Pre-Effective Amendment to Registration Statement (General Form) ˇ Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Orius Corp. S-1/A Am.#2 7/28/99 170 864K
2: EX-1.1 Form of Underwriting Agreement 34 146K
3: EX-3.1 Articles of Incorporation 3 18K
4: EX-3.2 Articles of Amendment to Articles of Incorporation 5 27K
5: EX-3.3 By-Laws 13 63K
6: EX-4.2 Specimen Certificate 2 13K
7: EX-4.3 Form of Stockholders Rights Plan 50 207K
8: EX-4.4 Form of Registration Rights Agreement 14 66K
9: EX-5.1 Opinion of Akerman Senterfitt & Eidson 1 11K
10: EX-10.4 1999 Stock Option Plan 10 50K
11: EX-23.2 Consent of Pricewaterhouse Coopers Llp 1 9K
12: EX-23.3 Consent of Bdo Seidman 1 8K
13: EX-23.4 Consent of Milhouse, Mortz & Neal 1 7K
14: EX-23.5 Consent of Williams, Young & Associates 1 7K
15: EX-99.1 Consent of Leo J. Hussey 1 7K
16: EX-99.2 Consent of Ronald J. Mittelstaedt 1 7K
17: EX-99.3 Consent of Gerald E. Wedren 1 7K
18: EX-99.4 Consent of Joseph P. Powers 1 7K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1999
REGISTRATION NO. 333-79743
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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ORIUS CORP.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 1731 65-0894212
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification Number)
1401 FORUM WAY, SUITE 400
WEST PALM BEACH, FLORIDA 33401
561-687-8300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
WILLIAM J. MERCURIO
1401 FORUM WAY, SUITE 400
WEST PALM BEACH, FLORIDA 33401
561-687-8300
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
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COPIES TO
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DONN A. BELOFF JORGE L. FREELAND
AKERMAN, SENTERFITT & EIDSON, P.A. WHITE & CASE LLP
450 EAST LAS OLAS BOULEVARD 200 S. BISCAYNE BOULEVARD
FORT LAUDERDALE, FLORIDA 33301 MIAMI, FLORIDA 33131
954-463-2700 305-371-2700
954-463-2224 (FACSIMILE) 305-358-5744 (FACSIMILE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the earlier offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2)(3) PER SHARE OFFERING PRICE REGISTRATION FEE(4)
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Common stock, par value
$.01 per share.......... 12,535,000 shs. $15.00 $188,025,000 $52,271
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(1) Includes 1,635,000 shares of common stock issuable pursuant to an
over-allotment option granted to the underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(3) This Registration Statement also includes the rights to purchase shares of
preferred stock of the Registrant which will be attached to all shares of
common stock as of the date the Registrant adopts a Shareholder Protection
Rights Agreement, at a rate of one right for each share of common stock. The
Registrant intends to enter into the Shareholder Protection Rights Agreement
immediately prior to the closing of the offering described in this
Registration Statement. Until the occurrence of specific events described in
the Shareholder Protection Rights Agreement, the Rights are not exercisable,
are evidenced by the certificates of common stock and will be transferred
with and only with the common stock.
(4) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, JULY 28, 1999
(ORIUS LOGO)
10,900,000 SHARES
COMMON STOCK
Orius is a nationwide provider of installation, design, engineering and
maintenance services for the telecommunications and cable television systems
industry in the United States. This is our initial public offering of shares of
common stock. We are offering 7,400,000 shares and selling stockholders are
offering 3,500,000 shares. Orius will not receive any proceeds from the sale of
the shares of common stock by the selling stockholders.
No public market currently exists for our shares. Our shares have been approved
for listing on the New York Stock Exchange under the symbol "ORS." We expect
that the initial public offering price will be between $13.00 and $15.00 per
share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS, PROCEEDS
PRICE TO DISCOUNTS AND BEFORE EXPENSES, TO SELLING
PUBLIC COMMISSIONS TO ORIUS STOCKHOLDERS
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PER SHARE $ $ $ $
TOTAL $ $ $ $
We and the selling stockholders have granted the underwriters an option to
purchase up to 1,635,000 additional shares of common stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any.
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The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares of common stock to investors in
Baltimore, Maryland on , 1999.
DEUTSCHE BANC ALEX. BROWN BANC OF AMERICA SECURITIES LLC
MORGAN KEEGAN & COMPANY, INC.
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS , 1999.
(ORIUS MAP)
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Orius, its financial statements and the related notes
appearing elsewhere in this prospectus. Unless otherwise indicated, all
information contained in this prospectus has been adjusted to reflect a 10.3609
for one stock split to be effected immediately prior to the closing of this
offering. The information provided in this prospectus assumes that, immediately
prior to the closing of this offering, we will reincorporate Orius in the state
of Florida.
OUR COMPANY
We are a nationwide provider of installation, design, engineering and
maintenance services for the telecommunications and cable television systems
industry in the United States. We also install, design, engineer and maintain
interior wiring for integrated voice, data and video networks in commercial,
institutional and governmental facilities. Our customers utilize our services to
add capacity to their existing networks, expand their networks into new
geographic markets and maintain their existing fiber optic, coaxial and copper
cable networks.
Our principal customers are telecommunications providers and cable
television system operators including TCI, Time Warner, MediaOne, Adelphia,
Jones Intercable, U.S. West, Southwestern Bell, GTE, MCI WorldCom, Cox
Communications, Charter Communications and Digital Teleport. Approximately 80%
of our pro forma revenues in 1998 were generated from repeat customers, in some
cases turnkey or master service agreements. The demand for our services has
accelerated as:
- traditional telecommunications and cable television industries have
converged
- our customers have encountered rapid growth in voice and data traffic
over their networks, and
- many of our customers have identified outsourcing as an efficient means
to expand, maintain and replace their communication networks.
We were formed in August 1997 to create a nationwide provider of
comprehensive services for telecommunications providers and cable television
system operators. We have completed 13 acquisitions since March 1998 and
currently perform work nationwide. We had pro forma revenues for the year ended
December 31, 1998 of approximately $265 million, of which 47% was from services
provided to cable television system operators, 29% was from services provided to
telecommunications providers and 24% was from interior wiring and other
services.
We estimate that the market for installation, design, engineering and
maintenance services for the telecommunications and cable television systems
industry exceeded $15 billion in 1998. We believe that our industry presents
substantial growth opportunities for large companies with broad geographic
coverage, comprehensive technical capabilities, and responsive and quality
service. Growth in our industry has been driven by the following trends:
- deregulation
- increased voice and data traffic on telecommunications networks
- increased outsourcing
- consolidation of telecommunications providers and cable television system
operators
- emergence of preferred service providers, and
- consolidation of our fragmented industry.
To enhance our position as a nationwide provider of comprehensive
installation, design, engineering and maintenance services, we intend to
supplement our internal growth with selective acquisitions. The businesses we
have acquired have achieved historical revenue
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growth on a combined basis at a compound annual rate of approximately 16%
between 1996 and 1998. As the size of, and services offered by,
telecommunications providers and cable television system operators have
expanded, these operators are increasingly requiring providers of installation,
design, engineering and maintenance services to offer these services
simultaneously in multiple geographic regions. Many of the smaller companies in
our industry do not have the financial resources necessary to provide
comprehensive services over a broad geographic area or the ability to manage
multiple projects. As a result, we believe that there will continue to be
consolidation within our industry and a large number of attractive acquisition
candidates.
BACKGROUND
Our company was formed by members of our senior management team to create a
nationwide provider of comprehensive installation, design, engineering and
maintenance services to the telecommunications and cable television systems
industry. The founding members of our executive management each have an average
of 30 years of experience within our industry. In March 1998, we acquired four
businesses with operations in 28 states that provide installation, design,
engineering and maintenance services to cable television system operators. These
businesses had combined 1998 revenues of approximately $66 million. Principal
customers of these businesses include TCI, Adelphia, Time Warner, Cablevision,
Ameritech, Bell Atlantic and Jones Intercable.
In June 1998 and August 1998, we acquired four additional businesses with
operations in 16 states that expanded our geographic coverage and resources to
service cable television system operators and enabled us to broaden our customer
base to include telecommunications providers. These additional acquisitions had
combined 1998 revenues of approximately $56 million. Principal customers of
these businesses include MediaOne, Cox Communications, Falcon, Media Com and
Intermedia.
RECENT DEVELOPMENTS
Recent Acquisitions
In February 1999, we acquired four additional businesses with operations in
17 states and combined 1998 revenues of approximately $113 million. These
companies offer installation, design, engineering and maintenance services to
the telecommunications and cable television systems industry primarily to
telecommunications providers and, to a lesser extent, cable television system
operators, and interior wiring services to a variety of commercial and
government entities.
In May 1999, we acquired Texel Corporation with operations in six states
and the District of Columbia and 1998 revenues of approximately $30 million.
Texel provides interior wiring services to commercial, institutional and
government entities.
New Credit Facility
In June 1999, we received a commitment for a new revolving credit facility
in the amount of $150 million. This facility will be provided by a group of
banks and other financial institutions led by Bank of America, N.A. We expect to
enter into this facility following the closing of this offering. The facility
will mature approximately five years after the date of the closing of the
facility.
Orius is a Florida corporation and our principal executive offices are
located at 1401 Forum Way, Suite 400, West Palm Beach, Florida 33401. Our
telephone number is (561) 687-8300.
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THE OFFERING
The following information, and similar information throughout this
prospectus relating to shares to be outstanding after this offering, assumes
that (1) the underwriters do not exercise the option granted by us and the
selling stockholders to purchase up to 1,635,000 additional shares of common
stock and (2) all outstanding shares of preferred stock, the junior convertible
promissory note and 339,983 warrants are converted into shares of common stock
immediately prior to the closing of this offering. References to outstanding
shares exclude 746,773 shares of common stock issuable upon exercise of
outstanding warrants and options at a weighted average exercise price of $5.87
per share, and 2,285,098 shares reserved for future grants under our stock
option plan.
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Common stock offered by Orius................ 7,400,000 shares
Common stock offered by the selling
stockholders............................... 3,500,000 shares
Total........................................ 10,900,000 shares
Common stock to be outstanding after this
offering................................... 29,264,328 shares
Use of proceeds.............................. We will use the net proceeds of this offering
to reduce existing indebtedness and for
general corporate purposes, including
possible acquisitions.
Over-allotment option........................ We and the selling stockholders have granted
the underwriters an option to purchase up to
1,635,000 additional shares of common stock.
New York Stock Exchange symbol............... ORS
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We were formed in August 1997 to create a nationwide provider of
installation, design, engineering and maintenance services to the
telecommunications and cable television systems industry. We acquired eight
businesses in 1998 and five additional businesses in 1999. While the businesses
were acquired at various dates during 1998 and 1999, the following pro forma
statements of operations are presented as if all the 1998 and 1999 acquisitions
and this offering had occurred on January 1, 1998. The following pro forma
balance sheet gives effect to the Texel acquisition and this offering as if they
had occurred on March 31, 1999.
The unaudited pro forma financial information presented below is intended
to give you a better understanding of what the results of the operations and
financial position of all of our businesses might have looked like had they been
combined as of January 1, 1998. We prepared the pro forma statements of
operations by combining the historical results of each acquired company as if it
had been acquired on January 1, 1998 with our historical financial statements.
We then adjusted the combined amounts for the effects of other pro forma
adjustments discussed in the footnotes below and the consummation of this
offering. The acquired businesses may have performed differently if they had
been combined as of January 1, 1998. You should not rely on the pro forma
information as being indicative of the historical results that we would have had
or the future results that we will experience.
You should read the summary financial data presented below in conjunction
with the information contained in "Selected Pro Forma Financial Data," "Selected
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes appearing elsewhere in this prospectus.
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YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
-------------------------------- ---------------------- --------------------------------
PRO FORMA, PRO FORMA, PRO FORMA,
PRO AS PRO AS PRO AS
ACTUAL FORMA(a) ADJUSTED(b) FORMA(a) ADJUSTED(b) ACTUAL FORMA(a) ADJUSTED(b)
------ -------- ----------- -------- ----------- ------- -------- -----------
OPERATING DATA:
Revenues:................... $81,551 $264,740 $264,740 $52,519 $52,519 $46,069 $68,156 $68,156
Expenses:
Direct costs.............. 59,896 193,455 193,455 40,425 40,425 36,224 51,703 51,703
General and
administrative.......... 8,645 25,367 25,367 5,285 5,285 4,540 7,105 7,105
Depreciation and
amortization............ 3,759 12,279 12,279 3,070 3,070 1,937 3,070 3,070
------- -------- -------- ------- ------- ------- ------- -------
Total................. 72,300 231,101 231,101 48,780 48,780 42,701 61,878 61,878
Income from operations...... 9,251 33,639 33,639 3,739 3,739 3,368 6,278 6,278
Other (Income) Expense:
Interest expense, net..... 2,508 14,261 4,622 3,565 1,156 2,160 3,565 1,156
Other (income) expense.... (72) (225) (225) (70) (70) (26) 29 29
------- -------- -------- ------- ------- ------- ------- -------
Income before income tax
provision and
extraordinary charge...... 6,815 19,603 29,242 244 2,653 1,234 2,684 5,093
Provision for income taxes.. 3,328 8,900 13,276 111 1,205 540 1,175 2,230
------- -------- -------- ------- ------- ------- ------- -------
Income before extraordinary
charge.................... $ 3,487 $ 10,703 $ 15,966 $ 133 $ 1,448 $ 694 $ 1,509 $ 2,863
======= ======== ======== ======= ======= ======= ======= =======
PRO FORMA PER SHARE DATA:
Diluted earnings per share.. $ 0.54 $ 0.05 $ 0.10
Diluted shares outstanding.. 29,529 29,529 29,529
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AT MARCH 31, 1999
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PRO FORMA,
ACTUAL PRO FORMA(a) AS ADJUSTED(b)
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BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ -- $ 2,126 $ 2,126
Working capital............................................ 38,153 41,356 63,177
Property and equipment, net................................ 35,314 36,324 36,324
Total assets............................................... 198,373 242,218 239,742
Long-term debt............................................. 111,329 134,779 64,916
Convertible preferred stock and redemption rights on junior
convertible subordinated note............................ 21,526 21,526 --
Total stockholders' equity................................. 8,837 21,150 131,884
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(a) For an explanation of the calculation of the pro forma adjustments, see
"Selected Pro forma Financial Data."
(b) Adjusted to give effect to the sale of the shares of common stock offered by
us, the conversion of the convertible preferred stock and junior convertible
subordinated note and 339,983 warrants, and the application of the net
proceeds therefrom. See "Use of Proceeds."
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our operations.
If any of the following risks actually materialize, our business, financial
condition or results of operations could be materially and adversely affected,
the trading price of our common stock could decline and you may lose all or part
of your investment.
OUR HISTORICAL AND PROPOSED GROWTH BY ACQUISITION MAY ADVERSELY AFFECT OUR
OPERATING RESULTS
Acquisitions involve a number of special risks including:
- failure of the acquired businesses to achieve the results we expect
- diversion of our management's attention from operational matters
- our inability to retain key personnel of the acquired businesses
- risks associated with unanticipated events or liabilities
- the potential disruption of our business, and
- customer dissatisfaction or performance problems at the acquired
business.
If we are unable to integrate or successfully manage the companies we have
acquired or may acquire in the future, we may not realize our anticipated cost
savings and revenue growth which may result in reduced profitability or
operating losses. To manage the combined enterprise on a profitable basis, we
intend to continue to integrate the computer, accounting and financial reporting
systems, and some of the operational, administrative, banking and insurance
procedures of the businesses we have acquired or may acquire in the future.
However, we cannot be certain that we will successfully institute these common
systems and procedures without substantial costs, delays or other operational or
financial problems. In addition, we cannot be certain that our recently
assembled management group will be able to successfully manage as a combined
entity the businesses we have acquired or may acquire in the future.
We expect to face competition for acquisition candidates, which may limit
the number of our acquisition opportunities and may lead to higher acquisition
prices. The realization of all or any of these risks could materially and
adversely affect the reputation of our company and our combined results of
operations.
WE MAY NOT BE ABLE TO CONTINUE OUR GROWTH THROUGH ACQUISITIONS
We may be unable to support our growth strategy through acquisitions if we
cannot finance future acquisitions. We may use our common stock for all or a
portion of the consideration for future acquisitions. If our common stock does
not maintain a sufficient market value or potential acquisition candidates are
unwilling to accept our common stock as part of the consideration for the sale
of their businesses, we may be required to utilize more of our cash resources to
pursue our acquisition program. Using cash for acquisitions limits our financial
flexibility and makes us more likely to seek additional capital through future
debt or equity financings. If we seek more debt, we may have to agree to
financial covenants that limit our operational and financial flexibility. When
we seek additional debt or equity financings, we cannot be certain that
additional debt or equity will be available to us at all or on terms acceptable
to us. We are required to obtain the consent of our lenders for acquisitions
which exceed minimum levels of cash consideration. We cannot readily predict the
timing, size and success of our acquisition efforts or the capital we will need
for these efforts.
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ALL OF OUR CONTRACTS CAN BE CANCELED ON SHORT NOTICE
All of our contracts are cancelable upon 30, 60 or 90 days notice.
Accordingly, we cannot give assurance that our future revenues will approximate
our historical performance. If any canceled contracts are not replaced with
contracts from other customers, or if we do not receive orders under our master
service agreements, our revenues would decrease, we would be unable to meet our
fixed expenses and our profitability would be materially and adversely affected.
All of our $368 million backlog at March 31, 1999 can be canceled at any
time without penalty, except, in some cases, for the recovery of our actual
committed costs and profit on work performed up to the date of cancellation.
Cancellations of pending purchase orders or terminations or reductions of
purchase orders in progress from our customers could have a material adverse
effect on our business. Our backlog may fluctuate and does not necessarily
indicate the amount of future sales.
WE HAVE EXPERIENCED AND EXPECT TO CONTINUE TO EXPERIENCE QUARTERLY VARIATIONS IN
REVENUES AND NET INCOME
Our revenues and net income in the first quarter and the fourth quarter
have in the past been, and may in the future be, materially and negatively
affected by adverse weather conditions and the year-end budgetary spending
patterns of our customers.
Quarterly variations in our revenues and net income result from many
factors, including:
- the timing of acquisitions
- variations in the margins of projects performed during any particular
quarter
- the timing and volume of work under new agreements
- the budgetary spending patterns of customers
- the termination of existing agreements
- costs we incur to support growth internally or through acquisitions or
otherwise
- the change in mix of our customers, contracts and business
- increases in construction and design costs, and
- general economic conditions.
OUR MASTER SERVICE AGREEMENTS AND TURNKEY AGREEMENTS SUBJECT US TO UNCERTAIN
REVENUE GROWTH AND SUBSTANTIAL UNREIMBURSED EXPENDITURES
A significant decline in work assigned to us under our master service
agreements and our turnkey agreements could materially and adversely affect our
results of operations due to a decline in revenue and our inability to offset
expenditures for working capital and equipment. Under our master service
agreements, we may be one of several companies that perform services for the
customer and our customers have no obligation to undertake any installation
projects or other work with us. Therefore, despite the long-term nature of these
master service agreements, they do not give us the security that typical
long-term contracts may provide. Under our turnkey agreements, the substantial
working capital and equipment required during the initial stages of these
agreements and the fixed unit-priced nature of these agreements subject us to
additional risks.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES
Our ability to provide high-quality services on a timely basis requires
that we employ an adequate number of skilled engineers, equipment operators,
linemen, foremen, cable and fiber splicers and project managers. Accordingly,
our ability to increase our productivity and
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profitability will be limited by our ability to attract, train and retain
skilled personnel. We, like many of our competitors, are currently experiencing
shortages of qualified personnel. We cannot be certain that we will be able to
maintain an adequate skilled labor force necessary to operate efficiently and to
support our growth strategy or that our labor expenses will not increase as a
result of a shortage in the supply of skilled personnel.
TECHNOLOGICAL CHANGES COULD REDUCE DEMAND FOR OUR SERVICES
New technologies could reduce the need for installation, repair and
replacement of wireline services, which could reduce the demand for our
business. Our industry is subject to rapid changes in technology. Wireline
systems used for the transmission of video, voice and data are subject to
potential displacement by various technologies, including wireless technologies.
Our customers may develop new technologies that allow users to receive enhanced
services without a significant upgrade of their existing telecommunications
networks.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH OTHER COMPANIES IN THE INDUSTRY
Our industry is highly competitive and is served by numerous small,
owner-operated private companies, a few public companies and several large
regional companies. Accordingly, we cannot assure you that we will be able to
maintain or enhance our competitive position. There are no substantial barriers
to entry in our industry and we expect that competition will intensify in the
future. As a result, any organization that has adequate financial resources and
access to technical expertise may become one of our competitors. Competition in
the industry depends on a number of factors, including price. Our competitors
may have lower overhead cost structures and may, therefore, be able to provide
their services at lower rates than we can. Our competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to us. As a result, they may be
able to develop and expand their customer base more quickly, adapt more swiftly
to new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services than
we can. We also face competition from the in-house service organizations of our
existing or prospective customers which often employ personnel who perform some
of the same types of services as we do.
THE DEPARTURE OF KEY PERSONNEL COULD DISRUPT OUR BUSINESS
We depend upon the continued services and experience of our senior
management team, including William J. Mercurio, our President and Chief
Executive Officer, and of the managers of businesses we acquire. The loss of the
services of any of our key employees could have a material adverse effect on our
business by disrupting our business plan and growth strategy.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Those sales might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
29,264,328 shares of common stock, and options and warrants to acquire 746,773
shares of common stock, assuming no exercise of the underwriters' over-allotment
option. Of these shares, the 10,900,000 shares offered by this prospectus are
freely tradable and the remaining 18,364,328 shares of common stock held by
existing stockholders on completion of this offering will be "restricted
securities," as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rules 144
or 701 of the Securities Act. None
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of the shares outstanding prior to completion of this offering may be sold or
otherwise disposed of for a period of 180 days after the date of this prospectus
without the prior written consent of Deutsche Bank Securities, Inc. After 180
days following the completion of this offering, we intend to file a registration
statement under the Securities Act to register 3,000,000 shares of common stock
issuable on exercise of stock options or other awards granted or to be granted
under our existing stock option plan, which shares will be freely saleable in
the public market immediately following their exercise.
ANTI-TAKEOVER PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND OUR
SHAREHOLDER PROTECTION RIGHTS AGREEMENT, COULD MAKE AN ACQUISITION OF OUR
COMPANY MORE DIFFICULT
Our articles of incorporation provide that our Board of Directors may issue
preferred stock without stockholder approval. Our bylaws provide for staggered
terms for the members of our Board of Directors and impose limitations on the
ability of stockholders to propose matters to be voted on at our annual meeting.
Immediately prior to the closing of this offering, we will adopt a stockholder
protection rights agreement and distribute, as a dividend, one right for each
outstanding share of our common stock. The rights may cause substantial dilution
to a person or group that attempts to acquire our company in a manner or on
terms not approved by our Board of Directors. These provisions could make it
more difficult for a third party to acquire us.
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED SO WE CANNOT PREDICT THE EXTENT
TO WHICH A TRADING MARKET WILL DEVELOP FOR OUR COMMON STOCK
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiations between representatives of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The trading price of our common stock could be subject to fluctuations in
response to the following factors:
- variations in our results of operations
- developments that affect the industry
- the overall economy, and
- the financial markets.
The market price of our common stock is also influenced by market
conditions for the common stock of our competitors and by changes in
recommendations or earnings estimates by securities analysts.
THE BOOK VALUE OF YOUR COMMON STOCK WILL BE SUBSTANTIALLY DILUTED IN THIS
OFFERING
The price you will pay for our common stock will be substantially higher
than the pro forma tangible book value per share of our common stock. As a
result, you will experience immediate and substantial dilution of $13.10 per
share in tangible book value, and the existing stockholders of our company will
receive a material increase in the tangible book value per share of their shares
of common stock. You will experience additional dilution as a result of common
stock being issued upon the exercise of outstanding stock options and warrants.
To implement our acquisition strategy, we intend to issue additional shares of
common stock in connection with future acquisitions, which may result in
additional dilution.
11
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS
Many computer programs and applications define the applicable year using
two digits rather than four. The "Year 2000 problem" refers to the inability of
these computer programs on and after January 1, 2000 to recognize that "00"
refers to "2000" rather than "1900." The term "Year 2000 compliant" means a
computer or a computer system that has been designed or modified to recognize
dates on and after January 1, 2000. We are in the process of upgrading our
information systems which we expect to be Year 2000 compliant. We have initiated
an audit of our third-party vendors, suppliers and customers to determine their
readiness for the Year 2000 problem. We cannot be certain that unexpected Year
2000 compliance problems of our systems or of our vendors, suppliers and
customers will not materially and adversely affect our business, financial
condition or operating results. The unanticipated failure of one of these
systems to properly recognize date information beyond the year 1999 could have a
significant adverse impact on our ability to deliver services to customers and
to manage our continuing operations.
12
USE OF PROCEEDS
We estimate that we will receive net proceeds of $93.2 million from the
sale of the 7,400,000 shares of common stock offered by us, assuming a public
offering price of $14.00 per share and after deducting underwriting discounts
and estimated expenses payable by us, of $10.4 million. The estimated net
proceeds will be $103.8 million if the underwriters' over-allotment option is
exercised in full. We will not receive any portion of the proceeds from the sale
of shares of common stock by the selling stockholders.
We intend to use the net proceeds of the offering to reduce outstanding
indebtedness under our credit facility. As of June 30, 1999, approximately $167
million was outstanding under our credit facility. The indebtedness to be repaid
out of the net proceeds from the offering consists of $51.7 million of term
loans bearing interest at LIBOR plus a 3.0% margin and due on February 26, 2004,
and $41.5 million of term loans, bearing interest at LIBOR plus a 3.75% margin
and due on February 26, 2005. This indebtedness was incurred under our credit
facility in connection with our prior acquisitions.
