EXHIBIT 99.2
CSI ELECTRICAL CONTRACTORS, INC.
interim Financial Statements
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
CSI ELECTRICAL CONTRACTORS, INC.
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
CONTENTS
Page
| Financial statements: | |
| | |
| Balance sheet as of June 30, 2019 (unaudited) and December 31, 2018 | 1-2 |
| | |
| Unaudited statement of income and retained earnings for the six months ended June 30, 2019 and 2018 | 3 |
| | |
| Unaudited statement of cash flows for the six months ended June 30, 2019 and 2018 | 4 |
| | |
| Unaudited notes to financial statements | 5-12 |
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| ASSETS | | (unaudited) | | | | |
| | | | | | | |
| Current assets : | | | | | | | | |
| Cash and cash equivalents | | $ | 2,801,642 | | | $ | 4,726,531 | |
| Contract receivable (notes 1 and 2) | | | 93,338,567 | | | | 92,978,576 | |
| Costs and estimated earnings in excess of billings | | | | | | | | |
| on uncompleted contracts (note 3) | | | 11,690,188 | | | | 10,996,076 | |
| Prepaid charges and other assets | | | 421,460 | | | | 601,790 | |
| Cash value of life insurance | | | 1,624,241 | | | | 1,524,695 | |
| | | | | | | | | |
| Total Current Assets | | | 109,876,098 | | | | 110,827,668 | |
| | | | | | | | | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation (note 4) | | | 3,029,273 | | | | 3,249,848 | |
| | | | | | | | | |
| | | | | | | | | |
| Other assets : | | | | | | | | |
| Note receivable (note 5) | | | 95,097 | | | | 75,526 | |
| Other | | | 148,977 | | | | 103,454 | |
| | | | | | | | | |
| Total Other Assets | | | 244,074 | | | | 178,980 | |
| | | | | | | | | |
| | | $ | 113,149,445 | | | $ | 114,256,496 | |
The accompanying notes are an integral part of these financial statement
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET – (Continued)
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | (unaudited) | | | | |
| | | | | | | |
| Current liabilities : | | | | | | | | |
| Current maturities of long term debt (note 8) | | | 31,002 | | | $ | 830,768 | |
| Bank lines of credit (note 7) | | | 16,510,000 | | | | 7,977,715 | |
| Accounts payable | | | 21,376,099 | | | | 33,505,716 | |
| Billings in excess of costs and estimated earnings on uncompleted contracts (note 3) | | | 26,896,611 | | | | 26,642,648 | |
| Accrued salaries and benefits | | | 9,574,717 | | | | 6,011,143 | |
| Compensated absences | | | 1,291,264 | | | | 988,376 | |
| Accrued union benefits | | | 3,449,040 | | | | 4,789,916 | |
| Other accruals | | | 422,238 | | | | 30,402 | |
| | | | | | | | | |
| Total Current Liabilities | | | 79,550,971 | | | | 80,776,684 | |
| | | | | | | | | |
| | | | | | | | | |
| Longs-term debt, less current maturities (note 8) | | | 103,869 | | | | 1,395,014 | |
| | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity : | | | | | | | | |
| Common stock, 8,000 shares issued and outstanding | | | 8,000 | | | | 8,000 | |
| Retained earnings | | | 33,486,605 | | | | 32,076,798 | |
| | | | | | | | | |
| Total Stockholders' Equity | | | 33,494,605 | | | | 32,084,798 | |
| | | | | | | | | |
| | | $ | 113,149,445 | | | $ | 114,256,496 | |
The accompanying notes are an integral part of these financial statement
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED STATEMENT OF INCOME AND RETAINED EARNINGS
| | | Six months ended June 30, | |
| | | 2019 | | | 2018 | |
| | | | | | | | | | | | | |
| Contract revenues earned | | $ | 158,679,160 | | | | 100.0 | % | | $ | 117,270,608 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| Cost of revenues earned | | | 121,607,690 | | | | 76.6 | | | | 91,479,448 | | | | 78.0 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 37,071,470 | | | | 23.4 | | | | 25,791,160 | | | | 22.0 | |
| | | | | | | | | | | | | | | | | |
| Indirect expenses | | | 7,164,744 | | | | 4.5 | | | | 5,113,642 | | | | 4.4 | |
| Selling, general and administrative expense | | | 20,923,125 | | | | 13.2 | | | | 13,405,916 | | | | 11.4 | |
| | | | | | | | | | | | | | | | | |
| Income from operations | | | 8,983,601 | | | | 5.7 | | | | 7,271,602 | | | | 6.2 | |
| | | | | | | | | | | | | | | | | |
| Other income and (expense): | | | | | | | | | | | | | | | | |
