**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2004**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from                    to**                    

 

**Commissionfile number  001-32164**

 

| **INFRASOURCE  SERVICES, INC.**                                 |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)         |
|                                                            |   |   |
| **Delaware**                                                    |   | **03-0523754** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **500 West Dutton Mill Road, Aston, PA**                        |
| (Address of principal executive offices)                        |
|                                                            |
| **19014**                                                       |
| (Zip Code)                                                      |
|                                                            |
| **(610) 619-3000**                                              |
| (Registrant’s telephone number, including  area code)      |

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes o   No ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

   At June 11, 2004, therewere 39,167,157 shares of InfraSource Services, Inc. Common Stock,  par value of $.001, outstanding.

 

 

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###### **For the Quarter Ended March 31, 2004**

 

###### **FORM 10-Q**

 

###### **INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

###### **Table of Contents**

 
| Part I - FINANCIAL INFORMATION   |                                                                                                                                                                                                                                    |
|----------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                             |                                                                                                                                                                                                                                    |
| Item 1.                          | Financial Statements (Unaudited)                                                                                                                                                                                                        |   |
|                             |                                                                                                                                                                                                                                    |   |
|                             | Condensed Consolidated Balance Sheets at  March 31, 2004 and December 31, 2003                                                                                                                                                | 2 |
|                             |                                                                                                                                                                                                                                    |   |
|                             | Condensed Consolidated Statements of  Operations for the period January 1, 2003 to March 21, 2003  (predecessor entity – InfraSource Incorporated and Subsidiaries) and the  three months ended March 31, 2004      | 3 |
|                             |                                                                                                                                                                                                                                    |   |
|                             | Condensed Consolidated Statements of Cash  Flows for the period January 1, 2003 to March 21, 2003 (predecessor  entity – InfraSource Incorporated and Subsidiaries)  and the three months ended March 31, 2004 | 4 |
|                             |                                                                                                                                                                                                                                    |   |
|                             | Notes to Condensed Consolidated Financial  Statements                                                                                                                                                                                   | 5 - 15 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 2.                          | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                                                                                             | 16 - 23 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 3.                          | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                                                                                             | 24 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 4.                          | Controls and Procedures                                                                                                                                                                                                                 | 24 |
|                             |                                                                                                                                                                                                                                    |   |
| PART II – OTHER INFORMATION |                                                                                                                                                                                                                                    |
|                             |                                                                                                                                                                                                                                    |   |
| Item 1.                          | Legal Proceedings                                                                                                                                                                                                                       | 25 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 2.                          | Changes in Securities and Use of Proceeds                                                                                                                                                                                               | 25 - 26 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 3.                          | Defaults Upon Senior Securities                                                                                                                                                                                                         | 26 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 4.                          | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                    | 26 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 5.                          | Other Information                                                                                                                                                                                                                       | 26 |
|                             |                                                                                                                                                                                                                                    |   |
| Item 6.                          | Exhibits and Reports on Form 8-K                                                                                                                                                                                                        | 26 |
|                             |                                                                                                                                                                                                                                    |   |
| SIGNATURES                       | 27                                                                                                                                                                                                                                      |

 

1

----

 

###### **PART I – FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

###### ** **

**INFRASOURCE SERVICES, INC. AND SUBSIDIARIESCondensed Consolidated BalanceSheets(Unaudited)**

**(Inthousands, except share data)**

 
|                                                                                                                                |   | **December 31,  2003** |    | **March 31,  2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|--------------------------|--------|
| ASSETS                                                                                                                              |   |                        |    |                     |   |
| Current assets:                                                                                                                     |   |                        |    |                     |   |
| Cash and cash equivalents                                                                                                           |   | $                           | 12,080  |                     | $      | 16,110 |   |
| Contract receivables (less allowances for  doubtful accounts of $4,057 and $4,057, respectively)                                    |   | 70,905                      |    | 79,904                   |   |
| Contract receivables due from related  parties                                                                                      |   | 14,617                      |    | —                   |   |
| Costs and estimated earnings in excess of  billings                                                                                 |   | 34,003                      |    | 58,217                   |   |
| Inventories                                                                                                                         |   | 8,473                       |    | 9,356                    |   |
| Deferred income taxes                                                                                                               |   | 685                         |    | 2,236                    |   |
| Other current assets                                                                                                                |   | 4,822                       |    | 17,042                   |   |
| Due from related parties, net                                                                                                       |   | 10,907                      |    | —                   |   |
| Current assets - discontinued operations                                                                                            |   | 4,262                       |    | 4,101                    |   |
| Total current assets                                                                                                                |   | 160,754                     |    | 186,966                  |   |
|                                                                                                                                |   |                        |    |                     |   |
| Property and equipment (less accumulated  depreciation of $5,299 and $10,618, respectively)                                         |   | 116,566                     |    | 125,140                  |   |
| Property and equipment - related parties                                                                                            |   | 7,218                       |    | —                   |   |
| Goodwill                                                                                                                            |   | 68,877                      |    | 128,426                  |   |
| Intangible assets (less accumulated  amortization of $2,600 and $7,147, respectively)                                               |   | 5,400                       |    | 12,353                   |   |
| Deferred charges and other assets, net                                                                                              |   | 7,309                       |    | 12,765                   |   |
| Deferred income taxes                                                                                                               |   | 1,058                       |    | —                   |   |
| Noncurrent assets - discontinued operations                                                                                         |   | 395                         |    | 332                      |   |
| Total assets                                                                                                                        |   | $                           | 367,577 |                     | $      | 465,982 |   |
|                                                                                                                                |   |                        |    |                     |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                           |   |                        |    |                     |   |
| Current liabilities:                                                                                                                |   |                        |    |                     |   |
| Current portion of long-term debt and  capital lease obligations                                                                    |   | $                           | 1,500   |                     | $      | 1,438 |   |
| Revolving credit facility borrowings                                                                                                |   | —                      |    | 5,000                    |   |
| Accounts payable                                                                                                                    |   | 13,244                      |    | 26,808                   |   |
| Other current and accrued liabilities                                                                                               |   | 42,701                      |    | 38,058                   |   |
| Accrued insurance reserves                                                                                                          |   | 19,773                      |    | 20,368                   |   |
| Billings in excess of costs and estimated  earnings                                                                                 |   | 8,019                       |    | 6,330                    |   |
| Deferred revenues                                                                                                                   |   | 3,393                       |    | 3,623                    |   |
| Other liabilities - related parties                                                                                                 |   | 7,218                       |    | —                   |   |
| Current liabilities - discontinued  operations                                                                                      |   | —                      |    | 134                      |   |
| Total current liabilities                                                                                                           |   | 95,848                      |    | 101,759                  |   |
|                                                                                                                                |   |                        |    |                     |   |
| Long-term debt and capital lease  obligations                                                                                       |   | 162,963                     |    | 163,217                  |   |
| Long-term debt - related party                                                                                                      |   | —                      |    | 1,000                    |   |
| Deferred revenues                                                                                                                   |   | 12,750                      |    | 16,571                   |   |
| Deferred income taxes                                                                                                               |   | —                      |    | 5,549                    |   |
| Other long-term liabilities                                                                                                         |   | 3,167                       |    | 5,364                    |   |
| Total liabilities                                                                                                                   |   | 274,728                     |    | 293,460                  |   |
| Commitments and contingencies                                                                                                       |   |                        |    |                     |   |
|                                                                                                                                |   |                        |    |                     |   |
| Shareholders’ equity:                                                                                                          |   |                        |    |                     |   |
| Preferred stock, $.0001 par value  (authorized - 12,000,000 shares; 0 shares issued and outstanding)                                |   | —                      |    | —                   |   |
| Common stock, $.001 par value (authorized -  120,000,000 shares; issued and outstanding - 19,914,840 and 30,177,610,  respectively) |   | 20                          |    | 30                       |   |
| Additional paid-in capital                                                                                                          |   | 91,480                      |    | 169,663                  |   |
| Retained earnings                                                                                                                   |   | 1,335                       |    | 2,407                    |   |
| Accumulated other comprehensive income                                                                                              |   | 14                          |    | 422                      |   |
| Total shareholders’ equity                                                                                                     |   | 92,849                      |    | 172,522                  |   |
| Total liabilities and shareholders’ equity                                                                                     |   | $                           | 367,577 |                     | $      | 465,982 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Ope****rations**

**(Unaudited)**

**(In thousands, except per share data)**

 
|                                                                                   |   | **For the  Period  January 1 to  March 21, 2003  (Predecessor entity -  InfraSource   Incorporated and   Subsidiaries) (Note 1)** |    | **Three  Months Ended  March 31, 2004** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|---------|----------------------------------------------|--------|
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Contract revenues                                                                      |   | $                                                                                                                                           | 96,923  |                                         | $      | 148,621 |   |
| Contract revenues - related parties                                                    |   | 13,679                                                                                                                                      |    | —                                       |   |
| Total contract revenues                                                                |   |                                                                                                                                        | 110,602 |                                         |   | 148,621 |   |
| Cost of revenues                                                                       |   | 97,183                                                                                                                                      |    | 123,344                                      |   |
| Gross profit                                                                           |   | 13,419                                                                                                                                      |    | 25,277                                       |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Selling, general and administrative  expenses                                          |   | 12,191                                                                                                                                      |    | 15,405                                       |   |
| Merger related costs                                                                   |   | 115                                                                                                                                         |    | —                                       |   |
| Amortization of intangible assets                                                      |   | —                                                                                                                                      |    | 4,547                                        |   |
| Income from operations                                                                 |   | 1,113                                                                                                                                       |    | 5,325                                        |   |
| Interest income                                                                        |   | 475                                                                                                                                         |    | 54                                           |   |
| Interest expense and amortization of debt  discount                                    |   | (2                                                                                                                                          | )       | (3,371                                       | )      |
| Other income (expense)                                                                 |   | 64                                                                                                                                          |    | (193                                         | )      |
| Income before income taxes and discontinued  operations                                |   | 1,650                                                                                                                                       |    | 1,815                                        |   |
| Income taxes                                                                           |   | 646                                                                                                                                         |    | 744                                          |   |
| Income from continuing operations                                                      |   | 1,004                                                                                                                                       |    | 1,071                                        |   |
| Discontinued operations (net of tax expense  (benefit) of $(472) and $1, respectively) |   | (701                                                                                                                                        | )       | 1                                            |   |
| Net income                                                                             |   | $                                                                                                                                           | 303     |                                         | $      | 1,072 |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Basic earnings (loss) per share:                                                       |   |                                                                                                                                        |    |                                         |   |
| Continuing operations                                                                  |   | $                                                                                                                                           | 0.02    |                                         | $      | 0.04 |   |
| Discontinued operations                                                                |   | (0.01                                                                                                                                       | )       | 0.00                                         |   |
| Net income                                                                             |   | $                                                                                                                                           | 0.01    |                                         | $      | 0.04 |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Weighted average basic common shares  outstanding                                      |   | 47,905                                                                                                                                      |    | 28,057                                       |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Diluted earnings (loss) per share:                                                     |   |                                                                                                                                        |    |                                         |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Continuing operations                                                                  |   | $                                                                                                                                           | 0.02    |                                         | $      | 0.04 |   |
| Discontinued operations                                                                |   | (0.01                                                                                                                                       | )       | 0.00                                         |   |
| Net income                                                                             |   | $                                                                                                                                           | 0.01    |                                         | $      | 0.04 |   |
|                                                                                   |   |                                                                                                                                        |    |                                         |   |
| Weighted average diluted common shares  outstanding                                    |   | 47,905                                                                                                                                      |    | 29,142                                       |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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###### **INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cas****h Flows**