We intend to use the balance of the estimated net proceeds, if any, for
acquisitions, capital expenditures and working capital. Pending the allocation
of these proceeds, we intend to invest the net proceeds in interest-bearing,
investment-grade instruments, certificates of deposit, or direct or guaranteed
obligations of the United States. We continually evaluate potential acquisition
candidates and intend to continue to pursue selective acquisition opportunities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock and we do
not anticipate paying any cash dividends in the near future. Our current and
proposed credit facilities prohibit the payment of dividends on our common
stock. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors and will be
dependent upon our financial condition, operating results, capital requirements
and other factors deemed relevant by our Board of Directors.
13
CAPITALIZATION
The table below sets forth the following:
- our actual capitalization as of March 31, 1999
- our capitalization on a pro forma basis after giving effect to the
acquisition of Texel accounted for as a purchase, and
- our capitalization on a pro forma basis after giving effect to the
acquisition of Texel, as adjusted to give effect to our sale of 7,400,000
shares and application of the estimated net proceeds from this offering
as described in "Use of Proceeds."
This table should be read in conjunction with our financial statements and
related notes and the Selected Pro Forma Financial Data and related notes, which
are included elsewhere in this prospectus. We will convert the junior
subordinated convertible note referred to in the table into 692,627 shares of
common stock immediately prior to the closing of this offering.
ˇ Enlarge/Download Table
MARCH 31, 1999
----------------------------------
(IN THOUSANDS)
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
Long-term debt:
Credit facility........................................ $110,250 $133,700 $ --
New senior credit facility............................. -- -- 63,837
Other.................................................. 1,079 1,079 1,079
-------- -------- --------
Total long-term debt........................... 111,329 134,779 64,916
-------- -------- --------
Convertible preferred stock, par value $.0001 per share;
300,000 shares authorized:
Series A, 10,000 shares outstanding.................... 10,017 10,017 --
Series B, 7,596.38 shares outstanding.................. 10,453 10,453 --
Value of redemption rights associated with junior
subordinated convertible note.......................... 1,056 1,056 --
-------- -------- --------
21,526 21,526 --
-------- -------- --------
Stockholders' equity:
Warrants............................................... 869 869 75
Common stock, $0.0001 par value, 48,696,230 shares
authorized; 13,421,163 shares issued on an actual
basis; 14,462,600 shares issued on a pro forma
basis; 29,264,328 shares issued on a pro forma as
adjusted basis...................................... 1 1 3
Additional paid-in-capital............................. 7,967 20,280 131,806
Retained earnings...................................... -- -- --
-------- -------- --------
Total stockholders' equity..................... 8,837 21,150 131,884
-------- -------- --------
Total capitalization........................... $141,692 $177,455 $196,800
======== ======== ========
14
DILUTION
The pro forma negative net tangible book value of our common stock as of
March 31, 1999, was $(63.0) million or $(2.88) per share of common stock. Pro
forma negative net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities, after
giving effect to the acquisition of Texel, divided by the number of shares of
common stock outstanding immediately prior to this offering.
After giving effect to our sale of 7,400,000 shares of common stock in this
offering and after deduction of the underwriting discounts and commissions and
estimated offering expenses, our pro forma net tangible book value as of March
31, 1999, would have been approximately $26.2 million, or $0.90 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of approximately $3.78 per share to existing stockholders and an
immediate dilution of $13.10 per share to new investors purchasing common stock
in this offering.
The following table illustrates this per share dilution:
ˇ Download Table
Offering price per share.................................... $14.00
Pro forma negative net tangible book value per share prior
to this offering.......................................... $(2.88)
Increase in pro forma net tangible book value per share to
existing stockholders..................................... $ 3.78
Pro forma net tangible book value per share after the
offering.................................................. $ 0.90
Dilution per share to new investors......................... $13.10
The following table summarizes on a pro forma basis as of March 31, 1999,
the differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us based on the initial
public offering price:
ˇ Enlarge/Download Table
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
Existing stockholders....... 21,864,328 74.7% $ 43,832,909 29.7% $ 2.00
New investors............... 7,400,000 25.3 103,600,000 70.3 14.00
---------- ----- ------------ ----- ------
Total............. 29,264,328 100.0% $147,432,909 100.0% $ 5.04
========== ===== ============ ===== ======
The table excludes 746,773 shares of common stock issuable upon exercise of
outstanding warrants and options at a weighted average exercise price of $5.87
per share, and 2,285,098 shares reserved for future grants under our stock
option plan. The table includes 14,106,937 shares of common stock owned by our
executive officers and directors and their affiliates. We may also issue
additional shares to acquire additional businesses or upon exercise of stock
options granted in the future, which could result in additional dilution to our
stockholders.
15
SELECTED PRO FORMA FINANCIAL DATA
We were formed in August 1997 to create a nationwide provider of
installation, design, engineering and maintenance services to the
telecommunications and cable television systems industry. We have completed 13
acquisitions since March 1998. While the businesses were acquired at various
dates during 1998 and 1999, the following pro forma statements of operations are
presented as if all these 13 acquisitions and this offering had occurred on
January 1, 1998. The following pro forma balance sheet gives effect to the Texel
acquisition and this offering as if they had occurred on March 31, 1999.
The following selected pro forma financial data has been derived from (1)
our financial information, which includes information for the acquired
businesses and, when applicable, includes adjustments to conform fiscal periods
to calendar periods, (2) the audited financial statements and notes thereto of
the acquired businesses and (3) our audited financial statements and notes
thereto since inception, which financial statements appear elsewhere in this
prospectus.
The selected pro forma financial data has been prepared for comparative
purposes only and do not purport to be indicative of the results which would
have been achieved had the acquired businesses been purchased and this offering
consummated as of the assumed dates, nor are the results indicative of our
future results. The selected pro forma financial data should be read in
conjunction with "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our Financial
Statements and related notes since inception and the acquired businesses and the
Unaudited Pro Forma Financial Statements and related notes included elsewhere in
this prospectus.
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ˇ Enlarge/Download Table
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
THE ACQUIRED PRO FORMA OFFERING PRO FORMA,
COMPANY(a) BUSINESSES(b) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------------- ----------- --------- ----------- -----------
REVENUES:....................... $81,551 $183,189 $ -- $264,740 $ -- $264,740
EXPENSES:
Direct costs.................. 59,896 134,484 (925)(c) 193,455 -- 193,455
General and administrative.... 8,645 31,910 (15,188)(d) 25,367 -- 25,367
Depreciation and
amortization................ 3,759 5,173 3,347(e) 12,279 -- 12,279
------- -------- -------- -------- -------- --------
Total.................. 72,300 171,567 (12,766) 231,101 -- 231,101
INCOME FROM OPERATIONS.......... 9,251 11,622 12,766 33,639 -- 33,639
OTHER (INCOME) EXPENSE:
Interest expense, net......... 2,508 674 11,079(f) 14,261 (9,639)(h) 4,622
Other (income) expense........ (72) (153) -- (225) -- (225)
------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAX
PROVISION..................... 6,815 11,101 1,687 19,603 9,639 29,242
PROVISION FOR INCOME TAXES...... 3,328 253 5,319(g) 8,900 4,376(g) 13,276
------- -------- -------- -------- -------- --------
NET INCOME...................... $ 3,487 $ 10,848 $ (3,632) $ 10,703 $ 5,263 $ 15,966
======= ======== ======== ======== ======== ========
Earnings per share:
Basic and diluted........... $ 0.54(i)
========
16
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ˇ Enlarge/Download Table
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------------
THE ACQUIRED PRO FORMA OFFERING PRO FORMA,
COMPANY(a) BUSINESSES(b) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------------- ----------- --------- ------------ -----------
REVENUES:........................ $4,219 $48,300 $ -- $52,519 $ -- $ 52,519
EXPENSES:
Direct costs................... 3,364 37,054 7(c) 40,425 -- 40,425
General and administrative..... 710 5,550 (975)(d) 5,285 -- 5,285
Depreciation and
amortization................. 203 1,383 1,484(e) 3,070 -- 3,070
------ ------- -------- ------- -------- --------
Total................... 4,277 43,987 516 48,780 -- 48,780
INCOME (LOSS) FROM OPERATIONS.... (58) 4,313 (516) 3,739 -- 3,739
OTHER (INCOME) EXPENSE:
Interest expense, net.......... (57) 278 3,344(f) 3,565 (2,409)(h) 1,156
Other (income) expense......... (53) (17) -- (70) -- (70)
------ ------- -------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION...................... 52 4,052 (3,860) 244 2,409 2,653
PROVISION FOR INCOME TAXES....... 358 519 (766)(g) 111 1,094(g) 1,205
------ ------- -------- ------- -------- --------
NET INCOME (LOSS)................ $ (306) $ 3,533 $ (3,094) $ 133 $ 1,315 $ 1,448
====== ======= ======== ======= ======== ========
Earnings per share
Basic and Diluted............ $ 0.05(i)
========
PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ˇ Enlarge/Download Table
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------------------
THE ACQUIRED PRO FORMA OFFERING PRO FORMA,
COMPANY(a) BUSINESSES(b) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------------- ----------- --------- ----------- -----------
REVENUES:........................ $46,069 $22,087 $ -- $68,156 $ -- $ 68,156
EXPENSES:
Direct costs................... 36,224 15,479 -- 51,703 -- 51,703
General and administrative..... 4,540 2,453 112(d) 7,105 -- 7,105
Depreciation and
amortization................. 1,937 661 472(e) 3,070 -- 3,070
------- ------- ------- ------- -------- --------
Total................... 42,701 18,593 584 61,878 -- 61,878
INCOME FROM OPERATIONS........... 3,368 3,494 (584) 6,278 -- 6,278
OTHER (INCOME) EXPENSE:
Interest expense, net.......... 2,160 (34) 1,439(f) 3,565 (2,409)(h) 1,156
Other (income) expense......... (26) 55 -- 29 -- 29
------- ------- ------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION AND EXTRAORDINARY
CHARGE......................... 1,234 3,473 (2,023) 2,684 2,409 5,093
PROVISION FOR INCOME TAXES....... 540 203 432(g) 1,175 1,055(g) 2,230
------- ------- ------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY
CHARGE......................... $ 694 $ 3,270 $(2,455) $ 1,509 $ 1,354 $ 2,863
======= ======= ======= ======= ======== ========
Earnings per share
Basic and Diluted............ $ 0.10(i)
========
17
PRO FORMA BALANCE SHEET
(IN THOUSANDS)
ˇ Enlarge/Download Table
AT MARCH 31, 1999
--------------------------------------------------------------------------------------
THE PRO FORMA OFFERING PRO FORMA,
COMPANY(j) TEXEL(j) ADJUSTMENTS(k) PRO FORMA ADJUSTMENTS(k) AS ADJUSTED
---------- -------- -------------- --------- -------------- -----------
ASSETS
Cash and cash
equivalents........... $ -- $ 2,126 $ -- $ 2,126 $ -- $ 2,126
Accounts receivable,
net................... 43,400 6,525 -- 49,925 -- 49,925
Unbilled accounts
receivable for
work-in-process....... 25,391 786 -- 26,177 -- 26,177
Inventory............... 14,682 -- -- 14,682 -- 14,682
Prepaid and other
current assets........ 1,241 14 -- 1,255 -- 1,255
-------- ------- ------- -------- -------- --------
Total current
assets....... 84,714 9,451 -- 94,165 -- 94,165
-------- ------- ------- -------- -------- --------
Property and equipment,
net................... 35,314 1,010 -- 36,324 -- 36,324
-------- ------- ------- -------- -------- --------
Goodwill, net........... 72,290 -- 33,384(i) 105,674 -- 105,674
Deferred financing
costs, net............ 3,976 -- -- 3,976 (2,476)(v) 1,500
Other, including
deferred income tax
asset................. 2,079 -- -- 2,079 -- 2,079
-------- ------- ------- -------- -------- --------
Total.......... $198,373 $10,461 $33,384 $242,218 $ (2,476) $239,742
======== ======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt............. $ 10,271 $ -- $ 1,550(ii) $ 11,821 $(11,821)(vi) $ --
Borrowing under credit
facility.............. 8,000 -- 2,000(ii) 10,000 (10,000)(vi) --
Accounts payable........ 13,796 1,297 -- 15,093 -- 15,093
Accrued liabilities..... 11,209 786 -- 11,995 -- 11,995
Deferred revenues....... 3,084 102 -- 3,186 -- 3,186
Other liabilities,
including deferred
income tax
liability............. 201 -- 513(iii) 714 -- 714
-------- ------- ------- -------- -------- --------
Total current
liabilities... 46,561 2,185 4,063 52,809 (21,821) 30,988
-------- ------- ------- -------- -------- --------
Long-term debt.......... 111,329 -- 23,450(ii) 134,779 (69,863) (vi) 64,916
Deferred income tax
liability............. 5,450 -- 1,537(iii) 6,987 -- 6,987
Deferred revenues....... 4,670 297 -- 4,967 -- 4,967
-------- ------- ------- -------- -------- --------
Total
liabilities... 168,010 2,482 29,050 199,542 (91,684) 107,858
Convertible preferred
stock................. 20,470 -- -- 20,470 (20,470)(vii) --
Value of redemption
rights associated with
junior subordinated
convertible note...... 1,056 -- -- 1,056 (1,056)(vii) --
-------- ------- ------- -------- -------- --------
21,526 -- -- 21,526 (21,526) --
-------- ------- ------- -------- -------- --------
Stockholders'
equity.............. 8,837 7,979 4,334(iv) 21,150 110,734(viii) 131,884
-------- ------- ------- -------- -------- --------
Total.......... $198,373 $10,461 $33,384 $242,218 $ (2,476) $239,742
======== ======= ======= ======== ======== ========
18
NOTES TO SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Results for the year ended December 31, 1998 and for the three months
ended March 31, 1998 represent the actual historical 1998 results of the
Company, including results for the acquired businesses purchased in the related
1998 period from the date of acquisition. Results for the three months ended
March 31, 1999 represent our actual historical results, including results for
the acquired businesses purchased in the first quarter of 1999 from the date of
acquisition.
(b) Results for the year ended December 31, 1998 and for the three months
ended March 31, 1998 represent combined historical 1998 results for (1) the
acquired businesses purchased in the related 1998 period prior to the date of
acquisition and (2) the acquired businesses purchased in 1999. Results for the
three months ended March 31, 1999 represent combined historical results for (1)
the acquired businesses purchased in 1999 prior to the date of acquisition and
(2) Texel which was acquired on May 25, 1999.
(c) Reflects the decrease resulting from differentials between the
compensation levels of the former owners of U.S. Cable that related to direct
costs and the terms of their employment agreements entered into with the
Company. A portion of the salaries of the former owners of U.S. Cable is also
included in general and administrative expenses. After the acquisition of the
acquired businesses, the owners' duties and responsibilities will not change and
additional costs are not expected to be incurred related to their efforts.
(d) The pro forma adjustment consists of the following:
ˇ Enlarge/Download Table
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------
1998 1998 1999
------------ ------- -----
Owners compensation (i)..................................... $(14,036) $ (969) $ 12
Business not acquired (ii).................................. (1,372) (86) --
Rent expense (iii).......................................... 220 80 100
-------- ------- -----
$(15,188) $ (975) $ 112
======== ======= =====
(i) Reflects the decrease resulting from differentials between
compensation levels of former owners of the acquired businesses and the
terms of the employment agreements entered into between the former owners
and the Company. After the acquisition of the acquired businesses, the
owners' duties and responsibilities will not change and additional costs
are not expected to be incurred related to their efforts. Also reflects
the elimination of compensation expense associated with the distribution
of excess cash balances to the former owners of the acquired businesses
immediately prior to the dates of acquisition by Orius.
(ii) Reflects the elimination of a business not purchased from CATV
Subscriber Services.
(iii) Reflects the rent expense resulting from our current lease terms
as compared to lease terms entered into by former owners. In addition,
reflects the increase in rent expense and corresponding decrease in
depreciation expense and real estate tax expense resulting from our
leasing rather than owning related facilities which were not purchased
from the former owners of the acquired businesses.
(e) Depreciation has been derived utilizing the property and equipment
values of each of the acquired businesses at the time of their acquisition,
rather than utilizing values of property, plant and equipment actually held by
each of the acquired businesses in the period presented. Reflects the impact on
depreciation resulting from the application of our straight-line depreciation
policy rather than those of the former owners of the acquired businesses. In
addition, reflects the change in depreciation resulting from the write-up of
property and equipment to fair value arising from purchase accounting. Also
reflects amortization of goodwill calculated based on goodwill lives ranging
from 10 to 25 years. The pro forma adjustments consist of the following:
ˇ Enlarge/Download Table
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1998 1998 1999
------------ ------ -----
Depreciation:
Change in accounting policy............................... $(3,088) $ (462) $(738)
Write-up of property and equipment........................ 2,679 815 575
------- ------ -----
(409) 353 (163)
Amortization of goodwill.................................... 3,756 1,131 635
------- ------ -----
$ 3,347 $1,484 $ 472
======= ====== =====
19
NOTES TO SELECTED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(f) Reflects the increase in interest expense at our borrowing rate under
our bank credit agreements on the indebtedness resulting from the purchase of
the acquired businesses. In addition, reflects elimination of $67 and $25 during
the year ended December 31, 1998 and three months ended March 31, 1998,
respectively, of a business not purchased from CATV Subscriber Services. Under
the terms of our bank credit agreements, interest accrues at variable borrowing
rates. If interest rates were to fluctuate by 1/8 of 1 percent, pro forma
interest expense would change by $194 for the year ended December 31, 1998 and
$49 for the three month periods ended March 31, 1998 and March 31, 1999.
(g) Reflects the income tax rate that would have been in effect if the
acquired businesses had been combined and subject to a federal statutory rate of
35% and the applicable state statutory rate for each of the Acquired Businesses
throughout the period presented.
(h) Reflects the decrease in interest expense at our borrowing rate under
our new credit facility on the indebtedness remaining after using the proceeds
from the initial public offering to repay a portion of our indebtedness. Under
the terms of our new credit facility, interest accrues at variable borrowing
rates. If interest rates were to fluctuate by 1/8 of 1 percent, pro forma
interest expense as adjusted would change by $81 for the year ended December 31,
1998 and $20 for the three month periods ended March 31, 1998 and March 31,
1999.
(i) Unaudited pro forma earnings per share has been computed based on the
weighted average number of common shares outstanding during the period, after
giving effect to the conversion of series A and series B preferred stock, the
stock split, this offering and the conversion of the junior subordinated
convertible note as well as the dilutive effect of shares issuable upon exercise
of outstanding options.
(j) Represents the actual historical balance sheets for the Company and
Texel as of March 31, 1999.
(k) The following are adjustments to the aforementioned balance sheets:
(i) Reflects $32,634 of goodwill representing the excess of the purchase
price over the fair value of net assets acquired. In addition, reflects $750
of transaction related expenses.
(ii) Reflects additional borrowings of $25,000 and $2,000 under the
senior secured credit facility and revolving credit facility, respectively,
to fund the Texel acquisition of $26,250 and $750 of transaction related
expenses.
(iii) Reflects liabilities assumed in connection with the Texel
acquisition.
(iv) Reflects the issuance of Orius common stock used to fund the
acquisition of Texel and the elimination of the equity of Texel.
(v) Reflects the capitalization of deferring financing fees incurred for
the new credit facility and the write-off of fees associated with the
previous facility.
(vi) Reflects the repayment of debt with the proceeds from the initial
public offering.
(vii) Reflects the conversion of the convertible preferred stock and the
junior convertible subordinated note.
(viii) Reflects the issuance of common stock in conjunction with the
initial public offering and the conversion of the convertible preferred
stock and the junior convertible subordinated note and the exercise of
339,983 warrants.
20
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Channel as of December
31, 1997 and for the years ended December 31, 1996 and 1997 have been derived
from audited financial statements and related notes included elsewhere in this
prospectus. The following selected historical financial data of Channel as of
December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and
1995 have been derived from unaudited financial statements which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data.
The selected historical financial data of our company as of and for the
period ended December 31, 1998 have been derived from the audited financial
statements and related notes appearing elsewhere in this prospectus.
The selected historical financial data of our company as of and for the
three months ended March 31, 1999 have been derived from unaudited financial
statements included elsewhere in this prospectus which have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data.
The selected historical financial data should be read in conjunction with
the information contained in "Selected Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes included elsewhere in this
prospectus.
ˇ Enlarge/Download Table
OPERATING DATA THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------ -------
CHANNEL:(a)
Total revenues............... $23,218 $20,731 $32,125 $20,268 $4,219
Income (loss) from
operations................. 1,786 279 4,638 1,926 (58)
Income before tax
provision.................. 1,613 138 4,823 2,063 52
THE COMPANY:
Total revenues............... $81,551 $46,069
Income from operations....... 9,251 3,368
Income before tax provision
and extraordinary charge... 6,815 1,234
Extraordinary charge, net of
tax benefit................ 770
ˇ Enlarge/Download Table
BALANCE SHEET DATA
AT DECEMBER 31,
------------------------------------------- AT MARCH 31,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------- ------------
CHANNEL:
Working capital........................ $2,476 $2,605 $4,709 $4,746
Total assets........................... 7,555 8,484 12,948 9,669
Total debt............................. 2,228 2,912 -- --
THE COMPANY:
Working capital........................ $20,921 $ 38,153
Total assets........................... 95,644 198,373
Total debt............................. 55,264 129,600
------------
(a) Income from operations and income before tax provision reflect expenses that
would not be included in our company's results going forward, such as excess
owners' compensation. The operating data of the predecessor includes its
results of operations which were sold during 1996.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains statements of a
forward-looking nature relating to future events or our future financial
performance. These statements are only predictions and the actual events or
results may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include,
but are not limited to, those discussed in "Risk Factors," as well as those
discussed elsewhere in this prospectus. The historical results set forth in this
discussion and analysis are not necessarily indicative of trends with respect to
our actual or projected future financial performance. This discussion and
analysis should be read in conjunction with the financial statements and related
notes which appear elsewhere in this prospectus.
OVERVIEW
We derive our revenues primarily from installing, designing, engineering
and maintaining aerial and underground fiber-optic, coaxial and copper cable
systems. In addition, we provide interior wiring services, which include the
installation of integrated voice, data and video local and wide area networks in
facilities. Finally, we also provide installation services for utility
companies. We currently perform work for more than 200 customers. We had pro
forma 1998 revenues of approximately $265 million and approximately $68 million
for the three months ended March 31, 1999. Of our pro forma 1998 revenues, 47%
was from services provided to cable television system operators, 29% was from
services provided to telecommunications providers and 24% was from interior
wiring and other services.
Our three primary types of contracts include:
- installation contracts for specific projects
- master service agreements for all specified services within a defined
geographic territory, and
- turnkey agreements for comprehensive installation, design, engineering
and maintenance services.
These contracts are awarded on the basis of competitive bids, the final terms
and pricing of which are frequently negotiated with the customer. The majority
of our contracts provide that we will furnish a specified unit of service for a
specified unit of price. For example, we contract to install cable for a
specified rate per foot. We recognize revenues as the related work is performed.
Production reports are inspected and approved by both our on-site quality
control manager and the customer's on-site project manager. A small percentage
of our work is performed under percentage-of-completion contracts. Under this
method, revenues are recognized on a cost-to-cost method based on the percentage
of total cost incurred to date in proportion to total estimated cost to complete
the contract.
Project-specific agreements are billed on either a unit basis, as work is
completed, or a deferred unit basis, when work is completed in connection with
the overall project. Unbilled revenues consist of work-in-process on contracts
based on work performed, but not yet billed. All costs associated with unbilled
revenues are recorded as expenses in the same period as the unbilled revenue.
Customers are generally billed weekly. This process is intended to keep disputed
billings to a minimum, improve receivable collections and reduce our risk on
deferred billing projects. Master service agreements are billed on a unit basis
where bills are delivered upon completion of work. Turnkey agreements are billed
both on a unit and deferred unit basis.
Direct costs include all direct costs of providing services to our
customers, other than depreciation on fixed assets which we own or use under
capital leases. Except for turnkey agreements, materials are typically provided
by our customers. General and administrative costs include all costs of our
management personnel and the management of our subsidiaries, rent,
22
utilities, travel and centralized costs such as insurance administration,
professional costs and clerical and administrative overhead. Our operating
subsidiaries' management personnel, and, with respect to national accounts, our
executive management, handle all sales and marketing functions as part or their
regular duties and, therefore, we do not incur material selling expenses.
RECENT ACQUISITIONS
Channel Communications, Inc. has been designated as our accounting
acquiror. All our acquisitions were accounted for using the purchase method of
accounting and, as a result, our financial statements will not include the
results of operations of the acquisitions prior to the date they were acquired.
The excess of the fair value of the consideration paid for the acquisitions of
$105.6 million over the fair value of the net assets purchased from the acquired
corporations has been recorded as goodwill. The majority of this goodwill is
being amortized over its estimated useful life of 25 years as a non-cash charge
to operating income. The effect to our net income of this amortization expenses,
a majority which is not deductible for tax purposes, is expected to be
approximately $4.5 million per year. Due to the timing of our acquisitions and
related costs, we believe that period to period comparisons may not be
meaningful in the near future.
1998 ACQUISITIONS
Our corporate predecessor, North American Tel-Com Group, was incorporated
in Florida in 1997. Orius was incorporated in Delaware in January 1999 and, in
February 1999, as a result of a corporate reorganization, North American became
our subsidiary. North American had no substantive operations until March 1998
when we acquired Cablemasters Corp., Channel, Excel Cable Construction, Inc. and
Mich-Com Cable Services, Incorporated, with combined 1997 revenues of
approximately $44 million.
