We account for a majority of our projects using units-of-delivery methods or
percentage-of-completion, therefore variations of actual results from our assumptions may reduce
our profitability.
For installation/construction projects, we recognize revenue on projects on the
units-of-delivery or percentage-of-completion methods, depending on the type of project. We
recognize revenue on unit based projects using the units-of-delivery method. Under the
units-of-delivery method, revenue is recognized as the units are completed at the contractually
agreed price per unit. Our profitability is reduced if the actual cost to complete each unit
exceeds our original estimates. We are also required to immediately recognize the full amount of
any estimated loss on these projects if the estimated costs to complete the remaining units for the
project exceed the revenue to be earned on such units. For certain customers with unit based
construction/installation contracts, we recognize revenue only after the service is performed and
as the related work orders are approved. Revenue from completed work orders not collected in
accordance with the payment terms established with these customers is not recognized until
collection is assured. If we are required to recognize a loss on a project, we could experience
reduced profitability which could negatively impact our liquidity.
We recognize revenue on non-unit based fixed price contracts using the
percentage-of-completion method. Under the percentage-of-completion method, we record revenue as
work on the contract progresses. The cumulative amount of revenue recorded on a contract at a
specified point in time is that percentage of total estimated revenue that incurred costs to date
bear to estimated total contract costs. The percentage-of-completion method therefore relies on
estimates of total expected contract costs. Contract revenue and total cost estimates are reviewed
and revised periodically as the work progresses. Adjustments are reflected in contract revenue in
the fiscal period when such estimates are revised. Estimates are based on managements reasonable
assumptions and experience, but are only estimates. Variation of actual results from estimates on a
large project or on a number of smaller projects could be material. We immediately recognize the
full amount of the estimated loss on a contract when our estimates indicate such a loss. Such
adjustments and accrued losses could result in reduced profitability which could negatively impact
our liquidity. For example, for the years ended December 31, 2006, 2005 and 2004 we incurred
approximately $6.8 million, $3.3 million and $7.8 million, respectively, of losses on
percentage-of-completion contracts, of which $6.5 million, $2.3 million and $3.7 million,
respectively, were included in loss from discontinued operations.
Amounts included in our backlog may not result in actual revenue or translate into profits.
Approximately 85.5% of our 18-month backlog at December 31, 2006 was comprised of master
service agreements and other service agreements which do not require our customers to purchase a
minimum amount of services and are cancelable on short notice. These backlog amounts are based on
our estimates and therefore may not result in actual receipt of revenue in the originally
anticipated period or at all. In addition, contracts included in our backlog may not be profitable.
We may experience variances in the realization of our backlog because of project delays or
cancellations resulting from weather conditions, external market factors and economic factors
beyond our control. If our backlog fails to materialize, we could experience a reduction in our
revenue, profitability and liquidity.
Our business is seasonal and is affected by adverse weather conditions and the spending patterns of
our customers, exposing us to variable quarterly results.
The budgetary years of many of our specialty infrastructure services customers end December
31. As a result, some of our customers reduce their expenditures and work order requests towards
the end of the year. Adverse weather conditions, particularly during the winter season, also affect
our ability to perform outdoor services in certain regions of the United States. As a result, we
experience reduced revenue in the first and fourth quarters of each calendar year.
Natural catastrophes such as the recent hurricanes in the United States could also have a
negative impact on the economy overall and on our ability to perform outdoor services in affected
regions or utilize equipment and crews stationed in those regions, which in turn could
significantly impact the results of any one or more of our reporting periods.
We are self-insured against many potential liabilities.
Although we maintain insurance policies with respect to automobile liability, general
liability, workers compensation and employee group health claims, those policies are subject to
high deductibles, and we are self-insured up to the amount of the deductible. Since most claims
against us do not exceed the deductibles under our insurance policies, we are effectively
self-insured for substantially all claims. We actuarially determine any liabilities for unpaid
claims and associated expenses, including incurred but not reported losses, and reflect those
liabilities in our balance sheet as other current and non-current liabilities. The determination of
such claims and expenses and the appropriateness of the liability is reviewed and updated
quarterly. However, insurance liabilities are difficult to assess and estimate due to the many
relevant factors, the effects of which are often unknown, including the severity of an injury, the
determination of our liability in proportion to other parties, the number of incidents not reported
and the effectiveness of
13
our safety program. If our insurance claims increase or costs exceed our estimates of
insurance liabilities, we could experience a decline in profitability and liquidity.
Increases in our insurance premiums or collateral requirements could significantly reduce our
profitability, liquidity and credit facility availability.
Because of factors such as increases in claims (primarily workers compensation claims),
projected significant increases in medical costs and wages, lost compensation and reductions in
coverage, insurance carriers may be unwilling to continue to provide us with our current levels of
coverage without a significant increase in insurance premiums or collateral requirements to cover
our deductible obligations. For example, in connection with our 2005 insurance program, we paid our
insurance carrier $18.0 million for cash collateral during 2005. In January 2006, we provided to
our insurance carrier a $6.5 million letter of credit related to our insurance plans. In addition,
in November 2006, we provided our insurance carrier with an $18.0 million letter of credit with the
insurance carrier returning cash collateral of $18.0 million plus all accrued interest to us. As
collateral for this letter of credit, we pledged $18.0 million in cash to our lenders under our
revolving credit facility. An increase in premiums or collateral requirements could significantly
reduce our profitability and liquidity as well as reduce availability under our revolving credit
facility.
We may be unable to obtain sufficient bonding capacity to support certain service offerings and the
need for performance and surety bonds may reduce our availability under our credit facility.
Some of our contracts require performance and surety bonds. Bonding capacity in the
infrastructure industry has become increasingly difficult to obtain, and bonding companies are
denying or restricting coverage to an increasing number of contractors. Companies that have been
successful in renewing or obtaining coverage have sometimes been required to post additional
collateral to secure the same amount of bonds which reduces availability under our credit facility.
We may not be able to maintain a sufficient level of bonding capacity in the future, which could
preclude us from being able to bid for certain contracts and successfully contract with certain
customers. In addition, even if we are able to successfully renew or obtain performance or payment
bonds in the future, we may be required to post letters of credit in connection with the bonds
which would reduce availability under our credit facility. We reported net losses for the past six
years. If we continue to incur net losses, our overall level of bonding capacity could be reduced.
We have agreed to keep certain liabilities related to the state Department of Transportation
related projects and assets that were sold in February 2007.
In connection with the sale of our state Department of Transportation related projects and
assets, we agreed to keep certain related liabilities, including certain litigation and the cost to
maintain and continue certain performance and payment bonds. At December 31, 2006, the cost to
complete on the $207.2 million in performance and payment bonds related to these projects and
assets was $21.0 million. While the buyer of the state
Department of Transportation related projects has indemnified us for
all contracts and liabilities sold, and has agreed to issue a standby
letter of credit in our favor in February 2008 to cover any
remaining exposure, if the buyer
were unable to meet its contractual obligations to a customer and the surety paid the amount due
under the bond, the surety would seek reimbursement of such payment from us. Accordingly, it is
possible that we may incur losses in the future related to these retained liabilities.
New accounting pronouncements including SFAS 123R may significantly impact our future results of
operations and earnings per share.
Prior to January 2006, we accounted for our stock-based award plans to employees and directors
in accordance with Accounting Principals Board Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees, under which compensation expense is recorded to the extent that the current
market price of the underlying stock exceeds the exercise price. Under this method, we generally
did not recognize any compensation related to employee stock option grants we issue under our stock
option plans at fair value. In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment,
(SFAS 123R). This statement, which became effective for us beginning on January 1, 2006, requires
us to recognize the expense attributable to stock options granted or vested subsequent to December
31, 2005 and has had a material negative impact on our future profitability.
SFAS 123R requires us to recognize share-based compensation as compensation expense in our
statement of operations based on the fair values of such equity on the date of the grant, with the
compensation expense recognized over the vesting period. This statement also required us to adopt a
fair value-based method for measuring the compensation expense related to share-based compensation.
The impact of the adoption of SFAS 123R on our results of operations resulted in share-based
compensation expense of approximately $7.6 million in 2006, including $0.2 million from
discontinued operations. Future annual share-based compensation expense could be affected by, among
other things, the number of stock options issued annually to employees and directors, volatility of
our stock price and the exercise price of the options granted. Future changes in generally accepted
accounting principles may also have a significant effect on our reported results.
14
We may incur goodwill impairment charges in our reporting entities which could harm our
profitability.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142, we
periodically review the carrying values of our goodwill to determine whether such carrying values
exceed the fair market value. In the year ended December 31, 2004, we charged $12.3 million against
goodwill in connection with the bankruptcy of our Brazilian subsidiary. In the year ended December
31, 2005, we charged $11.5 million against goodwill related to the decision to sell substantially
all of our state Department of Transportation related projects and assets. These impairment charges
are included in our consolidated statements of operations under discontinued operations. We may
incur additional impairment charges related to goodwill in any of our reporting entities in the
future if the markets they serve or their business deteriorates.
We may incur long-lived assets impairment charges which could harm our profitability.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS No. 144, we review long-lived assets for impairment. In analyzing potential
impairment of our state Department of Transportation related projects and assets we used
projections of future discounted cash flows from these assets in 2006 and estimated a selling price
by using a weighted probability cash flow analysis based on managements estimates, as well as our
negotiations with third parties for the sale of these assets which we sold effective February 1,
2007.
We may incur restructuring charges which could reduce our profitability.
From time to time we review our operations in an effort to improve profitability. We could
incur charges in the future as a result of:
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eliminating service offerings that no longer fit into our business strategy; |
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reducing or eliminating services that do not produce adequate revenue or margin; |
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reducing costs of businesses that provide adequate profit contributions but need margin improvements; and |
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reviewing new business opportunities capable of utilizing our existing human and physical resources. |
All charges related to restructuring would be reflected as operating expenses and could reduce
our profitability.
Our revolving credit facility and senior notes impose restrictions on us which may prevent us from
engaging in transactions that might benefit us, including responding to changing business and
economic conditions or securing additional financing, if needed.
At December 31, 2006, we had $121.0 million in senior subordinated notes outstanding due
February 2008 under an indenture and $9.2 million in other notes payable outstanding. Since then we
have issued $150.0 million aggregate principal amount of 7.625% senior notes due 2017, under a new
indenture, the proceeds of which we used to redeem the senior subordinated notes due 2008. We also
have a $150.0 million revolving credit facility of which we had no outstanding cash draws at
December 31, 2006. At December 31, 2006, the net availability under the credit facility was
approximately $35.1 million which includes outstanding standby letters of credit aggregating $83.3
million. The terms of our indebtedness contain customary events of default and covenants that
prohibit us from taking certain actions without satisfying certain financial tests or obtaining the
consent of the lenders. The prohibited actions include, among other things:
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making investments and acquisitions in excess of specified amounts; |
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incurring additional indebtedness in excess of specified amounts; |
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paying cash dividends; |
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making capital expenditures in excess of a specified amount; |
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creating certain liens against our assets; |
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prepaying our other indebtedness, including the senior notes; |
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engaging in certain mergers or combinations; and |
15
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engaging in transactions that would result in a change of control (as defined in the credit facility and indenture). |
Our credit facility provides that if our net borrowing base availability falls below $20.0
million we must comply with a minimum fixed charge coverage ratio. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition,
Liquidity and Capital Resources. In the past, we have not been in compliance with certain
financial covenants of our credit facility and have had to seek amendments or waivers from our
lenders. Should we be unable to comply with the terms and covenants of our credit facility, we
would be required to obtain further modifications of the facility or secure another source of
financing to continue to operate our business. A default could result in the acceleration of either
our obligations under the credit facility or under the indenture relating to the senior notes, or
both. In addition, these covenants may prevent us from engaging in transactions that benefit us,
including responding to changing business and economic conditions or securing additional financing,
if needed. Our business is capital intensive and, to the extent we need additional financing, we
may not be able to obtain such financing at all or on favorable terms, which may decrease our
profitability and liquidity.
If we are unable to attract and retain qualified managers and skilled employees, we will be unable
to operate efficiently which could reduce our revenue, profitability and liquidity.
Our business is labor intensive, and some of our operations experience a high rate of employee
turnover. At times of low unemployment rates in the areas we serve, it can be difficult for us to
find qualified and affordable personnel. We may be unable to hire and retain a sufficient skilled
labor force necessary to support our operating requirements and growth strategy. Our labor expenses
may increase as a result of a shortage in the supply of skilled personnel. If we are unable to hire
employees with the requisite skills, we may also be forced to incur significant training expenses.
Additionally, our business is managed by a number of key executive and operational officers and is
dependent upon retaining and recruiting qualified management. Labor shortages, increased labor or
training costs or the loss of key personnel could result in reduced revenue, profitability and
liquidity.
Increases in the costs of fuel could reduce our operating margins.
The price of fuel needed to run our vehicles and equipment is unpredictable and fluctuates
based on events outside our control, including geopolitical developments, supply and demand for oil
and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing
countries, regional production patterns and environmental concerns. Most of our contracts do not
allow us to adjust our pricing. Accordingly, any increase in fuel costs could reduce our
profitability and liquidity.
We may choose, or be required, to pay our subcontractors even if our customers do not pay, or delay
paying, us for the related services.
We use subcontractors to perform portions of our services and to manage work flow. In some
cases, we pay our subcontractors before our customers pay us for the related services. If we
choose, or are required, to pay our subcontractors for work performed for customers who fail to
pay, or delay paying us for the related work, we could experience a decrease in profitability and
liquidity.
Our failure to comply with environmental laws could result in significant liabilities.
Some of the work we perform is in underground environments. If the field location maps
supplied to us are not accurate, or if objects are present in the soil that are not indicated on
the field location maps, our underground work could strike objects in the soil containing
pollutants and result in a rupture and discharge of pollutants. In such a case, we may be liable
for fines and damages.
We own and lease several facilities at which we store our equipment. Some of these facilities
contain fuel storage tanks which may be above or below ground. If these tanks were to leak, we
could be responsible for the cost of remediation as well as potential fines.
We sometimes perform directional drilling operations below certain environmentally sensitive
terrains and water bodies. Due to the inconsistent nature of the terrain and water bodies, it is
possible that such directional drilling may cause a surface fracture releasing subsurface
materials. These releases may contain contaminants in excess of amounts permitted by law,
potentially exposing us to remediation costs and fines.
We are currently engaged in litigation related to environmental liabilities in Coos Bay,
Oregon. See Item 3. Legal Proceedings.
In addition, new environmental laws and regulations, stricter enforcement of existing laws and
regulations, the discovery of previously unknown contamination or leaks, or the imposition of new
clean-up requirements could require us to incur significant costs or become the basis for new or
increased liabilities that could negatively impact our profitability and liquidity.
16
Our failure to comply with the regulations of the U.S. Occupational Safety and Health
Administration the U.S. Department of Transportation and other state and local agencies that
oversee transportation and safety compliance could reduce our revenue, profitability and liquidity.
The Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes certain
employer responsibilities, including maintenance of a workplace free of recognized hazards likely
to cause death or serious injury, compliance with standards promulgated by the Occupational Safety
and Health Administration and various record keeping, disclosure and procedural requirements.
Various standards, including standards for notices of hazards, safety in excavation and demolition
work, may apply to our operations. We have incurred, and will continue to incur, capital and
operating expenditures and other costs in the ordinary course of our business in complying with
OSHA and other state and local laws and regulations.
We have, from time to time, received notice from the U.S. Department of Transportation that
our motor carrier operations will be monitored and that the failure to improve our safety
performance could result in suspension or revocation of vehicle registration privileges. If we
cannot successfully resolve these issues, our ability to service our customers could be damaged
which could lead to a reduction of our revenue, profitability and liquidity.
Our business is subject to hazards that could result in substantial liabilities and weaken our
financial condition.
Construction projects undertaken by our employees involve exposure to electrical lines,
pipelines carrying potentially explosive materials, heavy equipment, mechanical failures and
adverse weather conditions. If serious accidents or fatalities occur, we may be restricted from
bidding on certain work and certain existing contracts could be terminated. In addition, if our
safety record were to deteriorate, our ability to bid on certain work could suffer. The occurrence
of accidents in our business could result in significant liabilities or harm our ability to perform
under our contracts or enter into new contracts with customers, which could reduce our revenue,
profitability and liquidity.
Many of our communications customers are highly regulated and the addition of new regulations or
changes to existing regulations may adversely impact their demand for our specialty contracting
services and the profitability of those services.
Many of our communications customers are regulated by the Federal Communications Commission,
or the FCC. The FCC may interpret the application of its regulations to communication companies
in a manner that is different than the way such regulations are currently interpreted and may
impose additional regulations. If existing or new regulations have an adverse affect on our
communications customers and adversely impact the profitability of the services they provide, then
demand for our specialty contracting services may be reduced.
Claims, lawsuits and proceedings could reduce our profitability and liquidity and weaken our
financial condition.
We are subject to various claims, lawsuits and proceedings which arise in the ordinary course
of business, including those described in Item 3. Legal Proceeding. Claimants may seek large
damage awards and defending claims can involve significant costs. When appropriate, we establish
reserves against these items that we believe to be adequate in the light of current information,
legal advice and professional indemnity insurance coverage, and we adjust such reserves from time
to time according to case developments. If our reserves are inadequate, or if in the future our
insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities
for which we self-insure, we could experience a reduction in our profitability and liquidity. An
adverse determination on any such claim, lawsuit or proceeding could have a material adverse effect
on our business, financial condition or results of operations. In addition, claims, lawsuits and
proceedings may harm our reputation or divert management resources away from operating our
business. See Item 3. Legal Proceedings.
Acquisitions involve risks that could result in a reduction of our profitability and liquidity.
We have made, and in the future plan to make, strategic acquisitions. However, we may not be
able to identify suitable acquisition opportunities or may be unable to obtain the consent of our
lenders and therefore not be able to complete such acquisitions. We may pay for acquisitions with
our common stock which may dilute your investment in our common stock or decide to pursue
acquisitions that investors may not agree with. In addition, acquisitions may expose us to
operational challenges and risks, including:
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the ability to profitably manage additional businesses or successfully integrate the
acquired business operations and financial reporting and accounting control systems into
our business; |
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increased indebtedness associated with an acquisition; |
17
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the ability to fund cash flow shortages that may occur if anticipated revenue is not
realized or is delayed, whether by general economic or market conditions or unforeseen
internal difficulties; |
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the availability of funding sufficient to meet increased capital needs; |
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diversion of managements attention; and |
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the ability to hire qualified personnel required for expanded operations. |
A failure to successfully manage the operational challenges and risks associated with or
resulting from acquisitions could result in a reduction of our profitability and liquidity.
Borrowings associated with these acquisitions may also result in higher levels of indebtedness
which could impact our ability to service our debt within the scheduled repayment terms.
We may incur significant costs as a result of our lawsuit with our excess insurance carrier.
In the second quarter of 2004, several complaints for a purported securities class action were
filed against us and certain of our officers. We have settled these actions without payments to the
plaintiffs by us. As part of the settlement, our excess insurance carrier has retained its rights
to seek up to $2.0 million in reimbursement from us based on its claim that notice was not properly
given under the policy. We may be unable to successfully resolve this dispute without incurring
significant expense. See Item 3. Legal Proceedings.
Risks Related to Our Company and Our Common Stock
The market price of our common stock has been, and may continue to be, highly volatile.
From 2001 to 2003, for example, our common stock fluctuated from a high of $24.75 per share in
the first quarter of 2001 to a low of $1.31 per share in the first quarter of 2003. During 2006 and
2005, our common stock fluctuated from a high of $14.75 per share to a low of $6.56 per share. We
may continue to experience significant volatility in the market price of our common stock. See
Item 5. Market Information for the Registrants
Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
Numerous factors could have a significant effect on the price of our common stock, including:
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announcements of fluctuations in our operating results or the operating results of one of our competitors; |
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future sales of our common stock or other securities; |
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announcements of new contracts or customers by us or one of our competitors; |
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market conditions for providers of services to communications companies, utilities and government; |
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changes in recommendations or earnings estimates by securities analysts; and |
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announcements of acquisitions by us or one of our competitors. |
In addition, the stock market has experienced significant price and volume fluctuations in
recent years that have sometimes been unrelated or disproportionate to the operating performance of
companies. The market price for our common stock has been volatile and such volatility could cause
the market price of our common stock to decrease and cause you to lose some or all of your
investment in our common stock.
A small number of our existing shareholders have the ability to influence major corporate
decisions.
Jorge Mas, our Chairman, and other members of his family who are employed by MasTec
beneficially own approximately 33.7% of the outstanding shares of our common stock as of March 5,
2007. Accordingly, they are in a position to influence:
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the vote of most matters submitted to our shareholders, including any merger,
consolidation or sale of all or substantially all of our assets; |
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the nomination of individuals to our Board of Directors; and |
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a change in our control. |
18
These factors may discourage, delay or prevent a takeover attempt that you might consider in
your best interest or that might result in you receiving a premium for your common stock.
Our articles of incorporation and certain provisions of Florida law contain anti-takeover
provisions that may make it more difficult to effect a change in our control.
Certain provisions of our articles of incorporation and bylaws and the Florida Business
Corporation Act could delay or prevent an acquisition or change in control and the replacement of
our incumbent directors and management, even if doing so might be beneficial to our shareholders by
providing them with the opportunity to sell their shares possibly at a premium over the then market
price of our common stock. For example, our Board of Directors is divided into three classes. At
any annual meeting of our shareholders, our shareholders only have the right to appoint
approximately one-third of the directors on our Board of Directors. Consequently, it will take at
least two annual shareholder meetings to effect a change in control of our Board of Directors,
which may discourage hostile takeover bids. In addition, our articles of incorporation authorize
our Board of Directors, without further shareholder approval, to issue preferred stock. The
issuance of preferred stock could also dilute the voting power of the holders of our common stock,
including by the grant of voting control to others, which could delay or prevent an acquisition or
change in control.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is a 24,000 square foot leased facility located in Coral Gables,
Florida.
As of December 31, 2006, our operations were conducted from approximately 200 locations. None
of our facilities in these locations is material to our operations because most of our services are
performed on customers premises or on public rights of way and because suitable alternative
locations are available in substantially all areas where we currently conduct business.
We also own property and equipment that, at December 31, 2006, had a net book value of $61.4
million. This property and equipment includes land, buildings, vans, trucks, tractors, trailers,
bucket trucks, backhoes, bulldozers, directional boring machines, digger derricks, cranes,
networks, computers, computer software, office and other equipment. Our equipment is acquired
from various third-party vendors, none of which we depend upon, and we did not experience any
difficulties in obtaining desired equipment in 2006.
Item 3. Legal Proceedings
In April 2006, we settled, without payment to the plaintiffs by us, several complaints for
purported securities class actions that were filed against us and certain officers in the second
quarter of 2004. As part of the settlement, our excess insurance carrier has retained its rights to
seek reimbursement of up to $2.0 million from us based on its claim that notice was not properly
given under the policy. We are also seeking reimbursement of expenses incurred by us which we
believe are reimbursable by our excess insurance carrier. We believe the claims of the excess
insurance carrier are without merit and plan to continue vigorously pursuing this action. We also
are pursuing claims against the insurance broker for any losses arising from the same issue
involving notice.
We continue to cooperate with the SEC in the previously disclosed formal investigation related
to the restatement of our financial statements in 2001 through 2003.
In October 2005, former employees filed a Fair Labor Standards Act (FLSA) collective action
against MasTec in the Federal District Court in Tampa, Florida, alleging failure to pay overtime
wages as required under the FLSA. We believe that we have defenses to these claims, and we are
vigorously defending the lawsuit. Any damages that we may be subject to pursuant to this action
are not quantifiable at this time. This claim could divert our managements time and attention from
our business operations and might potentially result in substantial costs of defense, settlement or
other disposition, which could have a material adverse effect on our results of operations in one
or more fiscal periods.
We contracted to construct a natural gas pipeline for Coos County, Oregon in 2003.
Construction work on the pipeline ceased in December 2003 after the County refused payment due on
regular contract invoices of $6.3 million and refused to process change orders submitted to the
County on or after November 29, 2003 for additional work. In February 2004, we declared a breach of
contract and brought an action for breach of contract against Coos County in Federal District Court
in Oregon, seeking payment for work done, interest and anticipated profits. In April 2004, Coos
County announced it was terminating the contract and seeking another company to complete the
project. Coos County subsequently counterclaimed against us in the Federal District Court action
for breach of
19
contract and other causes. The amount of revenue recognized on the Coos County project that
remained uncollected at December 31, 2006 amounted to $6.3 million representing amounts due to us
on normal progress payment invoices submitted under the contract. In addition to these uncollected
receivables, we also have additional claims for payment and interest in excess of $6.0 million,
including all of our change order billings and retainage, which we have not recognized as revenue
but which we believe are due to us under the terms of the contract. The matter is currently
being prepared for trial, expected during 2007.
In connection with the Coos County pipeline project, the United States Army Corps of
Engineers, or Corps of Engineers, and the Oregon Department of Environmental Quality issued cease and desist
orders and notices of non-compliance to Coos County and to us with respect to the Countys project.
While we do not agree that the notices were appropriate or justified, we have cooperated with the
Corps of Engineers and the Oregon Division of State Land, Department of Environmental Quality to
mitigate any adverse impact as a result of construction. Through December 31, 2005 mitigation
efforts have cost MasTec approximately $1.4 million. These costs were included in the costs on the
project at December 31, 2005 and December 31, 2004. No further mitigation expenses were incurred in
2006 or are anticipated. On August 9, 2004, the Oregon Department of Environmental Quality issued a
Notice of Violation and Assessment of Civil Penalty to MasTec North America in the amount of
$126,000. MasTec North America settled this matter for approximately $68,000. Additional liability
may arise from fines or penalties assessed, or to be assessed by the Corps of Engineers. We have
been unable to settle with the Corps of Engineers. On March 30, 2006, the Corps of Engineers
brought a complaint in federal district court against us and the County. We are contesting this
action vigorously, but can provide no assurance that a favorable outcome will be reached.
The
potential loss for all unresolved Coos County matters and unpaid settlements reached
described above is estimated to be approximately $0.1 million at December 31, 2006, which has been
recorded in the consolidated balance sheet, as accrued expenses.
In June 2005, we posted a $2.3 million bond in order to pursue the appeal of a $2.0 million
final judgment entered against us for damages plus attorneys fees resulting from a break in a
Citgo pipeline. We are seeking a new trial and reduction in the damages award. We will continue to
contest this matter in the appellate court, and on subsequent retrial. The amount of the loss, if
any, relating to this matter not covered by insurance is estimated to range from $0.1 million to
$2.4 million, of which $0.1 million is recorded in the consolidated balance sheet as of December
31, 2006, as accrued expenses.
The labor union representing the workers of Sistemas e Instalaciones de Telecomunicación S.A.
(Sintel), a former MasTec subsidiary, initiated an investigative action with a Spanish federal
court that commenced in July 2001 alleging that five former members of the board of directors of
Sintel, including Jorge Mas, our chairman, and his brother Juan Carlos Mas, approved a series of
allegedly unlawful transactions that led to the bankruptcy of Sintel. We are also named as a
potentially liable party. The union alleges Sintel and its creditors were damaged in the
approximate amount of 13 billion pesetas ($103.2 million at December 31, 2006). The Court has taken
no action to enforce a bond order pending since July 2001 for the amount of alleged damages. The
Court has conducted extensive discovery, including the declarations of certain present and former
executives of MasTec, Inc. and intends to conduct additional discovery. To date, no actions have
been taken by the Court against us or any of the named individuals. Our directors and officers
insurance carrier reimbursed us in the third quarter 2004 for approximately $1.2 million in legal
fees already incurred and agreed to fund legal expenses for the remainder of the litigation. The
amount of loss, if any, relating to this matter cannot presently be determined.
In October 2003, a MasTec subsidiary filed a lawsuit in a New York state court against Inepar
Industria e Construcoes or Inepar, its Brazilian joint venture partner. MasTec sued Inepar for
breach of contract arising out of Inepars failure to indemnify MasTec for claims resulting from
numerous misrepresentations made by Inepar. Inepar subsequently failed to answer MasTecs complaint
and MasTec sought a default judgment. In September 2006, the state court entered a judgment in
favor of MasTec and against Inepar in the amount of $58.4 million. MasTec has commenced
collections efforts. Due to the uncertainty of the ongoing collection process, MasTec has accounted
for the receipt of any amounts related to this judgment in our favor as a gain contingency and has
not reflected these amounts in our financial statements.
In 2003, our quarterly financial information was restated for $6.1 million of previously
recognized revenue related primarily to work performed on undocumented or unapproved change orders
and other matters disputed by our customers. The revenue restatement was related to restated Canada
revenue and projects performed for ABB Power (ABB), MSE Power Systems, and the University of
California. Recovery of this revenue and related revenue from subsequent periods not restated is
now the subject of several independent collection actions. We provided services to ABB Power, in
the amount $2 million. In June 2006, prior to arbitration on a claim brought by MasTec for payments
due from ABB, we settled all differences between MasTec and ABB in exchange for partial payment to
MasTec from ABB. We provided services to MSE Power Systems on five separate projects in
Pennsylvania, New York and Georgia, with invoices in excess of $8 million now in dispute. We have
recovered $1.3 million from MSE in settlement on three of these projects and expect to arbitrate
the balance of this dispute, related to two Pennsylvania projects. The arbitration is expected
during 2007. We experienced cost overruns in excess of $2.7 million in completing a networking
contract for the University of California as the result of a subcontractors refusal to complete a
fixed price contract. An action has been brought
20
against that subcontractor to recover cost overruns. Judgment in our favor in the amount of $1.9
million was awarded after a jury verdict rendered January 24, 2006. This judgment is currently in
collection.
In December 2004, we brought an action against NextiraOne Federal in the Federal Court in
Eastern District of Virginia, to recover payment for services rendered in connection with a federal
Department of Defense project on a network wiring contract. Our network services are now a
discontinued operation. NextiraOne counterclaimed for offsets and remediation. On May 5, 2006, the
court ruled that we failed to establish an entitlement to recover damages for contract work done,
and that NextiraOne Federal failed to establish an entitlement to recover costs of alleged offsets
and costs of remediation. Neither party obtained the relief sought. We believe the ruling is an
error, and we have sought remedy on appeal. We may be unable to obtain relief without additional
expenses.
We are also a party to other pending legal proceedings arising in the normal course of
business. While complete assurance cannot be given as to the outcome of any legal claims,
management believes that any financial impact would not be material to its results of operations,
financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrants Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Market Information. Our common stock is listed on the New York Stock Exchange under the
symbol MTZ. The following table sets forth, for the quarters indicated, the high and low sale
prices of our common stock, as reported by the New York Stock Exchange.
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Year Ended December 31, |
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2006 |
|
2005 |
|
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$ |
14.32 |
|
|
$ |
10.20 |
|
|
$ |
10.20 |
|
|
$ |
7.87 |
|
Second Quarter |
|
$ |
14.75 |
|
|
$ |
11.54 |
|
|
$ |
9.40 |
|
|
$ |
6.56 |
|
Third Quarter |
|
$ |
13.75 |
|
|
$ |
9.88 |
|
|
$ |
11.95 |
|
|
$ |
8.66 |
|
Fourth Quarter |
|
$ |
12.52 |
|
|
$ |
9.88 |
|
|
$ |
11.39 |
|
|
$ |
9.24 |
|
Holders. As of March 5, 2007, there were 2,027 shareholders of record of our common stock.
Dividends. We have never paid any cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. Instead we intend to retain any future earnings for
reinvestment. Our board of directors will make any future determination as to the payment of
dividends at its discretion, and its determination will depend upon our operating results,
financial condition and capital requirements, general business conditions and such other factors
that the board of directors considers relevant. In addition, our credit agreements prohibit us from
paying cash dividends or making other distributions on our common stock without the prior consent
of the lenders. See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition, Liquidity and Capital Resources.
Purchases of MasTec Stock. We did not repurchase any shares of our common stock during the
fourth quarter of 2006.
Item 6. Selected Financial Data
The following table states our selected consolidated financial data, which has been derived
from our audited consolidated financial statements. The table reflects our consolidated results of
operations for the periods indicated. The following selected financial data should be read together
with our consolidated financial statements and notes thereto as well as Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
21
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Year Ended December 31, |
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2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(In thousands, except per share amounts) |
Statement of Operations Data |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
|
$ |
712,212 |
|
|
$ |
656,985 |
|
Costs of revenue, excluding depreciation |
|
$ |
813,406 |
|
|
$ |
731,504 |
|
|
$ |
719,282 |
|
|
$ |
629,290 |
|
|
$ |
586,854 |
|
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle |
|
$ |
38,915 |
|
|
$ |
18,604 |
|
|
$ |
(17,743 |
) |
|
$ |
(20,791 |
) |
|
$ |
(110,978 |
) |
Income (loss) from continuing operations |
|
$ |
38,915 |
|
|
$ |
18,604 |
|
|
$ |
(17,743 |
) |
|
$ |
(20,791 |
) |
|
$ |
(123,574 |
) |
Loss from discontinued operations, net of tax |
|
$ |
(89,263 |
) |
|
$ |
(33,220 |
) |
|
$ |
(31,694 |
) |
|
$ |
(31,508 |
) |
|
$ |
(12,982 |
) |
Net loss |
|
$ |
(50,348 |
)(3) |
|
$ |
(14,616 |
)(2) |
|
$ |
(49,437 |
)(2) |
|
$ |
(52,299 |
) |
|
$ |
(136,556 |
)(1) |
Basic net (loss) income per share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
0.61 |
|
|
$ |
0.38 |
|
|
$ |
(0.37 |
) |
|
$ |
(0.43 |
) |
|
$ |
(2.58 |
) |
Discontinued Operations |
|
$ |
(1.40 |
) |
|
$ |
(0.68 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.66 |
) |
|
$ |
(0.27 |
) |
Total basic net loss per share |
|
$ |
(0.79 |
) |
|
$ |
(0.30 |
) |
|
$ |
(1.02 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.85 |
) |
Diluted net (loss) income per share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
0.60 |
|
|
$ |
0.37 |
|
|
$ |
(0.37 |
) |
|
$ |
(0.43 |
) |
|
$ |
(2.58 |
) |
Discontinued Operations |
|
$ |
(1.37 |
) |
|
$ |
(0.66 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.66 |
) |
|
$ |
(0.27 |
) |
Total diluted net loss per share |
|
$ |
(0.77 |
) |
|
$ |
(0.29 |
) |
|
$ |
(1.02 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.85 |
) |
Basic net loss per share before cumulative
effect of change in accounting principle |
|
$ |
(0.79 |
) |
|
$ |
(0.30 |
) |
|
$ |
(1.02 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.58 |
) |
Diluted net loss per share before cumulative
effect of change in accounting principle |
|
$ |
(0.77 |
) |
|
$ |
(0.29 |
) |
|
$ |
(1.02 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.58 |
) |
|
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|
|
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|
|
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December 31, |
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2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(In thousands) |
Balance Sheet Data |
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|
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|
|
Working capital |
|
$ |
164,042 |
|
|
$ |
135,069 |
|
|
$ |
134,463 |
|
|
$ |
113,360 |
|
|
$ |
139,154 |
|
Property and equipment, net (4) (5) |
|
$ |
61,400 |
|
|
$ |
48,027 |
|
|
$ |
62,966 |
|
|
$ |
85,832 |
|
|
$ |
118,475 |
|
Total assets (5) |
|
$ |
646,113 |
|
|
$ |
584,164 |
|
|
$ |
600,523 |
|
|
$ |
628,263 |
|
|
$ |
622,681 |
|
Total debt (5) |
|
$ |
130,176 |
|
|
$ |
200,370 |
|
|
$ |
196,158 |
|
|
$ |
201,665 |
|
|
$ |
198,642 |
|
Total shareholders equity |
|
$ |
304,711 |
|
|
$ |
179,603 |
|
|
$ |
191,153 |
|
|
$ |
215,818 |
|
|
$ |
263,010 |
|
|
|
|
(1) |
|
Includes charges of $12.2 million to reduce the carrying amount of certain assets held for
sale and in use, and non-core assets, restructuring charges of $7.8 million, impairment of
goodwill of $79.7 million, and provisions for bad debt totaling $14.8 million. |
|
(2) |
|
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Comparison of Years Ended December 31, 2005 and 2004 Revenue, Costs of Revenue
and General and Administrative Expenses for discussion of factors impacting our net loss for
2005 and 2004. |
|
(3) |
|
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Comparison of Years Ended December 31, 2006 and 2005 Revenue, Costs of Revenue
and General and Administrative Expenses for discussion of factors impacting our net loss for
2006. |
|
(4) |
|
During 2005, 2004 and 2003, we reduced capital expenditures for long-lived assets and placed
greater reliance on operating leases to meet our equipment needs. |
|
(5) |
|
As of December 31, 2003 and 2002, these amounts include the assets and liabilities of
discontinued operations of the state Department of Transportation projects, as we were unable
to segregate such assets during those years. As of December 31, 2005 and 2004, the assets and
liabilities of the state Department of Transportation projects have been reclassified to
long-term assets held for sale and long-term liabilities related to assets held for sale and
are not included. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our historical consolidated financial statements and related
notes thereto in Item 8. Financial Statements and Supplementary Data. The
discussion below contains forward-looking statements that are based upon our current
expectations and are subject to uncertainty and
22
changes in circumstances. Actual results may differ
materially from these expectations due to inaccurate assumptions and known or unknown risks and
uncertainties, including those identified in Cautionary Statement Regarding Forward-Looking
Statements and Item 1A. Risk Factors.