**(Unaudited)**

** (In thousands)**

 
|                                                                                                  |   | **For the  Period  January 1 to  March 21, 2003  (Predecessor entity  -  InfraSource   Incorporated and   Subsidiaries) (Note 1)** |   | **Three  Months Ended  March 31, 2004** |   |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                  |   |                                                                                                                                              |   |                                         |   |
| Cash flows from operating activities:                                                                 |   |                                                                                                                                              |   |                                         |   |
| Income from continuing operations                                                                     |   | $                                                                                                                                                 | 1,004  |                                         | $      | 1,071 |   |
| Adjustments to reconcile income from  continuing operations to cash provided by operating activities: |   |                                                                                                                                              |   |                                         |   |
| Depreciation                                                                                          |   | 6,574                                                                                                                                             |   | 5,579                                        |   |
| Amortization of intangibles                                                                           |   | —                                                                                                                                            |   | 4,547                                        |   |
| Other                                                                                                 |   | (166                                                                                                                                              | )      | 560                                          |   |
| Changes in operating assets and  liabilities, net of effects of acquisitions:                         |   |                                                                                                                                              |   |                                         |   |
| Contract receivables                                                                                  |   | (2,334                                                                                                                                            | )      | 11,797                                       |   |
| Contract receivables due from related  parties                                                        |   | 295                                                                                                                                               |   | —                                       |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts, net                     |   | (823                                                                                                                                              | )      | (19,467                                      | )      |
| Inventories                                                                                           |   | 281                                                                                                                                               |   | (883                                         | )      |
| Due from related parties                                                                              |   | 12,911                                                                                                                                            |   | —                                       |   |
| Other current assets                                                                                  |   | (272                                                                                                                                              | )      | (821                                         | )      |
| Deferred charges and other assets                                                                     |   | 146                                                                                                                                               |   | 167                                          |   |
| Accounts payable                                                                                      |   | (1,693                                                                                                                                            | )      | 3,937                                        |   |
| Accrued taxes due to related parties                                                                  |   | (728                                                                                                                                              | )      | —                                       |   |
| Other current and accrued liabilities                                                                 |   | (10,201                                                                                                                                           | )      | (17,734                                      | )      |
| Accrued insurance reserves                                                                            |   | (433                                                                                                                                              | )      | 596                                          |   |
| Deferred revenue                                                                                      |   | 3,709                                                                                                                                             |   | 1,745                                        |   |
| Other long term liabilities                                                                           |   | —                                                                                                                                            |   | 2,405                                        |   |
| Net cash flows provided by (used in)  operating activities from continuing operations                 |   | 8,270                                                                                                                                             |   | (6,501                                       | )      |
| Net cash flows used in operating activities  from discontinued operations                             |   | (3,056                                                                                                                                            | )      | (134                                         | )      |
| Net cash flows provided by (used in)  operating activities                                            |   | 5,214                                                                                                                                             |   | (6,635                                       | )      |
|                                                                                                  |   |                                                                                                                                              |   |                                         |   |
| Cash flows from investing activities:                                                                 |   |                                                                                                                                              |   |                                         |   |
| Acquisitions of businesses, net of cash  acquired                                                     |   | —                                                                                                                                            |   | (19,501                                      | )      |
| Proceeds from sales of equipment                                                                      |   | 676                                                                                                                                               |   | 905                                          |   |
| Additions to property, plant and equipment                                                            |   | (4,883                                                                                                                                            | )      | (5,247                                       | )      |
| Net cash flows used in investing activities  from continuing operations                               |   | (4,207                                                                                                                                            | )      | (23,843                                      | )      |
| Net cash flows provided by investing  activities from discontinued operations                         |   | 133                                                                                                                                               |   | 23                                           |   |
| Net cash flows used in investing activities                                                           |   | (4,074                                                                                                                                            | )      | (23,820                                      | )      |
|                                                                                                  |   |                                                                                                                                              |   |                                         |   |
| Cash flows from financing activities:                                                                 |   |                                                                                                                                              |   |                                         |   |
| Increase in revolving credit facility  borrowings                                                     |   | —                                                                                                                                            |   | 5,000                                        |   |
| Repayments of long-term debt and capital  lease obligations                                           |   | (112                                                                                                                                              | )      | (399                                         | )      |
| Issuances of common stock                                                                             |   | —                                                                                                                                            |   | 29,773                                       |   |
| Net cash flows (used in) provided by  financing activities from continuing operations                 |   | (112                                                                                                                                              | )      | 34,374                                       |   |
| Net cash flows provided by financing  activities from discontinued operations                         |   | —                                                                                                                                            |   | —                                       |   |
| Net cash flows (used in) provided by  financing activities                                            |   | (112                                                                                                                                              | )      | 34,374                                       |   |
|                                                                                                  |   |                                                                                                                                              |   |                                         |   |
| Cash and cash equivalents:                                                                            |   |                                                                                                                                              |   |                                         |   |
| Net increase in cash and cash equivalents                                                             |   | 1,028                                                                                                                                             |   | 3,919                                        |   |
| Cash and cash equivalents transferred to  discontinued operations                                     |   | 2,923                                                                                                                                             |   | 111                                          |   |
| Cash and cash equivalents - beginning of  period                                                      |   | 20,784                                                                                                                                            |   | 12,080                                       |   |
| Cash and cash equivalents - end of period                                                             |   | $                                                                                                                                                 | 24,735 |                                         | $      | 16,110 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notes to Condensed Consolidated Financia****l Statements**

(Unaudited)

(In thousands,except share data)

 

 

**1.****              Organizationand****Basisof Presentation**

 

InfraSource Services, Inc. (“InfraSource”), formerly known as DearbornHoldings Corporation, was organized on May 30, 2003 as a DelawareCorporation.  In June 2003, OCM/GFIPower Opportunities Fund, L.P. and OCM Principal Opportunities Fund, L.P.(collectively, the “Principal Stockholders”), both Delaware limitedpartnerships, each acquired fifty shares of the common stock of InfraSource ata nominal purchase price.  OnSeptember 24, 2003, pursuant to an Agreement and Plan of Merger datedJune 17, 2003 (the “Merger”), InfraSource acquired InfraSource Incorporatedand certain of its wholly owned subsidiaries (collectively, the “InfraSourceGroup” or “the Predecessor”). Immediately prior to the Merger, certain other subsidiaries ofInfraSource Incorporated not acquired by InfraSource in the Merger (the“Non-Acquired Group”) were distributed to InfraSource Incorporated’s parent,Exelon Enterprises Company LLC, a wholly owned subsidiary of Exelon Corporation(“Exelon”).  InfraSource and its whollyowned subsidiaries are referred to herein as “the Company.”  For a more detailed description of theMerger, see Note 3 to these financial statements.  On May 12, 2004, the Company completed its initial publicoffering (“IPO”) of 8,500,000 shares of common stock (see Note 14).

 

TheCompany operates in one reportable segment as a specialty contractor servingthe utility transmission and distribution infrastructure in the UnitedStates.  The Company’s broad range ofservices include the design, engineering, procurement, construction, testing,maintenance, and leasing of utility infrastructure.  The Company’s customers primarily include electric powerutilities, natural gas utilities, government entities and heavy industrialcompanies, such as petrochemical, processing and refining businesses.  Each of these services is provided byvarious Company subsidiaries all of which have been aggregated into onereportable segment due to their similar economic characteristics, customerbases, products and production and distribution methods. The Company operatesin multiple service territories throughout the United States and does not havesignificant assets or operations outside of the United States.

 

Theaccompanying unaudited condensed consolidated financial statements reflect thefinancial position of the Company as of March 31, 2004 and December 31,2003; the results of operations and cash flows of the Company for the threemonths ended March 31, 2004; and the results of operations and cash flowsof the Predecessor for the period January 1, 2003 to March 21, 2003.  The Company had no operating activity priorto acquiring the InfraSource Group in the Merger.  Subsidiaries of the Predecessor not acquired in the Merger arereflected as discontinued operations in the accompanying financial statementsof the Predecessor for the period January 1, 2003 to March 21,2003.  During 2003, in order to meet thereporting deadlines of Exelon, each of the Predecessor’s first three fiscalquarters ended on March 21, June 20, and September 23, respectively.  Beginning in 2004, each of the Company’squarters will end on the last days of March, June, September andDecember.  Accordingly, as a result ofthe change in quarter end the three months ended March 31, 2004 containsten additional days comprising the period March 22 to March 31,2004.  The additional ten days would nothave had a material effect on the Predecessor’s 2003 three-month periodresults. The Company has not adjusted the prior-year Predecessor period toreflect the effect of the additional ten days because it is impracticable to doso.

 

The accompanyingcondensed consolidated financial statements are unaudited and have beenprepared in accordance with the rules and regulations of the U.S. Securitiesand Exchange Commission (“SEC”).  Thesefinancial statements include  alladjustments that we consider necessary for a fair presentation of financialposition, results of operations and cash flows for the interim periodspresented. Such adjustments consisted only of normal recurring items.  The December 31, 2003 condensedconsolidated balance sheet data were derived from audited financial statements,but do not include all disclosures required by accounting principles generallyaccepted in the United States of America. The results for interim periods are not necessarily indicative ofresults to be expected for a full year or future interim periods.  These financial statements should be read inconjunction with the Company’s financial statements and related notes includedin its Prospectus filed pursuant to Rule 424B1 (SEC File Number 333-112375) andcontained in the related registration statement declared effective on May 6,2004 (the “IPO Prospectus”)*.*

 

**2.****             ****Recently Issued Accounting Pronouncements**

 

In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable InterestEntities”**(“FIN 46”).  This Interpretation requires that a variableinterest entity be consolidated by a company if that company is subject to amajority of the risk of loss from the variable interest entity’s activities orentitled to receive a majority of the entity’s residual returns or both. Theconsolidation requirements apply immediately to variable interest

 

5

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**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

entities created after January 31, 2003.The consolidation requirements apply to older entities in the first fiscal yearor interim period ending after December 15, 2003. Certain of thedisclosure requirements apply in all financial statements issued afterJanuary 31, 2003, regardless of when the variable interest entity wasestablished. On February 1, 2003, the Company adopted FIN 46 for variableinterest entities created after January 31, 2003 and it did not have animpact on the Company’s consolidated financial statements. InDecember 2003, the FASB deferred the provisions of FIN 46 for all othervariable interest entities until March 31, 2004. The adoption of thesedeferred provisions did not have an impact on the Company’s consolidatedfinancial statements.

 

**3.****              Mergerand Acquisitions**

 

**Merger*:*****On September 24, 2003, the Companyacquired the InfraSource Group pursuant to an Agreement and Plan of Mergerdated June 17, 2003. In connection with the Merger, the Company acquiredall of the voting interests of InfraSource Incorporated for total purchaseprice consideration of $228,614. Pursuant to the Merger, the Company enteredinto a new term loan and revolving credit facility providing for a term loan of$140,000 and additional revolving credit facility of up to $40,000, withavailability for letters of credit of $25,000. In addition, the Company issueda long-term subordinated note payable to Exelon, the former majority owner of InfraSourceIncorporated, for $29,000. The proceeds of the term loans and the subordinatednote, together with the issuance of 19,912,664 shares of Company common stockfor cash of $91,500, were used to finance the redemption of allthen-outstanding shares of InfraSource Incorporated common stock and to fundcertain expenses related to the merger. The value assigned to the common stockresulted from the negotiated transaction for the purchase of the InfraSourceGroup.

 

As a result of the Merger, the Companyincurred $8,096 in related expenses on a pretax basis, including $6,344 of debtissuance costs which will be amortized over the lives of the respective debtinstruments, and $1,752 in professional fees and filing costs. Preliminarygoodwill of $68,584 recorded in connection with the Merger is subject to futureadjustment based upon the outcome of certain estimates and contingenciesincluding the valuation of certain specialty equipment acquired and thefinalization of purchase price contingencies related to a working capitaladjustment provision. The Company expects the valuation of the specialtyequipment to be completed during the second quarter of 2004.  Any adjustments resulting from theappraisals could result in an adjustment to goodwill, which amounts could bematerial.  Intangible assets related tocontracted volumes of work have been valued at $8,000.  Both the goodwill and the intangible assetsare deductible for tax purposes over 15 years. For the periodJanuary 1 through September 23, 2003, the InfraSource Group incurred$16,242 of expenses related to the Merger, including $10,553 of employeeretention, severance and incentive costs, and $5,689 of advisory fees, legal,accounting and other professional costs. The amount of Merger expenses in the periodJanuary 1, 2003 to March 21, 2003 was $115.

 

Also in connection with the Merger, theCompany entered into a volume agreement with Exelon, pursuant to which theCompany is assured a continuing level of business from Exelon through 2006, atapproximately the same levels as in 2003.