In June 1998, we acquired U.S. Cable, Inc., with 1997 revenues of
approximately $15 million.
In August 1998, we acquired CATV Subscriber Services, Inc., Burn-Techs,
Inc. and State Wide CATV, Inc., with combined 1997 revenues of approximately $26
million.
1999 ACQUISITIONS
In February 1999, we acquired DAS-CO of Idaho, Inc., Schatz Underground
Cable, Inc., Copenhagen Utilities & Construction, Inc. and Network Cabling
Services, Inc., which have combined 1998 revenues of approximately $113 million.
In May 1999, we acquired Texel, with 1998 revenues of approximately $30
million.
These 13 acquisitions have pro forma 1998 revenues of approximately $265
million and combined 1997 revenues of approximately $217 million. Prior to their
acquisition by Orius, many of our subsidiaries were operated with different
strategic and financial objectives. Some of the former owners of the businesses
we acquired sought to maximize cash flow and stockholder distributions, rather
than reinvest earnings in future growth. In addition, our acquired businesses
operated under varying tax structures which influenced the historical level of
owners' compensation. As a result of the foregoing, gross profits and selling,
general and administrative expenses as a percentage of revenues may not be
comparable among the acquired businesses on an historical basis.
We entered into a new credit facility in connection with our February 1999
acquisitions and incurred a one-time non-cash related charge of approximately
$800,000, net of tax benefit of approximately $600,000. At March 31, 1999 we had
deferred financing costs recorded as an asset of approximately $4 million and
anticipate that some portion and possibly all of the
23
$4 million may be written-off in a similar non-cash charge upon the closing of
this offering in connection with the refinancing of our existing credit
facility.
RESULTS OF OPERATIONS
PRO FORMA AND COMBINED RESULTS OF OPERATIONS -- ORIUS
Pro Forma Three Months Ended March 31, 1999 Compared to Pro Forma Three
Months Ended March 31, 1998
Revenues. Revenues increased 30.0%, or $15.7 million, from $52.5 million
for the three months ended March 31, 1998 to $68.2 million for the three months
ended March 31, 1999. The growth was primarily attributable to a 43% increase in
demand from our cable customers and a 34% increase attributed to our
telecommunications customers, which when combined accounted for $15.3 million of
the total increase. Included in that amount was approximately $7.2 million of
revenues from turnkey contracts with our cable customers, which were not in
place during the prior period. Additionally, favorable weather conditions at key
telecommunications project sites allowed for an overall increase in services
provided. Revenues from interior wiring and other customers grew 4% over the
comparable period, or $400,000, due to a general increase in demand for our
services.
Direct Costs. Direct costs increased 28.0%, or $11.3 million, from $40.4
million for the three months ended March 31, 1998 to $51.7 million for the three
months ended March 31, 1999. These amounts represent a 1.0% decrease in direct
costs as a percentage of revenues from 76.9% for the three months ended March
31, 1998 to 75.9% for the three months ended March 31, 1999. The improvement was
a result of improved pricing on selected turnkey and master service agreements
contracts, increased utilization of assets and generally favorable weather
conditions, which led to improved labor productivity. This productivity was
partially offset by the increased reliance on subcontractors as a percentage of
total labor to service the increasing level of activity.
General and Administrative Expenses. General and administrative expenses
increased 34.0%, or $1.8 million from $5.3 million for the three months ended
March 31, 1998 to $7.1 for the three months ended March 31, 1999, and
represented 10.1% of revenues in 1998 and 10.4% of revenues in 1999. The
variance was primarily due to the increased payroll and expenses required to
service the increased levels of activity, and a one time consulting payment of
$550,000 related to the closing of four acquisitions in the quarter. Exclusive
of this payment, general and administrative expenses decreased to 9.6% as a
percent of revenues for the three months ended March 31, 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $3.1 million for the three months ended March 31, 1998 and for the
three months ended March 31, 1999.
Interest Expense. Interest expense, net, was $3.6 million for the three
months ended March 31, 1998 and for the three months ended March 31, 1999.
Provision For Income Taxes. The provision for income taxes increased from
$111,000 to $1.2 million from the first quarter of 1998 to the first quarter of
1999. Our effective tax rate was 45.4% in 1998 and 43.8% in 1999 including
provision for federal, state and local taxes in each of the periods. The
increase was primarily attributable to the increased profits generated by our
company.
Pro Forma Year Ended December 31, 1998 Compared to Combined Year Ended
December 31, 1997
Revenues. Revenues increased 21.8%, or $47.3 million, from $217.4 million
for the year ended December 31, 1997 to $264.7 million for the year ended
December 31, 1998. Growth
24
in demand from our cable and interior wiring customers each exceeded 45%, a
combined increase of $55.3 million due to a general increase in demand for our
services. Revenues from our telephone customers increased $1.0 million or 1.5%
compared to prior year due to an increase in activities under master service
agreements. Other contract revenues declined $9.0 million or 37.2% due to the
completion of several municipal construction contracts in 1997.
Direct Costs. Direct costs increased from $163.9 million for the year
ended December 31, 1997 to $193.5 million for the year ended December 31, 1998.
The increase was due to the increased level of activity, and represents a
decline in direct costs as a percentage of revenues of 2.3% from 75.4% for the
year ended December 31, 1997 to 73.1% for the year ended December 31, 1998. The
increased productivity was due to increased utilization of assets and a shift to
higher margin telecommunications contracts from municipal construction
contracts.
Pro Forma Year Ended December 31, 1998
Revenues. Revenues for the year ended December 31, 1998 were $264.7
million.
Direct Costs. Direct costs for the year ended December 31, 1998 were
$193.5 million, or 73.1% of revenues.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 were $25.3 million, or 9.6% of revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 1998 was $12.3 million, or 4.6% of
revenues.
Income From Operations. Income from operations for the year ended December
31, 1998 was $33.6 million, or 12.7% of revenues.
Interest Expense. Net interest expense for the year ended December 31,
1998 was $14.2 million, or 5.4 % of revenues.
Provision For Income Taxes. The provision for income taxes for the year
ended December 31, 1998 was $8.9 million, or 3.4% of revenues.
HISTORICAL RESULTS OF OPERATIONS -- ORIUS AND CHANNEL
Our historical financial statements for the year ended December 31, 1998
include the results of Channel prior to its acquisition, for accounting
purposes, by our company on March 31, 1998. These results include the other
companies acquired in 1998 from the dates of acquisition. Our historical
financial statements for the three months ended March 31, 1998 and the year
ended December 31, 1997 consist solely of the results of Channel.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
The variations in our historical results for the three months ended March
31, 1999 and 1998 were primarily attributable to our completion of 12
acquisitions at different times during 1998 and the three months ended March 31,
1999. Accordingly, we believe that further explanation of these variances are
not meaningful.
Revenues. Revenues for the three months ended March 31, 1999 were $46.1
million and for the three months ended March 31, 1998 were $4.2 million.
Direct Costs. Direct costs for the three months ended March 31, 1999 were
$36.2 million, or 78.6% of revenues and for the three months ended March 31,
1998 were $3.3 million, or 79.7% of revenues.
25
General and Administrative Expense. General and administrative expenses for
the three months ended March 31, 1999 were $4.5 million or 9.9% of revenues and
for the three months ended March 31, 1998 were $710,000 or 16.8% of revenues.
Depreciation and Amortization Expense. Depreciation and amortization for
the three months ended March 31, 1999 was $1.9 million or 4.2% of revenues and
for the three months ended March 31, 1998 was $203,000 or 4.8% of revenues.
Interest Expense (Income), Net. Interest expense, net, for the three months
ended March 31, 1999 was $2.2 million and for the three months ended March 31,
1998 was ($57,000).
Provision For Income Taxes. The provision for income taxes for the three
months ended March 31, 1999 was ($38,000) and for the three months ended March
31, 1998 was $358,000.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The variations in our historical results for the years ended December 31,
1998 and 1997 were primarily attributable to our completion of eight
acquisitions at different dates during 1998. Accordingly, we believe that
further explanation of these variances are not meaningful.
Revenues. Revenues for the year ended December 31, 1998 were $81.5 million
and for the year ended December 31, 1997 were $20.3 million.
Direct Costs. Direct costs for the year ended December 31, 1998 were $59.9
million, or 73.4% of revenues and for the year ended December 31, 1997 were
$15.3 million, or 75.3% of revenues.
General and Administrative Expense. General and administrative expenses for
the year ended December 31, 1998 were $8.6 million or 10.6% of revenues and for
the year ended December 31, 1997 were $2.3 million or 11.2% of revenues.
Depreciation and Amortization Expense. Depreciation and amortization for
the year ended December 31, 1998 was $3.8 million or 4.6% of revenues and for
the year ended December 31, 1997 was $823,000 or 4.1% of revenues.
Interest Expense (Income), Net. Interest expense, net, for the year ended
December 31, 1998 was $2.5 million and for the year ended December 31, 1997 was
($66,000).
Provision (Benefit) For Income Taxes. The provision for income taxes for
the year ended December 31, 1998 was $3.3 million and for the year ended
December 31, 1997 was ($137,000).
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues decreased 36.9%, or $11.9 million, from $32.1 million
for the year ended December 31, 1996 to $20.3 million for the year ended
December 31, 1997. The decrease was primarily attributable to a reduction in
demand for Channel's services and the sale by Channel of operating assets.
Direct Costs. Direct costs decreased 35.1%, or $8.3 million, from $23.5
million for the year ended December 31, 1996 to $15.3 million for the year ended
December 31, 1997. As a percentage of revenues, direct costs increased from
73.2% to 75.2% primarily due to an increase of fixed costs as a percentage of
direct costs.
General and Administrative Expense. General and administrative expenses
decreased 43.8%, or $1.8 million, from $4.0 million for the year ended December
31, 1996 to $2.3 million for the
26
year ended December 31, 1997. As a percentage of revenues, general and
administrative expense decreased from 12.5% to 11.2 as a result of a reduction
of salary related costs.
Depreciation and Amortization Expense. Depreciation and amortization
increased 22.8%, or $153,000, from $670,000 for the year ended December 31, 1996
to $823,000 for the year ended December 31, 1997. As a percentage of revenues,
depreciation and amortization expense increased from 2.1% to 4.1% primarily due
to fixed charges resulting from capital investments made prior to the reduction
in demand for services.
Interest Income, Net. Interest income, net, decreased 32%, or $31,000, from
$97,000 for the year ended December 31, 1996 to $66,000 for the year ended
December 31, 1997 due to a reduction in the amount of invested cash.
Provision (Benefit) For Income Taxes. The provision (benefit) for income
taxes, decreased 108.5%, or $1.8 million from a provision of $1.6 million for
the year ended December 31, 1996 to a benefit of ($137,000) for the year ended
December 31, 1997. The decrease was attributable to a reduction in taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements have been primarily to support our increased
working capital requirements, for capital expenditures and to fund acquisitions.
We have historically financed our liquidity needs through a combination of bank
borrowings, the sale of debt and equity securities and cash flow from
operations.
As of March 31, 1999, we had $0 cash and cash equivalents, working capital
of $38.1 million, including $18.3 million of short-term debt, and long-term debt
of $111.3 million, net of current maturities, including borrowings of $128.0
million under our credit facilities.
During the three months ended March 31, 1999, we used $8.5 million of net
cash in operating activities primarily related to increases in accounts
receivable, unbilled accounts receivable for work in process and inventory.
Changes in working capital accounts are driven predominantly by our acquisitions
and as such are not comparable to prior periods. We used net cash in investing
activities of $67.3 million, including $65.7 million used for the purchase of
businesses, net of cash acquired. Financing activities provided a net cash flow
of $73.6 million, resulting primarily from $130.5 million of borrowings under
our credit facility reduced by payment of debt assumed in connection with
acquisitions and private sales of equity securities. In connection with entering
the credit agreement on February 26, 1999, we issued to several of the lenders
warrants to purchase a total of 371,853 shares of common stock. The warrants
expire March 31, 2009 and entitle the holders to purchase common stock for $.01
per share. The warrants are exercisable at any time. In February 1999, we sold
7,596.38 shares of Series B preferred stock for $7.6 million and 1,029,078
shares of our common stock to our existing stockholders and employees for $2.4
million. The proceeds from those transactions were used to fund a portion of the
1999 acquisitions.
In connection with the acquisition of Network Cabling Services, Inc., we
are obligated to pay up to $500,000 in each of the next two years if the
acquired company meets designated financial targets through December 31, 2000.
In connection with the acquisition of Copenhagen Utilities, Inc., we are
obligated to pay up to $2,438,000 and issue up to 120,259 additional shares of
common stock in each of the next two years if the acquired company meets
designated financial targets through December 31, 2000. If the additional
consideration is paid it will be accounted for as additional purchase price
consideration.
During the three months ended March 31, 1999, we funded $1.5 million of
capital expenditures for an upgrade in our management information systems and
additions to our vehicles and equipment. We expect to spend approximately $9.5
million for capital expenditures for the remainder of 1999.
27
During the nine months ended December 31, 1998, we used $5.2 million of net
cash in operating activities primarily related to increases in accounts
receivables, unbilled accounts receivable for work in process and inventory.
Changes in working capital accounts are driven predominantly by the acquisitions
throughout the period and as a result are not comparable to prior periods. We
used net cash in investing activities of $44.6 million, including $40.9 million
used for the purchase of businesses, net of cash acquired. Financing activities
provided a net cash flow of $50.7 million, resulting primarily from $61.3
million of borrowings under our credit facility reduced by payment of debt
assumed in connection with acquisitions and private sales of equity securities.
In March 1998, we sold 10,000 shares of Series A preferred stock for $4.4
million, net of issuing costs. At the same time, we borrowed $1 million in the
form of a junior subordinated convertible note. The proceeds from those
transactions were used to fund a portion of the 1998 acquisitions.
We currently have a $170 million credit facility with a group of financial
institutions. Our existing subsidiaries, and future subsidiaries will, guarantee
the repayment of all amounts due under our credit facility, and the existing
facility restricts pledges of our material assets. The credit facility contains
usual and customary covenants for a credit facility of this nature including the
prohibition of the payment of dividends, financial ratios and indebtedness
covenants and a requirement to obtain the consent of our lenders for
acquisitions which include a large cash consideration component. As of June 30,
1999, we had approximately $167 million outstanding under the credit facility.
In June 1999, we received a commitment for a new revolving credit facility
in the amount of $150 million. This facility will be provided by a group of
banks and other financial institutions led by Bank of America, N.A. We expect to
enter into this facility following the closing of this offering. The facility
will mature approximately five years after the date of the closing of the
facility.
Through May 26, 1999, we had acquired 13 businesses for an aggregate
consideration of $28.9 million of common stock, $138.6 million in cash and the
assumption of $14.6 million in debt. The cash portion of the consideration was
provided by borrowings under our credit facility and the issuance of debt and
equity securities.
As part of our growth strategy, we intend to pursue selective acquisitions.
The timing, size or success of any prospective acquisitions and the related
capital commitments cannot be predicted. To the extent that we seek to grow by
acquisitions that involve consideration other than our common stock, our capital
requirements may increase, although we are not currently subject to any
commitments or obligations with respect to any additional acquisitions. We
expect to fund future acquisitions primarily with issuances of additional equity
securities, the available portion of our credit facility and cash flow from
operations. We expect that our cash flow from operations and proceeds from the
offering will provide sufficient cash to allow us to meet our working capital
needs, debt service requirements and planned capital expenditures for property
and equipment through the end of 2000.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our operations are seasonal, generally resulting in reduced revenues and
profits during the first and fourth quarters relative to other quarters. Factors
affecting the seasonality of our business are holiday season shut-downs, adverse
weather conditions and capital expenditure patterns of our customers that can
negatively affect telecommunications systems repair, replacement and expansion.
Additionally, our industry can be highly cyclical. As a result, our business
volume may be adversely affected by declines in new projects in various
geographic regions. Quarterly results may also be materially affected by the
timing and magnitude of acquisitions and related costs, variations in the
margins of projects performed during any particular quarter and regional
economic conditions. Accordingly, our operating results in any
28
particular quarter may not be indicative of the results that can be expected for
any other quarter or for the entire year.
YEAR 2000 COMPLIANCE
Many computer programs and applications define the applicable year using
two digits rather than four in order to save memory and enhance the speed of
repeated date-based calculations. The "Year 2000 problem" refers to the
inability of these computer programs on and after January 1, 2000 to recognize
that "00" refers to "2000" rather than "1900." The term "Year 2000 compliant"
means a computer or a computer system that has been designed or modified to
recognize dates on and after January 1, 2000. We may be affected by Year 2000
issues in our own information technology ("IT") systems or non-IT systems, as
well as by Year 2000 issues related to IT and non-IT systems operated by third
parties. If our systems are not Year 2000 compliant, they could malfunction or
fail altogether, causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
CURRENT SITUATION
Our plan to address the Year 2000 issue is structured in three phases:
inventory, analysis and implementation. The inventory phase is an investigation
of all our operations to identify the software and hardware used in all of our
systems. The analysis phase is an evaluation of each component to determine date
sensitivity to the Year 2000 and the identification and recommendation of
possible corrective actions. The implementation phase involves testing and
verification that the systems to be implemented are Year 2000 compliant, and are
deployed as required into our overall systems.
IT SYSTEMS. Our current state of progress with our IT systems is as follows:
- Inventory Phase. Since March, 1998, we have acquired 13
telecommunications companies each with its own information system for
project management, inventory control and financial reporting. We
determined that one system should be developed to manage our projected
growth. We believe the inventory phase of our IT systems is complete.
- Analysis Phase. During the fourth quarter of 1998, we began evaluating
software products from third-party vendors that included modules for
project management, inventory control, database and financial reporting
to replace the ITsystems of businesses we have acquired. Each of the
third-party vendors from which we purchased software modules and hardware
components of our new system certified to us that the modules and
components were Year 2000 compliant. The majority of our IT system will
be implemented without modification. We have engaged a consulting firm
that will certify that any needed modifications are Year 2000 compliant.
We are in the process of reviewing all of the Year 2000 testing programs
of vendors who have provided us with certifications to determine the
quality of their testing and whether additional testing will be required.
We believe we are 85% complete with testing of all of the components, and
expect to complete this process by October 31, 1999. We are not currently
aware of any Year 2000 problems relating to our IT system or the systems
and hardware supplied by third parties which would have a material effect
on our business, results of operations, or financial condition. To date,
we have handled our Year 2000 plan with our own internal personnel and
have not engaged any third-party consultants other than those involved
with implementation of our new systems.
- Implementation Phase. The implementation phase consists of the
conversion and replacement of the systems of our acquired businesses with
the third-party software and hardware selected in the IT analysis phase
of the project. During December 1998, we
29
began converting our operations to the new systems. Currently, we operate
13 subsidiaries and have converted eight of these locations to the new IT
systems. The remaining five subsidiaries have begun implementation
activities and are expected to be converted by October 31, 1999.
NON-IT SYSTEMS. We are at the initial inventory phase for our non-IT systems
such as chips and microprocessors that may be embedded in our facilities and
equipment. We believe there is a minimal amount of dependence of our critical
operations on non-IT systems. However, since we have not completed our inventory
and assessment, we cannot currently determine if there are any potential Year
2000 problems that would cause a material adverse effect on our business,
results of operations, or financial condition. We expect to complete all phases
of our Year 2000 plan for our non-IT systems by October 31, 1999.
THIRD-PARTY SYSTEMS. We rely on third-party suppliers for operating supplies,
merchandise for resale, utilities, equipment and other key services.
Additionally, we rely on several key large customers for a continued source of
revenues. Interruption of any third-parties' operations due to Year 2000 issues
could have a material adverse effect on our business, results of operations or
financial condition. We have begun efforts to evaluate the progress of our
critical third-party suppliers and customers relative to their Year 2000 issues.
Letters and questionnaires are being sent to all essential third parties with
which we do business to assess their Year 2000 readiness. To the extent
necessary, we will seek alternative third-party relationships if circumstances
warrant. We expect to complete the analysis of the Year 2000 plan for our third-
party systems by October 31, 1999.
COSTS
The majority of our costs to address the Year 2000 issue are related to the
development of our new management information systems. Our costs principally
consist of licensing software modules and purchasing hardware components. As of
March 31, 1999, we have spent a total of approximately $500,000 for the new IT
systems. Our costs have been capitalized in accordance with generally accepted
accounting principles. We expect to incur $500,000 in additional software and
hardware costs installing the new IT system at our remaining current locations
in 1999. The aggregate cost of conversion and training employees for the new IT
system, which will be charged to expense in the period incurred, is expected to
be approximately $200,000. Although we do not expect to incur significant
expenses to address the Year 2000 issue beyond our capital investment in the new
IT system software and hardware, Year 2000 problems may require us to incur
unanticipated expenses which could have a material adverse effect on our
business, financial condition, or results of operations. These costs account for
approximately 90% of our information technology budget for 1999. To date, the
development of our management information system has run concurrent with and
been a part of our Year 2000 compliance efforts. No other major projects have
been deferred as a result of the system development effort. The source of the
funds for our Year 2000 compliance efforts has been cash generated from
operations and borrowings under our senior credit facilities.
RISKS RELATING TO THE COMPANY'S FAILURE TO BECOME YEAR 2000 COMPLIANT
Our worst case scenarios resulting from the Year 2000 issue include:
- interruptions to our customers' operations which could prevent them from
utilizing our services and paying for the services when rendered;
- disruptions to our utilities and other service providers which could
prevent us from operating in the normal course of business;
30
- failure of our suppliers' operations which could result in our inability
to obtain equipment, materials and supplies to meet the demands of our
customers;
- failure to convert all of our locations to our new management information
system before December 31, 1999 which could prevent our locations from
processing invoices from our projects and tracking accounts receivable,
tracking employee productivity and other critical financial data. These
and other unknown items could prevent our locations from providing
services to our customers in a timely manner; and
- failure to convert all of the systems of the businesses we acquire during
1999 to our system prior to the year 2000 which could prevent these
locations from being integrated into the rest of our operations leading
to a loss in productivity, profitability and the ability to conduct
ongoing operations in the normal course of business.
The failures described above could materially and adversely affect our
business, results of operations and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time what our most reasonable and likely
worst case scenario would be or whether the consequences of Year 2000 failures
will have a material adverse impact on our results of operations, liquidity, or
financial condition. As we complete all of the phases of our Year 2000
compliance plan, we expect to have a better understanding of our most reasonably
likely worst case scenarios and will tailor our contingency plans accordingly.
CONTINGENCY PLANS
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. Contingency plans for Year 2000-related interruptions are
being developed and will include emergency backup and recovery procedures for
lost data, manual invoicing, billing and collection procedures, identification
of alternate suppliers, acceleration of conversion times to our management
information system and increasing inventory levels of critical supplies and
equipment. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third-party failure. We
are currently considering what our final contingency plans will be in the event
that we are not able to bring all of our existing and acquired systems into Year
2000 compliance by the end of 1999. We currently plan to complete all
contingency plans by October 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SoP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and in April 1998 AcSEC issued SoP
98-5, "Reporting on the Costs of Start-up Activities." Both SoPs are effective
for our 1999 financial statements. SoP 98-1 provides guidance on accounting for
costs of computer software developed or obtained for internal use. SoP 98-5
requires that entities expense start-up costs and organization costs as they are
incurred. The adoption of these SoPs in the first quarter of 1999 did not have a
material affect on our financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for our 2000
financial statements, but that date is expected to be delayed to 2001 by the
FASB. This Statement requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Due to the complexity of this Statement, we are still
evaluating the impact, if any, on our financial statements.
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In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 in 1998 has had
no impact to date as we have not had any items of other comprehensive income in
any period presented.
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OUR BUSINESS
INTRODUCTION
We are a nationwide provider of installation, design, engineering and
maintenance services for the telecommunications and cable television systems
industry in the United States. We also install, design, engineer and maintain
interior wiring for integrated voice, data and video networks in commercial,
institutional and governmental facilities, which demand has been stimulated by
the rapid increases in internal networking of personal computers. Our customers
utilize our services to add capacity to their existing networks, expand their
networks into new geographic markets and maintain their existing fiber optic,
coaxial and copper cable networks. Fiber optic cable is composed of fine glass
fibers that allow light to pass through them, and can transmit a substantially
higher volume of information than copper wire. Coaxial cable is composed of an
insulated conducting tube surrounding a central, insulated conductor. We had pro
forma 1998 revenues of approximately $265 million, of which 47% was from
services provided to cable television system operators, 29% was from services
provided to telecommunications providers and 24% was attributable to interior
wiring and other services.
We currently have executive offices in 9 states and perform work
nationwide. Our principal customers are telecommunications providers and cable
television system operators including TCI, Time Warner, MediaOne, Adelphia,
Jones Intercable, U.S. West, Southwestern Bell, GTE, MCI WorldCom, Cox
Communications, Charter Communications and Digital Teleport. Approximately 80%
of our pro forma revenues in 1998 was generated from repeat customers, in some
cases under turnkey or master service agreements. The demand for our services
has accelerated as:
- traditional telecommunications and cable television industries have
converged,
- our customers have encountered rapid growth in voice and data traffic
over their networks, and
- many of our customers have identified outsourcing as an efficient means
to expand, maintain and replace their communication networks.
