UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

~~Washington,~~WASHINGTON, D.C. 20549

~~Form~~FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT ofOF 1934

For the quarterly period ended ~~June 30, 2004~~March 31, 2005

Commission File Number 001-08106

(MASTEC LOGO)

~~Commission file number 001-08106~~

~~Mastec, Inc.~~MASTEC, INC.

(Exact name of registrant as specified in ~~its~~Its charter)


Florida		65-0829355
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		~~(I.R.S. Employer~~ Identification No.)

800 Douglas Road, Floor 12, Coral Gables, FL		33134
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(305) 599-1800

Former name, former address and former fiscal year, if changed since last report:

Not Applicable

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

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

As of ~~December 20, 2004~~April 30, 2005 MasTec, Inc. had ~~48,146,650~~48,855,397 shares of common stock, $0.10 par value, outstanding.

MASTEC, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2005

~~MASTEC, INC.~~

~~Form 10-Q~~

~~Quarter Ended June 30, 2004~~

TABLE OF CONTENTS

Part I.

Financial Information

Item 1.

Financial Statements

Condensed Unaudited Consolidated Statements of Operations for ~~the three months and six months ended June 30, 2004 and 2003~~

~~Condensed Unaudited Consolidated Balance Sheets as of June 30, 2004~~the three months ended March 31, 2005 and ~~December 31, 2003~~2004

Condensed Unaudited Consolidated ~~Statements~~Balance Sheets as of ~~Cash Flows for the six months ended June 30,~~March 31, 2005

and December 31, 2004 ~~and 2003~~

~~Notes to~~ Condensed Unaudited Consolidated ~~Financial~~ Statements of Cash Flows for

the three months ended March 31, 2005 and 2004

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

~~Item 4.~~

~~Controls and Procedures~~Notes to Condensed Unaudited Consolidated Financial Statements

357

~~Part II.~~

~~Other Information~~

Item 1.2.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II.

Other Information

Signatures

~~Item 5.~~Employment Agreement/Michael Nearing

~~Other Information~~

~~Item 6.~~

~~Exhibits~~

~~Signatures~~

~~Sec~~Subsidiaries

Section 302 Chief Executive Officer Certification

~~Sec~~Section 302 Chief Financial Officer Certification

~~Sec~~Section 906 Chief Executive Officer Certification

~~Sec~~Section 906 Chief Financial Officer Certification

~~MASTEC, INC.~~

MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Six Months Ended
June 30, June 30,
2003 2003
2004 As Restated 2004 As Restated
(In thousands, except per share amounts)
Revenue $ 231,278 $ 201,361 $ 431,300 $ 376,529
Costs of revenue, excluding depreciation 206,261 169,031 400,834 316,871
Depreciation 4,481 7,200 9,466 15,550
Amortization 175 132 351 283
General and administrative expenses 16,717 15,066 38,037 32,326
Interest expense, net 4,664 4,754 9,567 9,368
Other (income) expense, net (444 ) 307 (304 ) (250 )

(Loss) income from continuing operations before provision for income taxes and minority interest (576 ) 4,871 (26,651 ) 2,381
Provision for income taxes — 1,900 — 887
Minority interest (35 ) — (35 ) —

(Loss) income from continuing operations (611 ) 2,971 (26,686 ) 1,494
Discontinued operations:
Loss on discontinued operations, net of tax benefit (129 ) (952 ) (955 ) (1,222 )
Loss on write off of assets of discontinued operations, net — — (19,165 ) —

Net (loss) income $ (740 ) $ 2,019 $ (46,806 ) $ 272

Basic weighted average common shares outstanding 48,385 48,030 48,354 48,024

Basic net (loss) income per share:
Continuing operations $ (.01 ) $ .06 $ (.55 ) $ .03
Discontinued operations (.01 ) (.02 ) (.42 ) (.02 )

Total basic net (loss) income per share $ (.02 ) $ .04 $ (.97 ) $ .01

Diluted weighted average common shares outstanding 48,385 48,215 $ 48,354 48,086

Diluted (loss) income per share:
Continuing operations $ (.01 ) $ .06 $ (.55 ) $ .03
Discontinued operations (.01 ) (.02 ) (.42 ) (.02 )

Total diluted net (loss) income per share $ (.02 ) $ .04 $ (.97 ) $ .01

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

~~MASTEC, INC.~~(In thousands, except per share amounts)


	For the Three Months
	Ended March 31,
	2005			2004
Revenue	$	217,770		$	194,707
Costs of revenue, excluding depreciation		204,970			188,574
Depreciation		4,965			4,831
General and administrative expenses		16,460			20,513
Interest expense, net		4,851			4,903
Other (income) expense, net		(1,973	)		166

Loss from continuing operations before minority interest		(11,503	)		(24,280	)
Minority interest		(66	)		—

Net loss from continuing operations		(11,569	)		(24,280	)
Discontinued operations:
Loss on discontinued operations, net of tax benefit of $0 in 2005 and 2004		(445	)		(2,621	)
Loss on write off of assets of discontinued operations, net		—			(19,165	)


Net loss	$	(12,014	)	$	(46,066	)

Basic and diluted weighted average common shares outstanding		48,696			48,323

Basic and diluted net loss per share:	$	(0.24	)	$	(0.50	)
Continuing operations
Discontinued operations	$	(0.01	)	$	(0.45	)

Basic and diluted net loss per share	$	(0.25	)	$	(0.95	)

~~CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS~~

June 30, December 31,
2004 2003
(Unaudited) (Audited)
(In thousands, except
share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 16,781 $ 19,415
Accounts receivable, unbilled revenue and retainage, net 204,098 208,211
Inventories 42,765 32,781
Income tax refund receivable 2,396 4,667
Prepaid expenses and other current assets 34,962 31,801

Total current assets 301,002 296,875
Property and equipment, net 75,394 85,832
Goodwill 138,640 150,984
Deferred taxes 56,346 55,083
Other assets 26,752 35,151

Total assets $ 598,134 $ 623,925

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt $ 95 $ 4,709
Accounts payable and accrued expenses 115,233 100,698
Other current liabilities 61,178 78,108

Total current liabilities 176,506 183,515
Other liabilities 33,927 27,636
Long-term debt 196,091 196,956

Total liabilities 406,524 408,107

Shareholders’ equity:
Preferred stock, no par value; authorized shares — 5,000,000; issued and outstanding shares — none — —
Common stock $0.10 par value; authorized shares — 100,000,000; issued and outstanding shares — 48,392,000 and 48,222,000 shares, respectively 4,839 4,822
Additional paid-in capital 351,290 349,823
Accumulated deficit (164,653 ) (117,847 )
Foreign currency translation adjustments 134 (20,980 )

Total shareholders’ equity 191,610 215,818

Total liabilities and shareholders’ equity $ 598,134 $ 623,925

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

MASTEC, INC.

