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EX-10.6 - EXHIBIT 10.6 - UniTek Global Services, Inc.v311609_ex10-6.htm
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EX-31.1 - EXHIBIT 31.1 - UniTek Global Services, Inc.v311609_ex31-1.htm
EX-10.4 - EXHIBIT 10.4 - UniTek Global Services, Inc.v311609_ex10-4.htm
EX-10.7 - EXHIBIT 10.7 - UniTek Global Services, Inc.v311609_ex10-7.htm
EX-31.2 - EXHIBIT 31.2 - UniTek Global Services, Inc.v311609_ex31-2.htm
EX-10.8 - EXHIBIT 10.8 - UniTek Global Services, Inc.v311609_ex10-8.htm
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EX-10.5 - EXHIBIT 10.5 - UniTek Global Services, Inc.v311609_ex10-5.htm
EX-32.1 - EXHIBIT 32.1 - UniTek Global Services, Inc.v311609_ex32-1.htm
EX-10.1 - EXHIBIT 10.1 - UniTek Global Services, Inc.v311609_ex10-1.htm
EX-10.3 - EXHIBIT 10.3 - UniTek Global Services, Inc.v311609_ex10-3.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

OR

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to ______________

 

COMMISSION FILE NUMBER 0-28579

 

UNITEK GLOBAL SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 75-2233445
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)

 

1777 Sentry Parkway West, Gwynedd Hall, Suite 302

Blue Bell, Pennsylvania 19422

 (Address of Principal Executive Offices)

 

(267) 464-1700

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x  No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Larger accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ¨  No  x

 

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

 

On May 7, 2012, 16,458,246 shares of the registrant's common stock, $0.00002 par value per share, were outstanding.

 

 
 

 

UNITEK GLOBAL SERVICES, INC. AND SUBSIDIARIES

 

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

      PAGE
NO.
PART I: FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Condensed Consolidated Balance Sheets (Unaudited) as of  March 31, 2012  and December 31, 2011   3
       
  Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2012 and April 2, 2011   4
       
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2012 and April 2, 2011   5
       
  Notes to Condensed Consolidated Financial Statements (Unaudited)   6
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   26
       
Item 3 Quantitative and Qualitative Disclosure About Market Risk   33
       
Item 4. Controls and Procedures   33
       
PART II:  OTHER INFORMATION    
       
Item 1. Legal Proceedings   35
       
Item 1A.  Risk Factors   35
       
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds   35
       
Item 3. Defaults Upon Senior Securities   35
       
Item 4. Mine Safety Disclosures   35
       
Item 5. Other Information   35
       
Item 6. Exhibits   35
       
SIGNATURES   37

 

2
 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements.


 

UNITEK GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

   March 31,   December 31, 
   2012   2011 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $5,054   $95 
Restricted cash   68    68 
Accounts receivable and unbilled revenue, net of allowances   90,427    91,533 
Inventories   9,711    10,985 
Prepaid expenses and other current assets   3,772    3,299 
Total current assets   109,032    105,980 
Property and equipment, net   38,733    39,022 
Amortizable customer relationships, net   28,163    29,783 
Other amortizable intangible assets, net   4,440    4,635 
Goodwill   165,870    163,797 
Deferred tax assets, net   848    568 
Other assets   5,104    5,095 
Total assets  $352,190   $348,880 
           
LIABILITIES AND STOCKHOLDERS ’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $26,441   $33,367 
Accrued liabilities   33,401    32,597 
Contingent consideration   20,025    26,958 
Current portion of long-term debt   1,000    1,000 
Current income taxes   119    904 
Current portion of capital lease obligations   9,862    9,631 
Other current liabilities   535    518 
Total current liabilities   91,383    104,975 
           
Long-term debt, net of current portion   129,563    111,217 
Long-term capital lease obligations, net of current portion   14,812    16,283 
Deferred income taxes   6,493    5,511 
Other long-term liabilities   1,553    1,664 
Total liabilities   243,804    239,650 
           
STOCKHOLDERS’ EQUITY          
Preferred Stock, $0.00002 par value (20 million shares authorized, no shares issued or outstanding)   -    - 
Common Stock, $0.00002 par value (200 million shares authorized, 16,458,246 and 16,305,369 issued and outstanding at March 31, 2012 and December 31, 2011, respectively)   -    - 
Additional paid-in capital   258,690    249,745 
Accumulated other comprehensive income (loss)   59    18 
Accumulated deficit   (150,363)   (140,533)
Total stockholders’ equity   108,386    109,230 
Total liabilities and stockholders' equity  $352,190   $348,880 

The accompanying notes are an integral part of these unaudited financial statements.

 

3
 

 

UNITEK GLOBAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands, except per share amounts)

(Unaudited)

 

   Three Months Ended 
   March 31,   April 2, 
   2012   2011 
         
Revenues  $108,227   $91,084 
Costs of revenues   90,263    76,554 
Gross profit   17,964    14,530 
Selling, general and administrative expenses   13,059    10,868 
Change in fair value of contingent consideration   (324)   - 
Restructuring charges   4,288    - 
Depreciation and amortization   6,957    6,330 
Operating loss   (6,016)   (2,668)
           
Interest expense   3,022    4,473 
Other income, net   (229)   (29)
Loss from continuing operations before income taxes   (8,809)   (7,112)
Income tax expense   675    512 
Loss from continuing operations   (9,484)   (7,624)
           
Loss from discontinued operations   (345)   (251)
           
Net (loss)  $(9,829)  $(7,875)
           
Net (loss) per share – basic and diluted:          
Continuing operations  $(0.57)  $(0.50)
Discontinued operations   (0.02)   (0.02)
Net loss  $(0.59)  $(0.52)
           
Weighted average shares of common stock outstanding:          
Basic and diluted   16,545    15,154 
           
Comprehensive income (loss)  $(9,788)   (7,815)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

4
 

 

UNITEK GLOBAL SERVICES, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 (Unaudited)

 

   Three Months Ended 
   March 31,   April 2, 
   2012   2011 
Cash flows from operating activities:          
Net loss  $(9,829)  $(7,875)
Adjustments to reconcile net loss to net cash used in operating activities:          
Loss from discontinued operations   345    251 
Provision for doubtful accounts   382    290 
Depreciation and amortization   6,957    6,330 
Amortization of deferred financing fees   188    993 
Change in fair value of warrants and interest-rate collar   31    40 
Accretion of debt discount   107    357 
Change in fair value of contingent consideration   (324)   - 
Stock-based compensation   2,065    2,511 
(Gain) loss on sale of fixed assets   (263)   12 
Deferred tax assets, net   702    532 
Changes in assets and liabilities:          
Accounts receivable and unbilled revenue   723    1,073 
Inventories   1,274    592 
Prepaid expenses and other assets   (671)   (1,987)
Accounts payable and accrued liabilities   (9,032)   (5,612)
Net cash used in operating activities – continuing operations   (7,345)   (2,493)
Net cash used in operating activities – discontinued operations   (299)   (208)
Net cash used in operating activities   (7,644)   (2,701)
           
Cash flows from investing activities:          
Acquisition of property and equipment   (1,916)   (1,026)
Proceeds from sale of property and equipment   406    79 
Cash paid for acquisition of businesses, net of cash acquired   (934)   (300)
Net cash used in investing activities   (2,444)   (1,247)
           
Cash flows from financing activities:          
Proceeds from revolving credit facilities, net   18,489    1,000 
Repayment of capital leases   (2,987)   (2,174)
Repayment of long term debt   (250)   (735)
Other financing activities   (213)   - 
Net cash provided by (used in) financing activities   15,039    (1,909)
           
Effect of exchange rate on cash and cash equivalents   8    (2)
Net increase (decrease) in cash and cash equivalents   4,959    (5,859)
Cash and cash equivalents at beginning of period   95    17,716 
Cash and cash equivalents at end of period  $5,054   $11,857 
           
Supplemental cash flow information:          
Interest paid  $2,653   $3,799 
Income taxes paid  $784   $- 
           
Significant noncash  items:          
Acquisition of property and equipment financed  by capital leases  $1,583   $1,855 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

5
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

1. Business

 

UniTek Global Services, Inc. (“UniTek,” the “Company,” “we,” “our” or “us”) is a provider of engineering, construction management and installation fulfillment services to companies specializing in the telecommunications, broadband cable, wireless, two-way radio, transportation, public safety and satellite industries. UniTek has created a scalable platform through which it can rapidly deploy a highly skilled workforce across the United States and Canada, delivering a comprehensive end-to-end suite of permanently outsourced infrastructure services.  The Company operates in two reportable segments: (1) Fulfillment, which includes fulfillment work for the pay television industry (both satellite and broadband cable), and (2) Engineering and Construction, which includes both wireless and wired telecommunications and public safety networks.

 

2. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of March 31, 2012, and for the three ended March 31, 2012 and April 2, 2011, have been prepared in accordance with accounting standards generally accepted in the United States (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly the results of its operations and cash flows at the dates and for the periods indicated. The results of operations for the interim periods are not necessarily indicative of the results for the full fiscal year. The condensed consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries. All intercompany accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 7, 2012.

 

3. Accounting Policies

 

The following is a summary of significant accounting policies followed in the preparation of the accompanying consolidated financial statements.  The guidelines and numbering system prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) are used when referring to GAAP in these financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, amounts contained in certain of the notes to the condensed consolidated financial statements, and the revenues and expenses reported for the periods covered by the financial statements. Although such assumptions are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ significantly from those estimates and assumptions. The Company’s more significant estimates relate to revenue recognition, allowances for bad debts, accruals for legal obligations, medical insurance and workers’ compensation insurance and valuation of goodwill and intangible assets.

 

In the ordinary course of accounting for items discussed above, the Company makes changes in estimates as appropriate and as the Company becomes aware of circumstances surrounding those estimates. Such changes in estimates are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the notes to the condensed consolidated financial statements.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. The Company’s cash and cash equivalents are invested in investment-grade, short-term investment instruments with high quality financial institutions.

