Exhibit 99.2
Q3 CONTRACTING, INC.
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
Q3 CONTRACTING, INC.
TABLE OF CONTENTS
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Independent Auditors’ Report | 1 |
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Financial Statements: |
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Combined Balance Sheets | 2 |
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Combined Statements of Income | 4 |
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Combined Statements of Changes in Shareholders’ and Members’ Equity | 5 |
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Combined Statements of Cash Flows | 6 |
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Notes to Combined Financial Statements | 7 |
To the Shareholders and Members
Q3 Contracting, Inc.
Little Canada, Minnesota
We have audited the accompanying combined balance sheets of Q3 Contracting, Inc. (formerly known as Quality Restoration Services, Inc.) and Quality Real Estate Partners, LLC (collectively “the Company”) as of December 31, 2011 and 2010, and the related combined statements of income, shareholders’ and members’ equity, and cash flows for the years then ended. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Q3 Contracting, Inc. and Quality Real Estate Partners, LLC as of December 31, 2011 and 2010 and the results of their combined operations and their combined cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moquist Thorvilson Kaufmann & Pieper LLC |
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Edina, Minnesota |
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March 20, 2012 |
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Q3 CONTRACTING, INC.
COMBINED BALANCE SHEETS
December 31, 2011 and 2010
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| 2011 |
| 2010 |
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ASSETS |
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Current assets: |
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Cash |
| $ | 6,007,215 |
| $ | 119,034 |
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Accounts receivable - less allowance for doubtful accounts of approximately $40,000 and $36,000 in 2011 and 2010, respectively |
| 6,306,795 |
| 5,987,963 |
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Unbilled receivables |
| 1,071,089 |
| 1,247,088 |
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Other receivables |
| 42,947 |
| 231,663 |
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Note receivable - related party |
| 300,000 |
| 35,000 |
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Prepaid expenses |
| 221,430 |
| 42,738 |
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Employee and shareholder advances |
| 122,911 |
| 5,852 |
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Total current assets |
| 14,072,387 |
| 7,669,338 |
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Property and equipment, net |
| 8,069,378 |
| 7,512,807 |
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Other assets: |
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Intangible assets, net |
| 262,150 |
| 153,670 |
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Security deposits |
| 19,300 |
| 25,290 |
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Investment |
| 15,000 |
| 15,000 |
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Total other assets |
| 296,450 |
| 193,960 |
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Total assets |
| $ | 22,438,215 |
| $ | 15,376,105 |
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See notes to combined financial statements.
Q3 CONTRACTING, INC.
COMBINED BALANCE SHEETS
December 31, 2011 and 2010
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| 2011 |
| 2010 |
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LIABILITIES AND SHAREHOLDERS’ AND MEMBERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 395,630 |
| $ | 1,415,368 |
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Current portion of capital lease obligations |
| 12,028 |
| 46,782 |
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Accounts payable |
| 1,039,599 |
| 704,643 |
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Accrued liabilities - wages and vacation |
| 2,398,866 |
| 2,054,896 |
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Accrued liabilities - other |
| 1,018,080 |
| 1,149,568 |
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Total current liabilities |
| 4,864,203 |
| 5,371,257 |
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Long-term liabilities: |
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Revolving credit facility |
| — |
| 156,195 |
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Capital lease obligations, less current portion |
| — |
| 12,028 |
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Notes payable - related party |
| 725,000 |
| 725,000 |
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Long-term debt, less current portion |
| 1,535,442 |
| 143,052 |
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Total long-term liabilities |
| 2,260,442 |
| 1,036,275 |
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Total liabilities |
| 7,124,645 |
| 6,407,532 |
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Shareholders’ and members’ equity: |
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Voting stock, par value $.01; 20,000 shares authorized; 297 shares issued and outstanding |
| 3 |
| 3 |
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Nonvoting stock, par value $.01; 180,000 shares authorized; 12,142 shares issued and outstanding |
| 121 |
| 121 |
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Additional paid-in capital |
| 559,873 |
| 559,873 |
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Retained earnings |
| 13,471,422 |
| 7,255,691 |
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Members’ equity, 653 units issued and outstanding |
| 1,282,151 |
| 1,152,885 |
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Total shareholders’ and members’ equity |
| 15,313,570 |
| 8,968,573 |
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Total liabilities and shareholders’ and members’ equity |
| $ | 22,438,215 |
| $ | 15,376,105 |
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See notes to combined financial statements.