 

In accordance with the terms of the Merger,the purchase price is subject to adjustment based upon the determination ofadjusted working capital as of September 23, 2003. The contingent purchaseprice adjustment could ultimately result in additional amounts due either tothe Company or to Exelon. The Company has included in its calculation ofpurchase price as goodwill an adjustment reflecting a payment to the Company ofapproximately $10,458. Exelon has informed the Company that Exelon believes theadjustment should result in a payment to Exelon in an amount of approximately$10,900. The Company and Exelon are in discussions to resolve the difference,and if unsuccessful will enter into a dispute resolution process.  Any difference from the recorded amount willresult in an adjustment to goodwill.

 

**Acquisition ofMaslonka:**  OnJanuary 27, 2004, the Company acquired all of the voting interests ofMaslonka & Associates (“Maslonka”), a complementary infrastructure servicesbusiness, for total purchase price consideration of $77,476, which included theissuance of 4,330,820 shares of the Company’s common stock.  The final allocation of the purchase priceis subject to completion of appraisals of certain property, plant and equipment,a final working capital adjustment and final settlement of the holdbackadjustments to the purchase price in accordance with the terms of theacquisition agreement.  The Companyexpects the appraisals and working capital adjustments to be finalized duringthe second quarter of 2004 and expects the holdback amount less any amountsretained by the Company will be released to the sellers in 2005 and 2006.  Any adjustments resulting from theappraisals, working capital adjustments and holdback adjustments could resultin an adjustment to goodwill, which amounts could be material.  The value of the shares issued to Maslonkastockholders was determined to be approximately $50,671.  Under the terms of the holdback provision,the

 

6

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

Company withheld $6,600 in cash payable at closing and 957,549 sharesof common stock.  Of the cash holdbackamount, $5,500 is contingent upon Maslonka’s achievement of certain performancetargets as well as satisfaction of any indemnification obligations owed to us,which may be set-off against all other portions of the holdback.  The results of Maslonka are included in theCompany’s consolidated results beginning January 27, 2004.

 

Additionally,**at the time of the acquisition, Maslonkahad an outstanding letter of credit collateralized with a $5,000 time depositaccount provided by the Maslonka stockholders, which the Company acquired inthe acquisition.  The Company isrequired to reimburse the Maslonka stockholders an aggregate of approximately$5,000 within six months of the closing date. After giving effect to the holdback and the reimbursement of the timedeposit account, the amount paid at closing was $26,700 in cash and 3,373,271shares of the Company’s common stock. The Company financed the cash portion of the Maslonka acquisition withcash on hand and the issuance of 5,931,950 shares of the Company’s common stockto the Principal Shareholders and certain members of the Company’s managementfor cash of  $27,522 (see Note 6).

 

The preliminary aggregate purchase price for the Maslonka acquisitionis as follows:

 
| Cash paid to sellers, net of cash acquired                                |   | $      | 9,187  |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|
| Transaction costs                                                         |   | 600    |   |
| Repayment of debt and capital leases                                      |   | 10,314 |   |
| Equity issued to sellers                                                  |   | 50,671 |   |
| Liability to sellers for time deposit  refund and prior income taxes paid |   | 5,604  |   |
| Liability to sellers for cash holdback for  purchase price                |   | 1,100  |   |
| Total purchase price consideration                                        |   | $      | 77,476 |   |

 

The preliminary purchase price has been initially allocated to theassets acquired and liabilities assumed as follows:

 
| Contract receivables                                |   | $       | 6,172  |   |
|-----------------------------------------------------|--------|---------|--------|--------|
| Costs and estimated earnings in excess of  billings |   | 6,437   |   |
| Deferred tax asset                                  |   | 1,542   |   |
| Other current assets                                |   | 562     |   |
| Property, plant & equipment                     |   | 9,561   |   |
| Goodwill                                            |   | 59,549  |   |
| Intangible assets                                   |   | 11,500  |   |
| Other non-current assets                            |   | 5,319   |   |
| Accounts payable and accrued expenses               |   | (15,559 | )      |
| Long-term debt                                      |   | (1,000  | )      |
| Deferred tax liability                              |   | (6,607  | )      |
| Total net assets acquired                           |   | $       | 77,476 |   |

 

Intangible assets consisting of construction backlog have been valuedat $11,500 and will be amortized over the life of the related contracts whichrange from one to two years.  Theamortization of these intangible assets as well as the goodwill currentlyestimated at $59,549 will not be deductible for tax purposes.

 

7

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

**Pro Forma FinancialInformation:** The following table provides pro forma unaudited consolidated statementof operations data for the period January 1, 2003 to March 21, 2003 as if theMerger and the acquisition of Maslonka had occurred as of January 1, 2003. Italso provides pro forma unaudited consolidated statement of operations data forthe three months ended March 31, 2004 as if the acquisition of Maslonka hadoccurred as of January 1, 2004:

 
|                                                 |   | **For the  Period   January 1 to   March 21, 2003   (Predecessor entity -  InfraSource   Incorporated and   Subsidiaries) (Note 1)** |    | **Three  Months   Ended March 31,  2004** |   |
|------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|---------|------------------------------------------------|--------|
|                                                 |   |                                                                                                                                           |    |                                           |   |
| Contract revenues                                    |   | $                                                                                                                                              | 117,354 |                                           | $      | 162,875 |   |
| Income (loss) before income taxes                    |   | (2,106                                                                                                                                         | )       | 5,849                                          |   |
| Income (loss) from continuing operations             |   | (1,170                                                                                                                                         | )       | 3,451                                          |   |
| Net income (loss)                                    |   | (1,871                                                                                                                                         | )       | 3,452                                          |   |
|                                                 |   |                                                                                                                                           |    |                                           |   |
| Basic and diluted earnings (loss) per  common share: |   |                                                                                                                                           |    |                                           |   |
|                                                 |   |                                                                                                                                           |    |                                           |   |
| Weighted average basic common shares  outstanding    |   | 30,178                                                                                                                                         |    | 30,178                                         |   |
| Weighted average diluted common shares  outstanding  |   | 30,178                                                                                                                                         |    | 31,257                                         |   |
| Basic earnings (loss) per share                      |   | $                                                                                                                                              | (0.06   | )                                              | $      | 0.11 |   |
| Diluted earnings (loss) per share                    |   | $                                                                                                                                              | (0.06   | )                                              | $      | 0.11 |   |

 

 

The Predecessor’s historical results of operations for the periodJanuary 1, 2003 to March 21, 2003 have been adjusted to reflect thepro forma effects of the Merger. The principal adjustments include (1) theelimination of Merger-related costs and expenses; (2) the effects on depreciationexpense (which is included in cost of revenues and selling, general andadministrative expenses) resulting from changes in lives and book basis ofcertain fixed assets; (3) additional amortization of intangibles resulting fromthe Merger; and (4) related income tax effects of the previously mentionedadjustments.  Additionally, The proforma results of operations for both periods presented above have been adjustedto reflect Maslonka’s historical operating results after giving effect toadjustments directly attributable to the transaction that are expected to havea continuing effect.  Such adjustmentsinclude (1) amortization of intangible assets acquired in the acquisition andrecorded in accordance with the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 141, “Business Combinations,” and related income taxeffects; (2) the elimination of costs incurred by Maslonka related to theacquisition including compensation expenses and professional fees and relatedincome tax effects; (3) the elimination of interest expense resulting from therepayment of Maslonka debt and additional interest expense associated with a note issued to the seller and relatedincome tax effects; and (4) the issuance of shares of the Company’s common stockto the sellers in the Maslonka acquisition and to the Principal Stockholdersand certain executive officers to finance a portion of the purchase price.

 

**4.****              IntangibleAssets**

 

The Company’s intangible assets comprise the following:

 
|                                  |   | **December 31,** |   | **March 31,** |   |
|---------------------------------------|--------|-----------------------|--------|--------------------|--------|
|                                  |   | **2003**              |   | **2004**           |   |
|                                  |   |                  |   |               |   |
| Goodwill                              |   | $                     | 68,877 |               | $      | 128,426 |   |
|                                  |   |                  |   |               |   |
| Intangible assets:                    |   |                  |   |               |   |
| Construction backlog                  |   | $                     | 5,500  |               | $      | 17,000 |   |
| Volume agreement                      |   | 2,500                 |   | 2,500              |   |
| Total intangible assets               |   | 8,000                 |   | 19,500             |   |
| Less:   accumulated amortization |   | (2,600                | )      | (7,147             | )      |
| Intangible assets, net                |   | $                     | 5,400  |               | $      | 12,353 |   |

 

8

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

The increase in intangible assets during the three months endedMarch 31, 2004 reflects the preliminary purchase price allocation of theMaslonka acquisition.  Amortizationexpense of the Company’s intangible assets was $4,547 during the three months endedMarch 31, 2004.  There was noamortization expense in the Predecessor’s results of operations during theperiod January 1, 2003 to March 21, 2003.  Our expected aggregate amortization expense of intangible assetsfor the next five fiscal years is as follows: 2004 - $11,400; 2005 - $3,800;2006 - $1,700; 2007 - $0; and 2008 - $0.

 

Under SFAS No. 142, “Goodwill and Intangible Assets,” goodwill issubject to an assessment for impairment using a two-step fair value-based test,the first step of which will be performed at least annually, or more frequentlyif events or circumstances exist which indicate that goodwill may be impaired.The first step compares the fair value of a reporting unit to its carryingamount, including goodwill. If the carrying amount of the reporting unitexceeds its fair value, the second step is then performed. The second stepcompares the carrying amount of the reporting unit’s goodwill to the fair valueof the goodwill. If the fair value of the goodwill is less than the carrying amount,an impairment loss would be recorded as a reduction to goodwill and acorresponding charge to operating expense. No provisions for goodwill impairments were recorded during the threemonths ended March 31, 2004 or the Predecessor period January 1, 2003to March 21, 2003.

 

**5.     Debt**

 

On September 24, 2003, the Company entered into a senior creditfacility consisting of a $140,000 term loan, which matures in 2010, and a$40,000 revolving credit facility, which matures in 2009.  On January 22, 2004, the Companyamended its senior credit facility to permit the acquisition of Maslonka and toobtain additional liquidity and operating flexibility, including expanding theCompany’s capacity for making capital expenditures. As a result of theamendment, the commitment of the banks under the revolving credit facility wasincreased by $10,000 to $50,000, and the amount available for letters of creditwas increased by $10,000 to $35,000.  AtMarch 31, 2004, the Company had revolving credit borrowings of $5,000 and $27,700of letters of credit outstanding.

 

**6.****              CommonStock and Preferred Stock**

 

At inception, the Board of Directors of theInfraSource Group authorized 150,000,000 shares of the Predecessor’s commonstock with a par value of $.0001 per share. Common shares outstanding as ofSeptember 23, 2003 were redeemed in connection with the Merger.  At inception of the Company, the Board ofDirectors authorized 2,500,000 shares of common stock with a par value of $.001per share.  On March 24, 2004, theBoard of Directors authorized an approximate 21.7625 to one stock split and anincrease in the authorized common stock from 2,500,000 shares to 120,000,000shares.  Par value of the common stockremained at $.001 per share.  The effectof the stock split has been retroactively reflected in the Company’saccompanying financial statements, and all applicable references as to thenumber of common shares and per share information have been restated.

 

At inception, the Board of Directors ofthe InfraSource Group authorized 20,000,000 shares of the Predecessor’spreferred stock with a par value of $.0001 per share.  On September 23, 2003 in anticipation of the Merger, theInfraSource Group issued one share of preferred stock to Exelon for$4,100.  In connection with the Merger,on September 24, 2003, Exelon exchanged this share of preferred stock,along with other consideration included in the Merger Agreement includingcertain indemnifications provided by Exelon along with a volume agreement for a$29,000 subordinated note issued by the Company.  At inception of the Company, the Company had no authorized sharesof preferred stock.  On March 24,2004, the Board of Directors authorized an increase in the authorized preferredstock from 0 shares to 12,000,000 shares with a par value of $0.001 per share.