 

6
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Restricted Cash

 

Restricted cash represents collateral held for a letter of credit issued in conjunction with a facility lease.

 

Accounts Receivable and Unbilled Revenue, Net of Allowance for Doubtful Accounts

 

Accounts receivable are customer obligations for services rendered to such customers under normal trade terms. The Company’s customers are primarily communications carriers, corporate and governmental entities, located primarily in the U.S. and Canada. The Company performs periodic credit evaluations of its customers’ financial condition.  Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Unbilled revenue represents revenue on uncompleted infrastructure equipment construction and installation contracts that are not yet billed or billable and revenue recognized on completed projects that are not yet billed pursuant to contract terms. Deferred revenues are classified as current liabilities and principally represent the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered. Any costs in excess of billings are deferred and recorded as a component of accrued liabilities.

 

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. A specific reserve for bad debts is recorded for known or suspected doubtful accounts receivable. For all other accounts, the Company recognizes a general reserve for bad debts based on the length of time receivables are past due and historical write-off experience. The adequacy of the reserve is evaluated using several factors including length of time a receivable is past due, changes in the customer’s credit worthiness, the customer’s payment history, the length of the customer’s relationship with the Company, current industry trends and the current economic climate.  Account balances are charged off against the allowance when the Company believes it is probable that the receivable will not be recovered.  Provisions for doubtful accounts are recorded in selling, general and administrative expenses.

 

Inventories

 

Inventories consist primarily of materials and supplies purchased from the customer and other suppliers used for installation fulfillment services and wireless construction. Inventories are stated at the lower of cost or market, as determined by the first-in, first-out method for the Fulfillment segment and the average cost method for the Engineering and Construction segment.

 

Property and Equipment

 

Property and equipment consist of vehicles, equipment, computer equipment and software, furniture and fixtures, buildings, land and leasehold improvements. Each class of asset is recorded at cost and depreciated using the straight-line method over the estimated useful lives, which range from a period of three to five years, except as follows. Leasehold improvements are depreciated over the term of the lease or the estimated useful life, whichever is shorter. Buildings are depreciated over 27.5 years. Assets under capital leases are depreciated over the lesser of the lease term or the asset’s estimated useful life. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. The Company capitalizes certain costs incurred in connection with the developing or obtaining internal use software, which are included within computers and equipment. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in our consolidated statements of operations. All depreciation of property and equipment is included in the consolidated statements of comprehensive income (loss) in depreciation and amortization.

 

 Impairment of Long-Lived Assets

 

In accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10), the Company periodically reviews long-lived assets, consisting primarily of property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In analyzing potential impairment, management uses projections of future undiscounted cash flows from the assets. These projections are based on management’s view of growth rates for the related business, anticipated future economic conditions and estimates of residual values and are considered to be impaired when the undiscounted net cash flows are less than its carrying value. The impairment recognized is the amount by which the carrying value exceeds the fair value based on assumptions that marketplace participants would use in their estimates of fair value.

 

7
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Leases

 

The Company leases vehicles primarily for performing fulfillment services to the pay television industry. Leases are accounted for either as operating or capital depending on the terms of the lease. Each lease is evaluated and a determination is made whether the lease is an operating or capital lease. Operating lease payments are expensed as incurred. Capital leases are included on the condensed consolidated balance sheets as property and equipment and capital lease obligations.

 

Business Combinations, Goodwill and Other Intangible Assets

 

The Company accounts for business combinations under the provisions of ASC 805-10, Business Combinations (ASC 805-10), which requires that the purchase method of accounting be used for all business combinations. ASC 805-10 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.

 

The Company amortizes intangible assets, consisting of customer relationships, trade names, technology, backlog and non-compete agreements from acquired businesses on a straight-line basis over the 9- to 129-month lives of those agreements (see Note 6).

 

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC 350-10, Goodwill and Other Intangible Assets (ASC 350-10), goodwill is subject to an assessment for impairment using a two-step, fair value-based test with the first step performed at least annually, or more frequently if events or circumstances exist that indicate that goodwill may be impaired. The Company completes an annual analysis of the reporting units at the beginning of the fourth quarter of each fiscal year. The first step requires the Company to determine the fair value of each reporting unit and compare it to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment test is performed to determine the implied value of goodwill for that reporting unit. If the implied value is less than the carrying amount of goodwill for that reporting unit, an impairment loss is recognized for that reporting unit.

 

Foreign Currency Translation

 

The balance sheets of foreign subsidiaries are translated into US dollars at current year-end rates, and the statements of operations are translated at average monthly rates during each monthly period. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are accumulated and credited or charged directly to a separate component of stockholders’ equity. Any foreign currency gains or losses related to transactions are charged to other income (expense), net.

 

Other Assets

 

Costs associated with obtaining long-term debt are deferred and amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the term of the related debt (see Note 7). At March 31, 2012 and December 31, 2011, $3.2 million and $3.4 million (net), respectively, is included in other assets related to deferred financing fees.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 605 “Revenue Recognition.”  Accordingly, revenue is recognized when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collection is reasonably assured. Revenue is recognized net of any estimated allowances.

 

Revenues from fulfillment services provided to the pay television industry are recognized as the services are rendered. Fulfillment services are generally performed under master or other services agreements and are billed on a contractually agreed price per unit, work order basis. Under master service and similar type service agreements, the Company furnishes specified units of service for a separate fixed price per unit of service. The Company recognizes revenue from fulfillment services net of equipment costs payable to the customer because the Company has determined that it acts as an agent specific to the equipment costs.

 

8
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Within the Engineering and Construction segment, the Company enters into contracts that require the installation or construction of specified units within an infrastructure system. Under these contracts, revenue is recognized at the contractually agreed price per unit as the units are completed, which best reflects the pattern in which the obligation to the customer is fulfilled. In the wireless portion of the Engineering and Construction segment, revenue for site acquisition and zoning services is based upon output measures using contract milestones as the basis. Revenue from infrastructure equipment construction and installation contracts is recorded under the percentage-of-completion method based on the percentage that the total direct costs incurred to date compared to estimated total costs at completion. Direct costs typically include direct materials, labor and subcontractor costs and indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Direct materials are primarily purchased from third-party vendors and are therefore included as a component of direct costs in estimating the percentage-of-completion. Losses relating to Engineering and Construction work are recognized when such losses become known.

 

Certain contracts within the Engineering and Construction segment include multiple deliverables, typically involving the design, construction and implementation of public safety radio networks with a separate maintenance component for a specific period of time following implementation. The maintenance component of these contracts is typically for a period of one to 10 years. The Company accounts for the maintenance component of these contracts as a separate unit of accounting with the revenue being recognized on a pro-rata basis over the term of the maintenance period. The revenue for the remaining portion of the contract is recognized on the percentage of completion method. The value assigned to each unit of accounting is objectively determined and obtained primarily from sources such as the separate selling price for that item or a similar item or from competitor prices for similar items. The liability associated with these maintenance contracts is reflected within other current liabilities and other long-term liabilities.

 

The Company is also subject to costs arising from vendor and subcontractor change orders (work performed that was not in original scope), which may or may not be pre-approved by the customer. The Company determines the likelihood that such costs will be recovered based upon past practices with the customer or specific discussions, correspondence or negotiation with the customer. The Company accounts for costs relating to change orders as contract costs to be expensed in the period incurred, unless persuasive evidence exists that the costs will be recovered. Unbilled revenues represent revenue on uncompleted infrastructure equipment construction and installation contracts that are not yet billed or billable and revenue recognized on completed projects that are not yet billed, pursuant to contract terms. Deferred revenues are classified as current liabilities and principally represent the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered. Any costs in excess of billings are deferred and recorded as a component of accrued liabilities.

 

Net Income (loss) per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods presented. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods adjusted for the dilutive effect, if any, of the exercise or conversion of any instruments into common stock, such as stock options, restricted stock units (“RSUs”) or warrants. Any outstanding stock options, warrants, or other instruments that are convertible to common stock could potentially be dilutive should the Company report income from continuing operations in a future period. 

 

The following table sets forth the computations of basic and diluted loss per share:

 

   Three Months Ended 
   March 31,   April 2, 
   2012   2011 
         
Basic and diluted earnings per share:          
Numerator:          
Net income (loss) from continuing operations  $(9,484)  $(7,624)
Net loss from discontinued operations   (345)   (251)
Denominator:          
Weighted average common shares outstanding – basic and diluted   16,545    15,154 
           
Net income (loss) per share from continuing operations - basic  and diluted  $(0.57)  $(0.50)
Net loss per share from discontinued operations - basic  and diluted  $(0.02)  $(0.02)

 

Common stock equivalents consist of stock options and warrants using the treasury stock method.  For the three months ended March 31, 2012 and April 2, 2011, respectively, 0.2 million and 0.4 million stock options and warrants were excluded from the computation of diluted net loss per share because the effect is anti-dilutive as a result of the loss from continuing operations.

 

9
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Insurance Reserves

 

The Company maintains a high-deductible casualty insurance program, subject to per claim deductibles of $0.35 million for its workers’ compensation policy with a $0.15 million corridor policy effective July 1, 2011, $0.25 million for its general liability policy and $0.35 million for its automobile liability policy. The Company also has excess umbrella coverage up to $50.0 million per claim and in the aggregate subject to policy terms and conditions. Because most claims do not exceed the deductibles under its insurance policies, the Company is effectively self-insured for substantially all claims. The Company also has a self-insured plan for medical and dental claims. The Company determines any liabilities for unpaid claims and associated expenses, including incurred but not reported losses, and reflects the undiscounted value of those liabilities in the balance sheet within accrued liabilities. The determination of such claims and expenses and the appropriateness of the related liability is reviewed and updated quarterly.  As of March 31, 2012 and December 31, 2011, the liability for insurance reserves was $14.4 million and $13.7 million, respectively. Known amounts for claims that are in the process of being settled, but have been paid in periods subsequent to those being reported, are recorded in the subsequent reporting period. The Company’s insurance accruals are based upon known facts, historical trends and its reasonable estimate of future expenses.