Overview
We are a leading specialty contractor operating mainly throughout the United States and across
a range of industries. Our core activities are the building, installation, maintenance and upgrade
of communications and utility infrastructure. Our primary customers are in the following
industries: communications (including satellite television and cable television), utilities and
governments. We provide similar infrastructure services across the industries we serve. Our
customers rely on us to build and maintain infrastructure and networks that are critical to their
delivery of voice, video and data communications, electricity and other energy resources.
We, or our predecessor companies, have been in business for over 70 years. We offer all of our
services under the MasTec® service mark and operate through a network of approximately 200
locations and 9,260 employees as of December 31, 2006. Providing services to the communication
industries, utility industries and government sectors, we have consistently ranked among the top
ten specialty contractors by Engineering News-Record.
Recent Developments
Sale of Substantially All of Our State Department of Transportation Related Projects and Assets
On December 31, 2005, the executive committee of our board of directors voted to sell
substantially all of our state Department of Transportation related projects and assets. The
decision to sell was made after evaluation of, among other things, short and long-term prospects.
Due to this decision, the projects that were held for sale have been accounted for as discontinued
operations for all periods presented in this Annual Report on Form 10-K. On February 14, 2007, we
sold the state Department of Transportation related projects and underlying net assets. We have
agreed to keep certain assets and liabilities related to the state Department of Transportation
related projects. See Item 1A. Risk Factors We have
agreed to keep certain assets and liabilities related
to the state Department of Transportation related projects that were sold in February 2007. The
sales price of $1.0 million was paid at closing. In addition, the buyer is required to pay us an
earn out of up to $12.0 million contingent on the future operations of the projects sold to the
third party. However, as the earn out is contingent upon the future performance of the state
Department of Transportation related projects, we may not receive any
of these earn out payments. While the buyer of the State Department
of Transportation related projects has indemnified us for all
contracts and liabilities sold, and has agreed to issue a standby
letter of credit in our favor in February 2008 to cover any remaining
exposure, if the buyer were unable to meet its contractual
obligations to a customer and the surety paid the amounts due under
the bond, the surety would seek reimbursement of such amounts from
us.
The closing was effective February 1, 2007 to the extent set forth in the purchase agreement. As of
December 31, 2006, the carrying value of the subject net assets for sale included total assets of
$18.9 million less total liabilities of $25.5 million. During the year ended December 31, 2005, we
wrote-off approximately $11.5 million in goodwill in connection with our decision to sell
substantially all of these projects and assets. We determined that this goodwill amount would not
be realized after evaluating the cash flows from the operations of these projects and assets in
light of our decisions on future operations and our decision to sell. During the year ended
December 31, 2006, we wrote-off approximately $44.5 million, calculated using the contractual sales
price for these assets, liabilities and managements estimate of closing costs. In addition, we
reviewed all projects in process in detail to ensure estimated costs to complete were accurate and
all projects with an estimated loss were properly accrued.
Issuance of $150 Million Senior Notes
On January 31, 2007, we issued $150.0 million aggregate principal amount of 7.625% senior
notes due February 2017 in a private placement. The notes are guaranteed by substantially all of
our domestic restricted subsidiaries. We have agreed to cause to become effective a registration
statement with respect to a registered offer to exchange the unregistered notes for registered
notes with substantially identical terms. If the exchange offer for the notes is not completed (or
a shelf registration is not declared effective) on or before October 31, 2007, the interest on the
notes will be increased by 0.25% per annum for the first 90-day period thereafter, and the amount
of such additional interest will increase by an additional 0.25% per annum for each subsequent
90-day period, up to a maximum of 1.0% per annum over the original interest rate on the notes. We
used approximately $121.8 million of the net proceeds from this offering to redeem all of our 7.75%
senior subordinated notes due February 2008 plus interest. We expect to use the remaining net
proceeds for working capital, possible acquisition of assets and businesses and other general
corporate purposes.
Acquisition of Remaining 51% Equity Interest
On February 6, 2007, we acquired the remaining 51% equity interest in an investment which had
been previously accounted for by the equity method because we owned 49% of the entity and had the
ability to exercise significant influence over the operational policies of the company. As a result
of our acquisition of the remaining 51% equity interest, we will consolidate the operations of this
entity with our results commencing in February 2007. In February 2007, we paid the seller $8.65
million in cash, in addition to
approximately $6.35 million, which we also paid at that time to discharge our remaining obligations
to the seller under the purchase
23
agreement for the original 49% equity interest, and issued 300,000
shares of our common stock. We have also agreed to pay the seller an earn-out through the eighth
anniversary of the closing date based on the future performance of the acquired entity. In
connection with the purchase, we entered into a service agreement with the sellers for them to
manage the business. Under certain circumstances, including a change of control of MasTec or the
entity or a termination of the service agreement under certain circumstances, the remaining
earn-out payments will be accelerated and become payable. Under certain circumstances, we may be
required to invest up to an additional $3.0 million in this entity. In connection with the
acquisition, we have agreed to file a registration statement to register for resale 200,000 shares
of the total shares issued to the seller by no later than June 1, 2007 and have agreed to use
commercially reasonable efforts to cause such registration statement to become effective.
Revenue
We provide services to our customers which are companies in the communications and utilities
industries as well as government customers.
Revenue for customers in these industries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Communications |
|
$ |
700,031 |
|
|
$ |
620,697 |
|
|
$ |
591,235 |
|
Utilities |
|
|
186,857 |
|
|
|
175,698 |
|
|
|
175,314 |
|
Government |
|
|
58,918 |
|
|
|
51,651 |
|
|
|
40,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
|
|
|
|
|
|
|
|
|
|
A significant portion of our revenue is derived from projects performed under service
agreements. Some of these agreements are billed on a time and materials basis and revenue is
recognized as the services are rendered. We also provide services under master service agreements
which are generally multi-year agreements. Certain of our master service agreements are exclusive
up to a specified dollar amount per work order for each defined geographic area. Work performed
under master service and other agreements is typically generated by work orders, each of which is
performed for a fixed fee. The majority of these services typically are of a maintenance nature and
to a lesser extent upgrade services. These master service agreements and other service agreements
are frequently awarded on a competitive bid basis, although customers are sometimes willing to
negotiate contract extensions beyond their original terms without re-bidding. Our master service
agreements and other service agreements have various terms, depending upon the nature of the
services provided and are typically subject to termination on short notice. Under our master
service and similar type service agreements, we furnish various specified units of service each for
a separate fixed price per unit of service. We recognize revenue as the related unit of service is
performed. For service agreements on a fixed fee basis, profitability will be reduced if the actual
costs to complete each unit exceed original estimates. We also immediately recognize the full
amount of any estimated loss on these fixed fee projects if the estimated costs to complete of the
remaining units for the project exceed the revenue to be received from such units.
The remainder of our work is generated pursuant to contracts for specific
installation/construction projects or jobs. For installation/construction projects, we recognize
revenue on the units-of-delivery or percentage-of-completion methods. Revenue on unit based
projects is recognized using the units-of-delivery method. Under the units-of-delivery method,
revenue is recognized as the units are completed at the contractually agreed price per unit. For
certain customers with unit based installation/construction projects, we recognize revenue after
the service is performed and the work orders are approved to ensure that collectibility is probable
from these customers. Revenue from completed work orders not collected in accordance with the
payment terms established with these customers is not recognized until collection is assured.
Revenue on non-unit based contracts is recognized using the percentage-of-completion method. Under
the percentage-of-completion method, we record revenue as work on the contract progresses. The
cumulative amount of revenue recorded on a contract at a specified point in time is that percentage
of total estimated revenue that incurred costs to date bear to estimated total contract costs.
Customers are billed with varying frequency: weekly, monthly or upon attaining specific milestones.
Such contracts generally include retainage provisions under which 2% to 15% of the contract price
is withheld from us until the work has been completed and accepted by the customer. If, as work
progresses, the projects actual costs exceed estimates, the profit recognized on revenue from that
project decreases. We recognize the full amount of any estimated loss on a contract at the time the
estimates indicate such a loss.
24
Revenue by type of contract is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Master service and other service agreements |
|
$ |
670,944 |
|
|
$ |
565,029 |
|
|
$ |
635,278 |
|
Installation/construction projects agreements |
|
|
274,862 |
|
|
|
283,017 |
|
|
|
171,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
|
|
|
|
|
|
|
|
|
|
Costs of Revenue
Our costs of revenue include the costs of providing services or completing the projects under
our contracts including operations payroll and benefits, fuel, subcontractor costs, equipment
rental, materials not provided by our customers, and insurance. Profitability will be reduced if
the actual costs to complete each unit exceed original estimates on fixed price service agreements.
We also immediately recognize the full amount of any estimated loss on fixed fee projects if
estimated costs to complete the remaining units for the project exceed the revenue to be received
from such units.
Our customers generally supply materials such as cable, conduit and telephone equipment.
Customer furnished materials are not included in revenue and cost of sales due to all materials
being purchased by the customer. The customer determines the specifications of the materials that
are to be utilized to perform installation/construction services. We are only responsible for the
performance of the installation/construction services and not the materials for any contract that
includes customer furnished materials nor do we not have any risk associated with customer
furnished materials. Our customers retain the financial and performance risk of all customer
furnished materials.
General and Administrative Expenses
General and administrative expenses include all costs of our management and administrative
personnel, provisions for bad debts, rent, utilities, travel, business development efforts and back
office administration such as financial services, insurance, administration, professional costs and
clerical and administrative overhead.
Discontinued Operations
As discussed previously in Item 1. Business in 2004 we declared each of our Brazil
subsidiary and network services operations a discontinued operation. In 2005, we declared
substantially all of our state Department of Transportation related projects and assets a
discontinued operation due to our intention to sell these projects and assets. Accordingly, all
financial information for all periods presented in this Annual Report on Form 10-K reflects these
operations as discontinued operations. See Recent developments Sale of Substantially All of Our
State Department of Transportation Related Projects and Assets and Item 1A. Risk Factors We
have agreed to keep certain liabilities related to the state Department of Transportation related
projects and assets that were sold in February 2007.
Financial Metrics
Members of our senior management team regularly review key performance metrics and the status
of operating initiatives within our business. These key performance indicators include:
|
|
|
revenue and profitability on an individual project basis; |
|
|
|
|
monthly, quarterly and annual changes in revenue on an individual project basis; |
|
|
|
|
costs of revenue, and general and administrative expenses as percentages of revenue; |
|
|
|
|
number of vehicles and equipment per employee; |
|
|
|
|
days sales outstanding; |
|
|
|
|
interest and debt service coverage ratios; |
|
|
|
|
safety results and productivity; and |
|
|
|
|
customer service metrics on an individual project basis. |
We analyze this information periodically through operating reviews which include detailed
discussions, proposed investments in new business opportunities or property and equipment and
integration and cost reduction efforts. Measuring these key performance
indicators is an important tool that our management uses to make
25
operational decisions. These
tools enable our management to make more informed, better and quicker decisions about the
allocation of costs and resources which, we believe, can help us improve our performance.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, intangible assets, reserves and accruals, impairment of assets,
income taxes, insurance reserves and litigation and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the carrying values of
assets and liabilities, that are not readily apparent from other sources. Actual results may differ
from these estimates if conditions change or if certain key assumptions used in making these
estimates ultimately prove to be materially incorrect.
We believe the following critical accounting policies involve our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue and related costs for master and other service agreements billed on a time and
materials basis are recognized as the services are rendered. There are also some master service
agreements that are billed on a fixed fee basis. Under our fixed fee master service and similar
type service agreements, we furnish various specified units of service for a separate fixed price
per unit of service. We recognize revenue as the related unit of service is performed. For service
agreements on a fixed fee basis, profitability will be reduced if the actual costs to complete each
unit exceed original estimates. We also immediately recognize the full amount of any estimated loss
on these fixed fee projects if estimated costs to complete the remaining units exceed the revenue
to be received from such units.
We recognize revenue on unit based installation/construction projects using the
units-of-delivery method. Our unit based contracts relate primarily to contracts that require the
installation or construction of specified units within an infrastructure system. Under the
units-of-delivery method, revenue is recognized at the contractually agreed upon price as the units
are completed and delivered. Our profitability will be reduced if the actual costs to complete each
unit exceed our original estimates. We are also required to immediately recognize the full amount
of any estimated loss on these projects if estimated costs to complete the remaining units for the
project exceed the revenue to be earned on such units. For certain customers with unit based
installation/construction contracts we recognize revenue after service has been performed and work
orders are approved to ensure that collectibility is probable from these customers. Revenue from
completed work orders not collected in accordance with the payment terms established with these
customers is not recognized until collection is assured.
Our non-unit based, fixed price installation/construction contracts relate primarily to
contracts that require the construction and installation of an entire infrastructure system. We
recognize revenue and related costs as work progresses on non-unit based, fixed price contracts
using the percentage-of-completion method, which relies on contract revenue and estimates of total
expected costs. We estimate total project costs and profit to be earned on each long-term,
fixed-price contract prior to commencement of work on the contract. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various stages of a contract
can be made. Under the percentage-of-completion method, we record revenue and recognize profit or
loss as work on the contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that incurred costs to date
bear to estimated total contract costs, after adjusting estimated total contract costs for the most
recent information. If, as work progresses, the actual contract costs exceed our estimates, the
profit we recognize from that contract decreases. We recognize the full amount of any estimated
loss on a contract at the time our estimates indicate such a loss.
Our customers generally supply materials such as cable, conduit and telephone equipment.
Customer furnished materials are not included in revenue and cost of sales as all materials are
purchased by the customer. The customer determines the specification of the materials that are to
be utilized to perform installation/construction services. We are only responsible for the
performance of the installation/construction services and not the materials for any contract that
includes customer furnished materials and we do not have any risk associated with customer
furnished materials. Our customers retain the financial and performance risk of all customer
furnished materials.
26
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. Management analyzes past due balances based on invoice
date, historical bad debt experience, customer concentrations, customer credit-worthiness, customer
financial condition and credit reports, the availability of mechanics and other liens, the
existence of payment bonds and other sources of payment, and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. We review the adequacy of reserves
for doubtful accounts on a quarterly basis. If our estimates of the collectibility of accounts
receivable are incorrect, adjustments to the allowance for doubtful accounts may be required, which
could reduce our profitability.
Our estimates for our allowance for doubtful accounts are subject to significant change during
times of economic weakness or uncertainty in either the overall U.S. economy or the industries we
serve, and our loss experience has increased during such times.
We recorded total provisions against earnings for doubtful accounts of $10.0 million, $4.9
million, and $5.1 million for the years ended December 31, 2006, 2005 and 2004, respectively, of
which $8.1 million, $3.3 million and $0.6 million, respectively, is included, in loss from
discontinued operations in our consolidated statements of operations.
Inventories
Inventories consist of materials and supplies for construction projects, and are typically
purchased on a project-by-project basis. Inventories are valued at the lower of cost (using the
specific identification method) or market. Construction projects are completed pursuant to customer
specifications. The loss of the customer or the cancellation of the project could result in an
impairment of the value of materials purchased for that customer or project. Technological or
market changes can also render certain materials obsolete. Allowances for inventory obsolescence
are determined based upon the specific facts and circumstances for each project and market
conditions. During 2006, 2005 and 2004, we recorded inventory
obsolescence provisions of $0.6
million, $1.0 million and $0.9 million, respectively, of
which
$0.6 million, $0.3 million and $0.9
million, respectively, are included in loss from discontinued operations in the consolidated
statements of operations.
Depreciation and Amortization
We depreciate our property and equipment over estimated useful lives using the straight-line
method. We periodically review changes in technology and industry conditions, asset retirement
activity and salvage values to determine adjustments to estimated remaining useful lives and
depreciation rates.
Effective November 30, 2002, we implemented the results of a review of the estimated service
lives of our property and equipment in use. Useful lives were adjusted to reflect the extended use
of much of our equipment. In addition, the adjustments made the estimated useful lives for similar
equipment consistent among all operating units. Depreciation expense was reduced by $5.8 million
for the years ended December 31, 2004 from the amount of expense which would had been reported
using the previous useful lives as a result of the change of estimate. This amount is included in
part in depreciation expense and in part in loss from discontinued operations in the consolidated
statements of operations. During 2002, we also implemented a plan to improve profitability by more
effectively utilizing our fleet. Under the plan, we began disposing of excess or underutilized
assets. During 2006, 2005 and 2004, we continued to dispose of excess assets and increased our
reliance on operating leases to finance equipment needs. In addition,
we have entered into several capital leases to finance the
acquisition of various equipment and machinery.
Valuation of Equity Investments
As of December 31, 2006, we had one investment which we account for by the equity method
because we owned 49% of the entity and we had the ability to exercise significant influence over
the operational policies of the limited liability company. Our share of the earnings or losses in
this investment is included in other income, net, in our consolidated statements of operations. As
of December 31, 2006, our investment exceeded the net equity of such investment and accordingly the
excess is considered to be equity goodwill. We periodically evaluate the equity goodwill for
impairment under Accounting Principles Board No. 18, The Equity Method of Accounting for
Investments in Common Stock, as amended. We recognized approximately $5.8 million of investment
income in the year ended December 31, 2006 related to this investment.
Valuation of Long-Lived Assets
We review long-lived assets, consisting primarily of property and equipment and intangible
assets with finite lives, for impairment in accordance with SFAS No. 144. In analyzing potential
impairment, we use projections of future discounted cash flows
from the assets. These projections are based on our view of growth rates for the related
business, anticipated future economic
27
conditions and the appropriate discount rates relative to
risk and estimates of residual values. We believe that our estimates are consistent with
assumptions that marketplace participants would use in their estimates of fair value. In addition,
due to the disposal of our state Department of Transportation projects and assets, we evaluated
long-lived assets for these operations under SFAS No. 144 based on projections of future discounted
cash flows from these assets in 2006 and an estimated selling price for the assets held for sale.
As discussed further in Note 19 to our consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data, on February 14, 2007, we sold the state Department of
Transportation related projects and underlying net assets. The closing was effective February 1,
2007 to the extent set forth in the purchase agreement.
Valuation of Goodwill and Intangible Assets
In accordance with SFAS No. 142, we conduct, on at least an annual basis, a review of our
reporting units to determine whether the carrying values of goodwill exceed the fair market value
using a discounted cash flow methodology for each unit. Should this be the case, the value of our
goodwill may be impaired and written down.
In connection with the disposition of our Brazil subsidiary, we wrote off goodwill associated
with this reporting entity in the amount of $12.3 million in the year ended December 31, 2004.
In connection with the commitment to sell substantially all of our state Department of
Transportation related projects and assets, we wrote off goodwill associated with this reporting
entity in the amount of $11.5 million during the year ended December 31, 2005.
We could record additional impairment losses if, in the future, profitability and cash flows
of our reporting entities decline to the point where the carrying value of those units exceed their
market value. See Item 1A. Risk Factors We may incur goodwill impairment charges in our
reporting entities which could harm our profitability.
Insurance Reserves
We presently maintain insurance policies subject to per claim deductibles of $2 million for
our workers compensation policy, $2 million for our general liability policy and $3 million for
our automobile liability policy. We have excess umbrella coverages up to $100 million per claim and
in the aggregate. We also maintain an insurance policy with respect to employee group health claims
subject to per claim deductibles of $300,000 after satisfying an annual deductible of $100,000. We
actuarially determine any liabilities for unpaid claims and associated expenses, including incurred
but not reported losses, and reflect those liabilities in our balance sheet as other current and
non-current liabilities. The determination of such claims and expenses and the appropriateness of
the related liability is reviewed and updated quarterly. However, insurance liabilities are
difficult to assess and estimate due to the many relevant factors, the effects of which are often
unknown, including the severity of an injury, the determination of our liability in proportion to
other parties, the number of incidents not reported and the effectiveness of our safety program. We
are working with our insurance carrier to resolve claims more quickly in an effort to reduce our
exposure. We are also attempting to accelerate the claims process where possible so that amounts
incurred can be reported rather than estimated. In addition, known amounts for claims that are in
the process of being settled, but have been paid in periods subsequent to those being reported, are
booked in the reporting period. Our accruals are based upon known facts, historical trends and our
reasonable estimate of future expenses and we believe such accruals to be adequate. If we do not
accurately estimate the losses resulting from these claims, we may experience losses in excess of
our estimated liability, which may reduce our future profitability.
We are required to periodically post letters of credit and provide cash collateral to our
insurance carriers related to our insurance programs. Such letters of credit amounted to $66.2
million at December 31, 2006 and cash collateral posted amounted to $6.6 million at December 31,
2006. The 2006 decrease in cash collateral for our insurance programs is related to a reduction of
collateral provided to the insurance carrier in exchange for an increase in
letters of credit issued to our insurance carrier. We also received a $1.1 million reduction in
cash collateral in January 2006 for prior year insurance programs. These reductions were based on
fewer claims remaining from these prior plan years. We may be required to post additional
collateral in the future which may reduce our liquidity, or pay increased insurance premiums, which
could decrease our profitability as well as reduce our availability under our revolving credit
facility. See Risk Factors Increases in our insurance premiums or collateral requirements could
significantly reduce our profitability, liquidity and credit facility availability.
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. We estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our tax exposure together with assessing temporary
differences resulting from differing treatment of
items, such as deferred revenue, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which
28
are included within our consolidated balance sheet. The
recording of a net deferred tax asset assumes the realization of such asset in the future.
Otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value.
We consider future pretax income and ongoing prudent and feasible tax planning strategies in
assessing the need for such a valuation allowance. In the event that we determine that we may not
be able to realize all or part of the net deferred tax asset in the future, a valuation allowance
for the deferred tax asset is charged against income in the period such determination is made.
As
a result of our operating losses, we have recorded valuation
allowances aggregating $49.2
million and $33.9 million as of December 31, 2006 and 2005, respectively, to reduce certain of our
net deferred federal, foreign and state tax assets to their estimated net realizable value. We
anticipate that we will generate sufficient pretax income in the future to realize our remaining
deferred tax assets. In the event that our future pretax operating income is insufficient for us to
use our deferred tax assets, we have based our determination that the deferred tax assets are still
realizable based on feasible tax planning strategies that are available to us involving the sale of
one or more of our operations. At December 31, 2006, we have
approximately $179.7 million of net
operating loss carryforwards for U.S. federal income tax purposes that expire beginning in 2022. We
also have net operating loss carryforwards for U.S. state and local purposes that expire from 2007
to 2026. We have unrealized excess tax benefit of approximately $2.6 million, that when realized,
will increase capital surplus. Additionally, we have approximately $6.6 million of net operating
loss carryforwards for Canadian income tax purposes that expire beginning in 2011.
Litigation and Contingencies
Litigation and contingencies are reflected in our consolidated financial statements based on
our assessments, along with legal counsel, of the expected outcome of such litigation or expected
resolution of such contingency. An accrual is made when the loss of such contingency is probable
and estimable. If the final outcome of such litigation and contingencies differs significantly from
our current expectations, such outcome could result in a charge to earnings. See Part I. Item 3.
Legal Proceedings for discussions of current litigation.
2007 Outlook
We believe we have increased market opportunities in 2007 in five areas:
Fiber to the Home (FTTH) we believe this market will continue to grow in 2007 and that the
Regional Bell Operating Companies, or RBOCs, will continue to enhance their infrastructures which
could increase the demand for our services.
Satellite Install to the Home the increased number of DIRECTV® subscribers
provides us with the opportunity to provide maintenance services for the existing customers and
opportunities to provide similar, or unrelated, installation services for new customers.
Federal Market for Telecommunications Upgrades the federal government is currently
upgrading, or has planned to upgrade, many of its telecommunications networks and systems for
military bases, ports, borders and security systems. We are making a concerted effort to market to
major government contracting firms.
Local Maintenance Work for Electrical Grid Upgrades we believe market and other conditions
are making it increasingly attractive for utilities to outsource their maintenance activities and
we are marketing our services for additional transmission, distribution and substation work.
RBOC Maintenance Agreements we serve RBOCs in states that are currently experiencing
increases in population such as Florida, Georgia, Nevada, North Carolina, South Carolina, and
Texas. We believe that population increases in these states could increase the demand for our
services.
Our 2007 results could be adversely affected by the matters discussed in the Cautionary
Statement Regarding Forward-looking Statements and Item 1A. Risk Factors, Item 3. Legal
Proceedings of this Annual Report on Form 10-K.
Comparisons of Fiscal Year Results
The components of our consolidated statements of operations, expressed as a percentage of
revenue, are set forth in the following table:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of revenue, excluding depreciation |
|
|
86.0 |
|
|
|
86.3 |
|
|
|
89.1 |
|
Depreciation |
|
|
1.6 |
|
|
|
1.9 |
|
|
|
1.8 |
|
General and administrative expenses |
|
|
7.9 |
|
|
|
7.5 |
|
|
|
8.9 |
|
Interest expense, net of interest income |
|
|
1.1 |
|
|
|
2.3 |
|
|
|
2.4 |
|
Other income, net |
|
|
0.9 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before benefit for income
taxes and minority interest |
|
|
4.3 |
|
|
|
2.4 |
|
|
|
(2.1 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
4.1 |
% |
|
|
2.2 |
% |
|
|
(2.2 |
)% |
Loss from discontinued operations |
|
|
(9.4 |
) |
|
|
(3.9 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(5.3 |
)% |
|
|
(1.7 |
)% |
|
|
(6.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion and analysis of our results of operations should be read in
conjunction with our consolidated financial statements and notes thereto in Item 8 of this Form
10-K.
Comparison of Years Ended December 31, 2006 and 2005
Revenue. Our revenue was $945.8 million for the year ended December 31, 2006, compared to
$848.0 million for the same period in 2005, representing an increase of $97.8 million or 11.5%.
This increase was due primarily to the increased revenue of approximately $83.5 million
from DIRECTV®, driven by a greater number of installations and larger market share resulting from the
DSSI acquisition, higher revenue of $3.3 million from BellSouth (now AT&T) mostly attributable to
work we were awarded for central office installations and an increase in general business
activities from other customers during 2006 compared to 2005. These increases in revenue were
partially offset by a decrease in revenue of $9.6 million from Verizon mostly attributed to the
timing of generating work orders. During the year ended December 31, 2005, fiber-to-home
installations for Verizon had commenced and work orders were high whereas the installations
normalized during 2006. In addition, during 2005, we experienced an increase in revenue related to
storm restoration in the Gulf Coast and Southern Florida, while we did not have any significant
revenue from storm restoration during 2006.
Costs of Revenue. Our costs of revenue were $813.4 million or 86.0% of revenue for the year
ended December 31, 2006, compared to $731.5 million or 86.3% of revenue for the same period in 2005
reflecting a slight improvement in margins. The improvement in margins was a result of decreasing
subcontractor costs as a percentage of revenue with operational payroll only slightly increasing as
a percentage of revenue. In 2006, we reduced the use of subcontractors and did not hire additional
employees at the same rate as in 2005. The decrease in costs of revenue as a percentage of revenue
was partially offset by rising fuel costs. Fuel costs, as a percentage of revenue, increased from
3.1% in the year ended December 31, 2005 to 3.6% in the year ended December 31, 2006.
Depreciation. Depreciation was $14.7 million for the year ended December 31, 2006, compared to
$16.3 million for the same period in 2005, representing a decrease of $1.7 million. The decrease in
depreciation expense in 2006 compared to 2005 was primarily due to our continued increase in use of
operating leases for fleet requirements. We also continued to dispose of excess equipment. However,
depreciation expense is expected to increase in the future as a result of several capital lease
agreements we entered into during 2006 to finance various machinery and equipment totaling $8.6
million.
General
and administrative. General and administrative expenses were $74.6 million or 7.9% of
revenue for the year ended December 31, 2006, compared to $64.3 million or 7.5% of revenue for the
same period in 2005, representing an increase of $10.3 million
or 16.1%. The increase in general
and administrative expenses was mostly attributable to an increase in non-cash stock compensation
expense and increases in legal fees. Non-cash stock compensation expense was $7.4 million or 0.8%
of revenue during the year ended December 31, 2006, compared to $0.6 million during 2005
representing an increase of $6.8 million. Effective January 1, 2006, we account for stock-based
award plans in accordance with SFAS 123R (revised 2004), Shared Based Payment, which requires us
to expense over the vesting period the fair-value of stock options and other equity-based
compensation issued to employees. In accordance with SFAS 123R, we expensed $6.0 million during the
year ended December 31, 2006 related to unvested stock options and restricted stock awards. In
addition, we recorded approximately $1.4 million related to restricted stock options and restricted
stock awards during the year ended December 31, 2006. For the year ended December 31, 2005, we
expensed $0.6 million related to restricted stock awards. Had we adopted SFAS 123R in 2005, we
would have been required to expense $6.9 million during the year ended December 31, 2005. See the
pro forma compensation expense disclosure in Note 1 to our audited consolidated financial
statements. The increase in general and administrative expenses was also due to additional
legal expenses of approximately $5.2
30
million during the year ended December 31, 2006 compared to
the same period in 2005. These increases in general and administrative expenses were partially
offset by a decrease in insurance expense. The reduction in insurance expense was a result of
improved claims and loss history during 2006, as well as a reduction in our insurance reserve based
on a change to the discount factor used for estimating actuarial insurance reserves. The discount
factor was changed from 3.5% to 5.2% to reflect current market conditions and to use a discount
factor more in line with the market interest rate we receive on our investments.
Interest expense, net. Interest expense, net of interest income was $10.0 million or 1.1% of
revenue for the year ended December 31, 2006 compared to $19.2 million or 2.3% of revenue for the
same period in 2005 representing a decrease of $9.2 million or 47.9%. The decrease was due to lower
interest rates charged during 2006 under our Credit Facility and the 2006 Amendment, as well as a
reduction in interest expense due to our redemption of $75.0 million principal of our 7.75% senior
subordinated notes on March 2, 2006. In addition, the decrease in interest expense, net, was due to
the higher interest income we earned during 2006 as a result of investing the remaining net
proceeds from our January 2006 equity offering and higher interest rates earned on our invested
funds. We expect to incur additional interest expense in future periods as a result of the issuance
of our $150.0 million 7.625% senior notes during early 2007.
Other income net. Other income was $8.1 million or 0.9% of revenue for the year ended
December 31, 2006, compared to $3.6 million or 0.4% of revenue for year ended December 31, 2005,
representing an increase of $4.5 million. The increase mainly relates to income earned in 2006 of
approximately $5.8 million associated with our equity investment in a limited liability company
compared to $0.3 million recognized during 2005. On February 6, 2007, we acquired the remaining 51%
equity interest of this company. As a result, commencing in February 2007, we will consolidate the
results of operations of the acquired entity with our operations. This increase in
other income was partially offset by a decrease in the net gains we recorded related to sales of fixed assets in the year ended December 31, 2006. Net gain on the sale of fixed assets was approximately $2.0 million during the year ended December 31, 2006 compared to approximately $2.8 million of net gains in the year ended December 31, 2005.
Benefit for income taxes. For 2006 and 2005, our effective tax rates were 0%. Our balance
sheet as of December 31, 2006 and 2005 includes a net deferred tax asset of $57.0 million and $56.8
million, respectively, net of valuation allowance. The realization of this net deferred tax asset
is dependent on our ability to generate future pretax income. We anticipate that we will generate
sufficient pretax income in the future to realize a portion of our net deferred tax asset relating
to federal income taxes. In making this assessment, we have considered our projected future pretax
income to realize our remaining deferred tax assets. In the event that our future pretax income is
insufficient for us to use our deferred tax assets, we believe that the deferred tax assets are
still realizable based on prudent and feasible tax planning strategies available to us involving
the sale of one or more of our operations. However, these tax planning strategies may not be viable
for the purpose of realizing all of the various income tax components of our net deferred tax
asset. Accordingly, we recorded an addition to our valuation
allowance of $15.3 million in 2006 to
reduce certain of our net deferred federal, foreign and state tax assets at December 31, 2006, to
their estimated net realizable value of $57.0 million.
Minority interest. Minority interest for GlobeTec Construction, LLC, in which we own a 51%
stake, resulted in a charge of $2.3 million for the year ended December 31, 2006, compared to a
charge of $1.7 million of minority interest for the same period in 2005, representing an increase
of $0.6 million. GlobeTec experienced an increase in business profits during 2006 compared to
2005, resulting in an increase in minority interest charge for 2006.
Discontinued operations. The loss from discontinued operations which includes our Brazilian
and network services operations, as well as our operations of the state Department of
Transportation related projects and assets, was $89.3 million or 9.4% of revenue for the year ended
December 31, 2006 compared to $33.2 million or 3.9% of revenue in year ended December 31, 2005. The
net loss on our state Department of Transportation related projects and assets amounted to $88.8
million for the year ended December 31, 2006 compared to a net loss of $31.5 million in the year
ended December 31, 2005. The net loss for these state Department of Transportation projects
increased due to impairment charges, lower revenue, and operational cost overruns and
inefficiencies on certain existing projects. During the second quarter of 2006, we determined
there were sufficient indicators of impairment to the carrying value of the underlying net assets
of the state Department of Transportation projects and assets. As a result, a $20.8 million
non-cash impairment charge was recorded in the second quarter of 2006 for the estimated selling
price and disposition of the state Department of Transportation projects and these assets. All
impairment charges are included in discontinued operations. On November 9, 2006, we entered into
an agreement to sell the state Department of Transportation related projects and assets to a third
party. The contractual selling price in that agreement was less than we estimated in the impairment
charge recorded in the quarter ended June 30, 2006. As a result, a non-cash impairment charge was
recorded during the quarter ended September 30, 2006 of approximately $13.7 million based on the
contractual selling price and our estimated closing costs. Effective February 1, 2007, we sold the
state Department of Transportation related projects and net assets for $1.0 million in cash paid at
closing, in addition to an earn out contingent on future operations of the projects sold, up to a
maximum of $12.0 million. As a result, an additional impairment charge of $10.0 million was
recorded during the quarter ended December 31, 2006. In addition to the impairment charges, the
loss during the year ended December 31, 2006 as compared to the year ended December 31, 2005
included increased legal expenses of approximately $1.9 million and bad debt expense of
approximately $4.8 million. In addition, we had increased operating expenses
related to stock compensation expense of $0.2 million related to a terminated executive,
duplication of back-office functions in order
31
to ensure an easier transition and moving costs
related to the consolidation of office space. The net loss for our Brazilian operations for the
year ended December 31, 2006 was approximately $0.1 million and was attributable to legal fees
related to the Brazilian operations bankruptcy proceedings. The net loss for our network services
operations decreased to approximately $0.3 million for the year ended December 31, 2006 from a net
loss of $1.7 million in the year ended December 31, 2005 as a result of the winding down of the
network services operations. The loss for network services operations in the year ended December
31, 2006 is mostly attributable to personnel and legal costs in winding down the operations.
Comparison of Years ended December 31, 2005 and 2004
Revenue. Our revenue was $848.0 million for the year ended December 31, 2005, compared to
$807.2 million for the same period in 2004, representing an increase of $40.8 million or 5.1%. This
increase was due primarily to the increased revenue of approximately $73.6 million received from
DIRECTV®, increased revenue of $40.0 million from Verizon, including fiber-to-the-home
installations which commenced towards the end of 2004 and an increase in revenue of $30.3 million
from BellSouth mostly attributed to work we were awarded for central office installations. We also
experienced an increase in general business activity throughout 2005 compared to 2004 and had an
increased amount of revenue related to storm restoration work in the Gulf Coast and Southern
Florida. These increases in revenue were partially offset by a significant decrease of $103.9
million in upgrade work for Comcast as they completed a major upgrade investment cycle. In the year
ended December 31, 2004, the Comcast projects were still operational.