Q3 CONTRACTING, INC.
COMBINED STATEMENTS OF INCOME
Years Ended December 31, 2011 and 2010
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| 2011 |
| 2010 |
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| Percent |
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| Percent |
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| Amount |
| of sales |
| Amount |
| of sales |
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Sales |
| $ | 83,824,198 |
| 100.0 | % | $ | 66,452,001 |
| 100.0 | % |
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Cost of sales |
| 67,490,407 |
| 80.5 |
| 54,481,169 |
| 82.0 |
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Gross margin |
| 16,333,791 |
| 19.5 |
| 11,970,832 |
| 18.0 |
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Operating expenses |
| 7,168,056 |
| 8.6 |
| 6,180,452 |
| 9.3 |
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Operating income |
| 9,165,735 |
| 10.9 |
| 5,790,380 |
| 8.7 |
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Other income (expense): |
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Other income |
| 52,591 |
| 0.1 |
| 17,717 |
| — |
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Interest expense |
| (140,824 | ) | (0.2 | ) | (216,405 | ) | (0.3 | ) | ||
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Total other expense |
| (88,233 | ) | (0.1 | ) | (198,688 | ) | (0.3 | ) | ||
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Net income |
| $ | 9,077,502 |
| 10.8 | % | $ | 5,591,692 |
| 8.4 | % |
See notes to combined financial statements.
Q3 CONTRACTING, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS’ AND MEMBERS’ EQUITY
Years Ended December 31, 2011 and 2010
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| Q3 Contracting, Inc. |
| Quality Real Estate |
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| Voting stock |
| Nonvoting stock |
| Additional |
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| Number |
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| Number |
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| Retained |
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| Members’ |
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| of shares |
| Amount |
| of shares |
| Amount |
| capital |
| earnings |
| Units |
| Equity |
| Total |
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Balances, January 1, 2010 |
| 297 |
| 3 |
| 12,142 |
| $ | 121 |
| $ | 559,873 |
| $ | 5,065,863 |
| 653 |
| $ | 1,010,812 |
| $ | 6,636,672 |
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Distributions |
| — |
| — |
| — |
| — |
| — |
| (3,259,791 | ) | — |
| — |
| (3,259,791 | ) | ||||||
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Net income |
| — |
| — |
| — |
| — |
| — |
| 5,449,619 |
| — |
| 142,073 |
| 5,591,692 |
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Balances, December 31, 2010 |
| 297 |
| 3 |
| 12,142 |
| 121 |
| 559,873 |
| 7,255,691 |
| 653 |
| 1,152,885 |
| 8,968,573 |
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Distributions |
| — |
| — |
| — |
| — |
| — |
| (2,732,505 | ) | — |
| — |
| (2,732,505 | ) | ||||||
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Net income |
| — |
| — |
| — |
| — |
| — |
| 8,948,236 |
| — |
| 129,266 |
| 9,077,502 |
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Balances, December 31, 2011 |
| 297 |
| $ | 3 |
| 12,142 |
| $ | 121 |
| $ | 559,873 |
| $ | 13,471,422 |
| 653 |
| $ | 1,282,151 |
| $ | 15,313,570 |
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See notes to combined financial statements.
Q3 CONTRACTING, INC.