 

Income Taxes

 

The Company follows the asset and liability method of accounting for income taxes. Income taxes consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is recorded against a deferred tax asset when it is determined to be more-likely-than-not that the asset will not be realized.

 

The Company recognizes uncertain tax positions in its financial statements when minimum recognition criteria are met in accordance with current accounting guidance. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 31, 2012, the Company had accrued $0.1 million in federal and state taxes, interest and penalties. At December 31, 2011, the Company had accrued $0.9 million in federal and state taxes, interest and penalties. The Company’s tax returns for the years ended December 31, 2008 through December 31, 2010 are still subject to examination by tax jurisdictions. The Company provides an intra-period tax allocation of the income tax expense or benefit for the year to continuing operations and discontinued operations.

 

Stock-based Compensation

 

The Company measures and recognizes compensation expense for all share-based awards made to employees and directors including employee stock options based on estimated grant-date fair values.

 

The condensed consolidated financial statements include stock-based compensation expense of $2.1 million and $2.5 million, respectively, for the three months ended March 31, 2012 and April 2, 2011 within selling, general, and administrative expenses in the consolidated statements of comprehensive income (loss).

 

Stock-based compensation expense is based on the fair value of awards ultimately expected to vest, net of estimated forfeitures. The Company estimates the fair value of stock-based awards granted in the form of options on the date of grant primarily using the Black-Scholes option-pricing model and recognizes compensation expense for all stock-based awards on a straight-line basis over the requisite service periods. Stock-based compensation expense recognized during the current period is based on the value of the portion of stock-based awards that is ultimately expected to vest. The Company estimates forfeitures at the time of grant in order to estimate the amount of stock-based awards that will ultimately vest. Limited historical forfeiture data is available. As such, management has based the estimated forfeiture rate on expected employee turnover and reevaluates its estimates each period. The Company records the cash flows resulting from the tax deductions in excess of the compensation cost recognized for those options (excess tax benefit) as financing cash flows.

 

10
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Fair Value Measurements

 

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

 

The Company uses a three-tier valuation hierarchy based upon observable and non-observable inputs, as described below:

   

Level 1 - Quoted market prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 - Observable market based inputs or other observable inputs corroborated by market data at the measurement date, other than quoted prices included in Level 1, either directly or indirectly.

   

Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using valuation models for which the assumptions utilize management’s estimates of market participant assumptions.

          

The Company determines the estimated fair value of assets and liabilities using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different assumptions or estimation methodologies could have a material effect on the estimated fair values. The fair value estimates are based on information available as of March 31, 2012 and December 31, 2011.

 

Concentration of Credit Risk

 

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company does not enter into financial instruments for trading or speculative purposes.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is a measure of net loss and all other changes in equity that result from transactions other than those with shareholders. Comprehensive income (loss) consists of net loss and foreign currency translation adjustments.

 

Comprehensive income (loss) consisted of the following:

 

   Three Months Ended 
   March 31,
2012
   April 2,
2011
 
Net income (loss)  $(9,829)  $(7,875)
Foreign currency translation (loss) gain   41    60 
Comprehensive income (loss)  $(9,788)  $(7,815)

 

11
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Recent Accounting Pronouncements

 

Fair Value. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU No. 2011-04”). The objective of ASU No. 2011-04 is to converge guidance of the FASB and the International Accounting Standards Board on fair value measurement and disclosure. This update changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements; clarifies the FASB’s intent about the application of existing fair value measurement requirements, and changes particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. ASU No. 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011. The Company has adopted this standard in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”). The objective of ASU No. 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-05 provides the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU No. 2011-05 is effective retrospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2011. On December 23, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Update 2011-12, defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately within their respective components of net income and other comprehensive income. Therefore, the amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this standard in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

Goodwill. In September 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU No. 2011-08”), an update to ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”)”. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in FASB Accounting Standards Codification Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU No. 2011-08 was effective for fiscal years and interim periods beginning after December 15, 2011, although early adoption is permitted. The Company has adopted this standard in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

 

4. Pinnacle Acquisition

 

Effective April 3, 2011, UniTek completed the acquisition of Pinnacle pursuant to an Asset Purchase Agreement, dated as of March 30, 2011 (the “Asset Purchase Agreement”), by and among UniTek and Pinnacle and its former owners (the “Sellers”). In accordance with the Asset Purchase Agreement, UniTek agreed to pay the Sellers an aggregate purchase price of up to $50.7 million, subject to certain conditions and adjustments as set forth in the Asset Purchase Agreement, consisting of a base purchase price of $20.7 million and earn-out payments of up to $30.0 million. The base purchase price of $20.7 million consisted of $12.7 million in cash and $8.0 million in shares of UniTek common stock, par value $0.00002 per share. The number of shares of common stock was determined using the volume-weighted average of the closing prices of the common stock as quoted on the Nasdaq Global Market for the 20 days prior to March 31, 2011, which was $8.65 per share, resulting in the issuance of 924,856 shares of the Company’s common stock.  Of the consideration paid in shares of the Company’s common stock, 578,037 shares were delivered to the Sellers at closing and 346,819 shares were delivered to an escrow agent, to be held until their release in accordance with the terms of the Asset Purchase Agreement. Pinnacle specializes in large-scale communications projects for transportation, public safety, entertainment, hospitality and enterprise-grade commercial real estate, which has expanded the Company’s presence in the two-way radio and wireless communications systems integration markets.

 

The total fair value of the consideration paid for Pinnacle was $47.0 million, consisting of $12.7 million in cash (net of cash acquired), $8.5 million in equity and contingent consideration of $25.8 million. The fair value of the 924,856 shares of common stock issued as consideration was determined based upon the Company’s closing stock price on the last business day prior to April 3, 2011, which was $9.14 per share. The contingent consideration is in the form of earn-out payments based upon the achievement of incremental earnings before interest, taxes, depreciation and amortization (“EBITDA”) performance targets as defined in the Asset Purchase Agreement. Per the original agreement, the earn-out payments of up to $30.0 million would be payable 60% in cash and 40% in shares of UniTek common stock, for which the number of shares of common stock will be determined using the volume-weighted average of the closing prices of the common stock as quoted on the Nasdaq Global Market for the 20 days prior to the EBITDA measurement date giving rise to the earn-out payment being made. The earn-out is to be paid out in up to three payments based upon the achievement of certain EBITDA thresholds after six months (September 30, 2011, a payment which was approximately $2.4 million), one year (March 31, 2012), and two years (March 31, 2013). The portion of the contingent consideration earned as of each of these measurement dates is expected to be paid out within 60 days of each measurement date. The initial and December 31, 2011 fair values of the contingent consideration were determined using a Monte Carlo simulation model applied to the Company’s estimate of Pinnacle’s expected EBITDA performance at each of the measurement dates. The significant assumptions used in this calculation include forecasted revenue and earnings, an estimate of the volatility of Pinnacle’s earnings based upon a selected peer group and a risk-free interest rate equal to that of U.S. Treasury bonds with terms approximating the earn-out periods. At March 31, 2012, the final settlement amount of the contingent consideration was calculated based on the actual EBITDA performance for the 12 months period ended March 31, 2012, which yielded a value of approximately $29.7 million. This compares to the fair value as of December 31, 2011 of $29.4 million. The incremental $0.3 million was recorded as part of the change in fair value on the statement of comprehensive income (loss) for the three months ended March 31, 2012.

 

12
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

On March 28, 2012, the Company entered into Amendment No. 1 (the “Amendment”) to the Asset Purchase Agreement. The Amendment limits the total number of shares of UniTek common stock that may be issued pursuant to the Asset Purchase Agreement, including the shares issued as part of the initial payment of the purchase price and the shares that may be issued pursuant to the earn-out, to 3,029,856, which equals 19.99% of the shares of the Company’s common stock outstanding on the date of the Asset Purchase Agreement. The Amendment provides that in the event the limitation set forth in the preceding sentence results in a decrease in the number of the shares of UniTek common stock that would otherwise be issued as part of any earn-out payment, the cash portion of such earn-out shall be increased by an amount equal to the dollar value, as determined in accordance with the Asset Purchase Agreement, of the shares not otherwise issued.

 

Following the Amendment, the number of shares of the Company’s common stock available for the earn-out is limited to 2,105,000 shares. Pursuant to the Asset Purchase Agreement, the value of these shares was determined using the volume-weighted average of the closing prices of the common stock as quoted on the Nasdaq Global Market for the 20 days prior to March 31, 2012 which was $3.65 per share, resulting in an equity value of approximately $7.7 million. The fair value of these shares of common stock was determined based upon the Company’s closing stock price on March 30, 2012, which was $3.37 per share. The resulting fair value of $7.1 million is classified as equity as of March 31, 2012. The resulting gain of approximately $0.6 million was recorded as a change in fair value on the statement of comprehensive income for the three months ended March 31, 2012.

 

The following table summarizes the allocation of the final purchase price to the fair value of assets acquired and liabilities assumed at the date of acquisition:

 

Cash  $451 
Accounts receivable   4,313 
Inventories   652 
Prepaid expenses and other assets   192 
Property and equipment   2,599 
Amortizable intangible assets   28,686 
Goodwill   16,817 
Other assets   445 
Accounts payable and accrued expenses   (3,700)
Billings in excess of costs   (636)
Deferred revenue   (2,462)
Capital lease obligations   (377)
Total fair value of net assets acquired  $46,980 

 

As of March 31, 2012, the final value of the earn-out payment is $29.7 million. This calculation was based on Pinnacle’s actual EBITDA performance through March 31, 2012.