 

The following table presentscommon stock activity for the three months ended March 31, 2004:

 
|                                  |   | **Common  Stock** |   | **Additional** |   |
|---------------------------------------|--------|-------------------|--------|----------------|--------|
|                                  |   | **Shares**        |   | **Amount**     |   | **Paid-In  Capital** |   |
|                                  |   |              |   |           |   |   |   |
| Balance as of December 31, 2003: |   | 19,914,840        |   | $              | 20     |   | $ | 91,480 |   |
| Common stock issued:                  |   |              |   |           |   |   |   |
| Acquisition of Maslonka               |   | 4,330,820         |   | 4              |   | 50,667 |   |
| Company management                    |   | 37,367            |   | —         |   | 437 |   |
| Principal Stockholders                |   | 5,894,583         |   | 6              |   | 27,079 |   |
| Balance as of March 31, 2004     |   | 30,177,610        |   | $              | 30     |   | $ | 169,663 |   |

 

9

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

In connection with the funding of theacquisition of Maslonka in January 2004, the Company offered to sell5,931,950

shares of common stock to all of thethen-existing shareholders at a price of $4.60 per common share.  Shares issued pursuant to this offer arereflected in the table above under the captions Company management andPrincipal Stockholders.  During thethree months ended March 31, 2004, the Company recorded pre-taxcompensation expense of $265 associated with such shares sold to Companymanagement representing the difference between the fair value and purchaseprice on the date of sale.

 

During the three months ended March 31,2004, certain members of the Company’s management and Board of Directorsconsummated early exercises of unvested stock option awards representing atotal of 489,547 shares of common stock. Pursuant to the terms of the related stock option agreements, theCompany has the option to repurchase these shares prior to the date they vestat the original strike price of the option grant.  In accordance with the provisions of Emerging Issues Task Force No.00-23, “Issues Related to the Accounting for Stock Compensation under APBOpinion No. 25 and FASB Interpretation No. 44,” these shares are not consideredoutstanding for accounting purposes and are not included in the calculation ofbasic earnings per share until shares issued pursuant to these option grantsvest.  Until such shares vest inaccordance with the terms of the option grant, the net proceeds from the earlyexercise of these option grants, which totaled $2,251 at March 31, 2004,are included in other long-term liabilities in the condensed consolidatedbalance sheet.

 

**7.****             ****Computation of Per Share Earnings**

 

The following table is a reconciliationof the numerators and denominators of the basic and diluted earnings (loss) pershare computation. Common shares used in the Predecessor earnings per sharecomputation represent shares of

InfraSource Incorporatedoutstanding during the period January 1, 2003 to March 21, 2003.  Such shares outstanding as ofSeptember 23, 2003 were redeemed in conjunction with the Merger.

 
|                                                                                                      |   | **For the  Period   January 1 to   March 21, 2003   (Predecessor entity -  InfraSource  Incorporated and  Subsidiaries) (Note 1)** |   | **Three  Months   Ended March 31,  2004** |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                      |   |                                                                                                                                         |   |                                           |   |
| Income from continuing operations  (numerator)                                                            |   | $                                                                                                                                            | 1,004  |                                           | $      | 1,071 |   |
|                                                                                                      |   |                                                                                                                                         |   |                                           |   |
| Income (loss) from discontinued operations,  net of tax expense (benefit) of $(472), and $1, respectively |   | (701                                                                                                                                         | )      | 1                                              |   |
|                                                                                                      |   |                                                                                                                                         |   |                                           |   |
| Net income                                                                                                |   | $                                                                                                                                            | 303    |                                           | $      | 1,072 |   |
|                                                                                                      |   |                                                                                                                                         |   |                                           |   |
| Weighted average basic common shares  outstanding (denominator)                                           |   | 47,905                                                                                                                                       |   | 28,057                                         |   |
|                                                                                                      |   |                                                                                                                                         |   |                                           |   |
| Potential common stock arising from stock  options                                                        |   | —                                                                                                                                       |   | 1,085                                          |   |
| Total shares - diluted                                                                                    |   | 47,905                                                                                                                                       |   | 29,142                                         |   |

 

For the Predecessor periodJanuary 1, 2002 to March 21, 2003, there were 1,042,200 shares underoption grants that were excluded from the calculation of diluted earnings pershare because the effect of these options would have been anti-dilutive.

 

**8.****              Stock-BasedCompensation**

 

The Company has a stock-based employee compensation plan and, prior tothe Merger, the Predecessor had a stock-based employee compensation plan. Inanticipation of the Merger, as of September 18, 2003, all of thePredecessor’s outstanding common stock options were canceled for nominalconsideration.  As permitted by SFAS No.123, “Accounting for Stock-Based Compensation,” the Company and the Predecessoraccount for stock-based compensation in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations (“APB 25”).  Under APB25, the Company recognizes no compensation expense related to employee stockoptions unless

 

10

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

options are granted at a price below the market price on the day of thegrant.

 

Had the Company and the Predecessor applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation, net income andbasic and diluted earnings per share for the Predecessor period January 1, 2003to March 21, 2003 and the three months ended March 31, 2004 wouldhave been as follows:

 
|                                                                                                                                                |   | **For the  Period  January 1 to  March 21, 2003  (Predecessor entity –  InfraSource  Incorporated and  Subsidiaries) (Note 1)** |   | **Three  Months  Ended March 31,****2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                                                                |   |                                                                                                                                           |   |                                            |   |
| Net income, as reported                                                                                                                             |   | $                                                                                                                                              | 303    |                                            | $      | 1,072 |   |
|                                                                                                                                                |   |                                                                                                                                           |   |                                            |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (199                                                                                                                                           | )      | (209                                            | )      |
| Add:   Total stock-based employee compensation expense, net of related tax  effects included in the determination of net income as reported    |   | —                                                                                                                                         |   | 166                                             |   |
| Pro forma net income                                                                                                                                |   | $                                                                                                                                              | 104    |                                            | $      | 1,029 |   |
|                                                                                                                                                |   |                                                                                                                                           |   |                                            |   |
| *Basic and diluted  earnings per share:*                                                                                                            |   |                                                                                                                                           |   |                                            |   |
| Basic income per share — as reported                                                                                                           |   | $                                                                                                                                              | 0.01   |                                            | $      | 0.04 |   |
| Basic income per share — pro forma                                                                                                             |   | 0.00                                                                                                                                           |   | 0.04                                            |   |
| Diluted income per share — as reported                                                                                                         |   | 0.01                                                                                                                                           |   | 0.04                                            |   |
| Diluted income per share — pro forma                                                                                                           |   | 0.00                                                                                                                                           |   | 0.04                                            |   |

 

**9.****              Concentrationof Credit Risk**

 

We derive a significant portion of ourrevenues from a small group of customers. Our top ten customers accounted for approximately 57% and 52% of ourconsolidated revenues for the three months ended March 31, 2004 and thePredecessor period January 1, 2003 to March 21, 2003,respectively.  Our top two customersduring the three months ended March 31, 2004, Western Area PowerAdministration (“WAPA”) and Exelon, accounted for approximately 20% and 19%,respectively, of our consolidated revenues.   For the Predecessor period January 1, 2003 to March 21, 2003,the only customer that provided more than 10% of our consolidatedrevenues,  Exelon, representedapproximately 12% of our consolidated revenues.

 

At March 31, 2004, accounts receivabledue from Exelon and WAPA totaled $19,969 and $11,693, or 23.8% and 13.9%,respectively, of our total accounts receivable balance outstanding.  At December 31, 2003, accountsreceivable due from Exelon totaled $14,617, or approximately 16% of totalaccounts receivable, and additionally one other customer represented $9,563 or10.6% of accounts receivable.

 

**10.****       ComprehensiveIncome**

 

Thefollowing table presents the components of comprehensive income for thePredecessor period January 1, 2003 to March 21, 2003 and the threemonths ended March 31, 2004:

 

11

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

|                              |   | **For the  Period   January 1 to   March 21, 2003   (Predecessor entity -  InfraSource   Incorporated and   Subsidiaries) (Note 1)** |   | **Three  Months   Ended March 31,  2004** |   |
|-----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                              |   |                                                                                                                                           |   |                                           |   |
| Net income                        |   | $                                                                                                                                              | 303    |                                           | $      | 1,072 |   |
|                              |   |                                                                                                                                           |   |                                           |   |
| Other comprehensive (loss) income |   | (75                                                                                                                                            | )      | 408                                            |   |
|                              |   |                                                                                                                                           |   |                                           |   |
| Comprehensive income              |   | $                                                                                                                                              | 228    |                                           | $      | 1,480 |   |

 

Duringthe period January 1, 2003 to March 21, 2003, the Predecessorrecognized other comprehensive loss of $75 associated with a foreign currencytranslation adjustment recorded prior to 2001, due to non-recoverability fromforeign operations.  Other comprehensiveincome during the three months ended March 31, 2004 comprises changes inthe fair value of interest rate cap and swap agreements designated andqualifying as cash flow hedges under the provisions of SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No.133”), as amended by SFAS Nos. 137, 138 and 149, net of reclassifications tonet income.

 

**11.****      ****Related Party Transactions**

 

On October 6, 1999, the InfraSourceGroup entered into a services agreement (“Services Agreement”) with Exelon forExelon to provide certain services, including contracting for employees,financial and accounting services, payroll services, office and equipmentleases and other administrative and support services. The scope of theseservices was reduced each year of the agreement. This agreement was effectivefor a period of 12 months commencing in October of each year and wasrenewable at both parties’ discretion. The InfraSource Group, throughInfraSource Corporate Services, Inc., was charged $545 for these services forthe Predecessor period January 1, 2003 to March 21, 2003. Pursuant tothe Merger, this Services Agreement was terminated.

 

The InfraSource Group has several servicecontracts with Exelon and performs work for various services including utilityconstruction and maintenance, telecommunications and infrastructure services onan outsourced basis to business and residential customers. Certain operatingassets and liabilities of the Non-Acquired Group, including certain operatingagreements (the “Operating Agreements”) with Exelon, were transferred to theInfraSource Group as of January 1, 2003, with operating results related tothe operating agreements reflected in the accompanying consolidated statementof operations beginning with the date of transfer. Under the OperatingAgreements, the Company performs infrastructure services on an outsourced basisto business and residential customers. Each operating agreement has an annualterm  ending on December 31  which automatically renews each year unlessformally terminated by Exelon. The services are charged to Exelon at a ratethat is intended to approximate market value. Revenues charged to Exelon forthe Predecessor period January 1, 2003 to March 21, 2003 under thesecontracts were $6,597.  These OperatingAgreements remained in place following the Merger. OnJanuary 29, 2004, Exelon relinquished its sole seat on the Company’sBoard of Directors and ceased to be a related party at that time.  Revenues from Exelon for the period January1 through January 29, 2004, (the date it ceased to be a related party) were$7,569.

 

In addition to the Operating Agreements,revenues for the Predecessor for the period January 1, 2003 toMarch 21, 2003 related to contracts with Exelon were $7,082. Accountsreceivable related to all revenues due from Exelon were  $14,617 at December 31, 2003.

 

In March 2004, after receiving approvalfrom the required parties, the Company distributed $7,218 of property andequipment that pursuant to the original terms of a purchase agreement withBlair Park Services, Inc. (“Blair Park”), an infrastructure services businessacquired in 2001, were owed to three officers of Blair Park.  The corresponding liability related to theseassets is reflected in other liabilities - related parties in theDecember 31, 2003 condensed consolidated balance sheet.

 

In connection with the Maslonka acquisition,our Principal Stockholders secured the issuance of $10,000 worth of letters ofcredit. 

 

12

----

 

**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

These letters of credit were provided ascredit support to enable Maslonka to secure a performance bond on a new projectaward. After consummation of the Maslonka acquisition, we caused the letters ofcredit to be terminated. We paid an aggregate fee of  $200  to the PrincipalStockholders for providing this security.

 

We lease our Maslonka headquarters in Mesa,Arizona and our Maslonka Texas field office in San Angelo, Texas from ECSource, LLC, which is wholly-owned by Martin Maslonka. Our leases for these twoproperties will run through February 2009, subject to a five-year renewaloption. Pursuant to these leases, we will incur total annual lease payments of$168.