| Other income | | | 30 | | | | 0.0 | | | | 16 | | | | 0.0 | |
| Loss on the sale of assets | | | (230,624 | ) | | | (0.2 | ) | | | - | | | | 0.0 | |
| Interest income | | | - | | | | 0.0 | | | | 538 | | | | 0.0 | |
| Interest expense | | | (134,762 | ) | | | (0.1 | ) | | | (100,003 | ) | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | |
| Total other expense | | | (365,356 | ) | | | (0.3 | ) | | | (99,449 | ) | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | |
| Income before state income taxes | | | 8,618,245 | | | | 5.4 | | | | 7,172,153 | | | | 6.1 | |
| | | | | | | | | | | | | | | | | |
| Provision for state income taxes | | | 18,059 | | | | 0.0 | | | | 85,500 | | | | 0.1 | |
| | | | | | | | | | | | | | | | | |
| Net income | | | 8,600,186 | | | | 5.4 | % | | | 7,086,653 | | | | 6.0 | % |
| | | | | | | | | | | | | | | | | |
| Beginning retained earnings | | | 32,076,798 | | | | | | | | 25,160,909 | | | | | |
| | | | | | | | | | | | | | | | | |
| Shareholder distributions (note 9) | | | (7,190,379 | ) | | | | | | | (3,119,381 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Ending retained earnings | | $ | 33,486,605 | | | | | | | $ | 29,128,181 | | | | | |
The accompanying notes are an integral part of these financial statement
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED STATEMENT OF CASH FLOW
| | | Six months ended June 30, | |
| | | 2019 | | | 2018 | |
| Cash flows from operating activities : | | | | | | | | |
| Net income | | $ | 8,600,186 | | | $ | 7,086,653 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 422,835 | | | | 454,555 | |
| Loss on sale of property and equipment | | | 230,624 | | | | - | |
| Decrease (increase) in: | | | | | | | | |
| Contracts receivable | | | (359,991 | ) | | | 15,911,115 | |
| Costs and estimated earnings in excess of billings | | | (694,112 | ) | | | (1,006,133 | ) |
| Prepaid charges and other assets | | | 180,330 | | | | 352,534 | |
| Increase (decrease) in: | | | | | | | | |
| Accounts payable | | | (12,129,617 | ) | | | (1,808,530 | ) |
| Billings in excess of costs and estimated earnings | | | 253,963 | | | | (8,488,915 | ) |
| Accrued salaries and benefits | | | 3,563,574 | | | | (15,344 | ) |
| Compensated absences | | | 302,888 | | | | 42,829 | |
| Accrued union benefits | | | (1,340,876 | ) | | | (350,699 | ) |
| Other accruals | | | 391,836 | | | | (424,720 | ) |
| Franchise tax payable | | | - | | | | (15,936 | ) |
| | | | | | | | | |
| Net cash (used) provided by operating activities | | | (578,360 | ) | | | 11,737,409 | |
| | | | | | | | | |
| Cash flows from investing activities : | | | | | | | | |
| Shareholder distributions | | | (7,190,379 | ) | | | (3,119,381 | ) |
| Increase in cash value of life insurance | | | (99,546 | ) | | | (59,554 | ) |
| Acquisition of property and equipment | | | (441,684 | ) | | | (376,002 | ) |
| Proceeds from disposition of property and equipment | | | 8,800 | | | | - | |
| | | | | | | | | |
| Net cash used by investing activities | | | (7,722,809 | ) | | | (3,554,937 | ) |
| | | | | | | | | |
| Cash flows from financing activities : | | | | | | | | |
| Increase in notes receivable | | | (19,571 | ) | | | (19,038 | ) |
| Other financing activities | | | (45,523 | ) | | | (16,504 | ) |
| Decrease in officer advances | | | - | | | | 39,735 | |
| Borrowings (repayments) under bank line of credit | | | 8,532,285 | | | | (12,679,357 | ) |
| Repayments of long-term debt, net | | | (2,090,911 | ) | | | (107,335 | ) |
| | | | | | | | | |
| Net cash provided (used) by financing activities | | | 6,376,280 | | | | (12,782,499 | ) |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (1,924,889 | ) | | | (4,600,027 | ) |
| | | | | | | | | |
| Cash at beginning of year | | | 4,726,531 | | | | 4,684,370 | |
| | | | | | | | | |
| Cash at end of period | | $ | 2,801,642 | | | $ | 84,343 | |
| | | | | | | | | |
| | | | | | | | | |
| Supplementary cash flow disclosures: | | | | | | | | |
| Interest paid | | $ | 134,762 | | | $ | 100,103 | |
| State income taxes paid | | $ | 4,995 | | | $ | 76,936 | |
The accompanying notes are an integral part of these financial statement
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Explanatory Note