 

During the three months ended March 31, 2012, the acquisition of Pinnacle contributed revenue of approximately $13.8 million and operating income of $2.4 million. During the year ended December 31, 2011, the acquisition of Pinnacle contributed revenue of approximately $28.5 million and operating income of $3.0 million. Acquisition related costs for the year ended December 31, 2011, were $0.2 million, which were recorded as a component of selling, general and administrative expenses. The Company has recognized goodwill of $16.8 million, which is tax-deductible, arising from the acquisition representing the value of the existing workforce as well as expected synergies from the combination of operations. The goodwill associated with the acquisition of Pinnacle is included in the Engineering and Construction segment’s assets. The amortizable intangible assets acquired in the acquisition consisted of the following as of the date of acquisition:

 

13
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

   Estimated   Weighted-average 
   fair value   amortization period 
Customer relationships and backlog  $23,530    10.5 Years 
Non-compete agreements   388    2.0 years 
Technology and trade names   4,768    6.5 years 
Total  $28,686    9.7 years 

 

The following pro forma data presents revenue and loss from continuing operations as if the Pinnacle acquisition had occurred on January 1, 2011:

 

   Three Months Ended
April 2, 2011
 
Revenue   $93,887 
Loss from continuing operations   $(9,218)

 

These pro forma combined historical results also include an adjustment for the increase in amortization and depreciation expense due to the incremental intangible assets and adjusted fair value of the fixed assets recorded in relation to the acquisition. The increase in amortization and depreciation expense for the three months ended April 2, 2011 was $1.0 million.

 

5. Other Acquisitions

 

2012 Cable Acquisitions

 

Acquisition of Cableview

 

On March 2, 2012, the Company acquired substantially all of the assets and assumed certain liabilities of Cableview Communications Inc. (“Cableview”), a company that provides cable television installation services, for a total purchase price of $2.9 million. The purchase price includes $0.5 million of cash paid at closing, $1.9 million of cash scheduled to be paid in 2012 and $0.5 million for the fair value of an earn-out. The earn-out is based on the achievement of certain revenue levels for the six and 12 month periods subsequent to the acquisition date up to a maximum earn-out of $0.4 million and $1.4 million, respectively. The fair value of the contingent consideration was calculated based on the estimated probabilities of certain revenue levels being achieved. The acquisition expands the Company’s cable installation geographic footprint and customer diversification. The intangible assets valued at approximately $0.5 million relate to a non-compete agreement which is being amortized over 12 months and customer contracts that are being amortized over 24 months. The amortization of intangible assets and goodwill will be deductible for tax purposes upon payment of all purchase consideration. The results of Cableview were included in the consolidated results of the Company effective March 2, 2012. During the three months ended March 31, 2012, Cableview contributed revenue of approximately $1.2 million and operating income of approximately $0.1 million.

 

Acquisition of Streamline

 

On January 3, 2012, the Company acquired substantially all of the assets and assumed certain liabilities of Streamline Communications, Inc., (“Streamline”), a company that provides cable television installation services in the greater Dallas, TX market, for a total purchase price of $0.5 million. The acquisition expands the Company’s cable installation existing presence in the Dallas area. The intangible asset valued at $0.2 million relates to customer contracts that are amortized over 24 months. The amortization of intangible assets and goodwill is deductible for tax purposes. The results of Streamline were included in the consolidated results of the Company effective January 3, 2012. During the three months ended March 31, 2012, Streamline contributed revenue of approximately $0.4 million and operating income of approximately zero.

  

14
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

  

 The preliminary purchase prices for these acquisitions were calculated as follows:

 

   Cableview   Streamline 
Cash  $500   $434 
Scheduled payments   1,900    24 
Contingent payments   484    - 
Total purchase price  $2,884   $458 

 

The preliminary purchase prices were allocated to assets acquired and liabilities assumed as follows:

  

   Cableview   Streamline 
Property and equipment  $697    103 
Goodwill   1,901    155 
Customer contracts   360    200 
Non-compete agreement   130    - 
Capital lease obligations   (204)   - 
Total net assets acquired  $2,884    458 

 

15
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

The 2012 Cable Acquisitions are not material on a pro forma basis to the Company’s consolidated revenues or loss from continuing operations.

 

6.  Accounts Receivable and Concentration of Credit Risk

 

Accounts receivable and unbilled revenue, net of allowances, at March 31, 2012 and December 31, 2011, consist of the following:

 

   March 31,   December 31, 
   2012   2011 
Accounts receivable  $56,196   $60,864 
Unbilled revenue   37,645    34,280 
    93,841    95,144 
Allowance for doubtful accounts   (3,414)   (3,611)
Total  $90,427   $91,533 

 

Revenue concentration information, as a percentage of total consolidated revenue, is as follows:

 

   For the Three Months Ended:  
   March 31, 2012   April 2, 2011   Primary Segment  
Revenue from top 10 customers   90%   95%     
Revenue from significant customers-               
DIRECTV   40%   49%  Fulfillment  
Comcast   16%   17%  Fulfillment  
Verizon Communications   8%   10%  Engineering &
Construction
 

 

 

Credit risk with respect to accounts receivable was concentrated with five customers at March 31, 2012.  These customers accounted for approximately $50.1 million (55%) of the accounts receivable, including unbilled revenue, balance at March 31, 2012. 

 

16
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

7.  Goodwill and Intangible Assets

 

The following table summarizes the changes in the carrying amount of the Company’s goodwill for the three months ended March 31, 2012:

 

   Fulfillment   Engineering &
Construction
   Total 
Beginning balance, December 31, 2011  $105,308   $58,489   $163,797 
Goodwill associated with acquisitions   2,056    -    2,056 
Other adjustments   17         17 
Ending balance, March 31, 2012  $107,381   $58,489   $165,870 

 

Management reviews goodwill and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. Accumulated impairment losses at March 31, 2012 and December 31, 2011 were $32.4 million, resulting from the wireline impairment charge incurred during the year ended December 31, 2009.

 

Other intangible assets consisted of the following:

 

   March 31,   December 31, 
   2012   2011 
Amortizable intangible assets:          
Customer relationships  $99,222   $98,662 
Technology and trade names   4,768    4,768 
Non-compete agreements   2,101    1,971 
Total amortizable intangible assets   106,091    105,401 
           
Accumulated amortization:          
Customer relationships   71,059    68,879 
Technology and trade names   837    628 
Non-compete agreements   1,592    1,476 
Total accumulated amortization   73,488    70,983 
Amortizable intangible assets, net  $32,603   $34,418 

 

 Amortization expense for the three months ended March 31, 2012 and April 2, 2011 was $2.5 million and $2.8 million, respectively.  The estimated amortization expense for the nine months ending December 31, 2012 and in each of the following four years, and thereafter, is as follows:

 

Nine months ending December 31, 2012  $7,408 
2012   4,418 
2013   3,408 
2014   3,370 
2015   2,665 
Thereafter   11,334 
Total  $32,603 

 

8. Long-Term Debt

 

On April 15, 2011, the Company completed a refinancing of all of its existing debt by entering into (i) a Credit Agreement (the “Term Loan Agreement”) by and among UniTek, the several banks and other financial institutions or entities that are parties to the Term Loan Agreement (collectively, the “Term Lenders”); and (ii) a Revolving Credit and Security Agreement (the “Revolving Loan Agreement”), by and among UniTek (and certain subsidiaries of UniTek) and PNC Bank, National Association, (the “Revolving Lender”).

 

17
 

 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

The Term Loan Agreement provides for a $100.0 million term loan (the “Term Loan”) and the Revolving Loan Agreement provides for a $75.0 million revolving credit facility (“Revolving Loan”). Both the Term Loan and the Revolving Loan may be used for general business purposes.  The Term Loan is to be repaid in installments beginning on June 30, 2011 and ending in 2018. The Term Loan Agreement was subject to a three percent (3%) debt discount totaling $3.0 million, which will be amortized over the life of the loan. The Term Loan bears interest at LIBOR (with a floor of 1.50%) plus a margin of 7.50% (9.00% at March 31, 2012). The Revolving Loan matures in 2016. UniTek may draw on the Revolving Loan and repay amounts borrowed in unlimited repetition up to the maximum allowed amount so long as no event of default has occurred and is continuing. The interest rate on the Revolving Loan is LIBOR (with no floor) plus a margin of between 2.25% and 2.75% (the weighted average interest rate of the Revolving Loan was 3.91% at March 31, 2012). Subject to certain terms and conditions, the Term Loan Agreement and the Revolving Loan Agreement include accordion features of $50.0 million and $25.0 million, respectively.

 

The Term Loan Agreement and the Revolving Loan Agreement contain customary representations and warranties of UniTek as well as provisions for repayment, guarantees, other security and customary events of default. Specifically, the Revolving Loan Agreement and the Term Loan Agreement provide the Revolving Lender and the Term Lenders, respectively, with security interests in the collateral of UniTek (and certain subsidiaries of UniTek). As of March 31, 2012, the Company had $19.7 million in letters of credit outstanding under the Revolving Loan Agreement.

 

Long-term debt consisted of the following:

 

   March 31,   December 31, 
   2012   2011 
         
Revolving Loan Agreement  $34,152   $15,663 
Term Loan, net of debt discounts of $2,589 and $2,696, respectively   96,411    96,554 
Total debt   130,563    112,217 
Less current portion   1,000    1,000 
Long-term debt, net of current portion  $129,563   $111,217 

 

Future maturities of total debt excluding $2,589 of debt discount are as follows as of March 31, 2012:

 

Nine months ending December 31, 2012  $750 
2013   1,000 
2014   1,000 
2015   1,000 
2016   35,152 
Thereafter   94,250 
Total  $133,152 

 

The Term Loan Agreement and the Revolving Loan Agreement require the Company to be in compliance with specified financial covenants, including (i) a “Consolidated Leverage Ratio” (as such term is respectively defined and applied in the Term Loan Agreement and the Revolving Loan Agreement) of less than a range of 4.75-3.00 to 1.00 (such ratio declining over time); (ii) a “Fixed Charge Coverage Ratio” (as such term is defined in the Term Loan Agreement and the Revolving Loan Agreement) not less than 1.2 to 1.0 for every fiscal quarter ended after the end of fiscal year 2011; and (iii) certain other covenants related to the operation of UniTek’s business in the ordinary course. In the event of noncompliance with these financial covenants and other defined events of default, the Term Lenders and the Revolving Lender are entitled to certain remedies, including acceleration of the repayment of amounts outstanding on the Term Loan and the Revolving Loan. The Company has to date not experienced any defaults with any such covenants.