 

Maslonka is the issuer of a $1,000installment promissory note in favor of Martin Maslonka. The promissory notebears interest at an annual rate of 8.5%, and interest is payable in equalmonthly payments of $7. The promissory note matures on June 30, 2006.

 

**12.****      ****Commitments and Contingencies**

 

On February 7, 2003, Rahsanne Bickmannfiled suit in the Travis County District Court in Texas State Court againstMaslonka and one employee alleging, among other things, gross negligence andseeking approximately $24,000 in actual and compensatory damages arising out ofthe death of her son.  OnOctober 27, 2003, the father of the deceased, Kevin Sam, Sr., filed suitin Taylor County Texas District Court seeking unspecified damages. The claimsarose out of an automobile accident that took place on December 1, 2002 onan interstate highway in Texas and resulted in death. In February 2004,Rahsanne Bickman’s claims were resolved through an out of court settlementfully funded by insurance proceeds (less a $10 deductible).  The dismissal order was entered onMarch 25, 2004.  The claims ofKevin Sam, Sr. have been docketed for trial on December 13, 2004.

 

In January 2004, a judgment was enteredagainst InfraSource in Superior Court of Fulton County, Georgia in the amountof $3,785, including $3,190 in punitive damages. The jury verdict upheldallegations by the plaintiff that in 1999 InfraSource Incorporated (formerlyknown as Exelon Infrastructure Services, Inc.) had fraudulently inducedthe plaintiff to incur expenses in connection with a proposed businessacquisition that was never consummated. We filed a notice of appeal onFebruary 19, 2004, and the plaintiff filed a notice of cross-appeal onMarch 2, 2004.  Pursuant to theappellate court’s May 28, 2004 Notice of Docketing, our brief supporting ourappeal must be filed no later than June 17, 2004 with the respondent’sbrief due by July 7, 2004.

 

In addition, pursuant to our servicecontracts, we also generally indemnify our customers for the services weprovide thereunder. Furthermore, because our services are integral to theoperation and performance of the electric power transmission and distributioninfrastructure, we may become subject to lawsuits or claims for any failure ofthe systems that we work on, even if our services are not the cause for suchfailures, and we could be subject to civil and criminal liabilities to theextent that our services contributed to any property damage or blackout. Theoutcome of these proceedings could result in significant costs and diversion ofmanagement’s attention to our business. Payments of significant amounts, evenif reserved, could adversely affect our reputation and liquidity position.

 

From time to time, we are a party to variousother lawsuits, claims and other legal proceedings that arise in the ordinarycourse of our business. These actions typically seek, among other things,compensation for alleged personal injury, breach of contract, property damage,punitive damages, civil penalties or other losses, or injunctive or declaratoryrelief. With respect to such lawsuits, claims and proceedings, we accruereserves when it is probable a liability has been incurred and the amount ofloss can be reasonably estimated. We do not believe any of these proceedings,individually or in the aggregate, would be expected to have a material adverseeffect on our results of operations, or of cash flows, or on our financialcondition.

 

**13.****       DiscontinuedOperations**

 

Subsidiaries of thePredecessor not acquired in the Merger are reflected as discontinued operationsin the accompanying Predecessor’s statement of operations and cash flows forthe period January 1, 2003 to March 21, 2003.  During 2003, subsequent to the Merger, theCompany committed to a plan to sell substantially all of the assets of OSPConsultants, Inc. and subsidiaries (“OSP”) which the Company expects toconsummate during 2004.  In accordancewith

 

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**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” the financial position,results of operations and cash flows of OSP are reflected as discontinuedoperations in the Company’s accompanying financial statements for the threemonths ended March 31, 2004 but are not included in discontinuedoperations for the Predecessor Period January 1, 2003 to March 21,2003.

 

The following table presentsthe balance sheet and statement of operations information for the previouslymentioned discontinued operations:

 

Balancesheet information:

 
|                                   |   | **December 31,  2003** |   | **March 31,  2004** |   |
|----------------------------------------|--------|-----------------------------|--------|--------------------------|--------|
| Contract receivables, net              |   | $                           | 2,656  |                     | $      | 3,195 |   |
| Property and equipment, net            |   | 355                         |   | 332                      |   |
| Other, net                             |   | 1,646                       |   | 906                      |   |
| Total assets                           |   | $                           | 4,657  |                     | $      | 4,433 |   |
|                                   |   |                        |   |                     |   |
| Accounts payable and other liabilities |   | $                           | — |                     | $      | 134 |   |
| Total liabilities                      |   | —                      |   | 134                      |   |
| Net assets                             |   | $                           | 4,657  |                     | $      | 4,299 |   |

 

Income statement information:

 
|                  |   | **For the  Period  January 1 to  March 21, 2003  (Predecessor entity -  InfraSource  Incorporated and  Subsidiaries) (Note 1)** | ** ** | **Three  Months  Ended March 31,  2004** | ** ** |
|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Contract revenues     |   | $                                                                                                                                         | 58,267     |                                          | $          | 5,062 |   |
| Pre-tax income (loss) |   | $                                                                                                                                         | (1,172     | )                                             | $          | 2 |   |

 

**14.****      ****Subsequent Events**

 

On May 12, 2004, the Company completed itsIPO through underwriters of 8,500,000 shares of common stock at a price to thepublic of $13 per share.  The netproceeds of the offering to the Company of approximately $101,000, afterdeducting  underwriters’ discounts andestimated offering expenses, were used by the Company as follows:  (1) $50,200 was used to repay a portion ofterm loans outstanding under our senior credit facility; (2)  $30,000 was used to repay the principal amountof our subordinated note with Exelon; and (3) the remaining proceeds ofapproximately $20,800 were retained for general corporate purposes.  Because the carrying amount of the Exelonnote was recorded at a discount to reflect the fair value based upon applicablemarket rates for similar securities, the Company will record a loss on theearly extinguishment of this debt of approximately $5,700 which loss will bereflected in the Company’s results of operations for the three months endingJune 30, 2004.  Because the IPOclosed after March 31, 2004, the effects of the offering are not reflectedin the accompanying condensed consolidated financial statements.

 

Concurrent with the IPO, in order to provide for additional borrowingflexibility and to reduce its borrowing rates to reflect its improved financialposition, the Company entered into an amended and restated credit agreement to,among other things, provide for a revolving credit facility in the originalamount of $40,000 that may be increased to $85,000 and to provide a term loanfacility in the amount of $85,310 which is equal to the amount of term loansoutstanding under the existing senior credit facility at May 12, 2004 aftergiving effect to the mandatory prepayment of $50,200 of such loans  in conjunction with the IPO. A portion ofthe revolving credit facility not in excess of 80% of the amount thereof shallbe available for the issuance of letters of credit. Term loans and revolvingloans under the amended and restated credit agreement will initially bearinterest, at the Company’s option, at the bank’s prime interest rate plus aspread of 2.00% or LIBOR plus a spread of 3.00%.  Beginning in 2005, such interest rate spreads will be dependentupon the Company’s Consolidated Leverage Ratio, as defined in the amended andrestated credit agreement, and range from 1.50% to 3.50% for revolving loansand 1.75% to 3.00% for term loans.  Asof June 11, 2004, the Company had commitments under its revolving creditfacility totaling $45,000.

 

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**INFRASOURCESERVICES, INC. AND SUBSIDARIES**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

(In thousands,except share data)

 

On April 21, 2004, the Company received a waiver and amendment tothe senior credit facility related to obtaining liens on certain vehicles andequipment following the Merger. The Company was required to obtain the liens byMarch 22, 2004 and was not in compliance at that date. The waiver andamendment extends the compliance date until July 7, 2004.

 

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**INFRASOURCESERVICES, INC. AND SUBSIDIARIES**

 

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

 

**Forward-Looking and Cautionary Statements**

 

In this Management’s Discussion andAnalysis, and elsewhere in this Quarterly Report on Form 10-Q, we have madeforward-looking statements. Generally,  these forward-lookingstatements can be identified by words like “may,” “will,” “should,” “expect,”“intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or“continue” or the negative of those words and other comparable words. Theseforward-looking statements generally relate to our plans, objectives andexpectations for future operations and are based upon our current estimates andprojections of future results or trends. Although we believe that our plans and objectives reflected in orsuggested by these forward-looking statements are reasonable, we may notachieve these plans or objectives. These statements are subject to known and unknown risks, uncertaintiesand other factors that could cause the actual results to differ materially fromthose contemplated by the statements.  These statements only reflect our predictions. Except as required bylaw, we will not update forward-looking statements even though our situationmay change in the future.  With respectto forward-looking statements, we claim the protection of the safe harbor forforward-looking statements contained in the Private Securities LitigationReform Act of 1995.

 

The factors that could affect futureresults and could cause those results to differ materially from those expressedin the forward-looking statements include, but are not limited to:

 

•                                          technological,structural and cyclical changes that could reduce the demand for the serviceswe provide;

•                                          lossof key customers;

•                                          theuncertainty of the outcome of federal energy legislation;

•                                          thenature of our contracts, particularly our fixed-price and unit-price contracts;

•                                          workhindrance due to inclement weather events;

•                                          theaward of new contracts and the timing of the performance of those contracts;

•                                          projectdelays or cancellations;

•                                          thefailure to meet schedule or performance requirements of our contracts;

•                                          ourfailure to attract and retain qualified personnel;

•                                          theuse of estimates in the percentage of completion method of revenue recognition;

•                                          significantcompetition in our industry;

•                                          thepresence of competitors with greater financial resources and the impact of competitiveproducts, services and pricing;

•                                          ourability to successfully identify, integrate and complete acquisitions;

•                                          ourability to obtain surety bonds;

•                                          infrastructureconstruction accidents;

•                                          theimpact of our unionized workforce on our operations; and

•                                          achange in government laws or regulations.

 

**Introduction**

 

The following discussion should be read inconjunction with the unaudited condensed consolidated financial statements andnotes of InfraSourceServices, Inc. and its wholly owned subsidiaries included elsewhere inthis Quarterly Report on Form 10-Q and with the audited financial statementsand notes included in its IPO Prospectus (SEC File Number 333-112375) and contained in the relatedregistration statement declared effective on May 6, 2004*.*

 

**General**

 

We operate in one reportable segment and we are one of the largestspecialty contractors serving the utility transmission and distributioninfrastructure in the United States based on market share. Our broad range ofservices includes the design, engineering, procurement, construction, testing,maintenance, and leasing of utility infrastructure.  Our customers primarily include electric power utilities, naturalgas utilities, government entities and heavy industrial companies, such aspetrochemical, processing and refining businesses.  Each of these services is provided by various Companysubsidiaries, which provide management with monthly financial statements.   All of our subsidiaries have been

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

aggregated into one reportable segment due to their similar economiccharacteristics, customer bases, products and production methods, anddistribution methods. During the three months ended March 31, 2004, we hadrevenues of $148.6 million of which we estimate 70% was attributable toelectric power customers, 21% to natural gas customers, 7% was attributable totelecommunications customers, and 2% for ancillary services.  Our top ten customers accounted forapproximately 57% of our consolidated revenues for  the three months ended March 31, 2004 while our top twocustomers,  Western Area PowerAdministration and Exelon,  accountedfor 20% and 19%, respectively, of such consolidated revenues.

 

We operate in multiple service territories throughout the United Statesand do not have significant operations or assets in countries outside of theUnited States.

 

**Overview of Operations**

 

Our historical performance is affected by thecapital spending of our customers. In the last several years, our business hasbeen impacted by several important trends affecting our end markets.

 

•                  Electricutilities are key customers and provide us with a diversified variety ofprojects, including aerial transmission work, substations, in-plantengineering, maintenance and upgrades. In recent years, our business from thesecustomers has been relatively stable despite financial pressures on someutilities. Although some utilities have restrained their overall capitalspending, the effects on third-party contractors have been partially offset byan increase in the proportion of work that these customers outsource.

 

•                  The deregulationof the electric utility industry in the 1990s created opportunities forindependent power producers, or IPPs, which constructed or acquired substantialgenerating capacity resulting in an increased demand for our services,particularly in providing “turnkey” substations, switching yards andinterconnections. In these projects, we would typically engineer, procurematerials for, and construct the entire project. These turnkey projects have asubstantial impact on our revenues because, when we procure materials for ourcustomers in addition to providing services, the value of those materialsresults in higher revenues than in a services-only contract. As a number oflarge IPPs have been under significant financial stress, IPP spending declinedsignificantly in 2003, with a substantially reduced contribution to our 2003financial performance.  This trend hascontinued into 2004.