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2011 and 2010
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| 2011 |
| 2010 |
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Cash flows from operating activities: |
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Net income |
| $ | 9,077,502 |
| $ | 5,591,692 |
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Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation |
| 1,825,471 |
| 1,556,838 |
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Amortization |
| 56,920 |
| 57,171 |
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Provision for doubtful accounts |
| 4,000 |
| 9,228 |
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Gain on sale of property and equipment |
| (122,299 | ) | (81,339 | ) | ||
Changes in operating assets and liabilities: |
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Accounts receivable |
| (322,832 | ) | (36,708 | ) | ||
Unbilled receivables |
| 175,999 |
| (1,128,470 | ) | ||
Other receivables |
| 188,716 |
| (266,663 | ) | ||
Prepaid expenses |
| (178,692 | ) | 118,516 |
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Employee and shareholder advances |
| (117,059 | ) | 4,131 |
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Other assets |
| (159,410 | ) | (127,601 | ) | ||
Accounts payable |
| 334,956 |
| 444,797 |
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Accrued liabilities - wages and vacation |
| 343,970 |
| (194,294 | ) | ||
Accrued liabilities - other |
| (131,488 | ) | 811,413 |
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Net cash flows provided by operating activities |
| 10,975,754 |
| 6,758,711 |
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Cash flows from investing activities: |
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Advances on note receivable - related party |
| (265,000 | ) | (35,000 | ) | ||
Proceeds from sale of property and equipment |
| 132,563 |
| 148,180 |
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Purchases of property and equipment |
| (2,392,306 | ) | (2,298,561 | ) | ||
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Net cash flows used in investing activities |
| (2,524,743 | ) | (2,185,381 | ) | ||
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Cash flows from financing activities: |
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Principal payments on long-term debt |
| (224,123 | ) | (517,054 | ) | ||
Proceeds from issuance of long-term debt |
| 596,775 |
| — |
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Net repayments on revolving credit facility |
| (156,195 | ) | (573,681 | ) | ||
Repayments on capital lease obligations |
| (46,782 | ) | (96,170 | ) | ||
Payments on redemption of common stock and members’ units |
| — |
| (75,000 | ) | ||
Distributions |
| (2,732,505 | ) | (3,259,791 | ) | ||
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Net cash flows used in financing activities |
| (2,562,830 | ) | (4,521,696 | ) | ||
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Net increase in cash |
| 5,888,181 |
| 51,634 |
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Cash, beginning of year |
| 119,034 |
| 67,400 |
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Cash, end of year |
| $ | 6,007,215 |
| $ | 119,034 |
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See notes to combined financial statements.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
Nature of Business
On January 1, 2010, Quality Restoration Services, Inc. merged with Quality Underground Services, Inc. and changed its name to Q3 Contracting, Inc. and Utility Resources, Inc. was liquidated.
Q3 Contracting, Inc. (Q3) is a Minnesota S-corporation that provides surface restoration services, including asphalt, concrete, sod, seeding and construction warning signs primarily in the Upper Midwest region of the United States.
Quality Real Estate Partners, LLC (QREP), owns the land and buildings which are used in the Company’s operations in Little Canada, Minnesota.
Basis of Presentation
Combination Policy
Due to banking requirements, the financial statements of Q3 are combined with the financial statements of its commonly owned entity, QREP (collectively referred to as the “Company”). Significant intercompany transactions between Q3 and QREP have been eliminated.
Use of Estimates
The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation allowances for accounts receivable, various accrued liabilities and accounting for amortization and depreciation. Actual results could vary from the estimates that were used.
Concentrations of Risk
Cash Deposits in Excess of Federally Insured Limits
The Company maintains cash balances at one financial institution. The accounts are insured by the Federal Deposit Insurance Corporation up to varying amounts. The Company did not have any uninsured cash balances at December 31, 2011.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of accounts receivable. The credit risk is largely based on the fact that a large portion of its accounts receivable is made up of companies in the utility industry throughout the Upper Midwest of the United States.
Major Customer
The Company had two customers in 2011 that comprised approximately 75% of its sales and 71% of its accounts receivable at December 31, 2011. In 2010, the Company had one customer that comprised approximately 59% of its sales and 57% of its accounts receivable at December 31, 2010.
Labor Force
A majority of the Company’s labor force is covered by collective bargaining agreements which expire at various times beginning in March 2012 through May 2015.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The Company determines the allowance based on historical write-off experience. Past due balances over 90 days are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Investments
Investments in businesses that are not controlled by the Company, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Equipment Financing
The Company finances equipment from time to time on an interest free basis. The Company imputes interest on the financed equipment and amortizes the interest over the life of the loan if the face amount of the loan does not approximate the cash sales price of the financed equipment.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method. Estimated useful lives of the assets are:
Buildings and leasehold improvements |
| 39 years |
Furniture, computers and fixtures |
| 3-8 years |
Equipment and vehicles |
| 5-8 years |
Costs related to maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are removed from the related accounts and any resulting gain or loss is charged or credited to operations.
Intangible Assets
Amounts paid for a non-compete agreement have been recorded as an intangible asset and are being amortized on a straight-line basis over the term of the non-compete agreement.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets, such as property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets, to be held and used, is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds the estimated fair value of the asset.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Revenue Recognition
The Company generally has two types of arrangements with customers based on a unit of measurement and an agreed-upon price per unit (a unit consists of hours, feet or yards).