CONDENSED UNAUDITED CONSOLIDATED ~~STATEMENTS OF CASH FLOWS~~

For the Six Months Ended
June 30,
2003
2004 As Restated
(In thousands)
Cash flows from operating activities of continuing operations:
(Loss) income from continuing operations $ (26,686 ) $ 1,494
Adjustments to reconcile net (loss) income from continuing operations to net cash (used in) operating activities of continuing operations:
Depreciation and amortization 9,817 15,833
Non-cash compensation expense 416 —
Income tax refunds 1,008 24,131
(Gain) loss on disposal of assets and investments (227 ) 38
Provision of doubtful accounts 2,754 —
Provision for inventory obsolescence 902 —
Minority interest 35 —
Changes in assets and liabilities:
Accounts receivable, unbilled revenue and retainage, net (2,259 ) (19,473 )
Inventories (11,021 ) (2,635 )
Other assets, current and non-current portion (620 ) (2,227 )
Accounts payable and accrued expenses 16,723 820
Other liabilities, current and non-current portion 8,009 (19,862 )

Net cash used in operating activities of continuing operations (1,149 ) (1,881 )

Cash flows from investing activities of continuing operations:
Capital expenditures (5,118 ) (4,624 )
Cash received (paid) for acquisitions and contingent consideration, net of cash acquired 190 (1,861 )
Payments received from sub-leases — 2,676
Investments in life insurance policy — (168 )
Investments in consolidated companies (88 ) —
Net proceeds from sale of assets and investments 6,505 6,178

Net cash provided by investing activities of continuing operations 1,489 2,201

Cash flows from financing activities of continuing operations:
Proceeds from revolving credit facilities, net — 96
Payments from other borrowings and capital lease obligations, net (3,447 ) (2,600 )
Proceeds from issuance of common stock 1,059 99

Net cash used in financing activities of continuing operations (2,388 ) (2,405 )

Net decrease in cash and cash equivalents (2,048 ) (2,085 )
Net effect of currency translation on cash 28 (2,149 )
Cash and cash equivalents — beginning of period 19,415 8,730
Cash used in discontinued operations (614 ) (273 )

Cash and cash equivalents — end of period $ 16,781 $ 4,223

Cash paid during the period for:
Interest $ 17,057 $ 16,775

Income taxes $ 62 $ 51

~~Supplemental disclosure of non-cash information:~~BALANCE SHEETS

~~During the six months ended June 30, 2003, the Company sold certain assets and equipment for which it recorded a receivable of $2 million in other current assets as of June 30, 2003.~~(In thousands, except share amounts)


	March 31,			December 31,
	2005			2004
	(Unaudited)			(Audited)

Assets
Current assets:
Cash and cash equivalents	$	23,648		$	19,548
Accounts receivable, unbilled revenue and retainage, net		190,493			200,743
Inventories		42,445			45,293
Income tax refund receivable		2,925			2,846
Prepaid expenses and other current assets		38,361			43,828

Total current assets		297,872			312,258
Property and equipment, net		63,849			69,303
Goodwill		138,640			138,640
Deferred taxes, net		50,732			50,732
Other assets		33,737			29,590

Total assets	$	584,830		$	600,523

Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of debt	$	80		$	99
Accounts payable and accrued expenses		115,217			113,333
Other current liabilities		57,971			64,363

Total current liabilities		173,268			177,795
Other liabilities		35,749			35,516
Long-term debt		196,058			196,059

Total liabilities		405,075			409,370

Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; authorized shares – 5,000,000; issued and outstanding shares – none		—			—
Common stock $0.10 par value; authorized shares – 100,000,000; issued and outstanding shares – 48,826,000 and 48,597,000 shares in 2005 and 2004, respectively		4,883			4,860
Capital surplus		353,621			353,033
Accumulated deficit		(179,298	)		(167,284	)
Accumulated other comprehensive income		549			544

Total shareholders’ equity		179,755			191,153

Total liabilities and shareholders’ equity	$	584,830		$	600,523

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

MASTEC, INC.

~~NOTES TO THE~~
CONDENSED UNAUDITED CONSOLIDATED ~~FINANCIAL~~ STATEMENTS OF CASH FLOWS

(In thousands)


	For the Three Months
	Ended March 31,
	2005			2004
Cash flows from operating activities of continuing operations:
Net loss from continuing operations	$	(11,569	)	$	(24,280	)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities of continuing operations:
Depreciation and amortization		5,011			5,007
Non-cash stock and restricted stock compensation expense		24			416
Gain on sale of fixed assets		(1,925	)		(426	)
Write down of fixed assets		327			605
Provision for doubtful accounts		1,028			1,420
Provision for inventory obsolescence		—			902
Minority interest		66			—
Changes in assets and liabilities:
Accounts receivable, unbilled revenue and retainage, net		8,030			6,981
Inventories		2,810			(7,101	)
Income tax refund receivable		(79	)		—
Other assets, current and non-current portion		1,852			4,764
Accounts payable		1,994			(8,709	)
Other liabilities, current and non-current portion		(5,318	)		5,334

Net cash provided by (used in) operating activities of continuing operations		2,251			(15,087	)


Cash flows provided by investing activities of continuing operations:
Capital expenditures		(1,893	)		(2,939	)
Payments received from sub-leases		190			146
Investments in unconsolidated companies		(1,139	)		(88	)
Net proceeds from sale of assets		3,875			2,883

Net cash provided by investing activities of continuing operations		1,033			2


Cash flows provided by (used in) financing activities of continuing operations:
Proceeds (repayments) from revolving credit facilities, net		—			(1,108	)
Proceeds (repayments) from other borrowings, net		(20	)		—
Payments of capital lease obligations		(91	)		(91	)
Proceeds from issuance of common stock		611			912

Net cash provided by (used in) financing activities of continuing operations		500			(287	)


Net increase (decrease) in cash and cash equivalents		3,784			(15,372	)
Net effect of currency translation on cash		5			202
Cash and cash equivalents – beginning of period		19,548			19,415
Cash provided by (used in) discontinued operations		311			(976	)

Cash and cash equivalents – end of period	$	23,648		$	3,269

~~June 30, 2004~~
Cash paid during the period for:

Interest $ 8,158 $ 8,233

Income taxes $ 248 $ 28

Supplemental disclosure of non-cash information (in thousands):
During the three months ended March 31, 2005, the Company disposed of certain assets and ~~2003~~equipment for which it recorded a receivable of $400,000 in other current assets as of March 31, 2005.
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
6

MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements


~~Note 1 —~~	Note 1 – Nature of the Business

MasTec, Inc. (collectively, with its subsidiaries, “MasTec” or “the Company”) serves providers of telecommunications, broadband (including cable, satellite and high speed ~~internet)~~Internet), energy services, traffic control and homeland security systems throughout many parts of North America. Although the Company’s clients may contract for a full range of services, the Company’s offerings are more typically separated into the construction, design and installation or the maintenance and upgrade, of infrastructure. MasTec is organized as a Florida corporation and its fiscal year ends December 31. MasTec or its predecessors have been active in the specialty infrastructure services industry for over 70 years.


~~Note 2 —~~ Note 2–Basis for Presentation	~~Basis for Presentation~~

The accompanying condensed unaudited consolidated financial statements for MasTec have been prepared in accordance with ~~United States~~accounting principles generally accepted ~~accounting principles~~in the United States for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all information and notes required by accounting principles generally accepted ~~accounting principles~~in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s ~~Annual Report on~~ Form 10-K for the year ended December 31, ~~2003.~~2004. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the quarterly periods presented have been included. The results of operations for the periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. As discussed in Note 8,7, the Company ceased doing business in Brazil in March 2004 and the ~~first~~Company committed to sell the Network Services division in the fourth quarter of 2004. These entities have been classified as discontinued operations. Accordingly, the ~~results of operations~~net loss for the Network Services division in ~~Brazil included herein for~~ the three months ~~and six months~~ ended ~~June 30, 2003, have~~March 31, 2004 has been reclassified toas a loss from discontinued operations onin the Company’s condensed unaudited consolidated statements of operations.


~~Note 3 —~~	~~Significant Accounting Policies~~


~~(a)~~ Note 3 – Significant Accounting Policies *(a) Principles of Consolidation*	*~~Principles of Consolidation~~*

The accompanying financial statements include MasTec, Inc. and its subsidiaries. Other parties’ interests in consolidated entities are reported as minority ~~interests.~~interests in the condensed unaudited consolidated financial statements during the three months ended March 31, 2005. There is no minority interest in the accompanying condensed unaudited consolidated financial statements in the three months ended March 31, 2004 as operating losses were generated by such consolidated entities in that period and it was uncertain whether such minority interest would be able to bear financial responsibility. All intercompany accounts and transactions have been eliminated in consolidation.