 

9. Fair Value Measurements

 

As defined by ASC 820, the fair value of an asset or liability would be based on an “exit price” basis rather than an “entry price” basis. Additionally, the fair value should be market-based and not an entity-based measurement. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of input that may be used to measure fair value.

 

18
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable and unbilled revenue, accounts payable, accrued liabilities and financial instruments included in other assets and other liabilities are reflected in the consolidated balance sheets at historical cost, which is materially representative of their fair value due to the relatively short-term maturities of these assets and liabilities. The carrying value of the capital lease obligations approximates fair value because they bear interest at rates currently available to the Company for debt with similar terms and remaining maturities (level 2 measurements). The carrying values of the Company’s notes payable and long-term debt is determined by comparison to rates currently available for debt with similar terms, credit risk and maturities. The fair value of the Company’s long-term debt at March 31, 2012 and December 31, 2011 was $131.5 and $112.9 million, respectively. The fair value has been estimated based on the present value of future cash flows using market interest rates for the same contractual terms and considering the Company’s credit risk (level 2 measurements).

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:

 

   Fair Value Measurements at March 31, 2012 
   Fair Value at
March 31, 2012
   Quoted Prices
in 
   Active
Markets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets                    
Cash and cash equivalents  $5,054   $5,054   $-   $- 
Deferred compensation plan assets   764    764    -    - 
Total  $5,818   $5,818   $-   $- 
Liabilities                    
Contingent consideration  $20,025   $-   $-   $20,025 
Interest rate swap   136    -    136    - 
Total  $20,161   $-   $136   $20,025 

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:

 

   Fair Value Measurements at December 31, 2011 
   Fair Value at
December 31, 2011
   Quoted Prices
in 
  Active
Markets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets                    
Cash and cash equivalents  $95   $95   $-   $- 
Deferred compensation plan assets   551    551    -    - 
Total  $646   $646   $-   $- 
Liabilities                    
Contingent consideration  $26,958   $-   $-   $26,958 
Interest rate swap   133    -    133    - 
Total  $27,091   $-   $133   $26,958 

 

Derivatives

 

The Company manages interest rate exposure by using derivative instruments to reduce the variability of interest payments for variable-rate debt. The Company was also required to maintain interest rate hedge agreements covering a notional amount of not less than 50% of the debt outstanding under the Term Loan Agreement. On July 15, 2011, the Company entered into an interest-rate collar agreement with an aggregate notional principal amount of $50.0 million with a financial institution. This interest rate collar agreement matures on July 15, 2013. The collar is used to hedge the required portion of the Company’s First Lien Credit Agreement. The fair value of the interest-rate collar liability was $0.1 million at March 31, 2012 and December 31, 2011 and was recorded within accrued liabilities with changes in fair value recorded in earnings as a component of interest expense. The change in fair value is also reflected within the consolidated statement of cash flows within the cash flows from operating activities. The valuation of the interest rate collar represents the estimate of the net present value of expected cash flows from each transaction between the Company and the financial institution using relevant mid-market data inputs and based on the assumption of no unusual market conditions or forced liquidations. Due to the Company’s limited use of derivative instruments, there were no significant concentrations of credit risk with respect to derivative transactions as of March 31, 2012.

 

19
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Contingent Consideration

 

The fair value of the contingent consideration was determined using a Monte Carlo simulation model applied to the Company’s estimate of Pinnacle’s expected EBITDA performance at each of the measurement dates. The significant assumptions used in this calculation include forecasted revenue and earnings, an estimate of the volatility of Pinnacle’s earnings based upon a selected peer group and a risk-free interest rate equal to that of U.S. Treasury bonds with terms approximating the earnout periods. The change in fair value of the contingent consideration during the three months ended March 31, 2012 was due to the change in fair value associated with the Pinnacle acquisition as well as the payment of cash in satisfaction of a portion of the contingent liability.

 

The activity in liabilities classified within Level 3 of the valuation hierarchy consisted of the following:

 

   Contingent
Consideration
 
     
Balance as of December 31, 2011  $26,958 
Acquisitions   484 
Reclassified to additional paid-in-capital   (7,093)
Changes in fair value   (324)
Balance as of March 31, 2012  $20,025 

 

10.        Legal Proceedings

 

From time to time, the Company is a party to various lawsuits, claims, or other legal proceedings and is subject, due to the nature of its business, to governmental agency oversight, audits, investigations and review. Such actions may seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. Under such governmental audits and investigations, the Company may become subject to fines and penalties or other monetary damages. With respect to such lawsuits, claims, proceedings and governmental investigations and audits, the Company accrues reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe any of the pending proceedings, individually or in the aggregate, will have a material effect on its consolidated results of operations, cash flows or financial condition.

 

11.      Warrants

 

At March 31, 2012, the Company had issued warrants to purchase up to 91,742 shares of our common stock. The following table summarizes those warrant grants:

 

20
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Issued to   Shares  Grant Date   Expiration Date  Exercise
Price
  Note  
UniTek employees     11,384   September 26, 2007     September 26, 2017  $ 140.00   A  
Former owners of UniTek Holdings     77,902   September 26, 2007     September 26, 2017    140.00   A  
AMBB     2,456   December 2, 2010     December 2, 2020    56.00   B  
Total     91,742         Weighted Average
Exercise Price
  $ 137.75      

 

A —  Issued to employees and former owners.

 

B —  Issued in connection with AMBB contingent consideration.

 

During the three months ended March 31, 2012 and April 2, 2011, no warrants to purchase shares were exercised and there were no new issuances of warrants.

 

12.      Stock Options and Restricted Stock Units

 

As of March 31, 2012, the Company sponsored three stock option plans, the 1999 Securities Plan (the “1999 Plan”), the 2007 Equity Incentive Plan (the “2007 Plan”) and the 2009 Omnibus Securities Plan (the “2009 Plan”) (collectively, the “Plans”).  The Company accounts for the Plans pursuant to ASC 718, “Stock-Based Compensation” (“ASC 718”).

 

The Plans provide for the grant of incentive stock options and non-qualified stock options. The terms of the options are set by our board of directors (the “Board”). The options expire no later than ten years after the date the stock option is granted. As of March 31, 2012, a total of 1.6 million shares of the Company’s common stock had been reserved for issuance under the Plans including 0.6 million shares remaining eligible for the grant of awards under the Plans.

 

On December 9, 2010, the Company commenced a tender offer to exchange certain eligible options to purchase shares of its common stock that were currently outstanding under the following stock option plans: (i) the 1999 Plan; (ii) the 2007 Plan; and (iii) the 2009 Plan.  Eligible options fell within one of the following three groups: (i) non-Homerun Portion (as defined below) stock options that were granted under the 2007 Plan and were vested as of December 31, 2010 (“Group 1”), (ii) non-Homerun Portion stock options that were unvested as of December 31, 2010 and any Homerun Portion stock options (whether vested or unvested) that were granted under the 2007 Plan (“Group 2”) and (iii) vested and unvested stock options granted under the 1999 Plan and the 2009 Plan (“Group 3”).   The “Homerun Portion” of a 2007 Plan stock option grant was the 40% portion of each stock option grant, whether vested or unvested, that becomes exercisable (at its then current exercise price) only if and when the fair market value of the Company’s common stock is at least $168.00 per share.

 

21
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

Each tendered eligible option was cancelled in exchange for either a grant of RSUs or a replacement option, depending on whether the tendered eligible option was in Group 1, Group 2 or Group 3.  In exchange for each tendered eligible option in Group 1 and Group 3, the holder was granted a replacement option with an exercise price per share equal to the fair market value of the Company’s common stock on the first business day following the expiration of the tender offer, January 10, 2011. Except for the exercise price and the date of grant, all other material terms and provisions (including post-termination exercise periods) of the eligible options remained unchanged.  In exchange for the tender of all eligible options in Group 2, each holder received a grant of RSUs under the 2009 Plan.  RSUs represent the right to receive one share of the Company’s common stock for each vested RSU.

 

The tender offer expired on Friday, January 7, 2011, and pursuant to the tender offer, eligible options to purchase an aggregate of 296,833 shares of the Company’s common stock were validly tendered and not withdrawn, and the Company accepted for repurchase these eligible options. The holders of eligible options who validly tendered eligible options received an aggregate of 688,976 RSUs and 96,204 replacement options, repriced at an exercise price of $9.42 per share. For more information, refer to the Company’s Tender Offer Statement on Schedule TO, as filed with the SEC on December 9, 2010, as amended on December 28, 2010 and January 10, 2011.  The Company issued an additional 74,202 RSUs on January 10, 2011 to eligible employees and members of the Board who were not eligible to participate in the tender offer or that did not hold any Group 2 options.  

 

During the three months ended March 31, 2012, the Company issued an additional 166,063 RSUs to eligible directors.

 

The following table represents stock options and RSUs under each of the Plans as of March 31, 2012:

 

   2007 Plan   2009 Plan and 1999 Plan   2009 Plan RSUs 
   Number of
Shares
   Weighted
Average
Exercise
Price
   Number of
Shares
   Weighted
Average
Exercise
Price
   Number of
Shares
   Weighted
Average Price
 
Outstanding at December 31,
2011
   -   $-    89,291   $10.28    487,726   $9.46 
Granted – New   -    -    -    -    166,063    4.22 
Exercised / Vested   -    -    -    -    (220,681)   8.75 
Cancelled / Forfeited   -    -    (13,760)  $9.54    -   $- 
Stock Options and RSUs outstanding at March 31, 2012   -   $-    75,531   $10.41    433,108   $9.47 

 

During the three months ended March 31, 2012 and April 2, 2011, the Company recorded stock-based compensation expense of $2.1 million and $2.5 million, respectively.  The stock based compensation expense for the three months ended March 31, 2012 included $1.4 million for the acceleration of RSU vesting related to the separation of the Chief Executive Officer and Executive Chairman. As of March 31, 2012, there was $4.9 million of total unrecognized compensation cost related to the non-vested share-based compensation arrangements granted under the Plans (Group 2 and new RSUs granted). That cost is expected to be recognized over a weighted-average period of 2.4 years.