INDUSTRY
We estimate that the market for installation, design, engineering and
maintenance services for the telecommunications and cable television systems
industry exceeded $15 billion in 1998. We believe that our industry presents
substantial growth opportunities for large companies with broad geographic
coverage, comprehensive technical capabilities, and responsive and quality
service. Growth in our industry has been driven by the following trends:
Telecom Deregulation. The Telecommunications Act of 1996 substantially
revised prior law by preempting state and local government control over access
to the telecommunications and cable television market and eliminating regulatory
barriers to competition such as the antitrust consent decree that had restricted
the local Bell operating companies from offering long distance telephone
service, many federal pricing regulations that had affected cable television
providers and FCC restrictions that had prevented telephone companies from
offering cable television services. We believe the elimination of these entry
barriers has and will continue to increase competition among telecommunications
providers and cable television system operators in this market. In addition,
many state regulatory commissions eliminated pricing regulations for
telecommunications providers and cable television system operators, thus
requiring these providers to be price competitive and thereby become efficient
in installing and maintaining their telecommunications and cable television
networks. As a result, providers are entering new markets, offering services
that once were reserved for incumbent providers, and expanding and improving
their existing networks.
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Increased Voice and Data Traffic on Telecommunications Networks. Growth in
demand for telecommunications voice traffic, electronic commerce, delivery of
information and entertainment services, and the growth, use and reliance on
personal computers has created an increased need for greater bandwidth.
Bandwidth controls both the speed and breadth of voice, video and data
communications and is limited by the size of the cable or other facilities
through which communications flow. Because of the physical limitations of
existing network facilities, telecommunications providers and cable television
system operators are upgrading facilities with new and innovative technology,
expanding and, in many cases, replacing existing telecom infrastructure to allow
for increased bandwidth in order to offer faster and greater volume of
communications flow.
Increased Outsourcing. The need to upgrade and expand telecommunications
and cable television systems as a result of deregulation and the growth in
demand for enhanced services and bandwidth are expected to continue to increase
the current level of outsourcing to telecommunications providers and cable
television system operators. The outsourcing trend has largely been driven by
the efforts of telecommunications providers and cable television system
operators to expedite the expansion, maintenance, replacement and enhancement of
their networks, to reduce costs and to focus on their core competencies.
Companies that specialize in providing services to the telecommunications and
cable television industry are able to provide these services on an effective and
low cost basis. In addition, we believe that telecommunications providers and
cable television system operators are seeking to reduce the number of service
providers they utilize by establishing preferred relationships with a select
number of providers that are able to offer comprehensive solutions to their
network needs across a broad geographic area.
Industry Consolidation. While deregulation has created new market
participants, consolidation in the telecommunications and cable television
systems industry has created geographically diverse and in some cases integrated
providers. The expanding geographic markets served by telecommunications
providers and cable television system operators increase the requirement for
telecommunications and cable television service providers to have broader
geographic coverage capabilities. As the size and scope of telecommunications
providers and cable television system operators have expanded, they are
increasingly requiring service providers to provide installation, design,
engineering, and maintenance services simultaneously over multiple geographic
regions. Many of the smaller companies in our industry do not have the financial
resources necessary to provide comprehensive service capabilities over a broad
geographic area or the ability to manage multiple projects.
Emergence of Preferred Service Providers. We believe that
telecommunications providers and cable television system operators increasingly
prefer to simplify vendor management through the use of well capitalized
telecommunications and cable television service providers which provide
comprehensive services and broad geographic coverage. These service providers
must be able to build out large and complex networks quickly and with a high
level of quality. Furthermore, telecommunications and cable television service
providers must be able to rapidly mobilize their capital equipment, financial
assets and personnel resources to effectively respond to the increasing scale
and time constraints of customer demands. As telecommunications providers and
cable television system operators expand their geographic market, we believe
they often desire to extend existing relationships with service providers to
these new markets and are increasing the use of turnkey and master service
agreements. Turnkey agreements typically require the service provider to
install, design, engineer and often maintain a comprehensive network for a
specific project. Master service agreements typically require the service
provider to install, design and maintain systems and equipment for a variety of
projects over a three to five year period. Telecommunications and cable
television service providers also must be able to support the substantial
initial working capital and equipment commitments
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required for these turnkey and master service agreements. This trend favors
larger, better capitalized service providers over smaller industry competitors.
Consolidation of Our Industry. We believe our industry is highly
fragmented. Most companies in our industry are relatively small, privately-held
companies that have limited access to capital and offer a limited range of
services over a small geographic area to a single customer or relatively few
customers. In the future, telecommunications and cable television service
providers will need significant management expertise, technical capabilities and
capital resources to provide the level of service necessary to gain significant
market share. As a result, we believe that there will continue to be
consolidation within our industry and a large number of attractive acquisition
candidates.
STRATEGY
Our objective is to enhance our position as a leading provider of
comprehensive telecom infrastructure services in the United States. We seek to
take advantage of the growth trends in the telecom industry by offering
reliable, quality service on a nationwide basis. We also seek to expand our
ability to provide services under turnkey and master service agreements that
allow us to be the sole provider of a variety of services. We believe our
ability to offer outside installation and inside premise wiring services
provides us with a competitive advantage as some of our projects include the
placement and removal of various types of cable systems both inside and outside
of facilities. We expect to grow both internally and by acquiring well-
established and leading regional telecommunications and cable television service
companies. Our growth will enhance our geographic coverage and allow us to
continue to develop our diverse customer base. We also plan to continue to
implement our operating strategy with respect to the businesses we acquire. Key
elements of our growth and operating strategies include the following:
GROWTH STRATEGY
Internal Growth. We are focused on generating internal growth by:
- increasing the volume of services we provide to existing customers in
their current markets
- expanding the scope of services we provide to existing customers
- leveraging customer relationships into new markets served by existing
customers
- broadening our customer base, and
- geographically expanding our service area.
Additionally, the competitive pressures of deregulation have prompted
several existing customers to increase the outsourcing of noncore activities,
which can provide opportunities for enhancing internal growth without
necessarily requiring us to achieve market share gains. We are also able to
increase internal growth by enhancing the utilization of the businesses we
acquire by integrating their resources with those of our other operating
subsidiaries.
Our strong customer relationships, comprehensive service capabilities and
nationwide geographic coverage enable us to cross-market our services and
resources. These abilities and our expertise in engineering and installation
project management give us a competitive advantage in obtaining new contracts.
In addition, we have recently begun to offer our customers integrated
installation, design, engineering and maintenance services on large-scale
turnkey projects, which we believe distinguishes us from many of our
competitors.
An example of the success of our internal growth strategies is our
experience on a major turnkey project for TCI. In March 1998, we were awarded a
three-year, $60 million contract for
35
the design, engineering and installation of a fiber optic/coaxial hybrid cable
network for TCI in its Pittsburgh region. The three-year contract, which may be
extended from time to time, involves the installation of approximately 7,800
miles of cable in western Pennsylvania, northern West Virginia and eastern Ohio.
Although the TCI contract was originally awarded to Channel, Excel, Cablemasters
and Mich-Com have also been involved in the completion of the contract. As a
result of our enhanced combined resources and our active cross-marketing
efforts, in June 1998 we were awarded a similar $10 million turnkey contract in
Tulsa, Oklahoma for the installation of a TCI cable network. Revenues from
turnkey agreements for the year ended December 31, 1998 and the three months
ended March 31, 1999 were $4.3 million and $7.2 million, respectively. We are
currently involved in discussions with several other customers for similar
turnkey contracts.
Expansion Through Selective Acquisitions. We believe that the increasing
trend toward the use of preferred service providers will result in a competitive
disadvantage for small and mid-sized companies that do not have access to
capital and cannot provide a comprehensive range of telecommunications and cable
television network services on a nationwide basis. As a result, we expect that
there will continue to be a large number of attractive acquisition candidates
that desire to join larger, better capitalized industry participants to compete
on a nationwide basis. We believe that our financial strength, experienced
management and decentralized operating strategy will be attractive to
acquisition candidates. The key elements of our acquisition strategy are:
- Enter New Geographic Markets. We intend to expand into geographic
markets we do not currently serve by selectively acquiring
well-established telecommunications and cable television service
providers that, like our current operating subsidiaries, are leaders in
their regional markets, are financially stable, have a strong customer
base, have senior management committed to participating in our future
growth and can enhance the resource utilization and internal growth of
the businesses we have previously acquired.
- Expand Services Within Existing Markets. We intend to explore selective
acquisition opportunities in the geographic markets we already serve as
well as markets serviced by businesses we acquire in the future. Once we
have entered a specific geographic market, we will seek to acquire other
well-established service providers in that particular market to deepen
our market penetration and expand the range of services offered to our
customers. We will also pursue acquisitions of smaller companies whose
operations can be integrated into and leveraged with our existing
operations.
OPERATING STRATEGY
Operate on a Decentralized Basis. We manage our operations on a
decentralized basis while overall operating and financial controls and strategic
planning are maintained at our corporate headquarters. Our operating
subsidiaries retain responsibility for the operations, profitability and growth
of their individual businesses. We believe that our decentralized operating
structure retains the entrepreneurial spirit of each of the businesses we
acquire and permits us to capitalize on the acquired businesses' local and
regional market knowledge, specialized skills, local brand name recognition and
customer relationships. Our operating subsidiaries have been in business for an
average of approximately 22 years. Our executive management team has
responsibility for overall operations, financing, capital expenditures,
insurance, investor relations, employee benefit plans, corporate strategy and
acquisitions. In addition, our executive management team is integrating
management information systems and accounting reporting systems through all of
our operating subsidiaries.
Achieve Operating Efficiencies. We are continuing to centralize
administrative functions. In addition, by combining overlapping operations of
the businesses we acquire, we expect to achieve more efficient asset and
personnel utilization and realize savings in overhead and other
36
expenses. We intend to use our increased purchasing power to gain volume
discounts in areas such as vehicles and equipment, materials, marketing,
bonding, employee benefits and insurance. As we grow internally and acquire
additional businesses, we will seek to realize additional cost savings and other
benefits through shared purchasing, bidding, scheduling and other business
practices. We have established a program where we periodically review our
operations at the subsidiary level in order to identify those practices that can
be successfully implemented throughout our operations nationwide. When
appropriate, our operating subsidiaries work together in bidding for, winning
and executing new contracts for telecom infrastructure projects by pooling their
available resources, technical expertise and coverage in key geographic areas.
Our executive management team coordinates our overall bidding strategies to
maximize the utilization of our resources. We intend to continue to develop and
expand the use of management information systems to enhance financial controls,
project costing and asset utilization.
Attract, Train And Retain Highly Qualified Personnel. We focus on
attracting and retaining a highly trained and motivated workforce in order to
consistently deliver innovative customer solutions and high-quality service. Our
strategy is to become the employer of choice in each of the markets in which we
operate by offering our employees:
- comprehensive ongoing internal technical training programs throughout
their careers
- competitive compensation and employee benefits
- career development opportunities and geographic mobility, and
- equity participation in our success.
We have a centralized employee training program and conduct numerous
additional training programs throughout our offices. We believe that we have the
comprehensive training, nationwide presence and financial resources to better
attract and retain a highly qualified workforce than many of our competitors.
SERVICES
Installation and Maintenance. We provide a full range of installation and
maintenance services to our customers. The services we provide include the
splicing and placing of cable, excavation of trenches in which to place the
cable, placement of related structures such as poles, anchors, conduits,
manholes, cabinets and closures, placement of drop cable from the main
distribution lines to the customer's home and businesses, and maintenance and
removal of these facilities. In addition, we install and maintain transmission
and central office equipment. We have the capacity to directionally bore the
placement of cables, a highly specialized and increasingly necessary method of
placing buried cable networks in congested urban and suburban markets where
trenching is highly impractical. We also employ a licensed rail plow device
which enables us to bury cable on railway easements expeditiously at a low cost.
Design and Engineering. We offer a variety of design and engineering
capabilities. We design aerial, buried and underground fiber optic and copper
cable systems from the telephone central office to the ultimate consumer's home
or business. Engineering services for local exchange carriers include the design
of service area concept boxes, terminals, buried and aerial drops, transmission
and central office equipment design and the proper administration of feeder and
distribution cable pairs. For competitive access providers, we design building
entrance laterals, fiber rings and conduit systems. We obtain rights of way and
permits in support of engineering activities, and provide installation
management and inspection personnel in conjunction with engineering services or
on a stand-alone basis. For cable television system operators, we perform make
ready studies, strand mapping, field walk out, computer-aided radio frequency
design and drafting, and fiber optic cable routing and design.
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Interior Wiring and Other Services. We provide a variety of interior
wiring services which include the installation, design, engineering and
maintenance of telecommunications and cable television networks in commercial,
institutional and governmental facilities. These services generally include the
development of communication networks within a company or government agency
related primarily to the establishment and maintenance of computer operations,
telephone systems, Internet access and communications systems established for
purposes of monitoring environmental controls or security procedures. We also
provide installation services for gas and water utilities.
ACQUISITION PROGRAM
Since our formation in August 1997, we have acquired 13 telecommunications
providers and cable television system operators which have pro forma 1998
revenues of approximately $265 million. The following table sets forth the
businesses we have acquired.
ˇ Enlarge/Download Table
MONTH
BUSINESS ACQUIRED ACQUIRED PRINCIPAL CUSTOMERS HEADQUARTERS
----------------- -------- ------------------- ------------
Texel Corporation............. May 1999 Interior Wiring Reston, VA
Copenhagen Utilities &
Construction, Inc........... February 1999 Telecommunications Clackamas, OR
Network Cabling Services,
Inc......................... February 1999 Interior Wiring Houston, TX
Schatz Underground Cable,
Inc......................... February 1999 Telecommunications/Cable TV Villa Ridge, MO
DAS-CO of Idaho, Inc.......... February 1999 Telecommunications Nampa, ID
Burn-Techs, Inc............... August 1998 Telecommunications Tampa, FL
State Wide CATV, Inc.......... August 1998 Cable TV Tampa, FL
CATV Subscriber Services,
Inc......................... August 1998 Cable TV Greensboro, NC
U.S. Cable, Inc............... June 1998 Cable TV O'Fallon, MO
Channel Communications, Inc... March 1998 Cable TV Sheboygan, WI
Cablemasters Corp............. March 1998 Cable TV Erie, PA
Mich-Com Cable Services
Incorporated................ March 1998 Cable TV Stuart, FL
Excel Cable Construction,
Inc......................... March 1998 Cable TV Jacksonville, FL
We believe that we are regarded by acquisition candidates as an attractive
acquirer because of the following:
- our strategy for creating a nationwide comprehensive and professionally
managed business servicing the telecommunications and cable television
systems industry
- our access to capital resources
- our decentralized operating strategy and opportunities to participate in
a larger organization
- our potential for increased profitability due to centralizing
administrative functions, enhanced management information systems and
economies of scale, and
- the potential for owners of the businesses being acquired to participate
in our planned growth while realizing liquidity.
The management of our acquired companies are instrumental in identifying and
assisting in the completion of future acquisitions.
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We have developed a set of financial, geographic and management criteria
designed to assist management in the evaluation of acquisition candidates. These
criteria evaluate a variety of factors, including, but not limited to the
following:
- experience and reputation of the candidate's management and operations
- expertise of personnel
- composition and size of the candidate's customer base
- whether the geographic location of the candidate will enhance or expand
our market area or ability to attract other acquisition candidates
- whether the acquisition will augment our market share or services offered
or help protect our existing customer base
- historical and projected financial performance
- historical and projected internal rate of return, return on assets and
return on revenues
- potential synergies gained by combining the acquisition candidate with
our existing operations, and
- liabilities, contingent or otherwise, of the candidate.
We anticipate that acquisition candidates in the target markets and services
will typically have annual revenues ranging from $10 million to $100 million,
exclusive of acquisitions which may have annual revenues below $10 million. All
acquisitions are subject to initial evaluation and approval by our management
before being recommended to our Board of Directors. The evaluation by management
includes comprehensive financial, accounting and legal due diligence of the
acquisition candidate.
BIDDING AND CONTRACTS
Our contracts are awarded on a competitive basis, a negotiated basis, or a
combination of the two depending on the nature of the contract and the customer.
Upon receipt of a request for proposal, we develop a detailed bid which meets
the unique specifications and requirements of each project. This process often
entails strategic business analysis, resource planning, network design, cost and
engineering studies and, in some cases, development of financing alternatives
for the project. Bids may be structured as fixed price or cost plus, depending
on the requirements of the request for proposal, and are typically quoted on a
per unit basis. In either case, we believe that we enjoy a favorable competitive
position due to our ability to provide a full range of high quality
installation, design, engineering and maintenance services nationwide. Although
master service agreements have historically been awarded in a competitive
bidding process, recent trends have been toward securing or extending these
contracts on negotiated terms. With the rapid expansion of the
telecommunications and cable television networks, we believe that more master
service agreements will be awarded on the basis of negotiated terms as opposed
to the competitive bidding process.
Our three primary types of contracts include:
- installation contracts for specific projects
- master service agreements for all specified services within a defined
geographic territory, and
- turnkey agreements for comprehensive installation, design, engineering
and maintenance services.
Project-Specific Contracts. We refer to contracts covering bids for
particular services at specified prices as project-specific contracts.
Generally, these contracts cover most installation
39
projects completed in over one year. The majority of these contracts provide
that we will furnish a specified unit of service for a specified unit of price.
For example, we contract to install cable for a specified rate per foot. Pro
forma revenues for project-specific contracts were $165 million in 1996, $174
million in 1997 and $218 million in 1998.
Master Service Agreements. We refer to contracts with telecommunications
providers and cable television system operators for the exclusive use of our
services to perform all work up to a price ceiling within a specific geographic
area as master service agreements. Under master service agreements, project
services are provided upon the execution of work orders, which will describe the
work to be undertaken. Each master service agreement contemplates hundreds of
individual installation and maintenance projects generally valued at less than
$50,000 each. While the terms of these agreements range from three to five
years, our customers are generally able to terminate the agreements upon 90 days
prior written notice and are often permitted to use other providers or to have
the services performed by their own regularly employed personnel. Pro forma
revenues for master service agreements were $32 million in 1996, $43 million in
1997 and $43 million in 1998.
Turnkey Agreements. We refer to contracts covering a comprehensive
spectrum of services, including the installation, design, engineering, and
maintenance of telecommunications and cable television networks on a fixed
unit-priced basis, as turnkey agreements. As we continue to grow and expand the
scope of services we provide, we are able to enter into an increasing number of
contracts to provide turnkey services. Even though these are generally long-term
agreements, the pricing for our services is not necessarily fixed because these
agreements often contain price adjustment provisions that are favorable to us as
well as performance and completion incentives. Turnkey agreements require
substantial initial working capital and equipment, which are partially funded by
customer prepayments. Pro forma revenues for turnkey agreements were $0 in 1996,
$0 in 1997 and $4 million in 1998.
CUSTOMERS
We served a diverse group of more than 200 customers in 1998. Our customers
include telecommunications providers such as incumbent local exchange carriers,
competitive local exchange carriers long-distance service providers and cable
television system operators. We also provide services to governmental entities,
general contractors, owners and managers of commercial and institutional
facilities such as public schools and utility providers. On a pro forma basis,
TCI and U.S. West each accounted for approximately 10% of our revenues during
1998. For the three months ended March 31, 1999, TCI was the only customer which
accounted for more than 10% of our pro forma revenues - $11.5 million, or 17%.
SALES AND MARKETING
Our sales and marketing efforts are primarily the responsibility of the
management of our operating subsidiaries. Our executive management supplements
their efforts with respect to national accounts. We focus on increasing the
value of comprehensive services provided to existing customers, actively
cross-marketing our additional services to our existing customer base and
developing new customer relationships. The management at each of our operating
subsidiaries has been responsible for developing and maintaining successful
long-term relationships with customers which helps facilitate our repeat
business and generate cross-marketing opportunities. We use both the written and
verbal referrals of our customers to help generate new business. Many of our
customers or prospective customers have a qualification procedure for becoming
an approved vendor based upon the satisfaction of particular performance and
safety standards set by the customer. These customers often maintain a list of
vendors meeting their standards and award contracts for individual jobs only to
vendors which meet their standards. We strive to maintain our status as a
preferred and qualified vendor to these customers.
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BACKLOG
We define our backlog as the uncompleted portion of services to be
performed under project specific contracts and the estimated value of future
services that we expect to provide under master service and turnkey agreements.
As of March 31, 1999, our backlog was approximately $368 million. Of that
amount, approximately $200 million is for work scheduled to be performed in 1999
and approximately $120 million is for work scheduled to be performed in 2000.
Approximately $16.5 million of our backlog represents work subject to
performance bonds and we may be required to pay liquidated damages if we fail to
perform in a timely manner. Two of our customers, TCI and US West, each
represent over 15% of our backlog. All our backlog can be canceled at any time
without penalty except, in some cases, for the recovery of our actual committed
costs and profit on work performed up to the date of cancellation. However, we
have not had any significant cancellations in the past. We are unable to provide
backlog information for periods prior to 1999 since our subsidiaries did not
maintain any consistent information on contract backlog prior to their
acquisition by Orius.
Due to the nature of our contractual commitments, in many instances our
customers do not commit to the volume of services to be purchased under the
contract. Rather, these contractual provisions commit us to perform these
services if requested by the customer and commit the customer to obtain these
services from us if they are not performed internally. Many of the contracts are
multi-year contracts and we include revenues from all the services projected to
be performed over the life of the contract in our backlog based upon our
historical relationships with our customers and experience in these types of
contracts.
SAFETY AND RISK MANAGEMENT
We are committed to ensuring that our employees perform their work in a
safe environment. We regularly communicate with our employees to promote safety
and to instill safe work habits through our company-wide employee training and
educational programs. We have dedicated risk managers at each of our operating
subsidiaries who review all accidents and claims, examine trends and implement
changes in procedures or communications to address any safety issues. We also
have a dedicated risk manager at our corporate headquarters who monitors the
risk management programs at our subsidiaries and establishes overall corporate
risk management objectives and standards.
EMPLOYEES
As of June 30, 1999, we had approximately 200 salaried employees, including
executive officers, project managers or engineers, job superintendents, staff
and clerical personnel. We also had approximately 2,470 field-based employees,
approximately 1,460 of which are paid on an hourly basis and approximately 1,000
of which are paid on a production basis. The number of employees can vary
significantly according to contracts in progress. We maintain a core of
technical and managerial personnel from which we draw to supervise all projects.
As the need arises, we also subcontract with independent contractors to supply
additional employees to complete specific projects. As of June 30, 1999, we had
approximately 1,200 subcontracted workers. Approximately 120 of our employees
are represented by a labor union and we consider relations with key and other
employees to be good.
EQUIPMENT AND FACILITIES
We operate a fleet of owned and leased trucks and trailers, support
vehicles and specialty installation equipment, such as backhoes, excavators,
trenchers, generators, boring machines, cranes, wire pullers and tensioners. The
total size of the equipment fleet approximates 2,100 units. We believe that
these vehicles generally are well-maintained and adequate for our present
41
operations. We believe that in the future, we will be able to lease or purchase
this equipment at favorable prices due to our larger size and the volume of our
leasing and purchasing activity.
Our corporate headquarters are located in leased space in West Palm Beach,
Florida. Our subsidiaries operate from one office facility which we own in Villa
Ridge, MO and leased administrative offices in: Jacksonville, FL; Stuart, FL;
Tampa, FL; Nampa, ID; O'Fallon, MO; Greensboro, NC; Clackamas, OR; Erie, PA;
Houston, TX; Reston, VA; and Sheboygan, WI. The total leased area is
approximately 125,000 square feet and the total annual base rent for our parent
and subsidiary headquarters facilities is approximately $1.1 million. The leases
for those facilities have terms ranging from month-to-month to five years. None
of the individual leases is material to our operations except for the facility
in Reston, VA which covers 17,654 square feet at an annual rent of $406,000. The
Reston lease expires in 2005 and has a five year annual option. Our subsidiaries
also lease various district field offices, equipment yards, shop facilities and
temporary storage locations. We also lease other smaller properties as necessary
to enable us to efficiently perform our obligations under master service
agreements and other contracts. We believe that our facilities are generally
adequate for our needs. We do not anticipate difficulty in replacing such
facilities or securing additional facilities, if needed.
COMPETITION
The market in which we operate is highly competitive, requiring substantial
resources and skilled and experienced personnel. We compete with other companies
in all of the markets in which we operate, some of which are large publicly
traded companies that may have greater financial, technical and marketing
resources than we do, including, Dycom Industries, Inc., MasTec, Inc. and Quanta
Services, Inc. There are relatively few, if any, 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 may become a competitor to
us. We may also face competition from the in-house service organizations of our
existing or prospective customers which often employ personnel who perform some
of the same types of services as those provided by us. Although a significant
portion of these services is currently outsourced, there can be no assurance
that our existing or prospective customers will continue to outsource service
requirements for installation, design, engineering and maintenance services in
the future.
We believe that the principal competitive factors in our market include
technical expertise, reputation, price, quality of service, availability of
skilled technical personnel, geographic presence, breadth of service offerings,
adherence to industry standards and financial stability. We believe that we
compete favorably within our industry on the basis of these factors.
LEGAL PROCEEDINGS
We occasionally are a party to legal proceedings incidental to our ordinary
business operations. At present, we are not a party to any pending legal
proceedings that we believe could have a material adverse effect on our
business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning our executive
officers and directors:
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NAME AGE POSITION
---- --- --------
William J. Mercurio....................... 58 President, Chief Executive Officer and
Chairman of the Board of Directors
Robert E. Agres........................... 38 Vice President and Chief Financial Officer
Robert J. Garrett......................... 61 Vice President-Business Development
Joseph P. Powers.......................... 53 Vice President-Operations, Director
Nominee
Bernard E. Czarnecki...................... 45 President-Cablemasters, Director
Jeffrey J. Ebersole....................... 43 President-Channel, Director
William Mullen............................ 46 President-U.S. Cable, Director
Douglas F. Berman......................... 33 Director
Sami Mnaymneh............................. 38 Director
Brian Schwartz............................ 32 Director
Leo J. Hussey............................. 60 Director Nominee
Ronald J. Mittelstaedt.................... 35 Director Nominee
Gerald E. Wedren.......................... 62 Director Nominee
William J. Mercurio has been our President, Chief Executive Officer and
Chairman of our Board of Directors since our formation in August 1997. Mr.