*~~(b)~~* *(b) Comprehensive Loss*	*~~Comprehensive (Loss) Income~~*

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

Comprehensive ~~(loss) income~~loss consisted of the ~~following:~~

Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Net (loss) income $ (740 ) $ 2,019 $ (46,806 ) $ 272
Plus (less): foreign currency translation (186 ) 3,316 21,114 3,921

Comprehensive (loss) income $ (926 ) $ 5,335 $ (25,692 ) $ 4,193

following (in thousands):

For the Three Months
Ended March 31,
2005 2004
Net loss $ (12,014 ) $ (46,066 )
Less: foreign currency translation 5 21,300

Comprehensive loss $ (12,009 ) $ (24,766 )

57

~~MASTEC, INC.~~MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements

~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~June 30, 2004 and 2003~~


~~(c)~~ (c) Revenue Recognition	*~~Revenue Recognition~~*

Revenue and related costs for master and other service agreements billed on a time and materials basis are recognized as the services are rendered. There are also some service agreements that are billed on a fixed fee basis. Under the Company’s fixed fee master service and similar type service agreements, the Company furnishes various specified units of service for a separate fixed price per unit of service. The Company recognizes revenue as the related unit of service is performed. For service agreements on a fixed fee basis, profitability will be reduced if the actual costs to complete each unit exceed original estimates. The Company also immediately recognizes the full amount of any estimated loss on these fixed fee projects if estimated costs to complete the remaining units exceed the revenue to be received from such units.

The Company recognizes revenue on unit based construction/installation projects using the units-of-delivery method. The Company’s unit based contracts relate primarily to contracts that require the installation or construction of specified units within an infrastructure system. Under the units-of-delivery method, revenue is recognized at the contractually agreed price per unit as the units are completed and delivered. Profitability will be reduced if the actual costs to complete each unit exceed original estimates. The Company is also required to immediately recognize the full amount of any estimated loss on these projects if estimated costs to complete the remaining units for the project exceed the revenue to be received from such units. For certain clients with unit based construction/installation contracts, the Company recognizes revenue after the service is performed and work orders are approved to ensure that collectibility is probable from these clients. Revenue from completed work orders not collected in accordance with the payment terms established with these clients is not recognized until collection is assured.

The Company’s non-unit based, fixed price installation/construction contracts relate primarily to contracts that require the construction, design and installation of an entire infrastructure system. The Company recognizes revenue and related costs as work progresses on non-unit based, fixed price contracts using the percentage-of-completion method, which relies on contract revenue and estimates of total expected contract revenue and costs. The Company estimates total project costs and profit to be earned on each long-term, fixed-price contract prior to commencement of work on the contract. The Company follows this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Under the percentage-of-completion method, the Company records revenue and recognizes profit or loss as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is the percentage of total estimated revenue that incurred costs to date bear to estimated total contract costs, after adjusting estimated total contract costs for the most recent information. If, as work progresses, the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases. The Company recognizes the full amount of any estimated loss on a contract at the time the estimates indicate such a loss.

The Company’s clients generally supply materials such as cable, conduit and telephone equipment. Customer furnished materials are not included in revenue and cost of sales as these materials are purchased by the customer. The customer determines the specification of the materials that are to be utilized to perform installation/construction services. The Company is only responsible for the performance of the installation/construction services and not the materials for any contract that includes customer furnished materials, nor does the Company have any risk associated with customer furnished materials. The Company’s clients retain the financial and performance risk of all customer furnished materials.

Billings in excess of costs and estimated earnings on uncompleted contracts are classified as current liabilities. Any costs and estimated earnings in excess of billings are classified as current assets. Work in process on contracts is based on work performed but not billed to clients as per individual contract terms.


*~~(d)~~* *(d) Basic and Diluted Net Loss Per Share*	*~~Basic and Diluted Net (Loss) Income Per Share~~*

Basic and diluted net ~~(loss) income~~loss per share is computed by dividing net ~~(loss)income~~loss by the weighted average number of common shares outstanding for each period presented. InCommon stock equivalents amounted to 796,625 shares and 1,509,208 shares for the three months ended March 31, 2005 and ~~six months ended June 30,~~ 2004, ~~common~~respectively. Common stock equivalents were

not considered since their effect would be antidilutive. ~~Common stock equivalents amounted to 381,000 shares and 915,000 shares for the three months and six months ended June 30, 2004, respectively.~~ Accordingly, for the three months ~~and six months~~ ended ~~June 30,~~March 31, 2005 and 2004 diluted net loss per share is the same as basic net loss per share.

~~In the three months~~(e) Intangibles and six months ended June 30, 2003, diluted net income per share includes the diluted effect of stock options using the treasury stock method. Differences between the weighted average shares outstanding used to calculate basic and diluted net income per share relates to stock options assumed exercised under the treasury stock method of accounting.


*~~(e)~~ Other Long-Lived Assets*	*~~Intangibles and Other Long-Lived Assets~~*

Long-lived assets and goodwill are recorded at the lower of carrying value or estimated fair value. Intangibles are amortized on a straight-line basis over ~~periods~~their definite useful life. Long-lived assets are depreciated using the straight-line method over the shorter of upthe useful lives (five to ~~five years.~~forty years) or lease terms (five to seven years for leasehold improvements) of the respective assets. Repairs and maintenance on such items are expensed as incurred.

Management assesses the impairment of ~~identifiable~~ intangibles, long-lived assets and goodwill at least annually or whenever events or changes in circumstances indicate that the

~~MASTEC, INC.~~

~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~June 30, 2004 and 2003~~

carrying value may not be recoverable.

The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Goodwill acquired in a purchase business combination and determined to have an infinite useful life is not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. In addition, acquired intangible assets are required to be recognized and amortized over their useful lives if the benefit of the asset is based on contractual or legal rights. In connection with the abandonment of the Brazil subsidiary as discussed in Note 8,7, the Company wrote off goodwill associated with this reporting entity in the ~~six~~amount of $12.3 million in the three months ended ~~June 30, 2004.~~March 31, 2004 which is included in the loss from discontinued operations.

The Company reviews its long-lived assets, including property and equipment that are held and used in its operations for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. ~~If such an event or change in circumstances is present, management estimates~~In the ~~undiscounted future cash flows, less~~three months ended March 31, 2005 and 2004, the future outflows necessary to obtain those inflows, expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted future cash flows is less than the carrying amount of the related assets, an impairment loss will beCompany recognized ~~or a review of depreciation policies may be appropriate. Management records~~ impairment losses ~~resulting from such abandonment in operating income. Assets to be disposed~~and write-offs of ~~are reclassified as~~long-lived assets ~~held for sale at the lower~~ of ~~their carrying amount or fair value less costs to sell. Write-downs to fair value less costs to sell are reported above the operating income line as “Other income (expense), net”.~~


*~~(f)~~ approximately $327,000 and $605,000, respectively.* *(f) Accrued Insurance*	*~~Accrued Insurance~~*

The Company ~~is insured~~maintains insurance policies subject to per claim deductibles of $2 million for ~~worker’s~~workers’ compensation ~~automobile~~ and general liability ~~claims subject to a $2.0~~policies and $3 million ~~deductible per occurrence per~~for its automobile liability policy. The Company has excess umbrella coverage for losses in excess of the primary coverages up to ~~$70~~$100 million per claim and in the aggregate. The liabilities are actuarially determined on a quarterly basis for unpaid claims and associated expenses, including the ultimate liability for claims incurred and an estimate of claims incurred but not reported. The accruals are based upon known facts, historical trends and ~~historical trends.~~a reasonable estimate of future expenses. However, a change in experience or actuarial assumptions could nonetheless materially affect results of operations in a particular period. Known amounts for claims that are in the process of being settled, but that have been paid in periods subsequent to those being reported, are also booked in such reporting ~~period~~period.