Costs of Revenue. Our costs of revenue were $731.5 million or 86.3% of revenue for the year
ended December 31, 2005, compared to $719.3 million or 89.1% of revenue for the same period in 2004
reflecting an improvement in margins. The improvement in margins was a result of decreasing
subcontractor costs from our two largest customers with operational payroll staying consistent. In
2005, we reduced the use of subcontractors and did not have to hire additional employees at the
same rate. In addition, cost of sales decreased due to a reduction in our insurance expense. In the
year ended December 31, 2004, insurance reserves and expenses in cost of sales were higher by $8.0
million mainly because there were increased claims and loss history in 2004 which resulted in an
adjustment to our actuarial assumptions. No such adjustment was needed in 2005. Our insurance
trends in 2005 also decreased from 2004 which also contributed to the decrease in insurance expense
from 2005 to 2004. There was also a decrease in cost of sales as a percentage of revenue due to the
company concentrating on improving overall margins and becoming more efficient throughout 2005. The
decrease in costs of revenue as a percentage of revenue was partially offset by rising fuel costs
and an increase in lease costs. Fuel costs, as a percentage of revenue, increased from 2.3% in the
year ended December 31, 2004 to 3.1% in the year ended December 31, 2005. The increase was a direct
result of the rising costs for fuel in the last few months of 2005. Lease costs, as a percentage of
revenue, increased from 2.5% in the year ended December 31, 2004 to 3.3% in the year ended December
31, 2005. The increase was due to leasing more on road and off road vehicles instead of purchasing
these vehicles.
Depreciation. Depreciation was $16.3 million for the year ended December 31, 2005, compared to
$14.9 million for the same period in 2004, representing an increase of $1.4 million. In the year
ended December 31, 2004, depreciation expense was reduced by $5.8 million related to the change in
estimate in useful lives that occurred in November 30, 2002. The increase in depreciation expense
in 2005 compared to 2004 was partially offset by our continued reduction of capital expenditures by
entering into operating leases for fleet requirements. We also continued to dispose of excess
equipment.
General and administrative. General and administrative expenses were $64.3 million or 7.5% of
revenue for the year ended December 31, 2005, compared to $71.5 million or 8.9% of revenue for the
same period in 2004, representing a decrease of $7.2 million or 10.1%. The decrease in general and
administrative expenses was mostly attributed to a decrease in professional and legal fees of $7.0
million, a decrease in insurance expense of $2.2 million, a decrease in provision for bad debts of
$2.8 million and $0.1 million decrease in non-cash stock option and restricted stock compensation
expense. The professional fees incurred in year ended December 31, 2004 were related to our annual
audit, fees to a third party in assisting us with Sarbanes-Oxley compliance and legal fees related
to our defense in various litigation matters. These fees substantially decreased in the year ended
December 31, 2005 due to performing our Sarbanes-Oxley testing and compliance internally as well as
decreasing outside legal fees. In addition, general and administrative expenses decreased due to
reduction of insurance expense in 2005. There were increased claims and loss history which resulted
in an adjustment to our actuarial assumptions and additional charges in general and administrative
of $2.2 million in 2004. No such increase was needed in 2005 as trends decreased from 2004 to 2005.
In addition, the provision for bad debts decreased by $2.8 million from 2004 to 2005 due to a lower
amount of specific provisions being recorded due to increased collection efforts and the general
provision that was booked being offset by recoveries of previously reserved receivables in the year
ended December 31, 2005. In addition, non-cash stock option and restricted stock compensation
decreased $0.1 million from the year ended December 31, 2004 to the year ended December 31, 2005.
In 2004, we recorded $0.6 million of non-cash compensation expense mostly related to the extension
of the exercise period on certain stock options held by former employees. In 2005, the non-cash
restricted stock compensation expense was approximately $0.5 million and related to the issuance of
restricted stock to directors and key employees. The stock expense is being recorded over the
vesting period. The decreases in general and administrative expenses were partially
offset by an increase in salaries, benefits, bonus expenses and other general and
administrative expenses in the amount of
32
approximately $5.0 million related to hiring additional
temporary and permanent finance and accounting professionals throughout the company towards the end
of 2004 and legal, corporate risk and information technology support personnel throughout 2005.
Interest expense, net. Interest expense, net of interest income was $19.2 million or 2.3% of
revenue for the year ended December 31, 2005 compared to $19.5 million or 2.4% of revenue for the
same period in 2004 representing a slight decrease of $0.2 million or 1.3%. The decrease was due to
borrowing less on the credit facility during 2005 than 2004.
Other income net. Other income was $3.6 million or 0.4% of revenue for the year ended December
31, 2005, compared to $601,000 or 0.1% of revenue for year ended December 31, 2004, representing an
increase of $3.0 million. The increase mainly relates to sales of fixed assets in the year ended
December 31, 2005 resulting in $2.8 million of net gains on these sales compared to approximately
$0.6 million of net losses on sales in the year ended December 31, 2004. Included in the amount for
the year ended December 31, 2005 is a gain related to a sale of property of $0.9 million. We
concurrently entered into a lease agreement with the buyer to lease the property sold. The term of
the lease is for a period of one year from October 2, 2005 to September 30, 2006. We recorded a
gain as the transaction was classified as a minor sale-leaseback due to the present value of the
rental payments being less than 10% of the propertys value. In addition, the increase in other
income is attributable to the income earned in 2005 of approximately $0.3 million associated with
our equity investment.
Benefit for income taxes. For 2004 and 2005, our effective tax rates were 0%. Our balance
sheet as of December 31, 2005 and 2004 includes a net deferred tax asset of $56.8 million, net of
valuation allowance. The realization of this net deferred tax asset is dependent on our ability to
generate future pretax income. We anticipate that we will generate sufficient pretax income in the
future to realize a portion of our net deferred tax asset relating to federal income taxes. In
making this assessment, we have considered our projected future pretax income to realize our
remaining deferred tax assets. In the event that our future pretax income is insufficient for us
to use our deferred tax assets, we have based our determination that the deferred tax assets are
still realizable based on prudent and feasible tax planning strategies available to us involving
the sale of one or more of our operations. However, these tax planning strategies do not appear
viable for the purpose of realizing all of the various income tax components of our net deferred
tax asset. Accordingly, we recorded an addition to our valuation allowance of $1.5 million in 2005
to reduce certain of our net deferred federal, foreign and state tax assets at December 31, 2005,
to their estimated net realizable value of $56.8 million.
Minority interest. Minority interest for GlobeTec Construction, LLC was $1.7 million for the
year ended December 31, 2005, compared to $0.3 million for the same period in 2004, representing an
increase of $1.4 million. We entered into this joint venture in 2004 in which we own 51%. This
subsidiary has grown in revenue and profits since inception. In the year ended December 31, 2005,
the joint venture generated an increased amount of revenue and profits due to increased business
activity and cost control initiatives.
Discontinued operations. The loss from discontinued operations was $33.2 million or 3.9% of
revenue for the year ended December 31, 2005 compared to $31.7 million or 3.9% of revenue in year
ended December 31, 2004. In the year ended December 31, 2004, we ceased performing contractual
services for customers in Brazil, abandoned all assets of our Brazil subsidiary and made a
determination to exit the Brazil market. During the year ended December 31, 2004, we wrote off
approximately $12.3 million in goodwill and the net investment in the Brazil subsidiary of
approximately $6.8 million which consisted of the accumulated foreign currency translation loss of
$21.3 million less a deficit in assets of $14.5 million. The net loss for the year ended December
31, 2004 of our Brazil subsidiary was $20.2 million. For the year ended December 31, 2005, our
Brazil subsidiary had no activity as the entity is in the process of liquidation. The net loss for
our network services operations was $1.7 million and $3.0 million for the years ended December 31,
2005 and 2004, respectively. The net loss in the year ended December 31, 2005 includes an
approximately $0.6 million, net of tax, loss on the sale of the operations. In May 2005, we sold
the operations for approximately $0.2 million consisting of cash in the amount of $0.1 million and
a promissory note in the amount of approximately $0.1 million due in May 2006. The loss on the sale
resulted from additional selling costs and remaining obligations that were not assumed by the
buyer. The net loss of the network services operations decreased from the year ended December 31,
2004 as a result of its winding down of operations. These operations in the future will be limited
to finishing certain projects. In addition, there is litigation outstanding related to potential
revenue as discussed in Item 3. Legal Proceedings which is currently in the process of being
finalized. The net loss of our state Department of Transportation related projects and assets that
are classified as discontinued was $31.5 million and $8.5 million for the years ended December 31,
2005 and 2004, respectively. The net loss increased from the year ended December 31, 2004 due to
the write-off of $11.5 million in goodwill and write-down throughout 2005 of receivables, inventory
and other assets that were no longer realizable. In addition, we estimated a significant amount of
losses on certain projects in 2005 in which we immediately recognized the full amount of the
estimated loss on a contract when our estimates indicated such a loss.
Financial Condition, Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from continuing operations, borrowings under
our credit facility, capital leases, and proceeds from sales of assets and investments. In January
2006, we also raised $156.4 million in net proceeds from the sale of our
common stock in a public offering. We used $18.5 million of the net proceeds for the cash
portion of the acquisition of DSSI in
33
January 2006 and on March 2, 2006 we used $75.5 million from
this offering to redeem a portion of our outstanding 7.75% senior subordinated notes due February
2008. In February 2007, we used $15.0 million in connection with the acquisition of the remaining
51% equity interest in our previous 49% owned investment. The remaining net proceeds will be used
for working capital, other possible acquisitions of assets and businesses, organic growth and other
general corporate purposes. On January 31, 2007, we issued $150.0 million of 7.625% senior notes
due February 2017. In March 2007, we used $121.8 million of the proceeds from the senior note
offering to redeem all of our remaining 7.75% senior subordinated notes plus interest. The
remaining net proceeds from the senior note offering will be used for working capital, possible
acquisitions of assets and businesses and other general corporate purposes.
Our primary liquidity needs are for working capital, capital expenditures, insurance
collateral in the form of cash and letters of credit, equity investment and earn out obligations
and debt service. In January 2006, our lenders issued a $6.5 million letter of credit to our
insurance carrier related to our 2006 insurance plans. In November 2006, our lenders issued an
$18.0 million letter of credit to our insurance carrier related to our current insurance plans
simultaneously with the insurance carrier returning cash collateral of $18.0 million plus all
accrued interest to us. Following the January 2007 issuance of the $150.0 million aggregate
principal amount of 7.625% senior notes due 2017, our semi-annual interest payments will be
increased to approximately $5.7 million for the senior notes from approximately $4.7 million. In
addition to ordinary course working capital requirements, we estimate that we will spend between
$20.0 million to $40.0 million per year on capital expenditures. We will, however, because of our
improved financial condition, continue to evaluate lease versus buy decisions to meet our equipment
needs and based on this evaluation, our capital expenditures may increase in 2007 from this
estimate. We expect to continue to sell older vehicles and equipment as we upgrade with new
equipment and we expect to obtain proceeds from these sales. From time to time, we engage in a review and analysis of our
performance to our key strategic objectives. In connection with this process, we consider
activities including sale or divestitures of portions of our assets, operations, real estate or
other properties. Any actions taken may impact our liquidity. In
addition, in connection with certain acquisitions including the DSSI
acquisition and our acquisition of the remaining 51% equity interest
in our equity investment described below, we have agreed to pay the
sellers certain equity investment and earn out obligations which are
generally based on the future performance of the investment or
acquired business.
In 2004, we purchased a 49% interest in a limited liability company from a third party. The
purchase price for this investment was an initial amount of $3.7 million which was paid in four
quarterly installments of $925,000. As of December 31, 2006, four additional contingent quarterly
payments were expected to be made to the third party from which the interest was purchased in
addition to an additional price payment contingent on certain performance. Each contingent payment
was subject to a maximum of $1.3 million per quarter based on the level of unit sales and
profitability of the limited liability company in specified preceding quarters. In addition, a
final contingent payment of up to a maximum of $3.6 million was required based on the profitability
of the limited liability company. Five contingent quarterly payments, each of $925,000, were made
on January 10, 2006, April 10, 2006, July 1, 2006, October 10, 2006 and January 10, 2007. In March
2006, we also made an additional capital contribution of $980,000. On February 6, 2007, we acquired
the remaining 51% equity interest in this company which had been previously accounted for by the
equity method since we owned 49% of the entity and had the ability to exercise significant
influence over the operational policies of the company. As a result of our acquisition of the
remaining 51% equity interest, we will consolidate the operations of this entity with our results
commencing in February 2007. In February 2007, we paid the seller $8.65 million in cash, in
addition to approximately $6.35 million, which we also paid at that time to discharge our remaining
obligations to the seller under the purchase agreement for the original 49% equity interest, and
issued to the seller 300,000 shares of our common stock. We also agreed to pay the seller an earn
out through the eighth anniversary of the closing date based on the future performance of the
acquired entity. In connection with the purchase, we entered into a service agreement with the
sellers to manage the business. Under certain circumstances, including a change of control of
MasTec or the entity or in certain cases a termination of the service agreement, the remaining earn
out payments will be accelerated and become payable. Under certain circumstances, we may be
required to invest up to an additional $3.0 million in this entity. In connection with the
acquisition, we have agreed to file a registration statement to register for resale 200,000 shares
of the total shares issued to the seller by no later than June 1, 2007 and have agreed to use our
commercially reasonable efforts to cause such registration statement to become effective.
We need working capital to support seasonal variations in our business, primarily due to the
impact of weather conditions on external construction and maintenance work, including storm
restoration work, and the corresponding spending by our customers on their annual capital
expenditure budgets. Our business is typically slower in the first and fourth quarters of each
calendar year and stronger in the second and third quarters. Accordingly, we generally experience
seasonal working capital needs from approximately April through September to support growth in
unbilled revenue and accounts receivable, and to a lesser extent, inventory. Our billing terms are
generally net 30 to 60 days, although some contracts allow our customers to retain a portion (from
2% to 15%) of the contract amount until the contract is completed to their satisfaction. We
maintain inventory to meet the material requirements of some of our contracts. Some of our
customers pay us in advance for a portion of the materials we purchase for their projects, or allow
us to pre-bill them for materials purchases up to a specified amount.
Our vendors generally offer us payment terms ranging from 30 to 90 days. Our agreements with
subcontractors usually contain a pay-when-paid provision, whereby our payments to subcontractors
are made after we are paid by our customers.
34
We anticipate that funds generated from continuing operations, the net proceeds from the sale
of our common stock and 7.625% senior notes due 2017, borrowings under our credit facility, capital
leases and proceeds from sales of assets and investments will be sufficient to meet our working
capital requirements, anticipated capital expenditures, insurance collateral requirements, equity
investment and earn out obligations, letters of credit and debt service obligations for at least
the next twelve months.
As
of December 31, 2006, we had $164.0 million in working capital compared to $135.1 million
as of December 31, 2005. Cash and cash equivalents increased from $2.0 million at December 31, 2005
to $89.0 million at December 31, 2006 ($18.0 million of which is restricted) mainly due to the net
proceeds received from the public offering of our common stock of approximately $156.5 million
during early 2006 offset by payments made in connection with the redemption of $75.0 million
principal amount of our senior subordinated notes and the $18.5 million cash purchase price in
connection with the DSSI acquisition.
Net
cash provided by operating activities was $46.2 million for the year ended December 31,
2006, primarily as a result of our operating loss adjusted for
changes in working capital and changes in other assets, including a reduction in cash collateral
requirements provided to our insurance carrier, and non-cash items.
Non-cash items during 2006 primarily included charges for impairment
of assets of $44.5 million,
depreciation and amortization, the gain on disposal of assets accrued losses on construction
projects, provision for doubtful accounts, and minority interest. Changes in working capital and
changes in other assets provided $20.0 million in operating cash flow in 2006, including a
reduction in cash collateral requirement to our insurance carrier of $18.0 million and timing of
cash payments to vendors and cash collections from customers. Net cash used in operating
activities was $18.4 million for the year ended December 31, 2005, primarily as a result of our
operating loss,
changes in working capital, and non-cash items reduced by an increase
in cash collateral requirements provided to our insurance carrier. Non-cash items during 2005 primarily included
charges for impairment of goodwill and assets of $11.5 million,
the gain on disposal of assets,
depreciation and amortization, accrued losses on construction projects, provision for doubtful
accounts, and minority interest. Changes in working capital and changes in other assets used $42.3
million in operating cash flow in 2005, including a cash collateral requirement paid to our
insurance carrier of $18.0 million, and timing of cash payments to vendors and cash collections
from customers.
Net
cash used in investing activities was $40.8 million and $2.3 million for the years ended
December 31, 2006 and 2005, respectively. Net cash used in investing activities for the year ended
December 31, 2006 primarily related to capital expenditures in the amount of $22.3 million,
payments made in connection with the DSSI acquisition of $19.3 million and payments related to our
equity investment in the amount of $4.7 million partially offset
by $6.2 million in net proceeds
from sales of assets. Net cash used in investing activities for the year ended December 31, 2005
primarily related to capital expenditures in the amount of $6.4 million and payments related to our
equity investment in the amount of $3.7 million offset by $9.0 million in net proceeds from sales
of assets.
Net
cash provided by financing activities was $81.8 million for the year ended December 31,
2006 compared to net cash provided by financing activities of $3.3 million for the year ended
December 31, 2005. Net cash provided by financing activities for the year ended December 31, 2006
was primarily related to net proceeds from the issuance of common stock of $156.5 million and
proceeds from the issuance of common stock pursuant to stock option
exercises in the amount of $4.6
million offset by the redemption of $75.0 million principal on our senior subordinated notes and
payments of borrowings of $3.8 million. Net cash provided by financing activities for the year
ended December 31, 2005 was primarily related to net proceeds from the revolving credit facility of
$4.2 million and proceeds from the issuance of common stock pursuant to stock option exercises in
the amount of $2.6 million partially offset by payments of financing costs of $3.1 million.
Cash
used in discontinued operations for the year ended December 31, 2006 was $45.4 million.
This consisted of (i) $45.0 million in cash used in operating activities, mostly attributed to our
net loss from these operations, (ii) $0.1 million in cash used in investing activities mostly
attributed to net proceeds from sales of assets and (iii) $0.3 million in cash used in financing
activities related to capital lease payments.
We have a secured revolving credit facility which was amended and restated on May 10, 2005
increasing the maximum amount of availability from $125 million to $150 million subject to reserves
of $5.0 million, and other adjustments and restrictions. The costs related to this amendment were
$2.6 million which are being amortized over the life of the credit facility, which expires on May
10, 2010. These deferred financing costs are included in prepaid expenses and other current assets
and other assets in our consolidated balance sheet. On May 8,
2006, we were able to amend our credit facility to
reduce the interest rate margins charged on borrowings and letters of credit. This amendment also
increases the purchase price of a permitted acquisition, increases permitted receivable
concentration on certain customers, increases the permitted capital expenditures and debt baskets,
and reduces the required minimum fixed charge coverage ratio if net availability falls below $20.0
million. On November 7, 2006, we again amended our credit facility to allow us to provide our
insurer with an $18.0 million letter of credit under the credit facility simultaneously with the
insurer returning to us cash collateral of $18.0 million, plus all accrued interest. As collateral
for this letter of credit, we pledged $18.0 million in cash to our lenders under the credit
facility. This increase in outstanding letters of credit will not result in a
reduction to our net availability under the credit facility as long as sufficient cash or
collateral is granted to our lenders.
35
The amount that we can borrow at any given time is based upon a formula that takes into
account, among other things, eligible billed and unbilled accounts receivable and equipment which
can result in borrowing availability of less than the full amount of the credit facility. As of
December 31, 2006 and 2005, net availability under the credit facility totaled $35.1 million and
$55.4 million, respectively, which included outstanding standby letters of credit aggregating $83.3
million and $57.6 million in each period, respectively. At December 31, 2006, $66.2 million of the
outstanding letters of credit were issued to support our casualty insurance requirements. These
letters of credit mature at various dates through November 2007 and most have automatic renewal
provisions subject to prior notice of cancellation. The credit facility is collateralized by a
first priority security interest in substantially all of our assets and a pledge of the stock of
certain of the operating subsidiaries. Under our credit facility each new subsidiary must become a
borrower under the credit facility or, at the election of the lenders, execute a guarantee. Most of our domestic subsidiaries are
either borrowers or guarantors under the credit facility and the shares of such subsidiaries have
been pledged to our lenders. At December 31, 2006 and 2005, we had outstanding cash draws under the
credit facility in the amount of $0 and $4.2 million, respectively. The balance at December 31,
2005 was paid off in early January 2006 and, through March 5, 2007 we have not borrowed any
additional amounts under the credit facility. Interest under the credit facility accrues at rates
based, at our option, on the agent banks base rate plus a margin of between 0.0% and 0.75% or the
LIBOR rate (as defined in the credit facility) plus a margin of between 1.25% and 2.25%, depending
on certain financial thresholds. The credit facility includes an unused facility fee of 0.375%,
which may be adjusted to as low as 0.250%.
The credit facility contains customary events of default (including cross-default) provisions
and covenants related to our operations that prohibit, among other things, making investments and
acquisitions in excess of specified amounts, incurring additional indebtedness in excess of
specified amounts, paying cash dividends, making other distributions in excess of specified
amounts, making capital expenditures in excess of specified amounts, creating liens against our
assets, prepaying other indebtedness including our 7.625% senior notes, and engaging in certain
mergers or combinations without the prior written consent of the lenders. In addition, any
deterioration in the quality of billed and unbilled receivables, reduction in the value of our
equipment or an increase in our lease expense related to real estate would reduce availability
under the credit facility.
We are required to be in compliance with a minimum fixed charge coverage ratio measured on a
monthly basis and certain events are triggered if the net availability under the credit facility is
under $20.0 million at any given day. The credit facility further provides that once net
availability is greater than or equal to $20.0 million for 90 consecutive days, the fixed charge
ratio will no longer apply. The fixed charge coverage ratio is generally defined to mean the ratio
of our net income before interest expense, income tax expense, depreciation expense, and
amortization expense minus net capital expenditures and cash taxes paid to the sum of all interest
expense plus current maturities of debt for the period. The financial covenant was not applicable
as of December 31, 2006, because at that time net availability under the credit facility was
approximately $35.1 million and net availability did not reduce below $20.0 million on any given
day during the period.
Based
upon our current liquidity, net proceeds from the issuance of the senior
notes in January 2007, and projections for 2007, we believe we will be in compliance with the credit
facilitys terms and conditions and the minimum availability requirements in 2007. We are dependent
upon borrowings and letters of credit under this credit facility to fund operations. Should we be
unable to comply with the terms and conditions of the credit facility, we would be required to
obtain further modifications to the credit facility or another source of financing to continue to
operate. We may not be able to achieve our 2007 projections and thus may not be in compliance with
the credit facilitys minimum net availability requirements and minimum fixed charge ratio in the
future.
Our variable rate credit facility exposes us to interest rate risk. We had no cash borrowings
outstanding under the credit facility at December 31, 2006.
As of December 31, 2006, we had outstanding $121.0 million, 7.75% senior subordinated notes
due in February 2008, with interest due semi-annually. On March 2, 2006, following the expiration
of our notice period, we paid $75.5 million in principal and interest to redeem a portion of these
notes.
On January 31, 2007, we issued $150.0 million of 7.625% senior notes due February 2017. We
used approximately $121.8 million of the net proceeds from this offering to redeem all of our 7.75%
senior subordinated notes plus interest. The 7.625% senior notes contain default (including cross
default) provisions and covenants restricting, among others, many of the same transactions as under
our credit facility. The indenture that governs our senior notes allows us to incur the additional
indebtedness or issue preferred stock under our credit facility (up to $200.0 million), and for
renewals to existing debt permitted under the indenture plus an additional $50.0 million. The
indenture prohibits incurring further indebtedness unless our fixed charge coverage ratio is
greater than 2:1 for the four most recently ended fiscal quarters determined on a pro forma basis
as if that additional debt has been incurred at the beginning of the period. In addition, the
indenture prohibits incurring additional capital lease obligations in excess of 5% of our
consolidated net assets at any time the senior notes remain outstanding.
Our credit standing and senior notes are rated by various agencies.
36
The following table sets forth our contractual commitments as of December 31, 2006 during the
periods indicated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
5 Years and |
|
Contractual Obligations (1) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Thereafter |
|
Senior subordinated notes (2) |
|
$ |
120,970 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
120,970 |
|
Line of credit outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable for equipment |
|
|
1,161 |
|
|
|
556 |
|
|
|
604 |
|
|
|
1 |
|
|
|
|
|
Equity investment/earn out obligations (3)(4) |
|
|
3,700 |
|
|
|
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases |
|
|
8,045 |
|
|
|
1,213 |
|
|
|
2,800 |
|
|
|
3,052 |
|
|
|
980 |
|
Operating leases |
|
|
74,127 |
|
|
|
32,814 |
|
|
|
32,031 |
|
|
|
6,844 |
|
|
|
2,438 |
|
Executive life insurance |
|
|
16,792 |
|
|
|
1,284 |
|
|
|
2,269 |
|
|
|
2,269 |
|
|
|
10,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
224,795 |
|
|
$ |
39,567 |
|
|
$ |
37,704 |
|
|
$ |
12,166 |
|
|
$ |
135,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not include interest payments. |
|
(2) |
|
In January 2007, we issued $150.0 million of 7.625% senior notes due 2017. On March 2,
2007, we used $121.8 million of the net proceeds to redeem all of our 7.75% senior
subordinated notes including $0.8 million of interest. |
|
(3) |
|
As of December 31, 2006, four contingent quarterly payments were expected to be made to
the seller in connection with our purchase of a 49% equity investment. Each contingent
payment was subject to a maximum of $1.3 million per quarter based on the level of unit
sales and profitability of the investee in specified quarters. Based on projections, we
included payments of $925,000 per quarter in the table above. In addition, a final
contingent payment up to a maximum of $3.6 million was required based on the profitability of
the investee. This contingent payment was excluded from the table above. On February 6,
2007, we acquired the remaining 51% equity interest for $8.65 million in cash, in addition
to approximately $6.35 million, which we also paid at that time to discharge our remaining
obligations to the seller for the original 49% equity interest, and issued 300,000 shares
of our common stock. We have also agreed to pay the seller an earn out through the eighth
anniversary of the closing date based on the future performance of the acquired entity. |
|
(4) |
|
In January 2006, in connection with our DSSI acquisition, we agreed to pay the seller
an earn out based on the future performance of the acquired business. Due to the contingent
nature of these earn out payments, these payments are not presently quantifiable and accordingly, these
amounts have been excluded from the table above. |
Off-balance sheet arrangement. We provide letters of credit to secure our obligations
primarily related to our insurance arrangements and surety bonds. We also provide letters of credit
related to legal matters. Total letters of credit reduce our available borrowings under our credit
facility and amounted to $83.3 million at December 31, 2006 of which $66.2 million were related to
our insurance programs.
Some of our contracts require us to provide performance and payment bonds, which we obtain
from a surety company. If we were unable to meet our contractual obligations to a customer and the
surety paid our customer the amount due under the bond, the surety would seek reimbursement of such
payment from us. At December 31, 2006, the cost to complete on our $292.9 million performance and
payment bonds was $30.2 million.
Seasonality
Our operations are historically slower in the first and fourth quarters of the year. This
seasonality is primarily the result of the effect of weather on our external activities and
customer budgetary constraints and preferences. Some of our customers tend to complete budgeted
capital expenditures before the end of the year and defer additional expenditures until the
following budget year.
Impact of Inflation
The primary inflationary factor affecting our operations is increased labor costs. We did not
experience significant increases in labor costs in 2006, 2005 or 2004. To a lesser extent, we are
also affected by changes in fuel costs which increased significantly in 2006 and 2005.
37
Recently Issued Accounting Pronouncements
On February 15, 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159). This standard permits
an entity to measure financial instruments and certain other items at estimated fair value. Most of
the provisions of SFAS No. 159 are elective; however, the amendment to FASB No. 115, Accounting
for Certain Investments in Debt and Equity Securities, applies to all entities that own trading
and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair value option (a) may
generally be applied instrument by instrument, (b) is irrevocable unless a new election date
occurs, and (c) must be applied to the entire instrument and not to only a portion of the
instrument. SFAS 159 is effective as of the beginning of the first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet
issued financial statements for any interim period of such year, and (iii) elects to apply the
provisions of FASB 157. We are currently evaluating the impact of SFAS 159, if any, on our
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of
FASB Statements No. 87, 88 and 132(R) (SFAS 158). This statement requires an employer to
recognize the funded status of a benefit plan as an asset or liability in its financial statements.
The funded status is measured as the difference between plan assets at fair value and the plans
specific benefit obligation, which would be the projected benefit obligation. Under SFAS 158, the
gains or losses and prior service cost or credits that arise in a period but are not immediately
recognized as components of net periodic benefit expense will now be recognized, net of tax, as a
component of other comprehensive income. SFAS 158 is effective for fiscal years ending after
December 15, 2008. We are currently evaluating the impact, if any, of the adoption of SFAS 158 on
our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff
Accounting Bulletin No. 108 (SAB 108), Considering the effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. Traditionally, there have been two
widely recognized methods for quantifying the effects of financial statement misstatements: the
roll-over method and the iron-curtain method. The roll-over method focuses primarily on the
impact of a misstatement on the income statement, including the reversing effect of prior year
misstatements. The iron-curtain method focuses primarily on the effect of correcting the period-end
balance sheet with less emphasis on the reversing effects of prior year errors on the income
statement. In SAB 108, the SEC staff established an approach that is commonly referred to as a
dual approach because it now requires quantification of
errors under both the iron-curtain and
the roll-over methods. For the Company, SAB 108 is effective for the fiscal year ending December
31, 2006. The adoption of SAB 108 did not have any effect on MasTecs financial position, net
earnings or prior year financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS
157), Fair Value Measurements. This statement establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and requires additional disclosures
about fair-value measurements. SFAS 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. For the Company, SFAS 157 is effective for the fiscal year beginning
January 1, 2008. We are currently evaluating this standard to determine its impact, if any, on our
consolidated financial statements.
In July 2006, FASB issued Financial Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109. This Interpretation
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the effect, if any, this
Interpretation will have on our consolidated financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155,
"Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and
140. In March 2006, the FASB issued Statement of Financial Accounting Standard No. 156,
"Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140. These
statements are effective beginning January 1, 2007 and are not expected to have a material effect
on our consolidated financial statements.
In November 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-04,
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split of
Endorsement Split-Dollar Life Insurance Arrangements, (EITF 06-04). EITF 06-04 reached a
consensus that for a split-dollar life insurance arrangement that provides a benefit to an
employee that extends to postretirement periods, an employer should recognize a liability for
future benefits in accordance with SFAS
38
No. 106 or Opinion 12 (depending upon whether a substantive
plan is deemed to exist) based on the substantive agreement with the employee. This consensus is
effective for fiscal years beginning after December 15, 2006. We have not determined the impact, if
any, that the adoption of this pronouncement will have on our consolidated financial statements.
In November 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-05,
"Accounting for Purchase of Life Insurance-Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-04, (EITF 06-05). EITF 06-05 reached a consensus
that a policyholder should consider any additional amounts included in the contractual terms of the
policy in determining the amount that could be realized under the insurance contract. The Task
Force agreed that contractual limitations should be considered when determining the realizable
amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance
company should be excluded from the amount that could be realized. The Task Force also agreed that
fixed amounts that are recoverable by the policyholder in future periods in excess of one year from
the surrender of the policy should be recognized at their present value. The Task Force also
reached a consensus that a policy holder should determine the amount that could be realizable under
the life insurance contract assuming the surrender of an individual-life by individual policy (or
certificate by certificate in a group policy). The Task Force noted that any amount that is
ultimately realized by the policyholder upon the assumed surrender of the final policy (or final
certificate in a group policy) shall be included in the amount that could be realized under the
insurance contract. This consensus is effective for fiscal years beginning after December 15, 2006.
We have not determined the impact, if any, that the adoption of this pronouncement will have on our
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and fluctuations in foreign
currency exchange rates.
Interest Rate Risk
Less than 5% of our outstanding debt at December 31, 2006 was subject to variable interest
rates. The remainder of our debt has fixed interest rates. Our fixed interest rate debt includes
$121.0 million (face value) in senior subordinated notes. The carrying value and market value of
our debt at December 31, 2006 was $130.2 million and $129.9 million, respectively. Based upon debt
balances outstanding at December 31, 2006, a 100 basis point (i.e. 1%) addition to our weighted
average effective interest rate for variable rate debt would increase our interest expense by less
than $0.1 million on an annual basis.
Foreign Currency Risk
We have an investment in a subsidiary in Canada and sell our services into this foreign
market. Our activities in other countries are not material.
Our foreign net asset/exposures (defined as assets denominated in foreign currency less
liabilities denominated in foreign currency) for Canada at December 31, 2006 of U.S. dollar
equivalents was $1.7 million compared to $1.5 million as of December 31, 2005.
Our Canadian subsidiary sells services and pays for products and services in Canadian dollars.
A decrease in the Canadian foreign currency relative to the U.S. dollar could adversely impact our
margins. An assumed 10% depreciation of these foreign currencies relative to the U.S. dollar over
the course of 2006 (i.e., in addition to actual exchange experience) would have resulted in a
translation reduction of our revenue by approximately $0.5 million for 2006.
As the assets, liabilities and transactions of our Canada subsidiary are denominated in
Canadian dollars, the results and financial condition are subject to translation adjustments upon
their conversion into U.S. dollars for our financial reporting purposes. A 10% decline in this
foreign currency relative to the U.S. dollar over the course of 2006 (i.e., in addition to actual
exchange experience) would have reduced our Canadian currency translated operating loss from $1.1
million to $1.0 million.
See Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Report for further
disclosures about market risk.
39
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders of MasTec, Inc.
We have audited the accompanying consolidated balance sheets of MasTec, Inc. and subsidiaries
as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in
shareholders equity, and cash flows for the three years then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of MasTec, Inc. as of December 31, 2006 and 2005, and
the consolidated results of their operations and their cash flows for the three years then ended in
conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, in 2006 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), Share Based Payments, utilizing the modified prospective
transition method effective January 1, 2006.