The results of operations for CSI Electrical Contractors, Inc. (California) as of and for the six months ended June 30, 2019 and 2018 are set forth below. These results were derived from the unaudited results of CSI Electrical Contractors, Inc. (California) and have been included herein for informational purposes.
| 1. | Nature of Operations and Significant Accounting Policies |
Nature of operations:
CSI Electrical Contractors, Inc., (the “Company”) is an electrical subcontracting company. Work is performed under fixed price and cost-plus fee contracts. The length of the Company's contracts varies but is typically less than one year, therefore assets and liabilities are classified as current and noncurrent.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and cost recognition:
Revenues from fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of direct costs incurred to date to the estimated total direct costs for each contract. Management considers this the best available measure of progress on these contracts. Revenues from cost-plus-fee contacts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs. Indirect costs are costs related to contract performance such as indirect labor, union benefits, equipment, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated
| 1. | Nature of Operations and Significant Accounting Policies (Continued) |
profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted for as changes in estimates in the current period.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.
Contracts receivable:
Contracts receivables are based on contracted prices. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contract receivables are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Property and equipment:
Property and equipment are recorded at cost and are being depreciated over their estimated useful lives ranging from 3 to 7 years, by use of the straight-line and declining balance methods.
Income taxes:
As of January 1, 2008 the Company elected to be taxed as an S-Corporation. California franchise tax is computed at 1.5% of estimated taxable income, less anticipated research, enterprise zone, and other State of California tax credits.
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| Contracts receivable | | | | | | | | |
| Billed: | | | | | | | | |
| Completed contracts | | $ | 3,057,749 | | | $ | 4,610,721 | |
| Contracts in progress | | | 65,391,128 | | | | 69,841,370 | |
| Retainage | | | 24,943,643 | | | | 18,526,485 | |
| | | | 93,392,520 | | | | 92,978,576 | |
| | | | | | | | | |
| Less: Allowances for doubtful collections | | | (53,953 | ) | | | - | |
| | | | 93,338,567 | | | | 92,978,576 | |
| 3. | Costs and Estimated Earnings on Uncompleted Contracts |
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| | | | | | | |
| Costs incurred on uncompleted contracts | | $ | 370,070,141 | | | $ | 307,564,228 | |
| Estimated earnings | | | 75,996,313 | | | | 51,281,012 | |
| | | | 446,066,454 | | | | 358,845,240 | |
| Less: billings to date | | | 461,272,877 | | | | 374,491,812 | |
| | | $ | (15,206,423 | ) | | $ | (15,646,572 | ) |
| | | | | | | | | |
| Included in the accompanying balance sheet | | | | | | | | |
| under the following captions: | | | | | | | | |
| Costs and estimated earnings in excess of | | | | | | | | |
| billings on uncompleted contracts | | $ | 11,690,188 | | | $ | 10,996,076 | |
| Billings in excess of costs and estimated | | | | | | | | |
| earnings on uncompleted contracts | | $ | (26,896,611 | ) | | | (26,642,648 | ) |
| | | $ | (15,206,423 | ) | | $ | (15,646,572 | ) |
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| Assets | | | | | | | | |
| Leasehold improvements | | $ | 3,398,800 | | | $ | 3,263,190 | |
| Furniture and fixtures | | | 1,313,987 | | | | 1,313,987 | |
| Computer equipment | | | 2,534,195 | | | | 2,618,490 | |
| Machinery and equipment | | | 1,977,331 | | | | 1,957,507 | |
| Transportation equipment | | | 428,559 | | | | 524,496 | |
| | | | 9,652,872 | | | | 9,677,670 | |
| Less accumulated depreciation | | | (6,623,599 | ) | | | (6,427,822 | ) |
| | | | | | | | | |
| Net property and equipment | | $ | 3,029,273 | | | $ | 3,249,848 | |
Notes receivable consist of short-term advances to a Company officer and an entity unrelated to the Company.