The Company is required to ~~increase~~post additional cash collateral or letters of credit periodically to the insurance ~~reserves.~~

~~On January 1, 2004, MasTec, Inc. formed a captive insurance subsidiary, JMC Insurance~~company. The Company ~~Inc. (“JMC”), a South Carolina corporation, to write a portion~~posted additional cash collateral of ~~its workers’ compensation, general liability and automobile liability coverages under deductible reinsurance policies. JMC,~~$4.5 million in the first quarter 2005 which is ~~the Company’s first formation and management~~included in other assets of ~~a captive insurance company,~~March 31, 2005. In addition, in April 2005 an additional $4.5 million was ~~capitalized with a $1 million letter of credit. JMC is a wholly owned subsidiary of MasTec Inc. and is consolidated in the Company’s financial statements.~~


*~~(g)~~ posted as collateral.* *(g) Stock Based Compensation*	*~~Stock-Based Compensation~~*

The Company accounts for its stock-based award plans in accordance with Accounting Principle Board (APB) Opinion No. 25, ““Accounting for Stock Issued to ~~Employees”~~Employees”, and related interpretations, under which compensation expense is recorded to the extent that the current market price of the underlying stock exceeds the exercise price. The Company has reflected below the net loss and proforma net loss as if compensation expense relative to the fair value of the options granted had been recorded under the provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (SFAS No. 123) established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply APB Opinion No. 25 and has adopted only the disclosure requirements of SFAS No. 123..

~~MASTEC, INC.~~

~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements

~~June 30, 2004 and 2003~~

The fair value of each option granted was estimated ~~on the date of grant~~ using the Black ~~Sholes~~Scholes option pricing model with the following assumptions used:

For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Expected Life 7 years 7 years 7 years 7 years
Volatility % 75.6% 74.2% 75.6% 74.2%
Interest Rate 3.0% 3.0% 3.0% 3.0%
Dividends None None None None

For the Three Months
Ended March 31,
2005 2004
Expected life 7 years 7 years
Volatility percentage 79.2 % 75.6 %
Interest rate 4.0 % 3.0 %
Dividends None None

The required proforma disclosures are as ~~follows:~~follows (in thousands, except per share data)

For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2003 2003
2004 As Restated 2004 As Restated
Net (loss) income, as reported $ (740 ) $ 2,019 $ (46,806 ) $ 272
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards (2,234 ) (970 ) (4,895 ) (1,916 )

Proforma net (loss) income $ (2,974 ) $ 1,049 $ (51,701 ) $ (1,644 )

Basic net (loss) income per share:
As reported $ (.02 ) $ .04 $ (.97 ) $ .01

Proforma $ (.06 ) $ .02 $ (1.07 ) $ (.03 )

Diluted net (loss) income per share:
As reported $ (.02 ) $ .04 $ (.97 ) $ .01

Proforma $ (.06 ) $ .02 $ (1.07 ) $ (.03 )

:

For the Three Months
Ended March 31,
2005 2004
Net loss, as reported $ (12,014 ) $ (46,066 )
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards (1,252 ) (2,661 )

Proforma net loss $ (13,266 ) $ (48,727 )

Basic and diluted net loss:
As reported $ (.25 ) $ (.95 )

Proforma $ (.27 ) $ (1.01 )

     ~~(h)~~ ~~Reclassifications~~
      The Company also grants restricted stock, which is valued based on the market price of the common stock on the date of grant. Compensation expense arising from restricted stock grants is recognized using the straight-line method over the vesting period. Unearned compensation for performance-based options and restricted stock is a reduction of stockholders’ equity in the consolidated balance sheets. In the three months ended March 31, 2005, the Company issued 75,000 shares of restricted stock to key employees. The value of the restricted stock is approximately $656,000 and will be expensed over twenty one months (the vesting period). The Company also issued 57,926 shares of restricted stock to board members in 2004 in which the remaining deferred compensation related to this restricted stock which was valued at $294,000 and is being amortized over three years (the vesting period). Total unearned compensation related to restricted stock grants as of March 31, 2005 is approximately $886,000.
(h) Reclassifications
Certain reclassifications were made to the ~~2003~~December 31, 2004 financial statements in order to conform to the current year presentation.
~~Note 4 —~~ ~~Restatement of June 30, 2003 Financial Statements~~
In ~~connection with the annual audit of the Company’s 2003 financial statements,~~addition, as discussed in Note 7, the Company ~~identified errors~~committed to sell the Network Services division in ~~amounts previously reported in its financial statements~~the fourth quarter 2004. Accordingly, the net loss for this entity for the three months ~~and six months~~ ended ~~June 30, 2003. The restatements related to overstatements due to irregularities in revenues recorded by the Company’s Canadian~~March 31, 2004 has been reclassified as a loss from discontinued operations in the ~~amount~~Company’s condensed unaudited consolidated statements of ~~$1.0 million and $1.3 million~~operations.
(i) Equity investments
      The Company has one common stock investment which the Company accounts for the three months and six months ended June 30, 2003. In addition, the quarterly information was restated for previously recognized revenues related primarily to work performed on undocumented or unapproved change orders and other matters which are being disputed by the equity method because the Company owns between 20% and 50% of the entity and the Company has a non-controlling ownership interest. The Company’s ~~clients~~share of its earnings or losses in this investment is included as other (income) expense in the ~~amount~~condensed unaudited consolidated statements of ~~$300,000~~operations. As of March 31, 2005, the Company’s investment exceeded the net equity of such investment and accordingly the excess is considered to be equity goodwill. The Company periodically evaluates the equity goodwill for ~~the three months and six months ended June 30, 2003.~~impairment under Accounting Principle Board No. 18, “The Equity Method of Accounting for Investments in Common Stock”, as amended. See Note 10.
810
~~MASTEC, INC.~~MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
(j) Fair value of financial instruments
      The ~~total amount~~Company estimates the fair market value of ~~restatement~~financial instruments through the use of public market prices, quotes from financial institutions and other available information. Judgment is required in interpreting data to develop estimates of market value and, accordingly, amounts are not necessarily indicative of the amounts that we could realize in a current market exchange. Short-term financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on ~~income from continuing operations before benefit for income taxes~~management’s estimates, equaled their carrying values. At March 31, 2005 and ~~minority interest~~December 31, 2004, the fair value of the Company’s outstanding senior subordinated notes was $190.3 million and $184.5 million, respectively, based on quoted market values. The Company uses letters of credit to back certain insurance policies. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the ~~three months and six months ended June 30, 2003 was $1.3 million and $1.5 million, respectively.~~

For the For the
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
As Previously As As Previously As
Reported Restated* Reported Restated*
(In thousands) (In thousands)
Revenue $ 209,108 $ 207,841 $ 389,677 $ 388,139
Income from continuing operations before provision for income taxes and minority interest $ 4,631 $ 3,364 $ 1,947 $ 409
Net income $ 2,765 $ 2,019 $ 1,177 $ 272
marketplace.
* ~~Before effect of reclassifying the 2003 results of operations of the Brazil operations to loss from discontinued operation as discussed in Note 8.~~
~~Note 5 —~~ Note 4 – Other Assets and Liabilities
      Prepaid expenses and other current assets as of ~~June 30, 2004~~March 31, 2005 and December 31, ~~2003 were $35.0 million and $31.8 million, respectively, primarily consists~~2004 consisted of ~~miscellaneous short-term receivables, assets held for sale, security deposits, and prepaid expenses mainly on~~ the ~~Company’s insurance policies.~~following (in thousands):

March 31, December 31,
2005 2004
Deferred tax assets $ 6,107 $ 6,107
Notes receivable 1,374 2,511
Non-trade receivables 14,960 22,164
Other investments and assets held for sale 6,217 5,884
Prepaid expenses and deposits 8,426 5,931
Other 1,277 1,231

Total prepaid expenses and other current assets $ 38,361 $ 43,828

      Other non-current assets consist of the following as of March 31, 2005 and December 31, 2004 (in thousands):