 

13.      Related-Party Transactions

 

The Company maintains certain policies and procedures for the review, approval and ratification of related-party transactions to ensure that all transactions with selected parties are fair, reasonable and in the Company’s best interest. All significant relationships and transactions are separately identified by management if they meet the definition of a related party or a related-party transaction. Related-party transactions include transactions that occurred during the year, or are currently proposed, in which the Company was or will be a participant and in which any related person had or will have a direct or indirect material interest. All related-party transactions are reviewed, approved and documented by the appropriate level of the Company’s management in accordance with these policies and procedures.

 

Monitoring and Oversight Agreement

On January 27, 2010, the Company entered into an Amended and Restated Monitoring and Oversight Agreement (the “M&O Agreement”) with HM Capital Partners LP (“HM LP.

 

22
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

In connection with the closing of the equity offering completed in November of 2010, the parties to the M&O Agreement agreed to terminate the M&O Agreement and the Company has agreed to pay a termination fee of $4.3 million (payable in cash or stock, as described below) that would only become payable only upon certain conditions being met as outlined below.

 

·The Sector Performance Fund, which is an affiliate of HM LP, sells its entire ownership stake in the Company, and

 

·The average price per share of common stock realized by the Sector Performance Fund is above its basis, which was calculated as of the closing of the Equity Offering and includes the conversion of the Series B Preferred and all other shares owned by Sector Performance Fund prior to the Equity Offering. Subsequent to the Equity Offering and as of March 31, 2012, the Sector Performance Fund’s basis in its stock was significantly above the quoted market price of the Company’s common stock.

 

If the two conditions above are met and the termination payment becomes payable, the Company will be entitled to satisfy this obligation in either cash or shares of its common stock, at its sole discretion. If payment is made in shares of common stock, the stock price would be calculated using the 20-day trailing average share price as of the date that the two conditions above are met and the termination payment becomes payable.

 

The termination fee resulting from the termination of the M&O Agreement represents a loss contingency under ASC 450. As of March 31, 2012, the Company believes it does not yet meet the requirements to be recorded as a liability since the Company’s quoted stock price is currently trading well below the Sector Performance Fund basis and a sale of their stock would not meet the conditions precedent required to trigger payment of the termination fee. The Company will continue to evaluate this loss contingency on an ongoing basis and as of each reporting period in order to determine the probability of the triggering conditions being met.

 

14.      Income Taxes

 

For the three months ended March 31, 2012, the Company’s income tax expense was $0.7 million, which consisted primarily of a current tax benefit of $0.3 million related to its Canadian operations and a deferred tax expense of $1.0 million related to tax deductible goodwill. During the three months ended April 2, 2011, the Company’s income tax expense was $0.5 million and consisted primarily of a current tax benefit of $0.1 million related to the Company’s Canadian operations and a deferred tax expense of $0.5 million related to tax deductible goodwill and $0.1 million of state income tax.

 

Because the Company has not yet achieved profitable operations outside of Canada, management believes the potential tax benefits from other deferred tax assets do not satisfy the recognition criteria set forth in ASC 740, “Accounting for Income Taxes” and accordingly, has recorded a valuation allowance for substantially its entire gross deferred tax asset. Additionally, for tax purposes, certain goodwill is being amortized.  In periods when the book basis of tax deductible goodwill exceeds its respective tax basis, a net deferred tax liability is recorded in the consolidated financial statements, since the basis difference will not reverse within the periods that the Company’s deferred tax assets will be recognized.

  

15.      Discontinued Operations

 

Discontinued operations for the three months ended March 31, 2012 and April 2, 2011 consisted of certain cable markets that have been exited for operational reasons as well as wireless service locations that were shut down and discontinued due to lack of continuing revenues. The following table summarizes the results for the Company’s discontinued operations for the three months ended March 31, 2012 and April 2, 2011:

 

   Three Months Ended   Three Months Ended 
   March 31, 2012   April 2, 2011 
Revenues  $137   $764 
Cost of revenues   435    972 
Gross margin   (298)   (208)
Depreciation and amortization   47    43 
Loss from discontinued operations before income taxes   (345)   (251)
Tax benefit from discontinued operations   -    - 
Loss from discontinued operations  $(345)  $(251)

 

23
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

16.      Segment Reporting

 

ASC 280 “Segment Reporting” establishes standards for reporting information about operating segments in annual financial statements of public business enterprises and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision makers of an enterprise. The Company reports its financial results on the basis of two reportable segments: (1) Fulfillment and (2) Engineering and Construction. The Fulfillment segment consists of installation and other services for the pay television industry. This reportable segment includes the aggregation of the satellite and broadband cable operating segments of the Company. The Engineering and Construction segment consists of engineering and construction services for the wired and wireless telecommunications industry, including public safety networks, on a project basis. This reportable segment includes the aggregation of the wireline, wireless and public safety operating segments of the Company. Transactions within and between segments are generally made on a basis to reflect the market value of the services and have been eliminated in consolidation.

 

 The Company evaluates the performance of its operating segments based on several factors of which the primary financial measure is segment EBITDA. Management believes segment operating income (loss) represents the closest GAAP measure to segment EBITDA. Selected segment financial information for the three months ended March 31, 2012 and April 2, 2011 is presented below:

 

   Three Months Ended 
   March 31, 2012   April 2, 2011 
   Fulfillment   Engineering &
Construction
   Total   Fulfillment   Engineering &
Construction
   Total 
                               
Revenue  $69,940   $38,287   $108,227   $63,940   $27,144   $91,084 
Cost of revenue   57,166    33,097    90,263    51,204    25,350    76,554 
Gross profit   12,774    5,190    17,964    12,736    1,794    14,530 
Selling, general and administrative expenses   7,509    5,550    13,059    7,156    3,712    10,868 
Change in fair value of contingent consideration   -    (324)   (324)   -    -    - 
Restructuring changes   2,771    1,517    4,288    -    -    - 
Depreciation and amortization   4,717    2,240    6,957    5,236    1,094    6,330 
Operating income (loss)  $(2,223)  $(3,793)  $(6,016)  $344   $(3,012)  $(2,668)
Interest expense             3,022              4,473 
Other (income) expense, net             (229)             (29)
Loss from continuing operations before income taxes            $(8,809)            $(7,112)

 

 

At March 31, 2012, the total assets of the Fulfillment segment were $165.3 million and the total assets of the Engineering and Construction segment were $186.9 million. This compares to $169.5 million and $179.4 million at December 31, 2011 for the Fulfillment segment and the Engineering and Construction segment, respectively. The decrease of $4.2 million in the assets of the Fulfillment segment was primarily due to timing of receivables and the increase of $7.5 million in the assets of the Engineering and Construction segment compared to December 31, 2011 is primarily due to increased receivables in the wireless and wireline businesses.

 

24
 

 

UniTek Global Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise indicated)

(Unaudited)

 

17.      Subsequent Events

 

On May 3, 2012, the Company entered into an incremental term draw of $20.0 million under the accordion feature of the Term Loan Agreement. The Incremental Term Loan was subject to a four percent (4%) debt discount, which will be amortized over the remaining life of the loan. The interest rate, maturity date and terms of the Term Loan Agreement did not change. The funds will be used for the scheduled payments of $1.9 million for the Cableview acquisition and for the $4.3 million of incremental cash required by the Amendment to the Pinnacle Wireless Asset Purchase Agreement. The remaining funds will be used to reduce the outstanding balance under the Revolving Loan Agreement creating approximately $12.6 million of incremental liquidity for working capital and other cash obligations.

 

25
 

 

Item 2.  Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The information included in this quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the attainment of which involves various risks and uncertainties. All statements other than statements of historical fact included in this quarterly report are forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “will,” “expects,” “believes,” “estimates,” “anticipates,” “planned,” “scheduled,” “continue” or similar terms, variations of those terms or the negative of those terms.

 

These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this quarterly report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations and cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:

 

  · our financial condition and strategic direction;
  · our future capital requirements and our ability to satisfy our capital needs;
  · the potential generation of future revenues and/or earnings and our ability to manage and control costs;
  · changes in our ability to adequately staff our service offerings;
  · opportunities for us from new and emerging technologies in our industries;
  · changes in our ability to obtain additional financing and the potential for restrictive covenants within our credit agreements;
  · our growth strategy and our ability to consummate acquisitions and integrate them into our existing operations;
  · trends in the satellite television, broadband cable and telecommunications industries;
  · key drivers of change in our business, as identified in this quarterly report;
  · our competitive position and the competitive landscape;
  · shortages in fuel supply or increases in fuel prices could increase operating expense; and
  · other statements that contain words like “believe,” “anticipate,” “expect” and similar expressions that are also used to identify forward-looking statements.

 

It is important to note that all of our forward-looking statements are subject to a number of risks, assumptions and uncertainties, such as risks:

 

  · related to a concentration in revenues from a small number of customers;
  · associated with the consolidation of our customers;
  · associated with competition in the satellite television, broadband cable and telecommunications industries;
  · that we will not be able to generate positive cash flow; and
  · that we may not be able to obtain additional financing.

 

This list is only an example of the risks that may affect the forward-looking statements. If any of these risks or uncertainties materialize or fail to materialize, or if the underlying assumptions are incorrect, then actual results may differ materially from those projected in the forward-looking statements.

 

Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, without limitation, those discussed elsewhere in this quarterly report. It is important not to place undue reliance on these forward-looking statements, which reflect our analysis, judgment, belief or expectation only as of the date of this quarterly report. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report.