Defined Arrangements
Under a defined arrangement, the Company and the customer agree on a defined scope of work at an agreed-upon total project fee. The pricing under this arrangement is based on a specific number of units at a specific unit price. Revenues are billed and recognized as work progresses as there are no significant continuing obligations to the Company after the units are completed.
If, however, the units delivered exceed the originally agreed-to number, such excess is billed outside the scope of the agreed-upon fee at the same price as in the original contract. The Company’s policy is to not recognize revenue on additional billings should there be indications that collectability is not reasonably assured.
Open Arrangements
Open arrangements are similar to defined arrangements except that there is no defined number of units, rather the contract stipulates a specified price and the customer is billed based on number of units delivered. Revenues are billed and recognized as each unit is completed as there are no significant continuing obligations to the Company after the units are completed.
Unbilled Receivables
Unbilled receivables represent work that has been completed but not invoiced. Unbilled receivables were $1,071,089 and $1,247,088 at December 31, 2011 and 2010, respectively.
Advertising
Advertising costs are expensed when incurred and totaled $66,620 and $41,220 in 2011 and 2010, respectively.
Income Taxes
The shareholders of Q3 have elected to be treated as an S-corporation for tax purposes. The members of QREP have elected to be treated as a partnership for tax purposes. Under the provisions of the Internal Revenue Code, profits and losses are passed directly to the shareholders/members of these entities for inclusion in their personal returns. Accordingly, no provision or liability for income taxes has been included in these financial statements.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
The Company accounts for income taxes pursuant to Financial Accounting Standards Board guidance. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves or related accruals for interest and penalties have been recorded at December 31, 2011 and 2010. In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of income. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2008.
2 INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
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| 2011 |
| 2010 |
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Non-compete agreement (See Note 6) |
| $ | 400,000 |
| $ | 234,600 |
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Less accumulated amortization |
| (137,850 | ) | (80,930 | ) | ||
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Intangible asset, net |
| $ | 262,150 |
| $ | 153,670 |
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Amortization expense for the years ending December 31, 2011 and 2010 was $56,920 and $57,171, respectively.
Estimated amortization expense for the next five years is as follows:
Years ending December 31, |
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2012 |
| $ | 57,172 |
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2013 |
| 57,172 |
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2014 |
| 57,172 |
| |
2015 |
| 57,172 |
| |
2016 |
| 33,462 |
| |
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| |
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| $ | 262,150 |
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Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
3 PROPERTY AND EQUIPMENT
Property and equipment is as follows at December 31:
|
| 2011 |
| 2010 |
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Equipment |
| $ | 10,456,079 |
| $ | 9,348,845 |
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Vehicles |
| 4,718,380 |
| 4,041,740 |
| ||
Computers |
| 1,134,570 |
| 1,081,229 |
| ||
Furniture |
| 484,532 |
| 435,631 |
| ||
Building and leasehold improvements |
| 1,742,765 |
| 1,727,247 |
| ||
Land |
| 1,344,451 |
| 1,344,451 |
| ||
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|
| 19,880,777 |
| 17,979,143 |
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Less accumulated depreciation |
| (11,811,399 | ) | (10,466,336 | ) | ||
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Property and equipment, net |
| $ | 8,069,378 |
| $ | 7,512,807 |
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Depreciation expense was $1,825,471 and $1,556,838 for the year ended December 31, 2011 and 2010, respectively.
4 ACCRUED LIABILITIES
Accrued liabilities are as follows at December 31:
|
| 2011 |
| 2010 |
| ||
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Bonuses |
| $ | 898,807 |
| $ | 578,000 |
|
Union benefits |
| 688,386 |
| 721,247 |
| ||
Wages |
| 445,961 |
| 424,772 |
| ||
Payroll taxes and withholdings |
| 246,562 |
| 235,106 |
| ||
Vacation |
| 119,150 |
| 95,771 |
| ||
|
|
|
|
|
| ||
Total accrued liabilities - wages and vacation |
| $ | 2,398,866 |
| $ | 2,054,896 |
|
|
|
|
|
|
| ||
Workers’ compensation |
| $ | 404,373 |
| $ | 680,288 |
|
Other accrued liabilities |
| 545,207 |
| 469,280 |
| ||
Safety incentive accrual |
| 68,500 |
| — |
| ||
|
|
|
|
|
| ||
Total accrued liabilities - other |
| $ | 1,018,080 |
| $ | 1,149,568 |
|
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
5 DEBT
In October 2006, the Company entered into a Credit Agreement with a bank that provides for three loan commitments: Revolving Credit Facility, Equipment Note Facility, and a Real Estate Loan Facility.