June 30, December 31,
2004 2003
(Unaudited)
Long-term receivables, including retainage $ 6,375 $ 9,431
Non-core investments 258 2,999
Real estate held for sale 1,683 1,683
Long-term portion of deferred financing costs, net 2,886 3,639
Cash surrender value of life insurance policies 4,691 4,691
Non-compete agreement 1,213 1,572
Insurance escrow 7,088 7,219
Other 2,558 3,917

Total $ 26,752 $ 35,151

March 31, December 31,
2005 2004
Long-term receivables, including retainage $ 4,705 $ 4,694
Equity investment 4,208 3,780
Investment in real estate 1,683 1,683
Long-term portion of deferred financing costs, net 2,037 2,414
Cash surrender value of insurance policies 5,230 5,279
Non-compete agreement, net 1,035 1,080
Insurance escrow 11,198 7,083
Other 3,641 3,577

Total $ 33,737 $ 29,590

911
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
~~June 30, 2004 and 2003~~
      Other current and non-current liabilities consist of the following as of March 31, 2005 and December 31, 2004 (in thousands):

June 30, December 31,
2004 2003
(Unaudited)
Current liabilities

Accrued compensation $ 15,346 $ 21,459
Accrued insurance 17,522 13,127
Accrued interest 6,329 6,458
Restructuring accruals 420 600
Accrued losses on contracts 3,805 7,482
Accrued labor claims — 10,336
Due to subcontractors 7,877 5,611
Other 9,879 13,035

Total $ 61,178 $ 78,108

June 30, December 31,
2004 2003
(Unaudited)
Non-current liabilities

Accrued insurance $ 33,770 $ 24,524
Minority interest — 434
Other 157 2,678

Total $ 33,927 $ 27,636

March 31, December 31,
2005 2004
Current liabilities:
Accrued compensation $ 10,739 $ 15,090
Accrued insurance 17,618 16,691
Accrued interest 2,532 6,329
Accrued restructuring 112 212
Accrued losses on contracts 2,534 2,638
Accrued guaranteed equity investment 1,850 2,775
Due to subcontractors 9,437 8,948
Other 13,149 11,680

Total $ 57,971 $ 64,363

~~Note 6 —~~
March 31, December 31,
2005 2004
Non-current liabilities:
Accrued insurance $ 34,118 $ 33,751
Minority interest 286 333
Other 1,345 1,432

Total $ 35,749 $ 35,516

Note 5 – Debt
      Debt is comprised of the following at March 31, 2005 and December 31, 2004 (in thousands):

June 30, December 31,
2004 2003
(Unaudited)
Revolving credit facility at LIBOR plus 3.25% as of June 30, 2004 and December 31, 2003, respectively $ — $ —
Notes payable for equipment, at interest rates from 7.5% to 8.5% due in installments through the year 2004 285 1,418
Other revolving debt — 4,360
7.75% senior subordinated notes due February 2008, net 195,901 195,887

Total debt 196,186 201,665
Less current maturities (95 ) (4,709 )

Long-term debt $ 196,091 $ 196,956

March 31, December 31,
2005 2004
Revolving credit facility at LIBOR plus 3.25% (6.125% and 5.75% as of March 31, 2005 and December 31, 2004, respectively) and the bank’s prime rate plus 1.75% (7.5% and 7.0% as of March 31, 2005 and December 31, 2004, respectively) $ — $ —
7.75% senior subordinated notes due February 2008 195,922 195,915
Notes payable for equipment, at interest rates from 7.5% to 8.5% due in installments through the year 2008 216 243

Total debt 196,138 196,158
Less current maturities (80 ) (99 )