 

Critical Accounting Policies and Estimates

 

There have been no changes to our critical accounting policies and estimates.

 

26
 

 

Summary of Operating Results

 

The following table presents consolidated selected financial information. The statement of operations data for the three months ended March 31, 2012 and April 2, 2011, has been derived from our unaudited condensed consolidated financial statements that, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the data for such period. We operate in two reportable segments: (1) Fulfillment and (2) Engineering and Construction.

 

Effective April 3, 2011, we completed the acquisition of Pinnacle pursuant to an Asset Purchase Agreement, dated as of March 30, 2011 (the “Asset Purchase Agreement”), by and among UniTek and Pinnacle and its former owners (the “Sellers”). The operating results of Pinnacle are included in our consolidated results as a component of the Engineering and Construction segment for the period beginning April 3, 2011.

 

Results of Operations – Three Months Ended March 31, 2012 Compared to Three Months Ended April 2, 2011

 

The following table presents, for the periods indicated, a summary of our condensed consolidated statements of operations information.

 

   Three Months Ended 
   March 31, 2012   April 2, 2011 
(in thousands, except per share data)  (unaudited)   (unaudited) 
Revenues  $108,227   $91,084 
Cost of revenues   90,263    76,554 
Gross profit   17,964    14,530 
Selling, general and administrative expenses   13,059    10,868 
Restructuring charges   4,288    - 
Change in fair value of contingent consideration   (324)   - 
Depreciation and amortization   6,957    6,330 
Operating loss   (6,016)   (2,668)
Interest expense   3,022    4,473 
Other (income) expense, net   (229)   (29)
Loss from continuing operations before income taxes   (8,809)   (7,112)
Income tax expense   675    512 
Loss from continuing operations   (9,484)   (7,624)
Loss from discontinued operations   (345)   (251)
Net loss  $(9,829)  $(7,875)
Net loss per share- basic and diluted:          
Continuing operations  $(0.57)  $(0.50)
Discontinued operations  $(0.02)  $(0.02)
Weighted average shares of common stock outstanding –basic and diluted   16,545    15,154 
Adjusted EBITDA (1)  $7,037   $6,173 

 

(1)  See description of “Adjusted EBITDA” below.

 

27
 

 

The following table presents, for the dates indicated, a summary of our condensed consolidated balance sheet information.

 

(Amounts in thousands)  March 31,
2012
(unaudited)
   December 31,
2011
 
Current assets  $109,032   $105,980 
Total assets   352,190    348,880 
Current liabilities   91,383    104,975 
Long-term debt and capital lease obligations, net of current portion   144,375    127,500 
Stockholders’ equity   108,386    109,230 

 

Revenues

 

The following table sets forth information regarding our revenues by segment for the three months ended March 31, 2012 and April 2, 2011.

 

   Three Months Ended (unaudited)     
   March 31, 2012   April 2, 2011     
(Amounts in thousands)  Amount   % of Revenues   Amount   % of Revenues   Increase 
Fulfillment  $69,940    64.6%  $63,940    70.2%  $6,000 
Engineering and Construction   38,287    35.4%   27,144    29.8%   11,143 
Total  $108,227    100%  $91,084    100%  $17,143 

 

We had revenue of $108.2 million for the three months ended March 31, 2012, compared to $91.1 million for the three months ended April 2, 2011. This represents an increase of $17.1 million, or 18.8%.

 

Revenue for the Fulfillment segment increased by $6.0 million, or 9.4%, from $63.9 million for the three months ended April 2, 2011 to $69.9 million for the three months ended March 31, 2012. The increase in revenues from our Fulfillment segment was primarily attributable to increased revenues from our cable operations due to market share growth combined with recent acquisitions.

 

Revenue for the Engineering and Construction segment was $38.3 million for the three months ended March 31, 2012 and $27.1 million for the three months ended April 2, 2011. The Pinnacle acquisition contributed $13.8 million in the quarter ended March 31, 2012 slightly offset by lower revenue in the legacy wireless group as new projects ramp up.

 

Gross Profit

 

The following table sets forth information regarding our gross profit by segment for the three months ended March 31, 2012 and April 2, 2011.

 

   Three Months Ended (unaudited)     
   March 31, 2012   April 2, 2011     
(Amounts in thousands)  Amount   % of Revenues   Amount   % of Revenues   Increase 
Fulfillment  $12,774    18.3%  $12,736    19.9%  $38 
Engineering and Construction   5,190    13.6%   1,794    6.6%   3,396 
Total  $17,964    16.6%  $14,530    16.0%  $3,434 

 

Our gross profit for the three months ended March 31, 2012 was $18.0 million compared to $14.5 million for the three months ended April 2, 2011, representing an increase of $3.4 million, or 23.6%. Our gross profit as a percentage of revenue was approximately 16.6% for the three months ended March 31, 2012, as compared to 16.0% for the three months ended April 2, 2011.

 

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For the Fulfillment segment, gross margin decreased from 19.9% for the three months April 2, 2011 to 18.3% for the three months ended March 31, 2012. The decrease in gross margin was attributable to mix of revenue changes between our broadband cable operations compared to our satellite operations.

 

For the Engineering and Construction segment, gross margin increased from 6.6% for the three months ended April 2, 2011 to 13.6% for the three months ended March 31, 2012.  The increase is primarily the result of volume leverage in our wireline business and the increased margins in the wireless business which includes the impact of Pinnacle.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expense ( “SG&A ”)  for the three months ended March 31, 2012 was $13.1 million as compared to $10.9 million for the three months ended April 2, 2011, representing an overall increase of $2.2 million. During the three months ended March 31, 2012, the Pinnacle acquisition (completed April 3, 2011) added $1.2 million in SG&A. In addition, we incurred an additional $0.7 million in salary and personnel costs. These increases were offset by a decrease in stock compensation expense for the three months ended March 31, 2012 of approximately $0.4 million as compared to the prior year first quarter. Our stock compensation expense for the three months ended March 31, 2012, included an additional $1.4 million related to the accelerated vesting of RSUs and stock options held by our former Chief Executive Officer and former Executive Chairman of the Board in accordance with the terms of their employment agreements.

 

Compared to the prior quarter ended December 31, 2011, our SG&A expense for the quarter ended March 31, 2012, decreased by $0.6 million before the $1.4 million increase in stock compensation expense due to the acceleration of RSU vesting in conjunction with the senior management changes.

 

Adjusted EBITDA and Net Income (Loss) after Certain Non-cash Adjustments

 

Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is a key indicator used by our management to evaluate operating performance of our company and to make decisions regarding compensation and other operational matters. While this Adjusted EBITDA is not intended to replace any presentation included in our consolidated financial statements under generally accepted accounting principles, or GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance with other companies in our industry. This calculation may differ in method of calculation from similarly titled measures used by other companies.  We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.  Adjusted EBITDA is our EBITDA adding back transaction costs, certain restructuring costs and other non-cash charges.

 

Net income (loss) after certain non-cash adjustments is a key indicator used by our management to evaluate operating performance of our company.  While the net income (loss) after certain non-cash adjustments is not intended to replace any presentation included in our consolidated financial statements under GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance in comparison with other companies in our industry. Specifically, (i) non-cash compensation expense may vary due to factors influencing the estimated fair value of performance based rewards, estimated forfeiture rates and amounts granted, (ii) non-cash interest expense varies depending on the timing of amendments to our debt and changes to our debt structure and (iii) amortization of intangible assets is impacted by the Company’s acquisition strategy and timing of acquisitions.

 

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A reconciliation of Adjusted EBITDA and net loss after certain non-cash adjustments to net loss for the three month periods set forth below is as follows:

 

   Three Months Ended (unaudited) 
(Amounts in thousands)  March 31, 2012   April 2, 2011 
         
Net loss  $(9,829)  $(7,875)
Non-cash stock based compensation   2,065    2,511 
Non-cash interest expense   326    1,390 
Non-cash amortization   2,509    2,807 
Net loss after certain non-cash adjustments  $(4,929)  $(1,167)
           
Loss from discontinued operations   345    251 
Income tax expense   675    512 
Restructuring costs   4,288    - 
Change in fair value   (324)   - 
Cash interest expense   2,696    3,083 
Other income   (229)   (29)
Depreciation   4,448    3,523 
Transaction costs   67    - 
Adjusted EBITDA  $7,037   $6,173 

 

Adjusted EBITDA increased by 14.0% to $7.0 million for the three months ended March 31, 2012 from $6.2 million for the three months ended April 2, 2011. Our year-over-year improvement of $3.4 million in gross profit was the main contributor to this increase, which was somewhat offset by an increase of $1.8 million in SG&A, excluding the lower stock compensation expense.

 

Restructuring Charges

 

In the quarter ended March 31, 2012, the Company recorded restructuring charges of $4.3 million related to the previously announced changes in senior management. Of these costs, approximately $3.2 million will be paid in 2012. This includes the severance pay, bonus payments and benefits related to the Separation Agreements entered into with our Chief Executive Officer and Executive Chairman of the Board in January 2012 and other senior management changes made in the first quarter of 2012.

 

Depreciation and Amortization

 

Depreciation of fixed assets totaled approximately $4.4 million for the three months ended March 31, 2012 compared to $3.5 million for the three months ended April 2, 2011. Of this increase, $0.2 million was attributable to Pinnacle, with the remaining increase due to the addition vehicles in the fourth quarter of 2011 related to our cable business growth.

 

Amortization of intangible assets totaled approximately $2.5 million for the three months ended March 31, 2012 compared to $2.8 million for the three months ended April 2, 2011. A portion of our customer related intangible assets arising from acquisitions completed in prior years reached the end of their estimated useful lives resulting in a decrease in amortization expense of $1.1 million, which was partially offset by amortization of intangible assets resulting from the Pinnacle acquisition of $0.8 million.