Mercurio has more than 25 years of experience in our industry. From 1995 to
1997, Mr. Mercurio served as President and Chief Executive Officer of Able
Telcom Holding Corp., a publicly-traded telecommunications installation, design,
engineering and maintenance services company. From 1986 to 1995, Mr. Mercurio,
who is a certified public accountant, owned a consulting and accounting firm.
From 1971 to 1986, Mr. Mercurio held various positions with Burnup & Sims, Inc.
at the time a publicly-traded telecom infrastructure service provider, including
Senior Vice President, Chief Financial Officer and was a member of the Board of
Directors. While at Burnup & Sims, Mr. Mercurio participated in over 30
acquisitions and was responsible for all financing and accounting matters.
Robert E. Agres has been our Chief Financial Officer since June 1998. From
1993 to 1997, Mr. Agres served as Senior Vice President and Chief Financial
Officer of Triarc Beverage Group, where he was primarily responsible for
Triarc's subsidiary, Royal Crown Company, Inc. From 1997 to 1998 Mr. Agres was a
private financial consultant. Mr. Agres, who is a CPA, has more than 15 years of
experience in accounting and financial reporting including work at two public
companies and public accounting at KMG prior to joining our company.
Robert J. Garrett has been our Vice President for Business Development
since our formation in August 1997. Mr. Garrett has more than 40 years of
experience in the telecom infrastructure services industry. From 1995 to 1997,
Mr. Garrett was Vice President of Development for Irwin Utilities, a Texas-based
cable television installation company. For 36 years, until 1995, he was a
district manager with American Telephone and Telegraph where he managed major
telecom projects in Florida, Georgia, Louisiana, and New York.
Joseph P. Powers has been our Vice President for Operations since our
formation in August 1997. Mr. Powers has more than 32 years of experience in the
telecom infrastructure services industry. From 1995 to 1997, he served as
President of Able Communication Services, Inc., a wholly-owned subsidiary of
Able Telcom. From 1990 to 1995, he was Director of Operations for Voltelcom, the
telecommunications installation, design, engineering and maintenance services
division of Volt Information Sciences.
43
Bernard E. Czarnecki has served as a Director since March 1998. He has
served as President of Cablemasters since he founded that company in 1983.
Jeffrey J. Ebersole has served as a Director since March 1998. He has
served as President of Channel since he founded that company in 1978.
William Mullen has served as a Director since July 1998. He currently
serves as the President of U.S. Cable and has been associated with that company
since 1972.
Douglas F. Berman has served as a Director since March 1998. Mr. Berman
joined HIG in 1996 and became a Managing Director of HIG in 1998. From 1992 to
1996, Mr. Berman was with Bain & Company, an international management consulting
firm, where he managed a variety of projects for Fortune 500 companies. Mr.
Berman is also a director of Let's Talk Cellular & Wireless, Inc.
Sami Mnaymneh has served as a Director since March 1998. He co-founded HIG
Capital Management, Inc. in 1993 and serves as one of its Managing Directors.
Before founding HIG, Mr. Mnaymneh was a Managing Director at The Blackstone
Group, where he specialized in providing financial advisory services to Fortune
100 companies. Mr. Mnaymneh is also a director of Let's Talk Cellular &
Wireless, Inc.
Brian Schwartz has served as a Director since February 1999. Mr. Schwartz
joined HIG in 1994 and became a Managing Director of HIG in 1998. Before joining
HIG, Mr. Schwartz worked for PepsiCo, Inc.'s Strategic Planning Department.
Leo J. Hussey has agreed to become a Director upon completion of this
offering. Mr. Hussey has been the owner and Chief Executive Officer of
Southeastern Printing Company, a commercial printer, since 1997. From 1994 to
1997, Mr. Hussey was engaged in residential land development and the export of
motor vehicles to the United Kingdom. From 1970 to 1994, Mr. Hussey was an
officer with Burnup & Sims, Inc., including, from 1984 to 1992, Senior Vice
President and, from 1992 to 1994, Executive Vice President. Mr. Hussey was also
a director of Burnup & Sims from 1986 to 1994.
Ronald J. Mittelstaedt has agreed to become a Director upon completion of
this offering. Mr. Mittelstaedt has been the President, Chief Executive Officer
and a director of Waste Connections, Inc., a public solid waste services
company, since the company was formed in September 1997. He became Chairman of
Waste Connections in January 1998. From January 1997 to August 1997, Mr.
Mittelstaedt was a consultant to United Waste Systems, Inc., and, from November
1993 to January 1997, was a Regional Vice President of USA Waste Services, Inc.
Gerald E. Wedren has agreed to become a Director upon completion of this
offering. Mr. Wedren has been the President of Craig Capital Co., a private
Washington, D.C. based merger and acquisition advisory firm since 1973. Mr.
Wedren has also been the Managing Partner of Tavern Real Estate Limited
Partnership and Associates, which owns and leases properties in the Washington,
D.C. and Baltimore area since 1988. Mr. Wedren is a director of Lexford
Residential Trust and American Eagle Outfitters, Inc.
BOARD OF DIRECTORS
Our Board of Directors has seven members. Upon the closing of this
offering, the Board of Directors will have seven members, consisting of Messrs.
Mercurio, Mnaymneh, Berman, Powers, Hussey, Mittelstaedt and Wedren. Our
articles of incorporation provide that our Board of Directors will be divided
into three classes, with regular three year staggered terms and initial terms of
one, two and three years. Accordingly, Messrs. Berman and Wedren will hold
office until the annual meeting of stockholders to be held in 2000, Messrs.
Hussey and Mittelstaedt
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will hold office until the 2001 annual meeting, and Messrs. Mercurio, Powers and
Mnaymneh will hold office until the 2002 annual meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
We have established an Audit Committee and a Compensation Committee.
Messrs. Mittelstaedt and Wedren have agreed to serve as the initial members of
our Audit Committee. The duties and responsibilities of the Audit Committee
include (1) recommending to the full Board of Directors the appointment of our
auditors and any termination of engagement, (2) reviewing the plan and scope of
audits, (3) reviewing our significant accounting policies and internal controls,
(4) administering our compliance programs, (5) having general responsibility for
all related auditing matters and (6) approving all transactions with affiliates.
The Compensation Committee is composed of two directors. Our Chief
Executive Officer makes recommendations to the committee as to the compensation
of our officers, including salary, bonus, stock options and benefits, as well as
the nomination of officers to be appointed by the Board of Directors. The
current members of the Compensation Committee are Messrs. Mnaymneh and Mercurio,
both of whom have agreed to resign. They will be replaced by Messrs. Hussey and
Mittelstaedt.
DIRECTORS' COMPENSATION
We do not currently pay any fees to directors. However, all directors are
reimbursed for out-of-pocket expenses incurred in connection with the rendering
of services as a director and, following this offering, our three independent
director nominees will be paid nominal amounts for attending board and committee
meetings. Upon consummation of this offering, each independent director nominee
will receive an initial grant of 25,000 options, exercisable at the initial
public offering price, which options will vest in one year. Each independent
director nominee will receive an additional grant of 7,500 options, exercisable
at the then current market value, on each anniversary of the consummation of the
initial public offering if such director nominee continues to serve as a
director at such time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Mercurio, a member of the Compensation Committee, is our President and
Chief Executive Officer. Mr. Mnaymneh, a member of our Compensation Committee,
is a controlling person of HIG, one of our principal stockholders. See "Certain
Transactions" for a description of various transactions between us, Mr. Mercurio
and HIG. None of our executive officers has served as a director or member of
the compensation committee of another entity, one of whose executive officers
served as a director or member of our Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended
December 31, 1998 concerning compensation we paid to our Chief Executive Officer
and our other executive officers who were compensated over $100,000 during that
year. None of the executive officers appearing in the Summary Compensation Table
has received any stock options. Other annual compensation primarily represents
amounts paid for auto allowances.
SUMMARY COMPENSATION TABLE
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ANNUAL COMPENSATION
------------------- OTHER ANNUAL
NAME YEAR SALARY BONUS COMPENSATION
---- ---- -------- -------- ------------
William J. Mercurio............................. 1998 $135,375 $100,000 $6,750
Joseph P. Powers................................ 1998 101,250 60,000 4,500
STOCK OPTION PLAN
We have a stock option plan which provides for the grant of both
nonstatutory stock options and stock options intended to be treated as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. Our stock option plan
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provides that stock options may be granted by the Compensation Committee. The
Compensation Committee has the sole authority to grant option awards, to
construe and interpret the plan and to make all other determinations and take
any and all actions necessary or advisable for the administration of the plan.
The stock option plan is intended to provide incentives to, and rewards for, our
employees and non-employee directors. All of our employees, non-employee
directors, officers and advisors are eligible to receive awards and vote on the
stock option plan, but only employees are eligible to receive incentive stock
options. Incentive stock options granted under the stock option plan are
non-transferable other than by will or by the laws of descent and distribution.
The stock option plan may be amended at any time by the Board of Directors,
although the Board of Directors may condition any amendment on the approval of
our stockholders if approval is necessary or advisable with respect to tax,
securities or other applicable laws. Options will be exercisable during the
period specified in each option agreement and will generally become exercisable
in installments pursuant to a vesting schedule designated by the Compensation
Committee. If a change of control of Orius occurs, the Board may terminate all
options as of that date or accelerate the expiration of the options to the tenth
day after the change of control. The stock option plan terminates in 2008.
The total number of shares of common stock reserved for issuance under the
stock option plan is 3,000,000. We have granted incentive stock options to
acquire 672,680 shares of common stock, 103,609 of which are currently
exercisable. We have awarded options on five occasions. In each case, the
options vest in three equal installments on the first, second and third
anniversaries of the date of grant. All of the options which we have awarded are
incentive stock options, exercisable for a period of ten years, and the awards
have been made only to our employees. All options expire 90 days after an
employee ceases to be employed by the Company. The options were granted at
exercise prices ranging from $4.83 per share to $8.69 per share when the
estimated market price for the common stock ranged from $1.45 to $11.95 per
share.
EXECUTIVE EMPLOYMENT AGREEMENTS
We have employment agreements with Messrs. Mercurio, Powers and Garrett,
dated February 26, 1999. Mr. Mercurio's employment agreement has a four-year
term and Messrs. Powers' and Garrett's agreements have two-year terms. Mr.
Mercurio receives a base salary of $400,000 per year, subject to adjustments for
inflation. Messrs. Powers and Garrett receive a base salary of $200,000 and
$150,000 per year, respectively, subject to adjustments for inflation. All three
employment agreements provide for health, life and disability insurance and
other benefits. They also contain covenants not to compete. So long as we do not
terminate the executives without cause, this period will run through their
employment and end on February 28, 2003 with respect to Mr. Mercurio, and
February 28, 2001 with respect to Messrs. Powers and Garrett, or one year after
their employment, whichever date is later. If we terminate Mr. Mercurio without
cause or due to his death or disability, then we must pay him his salary for a
period of two years following the date of termination. If that happens, Mr.
Mercurio also will have the right to exercise any options and warrants granted
to him while he was an employee. If Mr. Mercurio's termination is due to his
death or permanent disability, then we must pay him (or his estate) his salary
for one year after his death or date of disability. If Messrs. Powers or Garrett
are terminated without cause, we must continue to pay full compensation and
benefits to the terminated executive until February 28, 2001. If either
executive's termination is due to his death or permanent disability, then we
must pay him (or his estate) his salary for one year after his death or date of
disability.
None of our executive officers are parties to any agreements that are
triggered upon a "change of control."
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CERTAIN TRANSACTIONS
GENERAL
We have, from time to time, entered into various transactions with certain
of our officers, directors and principal stockholders and entities in which
these parties have an interest. We believe that these transactions have been on
terms no less favorable to us than could be obtained in a transaction with an
independent third party.
ORGANIZATION OF ORIUS
We were formed in August 1997 by William Mercurio, Joseph Powers and Robert
Garrett, who acted as co-founders of Orius and paid nominal cash consideration
for 2,008,701 shares of common stock. In March 1998, we acquired Cablemasters,
Excel, Mich-Com and Channel for $25.1 million, including assumed indebtedness of
$2.6 million, and 5,192,676 shares of common stock. Messrs. Ebersole and
Czarnecki, directors of Orius, were stockholders of two of the founding
companies. Mr. Ebersole received $12.9 million and 2,779,415 shares of common
stock, with an effective per share price of $1.44, in connection with the sale
of Channel to us. We also entered into two three-year leases with entities
controlled by Mr. Ebersole for the lease of Channel's headquarters and office
space. The monthly rent for both leases is approximately $10,600. At the time of
the acquisition of Channel, Mr. Ebersole entered into a three-year employment
agreement with Channel that provided for an initial annual base salary of
$150,000. In addition, Mr. Ebersole received $200,000 and 59,399 shares of our
common stock as a finders fee for identifying acquisition candidates. Mr.
Czarnecki received $4.6 million and 1,098,680 shares of common stock, with an
effective per share price of $1.44, in connection with the sale of Cablemasters.
Mr. Czarnecki also signed a three-year employment agreement with Cablemasters,
with an initial annual base salary of $150,000. HIG Cable, Inc., an entity
controlled by Mr. Mnaymneh, purchased 10,000 shares of our Series A preferred
stock for $4.5 million and $1.0 million of our 9% junior subordinated
convertible notes, which will be converted into an aggregate of 3,809,455 shares
of common stock, with an effective per share price of $1.44, immediately prior
to the closing of this offering, to fund a portion of our initial acquisitions.
U.S. CABLE ACQUISITION
In June 1998, we acquired U.S. Cable from its former shareholders,
including William Mullen, one of our directors. Mr. Mullen and members of his
immediate family received $5.1 million and 1,290,218 shares of our common stock,
with an effective per share price of $1.44. Mr. Mullen signed a three year
employment agreement with U.S. Cable with an initial annual base salary of
$140,000 and became a member of our Board of Directors. U.S. Cable also entered
into a five-year lease for its corporate headquarters with an entity controlled
by Mr. Mullen at a monthly base rent of $5,000. As a result of the U.S. Cable
acquisition, the conversion ratio of the series A preferred stock held by HIG
Cable, Inc. was adjusted to provide that the Series A preferred stock will
convert into an additional 935,838 shares of common stock. This adjustment was a
term of the series A preferred stock when it was originally issued. In addition,
Mr. Mercurio received an additional 337,987 shares of common stock and Mr.
Garrett received an additional 144,852 shares pursuant to the terms of the
original issuance of these shares.
1999 ACQUISITIONS
In February 1999, we acquired Schatz, DAS-CO, Copenhagen and Network in a
transaction that was designed to give tax-free treatment to the stock issued to
the former stockholders of the acquired companies. To complete these
acquisitions all of our then existing stockholders exchanged their interests in
the company for new interests in Orius and we raised additional
47
equity to fund the 1999 acquisitions. HIG Cable West, Inc., an entity controlled
by Mr. Mnaymneh, acquired 7,596.38 shares of our series B preferred stock for
$7.6 million, which will be converted into 3,252,290 shares of common stock,
with an effective per share price of $2.34, immediately prior to the closing of
the offering. We also sold 1,066,219 shares of our common stock to our then
existing stockholders and employees for $2.4 million. The following officers,
directors and principal stockholders, and their immediate family members and
affiliated entities, purchased the number of shares indicated at $2.34 per
share, in cash: William J. Mercurio -- 132,319, Robert E. Agres -- 41,444,
Bernard E. Czarnecki -- 115,843, and William Mullen -- 106,717. In connection
with the 1999 acquisitions, we paid (1) Mercurio and Associates, P.A., an
affiliate of William J. Mercurio, a consulting fee of $550,000 for assistance in
identification of, and due diligence with respect to, acquisition candidates and
(2) HIG, an entity controlled by Mr. Mnaymneh, $267,000 for fees and expenses.
We have agreed to pay HIG Capital LLC, an entity controlled by Mr.
Mnaymneh, a professional services fee of approximately $1.55 million in
connection with this offering, less $230,000 for fees previously paid. We do not
currently have any other agreements or arrangements with any of our executive
officers or directors for the payment of fees or the reimbursement of expenses,
other than pursuant to employment agreements.
OTHER
Rosemarie Mulholland, the daughter of William J. Mercurio, is our Secretary
and Treasurer. Ms. Mulholland, a certified public accountant, received total
compensation of $64,287 from us in 1998, including a salary of $53,787 and an
accrued bonus of $10,500. Ms. Mulholland also received options to purchase 9,325
shares of our common stock, exercisable at $4.83 per share. The options vest in
equal annual increments in April 1999, 2000 and 2001.
COMPANY POLICY
In the future, any transactions with our directors, officers, employees or
affiliates are anticipated to be minimal and will, in any case, be approved by a
majority of the Board of Directors or a committee thereof, including a majority
of disinterested members of the Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below lists information about the beneficial ownership of our
common stock as of June 30, 1999, including shares which the individuals have
the right to acquire within 60 days upon the conversion of our convertible
preferred stock or junior subordinated convertible note or the exercise of
options or warrants, by (a) each person whom we know to own beneficially more
than 5% of our common stock, (b) each of our directors and named executive
officers (c) all of our directors and executive officers as a group, and (d) our
selling stockholders. The share information for HIG Cable, Inc. set forth below
consists of shares issuable upon conversion of series A preferred stock and upon
conversion of a junior subordinated convertible note and the share information
for HIG Cable West, Inc. set forth below consists of shares issuable upon
conversion of series B preferred stock.
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SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING THE OFFERING
------------------- SHARES TO -------------------
NAME NUMBER % BE OFFERED NUMBER %
---- ----------- ----- ---------- ----------- -----
Sami Mnaymneh(1)................. 7,061,745 32.8 1,848,552 5,213,193 17.8
Douglas F. Berman(1)............. 7,061,745 32.8 1,848,552 5,213,193 17.8
Brian Schwartz(1)................ 7,061,745 32.8 1,848,552 5,212,193 17.8
HIG Cable, Inc.(2)............... 3,809,455 20.1 1,848,552 1,960,903 6.7
HIG Cable West, Inc.............. 3,252,290 18.4 -- 3,252,290 11.1
Jeffery J. Ebersole.............. 2,838,817 19.6 557,873 2,280,944 7.8
William J. Mercurio.............. 1,255,916 8.7 -- 1,255,916 4.3
Bernard E. Czarnecki............. 1,098,680 7.6 109,868 988,812 3.9
Robert J. Garrett................ 930,357 6.4 -- 930,357 3.2
Larry Bonadeo.................... 823,071 5.7 -- 823,071 2.8
P. Nicholas Johnson.............. 764,734 5.3 -- 764,734 2.6
Jerry R. Wood and Sandra M. Wood
Trust(3)....................... 760,448 5.3 199,062 561,386 1.9
William Mullen Trustee........... 569,531 3.9 112,198 457,333 1.6
Robert Mullen.................... 552,651 3.8 108,872 443,779 1.5
Kenneth Childress................ 401,237 2.8 79,044 322,193 1.1
Douglas Hoffman.................. 378,981 2.6 74,659 304,322 1.0
Joseph P. Powers................. 305,267 2.1 -- 305,267 1.0
Glenn E. Mullen(4)............... 168,036 1.2 43,987 124,049 *
PNC Bank, N.A.(5)................ 175,307 1.2 175,307 -- *
Magnetite Asset Investor LLC(5).. 106,241 * 106,241 -- *
Heller Financial Inc.(5)......... 31,870 * 31,870 -- *
GMS Consultants Group, Inc....... 47,049 * 25,902 21,147 *
Robert E. Agres.................. 46,624 * -- 46,624 *
Merrill Lynch Capital
Corporation(5)................. 26,565 * 26,565 -- *
All officers and directors as a
group (10 persons)............. 14,106,937 65.6 2,628,491 11,478,446 39.2
------------
(1) Consists of shares owned by HIG Cable, Inc. and HIG Cable West, Inc. that
are deemed to be owned by this person because of his position as a managing
director of HIG.
(2) Does not include up to 722,504 additional shares which may be purchased by
the underwriters upon exercise of the over-allotment option.
(3) Does not include up to 77,803 additional shares which may be purchased by
the underwriters upon exercise of the over-allotment option.
(4) Does not include up to 17,192 additional shares which may be purchased by
the underwriters upon exercise of the over-allotment option.
(5) Consists of shares issuable upon conversion of warrants.
* Less than 1%.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 200,000,000 shares of common
stock having a par value of $.01 per share and 2,000,000 shares of preferred
stock having a par value of $.01 per share.
COMMON STOCK
The holders of common stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Holders
of common stock are not entitled to vote cumulatively for the election of
directors. Holders of common stock are entitled to dividends on a pro rata basis
upon declaration of dividends by the Board of Directors. Dividends are payable
only out of funds legally available for the payment of dividends. The Board of
Directors is not required to declare dividends, and it currently expects to
retain earnings to finance the development of our business.
Upon a liquidation of our company, holders of the common stock will be
entitled to a pro rata distribution of our assets, after payment of all amounts
owed to our creditors, and subject to any preferential amount payable to holders
of our preferred stock, if any. Holders of common stock have no preemptive,
subscription, conversion, redemption or sinking fund rights.
PREFERRED STOCK
Our articles of incorporation permit the Board of Directors to issue shares
of preferred stock in one or more series and to fix the relative rights,
preferences and limitations of each series. These rights, preferences and
limitations include dividend rates, provisions of redemption, rights upon
liquidation, conversion privileges and voting powers. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, a majority of our
outstanding voting stock. There are currently two series of preferred stock
outstanding, all of the shares of which are held by HIG, which will be converted
into an aggregate of 6,369,118 shares of common stock immediately prior to the
closing of this offering.
In connection with the stockholder rights plan, which we will adopt
immediately prior to the closing of this offering, we will authorize 200,000
shares of series A junior participating preferred stock that will be issuable
upon the exercise of the stock purchase rights to be distributed as a dividend
to all of the holders of our common stock. Under the rights plan, each
stockholder will receive, for each share of common stock, a right to purchase
one one-thousandth of a share of series A junior participating preferred stock.
The junior participating preferred stock will have the following features:
quarterly cumulative dividends in an amount per whole share equal to the greater
of $10 or 1,000 times the dividends declared on the common stock; voting rights
of 1,000 votes per share; the ability to elect two directors in the event of a
default in the payment of six quarterly dividends; priority over the common
stock in the event of liquidation or dissolution; and ranking senior to the
common stock, but junior to all future series of preferred stock.
ANTI-TAKEOVER EFFECTS OF FLORIDA LAW AND THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The provisions of our articles of incorporation and bylaws summarized below
may be deemed to have an anti-takeover effect and may discourage, delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by the stockholders.
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Staggered Terms of Directors. Our articles and bylaws provide for a
classified Board of Directors. The Board is divided into three classes of three,
two and two directors. Directors are elected for three-year terms, which are
staggered so that the terms of the different classes expire in successive years.
Nominating Directors. Our bylaws have an advance notice procedure for the
nomination of candidates by our stockholders for election as directors.
Authorized But Unissued Shares. Subject to the applicable requirements of
the exchange or automated quotation service on which our shares are listed or
traded, the authorized but unissued shares of common stock and preferred stock
are available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public or private offerings to raise additional capital, corporate acquisitions
or employee benefit plans. The existence of authorized but unissued and
unreserved common stock and preferred stock may enable the Board of Directors to
issue shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of our company by means of
a proxy contest, tender offer, merger or otherwise, and thereby protect the
continuity of our management.
Indemnification and Limitation of Liability. Our articles of incorporation
and bylaws provide that our directors and officers shall be indemnified by us to
the full extent permitted by Florida law against all expenses and liabilities
reasonably incurred in connection with service for or on our behalf. Our bylaws
also provide that the right of any person to indemnification is a contract right
and shall not be exclusive of any other right to which the person may be
entitled. Our articles of incorporation contain a provision that generally
eliminates the personal liability of directors for monetary damages for breaches
of their fiduciary duty. This provision does not alter a director's liability
under the federal securities laws. In addition, this provision does not affect
the availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty.
Statutory Business Combination Provisions. Our articles of incorporation,
as amended, provide that we will be governed by the Florida Control Share Act,
which generally provides that shares acquired above specified thresholds will
not possess any voting rights unless those voting rights are approved by a
majority of a corporation's disinterested stockholders. Our articles provide
that we will NOT be governed by the Florida Affiliated Transactions Act, which
generally requires supermajority approval by disinterested stockholders of
specified transactions between a public corporation and holders of more than 10%
of the outstanding voting shares of the corporation.
STOCKHOLDER RIGHTS PLAN
Immediately prior to the closing of this offering, we will adopt a
stockholder protection rights agreement. Pursuant to the terms of the rights
agreement, we will distribute, as a dividend, preferred stock purchase rights to
holders of record of shares of common stock as of the closing date, at a rate of
one purchase right for each share of common stock held. Purchase rights will
also be attached to all shares of common stock that we issue on or after the
closing date. Each purchase right will entitle its holder to purchase from us
one one-thousandth of a share of preferred stock, par value $0.01 per share, at
a purchase price to be determined by the Board of Directors on the closing date,
subject to adjustment.
The purchase rights will become exercisable ten business days after a
person or group announces an offer which would, if consummated, result in the
person or group owning 15% or more of our common stock or the first date of a
public announcement that a person or group has acquired 15% or more of our
common stock. Until either of those events occur, the purchase rights will be
attached to all common stock certificates, and the rights will
51
automatically trade with shares of common stock. The rights will expire ten
years after the adoption of the stockholder protection rights agreement, unless
we terminate the rights earlier.