Long-term debt $ 196,058 $ 196,059

~~Revolving Credit Facility~~
Revolving Credit Facility
      See Note 13 for discussion of amendment to the bank credit facility entered into in May 2005. The credit facility as of March 31, 2005 had the following terms and conditions:
      The Company has a revolving credit facility for North American operations that provides for borrowings up to an aggregate of $125.0 million. The amount that the Company can borrow at any given time is based
10
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
upon a formula that takes into account, among other things, ~~fixed assets,~~ eligible billed and unbilled accounts receivable, which can result in borrowing availability of less than the full amount of the facility. ~~Fixed assets are based on a percentage of liquidation value.~~ As of ~~June 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, net availability under the credit facility totaled ~~$21.0~~$7.8 million and ~~$37.9~~$25.5 million, respectively, net of outstanding standby letters of credit aggregating ~~$51.8~~$66.8 million ~~and $54.5~~in each period. At March 31, 2005, $63.3 million ~~respectively. Substantially all~~ of the outstanding letters of
12
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
credit are issued to support the Company’s casualty insurance requirements or surety needs. These letters of credit mature at various dates through December 31, 2005, and except for Letters of Credit totaling $10.0 million, most have automatic renewal provisions subject to prior notice of cancellation. ~~There were~~The Company had no outstanding draws under the credit facility ~~as of June 30, 2004~~at March 31, 2005 and December 31, ~~2003 although the Company periodically borrowed against the credit facility during the periods.~~2004. The revolving credit facility matures on January 22, 2007. The revolving credit facility, at March 31, 2005, is collateralized by a first priority security interest in substantially all of the Company’s North American assets, including $7.3 million in restricted cash which is included in cash and cash equivalents at March 31, 2005 and a pledge of the stock of certain of the operating subsidiaries. All wholly owned subsidiaries collateralize the facility. Interest under the facility accrues at rates based, at the Company’s option, on the agent bank’s base rate plus a margin of between 0.75% and 1.75% or its LIBOR rate (as defined in the credit facility) plus a margin of between 2.25% and 3.25%, each margin depending on certain financial thresholds. The facility includes an unused facility fee of 0.50%, which may be adjusted to as low as 0.375% or as high as 0.625% depending on the ~~achievement~~amount of ~~certain financial thresholds.~~the total commitment which is unused.
      The revolving credit facility as of March 31, 2005 contains customary events of default (including cross-default) provisions and covenants related to the North American operations that prohibit, among other things, making investments and acquisitions in excess of a specified amount, incurring additional indebtedness in excess of a specified amount, paying cash dividends, making other distributions in excess of a specified amount, making capital expenditures in excess of a specified amount, creating liens against the Company’s assets, prepaying other indebtedness including ~~our~~the Company’s 7.75% senior subordinated notes, and engaging in certain mergers or combinations without the prior written consent of the lenders. In addition, any deterioration in the quality of billed and unbilled receivables would reduce availability under the credit facility.
      ~~Under the revolving credit facility the Company’s North American operations are~~The Company is required to be in compliance with certain financial covenants measured on a monthly ~~financial and reporting covenants.~~basis. The credit facility was amended on ~~July 22, 2004~~March 17, 2005 modifying ~~these covenants.~~financial covenants and the Company was in compliance with its credit facility’s financial covenants at March 31, 2005. Under the amended agreement, the Company’s North American operations ~~must maintain a~~has minimum tangible net worth ~~equal to:~~
• ~~$62 million beginning April 1, 2004; plus~~
• ~~50% of the consolidated net income of the Company’s operations from April 1, 2004 through the date of determination.~~
11
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
~~The Company’s North American operations must also maintain a~~requirements as well as minimum fixed charge ~~ratio,~~coverage ratios, computed on a monthly ~~basis, beginning in May 2004.~~basis. The fixed charge coverage ratio is generally defined to mean the ratio of ~~the Company’s~~our net income before interest expense, income tax expense, depreciation expense, and amortization expense plus $1.1 million to consolidated interest expense and current maturities of debt for the period of determination. For the purposes of determining the current maturities of ~~long-term~~long term debt during the period from April 2004 through March 2005 used in determining the fixed charge coverage ratio the amount of current maturities of long term debt as of any month during this period is multiplied by a fraction, the numerator of which is the number of cumulative months since April 2004, and the denominator of which is 12.
~~Period~~ ~~Ratio~~
~~For the 2 month period ending May 31, 2004~~ ~~1.00 to 1.00~~
~~For the 3 month period ending June 30, 2004~~ ~~1.50 to 1.00~~
~~For each of the 4, 5 and 6 month periods ending July 31, August 31 and September 30 2004, respectively~~ ~~1.75 to 1.00~~
~~For each of the 7, 8 and 9 month periods ending October 31, November 30, and December 31, 2004~~ ~~2.00 to 1.00~~
~~For each of the 10 and 11 month periods ending January 31 and February 28, 2005~~ ~~2.00 to 1.00~~
~~For the 12 month period ending on March 31, 2005 and each 12 month period ending on the last day of each calendar month thereafter~~ ~~2.00 to 1.00~~
      Based upon the Company’s performance to date, the Company was not in compliance with the credit facility’s financial covenants in the second quarter of 2004. The Company has not received a notice of default from the Company’s primary lender on these covenant violations. The Company has requested a waiver of the covenant conditions and expects such waiver to be granted although there is no assurance that the Company will obtain such a waiver and there is no assurance that such a waiver can be obtained without costs to the Company.
     The Company is dependent upon borrowings and letters of credit under this $125 million credit facility to fund operations. Letters of credit increased $16.2 million from $51.8 million on June 30, 2004 to December 10, 2004. The credit facility was amended on October 4, 2004 to allow for the issuance of these additional letters of credit, principally for the Company’s casualty insurance program and for its surety provider. In addition, in December 2004 the Company issued an additional $2.6 million letter of credit to collateralize a bond that was posted related to a legal matter (see Note 9). The total amount of letters of credit outstanding at December 10, 2004 was $70.6 million. Should the Company be unable to obtain a waiver of the covenants of the $125 million credit facility, the Company will be required to obtain further modifications of the facility or another source of financing to continue to operate. In addition, the Company may be unable to renew its outstanding letters of credit. The Company may be required to obtain advances on its current credit facility or other source of financing to collateralize the required reserves associated with these letters of credit.
The Company’s variable rate credit facility exposes it to interest rate risk. However, the Company had no borrowings outstanding under the credit facility at ~~June 30, 2004.~~
March 31, 2005.
Senior Subordinated Notes
      As of ~~June 30, 2004,~~March 31, 2005, the Company had outstanding $195.9 million ~~net~~in principal amount of ~~discount,~~its 7.75% senior subordinated notes due in February ~~2008, with interest~~2008. Interest is due semi-annually. The notes are redeemable, at the Company’s option at ~~102.583% of the principal amount~~101.292% until January 31, ~~2005, 101.292% during the twelve-month period beginning February 1, 2005,~~2006, and 100% annually thereafter. The notes also contain default (including cross-default) provisions and covenants restricting many of the same transactions asrestricted under the
12
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
Company’s credit facility. The Company has not met its covenants under the credit facility and is currently seeking a waiver of such covenant requirements. The cross default provisions under the notes are not triggered until acceleration under the credit facility occurs. The Company’s primary lender has not notified the Company that a default has occurred and the Company, in light of past practice with the primary lender and current ongoing favorable discussions with the primary lender, believes the possibility of receiving a notice of default under the credit facility from the primary lender is remote. Therefore, the Company believes the likelihood of cross default under the notes as a result of such acceleration is also remote. In the event the primary lender does declare the Company in default and accelerates the credit facility, the balance on the notes will be reclassified as a current liability.
      The Company had no holdings of derivative financial or commodity instruments at ~~June 30, 2004.~~
~~Note 7 —~~ March 31, 2005.
Note 6 – Restructuring Charges
      During the second quarter of 2002, the Company initiated a study to determine the proper balance of downsizing and cost cutting in relation to its ability to respond to current and future work opportunities in each of its service offerings. The review evaluated current operations, the growth and opportunity potential of each service offering and the consolidation of back-office processes. ~~As a result of this review, a restructuring program was implemented that included four categories~~
13
MasTec, Inc
Notes to ~~accomplish:~~
• ~~Elimination of service offerings that no longer fit into the Company’s long-term core business strategy.~~
• Reduction or elimination of services that do not produce adequate revenue or margins to support the level of profitability, return on investment or investments in capital resources. This included exiting contracts that did not meet the minimum rate on return requirements and aggressively seeking to improve margins and reduce costs.
• ~~Analyses of businesses that provide adequate profit contributions but still need margin improvements that include aggressive cost reductions and efficiencies.~~
• ~~Review new business opportunities in similar business lines that can utilize existing human and physical resources.~~
the Condensed Unaudited Consolidated Financial Statements
      The elements of the restructuring program included involuntary terminations of employees in affected service offerings and the consolidation of facilities. ~~The involuntary terminations impacted both the salaried and hourly employee groups. Approximately 1,025 employees were impacted during 2002.~~ As of June 30, 2004, all employees have been terminated and all severance and benefit costs have been paid. Approximately 25 facilities were closed during 2002 as part of the program in which some of the assets were sold, while other assets were retained and transferred to other locations. These facility closures were not accounted for as discontinued operations because these facilities did not represent separate components of the Company’s business for which cash flows could be clearly defined. The Company also continues to be involved in the markets in which these 25 facilities operated. As of June 30, 2004,March 31, 2005, the remaining obligations under the restructuring program are existing lease agreements for closed facilities ~~amounted~~amounting to ~~$420,000.~~approximately $112,000.
      The following is a reconciliation of the restructuring accruals as of ~~June 30, 2004~~March 31, 2005 (in thousands):

Accrued costs at December 31, 2003 $ 600
Cash payments (180 )

Accrued costs at June 30, 2004 $ 420

13
~~MASTEC, INC.~~

Accrued costs at December 31, 2004 $ 212
Cash payments (100 )

Accrued costs at March 31, 2005 $ 112

~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
~~Note 8 —~~ Note 7 – Discontinued Operations
      In March 2004, the Company ceased performing contractual services for customers in Brazil, abandoned all assets in its Brazil subsidiary and made a determination to exit the Brazil market. During the ~~six~~three months ended ~~June 30,~~March 31, 2004, the Company wrote off approximately $12.3 million in goodwill [see Note 3(e)] and the net investment in the Brazil subsidiary of approximately $6.8 million which consisted of the accumulated foreign currency translation loss of ~~$21.4~~$21.3 million less a net deficit in assets of ~~$14.6~~$14.5 million. The net loss from operations for the Brazil subsidiary was $129,000 and $955,000, for the three months and six months ended June 30, 2004, respectively. The net loss from operations for the Brazil subsidiary was $952,000, net of tax benefit of $453,000 and $1,222,000, for the three months and six months ended June 30, 2003, respectively. The abandoned Brazil subsidiary has been classified as a discontinued ~~operation and its expenses are not included~~operation. The net loss for the Brazil subsidiary was approximately $20.0 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, the Brazil subsidiary had no activity as the entity is in the ~~results~~process of ~~continuing operations.~~liquidation. In November 2004, ~~MasTec petitioned and~~ the subsidiary applied for relief and was adjudicated bankrupt by a Brazilian bankruptcy court. The subsidiary is currently being liquidated under court supervision.
      The following table summarizes the assets and liabilities of our Brazil operations as of ~~June 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004 (in thousands):

June 30,
2004 December 31,
(unaudited) 2003
Current assets $ 290 $ 7,755
Current liabilities (19,455 ) (21,886 )
Non current assets — 2,244
Non current liabilities (2,170 ) (1,334 )
Accumulated foreign currency translation loss (21,335 ) (21,091 )

March 31, December 31,
2005 2004
Current assets $ 290 $ 290
Non-current assets — —
Current liabilities (19,455 ) (19,455 )
Non-current liabilities (2,170 ) (2,170 )
Accumulated foreign currency translation. 21,335 21,335
      The following table summarizes the results of operations for our Brazil operations for the three months ended March 31, 2004 (in thousands):

For Three Months For Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Revenue $ — $ 6,480 $ — $ 11,610
Cost of sales — (6,236 ) (5 ) (11,181 )
Operating expenses (129 ) (1,196 ) (950 ) (1,651 )