The Revolving Credit Facility expires in April 2013 and allows for borrowings of up to $7,000,000. Borrowings under the Revolving Credit Facility are limited by a borrowing base formula dependent upon levels of eligible receivables and equipment reduced by outstanding borrowings and letters of credit. The monthly interest for the Revolving Credit Facility is based on the 30-day LIBOR Rate plus 2.5% (2.77% at December 31, 2011) and has no floor.
The Equipment Note Facility allows for borrowing of up to $5,000,000 for the purchase of eligible equipment through August 2012. The principal balance of each Equipment Note is due and payable in sixty equal payments starting on the last day of each month following the first day an Equipment Note is originated. The Equipment Note Facility bears interest at the 30-day LIBOR Rate plus 2.5% (2.77% at December 31, 2011) and has no floor.
The Real Estate Loan Facility provides for a $1,905,000 loan. The Real Estate Loan matured in October 2011 and was extended through October 2016. The principal amounts of the installments are based on a 15 year amortization schedule. The interest rate for the Real Estate Loan Facility is based on the 30-day LIBOR Rate plus 2.5% (2.77% at December 31, 2011) and has no floor.
A commitment fee of 0.125% per annum will be charged and payable quarterly on the unused commitment under the Revolving Credit Agreement. All debt under the Credit Agreement is secured by the personal guarantees of two of the shareholders/members and a security interest in substantially all of the assets of the Company. Additionally, as further security on the Real Estate Loan, QREP executed a mortgage granting the bank a first priority lien on the real property known as the land and buildings located in Little Canada, Minnesota.
The Credit Agreement contains various affirmative and negative financial covenants including: cash flow coverage ratio, maximum leverage ratio and minimum tangible net worth. As of December 31, 2011, the Company was in compliance with all financial covenants.
At December 31, 2011, the total outstanding balance on the Revolving Credit Facility was $0, while the availability as calculated under the Credit Agreement’s provision was $5,927,000.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Below is a summary of the term loans outstanding at December 31:
|
| 2011 |
| 2010 |
| ||
|
|
|
|
|
| ||
Real Estate Loan Facility with a bank requiring monthly payments of $10,583 including interest. Remaining principal and interest are due at maturity. |
| $ | 1,223,087 |
| $ | 1,339,504 |
|
|
|
|
|
|
| ||
Unsecured notes payable to a shareholder, maturing on July 15, 2018, payable in 27 quarterly installments beginning on January 15, 2012 in an amount necessary to fully amortize the remaining principal balance plus any unpaid accrued interest. Interest is accrued at the prime rate (3.25% at December 31, 2011) and payments are adjusted annually on January 15th. |
| 725,000 |
| 725,000 |
| ||
|
|
|
|
|
| ||
Unsecured note payable to former shareholder, maturing in October 2013, payable in monthly installments of $3,024 including interest at the Prime rate (3.25% at December 31, 2011). Payments are adjusted annually in October for interest. |
| 89,756 |
| 122,550 |
| ||
|
|
|
|
|
| ||
Notes payable to Kubota, maturing at various dates through April 2013, payable in monthly at an aggregate of $3,588 with no interest and secured by equipment. |
| 53,296 |
| 96,366 |
| ||
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
|
| 2011 |
| 2010 |
| ||
|
|
|
|
|
| ||
Term loan with a bank, maturing in October 2014, requiring monthly payments of $17,271 including interest of 2.68% per annum, secured by equipment. |
| 564,933 |
| — |
| ||
|
|
|
|
|
| ||
|
| 2,656,072 |
| 2,283,420 |
| ||
Less current portion |
| (395,630 | ) | (1,415,368 | ) | ||
|
|
|
|
|
| ||
Long-term portion |
| $ | 2,260,442 |
| $ | 868,052 |
|
Future maturities of long-term debt are as follows:
Years ending December 31, |
|
|
| |
|
|
|
| |
2012 |
| $ | 395,630 |
|
2013 |
| 475,728 |
| |
2014 |
| 442,124 |
| |
2015 |
| 254,573 |
| |
2016 |
| 846,866 |
| |
Thereafter |
| 241,151 |
| |
|
|
|
| |
Total |
| $ | 2,656,072 |
|
6 COMMITMENTS AND CONTINGENCIES
Captive Self Insurance Arrangement
From April 2007 through March 2009, the Company participated in a captive insurance arrangement. Though the Company terminated participation in this arrangement effective March 31, 2009, the Company has exposure to any claims which may be assessed to them for claims arising from incidents while the Company was insured under the captive insurance arrangement, through March 31, 2017. There were no assessments in 2011 and 2010.