| 6. | Related-Party Transactions |
On October 9, 2002 the Company entered into an agreement to lease its corporate office facility from a California limited liability company, of which the Company's president has a majority interest. The term of the agreement was 21 years with a single five-year renewal option. The lease provides monthly payments of $32,400 for the first 36 months, $34,500 for the next 60 months and $36,180 for the remaining term. On April 2, 2018 the Company entered into a lease amendment providing for monthly payments of $42,120 commencing May 1, 2018 and continuing for the remaining lease term. Lease expense under this agreement totaled $252,720 and $234,900 for the six months ended June 30, 2019 and 2018, respectively.
On November 20, 2018 and August 19, 2016, the Company negotiated a $28,000,000 and $18,000,000, respectively, revolving line of credit with MUFG Bank. The line is secured by the assets of the corporation, require payment of interest only and was scheduled to mature on April 30, 2019. An amendment was signed extending the terms through October 31, 2019 in the amount of $18,000,000. The interest rate is variable based on 2.35 percentage points above the Bank's LIBOR rate.
The agreement includes various financial covenants, including a minimum net worth, debt to equity and current ratios, and company profitability. The agreements also place restrictions on shareholder loan repayments.
At June 30, 2019 and December 31, 2018, $16,510,000 and $7,977,715, respectively, was advanced on the line. The Company was in compliance with all loan covenants. Additionally, on October 3, 2018 MUFG Union Bank has issued a Standby Letter of Credit in the amount of $1,490,000 and $950,000 in 2017 in favor of Zurich American Insurance Company relating to the Company’s high deductible workers compensation plan.
Long-term debt at June 30, 2019 and December 31, 2018, consists of the following:
| | | June 30, | | | December 31, | |
| | | 2019 | | | 2018 | |
| | | | | | | |
| Capital lease, payable to Toyota Commercial Finance in 60 monthly installments of $610.67, including interest at a rate of 4.59% per annum. $1.00 bargain purchase at lease end. | | $ | 20,702 | | | $ | 23,971 | |
| Commercial loan payable to MUFG Union bank. Maximum principal $1,000,000, payable in 48 equal installments beginning on July 31, 2016, plus interest payable monthly, at 2.75 percentage points above the bank's LIBOR rate. Loan matures June 30, 2020. | | | - | | | | 355,500 | |
| Auto loan payable in 72 monthly installments of $2,370, including interest at a rate of .99%, through February 2024. | | | 114,169 | | | | 126,401 | |
| Note payable to former shareholder and officer for the repurchase of 7.14% of Company common stock, payable beginning on September 17, 2018 in 60 monthly installments of $30,547, including interest at 5% per annum. | | | - | | | | 1,079,837 | |
| Note payable to former shareholder and officer for the repurchase of 12.5% of Company common stock, payable beginning on December 31, 2016 in five annual installments of $344,234, including interest at 5% per annum. | | | - | | | | 640,073 | |
| | | | 134,871 | | | | 2,225,782 | |
| Less current maturity | | | (31,002 | ) | | | (830,768 | ) |
| | | $ | 103,869 | | | $ | 1,395,014 | |
Maturities of long-term debt are as follows:
| | | | As of June 30, | |
| | | | 2019 | |
| | | | | |
| | Remainder of 2019 | | | $ | 15,501 | |
| | 2020 | | | | 31,002 | |
| | 2021 | | | | 31,002 | |
| | 2022 | | | | 28,824 | |
| | 2023 | | | | 24,465 | |
| | Thereafter | | | | 4,077 | |
| | | | | $ | 134,871 | |
| 9. | Shareholder Distributions |
As part of the decision to elect S-Corporation status for income tax reporting, it is the Company's policy to distribute cash to each shareholder, in part, as reimbursement for the individual income tax liability resulting from the pass through of the Company's taxable income.