We also have audited, in accordance with the Standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of MasTec, Inc.s internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 7, 2007, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Miami, Florida
March 7, 2007
41
MASTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share amounts) |
|
Revenue |
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
Costs of revenue, excluding depreciation |
|
|
813,406 |
|
|
|
731,504 |
|
|
|
719,282 |
|
Depreciation |
|
|
14,664 |
|
|
|
16,341 |
|
|
|
14,925 |
|
General and administrative expenses, including non-cash
stock compensation expenses of $7,401, $541 and $644,
respectively |
|
|
74,610 |
|
|
|
64,266 |
|
|
|
71,510 |
|
Interest expense, net of interest income |
|
|
10,023 |
|
|
|
19,233 |
|
|
|
19,478 |
|
Other income, net |
|
|
8,106 |
|
|
|
3,616 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
benefit for income taxes and minority interest |
|
|
41,209 |
|
|
|
20,318 |
|
|
|
(17,410 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest |
|
|
(2,294 |
) |
|
|
(1,714 |
) |
|
|
(333 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
38,915 |
|
|
|
18,604 |
|
|
|
(17,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax,
including non-cash stock compensation expense of
$242, $0 and $0, respectively |
|
|
(89,263 |
) |
|
|
(32,637 |
) |
|
|
(31,694 |
) |
Loss on sale of assets of discontinued operations,
net of tax benefit of $0 in 2005 |
|
|
|
|
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(50,348 |
) |
|
$ |
(14,616 |
) |
|
$ |
(49,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.61 |
|
|
$ |
0.38 |
|
|
$ |
(0.37 |
) |
Discontinued operations |
|
|
(1.40 |
) |
|
|
(0.68 |
) |
|
|
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
Total basic net loss per share |
|
$ |
(0.79 |
) |
|
$ |
(0.30 |
) |
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
63,574 |
|
|
|
48,952 |
|
|
|
48,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.60 |
|
|
$ |
0.37 |
|
|
$ |
(0.37 |
) |
Discontinued operations |
|
|
(1.37 |
) |
|
|
(0.66 |
) |
|
|
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
Total diluted net loss per share |
|
$ |
(0.77 |
) |
|
$ |
(0.29 |
) |
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
65,119 |
|
|
|
49,795 |
|
|
|
48,382 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
42
MASTEC, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except shares) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash of
$18,000 and $0, respectively |
|
$ |
89,046 |
|
|
$ |
2,024 |
|
Accounts receivable, unbilled revenue and retainage, net |
|
|
163,960 |
|
|
|
171,832 |
|
Inventories |
|
|
28,929 |
|
|
|
17,832 |
|
Income tax refund receivable |
|
|
135 |
|
|
|
1,489 |
|
Prepaid expenses and other current assets |
|
|
39,037 |
|
|
|
42,442 |
|
Current assets held for sale |
|
|
18,813 |
|
|
|
69,688 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
339,920 |
|
|
|
305,307 |
|
|
Property and equipment, net |
|
|
61,400 |
|
|
|
48,027 |
|
Goodwill |
|
|
150,702 |
|
|
|
127,143 |
|
Deferred taxes, net |
|
|
49,317 |
|
|
|
51,468 |
|
Other assets |
|
|
44,704 |
|
|
|
46,070 |
|
Long-term assets held for sale |
|
|
70 |
|
|
|
6,149 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
646,113 |
|
|
$ |
584,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
1,769 |
|
|
$ |
4,266 |
|
Accounts payable |
|
|
101,456 |
|
|
|
90,324 |
|
Other current liabilities |
|
|
47,707 |
|
|
|
45,549 |
|
Current liabilities related to assets held for sale |
|
|
24,946 |
|
|
|
30,099 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
175,878 |
|
|
|
170,238 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
36,521 |
|
|
|
37,359 |
|
Long-term debt |
|
|
128,407 |
|
|
|
196,104 |
|
Long-term liabilities related to assets held for sale |
|
|
596 |
|
|
|
860 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
341,402 |
|
|
|
404,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; authorized shares
5,000,000; issued and outstanding shares none |
|
|
|
|
|
|
|
|
Common stock $0.10 par value; authorized shares
100,000,000; issued and outstanding shares 65,182,437
in 2006 an 49,222,013 in 2005 |
|
|
6,518 |
|
|
|
4,922 |
|
Capital surplus |
|
|
530,179 |
|
|
|
356,131 |
|
Accumulated deficit |
|
|
(232,248 |
) |
|
|
(181,900 |
) |
Accumulated other comprehensive income |
|
|
262 |
|
|
|
450 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
304,711 |
|
|
|
179,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
646,113 |
|
|
$ |
584,164 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
43
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Capital |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Surplus |
|
|
Deficit |
|
|
(Loss) Income |
|
|
Total |
|
|
Loss |
|
Balance December 31, 2003 |
|
|
48,222 |
|
|
$ |
4,822 |
|
|
$ |
349,823 |
|
|
$ |
(117,847 |
) |
|
$ |
(20,980 |
) |
|
$ |
215,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,437 |
) |
|
|
|
|
|
|
(49,437 |
) |
|
$ |
(49,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,524 |
|
|
|
21,524 |
|
|
|
21,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(27,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation |
|
|
|
|
|
|
|
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, primarily for stock
options exercised |
|
|
375 |
|
|
|
38 |
|
|
|
1,801 |
|
|
|
|
|
|
|
|
|
|
|
1,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit resulting from stock option
plan |
|
|
|
|
|
|
|
|
|
|
765 |
|
|
|
|
|
|
|
|
|
|
|
765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004 |
|
|
48,597 |
|
|
|
4,860 |
|
|
|
353,033 |
|
|
|
(167,284 |
) |
|
|
544 |
|
|
|
191,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,616 |
) |
|
|
|
|
|
|
(14,616 |
) |
|
$ |
(14,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
|
(94 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(14,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation |
|
|
|
|
|
|
|
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, primarily for stock
options exercised |
|
|
625 |
|
|
|
62 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
2,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
49,222 |
|
|
|
4,922 |
|
|
|
356,131 |
|
|
|
(181,900 |
) |
|
|
450 |
|
|
|
179,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,348 |
) |
|
|
|
|
|
|
(50,348 |
) |
|
$ |
(50,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
(188 |
) |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(50,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation |
|
|
|
|
|
|
|
|
|
|
7,643 |
|
|
|
|
|
|
|
|
|
|
|
7,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from public
offerings |
|
|
14,375 |
|
|
|
1,438 |
|
|
|
155,027 |
|
|
|
|
|
|
|
|
|
|
|
156,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisition |
|
|
637 |
|
|
|
64 |
|
|
|
6,824 |
|
|
|
|
|
|
|
|
|
|
|
6,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, primarily for stock
options exercised |
|
|
948 |
|
|
|
94 |
|
|
|
4,554 |
|
|
|
|
|
|
|
|
|
|
|
4,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
65,182 |
|
|
$ |
6,518 |
|
|
$ |
530,179 |
|
|
$ |
(232,248 |
) |
|
$ |
262 |
|
|
$ |
304,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
44
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
2006 |
|
|
2005 |
|
|
(Revised) |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(50,348 |
) |
|
$ |
(14,616 |
) |
|
$ |
(49,437 |
) |
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,437 |
|
|
|
18,188 |
|
|
|
18,133 |
|
Impairment of goodwill and assets |
|
|
44,545 |
|
|
|
11,497 |
|
|
|
19,165 |
|
Non-cash stock and restricted stock compensation expense |
|
|
7,643 |
|
|
|
541 |
|
|
|
644 |
|
Gain on disposal of assets and investments |
|
|
(2,306 |
) |
|
|
(5,141 |
) |
|
|
(110 |
) |
Provision for doubtful accounts |
|
|
9,960 |
|
|
|
4,932 |
|
|
|
5,086 |
|
Accrued losses on construction projects |
|
|
3,075 |
|
|
|
1,117 |
|
|
|
2,638 |
|
Income from equity investment |
|
|
(5,772 |
) |
|
|
(285 |
) |
|
|
|
|
Write-down of assets |
|
|
280 |
|
|
|
2,838 |
|
|
|
2,020 |
|
Income tax refunds |
|
|
861 |
|
|
|
2,180 |
|
|
|
176 |
|
Provision for inventory obsolescence |
|
|
583 |
|
|
|
965 |
|
|
|
902 |
|
Minority interest |
|
|
2,294 |
|
|
|
1,714 |
|
|
|
333 |
|
Changes in assets and liabilities net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, unbilled revenue and retainage, net |
|
|
4,172 |
|
|
|
(20,926 |
) |
|
|
(714 |
) |
Inventories |
|
|
8,976 |
|
|
|
(3,381 |
) |
|
|
(1,886 |
) |
Other assets, current and non-current portion |
|
|
23,314 |
|
|
|
(15,050 |
) |
|
|
4,255 |
|
Accounts payable |
|
|
(9,810 |
) |
|
|
3,682 |
|
|
|
2,074 |
|
Other liabilities, current and non-current portion |
|
|
(6,697 |
) |
|
|
(6,689 |
) |
|
|
2,348 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
46,207 |
|
|
|
(18,434 |
) |
|
|
5,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(22,283 |
) |
|
|
(6,421 |
) |
|
|
(9,420 |
) |
Cash paid for acquisitions and contingent consideration,
net of cash acquired |
|
|
(19,285 |
) |
|
|
|
|
|
|
|
|
Investments
in unconsolidated companies partner |
|
|
(4,680 |
) |
|
|
(3,700 |
) |
|
|
(1,092 |
) |
Investment in life insurance policies |
|
|
(1,043 |
) |
|
|
(1,232 |
) |
|
|
(1,785 |
) |
Net proceeds from sale of assets and investments |
|
|
6,177 |
|
|
|
9,039 |
|
|
|
8,425 |
|
Payments received from sub-leases |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(40,781 |
) |
|
|
(2,314 |
) |
|
|
(3,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility, net |
|
|
|
|
|
|
4,212 |
|
|
|
|
|
Payments on senior subordinated notes |
|
|
(75,000 |
) |
|
|
|
|
|
|
|
|
Repayments of other borrowings, net |
|
|
(3,829 |
) |
|
|
|
|
|
|
(3,283 |
) |
Payments of capital lease obligations |
|
|
(385 |
) |
|
|
(363 |
) |
|
|
(363 |
) |
Proceeds from issuance of common stock, net |
|
|
156,465 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock pursuant to
stock option exercises |
|
|
4,648 |
|
|
|
2,620 |
|
|
|
1,839 |
|
Payments of financing costs |
|
|
(116 |
) |
|
|
(3,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
81,783 |
|
|
|
3,320 |
|
|
|
(1,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
87,209 |
|
|
|
(17,428 |
) |
|
|
(52 |
) |
Net effect of translation on cash |
|
|
(187 |
) |
|
|
(96 |
) |
|
|
185 |
|
Cash and cash equivalentsbeginning of period |
|
|
2,024 |
|
|
|
19,548 |
|
|
|
19,415 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of period |
|
$ |
89,046 |
|
|
$ |
2,024 |
|
|
$ |
19,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
13,876 |
|
|
$ |
17,300 |
|
|
$ |
17,643 |
|
Income taxes |
|
$ |
284 |
|
|
$ |
306 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease |
|
$ |
8,635 |
|
|
$ |
|
|
|
$ |
|
|
Investment in unconsolidated companies |
|
$ |
925 |
|
|
$ |
925 |
|
|
$ |
2,775 |
|
Accruals for inventory at year-end |
|
$ |
18,090 |
|
|
$ |
6,553 |
|
|
$ |
11,573 |
|
The accompanying notes are an integral part of these consolidated financial statements.
45
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of the Business and Summary of Significant Accounting Policies
MasTec, Inc. (collectively, with its subsidiaries, MasTec, we, us, our or the
Company) is a leading specialty contractor operating mainly throughout the United States and
across a range of industries. Our core activities are the building, installation, maintenance and
upgrade of communications and utility infrastructure. Our primary customers are in the following
industries: communications (including satellite television and cable television), utilities and
government. MasTec provides similar infrastructure services across the industries it serves.
Customers rely on us to build and maintain infrastructure and networks that are critical to their
delivery of voice, video and data communications, electricity and other energy resources.
The following is a summary of the significant accounting policies followed in the preparation
of the accompanying consolidated financial statements:
Management estimates. The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. The more significant estimates relate to our revenue
recognition, allowance for doubtful accounts, intangible assets, accrued insurance, income taxes,
litigation and contingencies. Estimates are based on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for judgments about results and the carrying values of assets and liabilities. Actual results
and values may differ from these estimates.
Principles of consolidation. The accompanying consolidated financial statements include
MasTec, Inc. and its subsidiaries. MasTec consolidates GlobeTec Construction, LLC as it has a 51%
ownership. Other parties interest in this entity is reported as minority interest in the
consolidated financial statements. All intercompany accounts and transactions have been eliminated
in consolidation.
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2005
presentation. In addition, as discussed in Note 8, in 2005 we announced our intention to sell
substantially all of our state Department of Transportation related projects and assets.
Comprehensive loss. Comprehensive loss is a measure of net loss and all other changes in
equity that result from transactions other than with shareholders. Comprehensive loss consists of
net loss and foreign currency translation adjustments in the years ended December 31, 2006, 2005
and 2004.
Statement of cash flows. In 2005, we revised the presentation of our cash flow statement and
elected not to disclose cash flows from discontinued operations separately for all years presented.
Revenue recognition. Revenue and related costs for master and other service agreements billed
on a time and materials basis are recognized as the services are rendered. There are also some
service agreements that are billed on a fixed fee basis. Under our fixed fee master service and
similar type service agreements, MasTec furnishes various specified units of service for a separate
fixed price per unit of service. We recognize revenue as the related unit of service is performed.
For service agreements on a fixed fee basis, profitability will be reduced if the actual costs to
complete each unit exceed original estimates. We also immediately recognize the full amount of any
estimated loss on these fixed fee projects if estimated costs to complete the remaining units
exceed the revenue to be received from such units.
We recognize revenue on unit based installation/construction projects using the
units-of-delivery method. Our unit based contracts relate primarily to contracts that require the
installation or construction of specified units within an infrastructure system. Under the
units-of-delivery method, revenue is recognized at the contractually agreed price per unit as the
units are completed and delivered. Profitability will be reduced if the actual costs to complete
each unit exceed original estimates. We also are required to immediately recognize the full amount
of any estimated loss on these projects if estimated costs to complete the remaining units for the
project exceed the revenue to be earned on such units. For certain customers with unit based
installation/construction projects, we recognize revenue after the service is performed and
work orders are approved to ensure that collectibility is probable from these
46
MasTec, Inc.
Notes to Consolidated Financial Statements continued
customers. Revenue from completed work orders not collected in accordance with the payment terms
established with these customers is not recognized until collection is assured.
Our non-unit based, fixed price installation/construction contracts relate primarily to
contracts that require the construction and installation of an entire infrastructure system. We
recognize revenue and related costs as work progresses on non-unit based, fixed price contracts
using the percentage-of-completion method, which relies on contract revenue and estimates of total
expected costs. We estimate total project costs and profit to be earned on each long-term,
fixed-price contract prior to commencement of work on the contract. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various stages of a contract
can be made. Under the percentage-of-completion method, we record revenue and recognize profit or
loss as work on the contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that incurred costs to date
bear to estimated total contract costs. If, as work progresses, the actual contract costs exceed
estimates, the profit recognized on revenue from that contract decreases. We recognize the full
amount of any estimated loss on a contract at the time the estimates indicate such a loss.
Our customers generally supply materials such as cable, conduit and telephone equipment.
Customer furnished materials are not included in revenue and cost of sales as these materials are
purchased by the customer. The customer determines the specification of the materials that are to
be utilized to perform installation/construction services. We are only responsible for the
performance of the installation/construction services and not the materials for any contract that
includes customer furnished materials and we have no risk associated with customer furnished
materials. Our customers retain the financial and performance risk of all customer furnished
materials.
Billings in excess of costs and estimated earnings on uncompleted contracts are classified as
current liabilities. Any costs and estimated earnings 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.
Basic and diluted net income (loss) per share. The computation of basic net income (loss) per
common share is based on the weighted average number of common shares outstanding during each
period. The computation of diluted net income (loss) per common share is based on the weighted
average number of common shares outstanding during the period plus, when their effect is dilutive,
incremental shares consisting of shares subject to stock options and unvested restricted stock
(common stock equivalents). For the year ended December 31, 2006 and 2005 diluted net income
(loss) per common share includes the effect of common stock equivalents in the amount of 1,545,000
shares and 843,000 shares, respectively. For the year ended December 31, 2004, common stock
equivalents of approximately 593,000 shares were not included in the diluted net loss per common
share because their effect would be anti-dilutive.
Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. Management analyzes
past due balances based on invoice date, historical bad debt experience, customer concentrations,
customer credit-worthiness, customer financial condition and credit reports, the availability of
mechanics and other liens, the existence of payment bonds and other sources of payment, and
current economic trends when evaluating the adequacy of the allowance for doubtful accounts.
Management reviews the adequacy of the reserves on a quarterly basis. Amounts are written off
against the allowance when deemed uncollectible.
Cash and cash equivalents. All short-term investments with maturities of three months or less
when purchased are considered to be cash equivalents. Restricted cash related to collateral of the
credit facility is also included in cash and cash equivalents.
Inventories. Inventories consist of materials and supplies for construction projects, and are
typically purchased on a project-by-project basis. Inventories are valued at the lower of cost
(using the specific identification method) or market. Construction projects are completed pursuant
to customer specifications. The loss of the customer or the cancellation of the project could
result in an impairment of the value of materials purchased for that customer or project.
Technological or market changes can also render certain materials obsolete. Allowances for
inventory obsolescence are determined based upon the specific facts and circumstances for each
project and market conditions. During 2006, 2005 and 2004, we recorded a provision for inventory
obsolescence of approximately $0.6 million, $0.9 million and $1.0 million, respectively, in Costs
of revenue and Loss on discontinued operations in the Consolidated Statements of Operations.
Property and equipment. Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective assets. Leasehold
improvements are depreciated over the shorter of the term of the
47
MasTec, Inc.
Notes to Consolidated Financial Statements continued
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 and depreciated over the
remaining useful life of the asset. 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 other income or expense.
Deferred costs. Deferred financing costs related to our credit facility and the senior
subordinated notes whose short and long-term portions are included in other current and non-current
assets in the consolidated balance sheets are amortized over the related terms of the debt using
the effective interest method. Net deferred financing costs were $3.9 million and $5.8 million at
December 31, 2006 and 2005, respectively. As of December 31, 2005, we had deferred costs of
approximately $0.3 million related to the January 2006 sale of MasTecs common stock. The total
costs of approximately $0.9 million offset the total gross proceeds received from the sale of the
common stock. As discussed in Note 19, on January 31, 2007, we issued $150.0 million aggregate
principal amount of 7.625% senior notes due 2017.
Software capitalization. The Company capitalizes certain costs incurred in connection with
developing or obtaining internal use software in accordance with American Institute of Certified
Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. These capitalized software costs are included in Property
and equipment, net in the consolidated balance sheets and are being amortized over a period not to
exceed seven years.
Valuation of Equity Investments. At December 31, 2006 and 2005, we had one investment which
we account for by the equity method because we own 49% of the entity and have the ability to
exercise significant influence over the operational policies of the limited liability company. Our
share of earnings or losses in this investment is included in other income, net, in the
consolidated statements of operations. As of December 31, 2006, our investment exceeded the net
equity of such investment and accordingly the excess is considered to be equity goodwill. We
periodically evaluate the equity goodwill for impairment under Accounting Principle Board No. 18,
The Equity Method of Accounting for Investments in Common Stock, as amended. As discussed in
Note 19, on February 6, 2007, we acquired the remaining 51% equity interest of this entity.
Valuation of Long-Lived Assets. Management reviews long-lived assets, consisting primarily of
property and equipment and intangible assets with finite lives, for impairment in accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). In analyzing potential impairment, we used projections of
future discounted cash flows from the assets. These projections are based on our view of growth
rates for the related business, anticipated future economic conditions and the appropriate discount
rates relative to risk and estimates of residual values. We believe that our estimates are
consistent with assumptions that marketplace participants would use in their estimates of fair
value. In addition, due to the subsequent sale of substantially all of our state Department of
Transportation projects and assets as discussed in Note 10, we evaluated long-lived assets for
these operations under SFAS No. 144 based on projections of future discounted cash flows from these
assets in 2006 and an estimated selling price for the assets held for sale.
Valuation of Goodwill and Intangible Assets. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS 142), we conduct, on at least an annual basis, a review of our
reporting entities to determine whether the carrying values of goodwill exceed the fair market
value using a discounted cash flow methodology for each entity. Should this be the case, the value
of goodwill may be impaired and written down. Goodwill acquired in a purchase business combination
and determined to have an infinite useful life is not amortized, but instead tested for impairment
at least annually in accordance with the provisions of SFAS No. 142. In addition, acquired
intangible assets are required to be recognized and amortized over their useful lives if the
benefit of the asset is based on contractual or legal rights.
In connection with the abandonment of the Brazil subsidiary as discussed in Note 10, we wrote
off goodwill associated with this reporting entity in the amount of $12.3 million in the year ended
December 31, 2004 which is included in the loss from discontinued operations. During the year ended
December 31, 2005, we wrote-off approximately $11.5 million in goodwill in connection with our
decision to sell substantially all of our state Department of Transportation related projects and
assets. The decision to sell was made after evaluation of, among other things, short and long-term
prospects. The projects and assets that are held for sale are accounted for as discontinued
operations. We determined that this goodwill amount would not be realized after evaluation of the
cash flows from the operations of these projects and assets and in light of our decision on future
operations and the decision to sell. The remaining net asset value was also reviewed by management
in the year ended December 31, 2006 and we reserved for inventory items that were considered
obsolete, reserved all receivables that appeared to be uncollectible and wrote off fixed assets
that were no longer in use or not saleable. In addition, we reviewed all projects in process to
ensure estimated costs to complete were accurate and all projects with an estimated loss were
accrued.
48
MasTec, Inc.
Notes to Consolidated Financial Statements continued
We could record additional impairment losses if, in the future, profitability and cash flows
of our reporting entities decline to the point where the carrying value of those units exceed their
market value.
Accrued insurance. MasTec maintains insurance policies subject to per claim deductibles of $2
million for its workers compensation policy, $2 million for its general liability policy and $3
million for its automobile liability policy. We have excess umbrella coverage for losses in excess
of the primary coverages of up to $100 million per claim and in the aggregate. We also maintain an
insurance policy with respect to employee group health claims subject to per claim deductibles of
$300,000 after satisfying an annual deductible of $100,000. All insurance liabilities are actuarially determined on a quarterly basis for unpaid
claims and associated expenses, including the ultimate liability for claims incurred and an
estimate of claims incurred but not reported. The accruals are based upon known facts, historical
trends and a reasonable estimate of future expenses. However, a change in experience or actuarial
assumptions could nonetheless materially affect results of operations in a particular period. Known
amounts for claims that are in the process of being settled, but have been paid in periods
subsequent to those being reported, are also recorded in such reporting period.
We are periodically required to post letters of credit and provide cash collateral to our
insurance carriers. As of December 31, 2006 and 2005, such letters of credit amounted to $66.2
million and $53.1 million, respectively, and cash collateral posted amounted to $6.6 million and
$24.8 million, respectively. Cash collateral is included in other assets. The 2006 decrease in cash
collateral for our insurance programs is related to a reduction in collateral provided to the
insurance carrier in exchange for an increase in letters of credit for the
same amount. We also received a $1.1 million reduction in cash collateral in January 2006 for prior
year insurance programs. These reductions were based on fewer claims remaining from these prior
plan years.
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. We estimate our income taxes in each of the jurisdictions
in which we operate. This process involves estimating our tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as deferred revenue, for
tax and accounting purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. The recording of a net deferred tax asset
assumes the realization of such asset in the future. Otherwise a valuation allowance must be
recorded to reduce this asset to its net realizable value. Management considers future pretax
income and ongoing prudent and feasible tax planning strategies in assessing the need for such a
valuation allowance. In the event that we determine that we may not be able to realize all or part
of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is
charged against income in the period such determination is made.
As
a result of our operating losses, we have recorded valuation
allowances aggregating $49.2
million and $33.9 million as of December 31, 2006 and 2005, respectively, to reduce certain of our
net deferred federal, foreign and state tax assets to their estimated net realizable value. We
anticipate that we will generate sufficient pretax income in the future to realize our deferred tax
assets. In the event that our future pretax operating income is insufficient for us to use our
deferred tax assets, we have based our determination that the deferred tax assets are still
realizable based on continuing operations and feasible tax planning strategies that are available
to us involving the sale of one or more of our operations.
Stock based compensation. In the first quarter of 2006, MasTec adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). This Statement
requires companies to expense the estimated fair value of stock options and similar equity
instruments issued to employees over the vesting period in their statement of operations. SFAS 123R
eliminates the alternative to use the intrinsic method of accounting provided for in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which
generally resulted in no compensation expense recorded in the financial statements related to the
grant of stock options to employees if certain conditions were met.
We adopted SFAS 123R using the modified prospective method effective January 1, 2006, which
requires us to record compensation expense over the vesting period for all awards granted after the
date of adoption, and for the unvested portion of previously granted awards that remain outstanding
at the date of adoption. Accordingly, amounts for periods prior to January 1, 2006 presented herein
have not been restated to reflect the adoption of SFAS 123R. The pro forma effect of the 2005 prior
period is as follows and has been disclosed to be consistent with prior accounting rules (in
thousands, except per share data):
The required pro forma disclosures are as follows (in thousands except per share data):
49
MasTec, Inc.
Notes to Consolidated Financial Statements continued
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net loss, as reported |
|
$ |
(14,616 |
) |
|
$ |
(49,437 |
) |
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
for all awards |
|
|
(6,913 |
) |
|
|
(8,734 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(21,529 |
) |
|
$ |
(58,171 |
) |
|
|
|
|
|
|
|
Basic net loss per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.30 |
) |
|
$ |
(1.02 |
) |
Pro forma |
|
$ |
(0.43 |
) |
|
$ |
(1.20 |
) |
Diluted net loss per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.29 |
) |
|
$ |
(1.02 |
) |
Pro forma |
|
$ |
(0.43 |
) |
|
$ |
(1.20 |
) |
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
Expected term-employees |
|
4.26 7 years |
|
4.17 6.17 years |
|
7 years |
Expected term-executives |
|
5.74 7.74 years |
|
5.38 7.38 years |
|
7 years |
Volatility |
|
40% - 65% |
|
60% - 65% |
|
80% |
Risk-free interest rate |
|
4.58% - 4.85% |
|
4.51% - 4.65% |
|
3.6% |
Dividends |
|
None |
|
None |
|
None |
Forfeiture rate |
|
7.47% |
|
6.97% |
|
5.68% |
On August 23, 2005, the compensation committee of our board of directors approved the
acceleration and vesting of all unvested stock options having an exercise price in excess of
current market value on or before December 31, 2005 for option grants under the Companys 2003
Employee Stock Incentive Plan (current employees, including executive officers) and the Companys
2003 Stock Incentive Plan for Non-Employees, as amended. Stock option awards granted in 2003 and
2004 with respect to 769,000 shares of the Companys common stock were accelerated resulting in
approximately $4.1 million of pro forma compensation expense in the pro forma calculation for the
year ended December 31, 2005. These options were not fully achieving their original objectives of
incentive compensation and employee retention. We expect these accelerations to have a positive
effect on employee morale, retention and perception of option value. The acceleration also
eliminates future compensation expense the Company would otherwise recognize in its consolidated
statement of operations with respect to these options as required by SFAS 123R.
We also grant restricted stock, which is valued based on the market price of the common stock
on the date of grant. Compensation expense arising from restricted stock grants is recognized using
the ratable method over the vesting period. Unearned compensation for performance-based options and
restricted stock is shown as a reduction of shareholders equity in the consolidated balance
sheets.
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. 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
managements estimates, approximated their carrying values. At December 31, 2006 and 2005, the fair
value of senior subordinated notes was $121.0 million and $195.0 million, respectively, based on
quoted market values. MasTec uses 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 marketplace.
New accounting pronouncements. On February 15, 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115
(FASB 159). This standard permits an entity to measure financial instruments and certain other
items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the
amendment to FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities,
applies to all entities that own trading and available-for-sale securities. The fair value option
created by SFAS 159 permits an entity to measure eligible items at fair value as of specified
election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is
irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and
not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of
the previous
50
MasTec, Inc.
Notes to Consolidated Financial Statements continued
fiscal year provided that the entity (i) makes that choice in the first 120 days of
that year, (ii) has not yet issued financial statements for any interim period of such year, and
(iii) elects to apply the provisions of FASB 157. We are currently evaluating the impact of SFAS
159, if any, on our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of
FASB Statements No. 87, 88 and 132(R) (SFAS 158). This statement requires an employer to
recognize the funded status of a benefit plan as an asset or liability in its financial statements.
The funded status is measured as the difference between plan assets at fair value and the plans
specific benefit obligation, which would be the projected benefit obligation. Under SFAS 158, the
gains or losses and prior service cost or credits that arise in a period but are not immediately
recognized as components of net periodic benefit expense will now be recognized, net of tax, as a
component of other comprehensive income. SFAS 158 is effective for fiscal years ending after
December 15, 2008. We are currently evaluating the impact, if any, of the adoption of SFAS 158 on
our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff
Accounting Bulletin No. 108 (SAB 108), Considering the effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. Traditionally, there have been two
widely recognized methods for quantifying the effects of financial statement misstatements: the
roll-over method and the iron-curtain method. The roll-over method focuses primarily on the
impact of a misstatement on the income statement, including the reversing effect of prior year
misstatements. The iron-curtain method focuses primarily on the effect of correcting the period-end
balance sheet with less emphasis on the reversing effects of prior year errors on the income
statement. In SAB 108, the SEC staff established an approach that is commonly referred to as a
dual approach because it now requires quantification of
errors under both the iron-curtain and
the roll-over methods. For the Company, SAB 108 is effective for the fiscal year ending December
31, 2006. The adoption of SAB 108 did not have any effect on MasTecs financial position, net
earnings or prior year financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS
157), Fair Value Measurements. This statement establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and requires additional disclosures
about fair-value measurements. SFAS 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. For Mastec, SFAS 157 is effective for the fiscal year beginning
January 1, 2008. We are currently evaluating this standard to determine its impact, if any, on our
consolidated financial statements.
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are
currently evaluating the effect, if any, this Interpretation will have on our consolidated
financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155,
Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and
140. In March 2006, the FASB issued Statement of Financial Accounting Standard No. 156,
Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140. These
statements become effective January 1, 2007 and are not expected to have a material effect on our
consolidated financial statements.
In November 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-04,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split of
Endorsement Split-Dollar Life Insurance Arrangements, (EITF 06-04). EITF 06-04 reached a
consensus that for a split-dollar life insurance arrangement that provides a benefit to an employee
that extends to postretirement periods, an employer should recognize a liability for future
benefits in accordance with FAS No. 106 or Opinion 12 (depending upon whether a substantive plan is
deemed to exist) based on the substantive agreement with the employee. This consensus is effective
for fiscal years beginning after December 15, 2006. We have not determined the impact, if any, that
the adoption of this pronouncement will have on our consolidated financial statements.
In November 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-05,
Accounting for Purchase of Life Insurance-Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-04, (EITF 06-05).
51
MasTec, Inc.
Notes to Consolidated Financial Statements continued
EITF 06-05 reached a consensus
that a policyholder should consider any additional amounts included in the contractual terms of the
policy in determining the amount that could be realized under the insurance contract. The Task
Force agreed that contractual limitations should be considered when determining the realizable
amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance
company should be excluded from the amount that could be realized. The Task Force also agreed that fixed amounts that are recoverable by the policyholder in future periods in excess of one year
from the surrender of the policy should be recognized at their present value. The Task Force also
reached a consensus that a policy holder should determine the amount that could be realizable under
the life insurance contract assuming the surrender of an individual-life by individual policy (or
certificate by certificate in a group policy). The Task Force noted that any amount that is
ultimately realized by the policyholder upon the assumed surrender of the final policy (or final
certificate in a group policy) shall be included in the amount that could be realized under the
insurance contract. This consensus is effective for fiscal years beginning after December 15, 2006.
We have not determined the impact, if any, that the adoption of this pronouncement will have on our
consolidated financial statements.
Note 2 Sale of the Companys Common Stock
On January 24, 2006, MasTec completed a public offering of 14,375,000 shares of our common
stock at $11.50 per share. The net proceeds from the sale were approximately $156.4 million after
deducting underwriting discounts and offering expenses. We used $18.5 million of the net proceeds
for the cash portion of the purchase price for the DSSI acquisition, as described below. On March
2, 2006, we used $75.5 million of the net proceeds of the public offering to redeem a portion of
our 7.75% senior subordinated notes due February 2008.
Note 3 Acquisition of Digital Satellite Services, Inc.
Effective January 31, 2006, we acquired substantially all of the assets and assumed certain
operating liabilities and contracts of Digital Satellite Services, Inc., which we refer to as the
DSSI acquisition. The purchase price was composed of
$18.5 million in cash, $6.9 million of MasTec
common stock (637,214 shares based on the closing price of MasTecs common stock of $11.77 per
share on January 27, 2006 discounted by 8.75% due to the shares
being restricted for 120 days), $0.9 million of estimated transaction costs and an earn-out based on
future performance. We registered the resale of these shares on
April 28, 2006.
DSSI was involved in the installation of residential and commercial satellite and security
services in several markets including Atlanta, Georgia, the Greenville-Spartanburg area of South
Carolina and Asheville, North Carolina, and portions of Tennessee, Kentucky and Virginia. These
markets are contiguous to areas in which we are active with similar installation services.
Following the DSSI acquisition, we provide installation services from the mid-Atlantic states to
South Florida.
The purchase price allocation for the DSSI acquisition is based on fair-value of each of the
following components on January 31, 2006 (in thousands):
|
|
|
|
|
Net assets |
|
$ |
2,026 |
|
Non-compete agreement |
|
|
658 |
|
Goodwill |
|
|
23,559 |
|
|
|
|
|
Purchase price |
|
$ |
26,243 |
|
|
|
|
|
The operations of DSSI are immaterial to our consolidated financial statements.
Note 4 Goodwill and Other Intangible Assets
SFAS No. 142 requires companies to stop amortizing goodwill and certain intangible assets with
an infinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed
to have an infinite useful life be reviewed for impairment upon adoption of SFAS No. 142 and
annually thereafter.
We continue to amortize identifiable intangible assets that have a definite useful life. These
consist exclusively of non-compete agreements that expire in 2010. Total amortization expense
related to these non-compete agreements was $0.3 million, $0.2 million and $0.5 million in 2006,
2005 and 2004, respectively. The remaining balance of $1.3 million at December 31, 2006 will be
amortized at a rate of approximately $0.3 million per year.
During the fourth quarters of 2006, 2005 and 2004, management performed its annual review of
goodwill for impairment. No additional impairment charges for 2006, 2005 and 2004 were required as
a result of this review. In connection with the abandonment
52
MasTec, Inc.
Notes to Consolidated Financial Statements continued
of the Brazil subsidiary as discussed
in Note 10, we wrote off $12.3 million of goodwill in the year ended December 31, 2004. In
connection with the intention to sell substantially all of the state Department of Transportation
projects and assets as discussed in Note 10, the Company wrote off $11.5 million of goodwill in the
year ended December 31, 2005.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value as determined using a discounted cash flow
methodology applied to the particular entity.
Note 5 Accounts Receivable
Accounts receivable, classified as current, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Contract billings |
|
$ |
128,756 |
|
|
$ |
146,369 |
|
Retainage |
|
|
9,051 |
|
|
|
10,223 |
|
Unbilled revenue |
|
|
37,735 |
|
|
|
31,186 |
|
|
|
|
|
|
|
|
|
|
|
175,542 |
|
|
|
187,778 |
|
Less allowance for doubtful accounts |
|
|
11,582 |
|
|
|
15,946 |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
163,960 |
|
|
$ |
171,832 |
|
|
|
|
|
|
|
|
Retainage, which has been billed but is not due until completion of performance and acceptance
by customers, is expected to be collected within one year. Any receivables, including retainage
expected to be collected beyond a year is recorded in long-term other assets.
Activity for the allowance for doubtful accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Allowance for doubtful accounts at beginning of year |
|
$ |
15,946 |
|
|
$ |
19,026 |
|
Provision for doubtful accounts from continuing operations |
|
|
1,893 |
|
|
|
1,620 |
|
Amounts charged against the allowance |
|
|
(6,257 |
) |
|
|
(4,700 |
) |
|
|
|
|
|
|
|
Allowance for doubtful accounts at end of year |
|
$ |
11,582 |
|
|
$ |
15,946 |
|
|
|
|
|
|
|
|
Note 6 Other Assets and Liabilities
Prepaid expenses and other current assets as of December 31, 2006 and 2005 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets |
|
$ |
7,639 |
|
|
$ |
5,308 |
|
Notes receivable |
|
|
1,630 |
|
|
|
2,231 |
|
Non-trade receivables |
|
|
14,664 |
|
|
|
21,452 |
|
Other investments |
|
|
5,548 |
|
|
|
4,815 |
|
Prepaid expenses and deposits |
|
|
7,259 |
|
|
|
6,563 |
|
Other |
|
|
2,297 |
|
|
|
2,073 |
|
|
|
|
|
|
|
|
Total |
|
$ |
39,037 |
|
|
$ |
42,442 |
|
|
|
|
|
|
|
|
Other non-current assets as of December 31, 2006 and 2005 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Investment in real estate |
|
$ |
1,683 |
|
|
$ |
1,683 |
|
Equity investments |
|
|
15,719 |
|
|
|
5,268 |
|
Long-term portion of deferred financing costs, net |
|
|
2,486 |
|
|
|
4,124 |
|
Cash surrender value of insurance policies |
|
|
7,654 |
|
|
|
6,369 |
|
Non-compete agreement, net |
|
|
1,286 |
|
|
|
900 |
|
Insurance escrow |
|
|
6,564 |
|
|
|
24,792 |
|
Long-term
portion of notes receivable |
|
|
3,150 |
|
|
|
|
|
Other
receivables |
|
|
2,910 |
|
|
|
|
|
Other |
|
|
3,252 |
|
|
|
2,934 |
|
|
|
|
|
|
|
|
Total |
|
$ |
44,704 |
|
|
$ |
46,070 |
|
|
|
|
|
|
|
|
53
MasTec, Inc.