In the event that any person becomes an owner of 15% or more of our common
stock, each holder of a purchase right, other than rights beneficially owned by
the acquiring person and its affiliates and associates, will have the right to
receive, upon exercise of a right, shares of our common stock. The number of
shares of common stock which a holder of a purchaser right is entitled to
receive is that number of shares having an aggregate market price, as defined in
the shareholder protection rights agreement, on the date of the public
announcement, equal to twice the exercise price of the purchase right, for an
amount in cash equal to the then current exercise price.
At any time after any person crosses the 15% threshold, but prior to the
acquisition by such person of 50% or more of the outstanding shares of common
stock, the Board of Directors may exchange the purchase rights, other than
purchase rights owned by the acquiring person, in whole or in part, at an
exchange ratio of one share of common stock per purchase right.
The purchase rights also have anti-takeover effects. The purchase rights
may cause substantial dilution to a person or group that attempts to acquire our
company in a manner or on terms not approved by the Board of Directors. The
purchase rights, however, should not deter any prospective offeror willing to
negotiate in good faith with the Board of Directors, nor should the purchase
rights interfere with any merger or other business combination approved by the
Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 29,264,328 shares of common
stock outstanding. All of the shares offered hereby will be freely saleable in
the public market after completion of this offering, unless acquired by
affiliates of our company. All of the shares outstanding prior to completion of
this offering are subject to contractual restrictions that prohibit the
stockholders from selling or otherwise disposing of shares for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities, Inc. After February 25, 2000, all of the currently
outstanding shares will be eligible for resale in the public market, subject to
the restrictions of Rule 144.
We have agreed not to sell, contract or otherwise dispose of any shares of
common stock for a period of 180 days after the date of this prospectus, except
as consideration for business acquisitions or upon exercise of currently
outstanding stock options or warrants, without the prior written consent of
Deutsche Bank Securities, Inc.
In general, under Rule 144, a person, including persons who may be deemed
affiliates of our company, who has beneficially owned his or her shares for at
least one year is entitled to sell within any three-month period that number of
shares which does not exceed the greater of 1% of the outstanding shares of the
common stock or the average weekly trading volume during the four calendar week
preceding each sale. Sales under Rule 144 also are subject to manner of sale
provisions, notice requirements and the availability of current public
information about our company. Under Rule 144(k), a person who is not or has not
been deemed an "affiliate" of the company for at least three months and who has
beneficially owned his or her shares for at least two years would be entitled to
sell these shares under Rule 144 without regard to the limitations discussed
above.
There has been no public market for the common stock prior to this offering
and no assurance can be given that an active public market for the common stock
will develop or be sustained after completion of this offering. Sales of
substantial amounts of the common stock, or the perception that substantial
sales of common stock could occur, could adversely affect the
52
prevailing market price of the common stock and could impair our ability to
raise capital or effect acquisitions through the issuance of common stock.
After 180 days after completion of this offering, we intend to file a
registration statement under the Securities Act to register 3,000,000 shares of
common stock issuable on exercise of stock options or other awards granted or to
be granted under our stock option plan. After the filing of that registration
statement, those shares will be freely saleable in the public market immediately
following exercise of such options.
In addition, our existing stockholders, who after the closing of this
offering will own approximately 18,364,325 shares of common stock, have the
right to include their shares in public offerings of our securities. Two of our
stockholders, holding 5,213,193 shares of common stock, have the right to cause
us to register shares of common stock owned by them.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company will serve as transfer agent and
registrar for our common stock.
53
PLAN OF DISTRIBUTION
We have entered into an underwriting agreement with the underwriters named
below in which they have severally agreed to purchase from us the number of
shares of common stock set forth beside their names below. Deutsche Bank
Securities, Inc., Banc of America Securities LLC, Morgan Keegan & Company, Inc.,
and The Robinson-Humphrey Company, LLC are the representatives of the
underwriters.
ˇ Download Table
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Deutsche Bank Securities, Inc. .............................
Banc of America Securities LLC..............................
Morgan Keegan & Company, Inc................................
The Robinson-Humphrey Company, LLC..........................
--------
Total.............................................
========
The obligation of the underwriters to purchase the common stock is subject
to the terms and conditions set forth in the underwriting agreement. The
underwriting agreement requires the underwriters to purchase all of the shares
of the common stock offered by this prospectus, if any are purchased. The shares
of common stock offered by the underwriters pursuant to this prospectus are
subject to prior sale, when, as and if delivered to and accepted by the
underwriters, and subject to the underwriters' right to reject any order in
whole or in part.
The underwriters have advised us that they propose to offer the shares of
common stock to the public at the public offering price of $ per share.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the public offering price. These
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the
public offering price. The underwriters may change the public offering price
after the common stock is released for sale to the public.
The underwriters may sell more shares than the total number set forth in
the table above. To cover these sales, the underwriters have an option to
purchase up to 1,635,000 additional shares of common stock, one half of which
are from Orius and one half of which are from the selling stockholders, at the
public offering price less the underwriting discounts and commissions set forth
in the table above. The underwriters may exercise this option for 30 days after
the date of this prospectus only to cover these sales. To the extent that the
underwriters purchase shares pursuant to this option, each of the underwriters
will purchase shares in approximately the same proportion as the number of
shares of common stock to be purchased by it shown in the above table bears to
10,900,000 and we will be obligated, pursuant to the option, to sell these
shares to the underwriters. If purchased, the underwriters will offer the
additional shares on the same terms as those on which the initial 10,900,000
shares are being offered.
Orius and the selling stockholders have agreed to indemnify the
underwriters with respect to liabilities incurred by the underwriters, including
liabilities under the Securities Act of 1933, as amended.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Specifically, the underwriters may over allot shares of the
common stock in connection with this offering,
54
thereby creating a short position in the underwriters' account. A short position
results when an underwriter sells more shares of common stock than the
underwriter is committed to purchase. Additionally, to cover the over allotments
or to stabilize the market price of the common stock, the underwriters may bid
for, and purchase, shares of the common stock at a level above that which might
otherwise prevail in the open market. The underwriters are not required to
engage in these activities, and, if commenced, they may be discontinued at any
time. The underwriters may also reclaim selling concessions allowed to an
underwriter or dealer, if the underwriters repurchase shares distributed by that
underwriter or dealer.
We have agreed not to make any offering, sale, short sale, transfer, pledge
or other disposition of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivatives of common stock for a period of 180 days after the date of this
prospectus, directly or indirectly, without the prior written consent of
Deutsche Bank Securities, Inc., except that we may, without this consent, issue
options granted under the stock option plan and issue shares upon exercise of
options granted under the stock option plan, and in connection with the
acquisitions of businesses.
Our executive officers, directors, and current stockholders have agreed not
to offer, sell, contract to sell, grant any option or other right for the sale
of, pledge or otherwise dispose of any shares of common stock or any securities
convertible or exchangeable into common stock owned or acquired in the future in
any manner until 180 days after the date of this prospectus, without the prior
written consent of Deutsche Bank Securities, Inc. These restrictions will be
applicable to any shares acquired by any of those persons during the applicable
restricted period.
The representatives of the underwriters have advise us that they do not
intend to confirm sales to any account over which they exercise discretionary
authority.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 400,000 shares to be offered and sold to our
employees and other persons. The number of shares of common stock available for
sale to the general public will be reduced to the extent these persons purchase
any of the reserved shares. Any reserved shares which are not orally confirmed
for purchase within one day of the pricing of the offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered hereby. Individuals purchasing reserved shares may be required to agree
not to sell, offer or otherwise dispose of any shares of common stock for a
period of three months after the date of this prospectus.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. Among the
factors to be considered in these negotiations are prevailing market conditions,
our result of operations in recent periods, the market capitalizations and
stages of development of other companies that we and the representatives believe
to be comparable to Orius, estimates of our business potential, the present
state of our development and other factors deemed relevant. The initial public
offering price set forth on the cover page of this prospectus should not be
considered an indication of the actual value of our common stock. The initial
public offering price is subject to change as a result of market conditions and
other factors. Our common stock has been approved for listing on the New York
Stock Exchange under the symbol "ORS."
55
EXPERTS
The consolidated financial statements of Orius Corp. and Subsidiaries as of
December 31, 1998 and for the period from March 31, 1998 through December 31,
1998 included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Channel Communications, Inc.,
f/k/a Kenya Corp., as of and for the two years ended December 31, 1997 included
in this prospectus have been included in reliance on the report of Williams,
Young & Associates, LLC, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of U.S. Cable, Inc. as of September 30, 1996 and
1997 and June 30, 1998 and for each of the two years in the period ended
September 30, 1997 and for the nine months ended June 30, 1998 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of CATV Subscriber Services, Inc. and its
subsidiary as of December 31, 1997 and August 31, 1998 and for the year ended
December 31, 1997 and the eight months ended August 31, 1998 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of DAS-CO of Idaho, Inc. as of December 31, 1997
and 1998 and for each of three years in the period ended December 31, 1998
included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Schatz Underground Cable, Inc. as of December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 included in this prospectus have been included in reliance on the
report of Milhouse, Martz & Neal, L.L.P., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Network Cablings Services, Inc. included in
this prospectus and in the registration statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and in the
registration statement, and are included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The financial statements of Copenhagen Utilities and Construction, Inc. as
of December 31, 1997 and 1998 and for each of three years in the period ended
December 31, 1998 included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Texel Corporation as of December 31, 1997 and
1998 and for each of two years in the period ended December 31, 1998 included in
this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
56
LEGAL MATTERS
Akerman, Senterfitt & Eidson, P.A., Fort Lauderdale, Florida will pass upon
the validity of the shares of common stock offered by this prospectus for us.
White & Case LLP, Miami, Florida, will pass upon the validity of the shares of
common stock offered by this prospectus for the underwriters.
ADDITIONAL INFORMATION
We intend to file annual, quarterly, and special reports, proxy statements,
and other information with the Securities and Exchange Commission. Our reports,
proxy and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at 7
World Trade Center, New York, New York 10048 and Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois, at prescribed rates. The
Commission maintains a website that contains all information filed
electronically by us. The address of the Commission's website is
http://www.sec.gov. Our common stock is proposed to be listed on the New York
Stock Exchange. Reports, proxy statements and other information concerning Orius
can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
This prospectus constitutes a part of a registration statement on Form S-1
filed by us with the Commission under the Securities Act, with respect to the
securities offered in this prospectus. The registration statement contains
additional information with respect to Orius and this offering. Accordingly, we
refer you to the registration statement and to the exhibits to the registration
statement for further information with respect to Orius and the securities
offered in this prospectus. Parts of the registration statement are omitted as
allowed by the rules and regulations of the Commission. Copies of the
registration statement and its exhibits are on file at the offices of the
Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the Commission
described above.
We have summarized what we believe are the material provisions of documents
discussed in this prospectus. If you have any questions concerning those
provisions or documents, we encourage you to read the entire documents which are
on file with the Commission as exhibits to the registration statement.
REPORTS TO SECURITY HOLDERS
We intend to distribute to our stockholders annual reports containing
audited financial statements and will make available copies of quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
financial information.
57
INDEX TO FINANCIAL STATEMENTS
ˇ Download Table
ORIUS CORP. AND SUBSIDIARIES INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Interim Consolidated Balance Sheets....................... F-3
Interim Consolidated Statements of Operations............. F-4
Interim Consolidated Statements of Cash Flows............. F-5
Notes to Interim Consolidated Financial Statements
(unaudited)............................................ F-6
ORIUS CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Financial
Statements............................................. F-12
Unaudited Pro Forma Statements of Operations.............. F-13
Unaudited Pro Forma Balance Sheet......................... F-16
Notes to Unaudited Pro Forma Financial Statements......... F-17
ORIUS CORP. AND SUBSIDIARIES
Financial Statements -- December 31, 1998
Report of Independent Accountants......................... F-19
Consolidated Balance Sheet................................ F-22
Consolidated Statements of Operations..................... F-23
Consolidated Statements of Cash Flows..................... F-24
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-25
Notes to Consolidated Financial Statements................ F-26
U.S. CABLE, INC.
Financial Statements -- September 30, 1996 and 1997 and
June 30, 1998
Report of Independent Accountants......................... F-38
Balance Sheets............................................ F-39
Statements of Operations.................................. F-40
Statements of Cash Flows.................................. F-41
Statements of Changes in Shareholders' Equity............. F-42
Notes to Financial Statements............................. F-43
CATV SUBSCRIBER SERVICES, INC. AND ITS SUBSIDIARY
Financial Statements -- December 31, 1997 and August 31,
1998
Report of Independent Accountants......................... F-48
Balance Sheets............................................ F-49
Statements of Operations.................................. F-50
Statements of Cash Flows.................................. F-51
Statements of Changes in Stockholders' Equity............. F-52
Notes to Financial Statements............................. F-53
DAS-CO OF IDAHO, INC.
Financial Statements -- December 31, 1996, 1997 and 1998
Report of Independent Accountants......................... F-58
Balance Sheets............................................ F-59
Statements of Operations.................................. F-60
Statements of Cash Flows.................................. F-61
Statements of Changes in Stockholders' Equity............. F-62
Notes to Financial Statements............................. F-63
F-1
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SCHATZ UNDERGROUND CABLE, INC.
Financial Statements -- December 31, 1996, 1997 and 1998
Report of Independent Accountants......................... F-67
Balance Sheets............................................ F-68
Statements of Income and Retained Earnings................ F-69
Statements of Cash Flows.................................. F-70
Notes to Financial Statements............................. F-71
NETWORK CABLING SERVICES, INC.
Financial Statements -- September 30, 1997 and 1998 and
December 31, 1997 and 1999 unaudited
Report of Independent Certified Public Accountants........ F-76
Balance Sheets............................................ F-77
Statements of Income...................................... F-78
Statements of Cash Flows.................................. F-79
Statements of Stockholders' Equity........................ F-80
Notes to Financial Statements............................. F-81
COPENHAGEN UTILITIES AND CONSTRUCTION, INC.
Consolidated Financial Statements -- December 31, 1996,
1997 and 1998
Report of Independent Accountants......................... F-86
Consolidated Balance Sheets............................... F-87
Consolidated Statements of Operations..................... F-88
Consolidated Statements of Cash Flows..................... F-89
Notes to Consolidated Financial Statements................ F-90
TEXEL CORPORATION
Financial Statements -- December 31, 1997 and 1998 and
March 31, 1998 and 1999 unaudited
Report of Independent Accountants......................... F-97
Balance Sheets............................................ F-98
Statements of Operations.................................. F-99
Statements of Cash Flows.................................. F-100
Statements of Changes in Shareholders' Equity............. F-101
Notes to Financial Statements............................. F-102
F-2
ORIUS CORP.
INTERIM CONSOLIDATED BALANCE SHEETS
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PRO FORMA
MARCH 31,
DECEMBER 31, MARCH 31, 1999
1998 1999 (NOTE 12)
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,252,303 $ -- $ --
Accounts receivable, net.................................... 26,153,402 43,399,783 43,399,783
Unbilled accounts receivable................................ 12,189,615 25,391,153 25,391,153
Inventory................................................... 9,542,743 14,681,541 14,681,541
Prepaid and other current assets............................ 852,481 1,241,667 1,241,667
----------- ------------ ------------
Total current assets................................ 50,990,544 84,714,144 84,714,144
----------- ------------ ------------
PROPERTY AND EQUIPMENT, NET................................. 15,474,071 35,314,088 35,314,088
----------- ------------ ------------
OTHER ASSETS:
Goodwill, net............................................... 26,860,511 72,289,965 72,289,965
Deferred financing costs, net............................... 1,400,527 3,976,256 3,976,256
Other....................................................... 917,986 2,078,681 2,078,681
----------- ------------ ------------
Total other assets.................................. 29,179,024 78,344,902 78,344,902
----------- ------------ ------------
TOTAL............................................... $95,643,639 $198,373,134 $198,373,134
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current portion of long term debt........................... $ 5,864,268 $ 10,270,713 $ 10,270,713
Borrowing under credit facility............................. 6,750,000 8,000,000 8,000,000
Accounts payable............................................ 8,288,999 13,796,238 13,796,238
Accrued liabilities......................................... 5,889,749 11,208,447 11,208,447
Deferred revenues........................................... 2,621,398 3,083,725 3,083,725
Other liabilities, including deferred income tax
liability................................................. 655,988 201,099 201,099
----------- ------------ ------------
Total current liabilities........................... 30,070,402 46,560,222 46,560,222
----------- ------------ ------------
Long-term debt.............................................. 42,649,585 111,328,837 111,328,837
Deferred income tax liability............................... 2,594,697 5,450,539 5,450,539
Deferred revenues........................................... 4,670,000 4,670,000 4,670,000
----------- ------------ ------------
Total liabilities................................... 79,984,684 168,009,598 168,009,598
----------- ------------ ------------
Convertible preferred stock, par value $.0001 per share;
300,000 shares authorized:
Series A, 10,000 shares issued and outstanding.......... 7,340,649 10,017,496 --
Series B, 7,596.33 shares issued and outstanding........ -- 10,452,866 --
Value of redemption rights associated with junior
subordinated convertible note............................. 493,358 1,056,290 --
----------- ------------ ------------
7,834,007 21,526,652 --
----------- ------------ ------------
STOCKHOLDERS' EQUITY:
Warrants.................................................... -- 868,538 868,538
Common stock, par value $.0001 per share; 48,696,230 shares
authorized; 10,897,151 and 13,421,163 shares issued and
outstanding at December 31, 1998 and March 31, 1999,
respectively.............................................. 105 130 197
Additional paid-in capital.................................. 7,427,745 7,968,216 29,494,801
Retained earnings........................................... 397,098 -- --
----------- ------------ ------------
Total stockholders' equity.......................... 7,824,948 8,836,884 30,363,536
----------- ------------ ------------
Total............................................... $95,643,639 $198,373,134 $198,373,134
=========== ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
ORIUS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
ˇ Enlarge/Download Table
1998 1999
---------- -----------
REVENUES, NET:.............................................. $4,218,833 $46,069,230
---------- -----------
EXPENSES:
Direct costs................................................ 3,364,584 36,223,996
General and administrative.................................. 709,928 4,540,170
Depreciation and amortization............................... 202,643 1,937,279
---------- -----------
Total............................................. 4,277,155 42,701,445
---------- -----------
Income (loss) from operations............................... (58,322) 3,367,785
Other (income) expense:
Interest expense, net..................................... (57,697) 2,160,091
Other income.............................................. (52,966) (26,257)
---------- -----------
Income before income tax provision and extraordinary item... 52,341 1,233,951
Provision for income taxes.................................. 358,430 540,470
---------- -----------
(Loss) income before extraordinary charge................... (306,089) 693,481
Extraordinary charge for debt retirement, net of tax benefit
of $578,000............................................... -- (770,000)
---------- -----------
(LOSS) FROM OPERATIONS...................................... $ (306,089) $ (76,519)
========== ===========
Accretion and dividends associated with preferred stock and
junior convertible note................................... (6,096,307)
-----------
Net (loss) available to common stockholders................. $(6,172,826)
-----------
(Loss) per share:
Basic:
(Loss) available to common stockholders................ $ (0.46)
Extraordinary charge................................... $ (0.07)
-----------
Net loss available to common stockholders.............. $(1,113.05) $ (0.53)
========== ===========
Weighted average shares outstanding:
Basic..................................................... 275 11,738,489
========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
ORIUS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
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1998 1999
---------- ------------
Increase (Decrease) in Cash and Equivalents from:
OPERATING ACTIVITIES:
Net (Loss)................................................ $ (306,089) $ (76,519)
Adjustments to reconcile net cash provided by (used in)
operating activities:
Provision for uncollectible accounts.................... 165,000 4,091
Depreciation and amortization........................... 202,643 1,937,279
Extraordinary charge.................................... -- 1,348,000
Amortization of deferred finance costs.................. -- 1,890,162
Loss (gain) on disposal of assets....................... 1,928 (16,400)
Deferred income taxes................................... 330,254 (314,673)
Changes in assets and liabilities:
Accounts receivable, billed and unbilled................ 903,872 (8,232,905)
Inventories............................................. -- (3,714,821)
Other current assets.................................... (51,198) (364,733)
Other noncurrent assets................................. (2,598) 47,329
Accounts payable and accrued liabilities................ (46,997) (1,078,499)
Deferred revenues....................................... -- 171,202
Other liabilities....................................... (31,242) (133,261)
---------- ------------
Net cash provided by (used in) operating activities....... 1,165,573 (8,533,748)
---------- ------------
INVESTING ACTIVITIES:
Capital expenditures.................................... (152,337) (1,534,966)
Purchases of subsidiaries, net of cash acquired......... -- (65,745,431)
---------- ------------
Net cash (used in) investing activities................... (152,337) (67,280,397)
---------- ------------
FINANCING ACTIVITIES:
Borrowings on credit facility........................... 51,074 130,500,000
Principal payments on notes payable and credit
facility............................................. -- (62,472,266)
Amounts paid for deferred financing costs............... -- (4,465,891)
Distributions paid to stockholder....................... (6,117) --
Proceeds from issuance of common stock.................. -- 2,403,622
Proceeds from issuance of convertible preferred stock,
net of costs......................................... -- 7,596,377
---------- ------------
Net cash provided by financing activities................. 44,957 73,561,842
---------- ------------
NET CASH INFLOW (OUTFLOW) FROM ALL ACTIVITIES............. 1,058,193 (2,252,303)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............... 346,636 2,252,303
---------- ------------
CASH AND EQUIVALENTS AT END OF PERIOD..................... $1,404,829 $ --
========== ============
Cash paid for:
Interest................................................ $ 855 $ 760,363
Income taxes............................................ $ 59,418 $ 793,760
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements of Orius Corp. and its
subsidiaries (the "Company") as of and for the period ended March 31, 1999
includes the accounts of the Company and its subsidiaries and in the opinion of
management, includes all necessary adjustments, consisting of only normal
recurring adjustments, to present fairly the consolidated financial position and
results of operations of the Company for the periods presented. The accompanying
unaudited consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. Accordingly, these
unaudited consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in this registration statement. Reported interim results of operations
are based in part on estimates, and are not necessarily indicative of those
expected for the year.
With the acquisitions discussed in Note 5, the Company assumed and began to
offer contracts under fixed price arrangements. Consequently, the Company
modified its revenue recognition policy to include these types of contracts. For
fixed priced contracts, Orius Corp. recognizes revenue and the related costs
under the percentage-of-completion method. Revenues from these contracts are
recognized as the related costs are incurred based on the relationship of costs
incurred to total estimated contract costs. Unbilled accounts receivable for
contracts-in-progress represents revenue recognized but not yet billed. Deferred
revenue represents billings on contracts for which costs have not yet been
incurred and revenue has not been recognized. At the time a loss on a contract
becomes known, the entire amount of the estimated loss is accrued.
The financial information as of and for the period ended March 31, 1998
represents the information of Channel Communications, Inc., which was deemed the
accounting acquirer in the March 31, 1998 simultaneous business combination.
Such financial information has been derived from the audited accounts as of and
for the same period which appear elsewhere in this registration statement.
2. REORGANIZATION
At December 31, 1998, the organization consisted of eight subsidiaries
operating under the Company: Channel Communications, Inc.; Cablemasters Corp.;
Excel Cable Construction, Inc.; Mich-Com Cable Services Incorporated; U.S.
Cable, Inc.; CATV Subscriber Services, Inc.; Statewide CATV, Inc.; and
Burn-Techs, Inc. The common stock of NATG is owned by the former owners of these
companies and certain executive officers and founders of NATG. HIG Cable, Inc.
owns all the outstanding Convertible Preferred Stock.
On February 8, 1999, a reorganization of the Company occurred in connection
with the acquisition of four companies and related financing. Orius Corp., a
Delaware corporation, was formed, and it formed NATG Holdings, LLC, a Delaware
limited liability company. All of the interest in NATG Holdings is held by Orius
Corp. NATG Holdings formed a subsidiary, NATG Merger Sub., which was merged with
and into NATG with NATG as the surviving corporation.
As a result of the Reorganization, NATG became an indirect wholly owned
subsidiary of Orius. The Reorganization resulted in all of the stockholders of
NATG holding shares of Orius.
F-6
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Shares of common and Preferred Stock of NATG were converted into one-tenth of a
share of common and preferred stock of Orius, respectively. This one-for-ten
exchange was the same for all stockholders and has been reflected in these
financial statements by restating all share amounts.
3. EARNINGS PER SHARE
Diluted earnings per common share have been excluded because inclusion of
the effects on earnings per share associated with the convertible preferred
stock, junior convertible note, options and warrants issued during the period
would be anti-dilutive.
4. PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share presented below were computed under SFAS No.
128 "Earnings per Share" based on the weighted average number of common shares
outstanding during the period after giving retroactive effect to the exchange of
the Company's Series A and Series B preferred stock to the Company's newly
established common stock, the split of the Company's newly established common
stock, the Company's planned initial public offering of common stock and the
conversion of the junior subordinated convertible note. All common shares and
stock options issued have been included as outstanding for the entire period
using the treasury stock method and the estimated public offering price per
share.
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FOR THE THREE MONTHS
ENDED
------------------------
MARCH 31, MARCH 31,
1998 1999
--------- ------------
Pro forma net income per share (unaudited):
Basic..................................................... $ 0.05 $ 0.10
Diluted................................................... $ 0.05 $ 0.10
Pro forma weighted average shares outstanding (unaudited):
Basic..................................................... 29,296 29,296
Diluted................................................... 29,529 29,529
5. ACQUISITIONS
On February 26, 1999, four companies were acquired for total consideration
of $73.1 million plus transaction related expenses of $.9 million. Additionally,
approximately $7.1 million of debt was assumed. Cash paid for the four
acquisitions totaled $65.7 million (net of cash acquired of $4.8 million) and
the value of common stock issued (1,494,922 shares) totaled $3.5 million. The
purchase price of each acquisition is subject to a customary purchase price
adjustment mechanism and finalization of certain valuations.