For the six months ended June 30, 2019 a total of $7,190,379 has been distributed. A majority of these distributions were to reimburse the shareholders for their 2018 individual income tax liability and 2019 federal and state safe-harbor installments of individual income taxes.
For the six months ended June 30, 2018 a total of $3,119,381 has been distributed. A majority of these distributions were to reimburse the shareholders for their 2017 individual income tax liability and 2018 federal and state safe-harbor installments of individual income taxes.
| 10. | Operating lease Agreements |
The Company rents vehicles, equipment and satellite office facilities under various operating leases. Total rent expense under all operating leases was approximately $1,385,033 and $779,771 for the six months ended June 30, 2019 and 2018, respectively.
Minimum rents due under the leases are as follows:
| | | | As of June 30, | |
| | | | 2019 | |
| | | | | |
| | Remainder of 2019 | | | $ | 1,484,415 | |
| | 2020 | | | | 2,766,174 | |
| | 2021 | | | | 2,513,696 | |
| | 2022 | | | | 1,983,047 | |
| | 2023 | | | | 1,501,578 | |
| | | | | $ | 10,248,910 | |
The following schedule summarizes changes in backlog on contracts for the six months ended June 30, 2019. Backlog represents the amount of revenue the Company expects to realize from work performed on uncompleted contracts in progress at year end and from contractual agreements on which work has not yet begun.
| Backlog balance at December 31, 2018 | | $ | 219,897,385 | |
| Contract adjustments | | | 65,030,261 | |
| New contracts during the period | | | 78,341,537 | |
| | | | 363,269,183 | |
| Less contract revenue earned during the period | | | (158,679,161 | ) |
| Backlog balance at June 30, 2019 | | $ | 204,590,022 | |
In July 2017 a wage and hour class action was brought in Fresno County Superior Court alleging seven causes of action including Failure to Pay Wages. Mediation has been set for October 2, 2019. Company counsel has advised that the Company will vigorously defend this case and cannot predict a potential outcome until the court has ruled on whether the case can proceed on a class action basis.
The Company has been served with several Notices to Cure relating to delays in construction from an ongoing project. Assessment of liquidated damages has been threatened. The Company has responded to the Notices and is preparing its own claim for damages related to breach of contract. Company counsel has indicated it is too early to assess potential damages.
In August 2019, CSI was served with a complaint in California state court from an electrical contractor alleging, unfair competition, intentional interference with prospective economic advantage, misappropriation of trade secrets and conspiracy.
No contingent liability has been recorded as of June 30, 2019 and 2018.
The Company, as a condition for entering into some of it's construction contracts, had outstanding surety bonds approximating $50,911,119 and $17,849,159 as of June 30, 2019 and 2018, respectively. The bonds are collateralized by the personal guarantee of the shareholder and his spouse.
The Company has a defined contribution 401(k) profit sharing plan covering all full-time employees who have met certain requirements as to length of service, age, and who are not members of a collective bargaining unit. The plan assets are held by a life insurance company as trustee. The Company contributes to each participant's account a matching contribution equal to 50% of the participant's deferred salary that does not exceed 6% of compensation, once the participant has obtained one year of service. Additionally, the Company makes an annual discretionary contribution to the plan.
For the six months ended June 30, 2019 and 2018 the Company declared $239,741 and $138,604 in matching and $550,000 and $275,230 in discretionary plan contributions, respectively.
On July 15, 2019, substantially all of the Company’s assets and liabilities were acquired by MYR Group, Inc., a holding company of specialty electrical construction service providers. The total consideration received was approximately $79.7 million, subject to working capital and net asset adjustments. Additionally, there could also be contingent payments based on the successful achievement of certain performance targets and continued employment of certain key executives of the Company.