Notes to Consolidated Financial Statements continued
Other current and non-current liabilities as of December 31, 2006 and 2005 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accrued compensation |
|
$ |
11,096 |
|
|
$ |
11,084 |
|
Accrued insurance |
|
|
16,784 |
|
|
|
17,144 |
|
Accrued interest |
|
|
3,907 |
|
|
|
6,329 |
|
Billings in excess of costs |
|
|
3,122 |
|
|
|
2,505 |
|
Accrued professional fees |
|
|
4,964 |
|
|
|
3,484 |
|
Accrued losses on contracts |
|
|
410 |
|
|
|
509 |
|
Accrued payments related to equity investment |
|
|
925 |
|
|
|
925 |
|
Other |
|
|
6,499 |
|
|
|
3,569 |
|
|
|
|
|
|
|
|
Total |
|
$ |
47,707 |
|
|
$ |
45,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Accrued insurance |
|
$ |
34,158 |
|
|
$ |
34,926 |
|
Minority interest |
|
|
2,305 |
|
|
|
1,837 |
|
Other |
|
|
58 |
|
|
|
596 |
|
|
|
|
|
|
|
|
Total |
|
$ |
36,521 |
|
|
$ |
37,359 |
|
|
|
|
|
|
|
|
Note 7 Property and Equipment
Property and equipment including property and equipment under capital leases, is comprised of
the following as of December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
Useful Lives |
|
|
|
2006 |
|
|
2005 |
|
|
(In Years) |
|
Land |
|
$ |
3,654 |
|
|
$ |
4,626 |
|
|
|
|
|
Buildings and leasehold improvements |
|
|
8,973 |
|
|
|
8,147 |
|
|
|
5 - 40 |
|
Machinery and equipment |
|
|
126,005 |
|
|
|
125,375 |
|
|
|
2 - 15 |
|
Office furniture and equipment |
|
|
38,716 |
|
|
|
35,298 |
|
|
|
3 - 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,348 |
|
|
|
173,446 |
|
|
|
|
|
Less accumulated depreciation |
|
|
(115,948 |
) |
|
|
(125,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61,400 |
|
|
$ |
48,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment under capitalized leasing arrangements are depreciated over their
estimated useful lives.
Management reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be realizable. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset are compared to
the assets carrying amount to determine if an impairment of such asset is necessary. The effect of
any impairment would be to expense the difference between the fair value of such asset and its
carrying value. In 2006, 2005 and 2004, fair market value was based on disposals of similar assets
and the review resulted in no impairment.
A review of the carrying value of property and equipment was conducted during the fourth
quarter of 2002 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This review was conducted in connection with the Companys plan of exiting
businesses that did not have adequate revenue or margins to support the desired level of
profitability and consideration of changes in the business environment which caused change in the
extent and manner in which these assets were being used. Depreciation expense was reduced by $0, $0
and $5.8 million for the years ended December 31, 2006, 2005 and 2004, respectively, from the
amount of expense which would have been reported using the previous useful lives as a result of the
change in estimate. This reduction is included in part in depreciation expense and in part in loss
from discontinued operations.
54
MasTec, Inc.
Notes to Consolidated Financial Statements continued
Note 8 Debt
Debt is comprised of the following at December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Revolving credit facility at LIBOR plus 1.25% as
of December 31, 2006 and 2.25% as of December
31, 2005 (5.36% as of December 31, 2006 and
5.25% as of December 31, 2005) or, at MasTecs
option, the banks base rate as of December 21,
2006 and the banks base rate plus 0.75% as of
December 31, 2005 (8.25% as of December 31, 2006
and 8.00% as of December 31, 2005) |
|
$ |
|
|
|
$ |
4,154 |
|
|
|
|
|
|
|
|
|
|
7.75% senior subordinated notes due February 2008 |
|
|
120,970 |
|
|
|
195,943 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
8,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable for equipment, at interest rates
from 4.9% to 7.0% due in installments through
the year 2008 |
|
|
1,161 |
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
130,176 |
|
|
|
200,370 |
|
Less current maturities |
|
|
(1,769 |
) |
|
|
(4,266 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
128,407 |
|
|
$ |
196,104 |
|
|
|
|
|
|
|
|
Revolving Credit Facility
We have a secured revolving credit facility which was amended and restated on May 10, 2005
increasing the maximum amount of availability from $125 million to $150 million, subject to
reserves of $5.0 million, and other adjustments and restrictions (the Credit Facility). The costs
related to this amendment were $2.6 million and are being amortized over the life of the Credit
Facility. The Credit Facility expires on May 10, 2010. These deferred financing costs are included
in prepaid expenses and other current assets and other assets in the consolidated balance sheet.
On May 8, 2006, we were able to amend our Credit Facility (the 2006 Amendment) to reduce the
interest rate margins charged on borrowings and letters of credit. The 2006 Amendment also
increases the maximum purchase price for a permitted acquisition, increases permitted receivable
concentration of certain customers, increases the permitted capital expenditures and debt baskets,
and reduces the required minimum fixed charge coverage ratio if net availability falls below $20.0
million. On November 7, 2006, we again amended our credit facility which allowed us to provide our
insurer with an $18.0 million letter of credit under the credit facility simultaneously with the
insurer returning to us cash collateral of $18.0 million in cash, plus all accrued interest. As
collateral for this letter of credit, we pledged $18.0 million
in cash to our lenders under the credit
facility. This increase in the outstanding balance in letters of credit will not result in a
reduction to our net availability under the credit facility as long as sufficient cash or
collateral is granted to our lenders.
The amount that we can borrow at any given time is based upon a formula that takes into
account, among other things, eligible billed and unbilled accounts receivable and equipment which
can result in borrowing availability of less than the full amount of the Credit Facility. As of
December 31, 2006 and 2005, net availability under the Credit Facility totaled $35.1 million and
$55.4 million, respectively, which includes outstanding standby letters of credit aggregating $83.3
million and $57.6 million in each period, respectively. At December 31, 2006, $66.2 million of the
outstanding letters of credit were issued to support MasTecs casualty and medical insurance
requirements. These letters of credit mature at various dates and most have automatic renewal
provisions subject to prior notice of cancellation. The Credit Facility is collateralized by a
first priority security interest in substantially all of our assets and a pledge of the stock of
certain of our operating subsidiaries. All wholly-owned subsidiaries collateralize the Credit
Facility. At December 31, 2006 and 2005, we had outstanding cash draws under the Credit Facility of
$0 and $4.2 million, respectively. The balance at December 31, 2005 was subsequently paid off in
early January 2006 and through March 5, 2007, we have not borrowed any additional amounts under
the Credit Facility. Interest under the Credit Facility accrues at variable rates based, at our
option, on the agent banks base rate plus a margin of between 0.0% and 0.75% or the LIBOR rate (as
defined in the Credit Facility) plus a margin of between 1.25% and 2.25%, depending on certain
financial thresholds. The Credit Facility includes an unused facility fee of 0.375%, which may be
adjusted to as low as 0.250%.
55
MasTec, Inc.
Notes to Consolidated Financial Statements continued
The Credit Facility contains customary events of default (including cross-default) provisions
and covenants related to our operations that prohibit, among other things, making investments and
acquisitions in excess of specified amounts, incurring additional indebtedness in excess of
specified amounts, paying cash dividends, making other distributions in excess of specified
amounts, making capital expenditures in excess of specified amounts, creating liens against our
assets, prepaying other indebtedness including our 7.75% senior subordinated notes, and engaging in
certain mergers or combinations without the prior written consent of the lenders. In addition, any
deterioration in the quality of billed and unbilled receivables, reduction in the value of our
equipment or an increase in our lease expense related to real estate, would reduce availability
under the Credit Facility.
MasTec is required to be in compliance with a minimum fixed charge coverage ratio of 1.1 to
1.0 measured on a monthly basis and certain events are triggered if the net availability under the
Credit Facility is under $20.0 million at any given day. The Credit Facility further provides that
once net availability is greater than or equal to $20.0 million for 90 consecutive days, the fixed
charge ratio will no longer apply. The fixed charge coverage ratio is generally defined to mean the
ratio of our net income before interest expense, income tax expense, depreciation expense, and
amortization expense minus net capital expenditures and cash taxes to the sum of all interest
expense plus current maturities of debt for the period. The financial covenant was not applicable
as of December 31, 2006 because at that time the net availability under the Credit Facility was
approximately $35.1 million and net availability did not reduce below $20.0 million on any given
day during the period.
We are dependent upon borrowings and letters of credit under this Credit Facility to fund
operations. Should we be unable to comply with the terms and conditions of the Credit Facility, we
would be required to obtain further modifications of the Credit Facility or obtain another source
of financing to continue to operate. We may not be able to achieve our 2007 projections and thus
may not be in compliance with the Credit Facilitys minimum net availability requirements and
minimum fixed charge ratio in the future.
The variable rate Credit Facility exposes us to interest rate risk.
Senior Subordinated Notes
As of December 31, 2006, $121.0 million of our 7.75% senior subordinated notes due in February
2008, with interest due semi-annually were outstanding. The notes contain default (including
cross-default) provisions and covenants restricting many of the same transactions as under the
Credit Facility. The notes were redeemable, at our option, at 100% of the face amount of the notes.
On March 2, 2006, we redeemed $75.0 million principal amount of the senior subordinated notes and
paid approximately $0.5 million in accrued interest. As further discussed in Note 19, on January
31, 2007, we issued $150.0 million aggregate principal amount of 7.625% senior notes due 2017.
MasTec had no holdings of derivative financial or commodity instruments at December 31, 2006.
The following table summarizes our contractual maturities of long-term debt obligations as of
December 31, 2006 (in thousands). The table below considers the
redemption of our senior subordinated notes that took place on
March 2, 2007.
|
|
|
|
|
2007 |
|
$ |
1,769 |
|
2008 |
|
|
1,752 |
|
2009 |
|
|
1,653 |
|
2010 |
|
|
1,530 |
|
2011 |
|
|
1,522 |
|
Thereafter |
|
|
121,950 |
|
|
|
|
|
Total |
|
$ |
130,176 |
|
|
|
|
|
Capital Leases
During 2006, we entered into several agreements which provided financing for various machinery
and equipment totaling $8.6 million. These capital leases are non-cash transactions and,
accordingly, have been excluded from the consolidated statements of cash flows. These leases range
between 60 and 72 months and have effective interest rates ranging from 4.47% to 6.86%. In
accordance with Statement of Financial Accounting Standard No. 13, Accounting for Leases (SFAS
13), as amended, these leases were capitalized. SFAS 13 requires the capitalization of leases
meeting certain criteria, with the related asset being recorded in property and equipment and an
offsetting amount being recorded as a liability. As of December 31, 2006, we had $8.0 million in
total indebtedness relating to the capital leases entered into during 2006, of which $6.8 million
was considered long-term.
56
MasTec, Inc.
Notes to Consolidated Financial Statements continued
Note 9 Lease Commitments
We have operating lease agreements for premises and equipment that expire on various dates.
The operating lease agreements are subject to escalation. Rent expense from continuing operations
for the years ended December 31, 2006, 2005 and 2004 was approximately $52.7 million, $48.5 million
and $40.6 million, respectively.
We also have capital lease agreements for equipment that expire on various dates.
Minimum future lease commitments under non-cancelable operating leases and future minimum
capital lease payments, including effect of escalation clauses in effect at December 31, 2006 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
Capital Leases |
|
2007 |
|
$ |
32,814 |
|
|
$ |
1,882 |
|
2008 |
|
|
20,425 |
|
|
|
1,882 |
|
2009 |
|
|
11,606 |
|
|
|
1,882 |
|
2010 |
|
|
4,496 |
|
|
|
1,882 |
|
2011 |
|
|
2,348 |
|
|
|
1,771 |
|
Thereafter |
|
|
2,438 |
|
|
|
1,194 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
74,127 |
|
|
|
10,493 |
|
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
|
|
|
|
2,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,045 |
|
Less current portion |
|
|
|
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,832 |
|
|
|
|
|
|
|
|
|
For leases with purchase options, the option to purchase equipment is at estimated fair market
value. We have non-cancelable subleases for certain capital leases which are recorded in other
assets. Future minimum leases received from subleases through January 2010 aggregated $0.9 million
as of December 31, 2006 which is included in assets held for sale.
Note 10 Discontinued Operations
In March 2004, we ceased performing contractual services for customers in Brazil, abandoned
all assets in our Brazil subsidiary and made a determination to exit the Brazil market. During the
year ended December 31, 2004, we wrote off approximately $12.3 million in goodwill (see Note 2) and
the net investment in its Brazil subsidiary of approximately $6.8 million which consisted of the
accumulated foreign currency translation loss of $21.3 million less a net deficit in assets of
$14.5 million. The abandoned Brazil subsidiary has been classified as a discontinued operation. In
addition to these impairment charges, the net loss from operations for the Brazil subsidiary was
$1.1 million for the year ended December 31, 2004. In November 2004, the subsidiary applied for
relief and was adjudicated bankrupt by a Brazilian bankruptcy court. The subsidiary is currently
being liquidated under court supervision. For the year ended December 31, 2005, the Brazil
subsidiary had no activity as the entity is in the process of liquidation. For the year ended
December 31, 2006, the Brazil subsidiary incurred approximately $0.1 million net loss mainly
related to legal costs.
The following table summarizes the assets and liabilities of the Brazil operations as of
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2005 |
Current assets |
|
$ |
290 |
|
|
$ |
290 |
|
Non current assets |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
19,455 |
|
|
|
19,455 |
|
Non current liabilities |
|
|
2,170 |
|
|
|
2,170 |
|
Accumulated foreign currency translation |
|
|
(21,335 |
) |
|
|
(21,335 |
) |
The following table summarizes the results of operations for the Brazil operations for the
years ended December 31 (in thousands):
57
MasTec, Inc.
Notes to Consolidated Financial Statements continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Operating expenses |
|
|
(132 |
) |
|
|
|
|
|
|
(1,046 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes and
minority interest |
|
|
(132 |
) |
|
|
|
|
|
|
(1,051 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(132 |
) |
|
$ |
|
|
|
$ |
(1,051 |
) |
|
|
|
|
|
|
|
|
|
|
During the fourth quarter 2004, we ceased performing new services in the network services
operations and sold these operations in 2005. On May 24, 2005, the Company sold certain assets of
its network services operations to a third party for $0.2 million consisting of $0.1 million in
cash and a promissory note in the principal amount of $0.1 million due in May 2006. We recorded a
loss on sale of approximately $0.6 million, net of tax, in the year ended December 31, 2005. The
loss on sale resulted from additional selling costs and remaining obligations that were not assumed
by the buyer. These operations have been classified as a discontinued operation in all periods
presented. The net loss for the years ended December 31, 2006, 2005 and 2004, for the network
services operations was $0.3 million, $1.7 million and $3.0 million, respectively.
The following table summarizes the assets and liabilities of the network services operations
as of December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2005 |
Current assets |
|
$ |
201 |
|
|
$ |
883 |
|
Non current assets |
|
|
34 |
|
|
|
34 |
|
Current liabilities |
|
|
618 |
|
|
|
816 |
|
Non current liabilities |
|
|
|
|
|
|
|
|
Shareholders equity (deficit) |
|
|
(383 |
) |
|
|
101 |
|
The following table summarizes the results of operations for the network services operations
for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
115 |
|
|
$ |
4,001 |
|
|
$ |
17,046 |
|
Cost of revenue |
|
|
(115 |
) |
|
|
(3,938 |
) |
|
|
(16,435 |
) |
Operating and other expenses |
|
|
(317 |
) |
|
|
(1,764 |
) |
|
|
(3,614 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes |
|
$ |
(317 |
) |
|
$ |
(1,701 |
) |
|
$ |
(3,003 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(317 |
) |
|
$ |
(1,701 |
) |
|
$ |
(3,003 |
) |
|
|
|
|
|
|
|
|
|
|
On December 31, 2005, the executive committee of our board of directors voted to sell
substantially all of our state Department of Transportation related projects and assets. The
decision to sell was made after evaluation of, among other things, short and long-term prospects.
Due to this decision, the projects and assets that are for sale have been accounted for as
discontinued operations for all periods presented, including the reclassification of results of
operations from these projects to discontinued operations for all years presented. During the year
ended December 31, 2005, we wrote-off approximately $11.5 million in goodwill in connection with
our decision to sell substantially all of these related projects and assets. We determined that
this goodwill amount would not be realized after evaluating the cash flows from the operations of
these projects and assets in light of our decisions on future operations and the our decision to
sell. The remaining net asset value was also reviewed by management in the year ended December 31,
2005 and we believed we reserved for inventory items that were considered obsolete,
reserved for all receivables that appeared to be uncollectible and wrote-off fixed assets that were
no longer in use or not
58
MasTec, Inc.
Notes to Consolidated Financial Statements continued
saleable. In addition, we reviewed all projects in process to determine
estimated to complete amounts were materially accurate and all projects with an estimated loss were
accrued. A review of the carrying value of property and equipment related to the state Department
of Transportation projects and assets was conducted in connection with the decision to sell these
projects and assets. Management assumed a one year cash flow and estimated a selling price using a
weighted probability cash flow approach based on managements estimates. As discussed in Note 19,
on February 14, 2007, we sold the state Department of Transportation effective related projects and
net assets. We have agreed to keep certain assets and liabilities related to the state Department
of Transportation related projects. The sales price of $1.0 million in cash was paid at closing. In
addition, the buyer is required to pay us an earn out of up to $12.0 million contingent on the
future operations of the projects sold to the third party. However, as the earn out is contingent
upon the future performance of the state Department of Transportation
related projects, we may not
receive any of these earn out payments. The closing was effective February 1, 2007 to the extent set forth in the purchase agreement. As a
result of this sale, we recorded impairment charges totaling $44.5 million during the year ended
December 31, 2006. The impairment charge was calculated using the contractual sales price for these
assets and managements estimate of closing costs and other liabilities.
The following table summarizes the assets held for sale and liabilities related to the assets
held for sale, including an estimate of selling costs, for the state Department of Transportation
operations as of December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accounts receivable, net |
|
$ |
10,315 |
|
|
$ |
44,906 |
|
Inventory |
|
|
8,461 |
|
|
|
23,724 |
|
Other current assets |
|
|
37 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
Current assets held for sale |
|
$ |
18,813 |
|
|
$ |
69,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
|
|
|
$ |
3,822 |
|
Long-term assets |
|
|
70 |
|
|
|
2,327 |
|
|
|
|
|
|
|
|
Long-term assets held for sale |
|
$ |
70 |
|
|
$ |
6,149 |
|
|
|
|
|
|
|
|
Current liabilities related to assets held for sale |
|
$ |
24,946 |
|
|
$ |
30,099 |
|
|
|
|
|
|
|
|
Long-term liabilities related to assets held for sale |
|
$ |
596 |
|
|
$ |
860 |
|
|
|
|
|
|
|
|
The following table summarizes the results of operations for the state Department of
Transportation related projects and assets that are considered to be discontinued for the years
ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
81,967 |
|
|
$ |
94,445 |
|
|
$ |
106,611 |
|
Cost of revenue |
|
|
(112,337 |
) |
|
|
(106,183 |
) |
|
|
(109,461 |
) |
Operating expenses |
|
|
(58,444 |
) |
|
|
(19,782 |
) |
|
|
(5,624 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes |
|
$ |
(88,814 |
) |
|
|
(31,520 |
) |
|
$ |
(8,474 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(88,814 |
) |
|
$ |
(31,520 |
) |
|
$ |
(8,474 |
) |
|
|
|
|
|
|
|
|
|
|
Note 11 Retirement and Stock Option Plans
MasTec has a 401(k) plan covering all eligible employees. Subject to certain dollar limits,
eligible employees may contribute up to 15% of their pre-tax annual compensation to the plan. We
did not match employee contributions in 2004 and 2005. Commencing in the first quarter of 2006, we
began to match contributions under the 401(k) plan. MasTec matches $0.50 on the dollar for the
first 2% of the employees contribution which is payable in common shares
of MasTec.
We have granted options to purchase our common stock to our employees and members of our board
of directors and our affiliates under various stock option plans at no less than the fair market
value of the underlying stock on the date of grant. These options are granted for a term not
exceeding ten years and are forfeited in the event the employee or director terminates his or her
employment or relationship with us or one of our affiliates. All option plans contain anti-dilutive
provisions that require the adjustment of the number of shares of our common stock represented by
each option for any stock splits or dividends.
59
MasTec, Inc.
Notes to Consolidated Financial Statements continued
We have five stock option plans that have stock options outstanding as of December 31, 2006:
the 1994 Stock Incentive Plan (the 1994 Plan), the 1994 Stock Option Plan for Non-Employee
Directors (the Directors Plan), the 1999 Non-Qualified Option Plan (the Non-Qualified Plan),
the 2003 Employee Stock Incentive Plan as amended (the 2003 Plan) and the Amended and Restated
2003 Stock Incentive Plan for Non-Employees as amended (the 2003 Non-Employee Plan) and
individual option agreements. Typically, options under these plans are granted at fair market value
at the date of grant, vest between three to five years after grant and terminate no later than 10
years from the date of grant. The 1994 Plan and the Directors Plan expired in 2004 and no future
stock options can be granted under these plans. During 2006, MasTec entered into the Deferred Fee
Plan for its directors.
The 2003 Non-Employee Plan was adopted in April 2003 and authorized granting of restricted
stock to non-employees. We have reserved 2,500,000 shares of common stock for grant under the 2003
Non-Employee Plan which covers stock options or restricted stock awards. We grant restricted stock which is valued based on the market price of the
common stock on the date of grant. Compensation expense arising from restricted stock grants is
recognized using the ratable method over the period of the restrictions. Unearned compensation for
the restricted stock is shown as a reduction of shareholders equity in the consolidated balance
sheets. We approved the issuance of restricted stock to the board of directors and certain
employees in 2006. In the year ended December 31, 2006, we issued 104,751 shares of restricted
stock to key employees and board members. The value of this issuance was approximately $1.4 million
and is being expensed over a vesting period ranging from 12 to 36 months. In the year ended
December 31, 2005, we issued 94,841 shares of restricted stock to key employees and certain board
members, which were valued at approximately $0.8 million. Total unearned compensation related to
restricted stock grants as of December 31, 2006 and 2005 is $0.7 million and $0.7 million,
respectively. Restricted stock expense for the years ended December 31, 2006, 2005 and 2004 is $1.4
million, $0.5 million and $39,380, respectively.
Under these plans there were a total of 5,526,667, 6,354,015 and 7,453,209 options available
for grant at December 31, 2006, 2005 and 2004, respectively. In addition, there are 233,200 options
outstanding under individual option agreements with varying vesting schedules at exercise prices
ranging from $14.06 $17.67 with terms up to 10 years. The
1997 Non-Qualified Employee Stock Purchase Plan also allows eligible
employees to purchase the MasTecs common stock through payroll deductions or in a lump sum at a
15% discount from fair market value. The amount of compensation expense related to these
transactions is immaterial.
The following is a summary of all stock option transactions during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding December 31, 2003 |
|
|
9,283,880 |
|
|
$ |
12.91 |
|
Granted |
|
|
610,500 |
|
|
|
9.01 |
|
Exercised |
|
|
(343,839 |
) |
|
|
5.38 |
|
Canceled |
|
|
(588,511 |
) |
|
|
13.38 |
|
|
|
|
|
|
|
|
Outstanding December 31, 2004 |
|
|
8,962,030 |
|
|
$ |
12.80 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,370,500 |
|
|
|
9.70 |
|
Exercised |
|
|
(452,815 |
) |
|
|
5.60 |
|
Canceled |
|
|
(1,225,654 |
) |
|
|
14.19 |
|
|
|
|
|
|
|
|
Outstanding December 31, 2005 |
|
|
8,654,061 |
|
|
$ |
12.54 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,064,500 |
|
|
|
13.50 |
|
Exercised |
|
|
(832,287 |
) |
|
|
5.40 |
|
Canceled |
|
|
(549,156 |
) |
|
|
19.24 |
|
|
|
|
|
|
|
|
Outstanding December 31, 2006 |
|
|
8,337,118 |
|
|
$ |
12.94 |
|
|
|
|
|
|
|
|
The weighted average fair value of stock options granted for 2006 and 2005 is $8.45 per share
and $7.52 per share, respectively.
The following table summarizes information about stock options outstanding as of December 31,
2006:
60
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Remaining |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
Range of Exercise Prices |
|
Stock Options |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
Stock Options |
|
|
Exercise Price |
|
$2.0050 - $2.2150 |
|
|
74,081 |
|
|
|
2.08 |
|
|
$ |
2.00 |
|
|
|
74,081 |
|
|
$ |
2.00 |
|
$3.3401 - $4.8600 |
|
|
228,763 |
|
|
|
3.94 |
|
|
$ |
3.84 |
|
|
|
223,663 |
|
|
$ |
3.83 |
|
$4.8601 - $7.0900 |
|
|
467,505 |
|
|
|
5.89 |
|
|
$ |
5.54 |
|
|
|
406,405 |
|
|
$ |
5.54 |
|
$7.0901 - $10.5600 |
|
|
2,724,888 |
|
|
|
6.09 |
|
|
$ |
9.07 |
|
|
|
2,246,683 |
|
|
$ |
8.96 |
|
$10.5601 - $21.0417 |
|
|
4,502,583 |
|
|
|
3.94 |
|
|
$ |
15.35 |
|
|
|
3,482,183 |
|
|
$ |
15.89 |
|
$21.0418 - $36.8750 |
|
|
334,048 |
|
|
|
0.51 |
|
|
$ |
30.62 |
|
|
|
334,048 |
|
|
$ |
30.62 |
|
$36.8751 - $45.0833 |
|
|
5,250 |
|
|
|
0.38 |
|
|
$ |
44.01 |
|
|
|
5,250 |
|
|
$ |
44.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.0050 - $45.0833 |
|
|
8,337,118 |
|
|
|
4.60 |
|
|
$ |
12.94 |
|
|
|
6,772,313 |
|
|
$ |
13.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, we had 6,722,313 options which were exercisable at a weighted
average exercise price of $13.17 per share. As of December 31, 2005, we had 6,945,606 options which
were exercisable at a weighted average exercise price of $13.69 per share.
Note 12 Equity Investment
In September 2004, MasTec purchased a 49% interest in a limited liability company from a third
party. The purchase price for this investment was an initial amount of $3.7 million which was paid
in four quarterly installments of $925,000 through December 31, 2005. Beginning in the first
quarter of 2006, eight additional contingent quarterly payments are expected to be made to the
third party from which the interest was purchased. The contingent payments will be up to a maximum
of $1.3 million per quarter based on the level of unit sales and profitability of the limited
liability company in specified preceding quarters. The first five quarterly contingent payments,
each of $925,000, were made on January 10, 2006, April 10, 2006, July 11, 2006, October 10, 2006
and January 10, 2007. The January 10, 2007 amount is included in accrued expenses and other
assets as of December 31, 2006. In March 2006,
the venture requested a total capital contribution in the amount of $2.0 million of which $980,000,
or 49%, was paid by us. Accordingly, this amount increased the investment balance which is included
in other assets as of December 31, 2006.
As of December 31, 2006, our investment exceeded the net equity of such investment and
accordingly the excess is considered to be equity goodwill.
We have accounted for this investment using the equity method as we have the ability to
exercise significant influence over the financial and operational policies of this limited
liability company. We recognized approximately $5.8 million of investment income in the year ended
December 31, 2006. As of December 31, 2006, we had an investment balance of approximately $16.8
million in relation to this investment which is included in other assets in the consolidated
financial statements.
As discussed in Note 19, on February 6, 2007, we acquired the remaining 51% equity interest in
this company for $8.65 million in cash, in addition to
approximately $6.35 million which we also paid at that time to
discharge our remaining
obligations to the seller under the purchase agreement for the
original 49% equity interest, and issued 300,000 shares of our common
stock. We also agreed to pay the seller an earn-out through the
eighth anniversary of the closing date based on the entitys future performance.
Note 13 Income Taxes
The expense (benefit) for income taxes from continuing operations consists of the following
(in thousands):
61
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(415 |
) |
|
$ |
39 |
|
|
$ |
2,312 |
|
Foreign |
|
|
7 |
|
|
|
(322 |
) |
|
|
(1,015 |
) |
State and local |
|
|
589 |
|
|
|
220 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
|
(63 |
) |
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
415 |
|
|
|
(39 |
) |
|
|
(2,267 |
) |
Foreign |
|
|
(7 |
) |
|
|
322 |
|
|
|
1,015 |
|
State and local, net of valuation provisions |
|
|
(589 |
) |
|
|
(220 |
) |
|
|
(296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
63 |
|
|
|
(1,548 |
) |
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of significant items comprising our net deferred tax asset as of December 31,
2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Non-compete |
|
$ |
2,914 |
|
|
$ |
3,356 |
|
Bad debts |
|
|
5,867 |
|
|
|
6,906 |
|
Accrued self insurance |
|
|
18,874 |
|
|
|
19,762 |
|
Operating loss and tax credit carry forward |
|
|
79,617 |
|
|
|
81,736 |
|
Other |
|
|
23,413 |
|
|
|
3,738 |
|
|
|
|
|
|
|
|
|
|
Valuation Allowance |
|
|
(49,178 |
) |
|
|
(33,863 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
81,507 |
|
|
|
81,635 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable retainage |
|
|
4,860 |
|
|
|
6,013 |
|
Property and equipment |
|
|
4,021 |
|
|
|
6,470 |
|
Basis differences in acquired assets |
|
|
399 |
|
|
|
407 |
|
Other |
|
|
5,284 |
|
|
|
5,620 |
|
Goodwill |
|
|
9,987 |
|
|
|
6,349 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
24,551 |
|
|
|
24,859 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
56,956 |
|
|
$ |
56,776 |
|
|
|
|
|
|
|
|
At
December 31, 2006, we had approximately $179.7 million of net operating loss carryforwards
for U.S. federal income tax purposes that expire beginning in 2022. We have net operating loss
carryforwards for U.S. state and local purposes that expire from 2007 to 2026. We have an
unrealized excess tax benefit of approximately $2.6 million, that when realized, will increase
capital surplus. Additionally, MasTec has approximately $6.6 million of net operating loss
carryforwards for Canadian income tax purposes that expires beginning in 2011.
In assessing the ability to realize the deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which these temporary differences become deductible. Management
considers the projected future taxable income and prudent and feasible tax planning strategies in
making this assessment. As of December 31, 2006 and 2005,
valuation allowances of $49.2 million and
$33.9 million have been recorded, respectively.
A reconciliation of U.S. statutory federal income tax rate related to pretax income (loss)
from continuing operations to the effective tax rate for the years ended December 31 is as follows:
62
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
U.S. statutory federal rate applied to
pretax (loss) income from continuing
operations |
|
|
35 |
% |
|
|
35 |
% |
|
|
(35 |
)% |
State and local income taxes |
|
|
1 |
|
|
|
5 |
|
|
|
(11 |
) |
Non-deductible expenses |
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
Effect of non U.S operations |
|
|
|
|
|
|
(7 |
) |
|
|
1 |
|
Worthless stock deduction |
|
|
|
|
|
|
|
|
|
|
(78 |
) |
Other |
|
|
9 |
|
|
|
3 |
|
|
|
5 |
|
Valuation allowance for deferred tax assets |
|
|
(46 |
) |
|
|
(40 |
) |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Note 14 Operations by Geographic Areas and Segments
MasTec manages its business on a project basis. All of our projects have been aggregated into
one reportable segment as a specialty trade contractor. We provide services to our customers in the
communications, utilities and government industries. Revenue for customers in these industries is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Communications |
|
$ |
700,031 |
|
|
$ |
620,697 |
|
|
$ |
591,235 |
|
Utilities |
|
|
186,857 |
|
|
|
175,698 |
|
|
|
175,314 |
|
Government |
|
|
58,918 |
|
|
|
51,651 |
|
|
|
40,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006, 2005 and 2004, MasTec operated in the United States,
Canada and the Cayman Islands. In 2003, we became engaged in a single project in Mexico which we
completed shortly after December 31, 2003. In 2003, we had operations in Brazil. In 2004, we ceased
performing contractual services in Brazil, abandoned all assets in the Brazil subsidiary and made a
determination to exit the Brazil market. The following table reflects financial information for
U.S. and foreign operations in continuing operations. Over the past three years, we have continued
to dispose of excess or underutilized long-lived assets and have
placed greater reliance on capital and
operating leases to meet equipment needs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
939,314 |
|
|
$ |
836,539 |
|
|
$ |
790,965 |
|
Foreign |
|
|
6,492 |
|
|
|
11,507 |
|
|
|
16,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
945,806 |
|
|
$ |
848,046 |
|
|
$ |
807,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Long Lived Assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
61,212 |
|
|
$ |
47,513 |
|
Foreign |
|
|
188 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
$ |
61,400 |
|
|
$ |
48,027 |
|
|
|
|
|
|
|
|
Note 15 Commitments and Contingencies
In April 2006, we settled, without payment to the plaintiffs, several complaints for purported
securities class actions that were filed against the Company and certain officers in the second
quarter of 2004. As part of the settlement, our excess insurance carrier has retained its rights to
seek reimbursement of up to $2.0 million from us based on its claim that notice was not properly
given under the policy. We are also seeking reimbursement of expenses incurred by us and are
reimbursable by our excess insurance carrier. We believe the claims of the excess insurance carrier
are without merit and plan to continue vigorously pursuing this action. We are also pursuing claims
against the insurance broker for any losses arising from the same issue involving notice.
63
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
We continue to cooperate with the SEC in the previously disclosed formal investigation related
to the restatement of our financial statements in 2001 through 2003.
In October 2005, eleven former employees filed a Fair Labor Standards Act (FLSA) collective
action against MasTec in the Federal District Court in Tampa, Florida, alleging failure to pay
overtime wages as required under the FLSA. We believe we have defenses to these claims, and will
vigorously defend the lawsuit. Any damages that we may be subject to pursuant to this action are
not quantifiable at this time. This claim could divert managements time and attention from its
business operations and might potentially result in substantial costs of defense, settlement or
other disposition, which could have a material adverse effect on our results of operations in one
or more fiscal periods.
We contracted to construct a natural gas pipeline for Coos County, Oregon in 2003.
Construction work on the pipeline ceased in December 2003 after the County refused payment due on
regular contract invoices of $6.3 million and refused to process change orders submitted to the
County on or after November 29, 2003 for additional work. In February 2004, we declared a breach of
contract and brought an action for breach of contract against Coos County in Federal District Court
in Oregon, seeking payment for work done, interest and anticipated profits. In April 2004, Coos
County announced it was terminating the contract and seeking another company to complete the
project. Coos County subsequently counterclaimed against us in the Federal District Court action
for breach of contract and other causes. The amount of revenue recognized on the Coos County
project that remained uncollected at December 31, 2006 amounted to $6.3 million representing
amounts due us on normal progress payment invoices submitted under the contract. In addition to
these uncollected receivables, we also had additional claims for payment and interest in excess of
$6.0 million, including change order billings and retainage, which we have not recognized as
revenue but which we believe are due to us under the terms of the contract. The matter is currently
being prepared for trial, expected during 2007.
In connection with the Coos County pipeline project, the United States Army Corps of
Engineers, or Corps of Engineers, and the Oregon Department of Environmental Quality issued cease and desist
orders and notices of non-compliance to Coos County and to MasTec with respect to the Countys
project. While we do not agree that the notices were appropriate or justified, we have cooperated
with the Corps of Engineers and the Oregon Division of State Land, Department of Environmental
Quality to mitigate any adverse impact as a result of construction. Through December 31, 2005
mitigation efforts have cost MasTec approximately $1.4 million. These costs were included in the
costs on the project at December 31, 2005 and December 31, 2004. No further mitigation expenses
were incurred in 2006 or are anticipated. On August 9, 2004, the Oregon Department of Environmental
Quality issued a Notice of Violation and Assessment of Civil Penalty to MasTec North America in the
amount of approximately $0.1 million. MasTec North America settled this matter for approximately
$68,000. Additional liability may arise from fines or penalties assessed, or to be assessed by the
Corps of Engineers. We have been unable to settle with the Corps of Engineers. On March 30, 2006,
the Corps of Engineers brought a complaint in federal district court against us and the County.