 

•                  We provide avariety of electrical design, engineering and construction services to heavyindustrial customers, including petrochemical, processing and refiningbusinesses. Higher oil prices have enhanced the financial performance of many ofour refinery customers, which has contributed to increased spending andconsequently greater demand for our services. By contrast, high natural gasprices have negatively impacted the financial performance of some of ourpetrochemical customers, leading to decreases in their capital spending andconsequently reduced demand for our services.

 

•                  During the late1990s, service contractors like us benefited from rapidly expanding demand fortelecommunications infrastructure, as telecommunications providers installednew long-haul optical fiber networks nationwide. This demand peaked in 2000 anddeclined significantly through 2003 as many of these customers have experiencedbankruptcies and have been unable to access capital. We continue to see lowlevels of activity in this sector.

 

•                  The decline intelecommunications spending on fiber-optic network construction led to anovercapacity of contractors serving this market. In response, many of thesecontractors began competing for opportunities in other industries, such asnatural gas distribution infrastructure. This led to increased competition forprojects from natural gas utilities, and pricing pressure, resulting in lowergross margins for us, particularly in 2002 and the first half of 2003. Webelieve some of these new market entrants have begun to exit the natural gasdistribution market. In addition, there has been continued strength in thehousing construction market. As a result of these factors, we experiencedimproved bidding conditions and profit margins in the latter half of 2003 andinto 2004.

 

In addition to industry trends describedabove, during 2002 we completed a review of our existing natural gasdistribution contracts. As a result of this review, we exited or renegotiated anumber of underperforming contracts. This strategy reduced our revenues during2002 and 2003. Additionally, the effects of extreme adverse weather and losseson certain contracts completed in 2003 contributed to lower gross margins inthe first half of the year. As has been common in our industry, we alsoexperienced increases in workers’ compensation and insurance expenses in recentyears.

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

**Acquisitionof Maslonka**

 

OnJanuary 27, 2004, we acquired Maslonka & Associates, Inc. The totalconsideration for the Maslonka acquisition was $77.5 million, consistingof $38.3 million in cash and 4,330,820 shares of our common stock, whichare both subject to a final working capital adjustment and a holdbackprovision, and the assumption of certain liabilities. Please refer to Note 3 toour condensed consolidated financial statements for additional informationregarding the breakdown of the total consideration. We accounted for theacquisition as a purchase in accordance with SFAS No. 141, “BusinessCombinations.” Under purchase accounting, the value of the shares of commonstock issued to the Maslonka stockholders was determined to be$50.7 million. Under the terms of the holdback provision, we withheld$6.6 million in cash payable at closing and 957,549 shares of our commonstock issued to the sellers from the consideration payable at closing. We willbe able to retain amounts from the holdback to satisfy any indemnificationobligations to us. In addition, if Maslonka fails to achieve specifiedfinancial targets, we will be entitled to retain a portion of the holdbackamount. We expect that the holdback amount, less any amounts retained by us,will be released to the sellers in part in 2005 and the remainder in 2006.Additionally, at the time of the acquisition, Maslonka had an outstandingletter of credit collateralized with a $5.0 million time deposit accountprovided by the Maslonka stockholders, which we acquired in the acquisition. Weare required to reimburse these stockholders an aggregate of approximately$5.0 million within six months after the closing date. After giving effectto the holdback and the reimbursement for the time deposit account, the amountpaid at closing was $26.7 million in cash and 3,373,271 shares of ourcommon stock.  The results of operationsof Maslonka are included in the condensed consolidated results of operationsfor the three months ended March 31, 2004 from the date of acquisition.

 

We financed the cash portion of the Maslonkaacquisition consideration with available cash and the issuance of anaggregate  5,931,950 shares of ourcommon stock to our principal stockholders and certain of our executiveofficers for cash of approximately $27.5 million.

 

**InitialPublic Offering**

 

On May 12, 2004, we completed our IPO throughunderwriters of 8,500,000 shares of common stock at a price to the public of$13 per share.  The net proceeds of theoffering of approximately $101 million, after deducting underwriters’ discountsand estimated offering expenses, were used by us as follows:  (1) $50.2 million was used to repay aportion of term loans outstanding under our senior credit facility; (2)  $30 million was used to repay the principalamount of our subordinated note with Exelon; and (3) the remaining proceeds ofapproximately $20.8 million were retained for general corporate purposes.  Because the carrying amount of the Exelonnote was recorded at a discount to reflect the fair value based upon applicablemarket rates for similar securities, the Company will record a loss on theearly extinguishment of this debt of approximately $5.7 million which loss willbe reflected in our results of operations for the three months endingJune 30, 2004.  Because the IPOclosed after March 31, 2003, the effects of the offering are not reflectedin the accompanying condensed consolidated financial statements.

 

**Resultsof Operations**

 

The following analysis compares our resultsof operations for the three months ended March 31, 2004 (“2004 three-monthperiod”) with the Predecessor’s historical results of operations as adjusted toreflect the pro forma effects of the Merger (“Predecessor pro forma 2003three-month period”). The following analysis also includes a comparison of theresults of our operations for the three months ended March 31, 2004 withthe Predecessor’s actual results for the period January 1, 2003 toMarch 21, 2003.

 

The principal adjustments associated with thePredecessor pro forma three-month period include (1) the elimination ofMerger-related costs and expenses; (2) the effects on depreciation expense(which is included in cost of revenues and selling, general and administrativeexpenses) resulting from changes in lives and book basis of certain fixedassets; (3) additional amortization of intangible assets resulting from theMerger; and (4) related income tax effects of the previously mentionedadjustments.

 

The comparison of results for the 2004three-month period with the Predecessor’s actual and pro forma 2003 results isaffected by (1) the Maslonka acquisition on January 27, 2004 and (2) theadditional ten days included in the 2004 three-month period resulting from thechange in quarter end. As disclosed in Note 1 to the condensed consolidatedfinancial statements, the 2004 three-month period reflects results fromJanuary 1, 2004 to March 31, 2004. The 2003 Predecessor prior-year period reflects the Predecessor’sresults for the period January 1, 2003 to March 21, 2003. Althoughthe change

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

in quarter end would not have had a material effect on the Predecessor’s 2003 actualor pro forma prior-year period results, it does affect the comparison ofthe 2004 three-month results with the Predecessor’s actual and pro forma  results.

 

Our results of operations can besubject to seasonal variations.  Duringthe winter months, demand for new projects and new maintenance servicearrangements may be lower due to reduced construction activity.  We generally experience lower grossoperating margins during the winter months due to lower demand for our servicesand more difficult operating conditions. However, demand for repair and maintenance services attributable todamage caused by inclement weather during the winter months may partiallyoffset the loss of revenues from lower demand for new projects and newmaintenance service arrangements.  Workis also hindered during other inclement weather events.  In addition, during periods of peak electricitydemand, utilities generally are unable to remove their electric powertransmission and distribution equipment from service, decreasing the demand forour services during this period. Accordingly, operating results in any particular quarter may not beindicative of the results that can be expected for any other quarter or for theentire year.

 
| **(Thousands of dollars)**                          |   | **Predecessor  Pro Forma  Three  Months Ended   March 21, 2003 (a)** |    | **% of  Revenue** |   | **Three  Months Ended  March 31, 2004** |   | **% of  Revenue** |   |
|-----------------------------------------------------|--------|---------------------------------------------------------------------------|---------|-------------------|--------|----------------------------------------------|--------|-------------------|--------|
|                                                |   |                                                                      |    |              |   |                                         |   |              |   |
| Revenues                                            |   | $                                                                         | 110,602 |              | 100.0  | %                                            | $      | 148,621           |   | 100.0 | % |
| Gross profit                                        |   | $                                                                         | 15,262  |              | 13.8   | %                                            | $      | 25,277            |   | 17.0 | % |
| Selling, general and administrative  expenses       |   | 12,191                                                                    |    | 11.0              | %      | 15,405                                       |   | 10.4              | %      |
| Amortization of intangible assets                   |   | 2,600                                                                     |    | 2.4               | %      | 4,547                                        |   | 3.1               | %      |
| Income from operations                              |   | 471                                                                       |    | 0.4               | %      | 5,325                                        |   | 3.6               | %      |
| Interest income                                     |   | 475                                                                       |    | 0.4               | %      | 54                                           |   | 0.0               | %      |
| Interest expense and amortization of debt  discount |   | (2,966                                                                    | )       | -2.7              | %      | (3,371                                       | )      | -2.3              | %      |
| Other income (expense)                              |   | 64                                                                        |    | 0.1               | %      | (193                                         | )      | -0.1              | %      |
| Income (loss) before income taxes                   |   | (1,956                                                                    | )       | -1.8              | %      | 1,815                                        |   | 1.2               | %      |
| Income tax expense (benefit)                        |   | (832                                                                      | )       | -0.8              | %      | 744                                          |   | 0.5               | %      |
| Income (loss) from continuing operations            |   | $                                                                         | (1,124  | )                 | -1.0   | %                                            | $      | 1,071             |   | 0.7 | % |

 

----

(a) Pro formafor the effects of the Merger.

 

**2004 Three-Month Period Compared to the Predecessor Pro Forma2003 Three-Month Period.**

 

Revenues:  Revenues increased $38.0 million, or 34%, to $148.6 million forthe 2004 three-month period as compared to the Predecessor pro forma 2003three-month period due primarily to a $38.9 million increase in aerial electrictransmission revenues including the work performed by Maslonka which wasacquired on January 27, 2004; $11.7 million of revenues attributable tothe 10 additional days in the 2004 three-month period as compared to thePredecessor pro forma 2003 three-month period; and $1.7 million of revenuesfrom the December 2003 acquisition of Utility Locating and MappingServices, Inc. (“ULMS”).  Partiallyoffsetting these increases in revenues was an $8.8 million decrease inunderground transmission revenues and the absence of revenues from OSP in the2004 three-month period compared to revenues of $3.9 million reflected in thePredecessor pro forma 2003 three-month period. Revenues of OSP were included in continuing operations of thePredecessor during 2003, however, as a result of the Company’s late-2003decision to sell OSP, the results of OSP in the 2004 three-month period areaccounted for as discontinued operations. Also offsetting the increase inrevenues in the 2004 three-month period were declines in revenues relatedto  independent power producers andtelecommunications work. As of March 31, 2004, our revenue backlog wasapproximately $790 million, approximately equal to our backlog as of December 31,2003 and approximately 34% higher than our backlog of $589 million as ofMarch 31, 2003.

 

Gross profit:  Gross profit increased $10.0 million, or 66%, to $25.3 million inthe 2004 three-month period compared to the Predecessor pro forma 2003three-month period due primarily to an increase in  gross profit of $11.2 million from aerial electric transmissionwork, including gross profit from work performed by Maslonka, and to a lesserextent higher gross profit from our natural gas and telecommunicationsbusinesses and the effect of the ten additional days in the 2004 three-monthperiod. These increases in gross profit were partially offset by a decline inother electric power gross margin.

 

Selling, general and administrativeexpenses:  Selling, general andadministrative expenses increased $3.2 million, or 26%, to $15.4 million.  The increase is primarily due to $1.7million of expenses associated with the IPO which closed on May 12, 2004 andincremental expenses

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

resulting from the acquisitions of Maslonka and, to a lesser degree,ULMS.

 

Amortization of intangible assets:  Amortization of intangible assets was $4.5million in the 2004 three-month period compared with $2.6 million in thePredecessor pro forma three-month period principally the result of intangibleassets acquired in the Maslonka acquisition partially offset by loweramortization of Merger-related intangible assets in the 2004 three-monthperiod.

 

Interest expense and amortization ofdebt discount:  We incurred $3.4 millionof interest expense in the 2004 three-month period, an increase of $0.4 millionfrom the Predecessor pro forma three-month period, principally reflecting theeffects of the additional ten days in the 2004 three-month period and, to alesser extent, higher interest expense on greater amounts of letters of creditoutstanding.