Net loss $ (129 ) $ (952 ) $ (955 ) $ (1,222 )

Revenue $ —
Cost of revenue (5 )
Operating expenses (821 )

Income (loss) from operations before (provision) benefit for income taxes and minority interest $ (826 )
(Provision) Benefit for income taxes —
Minority interest —

Net income (loss) $ (826 )

~~Note 9 —~~
      During the fourth quarter of 2004, the Company committed to sell its Network Services division and exit this service market. This division has been classified as a discontinued operation. The net loss for the three months ended March 31, 2004 has been reclassified to loss from discontinued operations. The net loss for the Network Services division was $445,000 and $1.8 million for the three months ended March 31, 2005 and 2004, respectively.
14
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
      The following table summarizes the assets and liabilities of the Network Services division as of March 31, 2005 and December 31, 2004 (in thousands):

March 31, December 31,
2005 2004
Current assets $ 3,447 $ 4,464
Non current assets 25 27
Current liabilities (2,339 ) (2,753 )
Non current liabilities — —
Shareholder’s equity (1,133 ) (1,738 )
      The following table summarizes the results of operations for the Network Services division (in thousands):

For the Three Months
Ended March 31,
2005 2004
Revenue $ 2,636 $ 5,315
Cost of revenue (2,533 ) (5,999 )
Operating and other expenses (548 ) (1,111 )

Loss from operations before benefit for income taxes $ (445 ) $ (1,795 )
Benefit for income taxes — —

Net loss $ (445 ) $ (1,795 )