MasTec is contesting this action vigorously, but can provide no assurance that a favorable outcome
will be reached.
The
potential loss for all unresolved Coos County matters and unpaid settlements reached
described above is estimated to be $125,000 at December 31, 2006, which has been recorded in the
consolidated balance sheet, as accrued expenses.
In June 2005, we posted a $2.3 million bond in order to pursue the appeal of a $2.0 million
final judgment entered against us for damages plus attorneys fees resulting from a break in a
Citgo pipeline. We are seeking a new trial and reduction in the damages award. We will continue to
contest this matter in the appellate court, and on subsequent retrial. The amount of the loss, if
any, relating to this matter not covered by insurance is estimated to range from $0.1 million to
$2.4 million, of which $0.1 million is recorded in the consolidated balance sheet as of December
31, 2006, as accrued expenses.
The labor union representing the workers of Sistemas e Instalaciones de Telecomunicación S.A.
(Sintel), a former MasTec subsidiary, initiated an investigative action with a Spanish federal
court that commenced in July 2001 alleging that five former members of the board of directors of
Sintel, including Jorge Mas, our chairman, and his brother Juan Carlos Mas, approved a series of
allegedly unlawful transactions that led to the bankruptcy of Sintel. MasTec is also named as a
potentially liable party. The union alleges Sintel and its creditors were damaged in the
approximate amount of 13 billion pesetas ($103.2 million at December 31, 2006). The Court has taken
no action to enforce a bond order pending since July 2001 for the amount of alleged damages. The
Court has conducted extensive discovery, including the declarations of certain present and former
executives of MasTec and intends to conduct additional discovery. To date, no actions have been
taken by the court against us or any of the named individuals. Our directors and officers
insurance carrier reimbursed us in the third quarter 2004 for approximately $1.2 million in legal
fees already incurred and
64
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
agreed to fund legal expenses for the remainder of the litigation. The amount of loss, if any,
relating to this matter cannot presently be determined.
In October 2003, a MasTec subsidiary filed a lawsuit in a New York state court against Inepar
Industria e Construcoes or Inepar, its Brazilian joint venture partner. We sued Inepar for breach
of contract arising out of Inepars failure to indemnify MasTec for claims resulting from numerous
misrepresentations made by Inepar. Inepar subsequently failed to answer our complaint and we sought
a default judgment. In September 2006, the state court entered a judgment in favor of MasTec and
against Inepar in the amount of $58.4 million. We have commenced collection efforts, however, due
to the uncertainty of the ongoing collection process, we have accounted for the receipt of any
amounts related to this judgment in our favor as a gain contingency and have not reflected these
amounts in our financial statements.
In 2003, MasTecs quarterly financial information was restated for $6.1 million of previously
recognized revenue related primarily to work performed on undocumented or unapproved change orders
and other matters disputed by our customers. The revenue restatement was related to restated Canada
revenue and projects performed for ABB Power (ABB), MSE Power Systems, and the University of
California. Recovery of this revenue and related revenue from subsequent periods not restated is
now the subject of several independent collection actions. We provided services to ABB Power, in
the amount $2 million. In June 2006, prior to arbitration on a claim brought by MasTec for payments
due from ABB, we settled all differences between MasTec and ABB in exchange for partial payment to
MasTec from ABB. We provided services to MSE Power Systems on five separate projects in
Pennsylvania, New York and Georgia, with invoices in excess of $8 million now in dispute. We have
recovered $1.3 million from MSE in settlement on three of these projects and expect to arbitrate
the balance of this dispute, related to two Pennsylvania projects. The arbitration is expected
during 2007. We experienced cost overruns in excess of $2.7 million in completing a networking
contract for the University of California as the result of a subcontractors refusal to complete a
fixed price contract. An action has been brought against that subcontractor to recover cost
overruns. Judgment in our favor in the amount of $1.9 million was awarded after a jury verdict
rendered January 24, 2006. This judgment is currently in collection.
In December 2004, we brought an action against NextiraOne Federal in the Federal Court in
Eastern District of Virginia, to recover payment for services rendered in connection with a federal
Department of Defense project on a network wiring contract. Our network services are now a
discontinued operation. NextiraOne counterclaimed for offsets and remediation. On May 5, 2006, the
court ruled that we failed to establish an entitlement to recover damages for contract work done,
and that NextiraOne Federal failed to establish an entitlement to recover costs of alleged offsets
and costs of remediation. Neither party obtained the relief sought. We believe the ruling is an
error, and has sought remedy on appeal. We may be unable to obtain relief without additional
expenses.
We are also a party to other pending legal proceedings arising in the normal course of
business. While complete assurance cannot be given as to the outcome of any legal claims,
management believes that any financial impact would not be material to its results of operations,
financial position or cash flows.
We are required to provide payment and performance bonds for some of our contractual
commitments related to projects in process. At December 31, 2006, the cost to complete projects for
which the $292.9 million in performance and payment bonds are outstanding was $30.2 million.
On January 3, 2005, we entered into an employment agreement with Gregory S. Floerke relating
to his employment as Chief Operations Officer. He was solely focused and responsible for managing
intelligent traffic services related projects for MasTec. The agreement was to expire on January 2,
2007 unless earlier terminated, and provided that Mr. Floerke would be paid an annual salary of
$0.3 million during the first year of employment and $0.4 million during the second year of
employment. The agreement also provided for the grant to Mr. Floerke of stock options pursuant to
MasTecs stock option plans and contained confidentiality, non-competition and non-solicitation
provisions. Mr. Floerke resigned effective March 30, 2006. In connection therewith, we entered into
a separation agreement with Mr. Floerke in which we paid him $0.1 million. This separation
agreement terminated the employment agreement with Mr. Floerke. We also recorded approximately $0.2
million in stock compensation for the first quarter of 2006 related to the extension of the
exercise period on Mr. Floerkes stock options and the acceleration of the vesting of his unvested
options. This amount is included in non-cash stock compensation expense as discussed in Note 3(i)
and is included in loss from discontinued operations.
65
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
Note 16 Concentrations of Risk
We are subject to certain risk factors, including, but not limited to risks related to
economic downturns in the telecommunications and broadband industries, collectibility of
receivables, competition within our industry, the nature of our contracts (which do not obligate
our customers to undertake any infrastructure projects and may be canceled on short notice),
acquisition integration and financing, seasonality, availability of qualified employees,
recoverability of goodwill, and potential exposures to environmental liabilities.
We have more than 400 customers which include some of the largest and most prominent companies
in the communications, utilities and government industries. Our customers include incumbent local
exchange carriers, broadband and satellite operators, public and private energy providers, long
distance carriers, financial institutions and wireless service providers.
We grant credit, generally without collateral, to our customers. Consequently, we are subject
to potential credit risk related to changes in business and economic factors. However, we generally
have certain lien rights on that work and concentrations of credit risk are limited due to the
diversity of the customer base. We believe our billing and collection policies are adequate to
minimize potential credit risk. During the year ended December 31, 2006, 55.0% of our total revenue
was attributed to three customers. Revenue from these three customers accounted for 37.3%, 9.5% and
8.2% of total revenue for the year ended December 31, 2006. During the year ended December 31,
2005, 52.0% of our total revenue was attributed to three customers. Revenue from these three
customers accounted for 31.8%, 10.2% and 10.0% of the total revenue for the year ended December 31,
2005. During the year ended December 31, 2004, 38.2% of our total revenue was attributed to two
customers. Revenue from these two customers accounted for 24.3% and 13.9% of total revenue for the
year ended December 31, 2004.
We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. Management analyzes historical bad debt
experience, customer concentrations, customer credit-worthiness, the availability of mechanics and
other liens, the existence of payment bonds and other sources of payment, and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. If judgments regarding
the collectibility of accounts receivables were incorrect, adjustments to the allowance may be
required, which would reduce profitability. In addition, our reserve mainly covers the accounts
receivable related to the unprecedented number of customers that filed for bankruptcy protection
during the year 2001 and general economic climate of 2002. As of December 31, 2006, we had
remaining receivables from customers undergoing bankruptcy
reorganization totaling $10.4 million net
of $4.1 million in specific reserves. As of December 31, 2005, we had remaining receivables from
customers undergoing bankruptcy reorganization totaling $14.5 million net of $8.0 million in
specific reserves. Based on the analytical process described above, management believes that we
will recover the net amounts recorded. We maintain an allowance for
doubtful accounts of $11.6
million and $15.9 million as of December 31, 2006 and December 31, 2005, respectively, for both
specific customers and as a reserve against other past due balances. Should additional customers
file for bankruptcy or experience difficulties, or should anticipated recoveries in existing
bankruptcies and other workout situations fail to materialize, we could experience reduced cash
flows and losses in excess of the current allowance.
Note 17 Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for the years ended
December 31, 2006 and 2005. 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, 2006 and 2005.
The quarterly information has been adjusted for the reclassification of the net loss of the Brazil
subsidiary and the network services operations and substantially all of the state Department of
Transportation related projects and assets to discontinued operations.
66
Mastec, Inc.
Notes to Consolidated Finantial Statement continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended |
|
|
2005 Quarter Ended |
|
|
|
Mar 31 |
|
|
Jun 30 |
|
|
Sep 30 |
|
|
Dec 31 |
|
|
Mar 31 |
|
|
Jun 30 |
|
|
Sep 30 |
|
|
Dec 31 |
|
|
|
(In thousands, except per share data) |
|
|
(In thousands, except per share data) |
|
Revenue |
|
$ |
218,752 |
|
|
$ |
232,100 |
|
|
$ |
253,870 |
|
|
$ |
241,084 |
|
|
$ |
193,976 |
|
|
$ |
209,660 |
|
|
$ |
220,969 |
|
|
$ |
223,442 |
|
Income (loss) from continuing
operations |
|
$ |
3,605 |
|
|
$ |
12,079 |
|
|
$ |
14,248 |
|
|
$ |
8,983 |
|
|
$ |
(5,443 |
) |
|
$ |
5,159 |
|
|
$ |
10,754 |
|
|
$ |
8,135 |
|
Loss from discontinued operations |
|
$ |
(7,829 |
) |
|
$ |
(35,736 |
) |
|
$ |
(21,870 |
) |
|
$ |
(23,828 |
) |
|
$ |
(6,571 |
) |
|
$ |
(4,043 |
) |
|
$ |
(3,005 |
) |
|
$ |
(19,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(4,224 |
) |
|
$ |
(23,657 |
) |
|
$ |
(7,622 |
) |
|
$ |
(14,845 |
) |
|
$ |
(12,014 |
) |
|
$ |
1,116 |
|
|
$ |
7,749 |
|
|
$ |
(11,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.06 |
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.14 |
|
|
$ |
(0.11 |
) |
|
$ |
0.10 |
|
|
$ |
0.22 |
|
|
$ |
0.17 |
|
Discontinued operations |
|
$ |
(0.13 |
) |
|
$ |
(0.56 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic net loss per share |
|
$ |
(0.07 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
$ |
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.06 |
|
|
$ |
0.18 |
|
|
$ |
0.22 |
|
|
$ |
0.14 |
|
|
$ |
(0.11 |
) |
|
$ |
0.10 |
|
|
$ |
0.22 |
|
|
$ |
0.16 |
|
Discontinued operations |
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted net loss per share |
|
$ |
(0.07 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
0.15 |
|
|
$ |
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter 2006, we recorded a non-cash impairment charge of approximately
$10.0 million in connection with our sale in February 2007 of substantially all of our state
Department of Transportation related projects and underlying assets. As discussed in Note 19, the
sales price of $1.0 million was paid in cash at closing. In addition, the buyer is required to pay
us an earn out of up to $12.0 million contingent on future operations of the projects sold to the
third party. However, as the earn out is contingent upon future performance of the state Department
of Transportation related projects, we may not receive any of these earn out amounts.
In the fourth quarter of 2005, we recorded a write-down of goodwill in the amount of $11.5
million in connection with our decision to sell substantially all of our state Department of
Transportation related projects and assets. In addition, the remaining asset value was also
reviewed and write-downs related to uncollected receivables, non-saleable inventory and fixed
assets were also recorded. We also accrued losses incurred on construction projects in the amount
of $1.0 million. Income from continuing operations in the fourth quarter includes $1.1 million of
bad debt expense based upon our write-off history and we wrote off approximately $0.8 million of
fixed assets as a result of physical inventories performed in the fourth quarter. We also recorded
a gain of $1.1 million in the fourth quarter 2005 related to a sale of property (see Note 7).
Note 18 Related Party Transactions
MasTec purchases, rents and leases equipment used in its business from a number of different
vendors, on a non-exclusive basis, including Neff Corp., in which Jorge Mas, the Companys Chairman
and Jose Mas, our Vice-Chairman and Executive Vice President, were directors and owners of a
controlling interest through June 4, 2005. Juan Carlos Mas, the brother of Jorge and Jose Mas, is
Chairman, Chief Executive Officer, a director and a shareholder of Neff Corp. During the years
ended December 31, 2006, 2005 and 2004, MasTec paid Neff
approximately $1.4 million, $0.9 million
and $1.2 million, respectively, for equipment purchases, rentals and leases. MasTec believes the
amount paid to Neff is equivalent to the payments that would have been made between unrelated
parties for similar transactions acting at arms length.
We provide the services of certain marketing and sales personnel to an entity which is 49%
owned by the Company. These services are reimbursed to us at cost. At December 31, 2006 and 2005,
total amount due us for these services was approximately $1.1 million and $0.1 million,
respectively.
During 2006, we had an arrangement with a customer whereby we leased employees to the customer
and charged approximately $0.3 million to the customer. Jorge Mas and Jose Mas are minority owners of this customer.
During 2004, we paid $44,000 to Irma Mas, the mother of our Chairman, Jorge Mas, for the lease
of certain property located in Florida.
67
MasTec, Inc.
Notes to Consolidated Financial Statements continued
Effective as of August 27, 2002, MasTec and Jorge Mas entered into a split dollar
agreement, as subsequently amended, wherein MasTec agreed to pay the premiums due on two life
insurance policies with an aggregate face amount of $50.0 million. Mr. Mas and his spouse are the
insureds under the policies. Under the terms of this agreement, MasTec is the sole owner and
beneficiary of the policies and is entitled to recover the greater of (i) all premiums it pays on
the policies plus interest equal to four percent, compounded annually, or (ii) the aggregate cash
value of the life insurance policy immediately before the death of the insureds. The remainder of
the policies proceeds will be paid in accordance with Mr. Mas designations. MasTec will make the
premium payments until the agreement is terminated, which occurs upon any of the following events:
(i) bankruptcy, or dissolution of MasTec, or (ii) a change of control of MasTec.
Additionally, effective as of September 13, 2002, MasTec and Jorge Mas entered into a second
split dollar agreement, as subsequently amended, wherein we agreed to pay the premiums due on a
life insurance policy with a face amount of $80.0 million, $60.0 million of which is subject to the
agreement and the remaining $20.0 million is deemed to be key-man insurance payable to MasTec and
falls outside of the agreement. Jorge Mas is the insured under this policy. Under the terms of this
agreement, MasTec is the sole owner and beneficiary of the policy and is entitled to recover the
greater of (i) all premiums it pays on the portion of the policy subject to the agreement, plus
interest equal to four percent, compounded annually, or (ii) the aggregate cash value of the life
insurance policy immediately before the death of the insured. We will make the premium payments
until the agreement is terminated, which occurs upon any of the following events: (i) bankruptcy,
or dissolution of MasTec, or (ii) a change of control of us. An amount equal to $60.0 million of
the policys proceeds will be paid in accordance with Jorge Mas designations. Any remainder of the
proceeds will be paid to us. In 2006, 2005 and 2004, we paid
approximately $1.1 million, $0.6 million and $1.1 million, respectively, in premiums in connection with the split dollar agreements
for Jorge Mas.
On November 1, 2002, MasTec and Jorge Mas entered into a deferred bonus agreement in which we
agreed to pay Mr. Mas a bonus in the event that the split dollar agreements Mr. Mas had entered
into with MasTec were terminated due to a change of control. The amount of the bonus is equal to
the total premiums made by us under the terms of the split dollar agreements, plus interest of four
percent, compounded annually. The bonus is to be paid within 60 days after termination of the
split dollar agreement. The deferred bonus agreement was subsequently amended to comply with
Section 409A of the Internal Revenue Code.
In 2002, MasTec paid approximately $0.1 million to Austin Shanfelter, our Chief Executive
Officer, related to a life insurance policy which was cancelled in April 2002. We were to be
reimbursed by the insurance company upon Mr. Shanfelters death. Accordingly a receivable was
recorded at the time of the payments. During the year ended December 31, 2004, we wrote off the
receivable balance because the policy was cancelled and all payments became taxable to Mr.
Shanfelter.
On November 1, 2002, MasTec and Mr. Shanfelter entered into a split dollar agreement, as
subsequently amended, wherein MasTec agreed to pay the premiums due on a life insurance policy with
an aggregate face amount of $18.0 million. Mr. Shanfelter and his spouse are the insureds under the
policy. Under the terms of this agreement, we are the sole owner and beneficiary of the policy and
is entitled, upon the death of the insureds, to recover the greater of (i) all premiums it pays on
the policy plus interest equal to four percent, compounded annually or (ii) the aggregate cash
value of the life insurance policy immediately before the death of the insureds. The remainder of
the policys proceeds will be paid in accordance with Mr. Shanfelters designations. We will make
the premium payments for the term of the agreement or until the agreement is terminated, which
occurs upon any of the following events: (i) bankruptcy or dissolution of MasTec, or (ii) the six
year anniversary of the agreement. In 2006, 2005 and 2004, MasTec paid approximately $0, $0.5
million and $0.5 million, respectively, in premiums in connection with the split dollar agreement
for Mr. Shanfelter and his family.
On November 1, 2002, MasTec and Mr. Shanfelter entered into a deferred bonus agreement in
which we agreed to pay Mr. Shanfelter a bonus in the event that the split dollar agreement Mr.
Shanfelter had entered into with us were terminated upon the six year anniversary of the agreement.
The amount of the bonus is equal to the total premiums made by us under the terms of the split
dollar agreements, plus interest of four percent, compounded annually. The bonus is to be paid
within 60 days after termination of the split dollar agreement. The deferred bonus agreement was
subsequently amended to comply with Section 409A of the Internal Revenue Code.
Effective as of August 3, 2004, MasTec and Jose Mas entered into a split dollar agreement
wherein we agreed to pay premiums on a life insurance policy with an aggregate face amount of $10.0
million. Under the terms of the agreement, we are the sole owner and beneficiary of the policy and
is entitled to recover the greater of (i) all premiums it pays on the policy plus interest equal to
four percent, compounded annually, or (ii) the aggregate cash value of the life insurance policy
immediately prior to the death of the
survivor of the insured. The remainder of the policys proceeds will be paid in accordance
with Mr. Mas designations. We have
68
MasTec, Inc.
Notes to Consolidated Financial Statements continued
agreed to make the premium payments until at least July 15,
2009. In 2006, 2005 and 2004, we paid approximately $0.2 million in premiums in connection with
the split dollar agreement for Mr. Jose Mas in each of the years.
On April 3, 2006, MasTec and Jose Mas entered into a deferred bonus agreement in which we
agreed to pay Mr. Mas a bonus in the event the split dollar agreement Mr. Mas had entered into with
us were terminated due to a change of control. The amount of the bonus is equal to the total
premium payments made by us under the terms of the split dollar agreements, plus interest of four
percent, compounded annually. The bonus is to be paid within 60 days after termination of the split
dollar agreement.
In
December 2006, we sold a property used in our operations for
$3.5 million to an entity whose principal is
also a principal at a non-wholly owned subsidiary of ours. We have
received a note in the amount of $2.8 million due July 2008. Concurrent with the sale of this
property, we entered into a month-to-month lease agreement at $25,000
per month. In accordance with Statement of Financial Accounting
Standards No. 66, Accounting for Sales of Real
Estate and Statements of Financial Accounting Standards
No. 98, Accounting for Leases; Sale-Leaseback
Transactions Involving Real Estate; Sales-Type Leases of Real Estate;
Definition of the Lease Term; Initial Direct Costs of Direct
Financing Lease An Amendment of FASB Statements No. 13, 66 and
91 and a Rescission of FASB Statement No. 26 and Technical
Bulletin No. 79-11, we deferred gain recognition on the sale of approximately $2.5
million until a future period.
Note 19 Subsequent Events
On February 14, 2007, we sold the state of Department of Transportation related projects and
underlying net assets. We have agreed to keep certain assets and liabilities related to the state
Department of Transportation related projects. The sales price of $1.0 million was paid in cash
paid at closing. In addition, the buyer is required to pay us an earn out up to $12.0 million
contingent on future operations of the projects sold to the third party. However, as the earn out
is contingent upon the future performance of the state Department of Transportation related
projects, we may not receive any of these earn out payments. The buyer of the state Department
of Transportation related projects has indemnified us for all
contracts and liabilities sold, and has agreed to issue a standby
letter of credit in our favor in February 2008 to cover any remaining
exposure. The closing was effective February 1,
2007 to the extent set forth in the purchase agreement. As a result of this sale, we recorded an
impairment charge of $44.5 million during the year ended December 31, 2006 calculated using the
sales price and managements estimate of closing costs and other liabilities.
On February 6, 2007, we acquired the remaining 51% equity interest in an investment which had been
previously accounted for by the equity method because we owned 49% of the entity and had the ability
to exercise significant influence over the operational policies of the company. As a result of our
acquisition of the remaining 51% equity interest, we will consolidate the operations of this entity
with our results commencing in February 2007. In February 2007, we paid the seller $8.65 million in
cash, in addition to approximately $6.35 million which we also
paid at that time to discharge our remaining obligations to the seller under the
purchase agreement for the original 49% equity interest, and issued to the seller 300,000 shares of
our common stock. We have also agreed to pay the seller an earn out through the eighth anniversary
of the closing date based on the future performance of the acquired entity. In connection with the
purchase, we entered into a service agreement with the sellers for them to manage the business.
Under certain circumstances, including a change of control of MasTec or the entity or in certain
cases a termination of the service agreement, the remaining earn-out payments will be accelerated
and become payable. Under certain circumstances, we may be required to invest up to an additional
$3.0 million in this entity. In connection with the acquisition, we have agreed to file a
registration statement to register for resale 200,000 shares of the total shares issued to the
seller by no later than June 1, 2007 and have agreed to use our commercially reasonable efforts to
cause such registration statement to become effective. As of
December 31, 2006, the acquired entity had $18.5 million
and $0.5 million in current and non-current assets,
respectively, and $3.6 million and $2.9 million in current
and non-current liabilities, respectively. For 2006, net income was
$11.8 million.
On January 31, 2007, we issued $150.0 million aggregate principal amount of 7.625% senior
notes due February 2017 in a private placement. The notes are guaranteed by substantially all of
our domestic restricted subsidiaries. We have agreed to cause to become effective a registration
statement with respect to a registered offer to exchange the unregistered notes for registered
notes with substantially identical terms. We used approximately $121.8 million of the net proceeds
from this offering to redeem all of our outstanding 7.75% senior subordinated notes due February
2008 plus interest on March 2, 2007. We expect to use the remaining net proceeds for working
capital, possible acquisition of assets and businesses and other general corporate purposes.
69
MasTec, Inc.
Notes to Consolidated Financial Statements continued
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedure
Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this
Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). In designing
and evaluating our disclosure controls and procedures, our management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and are subject to certain limitations, including the
exercise of judgment by individuals, the difficulty in identifying unlikely future events, and the
difficulty in eliminating misconduct completely. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, our disclosure controls and procedures
were effective to ensure the information required to be disclosed in the reports that we file or
submit under the Exchange Act were recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission and that such
information was accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures.
Managements Report on Internal Control Over Financial Reporting Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over
financial reporting is designed to provide reasonable assurance to management and to our board of
directors regarding the reliability of financial reporting and the preparation and fair
presentation of financial statements for external purposes in accordance with generally accepted
accounting principles. MasTecs internal control over financial reporting includes those policies
and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance with
authorizations of management and directors of MasTec; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
As of the end of the period covered by this report, management conducted an
evaluation of the effectiveness of the design and operation of our internal control over financial
reporting. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. The results of managements assessment and review were reported to the audit committee
of the board of directors. Based on this evaluation, management concluded that our internal control
over financial reporting were effective as of December 31, 2006.
Changes in Internal Controls over Financial Reporting There were no changes in our
internal control over financial reporting identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Our independent auditors have issued an attestation report on managements assessment of our
internal control over financial reporting. That report appears below.
70
Report of Independent Registered Public Accounting Firm
MasTec, Inc.
Coral Gables, FL
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control, that MasTec, Inc. (the Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that MasTec, Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal Control-Integrated Framework issued by
COSO. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on the criteria established in
Internal Control-Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of MasTec, Inc. as of December 31,
2006 and 2005 and the related consolidated statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended December 31, 2006 and our report dated March
7, 2007 expressed an unqualified opinion.
BDO SEIDMAN, LLP
Miami, Florida
March 7, 2007
Item 9B. Other Information
None
71
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information about directors required for this item is incorporated by reference from our
Proxy Statement to be filed in connection with our 2007 Annual Meeting of Shareholders.
We have adopted a code of ethics that applies to our principal officer, principal financial
officer, principal accounting officer, or persons performing similar functions. We have posted our
code of ethics on our website (www.mastec.com) as Appendix E to the MasTec Personal Responsibility
Code, and it is available to any shareholder upon request. We intend to post any amendments to, or
any waivers from, a provision of the code of ethics that applies to the principal executive
officer, principal financial officer, principal accounting officer or controller, or any other
person performing a similar function, on our website. See also, Item 1. Business Available
Information.
Item 11. Executive Compensation
The information required for this item is incorporated by reference from our Proxy Statement
to be filed in connection with our 2006 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information about our common stock that may be issued under all
of our existing equity compensation plans as of December 31, 2006 which include the 1994 Stock
Incentive Plan, 1994 Stock Option Plan for Non-Employee Directors, 1997 Annual Incentive
Compensation Plan, 1997 Non-Qualified Employee Stock Purchase Plan, Non-Employee Directors Stock
Plan, 1999 Non-Qualified Employee Stock Option Plan, 2003 Employee Stock Incentive Plan, Amended
and Restated 2003 Stock Incentive Plan for Non-Employees and individual option agreements. The 1994
Stock Incentive Plan, 1994 Stock Option Plan for Non-Employee Directors, the 1997 Annual Incentive
Compensation Plan, 2003 Employee Stock Incentive Plan and the Amended and Restated 2003 Stock
Incentive Plan for Non-Employees were approved by our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
Number of Securities to |
|
|
Weighted Average |
|
|
Future Issuance Under |
|
|
|
be Issued Upon Exercise |
|
|
Exercise Price |
|
|
Equity Compensation |
|
|
|
of Outstanding Options, |
|
|
Outstanding Options, |
|
|
(Excluding Securities |
|
|
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Reflected in Column (a) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans
approved by
security holders |
|
|
6,459,659 |
(1) |
|
$ |
11.84 |
|
|
|
6,125,176 |
(3) |
Equity compensation
plans not approved
by security holders |
|
|
1,877,459 |
(2) |
|
$ |
16.73 |
|
|
|
1,279,696 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,337,118 |
|
|
|
|
|
|
|
7,404,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents 2,055,921 shares issuable under the 1994 Stock Incentive Plan, 330,000 shares
issuable under the 1994 Stock Option Plan for Non-Employee Directors, 3,399,238 shares
issuable under the 2003 Employee Stock Incentive Plan, and 674,500 shares issuable under the
Amended and Restated 2003 Stock Incentive Plan for Non-Employees. |
|
(2) |
|
Represents 1,644,259 shares issuable under the 1999 Non-Qualified Employee Stock Option Plan
and 233,200 shares issuable under the Individual Option Grants. |
|
(3) |
|
Under the 2003 Employee Stock Incentive Plan, the Amended and Restated 2003 Stock Incentive
Plan for Non-Employees and the 1997 Annual Incentive Compensation
Plan, 2,913,594 shares, 1,711,582 shares, and
1,500,000 shares, respectively, remain available for future issuance. We are no longer issuing
options under the 1994 Stock Option Plan for Non-Employee Directors and the 1994 Stock
Incentive Plan. We have never issued any shares under the 1997 Annual Incentive Compensation
Plan and have no current plans to do so. |
|
(4) |
|
Under the MasTec, Inc. 1997 Non-Qualified Employee Stock Purchase Plan, Non-Employee
Directors Stock Plan, and 1999 Non-Qualified Employee Stock
Option Plan, 234,531 shares, 142,552 shares,
and 901,491 shares, respectively, remain available for future issuance. |
Summaries of Plans Not Approved by Our Shareholders
1997 Non-Qualified Employee Stock Purchase Plan. The MasTec, Inc. 1997 Non-Qualified Employee
Stock Purchase Plan is administered by the Compensation Committee, and permits employees of MasTec
who meet certain criteria set by the Committee to
72
purchase our common stock at a 15% discount to the market price at the time of purchase. Such
purchases are made through regular payroll deductions or lump sum investments. Employees are
limited to a maximum investment of $25,000 in the plan each year. The total amount of common stock
reserved under the plan is approximately 600,000 shares, substantially all of which has been
purchased.
Non-Employee Directors Stock Plan. The MasTec, Inc. Non-Employee Directors Stock Plan
adopted in 1999 permits non-employee directors to elect to receive all or a specified percentage of
any director fees paid for each year of service on the board in shares of our common stock. The
number of shares issued to each non-employee director is determined by dividing the directors fees
owed to such director by the fair-market value of a share of common stock on the date of the issue.
The shares issued are delivered to the non-employee director and the non-employee director has all
the rights and privileges of a stockholder as to the shares. The shares are immediately vested upon
grant and are not forfeitable to us. The maximum number of shares of common stock that may be
issued under the plan is 150,000. As of December 31, 2006,
142,552 shares remained available
for issuance under this plan.
1999 Non-Qualified Employee Stock Option Plan. The 1999 Non-Qualified Employee Stock Option
Plan is administered by the Compensation Committee of the Board and permits the Committee to grant
non-qualified options to purchase up to 2,000,000 shares of common stock to any MasTec employee.
The Compensation Committee determines the recipient of options, the number of shares covered by
each option, and the terms and conditions of options within the parameters of the plan (including
the exercise price, vesting schedule, and the expiration date) and may adopt rules and regulations
necessary to carry out the plan. Options may be granted pursuant to the plan until January 31,
2009. The Compensation Committee has the authority to change or discontinue the plan or the options
issued pursuant thereto at any time without the holders consent so long as the holders rights
would not be impaired. The plan permits the Compensation Committee to determine and accept
different forms of payment pursuant to the exercise of options.
The plan provides for the termination of all outstanding options whether or not vested in the
event of a termination of employment, and permits the Committee to take certain actions in the
event of a change of control to ensure fair and equitable treatment of the employees who hold
options granted under the plan, including accelerating the vesting of any outstanding option,
offering to purchase any outstanding option and making other changes to the terms of the
outstanding options. As of December 31, 2006, 901,491 shares remained available for issuance under
this plan.
Deferred Fee Plan. The Deferred Fee Plan became effective on January 1, 2006. Under the terms
of the Deferred Fee Plan, directors may elect to defer the receipt of cash and stock fees for their
services as directors. Each director may elect the type of fees to be deferred, the percentage of
such fees to be deferred, and the form in which the deferred fees and any earnings thereon are to
be paid. Deferred cash fees may be directed to a deferred cash account or a deferred stock account
(or both). Deferred stock fees may only be directed to a deferred stock account. Elections to defer
fees remain in force, unless amended or revoked within the required time periods.
The deferred cash account will be credited with interest on the cash balance at the end of
each calendar quarter. The interest rate is equal to the rate of interest payable by us on our
revolving credit facility, as determined as of the first day of each
calendar quarter. The deferred stock account will be credited with stock dividends (or with cash dividends that are
converted to deferred stock credits pursuant to the plan.)
Distribution of a directors cash and stock accounts will begin on January 15 of the year
following the directors termination of all services with us. Distributions from the deferred stock
account will be made in cash. Distribution will either be made in a lump-sum payment or in up to
five consecutive installments as elected by the director.
Individual Option Grants. We have entered into various option agreements with non-employee
directors, advisors and other parties in connection with providing certain services, acquisitions
and other matters. Such options have various vesting schedules and exercise prices and have been
included in the equity compensation plan table above.
The other information required for this item is incorporated by reference from our Proxy
Statement to be filed in connection with our 2007 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required for this item is incorporated by reference from our Proxy Statement
to be filed in connection with our 2006 Annual Meeting of Shareholders.