 

**2004 Three-Month Period Compared to the Actual PredecessorPeriod January 1, 2003 to March 21, 2003.**

 

Revenues:  Revenues increased $38.0 million, or 34%, to $148.6 million forthe 2004 three-month period as compared to the Predecessor periodJanuary 1, 2003 to March 21, 2003 due primarily to a $38.9 millionincrease in aerial electric transmission revenues including the work performedby Maslonka which was acquired on January 27, 2004; $11.7 million ofrevenue attributable to the 10 additional days in the 2004 three-month periodas compared to the Predecessor prior-year period; and $1.7 million from the December 2003 acquisition ofULMS.  Partially offsetting theseincreases in revenues was an $8.8 million decrease in underground transmissionrevenues and the absence of revenues from OSP in the 2004 three-month periodcompared to revenues of $3.9 million reflected in the Predecessor period.  Also offsetting the increase in revenues inthe 2004 three-month period were declines in revenues related to independentpower producers and telecommunications work.

 

Gross profit:  Gross profit increased $11.9 million, or 88%, to $25.3 million inthe 2004 three-month period compared to the Predecessor period January 1, 2003to March 21, 2003 due primarily to an increase in  gross profit of $11.2 million from aerial electric transmissionwork, including gross profit from work performed by Maslonka, and to a lesserextent higher gross profit from our natural gas and telecommunicationsbusinesses (including the impact of lower depreciation expense resulting fromchanges in estimated lives and bases of certain fixed assets resulting from theMerger) and the effect of the ten additional days in the 2004 three-monthperiod. These increases in gross profit were partially offset by a decline inother electric power gross margin.

 

Selling, general and administrativeexpenses:  Selling, general andadministrative expenses increased $3.2 million, or 26%, to $15.4 million.  The increase is primarily due to $1.7million of expenses associated with the IPO which closed on May 12, 2004 andincremental expenses resulting from the acquisitions of Maslonka and, to alesser degree, ULMS. The prior-year period includes $115,000 of Merger relatedcosts.

 

Amortization of intangible assets:  Amortization of intangible assets was $4.5million in the 2004 three-month period compared with no such amortization inthe Predecessor period as a result of intangible assets acquired in theMaslonka acquisition and the Merger.

 

Interest expense and amortization ofdebt discount:  We incurred $3.4 millionof interest expense in the 2004 three-month period reflecting interest on debtresulting from the Merger.

 

**Liquidity and Capital Resources**

 

As ofMarch 31, 2004, we had cash and cash equivalents of $16.1 million, workingcapital of $85.2 million and long-term debt of $164.2 millionprincipally consisting of term loans under our senior credit facility and theExelon note. We had $5.0 million of borrowings under our revolving creditfacility at March 31, 2004 and $27.7 million in letters of creditoutstanding thereunder, leaving $17.3 million as of that date availablefor additional borrowings.

 

On January 22, 2004, we amended our senior credit facility topermit the acquisition of Maslonka and to obtain additional liquidity andoperating flexibility, including expanding our capacity for making capitalexpenditures. As a result of the amendment, the commitment of the banks underthe revolving credit facility was increased by $10 million to $50 million, andthe amount available for letters of credit was increased by $10 million to $35million.

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

 

Concurrent with the IPO, in order to provide for additional borrowingflexibility and to reduce its borrowing rates to reflect its improved financialposition, we entered into an amended and restated credit agreement to, among otherthings, provide for a revolving credit facility in the original amount of $40million that may be increased to $85 million and to provide a term loanfacility in the amount of $85.3 million which is equal to the amount of termloans outstanding under the existing senior credit facility after giving effectto the mandatory prepayment of  $50.2million of such loans required in connection with the IPO. A portion of therevolving credit facility not in excess of 80% of the amount thereof shall beavailable for the issuance of letters of credit. Term loans and revolving loansunder the amended and restated credit agreement will initially  bear interest, at our option, at the bank’sprime interest rate plus a spread of 2.00% or LIBOR plus a spread of 3.00%.  Beginning in 2005, such interest ratespreads will be dependent upon our Consolidated Leverage Ratio, as defined, andrange from 1.50% to 3.50% for revolving loans and 1.75% to 3.00% for termloans.  As of June 11, 2004, we hadcommitments under our revolving credit facility totaling $45 million.

 

Concurrent with the IPO, we repaid the $30 million principal balance ofour subordinated promissory note (representing the $29 million issued inconjunction with the Merger and a $1 million increase resulting from theCompany’s December 2003 acquisition of ULMS) with Exelon.  Because the carrying amount of thesubordinated promissory note was reflected at a discount to reflect the fairvalue based upon applicable market rates for similar securities, the extinguishmentof this debt in May 2004 resulted in a non-recurring loss of approximately $5.7million which will be reflected in our results of continuing operations for thethree months ended June 30, 2004.

 

On April 21, 2004, we received a waiver and amendment to thesenior credit facility related to obtaining liens on certain vehicles andequipment following the Merger. We were required to obtain the liens byMarch 22, 2004 and were not in compliance at that date. The waiver andamendment extends the compliance date until July 7, 2004.

 

Our working capital needs are influenced bythe seasonality of our business. We experience a need for additional workingcapital during the spring when we increase our level of outdoor construction inweather-affected regions of the country. Conversely, we convert working capitalassets to cash during the winter months.

 

We expect capital expenditures to range from$20.0 million to $25.0 million in 2004, which could vary depending onthe expected award and timing of commencement of several large electric powertransmission projects. We intend to fund those expenditures primarily fromoperating cash flow. We have reduced our capital expenditures over the past twoyears in order to increase the utilization rates of our equipment.

 

We anticipate that our cash flow fromoperations, cash on hand (including the remaining net proceeds from our IPO),and our  amended and restated  credit facility will provide sufficient cashto enable us to meet our working capital needs, debt service requirements andplanned capital expenditures for property and equipment over the next twelve toeighteen months. However, deterioration in the markets we serve, materialchanges in our customers’ revenues or cash flows or adverse weather conditionscould negatively impact our revenues and cash flows. These factors, coupledwith restrictive covenants under our amended and restated credit facility, maynegatively impact our ability to meet these needs.

 

*Cash from operatingactivities from continuing operations.*   Duringthe 2004 three-month period, net cash used by operating activities fromcontinuing operations was $6.5 million compared to net cash provided byoperating activities from continuing operations of $8.3 million for thePredecessor prior-year period January 1, 2003 to March 21, 2003. Theprincipal sources of operating cash during the 2004 three-month period werepayments received from customers for contract services performed. The principaluses of operating cash during the 2004 three-month period were payments forlabor and materials related to performance of services and selling, general andadministrative expenses. Changes in operating assets and liabilities during the2004 three-month period used $18.3 million of operating cash flow fromcontinuing operations compared with $0.9 million of operating cash flowprovided from such changes in the prior-year Predecessor period.  The significantly greater use of cash fromchanges in operating assets and liabilities from continuing operations duringthe 2004 three-month period is because the prior-year period included $12.9million of related party payments; the current year includes a  $19.5 million  increase in costs and estimated earnings in excess of billings in2004 compared with an increase of only $0.8 million in the prior-year period;and greater 2004 three-month period income tax payments. Partially offsettingthese greater uses of cash in the 2004 three-month period  was a $13.8 million increase in  cash flow from decreases in contractreceivables.

 

*Cash from investingactivities from continuing operations.*  Duringthe 2004 three-month period, net cash used by

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

investing activities from continuing operations was $23.8 millioncompared to cash used by investing activities from continuing operations of$4.2 million for the prior-year Predecessor period. The primary uses ofcash for the 2004 three-month period were cash payments at closing for theacquisition of Maslonka, net of cash acquired, of $19.5 million, and purchasesof equipment of $5.2 million compared to $4.9 million during theprior-year Predecessor  period.  Proceeds from the sale of equipment were$0.9 million in the current year three-month period, slightly higher than the$0.7 million of such cash flow generated in the prior-year Predecessor  period.

 

*Cash from financingactivities from continuing operations.*   Duringthe 2004 three-month period, net cash provided by financing activities from continuingoperations was $34.4 million compared to net cash used in financing activitiesfrom continuing operations of $0.1 million for the prior-year Predecessorperiod. The primary sources of cash from financing activities for the 2004three-month period were $29.8 million of proceeds from the issuance of theCompany’s common stock to the Principal Shareholders and certain members ofmanagement in conjunction with the acquisition of Maslonka.  Additionally, the Company had net borrowingsof $5 million during the 2004 three-month period from its revolving creditfacility, and net repayments of long-term debt of $0.4 million principallyassociated with scheduled quarterly repayments of the senior credit facilityterm loan.

 

**Contractual Obligations and Other Commitments**

 

The following table of our futurecontractual obligations existing as of December 31, 2003 which wasincluded in our IPO Prospectus has been updated for material changes to reflect(1) the effects of the Maslonka acquisition and (2) the mandatory prepayment ofthe Exelon Note and a portion of the senior credit facility term loan from thenet proceeds of our IPO. There have been no other material changes to suchobligations and commitments since December 31, 2003.

 
| **(Thousands)  Long-Term Debt**        |   | **Payment  due by Period** |   |
|----------------------------------------|--------|----------------------------|--------|
| **2004**                               |   | **2005**                   |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |
| Senior credit facility                 |   | $                          | 52,600 |   | $ | 1,400 |   | $ | 1,400 |   | $ | 1,400 |   | $ | 1,400 |   | $ | 81,450 |   | $ | 139,650 |   |
| Subordinated promissory note to Exelon |   | 30,000                     |   | — |   | — |   | — |   | — |   | — |   | 30,000 |   |
| Bank Notes                             |   | 33                         |   | 95 |   | 1,000 |   | — |   | — |   | — |   | 1,128 |   |
| Total                                  |   | $                          | 82,633 |   | $ | 1,495 |   | $ | 2,400 |   | $ | 1,400 |   | $ | 1,400 |   | $ | 81,450 |   | $ | 170,778 |   |

 
|                                               |   | **Payment  due by Period** | ** ** |
|----------------------------------------------------|--------|----------------------------|------------|
| **(Thousands)  Other Contractual Obligations (1)** |   | **2004**                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Capital lease obligations                          |   | $                          | 122        |   | $ | 50 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 172 |   |
| Contingent earnout                                 |   | —                     |       | — |   | 2,662 |   | — |   | — |   | — |   | 2,662 |   |
| Maslonka holdback                                  |   | —                     |       | 3,300 |   | 3,300 |   | — |   | — |   | — |   | 6,600 |   |
| Maslonka time deposit                              |   | 5,000                      |       | — |   | — |   | — |   | — |   | — |   | 5,000 |   |
| Total                                              |   | $                          | 5,122      |   | $ | 3,350 |   | $ | 5,962 |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,434 |   |

 

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(1)Trade accounts payable are not included in Contractual Obligations.

 
|                                          |   | **Amount of  Commitment Expiration Per Period** |       |
|-----------------------------------------------|--------|-------------------------------------------------|------------|
| **(Thousands)  Other Commercial Commitments** |   | **2004**                                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating leases                              |   | $                                               | 3,083      |   | $ | 2,467 |   | $ | 1,751 |   | $ | 866 |   | $ | 417 |   | $ | 953 |   | $ | 9,537 |   |
|                                               |        |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Related Party Transactions**

 

On October 6, 1999, the InfraSourceGroup entered into a services agreement (“Services Agreement”) with Exelon forExelon to provide certain services, including contracting for employees,financial and accounting services, payroll services, office and equipmentleases and other administrative and support services. The scope of theseservices was reduced each year of the agreement. This agreement was effectivefor a period of 12 months commencing in October of each year and wasrenewable at both parties discretion. The InfraSource Group, throughInfraSource Corporate Services, Inc., was charged $545,000 for these servicesfor the Predecessor period January 1, 2003 to March 21, 2003.Pursuant to the Merger, this Services Agreement was terminated.