The companies acquired were: DAS-CO of Idaho, Inc.; Copenhagen Utilities
and Construction, Inc.; Shatz Underground Cable, Inc.; and Network Cabling
Services, Inc. All the acquisitions were accounted for as purchases and were
included in the results of operations from the date of acquisition. The goodwill
associated with all the acquisitions during the period ended March 31, 1999
totaled $45.0 million. In connection with the acquisition of Network Cabling
Services, Inc., the Company is obliged to pay up to $500,000 in each of the next
two years if the acquired company meets certain performance levels through
December 31, 2000. In connection with the acquisition of Copenhagen Utilities,
Inc., the Company is obligated to pay up to $2,438,000 and issue up to 120,259
additional shares of common stock in each of the
F-7
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
next two years if the acquired company meets certain performance levels through
December 31, 2000. If such contingent consideration is paid, it will be
accounted for as additional purchase price consideration.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions and the seven
acquisitions completed during the year ended December 31, 1998 had been
completed on January 1, 1998. These pro forma results give effect to increased
interest expense for acquisition debt and amortization of related goodwill.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which would have been
achieved had these acquisitions been completed on January 1, 1998 nor are the
results indicative of the company's future results of operations (in thousands).
ˇ Download Table
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
Revenues.................................................... $45,108 $62,105
Net income.................................................. $ (685) $ 1,366
Net (loss) available to common stock per share.............. $ (0.05) $ (0.35)
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt outstanding at December 31, 1998 and March 31, 1999 is
detailed by type of borrowing as follows:
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DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
Bank credit facilities:
Revolving credit facility, maturing on April 1, 2005;
interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... $ 6,750,000 $ --
Revolving credit facility, maturing on February 26, 2004;
interest rate of LIBOR or Federal Funds Rate plus
0.50%, plus a margin ranging from 2.25% to 3.00% for
LIBOR and 1.25% to 2.00% for Federal Funds Margin based
on leverage ratio, beginning June 30, 1999............. 8,000,000
Term loan, amortizing with final payment due April 1,
2003; interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... 27,625,000 --
Term loan, amortizing with final payment due April 1,
2005; interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.375% or
0.875%, respectively................................... 18,950,000 --
Term loan A, amortizing with final payment due December
31, 2003; interest rate of LIBOR or Federal Funds Rate
plus 0.50%, plus a margin ranging from 2.25% to 3.00%
for LIBOR and 1.25% to 2.00% for Federal Funds. Margin
based on leverage ratio, beginning June 30, 1999....... 60,000,000
F-8
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
Term loan B, amortizing with final payment due December
31, 2004; interest rate of LIBOR or Federal Funds Rate
plus 0.50%, in either case plus a margin of 3.75% or
2.75%, respectively 45,000,000
Term loan C, amortizing with final payment due December
31, 2005; interest rate of LIBOR or Federal Funds Rate
plus 0.50%, in either case plus a margin of 5.00% or
4.00%, respectively.................................... 14,151,462
Junior subordinated convertible note, due April 15, 2005,
interest rate of 9%....................................... 1,063,750 1,086,300
Other debt and capital lease obligations.................... 875,103 1,361,788
----------- ------------
Total debt and capital lease obligations.......... 55,263,853 129,599,550
Less current portion........................................ 12,614,268 18,270,713
----------- ------------
Long-term debt.............................................. $42,649,585 $111,328,837
=========== ============
On February 26, 1999, NATG Holdings entered into a new credit agreement
with Merrill Lynch, Pierce, Fenner & Smith Incorporated and PNC Bank, National
Association (PNC), as joint lead arrangers and a new syndication of banks (New
Credit Agreement). The New Credit Agreement includes a $25.0 million revolving
credit facility, maturing in 5 years, and a $120.0 million senior secured term
loan credit facility. The term loan facility is allocated among a $60.0 million
Term Loan A facility, maturing on December 1, 2003; a $45.0 million Term Loan B
facility, maturing on December 1, 2004; and a $15.0 million Term Loan C
facility, maturing on December 1, 2005. Of this credit facility, NATG Holding
borrowed $2.0 million under the revolving credit facility, $60.0 million under
the Term Loan A facility, $45.0 million under the Term Loan B facility, and
$15.0 million under the Term Loan C facility to complete the four new
acquisitions and to repay substantially all indebtedness of NATG, and terminate
all commitments to make extensions of credit to NATG, under NATG's old credit
facility with PNC.
Amounts under the credit facility bear interest, at the Company's choice,
at either LIBOR plus an applicable margin; or, the higher of PNC's corporate
base rate of interest, or the Federal Fund Rate plus 0.50% (the ABR), in each
case plus an applicable margin. For LIBOR loans, the margin is 3.00% for the
revolving credit facility and Term Loan A facility, 3.75% for the Term Loan B
facility and 5.00% for Term Loan C facility. For ABR loans, the margin is 2.00%
for the revolving credit facility and Term Loan A facility, 2.75% for the Term
Loan B facility and 4.00% for Term Loan C facility. Beginning June 30, 1999, the
margins for all interest rates will be adjusted based upon certain leverage
ratios, but cannot exceed the ranges disclosed above. Outstanding amounts under
the credit facility are secured by substantially all of NATG Holdings' assets
and the pledge of all of the outstanding shares of common stock of each or
Orius' direct and indirect subsidiaries, including NATG. The credit facility
also contains certain affirmative and negative covenants relating to NATG
Holdings' operations.
As a result of the termination and repayment of the indebtedness
outstanding under the old credit facility, the deferred financing costs
associated with the old credit facility totaling $1,348,000 were written off
resulting in an extraordinary charge to income of $770,000, net of tax benefits
of $578,000.
F-9
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
During the three months ended March 31, 1999, the accretion associated with
the junior subordinated convertible note totaled approximately $562,732 which
represents the estimated appreciation in the value of common stock into which
the debt could have been converted.
7. CONVERTIBLE PREFERRED STOCK
In connection with the reorganization discussed above, the number of shares
of common stock into which the Series A Convertible Preferred Stock (Series A
Preferred) was convertible was changed to 3,116,828. Additionally, the provision
that reduced the conversion rate in the event of an initial public stock
offering of Orius Corp. common stock was removed from the Series A Preferred
rights. At March 31, 1999, the total recorded value of the Series A Preferred
has been determined based upon the convertible common shares of 3,116,828 at
$3.214 per share, or $10,017,485. The accretion to that value during the period
ended March 31, 1999 was $2,676,847.
In connection with the acquisitions on February 26, 1999, HIG Cable West,
Inc. purchased 7,596.38 shares of Series B Convertible Preferred Stock (Series B
Preferred) for $7,569,377. The Series B Preferred has the same rights as the
Series A Preferred and may be converted into 3,252,289 shares of Orius Corp.
common stock. At March 31, 1999, the recorded value of the Series B Preferred
has been determined based upon the converted common shares of 3,252,289 at
$3.214 per share, or $10,452,856. The accretion from February 26, 1999 to March
31, 1999 totaled $2,856,728.
8. WARRANTS TO PURCHASE COMMON STOCK
In connection with entering the new credit agreement on February 26, 1999,
the Company issued to the joint lead arrangers and certain of the banks that
participated in the new credit agreement warrants to purchase a total of 371,853
shares of common stock. The warrants expire March 31, 2009 and entitle the
holders to purchase common stock for $.01 per share. The warrants are
exercisable any time after the consummation of an initial public offering,
September 30, 2003 or in the event of a merger or other change of control.
The estimated fair market value of the warrants at date of issuance of
$868,538 has been reflected in the separate component of stockholders' equity
entitled warrants. An offsetting amount has been reflected as a discount or
reduction of the Company's long-term debt. The $868,538 of discount is being
recognized as interest expense using the effective interest method over 66
months which is the weighted average life of the credit agreement components
including the full capacity of the revolver and the Term A, B and C loans.
9. ISSUANCE OF COMMON STOCK
On February 26, 1999, the Company issued to certain of its then existing
stockholders 1,066,219 shares of common stock in exchange for cash of
$2,403,622.
10. INCOME TAXES
In connection with the simultaneous business combination on March 31, 1998,
Channel Communications, Inc.'s S corporation status for income tax purposes was
terminated. Consequently, a change to income tax expense of $330,254 was
recorded to establish deferred tax liabilities with payment to be spread over
four years.
F-10
ORIUS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
11. SUBSEQUENT EVENTS -- ACQUISITION
On May 25, 1999, the Company acquired all of the outstanding stock of Texel
Corporation for cash of $26.25 million and 1,030,335 shares of common stock,
plus transaction costs of $750 thousand.
12. PRO FORMA BALANCE SHEET (UNAUDITED)
In July 1999, the Company announced its plan to exchange all outstanding
convertible Series A and Series B preferred stock and the junior subordinated
convertible note for 7,061,745 shares of common stock immediately preceding an
initial public offering of its common stock. Additionally, the Company announced
its plan to split each share of common stock into 10.3609 shares of common
stock. The effect of this exchange and split has been reflected in the unaudited
pro forma balance sheet and all share amounts presented reflect the split.
F-11
ORIUS CORP. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
We (Orius Corp.) were formed in August 1997 to create a nationwide provider
of comprehensive telecom infrastructure services. We have completed 13
acquisitions since March 1998. While the businesses were acquired at various
dates during 1998 and 1999, the following unaudited pro forma statements of
operations are presented as if all such acquisitions and this offering had
occurred on January 1, 1998. The following unaudited pro forma balance sheet
gives effect to the Texel acquisition and this offering as if they had occurred
on March 31, 1999. All other acquisitions occurred prior to March 31, 1999 and
are included in the Company's balance sheet at March 31, 1999.
The following unaudited pro forma financial statements have been derived
from (1) our (including the acquired businesses) financial information and, when
applicable, includes adjustments to conform fiscal periods to calendar periods,
(2) the audited financial statements and notes thereto of certain of the
acquired businesses for certain periods and (3) audited financial statements and
notes thereto since inception, which financial statements appear elsewhere in
this prospectus.
The unaudited pro forma financial statements have been prepared for
comparative purposes only and do not purport to be indicative of the results
which would have been achieved had the acquired businesses been purchased and
this offering consummated as of the assumed dates, nor are the results
indicative of our future results. The unaudited pro forma financial statements
should be read in conjunction with "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto since inception and
certain of the acquired businesses for certain periods included elsewhere
herein.
F-12
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS(A)
(IN THOUSANDS)
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YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------
THE CABLE- U.S. STATE- BURN-
COMPANY MASTERS EXCEL MICH-COM CABLE WIDE TECHS CATV DAS-CO SCHATZ COPENHAGEN
------- ------- ------ -------- ------ ------ ----- ------- ------- ------- ----------
REVENUES:............ $81,551 $3,485 $1,868 $2,379 $9,465 $3,524 $597 $19,412 $21,778 $31,254 $35,192
EXPENSES:
Direct costs........ 59,896 2,500 1,545 1,953 6,832 2,879 223 16,018 14,548 18,867 27,092
General and
administrative.... 8,645 572 94 187 3,013 272 41 3,493 3,830 9,137 7,701
Depreciation and
amortization...... 3,759 114 35 73 259 125 14 296 938 2,199 840
------- ------ ------ ------ ------ ------ ---- ------- ------- ------- -------
Total.......... 72,300 3,186 1,674 2,213 10,104 3,276 278 19,807 19,316 30,203 35,633
INCOME (LOSS) FROM
OPERATIONS.......... 9,251 299 194 166 (639) 248 319 (395) 2,462 1,051 (441)
OTHER (INCOME)
EXPENSE:
Interest expense,
net............... 2,508 43 -- 7 (67) 24 -- 290 (44) 576 (170)
Other (income)
expense........... (72) (6) (1) 30 (144) -- -- 4 (77) (35)
------- ------ ------ ------ ------ ------ ---- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAX
PROVISION........... 6,815 262 195 129 (428) 224 319 (685) 2,502 552 (236)
PROVISION FOR INCOME
TAXES............... 3,328 -- -- 21 (156) 1 96 (248) -- 224 (76)
------- ------ ------ ------ ------ ------ ---- ------- ------- ------- -------
NET INCOME (LOSS).... $3,487 $ 262 $ 195 $ 108 $ (272) $ 223 $223 $ (437) $2,502 $ 328 $ (160)
======= ====== ====== ====== ====== ====== ==== ======= ======= ======= =======
Earnings per share,
Basic and diluted...
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
PRO
OFFERING FORMA,
NETWORK PRO ADJUST- AS
CABLING TEXEL ADJUSTMENTS FORMA MENTS ADJUSTED
------- ------- ----------- --------- --------- --------
REVENUES:............ $24,586 $29,649 $ -- $264,740 $ -- $264,740
EXPENSES:
Direct costs........ 21,393 20,634 (925)(b) 193,455 -- 193,455
General and
administrative.... 1,808 1,762 (15,188)(c) 25,367 -- 25,367
Depreciation and
amortization...... 179 101 3,347(d) 12,279 -- 12,279
------- ------- --------- -------- --------- --------
Total.......... 23,380 22,497 (12,766) 231,101 -- 231,101
INCOME (LOSS) FROM
OPERATIONS.......... 1,206 7,152 12,766 33,639 -- 33,639
OTHER (INCOME)
EXPENSE:
Interest expense,
net............... 143 (128) 11,079(e) 14,261 (9,639)(g) 4,622
Other (income)
expense........... (12) 88 -- (225) -- (225)
------- ------- --------- -------- --------- --------
INCOME (LOSS) BEFORE
INCOME TAX
PROVISION........... 1,075 7,192 1,687 19,603 9,639 29,242
PROVISION FOR INCOME
TAXES............... 391 -- 5,319(f) 8,900 4,376(f) 13,276
------- ------- --------- -------- --------- --------
NET INCOME (LOSS).... $ 684 $ 7,192 $ (3,632) $ 10,703 $ 5,263 $ 15,966
======= ======= ========= ======== ========= ========
Earnings per share,
Basic and diluted... $ 0.54(h)
F-13
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS(A)
(IN THOUSANDS)
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THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------------------------------------------------------------
THE CABLE- U.S. STATE
COMPANY MASTERS EXCEL MICH-COM CABLE WIDE BURN-TECHS CATV DAS-CO SCHATZ COPENHAGEN
------- ------- ------ -------- ------ ----- ---------- ------ ------ ------ ----------
REVENUES:............ $4,219 $3,485 $1,868 $2,379 $3,948 $909 $189 $8,069 $2,655 $4,830 $7,654
Expenses:
Direct costs........ 3,364 2,500 1,545 1,953 2,557 598 30 6,673 2,060 3,458 6,149
General and
administrative.... 710 572 94 187 888 166 4 639 682 1,066 532
Depreciation and
amortization...... 203 114 35 73 75 36 2 139 235 400 221
------ ------ ------ ------ ------ ---- ---- ------ ------ ------ ------
Total.......... 4,277 3,186 1,674 2,213 3,520 800 36 7,451 2,977 4,924 6,902
INCOME (LOSS) FROM
OPERATIONS.......... (58) 299 194 166 428 109 153 618 (322) (94) 752
OTHER (INCOME)
EXPENSE:
Interest expense,
net............... (57) 43 -- 7 (32) 15 -- 115 (2) 129 (5)
Other (income)
expense........... (53) (6) (1) 30 (12) -- -- (9) 8 (15) (31)
------ ------ ------ ------ ------ ---- ---- ------ ------ ------ ------
INCOME (LOSS) BEFORE
INCOME TAX
PROVISION........... 52 262 195 129 472 94 153 512 (328) (208) 788
PROVISION FOR INCOME
TAXES............... 358 -- -- 21 196 -- -- 167 -- 56 --
------ ------ ------ ------ ------ ---- ---- ------ ------ ------ ------
NET INCOME (LOSS).... $ (306) $ 262 $ 195 $ 108 $ 276 $ 94 $153 $ 345 $(328) $ (264) $ 788
====== ====== ====== ====== ====== ==== ==== ====== ====== ====== ======
Earnings per share,
basic and diluted...
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------------
PRO
OFFERING FORMA,
NETWORK PRO ADJUST- AS
CABLING TEXEL ADJUSTMENTS FORMA MENTS ADJUSTED
------- ------ ----------- --------- -------- ---------
REVENUES:............ $4,903 $7,411 $ -- $52,519 $ -- $52,519
Expenses:
Direct costs........ 4,272 5,259 7(b) 40,425 -- 40,425
General and
administrative.... 339 381 (975)(c) 5,285 -- 5,285
Depreciation and
amortization...... 38 15 1,484(d) 3,070 -- 3,070
------ ------ -------- ------- ------- -------
Total.......... 4,649 5,655 516 48,780 -- 48,780
INCOME (LOSS) FROM
OPERATIONS.......... 254 1,756 (516) 3,739 -- 3,739
OTHER (INCOME)
EXPENSE:
Interest expense,
net............... 38 (30) 3,344(e) 3,565 (2,409)(g) 1,156
Other (income)
expense........... -- 19 -- (70) -- (70)
------ ------ -------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAX
PROVISION........... 216 1,767 (3,860) 244 2,409 2,653
PROVISION FOR INCOME
TAXES............... 79 -- (766)(f) 111 1,094(f) 1,205
------ ------ -------- ------- ------- -------
NET INCOME (LOSS).... $ 137 $1,767 $ (3,094) $ 133 $ 1,315 $ 1,448
====== ====== ======== ======= ======= =======
Earnings per share,
basic and diluted... $ 0.05(h)
F-14
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS(A)
(IN THOUSANDS)
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THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------------------
THE NETWORK
COMPANY DAS-CO SCHATZ COPENHAGEN CABLING TEXEL ADJUSTMENTS
------- ------ ------ ---------- ------- ------ -----------
REVENUES:......................... $46,069 $3,660 $4,698 $3,877 $3,801 $6,051 $ --
Expenses:
Direct costs.................... 36,224 1,910 3,457 2,640 3,012 4,460 --
General and administrative...... 4,540 368 902 474 314 395 112(c)
Depreciation and amortization... 1,937 122 320 160 28 31 472(d)
------- ------ ------ ------ ------ ------ ---------
Total..................... 42,701 2,400 4,679 3,274 3,354 4,886 584
INCOME FROM OPERATIONS............ 3,368 1,260 19 603 447 1,165 (584)
OTHER (INCOME) EXPENSE:
Interest expense, net........... 2,160 (3) (12) (19) 31 (31) 1,439(e)
Other (income) expense.......... (26) 1 (1) 8 1 46 --
------- ------ ------ ------ ------ ------ ---------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION and extraordinary
charge.......................... 1,234 1,262 32 614 415 1,150 (2,023)
PROVISION FOR INCOME TAXES........ 540 18 13 -- 172 -- 432(f)
------- ------ ------ ------ ------ ------ ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
CHARGE.......................... $ 694 $1,244 $ 19 $ 614 $ 243 $1,150 $ (2,455)
======= ====== ====== ====== ====== ====== =========
Earnings per share, basic and
diluted.........................
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------
PRO OFFERING PRO FORMA,
FORMA ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
REVENUES:......................... $68,156 $ -- $68,156
Expenses:
Direct costs.................... 51,703 -- 51,703
General and administrative...... 7,105 -- 7,105
Depreciation and amortization... 3,070 -- 3,070
------- --------- -------
Total..................... 61,878 -- 61,878
INCOME FROM OPERATIONS............ 6,278 -- 6,278
OTHER (INCOME) EXPENSE:
Interest expense, net........... 3,565 (2,409)(g) 1,156
Other (income) expense.......... 29 -- 29
------- --------- -------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION and extraordinary
charge.......................... 2,684 2,409 5,093
PROVISION FOR INCOME TAXES........ 1,175 1,055(f) 2,230
------- --------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY
CHARGE.......................... $ 1,509 $ 1,354 $ 2,863
======= ========= =======
Earnings per share, basic and
diluted......................... $ 0.10(h)
F-15
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
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AT MARCH 31, 1999
--------------------------------------------------------------------------------------
THE PRO FORMA OFFERING PRO FORMA,
COMPANY(I) TEXEL(I) ADJUSTMENTS(J) PRO FORMA ADJUSTMENTS(J) AS ADJUSTED
---------- -------- -------------- --------- -------------- -----------
ASSETS
Cash and cash equivalents......... $ -- $ 2,126 $ -- $ 2,126 $ -- $ 2,126
Accounts receivable, net.......... 43,400 6,525 -- 49,925 -- 49,925
Unbilled accounts receivable for
work-in-process................. 25,391 786 -- 26,177 -- 26,177
Inventory......................... 14,682 -- -- 14,682 -- 14,682
Prepaid and other current
assets.......................... 1,241 14 -- 1,255 -- 1,255
-------- ------- ------- -------- -------- --------
Total current assets...... 84,714 9,451 -- 94,165 -- 94,165
-------- ------- ------- -------- -------- --------
Property and equipment, net....... 35,314 1,010 -- 36,324 -- 36,324
-------- ------- ------- -------- -------- --------
Goodwill, net..................... 72,290 -- 33,384(i) 105,674 -- 105,674
Deferred financing costs, net..... 3,976 -- -- 3,976 (2,476)(v) 1,500
Other, including deferred income
tax asset....................... 2,079 -- -- 2,079 -- 2,079
-------- ------- ------- -------- -------- --------
TOTAL..................... $198,373 $10,461 $33,384 $242,218 $ (2,476) $239,742
======== ======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long term
debt............................ $ 10,271 $ -- $ 1,550(ii) $ 11,821 $(11,821)(vi) $ --
Borrowing under credit facility... 8,000 -- 2,000(ii) 10,000 (10,000)(vi) --
Accounts payable.................. 13,796 1,297 -- 15,093 -- 15,093
Accrued liabilities............... 11,209 786 -- 11,995 -- 11,995
Deferred revenues................. 3,084 102 -- 3,186 -- 3,186
Other liabilities, including
deferred income tax liability... 201 -- 513(iii) 714 -- 714
-------- ------- ------- -------- -------- --------
Total current
liabilities............. 46,561 2,185 4,063 52,809 (21,821) 30,988
-------- ------- ------- -------- -------- --------
Long-term debt.................... 111,329 -- 23,450(ii) 134,779 (69,863)(vi) 64,916
Deferred income tax liability..... 5,450 -- 1,537(iii) 6,987 -- 6,987
Deferred revenues................. 4,670 297 -- 4,967 -- 4,967
-------- ------- ------- -------- -------- --------
Total liabilities......... 168,010 2,482 29,050 199,542 (91,684) 107,858
-------- ------- ------- -------- -------- --------
Convertible preferred stock....... 20,470 -- -- 20,470 (20,470)(vii) --
Value of redemption rights
associated with junior
subordinated convertible note... 1,056 -- -- 1,056 (1,056)(vii) --
-------- ------- ------- -------- -------- --------
21,526 -- -- 21,526 (21,526) --
-------- ------- ------- -------- -------- --------
Stockholders' equity.............. 8,837 7,979 4,334(iv) 21,150 110,734(viii) 131,884
-------- ------- ------- -------- -------- --------
TOTAL..................... $198,373 $10,461 $33,384 $242,218 $ (2,476) $239,742
======== ======= ======= ======== ======== ========
F-16
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) For the Company, results for the year ended December 31, 1998 and for
the three months ended March 31, 1998 represent actual historical 1998 results,
including results for the Acquired Businesses purchased in the related 1998
period from the date of acquisition. Results for the three months ended March
31, 1999 represent actual historical results for the Company, including results
for the acquired businesses purchased in the first quarter of 1999 from the date
of acquisition. For the acquired businesses, results for the year ended December
31, 1998 and for the three months ended March 31, 1998, represent combined
historical results for (i) the acquired businesses purchased in the related 1998
period prior to the date of acquisition and (ii) the acquired businesses
purchased in 1999. For the acquired businesses, results for the three months
ended March 31, 1999 represent combined historical results for (i) the acquired
businesses purchased in 1999 prior to the date of acquisition and (ii) Texel
which was acquired on May 25, 1999.
(b) Reflects the decrease resulting from differentials between compensation
levels of the former owners of U.S. Cable that related to direct costs and the
terms of their employment agreements entered into with the Company. A portion of
the salaries of the former owners of U.S. Cable is also included in general and
administrative expenses. After the acquisition of the acquired businesses, the
owners' duties and responsibilities will not change and additional costs are not
expected to be incurred related to their efforts.
(c) The pro forma adjustment consists of the following:
ˇ Enlarge/Download Table
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------
1998 1998 1999
------------ ------- -----
Owners compensation(i)...................................... $(14,036) $ (969) $ 12
Business not acquired(ii)................................... (1,372) (86) --
Rent expense(iii)........................................... 220 80 100
-------- ------- -----
$(15,188) $ (975) $ 112
-------- ------- -----
(i) Reflects the decrease resulting from differentials between
compensation levels of former owners of the acquired businesses and the
terms of the employment agreements entered into between the former owners
and the Company. After the acquisition of the acquired businesses, the
owners' duties and responsibilities will not change and additional costs are
not expected to be incurred related to their efforts. Also reflects the
elimination of compensation expense associated with the distribution of
excess cash balances to the former owners of the acquired businesses
immediately prior to the dates of acquisition by Orius.
(ii) Reflects the elimination of a business not purchased from CATV
Subscriber Services.
(iii) Reflects the rent expense resulting from our current lease terms
as compared to lease terms entered into by former owners. In addition,
reflects the increase in rent expense and corresponding decrease in
depreciation expense and real estate tax expense resulting from leasing
rather than owning related facilities which were not purchased from the
former owners of the acquired businesses.