 

Interest Expense

 

We recognized $3.0 million and $4.5 million of interest expense during the three months ended March 31, 2012 and April 2, 2011, respectively. The decrease of approximately $1.5 million was primarily attributable to lower overall effective interest expense resulting from the debt refinancing on April 15, 2011.

 

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Income Taxes

 

During the three months ended March 31, 2012, we recorded income tax expense of $0.7 million, which consisted primarily of a current tax benefit of $0.3 million related to our Canadian operations and a deferred tax expense of $1.0 million related to tax deductible goodwill. During the three months ended April 2, 2011, the Company’s income tax expense was $0.5 million and consisted primarily of a current tax benefit of $0.1 million related to the Company’s Canadian operations and a deferred tax expense of $0.5 million related to tax deductible goodwill and $0.1 million of state income tax. Because we have not yet achieved profitable operations outside of Canada, management believes the potential tax benefits from other deferred tax assets do not satisfy the recognition criteria set forth in ASC 740, “Accounting for Income Taxes” (“ASC 740”), and accordingly, have recorded a valuation allowance for substantially our entire gross deferred tax asset. Additionally, for tax purposes, certain goodwill is being amortized.  In periods when the book basis of tax deductible goodwill exceeds its respective tax basis, a net deferred tax liability is recorded in the consolidated financial statements, since the basis difference will not reverse within the periods that our deferred tax assets will be recognized.

 

Net Income (Loss)

 

We had net loss of $9.8 million for the three months ended March 31, 2012, compared to net loss of $7.9 million for the three months ended April 2, 2011. The net loss for the three months ended March 31, 2012 includes a loss from discontinued operations of $0.3 million. The increase in net loss is primarily due to the restructuring charges resulting from the management changes that occurred in the quarter.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2012, we had consolidated current assets of approximately $109.0 million, including cash and cash equivalents of approximately $5.1 million. We had a total cash balance and current availability under the Revolving Loan Agreement of $9.8 million based on the March 31, 2012 borrowing base levels. We have an additional availability under the Revolving Loan Agreement of $16.4 million for incremental eligible accounts receivable above the March 31, 2012 amount. Our cash management process applies daily cash received from customers directly to the outstanding balance under the revolving credit facility.

 

Historically, we have funded our operations primarily through operating cash flows and borrowings under loan arrangements. Our primary liquidity needs are for working capital, debt service, insurance collateral in the form of cash and letters of credit and capital expenditures. In the past we have also used our capital resources to fund our growth through strategic mergers and acquisitions. The principal uses of cash during the quarter ended March 31, 2012 were for working capital purposes. In addition, during the second quarter of 2012, we will fund the cash portion of the earn-out payment for the Pinnacle acquisition. This will be funded from operations in the year with the $4.3 million cash impact of the Amendment to the Asset Purchase Agreement funded by the incremental term draw under the Term Loan Agreement described in the Subsequent Events.

 

We need working capital primarily to support the expected growth in our business, particularly in our Engineering and Construction segment as a result of wireless growth, fiber deployment and cable fulfillment related construction. We are also subject to seasonal variations in our business, which occur primarily due to the impact of weather on our Engineering and Construction work, as well as seasonal fluctuations within our Fulfillment segment. Our business is typically slower during the first quarter and second half of the fourth quarter of each calendar year. As a result, we generally experience seasonal working capital needs from approximately July through November of each calendar year in order to support growth in accounts receivable and unbilled revenue.  Our billing terms are generally 30 days, and in addition, we also maintain inventory to meet the material requirements of certain of our contracts, primarily within the Fulfillment segment. Our vendors typically offer us terms ranging from 30 to 90 days, while our agreements with subcontractors are generally 14 to 21 days, with some terms as long as 35 to 45 days.

 

We believe that our cash, cash equivalents and availability under our new credit facilities will be sufficient to meet our anticipated cash requirements within our existing businesses for at least the next 12 months.  If we make additional acquisitions or our growth in revenues exceeds our current projections, we may need to seek additional sources of liquidity. If our available cash and cash equivalents are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecast amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned development and operations, which could harm our business.

 

Capital Leases and Other Contractual Obligations

 

We rent office space, equipment and trucks under non-cancelable operating and capital leases, certain of which contain purchase option terms. Operating lease payments are expensed as incurred. Leases meeting certain criteria are capitalized, with the related asset being recorded in property and equipment and an offsetting amount recorded as a liability. These capital leases are non-cash transactions and, accordingly, have been excluded from the consolidated statements of cash flows. As of March 31, 2012 and December 31, 2011, the total cost of the assets under capital leases was approximately $39.8 million and $38.8 million, respectively, and the related accumulated depreciation was approximately $15.5 million and $13.7 million, respectively. The total capital lease liability related to these assets was $24.7 million as of March 31, 2012 and $25.9 million as of December 31, 2011.

 

Summary of Cash Flows

 

The following table summarizes our cash flows for the three months ended March 31, 2012 and April 2, 2011:

 

   Three months
Ended (unaudited)
 
(Amounts in thousands)  March 31, 2012   April 2, 2011 
Net cash used in operating activities  $(7,644)  $(2,701)
Net cash used in investing activities  $(2,444)  $(1,247)
Net cash provided by (used in) financing activities  $15,039   $(1,909)

 

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Net Cash Used in Operating Activities.

 

Net cash used in operating activities for the three months ended March 31, 2012 and April 2, 2011 was approximately $7.6 million and $2.7 million, respectively. During the three months ended March 31, 2012, cash flows resulting from operating activities were impacted primarily by a decrease in accounts payable of $9.0 million related to the timing of year end payments and a change in payment terms with one vendor.

 

Net Cash Used in Investing Activities.

 

Net cash used in investing activities for the three months ended March 31, 2012 and April 2, 2011 was approximately $2.4 million and $1.2 million, respectively. Cash paid for acquisitions during the three months ended March 31, 2012 was approximately $0.9 million, primarily for the two cable acquisitions. Cash used for the purchase of fixed assets was $1.9 million and $1.0 million for the three months ended March 31, 2012 and April 2, 2011, respectively.

 

Net Cash Provided by (Used in) Financing Activities.

 

Net cash provided by financing activities for the three months ended March 31, 2012 was approximately $15.0 million and net cash used in financing activities was approximately $1.9 million for the three months ended April 2, 2011. During the three months ended March 31, 2012, we had proceeds of $18.5 million from the Revolving Loan Agreement offset by long-term debt and capital lease payments of $3.2 million.

 

During the three months ended April 2, 2011, net cash used in financing activities consisted primarily of $1.0 million of borrowings under the prior revolving credit facility, offset by long-term debt and capital lease payments of $2.9 million.

 

 Off-Balance Sheet Arrangements

 

We provide letters of credit to secure our obligations related to our insurance arrangements and bonding requirements. Total letters of credit issued as of May 7, 2012 were $21.3 million, which were issued under the Revolving Loan Agreement. We expect that the total letters of credit issued will peak during 2012 as we build a longer loss and claim history under our existing insurance plans.

 

In the ordinary course of business, we are required by certain customers and state license agencies to provide performance, payment and permit bonds for some of our contractual commitments related to projects in process. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and other vendors. As of March 31, 2012, the Company had $60.8 million in bonds outstanding.

 

Effect of Inflation

 

We do not believe that our businesses are impacted by inflation to a significantly different extent than the general economy. However, there can be no assurance that inflation will not have a material effect on our operations in the future.

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

 

There have been no material changes to our market risk since our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 4.     Controls and Procedures

 

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) of the Exchange Act. Based upon that evaluation, such officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Exchange Act, is accumulated and communicated to our management, including our Principal Executive and Financial Officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II:  OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

We are subject to various litigation claims that occur in the ordinary course of business, which the Company believes, even if decided adversely to us, would not have a material adverse effect on our business, financial condition, results of operations and liquidity.

 

Item 1A.  Risk Factors

 

There have been no material changes to any of the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not Applicable

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits.

 

(a)   Exhibits

 

*10.1   Retention Agreement, dated January 11, 2012 by and between UniTek and Ronald J. Lejman
     
*10.2   Retention Agreement, dated January 11, 2012 by and between UniTek and Daniel Yannantuono
     
*10.3   Retention Agreement, dated January 11, 2012 by and between UniTek and Elizabeth Downey
     
*10.4   Retention Agreement, dated January 15, 2012 by and between UniTek and Norman Snell
     
*10.5   Retention Agreement, dated January 15, 2012 by and between UniTek and Christopher Perkins
     
*10.6   Retention Agreement, dated January 23, 2012 by and between UniTek and Kevin McClelland
     
*10.7   Retention Agreement, dated January 25, 2012 by and between UniTek and Scott Lochhead
     
*10.8   Employment Agreement, dated December 1, 2010, by and between, UniTek USA LLC, and Daniel Yannantuono
     
*10.9   Employment Agreement, dated December 1, 2010, by and between, UniTek USA LLC, and Elizabeth Downey
     
*31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
*31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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**32.1   Certification of our Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
**101.INS   XBRL Instance Document
     
**101.SCH   XBRL Taxonomy Extension Schema
     
**101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
**101.LAB   XBRL Taxonomy Extension Label Linkbase
     
**101.PRE   XBRL Taxonomy Extension Presentation Linkbase
     
**101.DEF   XBRL Taxonomy Extension Definition Linkbase

 

* Filed herewith.

 

** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNITEK GLOBAL SERVICES, INC.

 

Date:   May 9, 2012 By: /s/ Daniel Yannantuono
    Daniel Yannantuono
    Co-Manager of the Interim Office of the CEO
    (Interim Co-Principal Executive Officer)
     
Date:   May 9, 2012 By: /s/ Ronald J. Lejman
    Ronald J. Lejman
    Co-Manager of the Interim Office of the CEO
    (Interim Co-Principal Executive Officer)
    Chief Financial Officer and Treasurer
    (Principal Financial Officer)
     
Date:   May 9, 2012 By: /s/ Kevin McClelland
    Kevin McClelland
    Corporate Controller
    (Principal Accounting Officer)

 

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