 

The InfraSource Group has several servicecontracts with Exelon and performs work for various services including utilityconstruction and maintenance, telecommunications and infrastructure services onan outsourced basis to business and residential customers. Certain operatingassets and liabilities of the Non-Acquired Group, including certain operatingagreements (the “Operating Agreements”) with Exelon, were transferred to theInfraSource Group as of January 1, 2003,

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

with operating results related to the Operating Agreements reflected inthe accompanying consolidated statement of operations beginning with the dateof transfer. Under the Operating Agreements, the Company performsinfrastructure services on an outsourced basis to business and residentialcustomers. Each Operating Agreement has an annual term ending onDecember 31, which automatically renews each year unless formallyterminated by Exelon. The services are charged to Exelon at a rate that isintended to approximate market value. Revenues charged to Exelon for the Predecessorperiod January 1, 2003 to March 21, 2003 under these contracts were$6.6 million.  These OperatingAgreements remained in place following the Merger. On January 29, 2004,Exelon relinquished its sole seat on the Company’s Board of Directors and ceasedto be a related party at that time. Revenues from Exelon for the period January 1 through January 29, 2004,(the date it ceased to be a related party) totaled $7.6 million.

 

In addition to the Operating Agreements,revenues for the Predecessor for the period January 1, 2003 toMarch 21, 2003 related to contracts with Exelon were $7.1 million.Accounts receivable related to all revenues due from Exelon were  $14.6 million at December 31, 2003.

 

In March 2004, after receiving approvalfrom the required parties, the Company distributed $7.2 million of property andequipment that pursuant to the original terms of a purchase agreement withBlair Park Services, Inc. (“Blair Park”), an infrastructure services businessacquired in 2001, were owed to three officers of Blair Park.  The corresponding liability related to theseassets is reflected in other liabilities - related parties in theDecember 31, 2003 condensed consolidated balance sheet.

 

In connection with the Maslonka acquisition,our Principal Stockholders secured the issuance of $10.0 million worth ofletters of credit. These letters of credit were provided as credit support toenable Maslonka to secure a performance bond on a new project award. Afterconsummation of the Maslonka acquisition, we caused the letters of credit to beterminated. We paid an aggregate fee of $200,000 to the Principal Stockholdersfor providing this security.

 

We lease our Maslonka headquarters in Mesa,Arizona and our Maslonka Texas field office in San Angelo, Texas from EC Source,LLC, which is wholly-owned by Martin Maslonka. Our leases for these twoproperties will run through February 2009, subject to a five-year renewaloption. Pursuant to these leases, we will incur total annual lease payments of$168,000.

 

Maslonka is the issuer of a $1.0 millioninstallment promissory note in favor of Martin Maslonka. The promissory notebears interest at an annual rate of 8.5%, and interest is payable in equalmonthly payments of $7,083. The promissory note matures on June 30, 2006.

 

**Recently Issued Accounting Pronouncements**

 

In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable InterestEntities”**(“FIN 46”).  This Interpretation requires that a variableinterest entity be consolidated by a company if that company is subject to amajority of the risk of loss from the variable interest entity’s activities orentitled to receive a majority of the entity’s residual returns or both. Theconsolidation requirements apply immediately to variable interest entitiescreated after January 31, 2003. The consolidation requirements apply toolder entities in the first fiscal year or interim period ending afterDecember 15, 2003. Certain of the disclosure requirements apply in all financialstatements issued after January 31, 2003, regardless of when the variableinterest entity was established. On February 1, 2003, the Company adoptedFIN 46 for variable interest entities created after January 31, 2003 andit did not have an impact on the Company’s consolidated financial statements.In December 2003, the FASB deferred the provisions of FIN 46 for all othervariable interest entities until March 31, 2004. The adoption of thesedeferred provisions did not have an impact on the Company’s consolidatedfinancial statements.

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

Our exposure to market risks results primarily from adverse changes ininterest rates.  We have nothistorically used derivative instruments for trading purposes or to speculateon changes in interest rates or commodity prices.

 

In October 2003, we entered into an interest rate swap agreementand an interest rate cap agreement with terms of three years, both ofwhich qualify and have been designated as cash flow hedges to reduce marketinterest rate risk associated with $70 million notional amount of our variablerate term loan. After considering the effect of these agreements, a portion ofour long-term debt obligations remain subject to interest rate risk.  The annual detrimental net income effect ofa 50 basis point increase in interest rates on these long-term obligations,after considering the $50.2 million reduction in our term loan concurrent withthe IPO, would be less than $0.1 million.

 

**Item 4. Controls and Procedures**

 

(a)  Evaluation of DisclosureControls and Procedures

 

The Company’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures as of the end of the period covered by this report were designed andfunctioning effectively to provide reasonable assurance that the informationrequired to be disclosed by the Company in reports filed under the ExchangeAct, is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. The Company believes that a controlssystem, no matter how well designed and operated, cannot provide absoluteassurance that the objectives of the controls system are met, and no evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within a company have been  detected.

 

(b) Change in Internal Control over Financial Reporting

 

No change in the Company’s internal control over financial reporting(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) occurred during the Company’s most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

PART II OTHER INFORMATION

**Item 1.  LegalProceedings**

 

On February 7, 2003, Rahsanne Bickmannfiled suit in the Travis County District Court in Texas State Court against Maslonkaand one employee alleging, among other things, gross negligence and seekingapproximately $24 million in actual and compensatory damages arising out of thedeath of her son.  On October 27,2003, the father of the deceased, Kevin Sam, Sr., filed suit in Taylor CountyTexas District Court seeking unspecified damages. The claims arose out of anautomobile accident that took place on December 1, 2002 on an interstatehighway in Texas and resulted in death. In February 2004, RahsanneBickman’s claims were resolved through an out of court settlement fully fundedby insurance proceeds (less a $10,000 deductible).  The dismissal order was entered on March 25, 2004.  The claims of Kevin Sam, Sr. have beendocketed for trial on December 13, 2004.

 

In January 2004, a judgment was enteredagainst InfraSource in Superior Court of Fulton County, Georgia in the amountof $3.8 million, including $3.2 million in punitive damages. The jury verdictupheld allegations by the plaintiff that in 1999 InfraSource Incorporated(formerly known as Exelon Infrastructure Services, Inc.) had fraudulentlyinduced the plaintiff to incur expenses in connection with a proposed businessacquisition that was never consummated. We filed a notice of appeal onFebruary 19, 2004, and the plaintiff filed a notice of cross-appeal onMarch 2, 2004.  Pursuant to theappellate court’s May 28, 2004 Notice of Docketing, our brief supporting ourappeal must be filed no later than June 17, 2004 with the respondent’sbrief due by July 7, 2004.

 

In addition, pursuant to our servicecontracts, we also generally indemnify our customers for the services weprovide thereunder. Furthermore, because our services are integral to theoperation and performance of the electric power transmission and distribution infrastructure,we may become subject to lawsuits or claims for any failure of the systems thatwe work on, even if our services are not the cause for such failures, and wecould be subject to civil and criminal liabilities to the extent that ourservices contributed to any property damage or blackout. The outcome of theseproceedings could result in significant costs and diversion of management’sattention to our business. Payments of significant amounts, even if reserved,could adversely affect our reputation and liquidity position.

 

From time to time, we are a party to variousother lawsuits, claims and other legal proceedings that arise in the ordinarycourse of our business. These actions typically seek, among other things,compensation for alleged personal injury, breach of contract, property damage,punitive damages, civil penalties or other losses, or injunctive or declaratoryrelief. With respect to such lawsuits, claims and proceedings, we accruereserves when it is probable a liability has been incurred and the amount ofloss can be reasonably estimated. We do not believe any of these proceedings,individually or in the aggregate, would be expected to have a material adverseeffect on our results of operations, or of cash flows, or on our financial condition.

 

**Item2.    Changes in Securities and Use ofProceeds.**

 

(c) During the three months endedMarch 31, 2004, the Company issued the following unregistered equitysecurities:

 

In January 2004, in connection with theMaslonka acquisition, the Company issued and sold an aggregate of 5,931,950shares of common stock at a per share purchase price of $4.60 for an aggregatepurchase price of $27.3 million to OCM/GFI Power Opportunities Fund, L.P.,2,947,292 shares, OCM Principal Opportunities Fund Il, L.P., 2,947,292 shares,and certain of the Company’s executive officers, 37,367 shares. These shares ofcommon stock were issued in a transaction exempt from the registrationrequirements of the Securities Act in reliance on Section 4(2) of theSecurities Act.

 

In January 2004, the Company issued4,330,820 shares of common stock to the Maslonka stockholders as part of theconsideration in the Maslonka acquisition. These shares of common stock were issued to seven stockholders, all ofwhich were “accredited investors” within the meaning of the Securities Act, ina transaction exempt from the registration requirements of the Securities Actin reliance on Section 4(2) of the Securities Act.

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

In January 2004, the Company issued andsold to David R. Helwig, 380,844 shares of common stock at a per share price of$4.60, pursuant to the exercise of options granted pursuant to an exemptionfrom registration under Section 4(2) of the Securities Act.

 

In January 2004, the Company issued andsold to Terence R. Montgomery, 43,525 shares of common stock at a per shareprice of $4.60, pursuant to Mr. Montgomery’s exercise of options grantedpursuant to an exemption from registration under Section 4(2) of theSecurities Act.

 

In January 2004, the Company issued andsold to John R. Marshall, 39,826 shares of common stock at a per share price of$4.60, pursuant to Mr. Marshall’s exercise of options granted pursuant to anexemption from registration under Section 4(2) of the Securities Act.

 

In January 2004, the Company issued andsold to John Brayman, 19,913 shares of common stock at a per share price of$4.60, pursuant to Mr. Brayman’s exercise of options granted pursuant to anexemption of registration under Section 4(2) of the Securities Act.

 

In March 2004, the Company issued andsold to Paul M. Daily, 5,441 shares of common stock at a per share price of$4.60, pursuant to Mr. Daily’s exercise of options granted pursuant to anexemption from registration under Section 4(2) of the Securities Act.

 

We grantedoptions to directors and employees to purchase an aggregate of 75,080 shares ofcommon stock at a price of $4.60 per share and 19,913 shares of common stock ata price of $13.00 per share under our 2003 Omnibus Stock Incentive Plan.  These options were granted in transactionsexempt from the registration requirements of the Securities Act in reliance onSection 4(2) and Rule 701 promulgated under the Securities Act.

 
| Item 3. |   | Defaults Upon Senior Securities.                                                                                                                                                          |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                      |
| None.   |   |                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                      |
| Item 4. |   | Submission of Matters to a Vote of Security  Holders.                                                                                                                                     |
|    |   |                                                                                                                                                                                      |
| None.   |   |                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                      |
| Item 5. |   | Other Information.                                                                                                                                                                        |
|    |   |                                                                                                                                                                                      |
| None.   |   |                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                      |
| Item 6. |   | Exhibits and  Reports on Form 8-K.                                                                                                                                                        |
|    |   |                                                                                                                                                                                      |
|    |   | (a)  Exhibits                                                                                                                                                                        |
|    |   |                                                                                                                                                                                      |
| 31.1    |   | Certification of Chief  Executive Officer pursuant to Rule 13a —14(a) under the Securities Exchange  Act of 1934                                                                     |
|    |   |                                                                                                                                                                                      |
| 31.2    |   | Certification of Chief  Financial Officer pursuant to Rule 13a —14(a) under the Securities Exchange  Act of 1934                                                                     |
|    |   |                                                                                                                                                                                      |
| 32.1    |   | Certification of Chief Executive  Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

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 theundersigned thereunto duly authorized.

 

 
|                     |   | INFRASOURCE SERVICES, INC.                        |
|--------------------------|--------|---------------------------------------------------|
|                     |   | (Registrant)                                      |
|                     |   |                                              |
|                     |   |                                              |
| Date: June 11, 2004 |   | By:                                               | /s/ Terence  R. Montgomery |   |
|                     |   | Terence R. Montgomery                             |
|                     |   | Chief Financial Officer and Senior Vice President |

 

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**INFRASOURCE SERVICES, INC. AND SUBSIDIARIES**

 

EXHIBIT INDEX

 
| 31.1   |   | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)  under the Securities Exchange Act of 1934                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)  under the Securities Exchange Act of 1934                                                                           |
|   |   |                                                                                                                                                                                     |
| 32.1   |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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