73
Item 14. Principal Accountant Fees and Services
The information required for this item is incorporated by reference from our Proxy Statement
to be filed in connection with our 2007 Annual Meeting of Shareholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a)
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|
1.
|
|
Financial Statements the consolidated financial statements and the reports of the Independent Registered Public
Accounting firms are listed on page 44 through 74. |
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|
2.
|
|
Financial Statement Schedules The financial statement schedule information
required by Item 14(a)2 is included as part of Note 4 Accounts Receivable of the
Notes to Consolidated Financial Statements. |
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|
|
3.
|
|
Exhibits including those incorporated by reference: |
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|
Exhibits |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation filed as Exhibit 3.1 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of MasTec, Inc. Amended and Restated as
of May 30, 2003, filed as Exhibit 3.1 to our Form 10Q for the quarter
ended June 30, 2003 and filed with the SEC on August 14, 2003 and
incorporated by reference herein. |
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4.1
|
|
Indenture, dated as of February 4, 1998, between the Registrant and First
Trust National Association, as trustee, relating to the Registrants 7.75%
Senior Subordinated Notes due 2008 filed as Exhibit 4.2 to our
Registration Statement on Form S4 (Registration No. 33346361), filed
on February 13, 1998, and incorporated by reference herein. |
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4.2
|
|
Indenture, dated January 31, 2007, by and among MasTec, Inc., certain of
MasTecs subsidiaries and U.S. Bank National Association, as trustee filed
as Exhibit 4.1 to our Form 8K filed with the SEC on February 2, 2007 and
incorporated by reference herein. |
|
|
|
10.1+
|
|
1994 Stock Incentive Plan filed as Exhibit 10.1 to our Registration
Statement on Form S-1 (Registration No. 333-129790) and incorporated by
reference herein. |
|
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10.2+
|
|
1994 Stock Option Plan for Nonemployee Directors filed as Exhibit 10.2
to our Registration Statement on Form S-1 (Registration No. 333-129790)
and incorporated by reference herein. |
|
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|
10.3+
|
|
1997 NonQualified Employee Stock Purchase Plan filed as Exhibit 10.3 to
our Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.4+
|
|
1999 NonQualified Employee Stock Option Plan, as amended October 4,
1999, filed as Exhibit 10.4 to our Annual Report on Form 10K for the
year ended December 31, 2002 and incorporated by reference herein. |
|
|
|
10.5+
|
|
1999 NonQualified Employee Stock Option Plan filed as Exhibit 10.5 to
our Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.6+
|
|
NonEmployee Directors Stock Plan filed as Exhibit 10.6 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
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|
10.7+
|
|
Employment Agreement dated September 27, 2002, between MasTec, Inc. and
Austin J. Shanfelter, filed as Exhibit 10.1 to our Form 10Q for the
quarter ended September 20, 2002, and filed with the SEC on November 14,
2002 and incorporated by reference herein. |
|
|
|
10.8+
|
|
SplitDollar Agreement effective August 27, 2002 between MasTec, Inc. and
Jorge Mas, filed as Exhibit 10.15 to our Annual Report on Form 10K for
the year ended December 31, 2002 and incorporated by reference herein. |
|
|
|
10.9+
|
|
SplitDollar Agreement effective September 13, 2002 between MasTec, Inc.
and Jorge Mas, filed as Exhibit 10.16 to our Annual Report on Form 10K
for the year ended December 31, 2002 and incorporated by reference herein. |
|
|
|
10.10+
|
|
SplitDollar Agreement effective September 13, 2002 between MasTec, Inc.
and Austin J. Shanfelter, filed as Exhibit 10.18 to our Annual Report on
Form 10K for the year ended December 31, 2002 and incorporated by
reference herein. |
|
|
|
10.11+
|
|
2003 Employee Stock Incentive Plan as amended and restated as of January
1, 2006, filed as Exhibit 10.5 to our Form 8-K dated March 31, 2006 and
incorporated by reference herein. |
|
|
|
10.12+
|
|
Amended and Restated 2003 Stock Incentive Plan for NonEmployees as
amended and restated as of January 1, 2006, filed as Exhibit 10.4 to our
Form 8-K dated March 31, 2006 and incorporated by reference herein |
74
|
|
|
Exhibits |
|
Description |
|
|
|
10.13+
|
|
Employment Agreement dated January 3, 2005 between Gregory S. Floerke and
MasTec, Inc. filed as Exhibit 10.29 to our Form 8K, filed with the SEC
on January 7, 2005 and incorporated by reference herein. |
|
|
|
10.14+
|
|
SplitDollar Agreement effective July 16, 2004 between MasTec, Inc and
Jose Mas, filed as Exhibit 10.30 to our Form 10K for the year ended
December 31, 2004 and filed with the SEC on March 31, 2005 and
incorporated by reference herein. |
|
|
|
10.15+
|
|
Employment Agreement dated February 1, 2004 between Michael G. Nearing and
MasTec, Inc. , filed as Exhibit 10.32 to our Form 10Q for the quarter
ended March 31, 2005 and filed with the SEC on May 10, 2005, and
incorporated by reference herein. |
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|
|
10.16
|
|
Amended and Restated Loan and Security Agreement dated as of May 10, 2005
between MasTec, Inc., certain of its subsidiaries, Bank of America, N.A.,
as collateral and administrative agent and General Electric Capital
Corporation, as syndication agent, filed as Exhibit 10.1 to our Form 8K
filed with the SEC on May 12, 2005 and incorporated by reference herein. |
|
|
|
10.17+
|
|
Amendment to Employment Agreement dated November 3, 2005 between MasTec,
Inc. and Austin J. Shanfelter, filed as Exhibit 10.1 to our Form 10Q for
the quarter ended September 30, 2005, and incorporated by reference
herein. |
|
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|
10.18+
|
|
Employment Agreement dated November 16, 2005 between MasTec, Inc. and
Alberto de Cardenas filed as Exhibit 10.34 to our Registration Statement
on Form S-1 (Registration No. 333-129790) and incorporated by reference
herein. |
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|
10.19+
|
|
Second Amendment to Employment Agreement dated December 19, 2005 by and
between MasTec, Inc. and Austin J. Shanfelter filed as Exhibit 10.36 to
our Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
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10.20+
|
|
1997 Annual Incentive Compensation Plan filed as Exhibit 10.37 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
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|
10.21+
|
|
Deferred Fee Plan for Directors dated December 19, 2005, filed as Exhibit
10.38 to our Form 8K filed with the SEC on December 23, 2005 and
incorporated by reference herein. |
|
|
|
10.22
|
|
Asset Purchase Agreement dated December 30, 2005, by and among MasTec
North America AC, LLC, MasTec, Inc., Ronald E. Phillips, Dawn M. Phillips,
Digital Satellite Services Employee Stock Ownership Trust and Digital
Satellite Services, Inc filed as Exhibit 10.39 to our Registration
Statement on Form S-1 (Registration No. 333-129790) and incorporated by
reference herein. |
|
|
|
10.23+
|
|
Deferred Bonus Agreement dated November 1, 2002 between MasTec, Inc. and
Jorge Mas filed as Exhibit 10.40 to our Registration Statement on Form S-1
(Registration No. 333-129790) and incorporated by reference herein. |
|
|
|
10.24+
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|
First Amendment to Deferred Bonus Agreement dated January 6, 2006 between
MasTec Inc. and Jorge Mas filed as Exhibit 10.41 to our Registration
Statement on Form S-1 (Registration No. 333-129790) and incorporated by
reference herein. |
|
|
|
10.25+
|
|
Deferred Bonus Agreement dated November 1, 2002 between MasTec, Inc. and
Austin Shanfelter filed as Exhibit 10.42 to our Registration Statement on
Form S-1 (Registration No. 333-129790) and incorporated by reference
herein. |
|
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|
10.26+
|
|
First Amendment to Deferred Bonus Agreement dated January 6, 2006 between
MasTec, Inc. and Austin Shanfelter filed as Exhibit 10.43 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.27+
|
|
First Amendment to SplitDollar Agreement between MasTec, Inc. and Austin
Shanfelter dated September 15, 2003 filed as Exhibit 10.44 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.28+
|
|
Second Amendment to SplitDollar Agreement between MasTec, Inc. and
Austin Shanfelter dated January 6, 2006 filed as Exhibit 10.45 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
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|
|
10.29+
|
|
First Amendment to SplitDollar Agreement (dated December 2002) between
MasTec, Inc. and Jorge Mas dated May 4, 2003 filed as Exhibit 10.46 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
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|
10.30+
|
|
Amendment to SplitDollar Agreement (dated December 2002) between MasTec,
Inc. and Jorge Mas dated September 15, 2003 filed as Exhibit 10.47 to our
Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.31+
|
|
Third Amendment to SplitDollar Agreement (dated December 2002) between
MasTec, Inc. and Jorge Mas dated January 6, 2006 filed as Exhibit 10.48 to
our Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
|
|
|
10.32+
|
|
First Amendment to SplitDollar Agreement (dated May 2003) between
MasTec, Inc. and Jorge Mas dated September 15, 2003 filed as Exhibit 10.49
to our Registration Statement on Form S-1 (Registration No. 333-129790)
and incorporated by reference herein. |
|
|
|
10.33+
|
|
Second Amendment to SplitDollar Agreement (dated May 2003) between
MasTec, Inc. and Jorge Mas dated January 6, 2006 filed as Exhibit 10.50 to
our Registration Statement on Form S-1 (Registration No. 333-129790) and
incorporated by reference herein. |
75
|
|
|
Exhibits |
|
Description |
|
|
|
10.34+
|
|
First Amendment to SplitDollar Agreement between MasTec, Inc. and Jorge
Mas dated January 6, 2006 filed as Exhibit 10.51 to our Registration
Statement on Form S-1 (Registration No. 333-129790) and incorporated by
reference herein. |
|
|
|
10.35+
|
|
Amendment to Employment Agreement dated as of March 31, 2006 by and
between MasTec, Inc. and C. Robert Campbell filed as Exhibit 10.1 to our
Form 8-K filed with the SEC on April 6, 2006 and incorporated by reference
herein. |
|
|
|
10.36+
|
|
Amendment to Employment Agreement dated as of March 31, 2006 by and
between MasTec, Inc. and A. de Cardenas filed as Exhibit 10.2 to our Form
8-K filed with the SEC on April 6, 2006 and incorporated by reference
herein.
Deferred Bonus Agreement dated as of April 3, 2006, by and between Jose
Mas and MasTec, Inc. filed as Exhibit 10.3 to our Form 8-K filed with the
SEC on April 6, 2006 and incorporated by reference herein. |
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|
10.37+
|
|
Separation Agreement and General Release entered into as of April 5, 2006
between MasTec, Inc. and Gregory Floerke, filed as Exhibit 10.6 to our
Form 8-K filed with the SEC on April 6, 2006 and incorporated by reference
herein. |
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|
|
10.38+
|
|
Form of Restricted Stock Agreement for the MasTec, Inc. Amended and
Restated 2003 Stock Incentive Plan for Employees filed as Exhibit 10.7 to
our Form 8-K filed with the SEC on April 6, 2006 and incorporated by
reference herein. |
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|
|
10.39+
|
|
Form of Stock Option Agreement for the MasTec, Inc. Amended and Restated
2003 Stock Incentive Plan for Employees filed as Exhibit 10.8 to our Form
8-K filed with the SEC on April 6, 2006 and incorporated by reference
herein. |
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|
|
10.40+
|
|
Form of Restricted Stock Agreement for the MasTec, Inc. Amended and
Restated 2003 Stock Incentive Plan for Non-Employees filed as Exhibit 10.9
to our Form 8-K filed with the SEC on April 6, 2006 and incorporated by
reference herein. |
|
|
|
10.41+
|
|
Form of Stock Option Agreement for the MasTec, Inc. Amended and Restated
2003 Stock Incentive Plan for Non-Employees filed as Exhibit 10.10 to our
Form 8-K filed with the SEC on April 6, 2006 and incorporated by reference
herein. |
|
|
|
10.42
|
|
First Amendment to Amended and Restated Loan and Security Agreement dated
May 8, 2006 by and between MasTec, Inc., the subsidiaries of MasTec, Inc.
identified therein, the financial institutions party from time to time to
the Loan Agreement and Bank of America, N.A., as administrative agent
filed as Exhibit 10.52 to our Form 10Q for the quarter ended March 31,
2006 and filed with the SEC on May 8, 2006, and incorporated by reference
herein. |
|
|
|
10.43+
|
|
Renewal Employment Agreement dated as of August 3, 2006, by and
between MasTec, Inc. and C. Robert Campbell filed as Exhibit 10.1 to our
Form 10Q for the quarter ended June 30, 2006 and filed with the SEC on
August 3, 2006, and incorporated by reference herein |
|
|
|
10.44
|
|
Second Amendment to the Amended and Restated Loan and Security Agreement
dated November 7, 2006 by and between MasTec, Inc., the subsidiaries of
MasTec, Inc. identified therein, the financial institutions party from
time to time to the Loan Agreement and Bank of America, N.A., as
administrative agent filed as Exhibit 10.53 to our Form 10Q for the
quarter ended September 30, 2006 and filed with the SEC on November 9,
2006, and incorporated by reference herein. |
|
|
|
10.45
|
|
Asset Purchase Agreement dated as of November 9, 2006 between MasTec North
America, Inc. and LM-ITS Acquisition LLC filed as Exhibit 10.54 to our
Form 10Q for the quarter ended September 30, 2006 and filed with the SEC
on November 9, 2006, and incorporated by reference herein. |
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10.46+
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Employment Agreement dated as of January 1, 2007, by and between MasTec,
Inc. and Robert Apple filed as Exhibit 10.1 to our Form 8-K filed with the
SEC on December 8, 2006 and incorporated by reference herein. |
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10.47
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Placement Agreement between MasTec, Inc., certain of MasTecs
subsidiaries, and Morgan Stanley & Co., Incorporated, as placement agent,
dated January 24, 2007, filed as Exhibit 4.1 to the Form 8-K file with the
SEC on January 25, 2007, and incorporated by reference herein. |
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10.48
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Registration Rights Agreement between MasTec, Inc., certain of MasTecs
subsidiaries, and Morgan Stanley & Co., Incorporated, as placement agent,
dated January 24, 2007, filed as Exhibit 4.2 to the Form 8-K filed with
the SEC on January 31, 2007, and incorporated by reference herein. |
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10.49
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Amended and Restated Asset Purchase Agreement dated February 14, 2007, by
and between MasTec North America and Atlas Traffic Management Systems,
LLC, filed as Exhibit 10.1 to the Form 8-K with the SEC on February |
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10.50*
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Consent and Amendment, dated January 16, 2007, by and among MasTec, Inc.,
certain of the Companys subsidiaries, the Lenders and Bank of America,
N.A. in its capacity as collateral and administrative agent for the
Lenders |
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10.51*
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Consent and Amendment, dated
February 6, 2007, by and among MasTec, Inc., certain of the
Companys subsidiaries, the Lenders and Bank of America, N.A. in
its capacity as collateral and administrative agent for the Lenders. |
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21*
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Subsidiaries of the MasTec, Inc. |
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23.1*
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Consent of Independent Registered Public Accounting Firm |
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31.1*
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Certifications required by Section 302(b) of the Sarbanes-Oxley Act of 2002 |
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31.2*
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Certifications required by Section 302(b) of the Sarbanes-Oxley Act of 2002 |
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32.1*
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Certifications required by Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2*
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Certifications required by Section 906 of the Sarbanes-Oxley Act of 2002 |
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* |
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Filed herewith. |
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+ |
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Management contract or compensation plan arrangement. |
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Miami, State of Florida, on March 8, 2007.
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MASTEC, INC.
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/s/ AUSTIN J. SHANFELTER |
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Austin J. Shanfelter
President and Chief Executive Officer
(Principal Executive Officer) |
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/s/ C. ROBERT CAMPBELL |
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C. Robert Campbell
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities indicated
on March 8, 2007.
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Chairman of the Board of Directors |
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/s/ AUSTIN J. SHANFELTER
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President and Chief Executive Officer and Director |
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(Principal Executive Officer) |
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/s/ JOSE R. MAS
Jose
R. Mas
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Executive Vice President and Vice Chairman of the
Board of Directors |
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/s/ C. ROBERT CAMPBELL
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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/s/ ERNST N. CSISZAR
Ernst
N. Csiszar
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Director |
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/s/ CARLOS M. DE CESPEDES
Carlos
M. de Cespedes
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Director |
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/s/ ROBERT J. DWYER
Robert
J. Dwyer
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Director |
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/s/ FRANK E. JAUMOT
Frank
E. Jaumot
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Director |
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/s/ JULIA L. JOHNSON
Julia
L. Johnson
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Director |
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/s/ JOSE S. SORZANO
Jose
S. Sorzano
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Director |
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/s/ JOHN VAN HEUVELEN
John
Van Heuvelen
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Director |
77
EX-10.50 Consent and Amendment dated January 16, 2
EXHIBIT 10.50
January 16, 2007
MasTec, Inc.
800 Douglas Road
North Tower, 12th Floor
Coral Gables, FL 33134
Attention: Chief Executive Officer
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RE: |
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Consent to Refinancing of Existing Subordinated Notes and Issuance of New Notes |
Ladies and Gentlemen:
Reference is made to that certain Amended and Restated Loan and Security Agreement (as at any
time amended, restated, modified or supplemented, the Loan Agreement), dated May 10, 2005, by and
among MasTec, Inc., a Florida corporation (MasTec), and certain subsidiaries of MasTec (together
with MasTec NA and MasTec, hereinafter referred to collectively as the Borrowers), the various
financial institutions named in the Loan Agreement (collectively, Lenders), and Bank of America,
N.A., a national banking association, in its capacity as collateral and administrative agent for
the Lenders (together with its successors in such capacity, Agent). Capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed to such terms in the Loan
Agreement.
As described in the Loan Agreement, MasTec is currently a party to an Indenture dated as of
February 4, 1998, between MasTec and U.S. Bank National Association, successor to First Trust
National Association, as Trustee and paying agent (the Existing Indenture), pursuant to which
were issued MasTecs 7-3/4% Senior Subordinated Notes due 2008 in the original principal amount of
$200,000,000 (collectively, the Existing Subordinated Notes).
MasTec has advised Agent and Lenders of MasTecs desire to repay the Existing Subordinated
Notes with a portion of the proceeds of a proposed issuance of new Senior Notes due no sooner than
2017 in the original principal amount of up to $150,000,000 (collectively, the New Notes)
pursuant to an Indenture among MasTec, as issuer of the New Notes, certain of MasTecs
Subsidiaries, as guarantors of the New Notes, and the trustee named therein (the New Notes
Indenture); provided, that, the original principal amount set forth above may be increased by an
amount of up to $25,000,000 reflecting an oversubscription of the New Notes issued under the New
Notes Indenture.
Pursuant to Section 10.1.14 of the Loan Agreement, the Borrowers are required, on or before
November 1, 2007, to defease, refinance, reserve or otherwise pay and discharge all of the Debt
evidenced by the outstanding Existing Subordinated Notes on terms satisfactory to Agent and
Lenders, but which defeasance, refinancing, reserve, payment, or discharge is not permitted to
occur if, for the period of 30 consecutive days immediately preceding such defeasance, reservation,
payment or discharge, at the time of, and after giving pro forma effect thereto, the amount of the
Revolver Loans outstanding exceeds $0 and Availability is less than $20,000,000.
In light of the requirements of Section 10.1.14 of the Loan Agreement, Borrowers have provided to
Agent and Lenders a summary of the terms of the proposed New Notes Indenture and the New Notes to
be issued thereunder, and the Borrowers guarantees thereof, such terms being more particularly
described on Exhibit A attached hereto (the Refinancing Terms), and Borrowers have
requested that Agent and Lenders (i) acknowledge that the proposed Refinancing Terms are
satisfactory to Agent and Lenders, and (ii) agree to amend the Loan Agreement in order to permit
the issuance of the New Notes,
the Borrowers guarantees thereof, and the repayment of the Existing Subordinated Notes, in each
case subject to the Refinancing Terms (the Proposed Refinancing), and waive any other
restrictions in the Loan Agreement to the Proposed Refinancing.
Agent and Lenders are willing to (i) acknowledge and agree to the proposed Refinancing Terms
with respect to the Proposed Refinancing are satisfactory to Agent and Lenders pursuant to the
requirements of Section 10.1.14 of the Loan Agreement, and (ii) agree to amend the Loan Agreement
in order to permit the Proposed Refinancing, and, to the extent not otherwise covered by the
amendments contained herein, waive any other restrictions in the Loan Agreement with respect to the
Proposed Refinancing, in each case on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the
receipt and sufficiency of which are hereby severally acknowledged, the parties hereto, intending
to be bound hereby, agree as follows:
1. Consent to Issuance of the New Notes and the Refinancing of the Existing Subordinated
Notes; Waiver. Agent and Lenders hereby consent to the Proposed Refinancing, including the
issuance of the New Notes, the Borrowers guarantees thereof, and the repayment, defeasance or
redemption of the Existing Subordinated Notes, in each case subject to the satisfaction of each the
following conditions, in form and substance satisfactory to Agent:
(a) No Default or Event of Default exists at the time of, or will exist
immediately after giving effect to, the Proposed Refinancing;
(b) The Proposed Refinancing is not permitted to occur if, for the period of
30 consecutive days immediately preceding the Proposed Refinancing, at the time of,
and after giving pro forma effect thereto, the amount of the Revolver Loans
outstanding exceeds $0 and Availability is less than $20,000,000;
(c) Agent shall have received evidence satisfactory to Agent that:
(i) the final terms of the Proposed Refinancing contained in the New
Notes Indenture and New Notes with respect to the restrictions on and
priorities of Indebtedness and Liens are not modified from the
Refinancing Terms in a manner that is adverse to Agent and Lenders (without
limiting the generality of the foregoing, the restriction on the principal
amount of indebtedness of the Credit Facility (or the equivalent term
defined in the New Notes Indenture) shall not be reduced to an amount less
than $200,000,000, and the New Notes shall at all times remain unsecured
except in those limited circumstances currently described in the
Refinancing Terms), and
(ii) the Commitments under the Loan Agreement constitute a Credit
Facility (or the equivalent term defined in the New Notes Indenture) under
the New Notes Indenture; and
(d) Agent shall have received evidence satisfactory to Agent that :
(i) On the New Notes Issuance Date (as defined herein), MasTec has
delivered to the trustee for the Existing Subordinated Notes (the Existing
-2-
Trustee) a notice of redemption of the Existing Subordinated Notes
pursuant to the terms of the Existing Indenture,
(ii) As soon as practicable (but in any event not later than 24 hours)
after the New Notes Issuance Date and the delivery by MasTec of the notice
of redemption under the Existing Indenture, MasTec has either (A) paid to
the Existing Trustee a portion of the proceeds of the New Notes in an
amount sufficient to fully repay and redeem the Existing Subordinated
Notes, including all principal, interest, fees and other amounts owing in
connection therewith pursuant to the terms of the Existing Indenture (the
Existing Subordinated Notes Redemption Amount), or (B) deposited the
Existing Subordinated Notes Redemption Amount into a deposit or investment
account with a bank or securities intermediary acceptable to Agent (but
which account shall not constitute Collateral nor be subject to Agents
exclusive control), and
(iii) MasTec has certified to Agent in writing on and as of the New
Notes Issuance Date that (A) the Existing Trustee has received the notice
of redemption and that it has been delivered in compliance with the
Existing Indenture, (B) the Existing Subordinated Notes Redemption Amount
is sufficient to fully repay and redeem the Existing Subordinated Notes in
compliance with the Existing Indenture, and (C) pursuant to the terms of
the Existing Indenture, the Existing Trustee will apply the Existing
Subordinated Notes Redemption Amount to redeem the Existing Subordinated
Notes on the Existing Subordinated Notes Redemption Date (as defined
herein), the date of which shall be no later than 30 days after the New
Notes Issuance Date.
To the extent that any of the terms and provisions of the Loan Agreement or any of the other Loan
Documents (other than this letter agreement and the terms and conditions set forth herein) would
otherwise restrict the Borrowers ability to enter into or consummate the Proposed Refinancing,
including the issuance of the New Notes, the Borrowers guarantees thereof, and the repayment,
defeasance or redemption of the Existing Subordinated Notes, Agent and Lenders hereby waive the
same with respect to the Proposed Refinancing.
2. Amendments to Loan Agreement. In addition to the foregoing consent, the parties
hereto agree to amend, and hereby amend, the Loan Agreement as follows:
(a) By adding the following new definitions to Section 1.1 of the Loan Agreement in
proper alphabetical sequence:
Existing Indenture the Indenture dated as of February 4,
1998, between MasTec and U.S. Bank National Association, successor to First
Trust National Association, as Trustee and paying agent, governing the
Subordinated Notes.
Existing Subordinated Notes MasTecs 7-3/4% Senior
Subordinated Notes due 2008 in the original principal amount of
$200,000,000, issued pursuant to the Existing Indenture, including any
Exchange Notes issued (and as defined) thereunder.
-3-
Existing Subordinated Notes Redemption Date the date on
which the Existing Subordinated Notes are repaid in full pursuant to the
terms of the New Notes Indenture.
New Notes MasTecs Senior Notes having a maturity date no
sooner than 2017 in the original principal amount of no greater than
$150,000,000, to be issued pursuant to the New Notes Indenture on the New
Notes Issuance Date on an unsecured basis and otherwise on terms
satisfactory to Agent and Lenders; provided, that, the original principal
amount set forth above may be increased by an amount of up to $25,000,000
reflecting an oversubscription of the New Notes issued under the New Notes
Indenture.
New Notes Indenture the Indenture, among MasTec, its
Subsidiaries and the trustee named thereunder, as Trustee, governing the
New Notes.
New Notes Issuance Date the date on which the proceeds from
the New Notes have been issued and the New Notes are received by MasTec
pursuant to the terms of the New Notes Indenture.
Permitted Existing Indenture Covenant Violation a default
arising under the Existing Indenture (to the extent any such default may
exist on the New Notes Issuance Date) as a result of the issuance of the
New Notes or the guarantees by Borrowers thereof, in each case so long as
the trustee for the Existing Subordinated Notes does not accelerate the
Debt evidenced thereby or otherwise exercise any of the trustees or note
holders rights or remedies in consequence thereof under the Indenture or
applicable law.
(b) By deleting from Section 1.1 of the Loan Agreement the definitions of
Subordinated Debt, Subordinated Notes, Indenture and
Refinancing Conditions and by substituting the following new definitions in lieu
thereof:
Subordinated Debt unsecured Debt incurred by an Obligor that
is expressly subordinated and made junior to the Full Payment of the
Obligations and contains terms and conditions (including terms relating to
interest, fees, repayment and subordination) satisfactory to Agent. For the
avoidance of doubt, the New Notes (and upon the occurrence of the New Notes
Issuance Date, the Subordinated Notes) shall not constitute Subordinated
Debt hereunder.
Subordinated Notes the Existing Subordinated Notes and, upon
the occurrence of the New Notes Issuance Date, the New Notes;
provided, that, upon the occurrence of the Existing
Subordinated Notes Redemption Date and thereafter, the term Subordinated
Notes shall mean only the New Notes.
Indenture the Existing Indenture and, upon the occurrence of
the New Notes Issuance Date, the New Notes Indenture; provided,
that, upon the occurrence of the Existing Subordinated Notes
Redemption Date and thereafter, the term Indenture shall mean only the New
Notes Indenture.
-4-
Refinancing Conditions the following conditions, each of
which must be satisfied before Refinancing Debt shall be permitted under
Section 10.2.3 of this Agreement: (i) the Refinancing Debt is in an
aggregate principal amount that does not exceed the aggregate principal
amount of the Debt being extended, renewed or refinanced (or in the case of
the Indenture and Subordinated Notes, the original principal amount
thereof), (ii) the Refinancing Debt has a later or equal final maturity and
a longer or equal weighted average life than the Debt being extended,
renewed or refinanced, (iii) the Refinancing Debt does not bear a rate of
interest that exceeds a market rate (as determined in good faith by a Senior
Officer) as of the date of such extension, renewal or refinancing, (iv) if
the Debt being extended, renewed or refinanced is subordinate to the
Obligations, the Refinancing Debt is subordinated to the same extent, (v)
the covenants contained in any instrument or agreement relating to the
Refinancing Debt are no less favorable to Obligors than those relating to
the Debt being extended, renewed or refinanced, and (vi) at the time of and
after giving effect to such extension, renewal or refinancing, no Default or
Event of Default shall exist.
(c) By deleting the final clause of the definition of Permitted Contingent
Obligations contained in of Section 1.1 of the Loan Agreement which reads and other
Contingent Obligations not to exceed $1,000,000 in the aggregate at any time, and by
substituting in lieu thereof the following:
guarantees by MasTecs now existing or hereafter created or acquired
Subsidiaries of the Subordinate Notes, as described in the Indenture; and
other Contingent Obligations not to exceed $1,000,000 in the aggregate at
any time.
(d) By deleting clause (z) of Section 2.1.3 of the Loan Agreement, and by substituting
in lieu thereof the following:
(z) to defease, redeem or refinance the Subordinated Notes.
(e) By deleting the last paragraph of Section 5.2.3 of the Loan Agreement, beginning
with Borrowers shall permanently reduce the Commitments, in its entirety.
(f) By deleting the references to Subordinated Notes contained in Section 10.1.14 of
the Loan Agreement, and by substituting in lieu thereof references to Existing Subordinated
Notes.
(g) By deleting clause (ii) of Section 10.2.3 of the Loan Agreement in its entirety,
and by substituting the following in lieu thereof:
(ii) the Subordinated Notes;
(h) By deleting clause (xi) of Section 10.2.5 of the Loan Agreement in its entirety,
and by substituting the following in lieu thereof:
(xi) the Lien of the trustee under the Indenture pursuant to the
applicable section thereof on certain property in its possession as
security for payment of fees and other amounts owing to it in its capacity
as such trustee;
-5-
(i) By redesignating the current clause (xiv) of Section 10.2.5 of the Loan Agreement
as clause (xv) thereof and adding the following new clause (xiv) to Section 10.2.5 of the
Loan Agreement immediately following clause (xiii) thereof:
(xi) any Lien under the Indenture (an Indenture Lien) arising out of
the existence of a Lien in the same assets granted or suffered to exist by
MasTec or any of its Subsidiaries that constitutes a Permitted Lien
hereunder, provided that such Indenture Lien is granted or suffered to
exist in order to prevent a violation of the negative pledge provisions of
the Indenture;
(j) By deleting Section 12.16 of the Loan Agreement in its entirety, and by
substituting the following in lieu thereof:
12.1.6 Other Defaults. There shall occur any default or event
of default on the part of any Obligor or any Subsidiary under (i) the
Indenture (other than a Permitted Existing Indenture Covenant Violation), or
(ii) under any other agreement, document or instrument to which such Obligor
or such Subsidiary is a party or by which such Obligor or such Subsidiary or
any of their respective Properties is bound, creating or relating to any
Debt (other than the Obligations) in excess of $2,500,000, in each case if
the payment or maturity of such Debt may be accelerated in consequence of
such default or event of default or demand for payment of such Debt may be
made.
(k) By deleting Section 15.18 of the Loan Agreement in its entirety, and by
substituting the following in lieu thereof:
15.18 Certifications Regarding Indentures.
(a) Each Borrower hereby certifies to Agent and Lenders that neither
the execution or performance of this Agreement by Borrowers nor the
incurrence of any Obligations pursuant to the terms of this Agreement or any
of the other Loan Documents violates any provision of the Existing
Indenture, including Sections 4.09 and 4.12 of the Existing Indenture. Each
Borrower further certifies to Agent and Lenders that (i) all of the
Commitments constitute a Credit Facility under the Existing Indenture,
(ii) that all Obligations collectively constitute Senior Debt and
Designated Senior Debt under the Existing Indenture, and (iii) the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the amount of Indebtedness under any Credit Facility (as such
terms are defined in the Existing Indenture), including the Existing Loan
Agreement, on or prior to the date hereof is $0.
(b) Upon and after the New Notes Issuance Date, each Borrower hereby
certifies to Agent and Lenders that neither the execution or performance of
this Agreement by Borrowers nor the incurrence of any Debt pursuant to the
terms of this Agreement or any of the other Loan Documents violates any
provision of the New Notes Indenture. Each Borrower further certifies to
Agent and Lenders that (i) all of the Commitments constitute a Credit
Facility (or the equivalent term defined in the New Notes Indenture) under
the New Notes
-6-
Indenture, and (ii) that all Obligations collectively constitute
Senior Debt (or the equivalent term defined in the New Notes Indenture)
under the New Notes Indenture.
3. No Novation, etc. The parties hereto acknowledge and agree that, except as set
forth herein, nothing in this letter agreement shall be deemed to amend or modify any provision of
the Loan Agreement or any of the other Loan Documents, each of which shall remain in full force
and effect, and the Agents and Lenders willingness to consent to the Proposed Refinancing,
including the issuance of the New Notes and the repayment of the Existing Subordinated Notes, as
set forth herein, shall not extend to, or be deemed a consent, to any other refinancing, issuance
or other transactions other than in accordance with the terms of the Loan Agreement. This letter
agreement is not intended to be, nor shall it be construed to create, a novation or accord and
satisfaction, and the Loan Agreement as herein modified shall continue in full force and effect.
4. Acknowledgements and Stipulations; Representation and Warranties. By its signature
below, each Borrower (a) acknowledges and stipulates that (i) the Loan Agreement and the other Loan
Documents executed by such Borrower are legal, valid and binding obligations of such Borrower that
are enforceable against such Borrower in accordance with the terms thereof, (ii) all of the
Obligations of such Borrower are owing and payable without defense, offset or counterclaim (and to
the extent there exists any such defense, offset or counterclaim on the date hereof, the same is
hereby waived by each Borrower), (iii) the security interests and liens granted by such Borrower in
favor of the Agent are duly perfected, first priority security interests and liens (except with
respect to those Permitted Liens that are permitted to have priority pursuant to the Loan
Documents), and (iv) the Loan Agreement and each amendment to the Loan Agreement heretofore entered
into by the any or all of the Borrowers and any actions taken under the Loan Agreement as thereby
amended are hereby ratified and approved by such Borrower; and (b) represents and warrants to Agent
and Lenders, to induce Agent and Lenders to enter into this letter agreement, that (i) the
execution, delivery and performance of this letter agreement has been duly authorized by all
requisite corporate or limited liability company action on the part of such Borrower, (ii) all of
the representations and warranties made by such Borrower in the Loan Agreement and the other Loan
Documents are true and correct on and as of the date hereof, except to the extent that any such
representation or warranty is stated to relate to an earlier date, in which case such
representation or warranty shall be true and correct on and as of such earlier date, and (iii) to
the best of such Borrowers knowledge, there exists no claim or cause of action of any kind or
nature, whether absolute or contingent, disputed or undisputed, at law or in equity, that such
Borrower has or has ever had against Agent or any Lender arising under or in connection with any of
the Loan Documents (and to the extent there exists any such claim or cause of action on the date
hereof, the same is hereby waived by such Borrower).
5. Miscellaneous. This letter agreement shall be governed by and construed in
accordance with the internal laws of the State of Georgia. This letter agreement shall be binding
upon an inure to the benefit of the parties and their respective successors and assigns. This
letter agreement may be executed in any number of counterparts and by different parties to this
letter agreement on separate counterparts, each of which when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original signature hereto.
-7-
This letter agreement shall be effective upon Agents receipt of counterparts hereof duly
executed by Lenders and Borrowers.
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Very truly yours
BANK OF AMERICA, N.A.,
as Agent
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By: |
/s/ Dennis S. Losin
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Name: |
Dennis S. Losin |
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Title: |
SVP |
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(Signatures continued on the following pages.)
-8-
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LENDERS:
BANK OF AMERICA, N.A.,
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By: |
/s/ Dennis S. Losin
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Name: |
Dennis S. Losin |
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Title: |
SVP |
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LASALLE BUSINESS CREDIT, LLC
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By: |
/s/ Steve Friedlander
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Name: |
Steve Friedlander |
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Title: |
S.V.P. |
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PNC BANK, NATIONAL ASSOCIATION
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By: |
/s/ Alex M. Council
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Name: |
Alex M. Council |
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Title: |
Vice President |
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GENERAL ELECTRIC CAPITAL CORPORATION
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By: |
/s/ Mark A. Kassis
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Name: |
Mark A. Kassis |
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Title: |
Duly Authorized Signatory |
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(Signatures continued on the following pages.)
-9-
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Accepted and Agreed to:
BORROWERS:
MASTEC, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC TC, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC FC, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC CONTRACTING COMPANY, INC.
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By: |
/s/ Alberto de Cardenas
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Name: |
Alberto de Cardenas |
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Title: |
Vice President |
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MASTEC MINNESOTA SW, LLC
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC SERVICES COMPANY, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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(Signatures continued on following page.)
-10-
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MASTEC NORTH AMERICA, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC ASSET MANAGEMENT
COMPANY, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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CHURCH & TOWER, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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MASTEC OF TEXAS, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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S.S.S. CONSTRUCTION, INC.
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By: |
/s/ Austin Shanfelter
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Name: |
Austin Shanfelter |
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Title: |
President and CEO |
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-11-
Exhibit A
Refinancing Terms
MasTec, Inc.