As a requirement of the captive insurance arrangement, the Company has a $1,073,000 standby Letter of Credit available through March 31, 2012. The beneficiary of the Letter of Credit is Royal Bank of Canada, Miami Agency.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Operating Leases
The Company has various leases for storage and office space with monthly payments ranging from $525 to $8,000 plus a proportionate share of real estate taxes, maintenance and insurance costs. The leases have expiration dates ranging from March 2012 to December 2014. The Company also has various operating leases for equipment with monthly payments ranging from $203 to $40,612. The leases have expiration dates ranging from May 2012 to November 2016.
Future minimum lease payments are as follows for the years ending December 31:
|
| Real estate |
| Equipment |
| Total |
| |||
|
|
|
|
|
|
|
| |||
2012 |
| $ | 329,328 |
| $ | 5,215,250 |
| $ | 5,544,578 |
|
2013 |
| 195,305 |
| 4,788,635 |
| 4,983,940 |
| |||
2014 |
| 96,000 |
| 3,422,666 |
| 3,518,666 |
| |||
2015 |
| — |
| 1,967,202 |
| 1,967,202 |
| |||
2016 |
| — |
| 659,175 |
| 659,175 |
| |||
|
|
|
|
|
|
|
| |||
Total |
| $ | 620,633 |
| $ | 16,052,928 |
| $ | 16,673,561 |
|
Rent expense was as follows for the years ended December 31:
|
| 2011 |
| 2010 |
| ||
|
|
|
|
|
| ||
Equipment |
| $ | 5,143,666 |
| $ | 3,675,204 |
|
Real estate |
| 455,569 |
| 386,282 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 5,599,235 |
| $ | 4,061,486 |
|
Capital Leases
The Company leases equipment under an agreement that is classified as a capital lease which expires in July 2012. The equipment is amortized over its estimated productive life. Amortization of the equipment under the capital lease is included in depreciation expense. Property held under the lease has a total cost of $97,016 and $277,614 and accumulated depreciation of $85,228 and $218,866 at December 31, 2011 and 2010, respectively.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Future minimum capital lease payments are as follows:
Year ending December 31, 2011: |
|
|
| |
Total minimum lease payments |
| $ | 12,138 |
|
Less amounts representing interest |
| (110 | ) | |
|
|
|
| |
Present value of capital lease obligation |
| 12,028 |
| |
Less current portion |
| (12,028 | ) | |
|
|
|
| |
Long-term portion |
| $ | — |
|
Non-Compete Agreements
During 2000, the Company entered into a shareholder stock redemption agreement. In conjunction with this agreement, the Company entered into a twenty year non-compete agreement with a former shareholder requiring annual payments of $135,000 through 2019. The amount outstanding can be prepaid at any time at a 9% discount. The Company exercised its prepayment option in August 2011 and paid the shareholder a discounted payment of $853,790. The Company expensed the entire amount in 2011, as the Company determined the likelihood of the former shareholder competing with the Company was remote.
On January 1, 2003, a second stock redemption agreement was entered into with a different former shareholder. In conjunction with this agreement, the Company entered into a ten year non-compete agreement requiring monthly payments of $5,456 beginning February 2004 and ending October 2013. The amount outstanding can be prepaid at anytime during the non-compete period at a 7% discount. The present value of the remaining obligation (based on a discount rate of 7%) at December 31, 2011 is $112,955. The Company is expensing the cost of this agreement on a monthly basis as payments are made.