(d) Depreciation has been derived utilizing the property, plant and
equipment values of each of the acquired businesses at the time of their
acquisition, rather than utilizing values of property, plant and equipment
actually held by each of the acquired businesses in the period presented.
Reflects the impact on depreciation resulting from the application of our
straight-line depreciation policy rather than those of the former owners of the
acquired businesses. In addition, reflects the change in depreciation resulting
from the write-up of property, plant and equipment to fair value arising from
purchase accounting. Also reflects amortization of goodwill calculated based on
goodwill lives ranging from 10 to 25 years. The pro forma adjustments consist of
the following:
ˇ Enlarge/Download Table
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------ --------------
1998 1998 1999
------------ ------ -----
Depreciation:
Change in accounting policy............................... $(3,088) $ (462) $(738)
Write-up of property and equipment........................ 2,679 815 575
------- ------ -----
(409) 353 (163)
Amortization of goodwill.................................... 3,756 1,131 635
------- ------ -----
$ 3,347 $1,484 $ 472
------- ------ -----
(e) Reflects the increase in interest expense at our borrowing rate under
our bank credit agreements on the indebtedness resulting from the purchase of
the acquired businesses. In addition, reflects elimination of $67 and $25
F-17
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) -- (CONTINUED)
during the year ended December 31, 1998 and three months ended March 31, 1998,
respectively, of a business not purchased from CATV Subscriber Services. Under
the terms of our bank credit agreements, interest accrues at variable borrowing
rates. If interest rates were to fluctuate by 1/8 of 1 percent, pro forma
interest expense would change by $194 for the year ended December 31, 1998 and
$49 for the three month periods ended March 31, 1998 and 1999.
(f) Reflects the income tax rate that would have been in effect if the
acquired businesses had been combined and subject to a federal statutory rate of
35% and the applicable state statutory rate for each of the acquired businesses
throughout the period presented.
(g) Reflects the decrease in interest expense at our borrowing rate under
our new credit facility on the indebtedness remaining after using the proceeds
from the initial public offering to repay a portion of our indebtedness. Under
the terms of new credit facility, interest accrues at variable borrowing rates.
If interest rates were to fluctuate by 1/8 of 1 percent, pro forma interest
expense as adjusted would change by $81 for the year ended December 31, 1998 and
$20 for the three month periods ended March 31, 1998 and March 31, 1999.
(h) Unaudited pro forma earnings per share has been computed based on the
weighted average number of common shares outstanding during the period, after
giving effect to the conversion of Series A and Series B Preferred Stock, the
Stock Split, the Offering and the conversion of the junior subordinated
convertible note as well as the dilutive effect of shares issuable upon exercise
of outstanding options.
(i) Represents the actual historical balance sheets for the Company and
Texel as of March 31, 1999.
(j) The following are adjustments to the aforementioned balance sheets:
(i) Reflects $32,634 of goodwill representing the excess of the purchase
price over the fair value of net assets acquired. In addition, reflects $750
of transaction related expenses.
(ii) Reflects additional borrowings of $25,000 and $2,000 under the
senior secured credit facility and revolving credit facility, respectively,
to fund the Texel acquisition of $26,250 and $750 of transaction related
expenses.
(iii) Reflects liabilities assumed in connection with the Texel
acquisition.
(iv) Reflects the issuance of Orius common stock used to fund the
acquisition of Texel and the elimination of the equity of Texel.
(v) Reflects the capitalization of deferring financing fees incurred for
the new credit facility and the write-off of fees associated with the
previous facility.
(vi) Reflects the repayment of debt with the proceeds from the initial
public offering.
(vii) Reflects the conversion of the convertible preferred stock and the
junior convertible subordinated note.
(viii) Reflects the issuance of common stock in conjunction with the
initial public offering and the conversion of the convertible preferred
stock and the junior convertible subordinated note and the exercise of
339,983 warrants.
F-18
REPORT OF INDEPENDENT ACCOUNTANTS
THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
ORIUS CORP. AND SUBSIDIARIES
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Orius Corp.
and Subsidiaries (the "Company") at December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
April 29, 1999, except for Note 18 as
to which the date is July 7, 1999
F-19
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholder and Board of Directors of
Kenya Corporation and Subsidiary
Sheboygan, Wisconsin
We have audited the accompanying consolidated balance sheet of Channel
Communications, Inc. (f/k/a Kenya Corp.) as of December 31, 1997, and the
related consolidated statements of income and retained earnings and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the consolidated
financial position of Kenya Corporation and subsidiary as of December 31, 1997,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ WILLIAMS, YOUNG & ASSOCIATES, LLC
Madison, Wisconsin
February 27, 1998
F-20
INDEPENDENT AUDITORS' REPORT
Stockholder and Board of Directors
Kenya Corporation and Subsidiary
Sheboygan, Wisconsin
We have audited the accompanying consolidated balance sheet of Kenya
Corporation and Subsidiary as of December 31, 1996, and the related consolidated
statement of income and retained earnings and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our report dated August 15, 1997, we expressed a qualified opinion
because of the non recognition of a loss of $723,716 for an uncollectible
receivable in 1995. This loss was recorded in 1996. If the financial statements
were corrected for this departure, net income would be increased by $723,716 in
1996 and decreased by $723,716 in 1995. The net effect of this loss on retained
earnings as of December 31, 1996 is $0. The Company has changed its method of
accounting for this transaction and restated its financial statements to conform
with generally accepted accounting principles. Accordingly, our present opinion
on the financial statements, as presented herein, is different from that
expressed in our previous report.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the consolidated
financial position of Kenya Corporation and Subsidiary as of December 31, 1996,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ WILLIAMS, YOUNG & ASSOCIATES, LLC
Madison, Wisconsin
August 15, 1997, except as to the
third paragraph above, which is
as of May 26, 1999.
F-21
ORIUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ˇ Enlarge/Download Table
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 346,636 $ 2,252,303
Accounts receivable, net.................................. 4,349,058 26,153,402
Unbilled accounts revenue................................. 1,495,732 12,189,615
Inventory................................................. -- 9,542,743
Prepaid and other current assets.......................... 76,158 852,481
---------- -----------
Total current assets...................................... 6,267,584 50,990,544
---------- -----------
Property and equipment, net................................. 3,303,390 15,474,071
---------- -----------
Other assets:
Goodwill, net............................................. 81,304 26,860,511
Deferred financing costs, net............................. -- 1,400,527
Other..................................................... 16,450 917,986
---------- -----------
Total other assets........................................ 97,754 29,179,024
---------- -----------
Total assets...................................... $9,668,728 $95,643,639
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt......................... $ -- $ 5,864,268
Borrowing under credit facility........................... -- 6,750,000
Accounts payable.......................................... 1,244,919 8,288,999
Accrued liabilities....................................... 276,682 5,889,749
Deferred revenues......................................... -- 2,621,398
Other liabilities, including deferred income tax
liability.............................................. -- 655,988
---------- -----------
Total current liabilities......................... 1,521,601 30,070,402
---------- -----------
Long-term debt.............................................. -- 42,649,585
Deferred income tax liability............................... -- 2,594,697
Deferred revenues........................................... -- 4,670,000
---------- -----------
Total liabilities................................. 1,521,601 79,984,684
---------- -----------
Convertible preferred stock, par value $.0001 per share;
300,000 shares authorized; 10,000 shares issued and
outstanding............................................... -- 7,340,649
Value of redemption rights associated with junior
subordinated convertible note............................. -- 493,358
---------- -----------
-- 7,834,007
---------- -----------
Stockholders' equity:
Common stock: no par value, 275 shares authorized, issued
and outstanding at December 31, 1997; par value $.0001
per share, 48,696,230 shares authorized, 10,897,151
shares issued and outstanding at December 31, 1998..... 27,500 105
Additional paid-in capital................................ 386 7,427,745
Retained earnings......................................... 8,119,241 397,098
---------- -----------
Total stockholders' equity........................ 8,147,127 7,824,948
---------- -----------
Total liabilities and stockholders' equity........ $9,668,728 $95,643,639
========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-22
ORIUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ˇ Enlarge/Download Table
CHANNEL COMPANY
------------------------- --------------
YEARS ENDED
DECEMBER 31, YEAR ENDED
------------------------- DECEMBER 31,
1996 1997 1998
----------- ----------- --------------
REVENUES, NET:................................. $32,124,776 $20,267,800 $81,550,425
----------- ----------- -----------
EXPENSES:
Direct costs................................... 23,518,738 15,256,947 59,896,854
General and administrative..................... 3,297,932 2,260,758 8,645,007
Depreciation and amortization.................. 670,436 823,602 3,758,708
----------- ----------- -----------
Total................................ 27,487,106 18,341,307 72,300,569
----------- ----------- -----------
Income (loss) from operations.................. 4,637,670 1,926,493 9,249,856
Other (income) expense:
Interest expense, net................... (97,068) (66,314) 2,507,395
Other income............................ (88,669) (69,812) (72,345)
----------- ----------- -----------
Income before income tax provision and
discontinued operations...................... 4,823,407 2,062,619 6,814,806
(Benefit) provision for income taxes........... 1,619,000 (137,387) 3,328,290
----------- ----------- -----------
Income (loss) from continuing operations....... 3,204,407 2,200,006 3,486,516
Loss from discontinued operations, net of tax
benefit of $77,401........................... (121,063) -- --
Gain on sale of assets of discontinued
operation, net of tax of $1,042,760.......... 2,003,648 -- --
----------- ----------- -----------
Net income (loss).............................. $ 5,086,992 $ 2,200,006 3,486,516
=========== ===========
Accretion and dividends associated with
preferred stock and junior convertible
note......................................... (3,395,507)
-----------
Net income available to common stockholders.... $ 91,009
===========
Per common share:
Basic:
Income (loss) from operations............. $ 11,652.39
Loss from discontinued operations......... (440.23)
Gain on sale of discontinued operations... 7,285.99
-----------
Net income (loss) available to common
stockholders................................. $ 18,498.15 $ 8,000.02 $ 0.01
=========== =========== ===========
Weighted average shares outstanding:
Basic........................................ 275 275 8,361,078
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-23
ORIUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ˇ Enlarge/Download Table
CHANNEL COMPANY
----------------------- --------------
YEARS ENDED
DECEMBER 31, YEAR ENDED
----------------------- DECEMBER 31,
1996 1997 1998
---------- ---------- --------------
Increase (Decrease) in cash and equivalents from:
Operating Activities:
Net Income................................................ $5,086,992 $2,200,006 $ 3,486,516
Adjustments to reconcile net cash provided by (used in)
operating activities:
Provision for uncollectible accounts.................... -- 14,047 405,284
Depreciation and amortization........................... 837,130 823,602 3,758,708
Amortization of deferred finance costs.................. -- -- 166,919
Loss (gain) on disposal of assets....................... (3,032,742) (13,705) 53,150
Deferred income tax benefit............................. 133,420 (220,276) (307,439)
Changes in assets and liabilities:
Accounts receivable and unbilled revenues............... (1,246,198) (2,982,762) (11,151,317)
Inventories............................................. -- -- (9,542,743)
Income tax receivable................................... 196,406 -- --
Other current assets.................................... (69,602) 86,050 690,921
Other noncurrent assets................................. 958,917 9,623 (576,584)
Accounts payable and accrued liabilities................ 303,055 (112,602) 2,318,033
Deferred revenues....................................... -- -- 7,291,398
Other liabilities....................................... 2,216,568 (2,185,326) (641,807)
---------- ---------- ------------
Net cash provided by (used in) operating activities....... 5,383,946 (2,381,343) (4,048,961)
---------- ---------- ------------
INVESTING ACTIVITIES:
Capital expenditures.................................... (2,475,748) (211,947) (3,923,200)
Proceeds from sale of assets............................ 3,214,590 57,542 75,510
Purchases of subsidiaries, net of cash acquired,
including payment to accounting acquirer.............. -- -- (40,934,547)
Collection on notes receivable stockholder.............. 982,823 548,614 --
---------- ---------- ------------
Net cash provided by (used in) investing activities....... 1,721,665 394,209 (44,782,237)
---------- ---------- ------------
FINANCING ACTIVITIES:
Borrowings on credit facility........................... -- -- 61,306,677
Principal payments on notes payable and credit
facility.............................................. (2,911,878) -- (13,434,749)
Amounts paid for deferred financing costs............... -- -- (1,567,446)
Distributions paid to stockholder....................... -- (2,593,439) (6,117)
Proceeds from issuance of convertible preferred stock,
net of costs.......................................... -- -- 4,438,500
---------- ---------- ------------
Net cash provided by (used in) financing activities....... (2,911,878) (2,593,439) 50,736,865
---------- ---------- ------------
NET CASH INFLOW (OUTFLOW) FROM ALL ACTIVITIES............. 4,193,733 (4,580,573) 1,905,667
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 733,476 4,927,209 346,636
---------- ---------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $4,927,209 $ 346,636 $ 2,252,303
========== ========== ============
Cash paid for:
Interest................................................ $ 97,525 $ 19,858 $ 2,306,701
Income taxes............................................ $ 26,356 $2,185,326 $ 2,769,243
The accompanying notes are an integral part of the consolidated financial
statements
F-24
ORIUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ˇ Enlarge/Download Table
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ -------- ---------- ------ ---------- ---------- -------------
Balance at December 31,
1996.................. 275 $ 27,500 -- $ -- $ 386 $8,512,674 $ 8,540,560
Net Income.............. 2,200,006 2,200,006
Distributions........... (2,593,439) (2,593,439)
----- -------- ---------- ---- ---------- ---------- -----------
Balance at December 31,
1997.................. 275 27,500 -- -- 386 8,119,241 8,147,127
Distributions........... (166,787) (166,787)
Shares exchanged........ (275) (27,500) 2,779,387 27 27,473 -- --
Cash payment to
accounting acquirer... (4,440,635) (7,646,365) (12,087,000)
Common stock issued for
acquisitions.......... 8,117,764 78 11,840,521 11,840,599
Accretion associated
with junior
subordinated
convertible note...... (493,358) (493,358)
Accretion associated
with convertible
preferred stock,
including dividends... (2,902,149) (2,902,149)
Net income.............. 3,486,516 3,486,516
----- -------- ---------- ---- ---------- ---------- -----------
Balance at December 31,
1998.................. -- $ -- 10,897,151 $105 $7,427,745 $ 397,098 $ 7,824,948
===== ======== ========== ==== ========== ========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
F-25
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMMENCEMENT OF OPERATIONS
Orius Corp. was formed in January 1999 by North American Tel-Com Group,
Inc. (NATG or the Company). NATG was formed in 1997 to create a nationwide
provider of comprehensive telecom infrastructure services. As further discussed
in Note 17, as a result of a merger in February 1999, NATG became an indirect
subsidiary of Orius. NATG had no substantive operations prior to March 31, 1998
and these financial statements reflect the NATG operations from March 31, 1998
through December 31, 1998, NATG's fiscal year end.
On March 31, 1998, NATG and several other parties simultaneously entered
into a series of transactions and agreements including: a new stockholders'
agreement (Note 9); preferred stock coupled with a redemption agreement (Notes 7
and 8) and a junior subordinated convertible note (Note 6) were issued to HIG
Cable, Inc. (HIG), a credit facility and loan agreement was completed (Note 6);
and four stock exchange agreements were completed (Note 3). The result of these
transactions was the commencement of NATG's operations. NATG had no substantive
operations from its inception in August 1997 to March 31, 1998 and these
financial statements reflect the NATG operations from March 31, 1998 through
December 31, 1998. As further discussed in Note 17, Orius was reorganized in
early 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature Of Business -- The Company's operations consist primarily of
installation, design, engineering, and maintenance services for the telecom
industry in the United States.
Principles Of Consolidation -- The consolidated financial statements
include NATG Corp. and its subsidiaries, all of which are currently wholly owned
subsidiaries of NATG. All material intercompany accounts and transactions have
been eliminated. The Company operates and reports financial results on a fiscal
year of 52 or 53 weeks ending on the Saturday closest to December 31.
Accordingly, fiscal 1998 ended on December 31, 1998.
Use Of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates and such differences may be material to the financial statements.
Estimates are used in the Company's revenue recognition of work-in-process,
allowance for doubtful accounts, depreciation and amortization, and in the
estimated lives of assets including intangibles.
Earnings Per Share -- Diluted earnings per share have not been presented
because inclusion of the effects of the Company's convertible securities and
options granted to management are anti-dilutive individually and in the
aggregate.
Revenues -- Orius Corp.'s revenue consists principally of unit contracts.
Consequently, Orius Corp. accounts for revenue and related costs using the
units-of-delivery revenue recognition method. Revenue is recognized as the
related units are completed, and costs allocable to the delivered units are
recognized as the cost of earned revenue. Unbilled revenues consist of
work-in-process on contracts based on management's estimate of work performed,
but not billed. All costs associated with unbilled revenues are recorded as
expenses in the same period as the unbilled revenue. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
accrued. Deferred revenues consist principally of
F-26
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prepayments by customers for the cost of material and services to be provided
and are recognized as revenues as the related material is used or services are
provided.
Additionally, Orius Corp. recognizes revenues from short term contracts
with duration under two weeks under the completed contract method. Billings and
costs are accumulated on the balance sheet, and no profit or income is recorded
before completion or substantial completion of the work.
Cash And Cash Equivalents -- Cash and cash equivalents include all highly
liquid investments with a maturity of three months or less at the time of
purchase. For purposes of the consolidated statements of cash flows, the Company
considers these to be cash equivalents.
Property And Equipment -- Property and equipment is stated at cost.
Depreciation and amortization is computed over the estimated useful life of the
assets utilizing the straight-line method. The estimated useful service lives of
the assets are: buildings -- 20-30 years; leasehold improvements -- the term of
the respective lease or the estimated useful life of the improvements, whichever
is shorter; vehicles -- 3-7 years; equipment and machinery -- 3-7 years;
computer software and hardware -- 3-5 years; and furniture and fixtures -- 5-7
years. Maintenance and repairs are expensed as incurred; expenditures that
enhance the value of the property or extend its useful life are capitalized.
When assets are sold or retired, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss is included in
income.
Inventory -- Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market. Inventory consists of items purchased for resale at
cost based on terms of customer contracts. Accordingly, there is no cost other
than the purchase price of the items purchased included in the carrying value.
Fair Value Of Financial Instruments -- The fair value of the Company's
financial instruments approximate the carrying values.
Intangible Assets -- The excess of the purchase price over the fair market
value of the tangible net assets of acquired businesses (goodwill) is amortized
on a straight-line basis over estimated useful lives of 10 to 25 years. The
appropriateness of the carrying value of goodwill is reviewed periodically by
the Company at a subsidiary level. An impairment loss for the difference between
fair value and recorded value is recognized when the projected undiscounted
future cash flows are less than the carrying value of goodwill. No impairment
loss has been recognized in the period presented. Amortization expense was
$766,953 for the fiscal period ending December 31, 1998. The intangible assets
at December 31, 1998 are net of accumulated amortization of $766,953.
Included in other assets are intangible assets for deferred financing
costs. Deferred financing costs of $1,567,446 are being amortized over the term
of the related debt facility. For the period ended December 31, 1998, $166,919
of amortization expense related to these costs has been included in interest
expense.
Income Taxes -- The Company and its subsidiaries file a consolidated
federal income tax return. Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
Stock Option Plans -- In October 1995, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock Based Compensation," which was effective for the Company
beginning August 1, 1996. SFAS No. 123 requires expanded disclosures of stock
based compensation arrange-
F-27
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ments with employees, and encourages, but does not require, compensation cost to
be measured based on the fair value of the equity instrument awarded. Under SFAS
No. 123, companies are permitted, however, to continue to apply Accounting
Principle Board (APB) Opinion No. 25, which recognizes compensation based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock based compensation awards to employees,
and will disclose in the annual financial statements the required pro forma
effect on net income and earnings per share. See Note 12.
Recently Issued Accounting Pronouncements -- In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes standards for the accounting and reporting of derivative
instruments, including certain derivative instruments imbedded in other
contracts, (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as other assets
or liabilities in the statement of financial position, and measure those
instruments at fair value. This statement is effective for financial statements
for periods beginning after December 15, 1999.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 in 1998 has had
no impact to date as the Company has not had any items of other comprehensive
income in any period presented.
3. ACQUISITIONS
On March 31, 1998, Channel Communications, Inc. (Channel), Cablemasters
Corp., Excel Cable Construction, Inc. and Mich-Com Cable Services Incorporated
simultaneously entered into stock exchange agreements with the Company. Common
stock of each of these companies was exchanged for cash and common stock of the
Company. In accordance with APB Opinion No. 16, Channel was deemed to be the
accounting acquirer of the other companies involved in the simultaneous business
combination. This designation was made because after giving effect to the
transactions on March 31, 1998, Channel held the largest percentage of voting
common stock and was the largest entity involved in the simultaneous business
combination. Accordingly, the cash paid of $12,087,000 to former Channel
stockholders was accounted for as a reduction of Channel's March 31 equity and
no value was ascribed to the Company shares of common stock received by the
former stockholders.
F-28
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Seven companies, including the companies involved in the simultaneous
business combination other than Channel, were acquired during 1998 for total
consideration of $39,583,400 plus transaction related expenses of $1,209,350.
Cash paid for the seven acquisitions totaled $27,638,200 (net of cash acquired
of $3,025,200) and the value of common stock issued, including the value of the
shares held by Orius management, totaled $11,840,600. Additionally,
approximately $7.5 million of debt was assumed. Summarized below are the seven
acquisitions:
ˇ Enlarge/Download Table
ACQUISITION PRIMARY PRINCIPAL
COMPANY ACQUIRED DATE LOCATION CUSTOMERS
---------------- ----------- -------------- ------------------
Cablemasters Corp........................... 3/31/98 Pennsylvania Cable TV
Excel Cable Construction, Inc............... 3/31/98 Florida Cable TV
Mich-Com Cable Services Incorporated........ 3/31/98 Florida Cable TV
U.S. Cable, Inc............................. 6/30/98 Missouri Cable TV
CATV Subscriber Services, Inc............... 8/31/98 North Carolina Cable TV
State Wide CATV, Inc........................ 8/31/98 Florida Cable TV
Burn-Techs, Inc............................. 8/31/98 Florida Telecommunications
All the acquisitions were accounted for as purchases and were included in
the results of operations from the date of acquisition. The goodwill associated
with all the acquisitions during 1998 totaled $27,627,465.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions had been
completed on January 1, 1998. These pro forma results give effect to increased
interest expense for acquisition debt and amortization of related goodwill.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which would have been
achieved had these acquisitions been completed on January 1, 1998 nor are the
results indicative of the company's future results of operations (in thousands).
ˇ Download Table
Revenues.................................................... $123,338
Net income.................................................. $ 5,924
Net income available to common stock per share.............. $ 0.23
4. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1998 consist of the following:
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DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
Contract billings........................................... $4,067,489 $23,673,522
Retainage.............................................. 301,569 2,818,579
---------- -----------
4,369,058 26,492,101
Less allowance for doubtful accounts................... 20,000 338,699
---------- -----------
Accounts receivable, net.................................. $4,349,058 $26,153,402
========== ===========
The balances billed but not paid by customers pursuant to retainage
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts, the majority of the retention balances at December 31, 1998 are
expected to be collected within the next twelve months.
F-29
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
The accompanying consolidated balance sheet includes the following property
and equipment at December 31, 1998:
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DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
Land, building and leasehold improvements................... $ 510,217 $ 616,258
Vehicles.................................................. 3,010,131 12,957,646
Equipment and machinery................................... 3,331,415 7,579,213
Office equipment, including furniture and fixtures, and
computer equipment and software........................ -- 770,931
---------- -----------
6,851,763 21,924,048
Less accumulated depreciation............................. 3,548,374 6,449,977
---------- -----------
Property and equipment, net............................... $3,303,389 $15,474,071
========== ===========
Certain subsidiaries of the Company have entered into lease arrangements
accounted for as capitalized leases. The carrying value of capital leases at
December 31, 1998 was $474,326, net of accumulated depreciation of $76,628.
Assets under capital leases are included as a component of vehicles, and
equipment and machinery. Maintenance and repairs of property and equipment
amounted to $1,204,600 for the period ended December 31, 1998.
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt outstanding at December 31, 1998 is detailed by type of
borrowing as follows:
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DECEMBER 31,
1998
------------
Bank credit facility:
Revolving credit facility, maturing on April 1, 2005;
interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... $ 6,750,000
Term loan, amortizing with final payment due April 1,
2003; interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... 27,625,000
Term loan, amortizing with final payment due April 1,
2005; interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.375% or
0.875%, respectively................................... 18,950,000
Capital lease obligations................................... 402,819
Equipment loans............................................. 472,284
Junior subordinated convertible note, due April 15, 2005,
interest rate of 9%....................................... 1,063,750
-----------
Total debt and capital lease obligations.......... 55,263,853
Less current portion........................................ 12,614,268
-----------
Long-term debt.............................................. $42,649,585
===========
BANK CREDIT FACILITY
On March 31, 1998, the Company entered into a credit facility with PNC
Bank, National Bank (PNC) as Bank and agent (the Credit Agreement), to provide
for two term notes totaling $19,000,000 and a revolving credit facility,
including a letter of credit subfacility, in the amount
F-30
ORIUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $10,000,000. In conjunction with the purchase of U.S. Cable, Inc., the Credit
Agreement was amended on June 30, 1998, increasing the revolving credit note to
$12,000,000 and the term notes to $33,000,000. In conjunction with the
acquisition of CATV Subscriber Services, Inc., State Wide CATV, Inc., and
Burn-Techs, Inc., a second amendment to the credit facility occur