$150,000,000 Senior Notes due 2017
Summary of Key Provisions
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Maturity
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10 years |
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Guarantors
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Each restricted subsidiary existing on the closing date (other than foreign
subsidiaries and Globetec Construction, LLC)
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Guarantors
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Any future restricted subsidiary (other than a foreign subsidiary and other than
certain non-wholly owned restricted subsidiary) that guarantees any credit
facility of MasTec |
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Ranking
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The notes and the guarantees will be senior unsecured obligations of MasTec and
each guarantor |
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Optional redemption
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The notes will be redeemable during the first five years after the closing date
at 100% of their principal amount plus a make-whole premium based on treasury
rates plus 50 basis points |
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Commencing in year six, the notes will be redeemable at 100% of their principal
amount plus a premium initially equal to 1/2 of the coupon, with such premium
declining to nil in year nine. |
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Up to 35% of the notes will be redeemable during the first three years after the
closing date using the proceeds from certain equity offerings at 100% of their
principal amount plus a premium that is equal to the coupon |
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Change of control
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Upon a change of control, MasTec must offer to purchase the notes at 101% of
their principal amount |
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A change of control includes any person (other than the Mas family) becoming the
beneficial owner of more than 50% of the voting power of MasTec |
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Covenants:
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Covenant termination
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On the first day that the notes receive investment grade ratings from both
Moodys and S&P, certain covenants under the indenture will terminate (including
those marked with a * below) |
-12-
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Limitation on
indebtedness*
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MasTec and any guarantor (which would not include foreign subsidiaries) may
incur unlimited indebtedness so long as after giving pro forma effect to such
incurrence and the application of the proceeds therefrom, and other proforma
adjustments for the incurrence or repayment of debt and asset sales and
dispositions MasTecs fixed charge coverage ratio would be greater than 2:1
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Additionally, the incurrence of certain indebtedness is permitted even if the
fixed charge coverage ratio is less than 2:1, including the following: |
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- indebtedness under credit facilities equal to the greater of (a) $200 million
or (b) the borrowing base (defined as 75% of A/R plus 50% of PP&E plus 50% of
inventory) |
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- capitalized lease obligations or purchase money obligations up to 5% of
MasTecs consolidated net assets |
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- indebtedness of a foreign subsidiary up to 50% of the consolidated net assets
of any such foreign subsidiary, so long as after giving pro forma effect to such
incurrence and the application of the proceeds therefrom, and other proforma
adjustments for the incurrence or repayment of debt and asset sales and
dispositions MasTecs fixed charge coverage ratio would be greater than 2:1 |
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- indebtedness of a receivables subsidiary in a qualified receivables transaction |
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- up to $50 million of additional indebtedness |
-13-
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Limitation on restricted
payments*
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Restricted payments include (1) dividend payments, (2) repurchases of MasTecs
capital stock, (3) repayments of subordinated indebtedness more than one year
prior to maturity, and (4) investments other than permitted investments
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MasTec and any restricted subsidiary may not make any restricted payment unless
(a) there is no default under the indenture, (b) MasTec could incur at least $1
of debt under the 2:1 fixed charge coverage ratio test, and (c) MasTec has room
in its restricted payments build-up (equal to (i) 50% of adjusted consolidated
net income plus (ii) cash and non-cash proceeds received from issuances of
capital stock plus (iii) net reductions in restricted investments plus (iv)
proceeds from the sale of convertible debt that has been converted into capital
stock) |
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Additionally, certain restricted payments are permitted, including: |
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- repurchases of capital stock from officers, directors and employees not to
exceed $3 million per year (with unused amounts carried forward into subsequent
years, subject to a maximum of $6 million in any year) |
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- repurchases of capital stock not to exceed $5 million for distribution to an
employee benefit plan |
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- other restricted payments up to $25 million |
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- There is no basket for a regular quarterly dividend. Any such dividend would
need to come from the restricted payments build-up described above |
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Permitted investments include: |
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- unlimited investments in a person (including a joint venture) that is or will
become (as a result of the investment) a restricted subsidiary (which must be at
least majority-owned) |
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- loans to employees and officers not to exceed $2 million |
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- investments in a person engaged in a permitted business not to exceed the
greater of (a) $50 million or (b) 10% of MasTecs consolidated net assets |
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- the remaining installment payments for Direct Star (up to $[ ] million) and
ongoing investments to fund working capital of Direct Star in proportion to the
Companys equity interest, and pursuant to the joint venture agreement |
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- other investments up to $5 million |
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Limitation on liens
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No liens securing indebtedness or trade payables are permitted unless the notes
are equally secured, subject to certain exceptions including: |
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- liens securing credit facilities allowed under the debt covenant equal to the
greater of (a) $200 million or (b) the borrowing base described above |
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- liens on property and assets of foreign subsidiaries to secure debt of foreign
subsidiaries permitted under the debt covenant |
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- liens securing the $50 million general indebtedness basket |
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- purchase money liens and liens on Capital and Operating leases |
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Accordingly, the Company will not be able to incur secured debt to finance
acquisition in excess of the credit facility basket described above even if it
is in compliance with the 2:1 fixed charge coverage ratio test |
-14-
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Limitation on
transactions with
affiliates*
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Transactions with affiliates must be on fair and reasonable terms |
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Transactions over $5 million require approval by a majority of disinterested
members of the board of directors |
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Transactions over $25 million require delivery of a fairness opinion |
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Limitation on dividend
restrictions*
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Limitations on the ability of restricted subsidiaries to pay dividends, repay
indebtedness to MasTec, make loans to MasTec or transfer its property or assets
to MasTec are not permitted, subject to exceptions including: |
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- restrictions existing on the closing date |
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- customary restrictions in indebtedness permitted to be incurred under the
indenture |
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- customary provisions in joint venture agreements |
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Limitation on asset sales*
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If MasTec or a restricted subsidiary sells (a) capital stock of a restricted
subsidiary, (b) all or substantially all of the assets of an operating unit or
business, or (c) other assets outside of the ordinary course of business (in
each case subject to a $5 million minimum threshold) then: |
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- MasTec must receive fair market value; |
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- at least seventy-five percent (75%) of the consideration must be cash or cash
equivalents; and |
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- MasTec must within 12 months apply the proceeds to (a) permanently repay
[secured] indebtedness or (b) invest in replacement assets. |
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If any excess proceeds not applied in accordance with (a) and (b) above reach
$10 million, then MasTec must use such excess proceeds to offer to repurchase
the notes at 100% of their principal amount |
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Limitation on mergers*
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MasTec may not merge with another person or sell all or substantially all of its
assets to another person unless: |
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- the surviving entity is a U.S. corporation and assumes MasTecs obligations
under the notes |
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- there is no default under the indenture |
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- after giving pro forma effect to such transaction, the surviving entity could
incur $1 of indebtedness under the 2:1 fixed charge coverage ratio test |
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* note only the $1 of indebtedness requirement under this covenant would
terminate upon the attainment of investment grade status |
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Reporting
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MasTec must call reports with the SEC within 15 days of the due date. If filing
is late, such late filing would result in an Event of Default after a 60 day
grace period for covenant defaults |
-15-
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Events of default
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Events of default include the following: |
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- default in payment of the principal of the notes |
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- default in payment of interest on the notes, with a 30 day grace period |
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- default in other covenants under the indenture, generally with a 60 day grace
period |
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- acceleration of other indebtedness $20 million threshold, with a 30 day
grace period |
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- judgment default $20 million threshold, with a 30 day grace period |
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Note: Definitions are not covered |
-16-
EX-10.51 Consent & Amendment dated February 6, 200
EXHIBIT 10.51
February 6, 2007
MasTec, Inc.
800 Douglas Road
North Tower, 12th Floor
Coral Gables, FL 33134
Attention: Chief Executive Officer
RE: Acquisition by MasTec North America, Inc. of DirectStar TV, LLC
Ladies and Gentlemen:
Reference is made to that certain Amended and Restated Loan and Security Agreement (as at any
time amended, restated, modified or supplemented, the Loan Agreement), dated May 10,
2005, by and among MasTec North America, Inc., a Florida corporation (MasTec NA), MasTec,
Inc., a Florida corporation (MasTec), and certain subsidiaries of MasTec (together with
MasTec NA and MasTec, hereinafter referred to collectively as the Borrowers), the various
financial institutions named in the Loan Agreement (collectively, Lenders), and Bank of
America, N.A., a national banking association, in its capacity as collateral and administrative
agent for the Lenders (together with its successors in such capacity, Agent).
Capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to
such terms in the Loan Agreement.
MasTec NA currently owns forty-nine percent (49%) of the issued and outstanding membership
interests of DirectStar TV, LLC, a North Carolina limited liability company (the
Company). Borrowers have advised Agent and Lenders of MasTec NAs desire to purchase the
remaining fifty-one percent (51%) of the issued and outstanding membership interests of the
Company, all of which are currently owned by Red Ventures, LLC, a North Carolina limited liability
company (the Seller), pursuant to a certain Membership Interest Purchase Agreement (the
DirectStar Purchase Agreement) dated February 6, 2007, by and among MasTec NA, MasTec,
the Company, the Seller, and Ricardo Elias, Daniel S. Feldstein, and Mark Brodsky (collectively,
the Seller Parties) (the acquisition by MasTec NA of the membership interests of the
Company pursuant to the terms of the DirectStar Purchase Agreement is hereinafter referred to as
the DirectStar Acquisition).
Pursuant to Section 10.2.13 of the Loan Agreement, the Borrowers are restricted from acquiring
the stock or membership interests of any Person, except in certain limited circumstances including,
without limitation, pursuant to a Permitted Acquisition.
As a result, Borrowers have requested that Agent and Lenders (i) acknowledge that the
DirectStar Acquisition constitutes a Permitted Acquisition under the Loan Agreement, and (ii) agree
to amend the Loan Agreement in certain respects in connection therewith.
Agent and Lenders are willing to (i) acknowledge that the DirectStar Acquisition constitutes a
Permitted Acquisition under the Loan Agreement, and (ii) agree to amend the Loan Agreement in
connection therewith, in each case on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the
receipt and sufficiency of which are hereby severally acknowledged, the parties hereto, intending
to be bound hereby, agree as follows:
1
1. Acknowledgment of DirectStar Acquisition as a Permitted Acquisition; Waiver.
Notwithstanding anything to the contrary contained in the Loan Agreement, Agent and Lenders hereby
acknowledge that the DirectStar Acquisition constitutes a Permitted Acquisition under the Loan
Agreement effective upon (i) the satisfaction of all of the conditions thereto set forth in the
definition of Permitted Acquisition contained in the Loan Agreement (other than conditions, (c),
(d) and (j) thereof), and (ii) the satisfaction of each of the following conditions, in form and
substance satisfactory to Agent:
(a) the Purchase Price of such Acquisition does not exceed $100,000,000,
and the cash portion of such Purchase Price does not exceed $85,000,000;
(b) The Liquidity Amount after giving effect to the DirectStar
Acquisition is at least $25,000,000;
(c) Agent receives (i) from MasTec and MasTec NA, a collateral assignment of
all rights and sums due to MasTec and MasTec NA under the DirectStar Purchase
Agreement, and (ii) from the Seller and Seller Parties, an acknowledgment of such
collateral assignment;
(d) Agent receives from MasTec NA, the Seller and Seller Parties, a tri-party
agreement with respect to the Earn-Out Payments under (and as defined in) the
DirectStar Purchase Agreement; and
(e) Agent receives the amendment fee described in Section 5 hereof in
immediately available funds.
To the extent that any of the terms and provisions of the Loan Agreement or any of the other Loan
Documents (other than this letter agreement and the terms and conditions set forth herein) would
otherwise restrict the Borrowers ability to enter into or consummate the DirectStar Acquisition,
Agent and Lenders hereby waive the same with respect to the DirectStar Acquisition. The foregoing
waiver shall not extend to, or be deemed a waiver with respect to, any Acquisition other than the
DirectStar Acquisition.
2. Amendments to Loan Agreement. In addition to the foregoing consents, the parties
hereto agree to amend the Loan Agreement as follows:
(a) By adding the following new definitions to Section 1.1 of the Loan Agreement in
proper alphabetical sequence:
DirectStar DirectStar TV, LLC, a North Carolina limited
liability company.
DirectStar Purchase Agreement that certain Membership
Interest Purchase Agreement dated February 6, 2007, by and among MasTec
North America, MasTec, DirectStar, Red Ventures, LLC, a North Carolina
limited liability company, and Ricardo Elias, Daniel S. Feldstein and Mark
Brodsky, pursuant to which MasTec North America has agreed to purchase the
remaining fifty-one percent (51%) of the issued and outstanding
membership shares in DirectStar.
2
Permitted DirectStar Investments cash Investments in
DirectStar in amounts determined by the Borrowers so long
as (i) the aggregate amount of Borrowers cash Investments in
DirectStar does not at any time exceed $3,000,000, (ii) no Default or
Event of Default exists at the time of or will exist immediately after
giving effect to any such Investment, and (iii) Availability before and
immediately after giving effect to any such Investment equals or exceeds
$25,000,000.
(b) By deleting from Section 1.1 of the Loan Agreement the definitions of Adjusted
EBITDA, and Fixed Charge Coverage Ratio, Permitted Contingent
Obligations, Purchase Price and Restricted Investment in their
entirety and by substituting the following new definitions in lieu thereof:
Adjusted EBITDA for any fiscal period of Borrowers and their
Subsidiaries (other than DirectStar), an amount equal to the sum for such
period of (i) Adjusted Net Earnings, plus (ii) provision for taxes
based on income and for state or provincial franchise taxes, to the extent
deducted in the calculation of Adjusted Net Earnings, plus (iii)
interest expense, to the extent deducted in the calculation of Adjusted Net
Earnings, plus (iv) depreciation and amortization and other non-cash
charges approved by Agent, to the extent deducted in the calculation of
Adjusted Net Earnings, plus (v) purchase accounting adjustments that
are as required by FASB 141 and 142, plus (vi) non-cash charges
(including inventory adjustments, lost job accruals, stock option expenses
and write down of assets) from discontinued operations and other non-cash
charges approved by Agent, to the extent deducted in the calculation of
Adjusted Net Earnings for such period, all calculated on a Consolidated
basis, plus (vii) without duplication, any cash Distributions made
by DirectStar to any Borrower, all calculated on a Consolidated basis.
Fixed Charge Coverage Ratio for any period, the ratio of (a)
Adjusted EBITDA for such period minus Net Capital Expenditures
(excluding Capital Expenditures financed by Permitted Purchase Money Debt)
for such period, minus Distributions made during such period,
minus cash Taxes paid during such period, minus cash
Investments made by Borrowers in DirectStar, minus any portion of
the Earn-Out Payments under (and as defined in) the DirectStar Purchase
Agreement made by Borrowers in cash, to (b) the sum of all Fixed Charges for
such period, all calculated for Borrowers and their Subsidiaries (other than
DirectStar) on a Consolidated basis.
Permitted Contingent Obligations Contingent Obligations (a)
arising from endorsements of Payment Items for collection or deposit in the
Ordinary Course of Business; (b) arising from Hedging Agreements entered
into in the Ordinary Course of Business pursuant to this Agreement or with
Agents prior written consent; (c) of any Borrower and its Subsidiaries
existing as of the Closing Date, including extensions and renewals thereof
that do not increase the amount of such Contingent Obligations as of the
date of such extension or renewal; (d) incurred in the Ordinary Course of
Business with respect to surety bonds, appeal bonds, performance bonds and
other similar obligations; (e) arising under indemnity agreements to title
insurers to cause such title insurers to issue to Agent title insurance
policies; (f) with respect to customary indemnification
3
obligations in favor of purchasers in connection with dispositions of
Equipment permitted under Section 8.4.2 of this Agreement; (g) consisting of
reimbursement obligations from time to time owing by any Borrower to an
Issuing Bank with respect to Letters of Credit (but in no event to include
reimbursement obligations at any time owing by a Borrower to any other
Person that may issue letters of credit for the account of Borrowers); (h)
of MasTec arising from any guaranty, indemnity or other assurance of payment
or performance of any equipment lease for which any other Obligor is the
primary obligor; (i) arising from the Earn-Out Payments under (and as
defined in) the DirectStar Purchase Agreement and subject to the terms and
conditions of any subordination agreement or other tri-party agreement
required by Agent, (j) of DirectStar arising from a Funding Obligation Loan
under (and as defined in) the DirectStar Purchase Agreement and other
payments of Net Available Cash required under (and as defined in) the
DirectStar Purchase Agreement by DirectStar during the period in which such
Funding Obligation Loan remains outstanding, and (k) other than those
Contingent Obligations described in the foregoing clauses of this
definition, not exceeding $1,000,000 in the aggregate at any time.
Purchase Price for purposes of the definition of Permitted
Acquisition means an amount equal to the total consideration paid for such
Acquisition, including all cash payments (whether classified as purchase
price, noncompete payments, consulting payments, earn out or otherwise and
without regard to whether such amount is paid in whole or in part at the
closing of the Acquisition or over time thereafter, but excluding any
finance charges attributable to deferred payments, any salary or other
employment compensation paid to a seller for the purpose of retaining such
sellers services as an active employee of a Borrower or a Subsidiary and,
upon Agents determination to such effect, any earn out based upon
achievement of a material improvement in financial performance of the
target), the remaining principal amount of all Debt of the Acquisition
target and of any Subordinated Debt owing to the seller, and the value (as
determined by the board of directors of MasTec, including pursuant to the
applicable purchase agreement between the relevant Obligor or Subsidiary of
an Obligor and the seller, in the case of any property, the fair value of
which is not readily ascertainable) of all other property, other than
capital stock or options to acquire such capital stock of MasTec,
transferred by MasTec to the seller. For purposes of determining the
Purchase Price of the DirectStar Acquisition, such Purchase Price shall be
calculated as set forth above, provided, that, the amount of
the earn-out portion of such Purchase Price will be based on the projected
calculation thereof provided by MasTec to Agent on or prior to the closing
date of the DirectStar Acquisition.
Restricted Investment any acquisition of Property by an
Obligor or any of its Subsidiaries in exchange for cash or other Property,
whether in the form of an acquisition of Equity Interests or Debt, or the
purchase or acquisition by such Obligor or any of its Subsidiary of any
other Property, or a loan, advance, capital contribution or subscription
(each of the foregoing, an Investment), except acquisitions of the
following: (i) fixed assets to be used in the Ordinary Course of Business of
such Obligor or any of its Subsidiaries so long as the acquisition costs
thereof are Capital Expenditures permitted hereunder; (ii) goods held for
4
sale or lease or to be used in the manufacture of goods or the
provision of services by such Obligor or any of its Subsidiaries in the
Ordinary Course of Business; (iii) Current Assets arising from the sale or
lease of goods or the rendition of services in the Ordinary Course of
Business of such Obligor or any of its Subsidiaries; (iv) Investments in
Subsidiaries to the extent existing on the Closing Date; (v) Cash
Equivalents to the extent they are not subject to rights of offset in favor
of any Person other than Agent or a Lender; (vi) loans and other advances of
money to the extent not prohibited by Section 10.2.2; (vii) Permitted
Acquisitions; (viii) those Investments of Borrowers described in Schedule
1.1A, to the extent existing or committed to (as described in Schedule 1.1A)
on the Closing Date; (ix) Permitted DirectStar Investments, and (x) any
other Investment (other than a Permitted DirectStar Investment) that does
not result in an Acquisition, so long as (a) no Default or Event of Default
exists before or after giving effect to such Investment, (b) after giving
effect to such Investment, Availability is greater than $25,000,000, and (c)
the aggregate amount of Investments under this clause (x) does not exceed
$10,000,000.
(c) By adding the following new paragraph at the end of Section 7.1 of the Loan
Agreement:
Notwithstanding anything to the contrary set forth herein, Agent shall
not be deemed to have been granted a security interest in, and the term
Collateral shall not include, any Equity Interests owned or held by any
Borrower in DirectStar.
(d) By deleting the second sentence of Section 9.1.18 of the Loan Agreement and by
substituting the following in lieu thereof:
No Obligor nor any of its Subsidiaries is a party or subject to any
Restrictive Agreements, except for (i) the DirectStar Purchase Agreement and
(ii) such other agreements as are set forth on Schedule 9.1.18 hereto, none
of which agreements referenced in (i) or (ii) prohibit the execution or
delivery of any of the Loan Documents by any Obligor or the performance by
any Obligor of its obligations under any of the Loan Documents to which it
is a party, in accordance with the terms of such Loan Documents.
(e) By deleting Section 10.1.3 of the Loan Agreement in its entirety and by
substituting the following in lieu thereof:
10.1.3 Financial and Other Information. Keep adequate records and
books of account with respect to its business activities in which proper
entries are made in accordance with GAAP reflecting all its financial
transactions; and cause to be prepared and furnished to Agent and Lenders
the following (all to be prepared in accordance with GAAP applied on a
consistent basis, unless Borrowers certified public accountants concur in
any change therein, such change is disclosed to Agent and is consistent
with GAAP and, if required by the Required Lenders, the financial covenants
set forth in Section 10.3 are amended in a manner requested by the Required
Lenders to take into account the effects of such change):
5
(i) as soon as available, and in any event within 90 days
after the close of each Fiscal Year, audited consolidated balance
sheet of Borrowers and their respective Subsidiaries prepared as of
the end of such Fiscal Year and accompanied by the related
statements of income, shareholders equity and cash flow, and
certified without an Impermissible Qualification by a firm of
independent certified public accountants of recognized national
standing selected by Borrowers but reasonably acceptable to Agent,
and setting forth in each case in comparative form the
corresponding Consolidated figures for the preceding Fiscal Year.
The audited consolidated balance sheet and related statements of
income, shareholders equity and cash flow shall be accompanied by
supplemental schedules showing, on a Consolidated and consolidating
basis (including DirectStar), the balance sheet of Borrowers and
their respective Subsidiaries, prepared as of the end of such
Fiscal Year and accompanied by the related statements of income,
shareholders equity and cash flow,
(ii) as soon as available, and in any event within 30 days
after the end of each month hereafter (but (a) for the last month
in each of the first 3 Fiscal Quarters of any Fiscal Year, on the
sooner to occur of 45 days after the end of such month or the date
on which MasTec files with the SEC its Form 10-Q for the Fiscal
Quarter ending on such date, and (b) within 45 days after the last
month in a Fiscal Year), including the last month of Borrowers
Fiscal Year, unaudited Consolidated and consolidating balance
sheets of Borrowers and their respective Subsidiaries (including
DirectStar), in each case as of the end of such month, and the
related unaudited Consolidated statements of income and cash flow
for such month and for the portion of the Fiscal Year then elapsed
(including DirectStar), on a Consolidated and consolidating basis,
setting forth in each case in comparative form the corresponding
figures for the preceding Fiscal Year and certified by the
principal financial officer of Borrowers as prepared in accordance
with GAAP and fairly presenting the Consolidated and consolidating
financial position and results of operations of Borrowers and their
Subsidiaries, in each case for such month and period subject only
to changes from audit and year-end adjustments and except that such
statements need not contain notes;
6
(iii) as soon as available, and in any event within 30 days
after the end of each month hereafter, unaudited balance sheets of
DirectStar, as of the end of such month, and the related unaudited
Consolidated statements of income and cash flow for such month and
for the portion of the Fiscal Year then elapsed, on a Consolidated
and consolidating basis, setting forth in each case in comparative
form the corresponding figures for the preceding Fiscal Year and
certified by the principal financial officer of DirectStar, as
prepared in accordance with GAAP and fairly presenting the
Consolidated and consolidating financial position and results of
operations of DirectStar, for such month and period subject only to
changes from audit and year-end adjustments and except that such
statements need not contain notes;
(iv) not later than 25 days after each month, a summary aging
of each Obligors trade payables as of the last Business Day of
such month, and, at Agents request, a listing of all of each
Obligors trade payables, specifying the name of and balance due
each trade creditor and monthly detailed trade payable agings, each
in form acceptable to Agent;
(v) promptly after the sending or filing thereof, as the case
may be, copies of any proxy statements, financial statements or
reports which any Obligor has made generally available to its
shareholders; copies of any regular, periodic and special reports
or registration statements or prospectuses which any Obligor files
with the SEC or any Governmental Authority which may be substituted
therefor, or any national securities exchange; and copies of any
press releases or other statements made available by an Obligor to
the public concerning material changes to or developments in the
business of such Obligor;
(vi) promptly after the sending or filing thereof, copies of
any annual report to be filed in accordance with ERISA or any
similar provision of the PBA in connection with each Plan and such
other data and information (financial or otherwise) as Agent, from
time to time, may request, bearing upon or related to the
Collateral or any Borrowers or any Subsidiarys financial
condition or results of operations; and
(vii) quarterly within 60 days after the end of each Fiscal
Quarter, a certificate of the senior officer of MasTec serving as
agent of Agent, in such form as Agent and the Borrowers may agree,
listing all title certificates for vehicles owned by Obligors as of
the last day of such Fiscal Quarter, indicating vehicles sold or
transferred and vehicles purchased since the date of the last such
certificate and confirming that all title certificates for such
purchased vehicles with a purchase price in excess of $2,500
reflect Agent as the first lienor thereof (or that applications for
new title certificates reflecting such Lien have been properly
made).
Concurrently with the delivery of the financial statements described
in clause (i) of this Section 10.1.3, Borrowers shall deliver to Agent a
copy of the accountants letter to Borrowers management that is prepared
in connection with such financial statements. Concurrently with the
delivery of the financial statements described in clauses (i) and (ii) of
this Section 10.1.3, or more frequently if requested by Agent during any
period that a Default or Event of Default exists, Borrowers shall cause to
be prepared and furnished to Agent a Compliance Certificate executed by the
chief financial officer of Borrowers.
(f) By deleting Section 10.1.11 of the Loan Agreement and by substituting the
following in lieu thereof:
10.1.11 Future Subsidiaries. Each Borrower shall
promptly notify Agent upon any Person becoming a Subsidiary, or upon an
Obligor directly or indirectly acquiring additional Equity Interests of any
existing Subsidiary, and
7
(i) Any such Person (other than DirectStar) shall, if it is a
Domestic Subsidiary, (i) execute and deliver to Agent a Joinder
Agreement or, if elected by Agent, a Subsidiary Guaranty and
Subsidiary Security Agreement and (ii) to the extent such Domestic
Subsidiary is required to pledge Equity Interests of a Subsidiary
pursuant to clause (ii) of this Section, become a party to the
Pledge Agreement, if not already a party thereto as a pledgor, in a
manner reasonably satisfactory to Agent;
(ii) Each Borrower and each Domestic Subsidiary (other than
DirectStar) shall, pursuant to the Pledge Agreement, pledge to Agent
all of the outstanding Equity Interests of each such new Domestic
Subsidiary (and 66% of the Equity Interests of each new Foreign
Subsidiary, if requested by Agent or the Required Lenders) owned
directly by such Borrower or such Domestic Subsidiary, and shall
deliver to Agent undated stock powers for such certificates,
executed in blank (or, if any such Equity Interests are
uncertificated, confirmation and evidence reasonably satisfactory to
Agent that the security interest in such uncertificated securities
has been transferred to and perfected by Agent, for the benefit of
the Secured Parties, in accordance with Sections 8-313, 8-321 and
9-115 of the UCC or any other similar or local or foreign law that
may be applicable); and
(iii) Each Borrower and each Domestic Subsidiary (other than
DirectStar) shall, pursuant to the Pledge Agreement, pledge to Agent
for its benefit and that of the Lenders, all intercompany notes
evidencing Debt of such new Subsidiary in favor of such Borrower or
such Domestic Subsidiary (which shall be in a form acceptable to
Agent).
10.1.12 Pledged Shares. Pledge to Agent, for the
benefit itself and Secured Parties, all of the Equity Interests of each of
their respective Subsidiaries (other than DirectStar) from time to time
pursuant to a Pledge Agreement.
(g) By adding the following new clause (xiv) to Section 10.2.5 of the Loan Agreement
and by redesignating the existing clause (xiv) of Section 10.2.5 of the Loan Agreement as
clause (xv) thereof:
(xiv) Liens in favor of the seller of DirectStar in the assets of
DirectStar to the extent such Liens secure the DirectStars obligations to
make the Earn-Out Payments under (and as defined in) the DirectStar
Purchase Agreement (as in effect on February 6, 2007); and
(h) By deleting clause (iii) of Section 10.2.18 of the Loan Agreement and by
substituting the following in lieu thereof:
(iii) provided for under the DirectStar Purchase Agreement with
respect to Upstream Payments by DirectStar to Borrowers, or as otherwise
identified and fully disclosed in Schedule 10.2.8.
8
(i) By deleting clause (i) of Section 10.2.18 of the Loan Agreement and by substituting
the following in lieu thereof:
(i) the DirectStar Purchase Agreement and those Restrictive Agreements
existing on the date hereof and identified on Schedule 9.1.18 (but shall
apply to any amendment or modification expanding the scope of any
restriction or condition contained in any such Restrictive Agreement),
(j) By deleting Section 10.2.22 of the Loan Agreement in its entirety and by
substituting the following in lieu thereof:
10.2.22 Conduct of Business. Engage in any business
other than the business engaged in by it on the Closing Date and any
business or activities which are substantially similar, related, incidental
or, in the case of DirectStar, complementary thereto.
3. No Novation, etc. The parties hereto acknowledge and agree that, except as set
forth herein, nothing in this letter agreement shall be deemed to amend or modify any provision of
the Loan Agreement or any of the other Loan Documents, each of which shall remain in full force
and effect, and the Agents and Lenders willingness to consent to the DirectStar Acquisition and
the Permitted DirectStar Investments as set forth herein, shall not extend to, or be deemed a
consent, to any other Acquisitions, Investments or other transactions other than in accordance
with the terms of the Loan Agreement. This letter agreement is not intended to be, nor shall it
be construed to create, a novation or accord and satisfaction, and the Loan Agreement as herein
modified shall continue in full force and effect.
4. Acknowledgements and Stipulations; Representation and Warranties. By its signature
below, each Borrower (a) acknowledges and stipulates that (i) the Loan Agreement and the other Loan
Documents executed by such Borrower are legal, valid and binding obligations of such Borrower that
are enforceable against such Borrower in accordance with the terms thereof, (ii) all of the
Obligations of such Borrower are owing and payable without defense, offset or counterclaim (and to
the extent there exists any such defense, offset or counterclaim on the date hereof, the same is
hereby waived by each Borrower), (iii) the security interests and liens granted by such Borrower in
favor of the Agent are duly perfected, first priority security interests and liens (except with
respect to those Permitted Liens that are permitted to have priority pursuant to the Loan
Documents), and (iv) the Loan Agreement and each amendment to the Loan Agreement heretofore entered
into by the any or all of the Borrowers and any actions taken under the Loan Agreement as thereby
amended are hereby ratified and approved by such Borrower; and (b) represents and warrants to Agent
and Lenders, to induce Agent and Lenders to enter into this letter agreement, that (i) the
execution, delivery and performance of this letter agreement has been duly authorized by all
requisite corporate or limited liability company action on the part of such Borrower, (ii) all of
the representations and warranties made by such Borrower in the Loan Agreement and the other Loan
Documents are true and correct on and as of the date hereof, except to the extent that any such
representation or warranty is stated to relate to an earlier date, in which case such
representation or warranty shall be true and correct on and as of such earlier date, and (iii) to
the best of such Borrowers knowledge, there exists no claim or cause of action of any kind or
nature, whether absolute or contingent, disputed or undisputed, at law or in equity, that such
Borrower has or has ever had against Agent or any Lender arising under or in connection with any of
the Loan Documents (and to the extent there exists any such claim or cause of action on the date
hereof, the same is hereby waived by such Borrower).
9
5. Fee. In consideration of Agents and Lenders willingness to enter into this
letter agreement, Borrowers agree to pay to Agent, for the Pro Rata benefit of Lenders, an
amendment fee in the amount of $50,000 which shall be due and payable in immediately available
funds on the date hereof.
6. Miscellaneous. This letter agreement shall be governed by and construed in
accordance with the internal laws of the State of Georgia. This letter agreement shall be binding
upon an inure to the benefit of the parties and their respective successors and assigns. This
letter agreement may be executed in any number of counterparts and by different parties to this
letter agreement on separate counterparts, each of which when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original signature hereto.
(Signatures appear on following page.)
10
This letter agreement shall be effective upon Agents receipt of counterparts hereof duly
executed by Lenders and Borrowers.
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Very truly yours
BANK OF AMERICA, N.A.,
as Agent
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By: |
/s/
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Name: |
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Title: |
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LENDERS:
BANK OF AMERICA, N.A.,
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By: |
/s/
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Name: |
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Title: |
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LASALLE BUSINESS CREDIT, LLC
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By: |
/s/
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Name: |
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Title: |
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PNC BANK, NATIONAL ASSOCIATION
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By: |
/s/
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Name: |
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Title: |
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GENERAL ELECTRIC CAPITAL CORPORATION
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By: |
/s/
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Name: |
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Title: |
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(Signatures continued on following pages.)
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Accepted and Agreed to:
BORROWERS:
MASTEC, INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC TC, INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC FC, INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC CONTRACTING COMPANY,
INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC SERVICES COMPANY, INC.
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By: |
/s/
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Name: |
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Title: |
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(Signatures continued on following page.)
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MASTEC NORTH AMERICA, INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC ASSET MANAGEMENT COMPANY, INC.
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By: |
/s/
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Name: |
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Title: |
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CHURCH & TOWER, INC.
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By: |
/s/
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Name: |
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Title: |
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MASTEC OF TEXAS, INC.
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By: |
/s/
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Name: |
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Title: |
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13
EX-21 Subsidiaries of the MasTec, Inc.
Exhibit 21
MasTec, Inc.
AFFILIATED ENTITIES
NORTH AMERICA
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Church & Tower, Inc. (FL)
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(100% owned by MasTec, Inc.) |
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Integral Power & Telecommunications Incorporated
(Canadian)
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(100% owned by Phasecom Systems, Inc.) |
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MasTec Asset Management Company, Inc. (NV)
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(100% owned by MasTec, Inc) |
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MasTec Contracting Company, Inc. (NV)
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(100% owned by MasTec, Inc) |
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MasTec North America, Inc. (FL)
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(100% owned by MasTec, Inc.) |
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MasTec North America AC, LLC (FL)
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(Sole member MasTec North America, Inc.) |
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MasTec Services Company, Inc. (FL) |
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f/k/a Central America Construction, Inc.
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(100% owned by MasTec, Inc.) |
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Phasecom Systems Inc. (Canadian)
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(100% owned by MasTec, Inc.) |
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GlobeTec Construction, LLC (Florida)
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(51% owned by MasTec North America, Inc.) |
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Direct Star TV LLC (NC)
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(100% owned by MasTec, Inc.) |
Holding Companies
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MasTec FC, Inc. (NV)
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(100 % owned by MasTec, Inc.) |
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MasTec of Texas, Inc. (TX)
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(100% owned by MasTec, Inc.) |
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MasTec TC, Inc. (NV)
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(100% owned by MasTec, Inc.) |
INTERNATIONAL
Latin America
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Aidco de Mexico, S.A. de C.V. (Mex.)
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(98% owned by MasTec, Inc.)
(2% owned by MasTec International Holdings, Inc.) |
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MasTec Latin America, Inc. (DE)
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(100% owned by MasTec, Inc.) |
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Acietel Mexicana, S.A. (Mex.)
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(99% owned by Dresser Acquisition Company)
(1% owned by MasTec International Holdings, Inc.) |
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MasTec Brasil S/A (Brazil)
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(88% owned by MasTec Latin America, Inc.) |
CIDE Engenharia, Ltda. (Brazil)
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(100% owned by MasTec Brasil S/A) |
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MasTec Participações Do Brasil LTDA
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(100% owned by MasTec, Inc.) |
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MasTelecom Europe I APS (Denmark)
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(100% owned by MasTec, Inc.) |
78
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MasTelecom Europe II BV (Netherlands)
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(100% owned by MasTelecom Europe I APS) |
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MasTelecom S. DE R.L. DE C.V
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(100% owned by MasTelecom Europe II BV) |
(Mexico) |
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Pantel Inversiones de Venezuela, CA
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(100% owned by MasTec Venezuela, Inc.) |
(Venezuela) |
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Burntel Telecommunications, C.A.
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(50% owned by Pantel Inversiones) |
Holding Companies
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MasTec Brazil, Inc. (FL)
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(100% owned by MasTec, Inc.) |
MasTec Brazil II, Inc. (FL)
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(100% owned by MasTec, Inc.) |
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MasTec Venezuela, Inc. (FL)
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(100% owned by MasTec, Inc.) |
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MasTec Spain, Inc. (FL)
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(100% owned by MasTec, Inc.) |
79
EX-23.1 Consent of BDO Seidman LLP
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-139996, 333-112010, 333-105781, 333-105516, 333-38932,
333-77823, 333-47003, 333-30647, Form S-4 No. 333-79321, and Form S-3 Nos. 333-133252,
333-46067) of MasTec, Inc. of our report dated March 7, 2007 relating to the
consolidated financial statements and the effectiveness of MasTec, Incs internal
control over financial reporting which appear in this Form 10-K.
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/s/ BDO Seidman LLP |
Miami, Florida |
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March 7, 2007 |
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80
EX-31.1 Section 302 Certification of CEO
Exhibit 31.1
Certifications
I, Austin Shanfelter, certify that:
I have reviewed this Form 10-K of MasTec, Inc;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
The registrants other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
Date: March 8, 2007
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/s/ Austin J. Shanfelter
Austin J. Shanfelter
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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81
EX-31.2 Section 302 Certification of CFO
Exhibit 31.2
Certifications
I, C. Robert Campbell, certify that:
I have reviewed this Form 10-K of MasTec, Inc;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
The registrants other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
Date: March 8, 2007
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/s/ C. Robert Campbell
C. Robert Campbell
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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82
EX-32.1 Section 906 Certification of CEO
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of MasTec, Inc. (the Company) on Form 10-K for the year
ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof
(the Report), I, Austin J. Shanfelter, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: March 8, 2007
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/s/ Austin J. Shanfelter
Name: Austin J. Shanfelter
Title: President and Chief Executive Officer
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The certification set forth above is being furnished as an Exhibit solely pursuant to Section 906
of the SarbanesOxley Act of 2002 and is not being filed as part of the Annual Report of MasTec,
Inc. on Form 10-K for the period ending December 31, 2006, or as a separate disclosure document of
the Company or the certifying officers.
83
EX-32.2 Section 906 Certification of CFO
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of MasTec, Inc. (the Company) on Form 10-K for the year
ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof
(the Report), I, C. Robert Campbell, Executive Vice President Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: March 8, 2007
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/s/ C. Robert Campbell
Name: C. Robert Campbell
Title: Executive Vice President/ Chief Financial Officer
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The certification set forth above is being furnished as an Exhibit solely pursuant to Section 906
of the SarbanesOxley Act of 2002 and is not being filed as part of the Annual Report of MasTec,
Inc. on Form 10-K for the period ending December 31, 2006, or as a separate disclosure document of
the Company or the certifying officers.
84