On August 1, 2009, the Company entered into a third stock redemption agreement. In conjunction with this agreement, the Company entered into a seven year non-compete agreement with a third former shareholder requiring monthly payments of approximately $13,800 beginning August 15, 2009 for 29 months through December 15, 2011 totaling $400,000, which is being expensed on a straight-line basis over the seven year non-compete period. This transaction resulted in a prepaid asset with a balance of $262,150 and $153,670 at December 31, 2011 and 2010, respectively. The asset is being amortized over the remaining term of the non-compete agreement. See Note 2 for further information.
Pending and Threatened Litigation
In the ordinary course of business, the Company will from time to time be involved in threatened or actual litigation. The Company is not aware of any asserted or unasserted claims at December 31, 2011.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
7 RELATED PARTIES
Shareholder Advances
In 2008, Quality Restoration Services, now Q3 Contracting, Inc., sold equipment to a shareholder of the Company. The shareholder is paying the Company for the equipment in 48 monthly installments of $344 with no interest. At December 31, 2011, the Company has recorded the remaining balance of the shareholder advance of $1,721 in employee and shareholder advances.
The Company, from time to time, will advance funds to its shareholders. The amount due from shareholder advances was $121,190 and $0 at December 31, 2011 and 2010, respectively.
In August 2010, the Company paid $15,000 for a non-controlling interest in a company and entered into a loan agreement with the company, whereby the Company agrees to advance up to $350,000 to the affiliated company to fund its working capital needs. The $15,000 investment is being recorded under the cost method and is reported as an investment in the Company’s combined balance sheet. As of December 31, 2011 and 2010, amounts due from the affiliated company under the loan agreement were $300,000 and $35,000, respectively, and are recorded as note receivable — related party in the Company’s combined balance sheet. Amounts outstanding under the loan are subject to a variable rate of interest calculated at the greater of 5% or LIBOR plus 3%. At December 31, 2011 and 2010, the rate of interest on the outstanding balance of the loan was 5.00% and there was no unpaid interest. The loan agreement matured on July 31, 2011 but contains a provision whereby the arrangement will continue month-to-month unless terminated by either party, in which case the maturity date will be the last day of the next complete calendar month. However, as per the loan agreement, in no event shall the maturity date extend beyond July 31, 2012.
8 RETIREMENT PLANS
Profit Sharing Plan
Effective January 1, 1996, the Company adopted a 401(k) profit sharing plan and trust. All employees, excluding those governed by collective bargaining agreements, are eligible to participate as long as they meet the minimum age and service requirements defined by the plan. The plan allows for voluntary employee contributions and discretionary employer contributions. Employer contributions for 2011 and 2010 were $150,210 and $153,539, respectively.
Q3 CONTRACTING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Years Ended December 31, 2011 and 2010
Defined Benefit Retirement Plan
Union employees of the Company are covered by the union sponsored Multi-Employer Defined Benefit Industry Pension Funds. The Company contributes amounts to these pension funds in accordance with negotiated union contracts. Contribution expense was $3,434,645 and $2,659,374 for the years ended December 31, 2011 and 2010, respectively.
Provisions of the Multi-Employer Pension Plan Amendments Act of 1980 (the Act) require participating employers to assume a proportionate share of a multi-employer plan’s unfunded vested benefits in the event of withdrawal from or termination of such plan. Provisions of the Act may have the effect of increasing the level of contributions in future years. In September 2011, the Company withdrew from the Central State Pension Union and has recorded an accrued liability for this withdrawal of $85,000 at December 31, 2011.
9 SHAREHOLDERS’ AND MEMBERS’ EQUITY
Buy-Sell Agreement
In August 2009, the Board of Directors adopted a buy-sell agreement where upon death, insolvency, divorce, voluntary transfer, or termination of employment of a shareholder, the remaining shareholders have the option to purchase all or any portion of the stock owned by the shareholder at a price and on such terms as provided for in the agreement. If the remaining shareholders do not exercise their option to purchase the stock, the Company then has the option to purchase all or any portion of the stock that was not purchased by the remaining shareholders at a price and on such terms as provided for in the agreement.
10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31, 2011 and 2010 was $115,185 and $191,503, respectively.
11 RECLASSIFICATIONS
Certain amounts in the December 31, 2010 combined financial statements have been reclassified to conform to the December 31, 2011 presentation. The reclassifications had no effect on the December 31, 2010 cash flows, financial position or net income, as originally reported.
12 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through March 20, 2012, the date the combined financial statements were available to be issued, for potential recognition or disclosure in the combined financial statements.