Note 8 – Commitments and Contingencies
      In the second quarter of 2004, purported class action complaints were filed against the Company and certain of its officers in the United States District Court for the Southern District of Florida and one was filed in the United States District Court for the Southern District of New York. These cases have been consolidated by court order in the Southern District of Florida. The complaints allege certain violations of Sections 10(b) and 20(a) of the Securities ~~and~~ Exchange Act of 1934, as amended, related to current and prior period earnings reports. ~~The actions were consolidated by court order and~~On January 25, 2005, a ~~first amended complaint~~motion for leave to file a Second Amended Complaint was filed ~~October 8, 2004. Plaintiff’s~~by Plaintiffs which motion the Court granted. Plaintiffs filed their Second Amended Complaint on February 22, 2005. Plaintiffs contend that the Company’s financial statements during the purported Class Period of August 12, 2003 to May 11, 2004 were materially misleading in the following areas: 1) the financials for the third quarter of 2003 were allegedly overstated by ~~some $6.0~~$5.8 million in revenue from unapproved
14
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
change orders ~~connected with the Coos Bay project;~~from a variety of Company projects; and 2) the financials for the second quarter of 2003 were overstated by some $1.3 million as a result of the intentional overstatement of ~~revenues,~~revenue, inventories and work in progress at the Company’s Canadian subsidiary. Plaintiffs seek damages, not quantified, for the difference between the stock price Plaintiffs paid and the stock price Plaintiffs believe they should have paid, plus interest and attorney fees. MasTec believes the claims are without merit. MasTec will vigorously defend these lawsuits but may be unable to successfully resolve these disputes without incurring significant expenses. Due to the early stage of these proceedings, any potential loss cannot presently be determined with respect to this litigation.
      On July 28, 2004, MasTec, Inc.’s Board of Directors received a demand from a shareholder that the Board take appropriate steps to remedy breaches of fiduciary duty, mismanagement and corporate waste, all arising from the same factual predicate set out in the shareholder class actions described above. On November 18, 2004, the Board of Directors authorized its Executive Committee to establish appropriate procedures and form a special litigation committee, as contemplated by Florida law, to investigate these allegations and to determine whether it is in the best interests of MasTec to pursue an action or actions based on said allegations. On December 22, 2004, a derivative action was filed by the shareholder. On January 10, 2005, the Executive Committee formed a special litigation committee to investigate this matter. By agreement of counsel, the derivative action has been stayed during the pendency of any motion to dismiss in the securities class action described above.
15
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
      The Company contracted to construct a natural gas pipeline for Coos County, Oregon in 2003. Construction work on the pipeline ceased in December 2003 after the County refused payment due on regular contract invoices of $6.3 million and refused to process change orders for additional work submitted to the County on or after November 29, ~~2003 totaling $4.3 million.~~2003. In February 2004, MasTec brought an action for breach of contract against Coos County in Federal District Court in Oregon, seeking payment for work done, interest and anticipated profits. In April 2004, Coos County announced it was terminating the contract and seeking another company to complete the project. Coos County subsequently counterclaimed for breach of contract and other causes in the Federal District Court action. The amount of revenue recognized on the Coos County project that remained uncollected at ~~June 30, 2004~~March 31, 2005 amounted to $6.3 million representing amounts due MasTec on normal progress payment invoices submitted under the contract. In addition to these uncollected receivables, the Company also has additional claims for payment and interest in excess of $6.0 million, including all of its change order billings and retainage, which the Company has not recognized as revenue but to which the Company believes is ~~entitled~~due to the Company under the terms of the contract. In addition, the Company was made party to a number of citizen initiated actions arising from the Coos County project. A complaint alleging failure to comply with prevailing wage requirements was issued by the Oregon Bureau of Labor and Industry. A number of individual property owners brought claims in Oregon state courts against the Company for property damages and related claims; a number of citizens’ groups brought an action in federal court for alleged violations of the Clean Water Act. ~~Five~~All but one of the individual property claims ~~were settled~~has been settled; one is set for ~~$30,000~~trial in ~~August 2004 and three remain pending.~~2005. The Company will vigorously defend these actions, but may incur significant expense in connection with that defense.
      In connection with the Coos County pipeline project, the United States Army Corps of Engineers and the Oregon Division of State Land, Department of Environmental Quality ~~have~~ issued cease and desist orders and notices of non-compliance to Coos County and to the Company with respect to the County’s project. A cease and desist order was issued by the Corps on October 31, 2003 and addressed sedimentary disturbances and the discharge of bentonite, an inert clay mud employed for this kind of drilling, resulting from directional boring under stream beds along a portion of the natural gas pipeline route then under construction. The County and the Company received a subsequent cease and desist order from the Corps on December 22, 2003. The order addressed additional sedimentary discharges caused by clean up efforts along the pipeline route. MasTec and the County were in substantial disagreement with the United States Army Corps of Engineers and the Oregon Division of State Land as to whether the subject discharges were permitted pursuant to Nationwide Permit No. 12 (utility line activities) or were otherwise prohibited pursuant to the Clean Water Act. However, the Company has been cooperating with Corps of Engineers and the Oregon Division of State Land, Department
15
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
of Environmental Quality to mitigate any adverse impact as a result of construction. Corps of Engineer and Oregon Division of State Land notices or complaints focused for the largest part on runoff from the construction site and from nearby construction spoil piles which may have increased sediment and turbidity in adjacent waterways and roadside ditches. Runoff was the result of an extremely wet and snowy weather, which produced exceptionally high volumes of runoff water. MasTec employed two erosion control consulting firms to assist. As weather permitted and sites became available, MasTec moved spoil piles to disposal sites. Silt fences, sediment entrapping blankets and sediment barriers were employed in the meantime to prevent sediment runoff. Ultimately, when spring weather permitted, open areas were filled, rolled and seeded to eliminate the runoff. To date, mitigation efforts have cost the Company approximately ~~$1.3~~$1.4 million. These costs were included in the ~~accrued loss~~costs on the project at March 31, 2005 and December 31, ~~2003 and June 30,~~ 2004.
No further mitigation expenses are anticipated. The only additional anticipated liability arises from possible fines or penalties assessed, or to be assessed by the Corps of Engineers and/or Oregon Division of State Land. The County accepted a fine of $75,000 to settle this matter with the Corp of Engineers; the County has not concluded with the Oregon Department of Environmental Quality. No fines or penalties have been assessed against the Company by the Corp of Engineers to date. On August 9, 2004, the Oregon Division of State Land Department of Environmental Quality issued a Notice of Violation and Assessment of Civil Penalty to MasTec North America in the amount of ~~$205,658.~~$126,000. MasTec North America has denied liability for the civil penalty and requested a formal contested case hearing on the same.
      The potential loss for all Coos Bay matters and settlements reached described above is estimated to be ~~$205,000~~$175,000 at ~~June 30, 2004,~~March 31, 2005, which is recorded in the ~~condensed unaudited~~ consolidated balance sheet as accrued expenses.
     The labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. (“Sintel”), a former MasTec subsidiary, initiated an investigative action with a Spanish federal court that commenced in July 2001 alleging that five former members of the board of directors of Sintel, including Jorge Mas, the Chairman of the Board of MasTec, and his brother Juan Carlos Mas, approved a series of allegedly unlawful transactions that led to the bankruptcy of Sintel. The Company is also named as a potentially liable party. The union alleges Sintel and its creditors were damaged in the approximate amount of 13 billion pesetas ($95.1 million at June 30, 2004). The Court has taken no action to enforce a bond order pending since July 2001 for the amount of alleged damages. The Court has conducted extensive discovery, including the declarations of certain present and former executives of MasTec, Inc. and intends to conduct additional discovery. To date, no actions have been taken by the Court against the Company or any of the named individuals. The Company’s directors’ and officers’ insurance carrier agreed to reimburse the Company for approximately $1.2 million in legal fees already incurred and agreed to fund legal expenses for the remainder of the litigation. The amount of loss, if any, relating to this matter cannot presently be determined.16
     On January 9, 2002, Harry Schipper, a MasTec shareholder, filed a shareholder derivative lawsuit in the U.S. District Court for the Southern District of Florida against the Company as nominal defendant and against certain current and former members of the Company’s Board of Directors and senior management, including Jorge Mas, Chairman of the Board, and Austin J. Shanfelter, President and Chief Executive Officer. The lawsuit alleges mismanagement, misrepresentation and breach of fiduciary duty as a result of a series of allegedly fraudulent and criminal transactions, including the Sintel matter described above, the severance paid the Company’s former chief executive officer, and the investment in and financing of a client that subsequently filed for bankruptcy protection, as well as certain other matters. The lawsuit seeks damages and injunctive relief against the individual defendants on MasTec’s behalf. The Board of Directors formed a special litigation committee, as contemplated by Florida law, to investigate the allegations of the complaint and to determine whether it is in the best interests of MasTec to pursue the lawsuit. On July 16, 2002, Mr. Schipper made a
16
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
supplemental demand on the Company’s Board of Directors by letter to investigate allegations that the Company reported greater revenue in an unspecified amount on certain contracts than permitted under the contract terms and that the Company recognized between $3 to $5 million in income for certain projects on the books of two separate subsidiaries. These additional allegations were referredMasTec, Inc
Notes to the special committee for investigation. The Special Litigation Committee issued its report on December 11, 2003, as amended on April 22, 2004. The report concluded that the settlement was in the best interest of MasTec and its shareholders, that it was not in the best interest of MasTec to pursue claims against the Company’s officers and directors and, specifically with respect to the improper recognition of revenue allegations in Mr. Schipper’s supplemental demand the report concluded, that there was no evidence that any improper conduct had been involved. A settlement was entered into between the parties pursuant to which MasTec agreed to implement certain corporate governance policies. The Company’s directors’ and officers’ liability insurance carrier paid $1 million into a settlement fund; $300,000 of this fund was paid to plaintiff’s counsel to cover fees and expenses and the remaining $700,000 was used to pay the Company’s legal fees related to this matter.
     In 2003, the Company’s quarterly financial information was restated for $6.1 million of previously recognized revenue related primarily to work performed on undocumented or unapproved change orders and other matters disputed by the Company’s clients. The revenue restatement was related to projects performed for ABB Power (“ABB”) and MSE Power Systems (“MSE”), the University of California, and in connection with restated Canadian revenue. Recovery of those revenues and related revenues from subsequent periods not restated is now the subject of several independent collection actions. MasTec provided services to ABB, in the amount $2 million, now subject to dispute. The parties have attempted arbitration, which has been unsuccessful. A legal action on the claim will be filed by the Company. MasTec provided services to MSE on five separate projects in Pennsylvania, New York and Georgia, with invoices in excess of $8 million now in dispute. An action has been brought against MSE in New York state court. The Company experienced cost overruns in excess of $2.7 million in completing a networking contract for the University of California as the result of a subcontractor’s refusal to complete a fixed price contract. An action has been brought against that subcontractor to recover cost overruns. Finally, the Company experienced a revenue adjustment for the year ended December 31, 2003 resulting from correction of intentionally overstated WIP and revenue in an amount of $1.3 million in a Canadian subsidiary. The individuals responsible for the overstatement were terminated and an action against them has been brought to recover damages resulting from the overstatement.Condensed Unaudited Consolidated Financial Statements
      In November 2004, the Company entered into, and bonded a conditional $2.6 million settlement of litigation brought for subcontract work done by Hugh O’Kane Electric for MasTec on a telecommunication project for Telergy in New York. Telergy is in bankruptcy and did not pay MasTec for the Hugh O’Kane work. The settlement iswas conditioned on the outcome of ~~a pending~~an interlocutory appeal brought by MasTec. The appeal ~~seeks~~sought to enforce contract terms ~~of the contract between the Company and Hugh O’Kane~~ which ~~relieve~~relieved MasTec of its obligation to pay Hugh O’Kane when MasTec iswas not ~~paid. MasTec is pursuing~~paid by Telergy. New York’s appellate level court upheld the enforceability of the term of MasTec’s contract, but remanded the case to the trial court to determine whether the Company was estopped from using this contract provision as a defense. Hugh O’Kane has sought reargument of the issue before the court which issued the ruling. The Company expects to recover the bond posted in connection with the appeal, ~~vigorously.~~and will continue to contest this matter in the trial court. The amount of the loss, if any, relating to this matter cannot ~~presently~~ be ~~determined.~~determined at this time.
      The Company is also a party to other pending legal proceedings arising in the normal course of business. While complete assurance cannot be given as to the outcome of any legal claims, management believes that any financial impact would not be material to the Company’s results of operations, financial position or cash flows.
      The Company has commitments to pay life insurance premiums on policies on the life of its chairman of the board and its chief executive officer totaling $18.6 million over the next nineteen years, capital leases totaling $1.7 million and, operating lease commitments of $47.1 million.
17
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
~~The Company~~ is required to provide payment and performance bonds in connection with some of its contractual commitments. Such bonds amounted to ~~$164.5 million and $140.5~~$125.1 million at ~~June 30, 2004 and December~~March 31, ~~2003, respectively,~~2005 related to projects in process.
~~Note 10 —~~ ~~Concentrations of Risk and Segments~~
     ~~The Company operates in one reportable segment as a specialty trade contractor.~~Note 9 – Concentrations of Risk
      The Company provides services in the telecommunications, broadband (including cable, satellite and high speed ~~internet)~~Internet), energy, traffic control and homeland security systems markets. ~~All of the operating units have been aggregated into one reporting segment due to their similar customer bases, products and production and distribution methods.~~
      ~~Revenues~~Revenue by customer industry group ~~are~~is as follows (in thousands):

For Three Months For Six Months
Ended Ended
June 30, June 30,
2003 2003
2004 Restated 2004 Restated
Telecommunications $ 60,582 $ 66,083 $ 112,612 $ 123,656
Broadband 94,052 53,337 173,504 93,192
Energy 41,157 45,389 78,977 86,211
Government 35,487 36,552 66,207 73,470

$ 231,278 $ 201,361 $ 431,300 $ 376,529

     The Company has more than 600 clients throughout the United States and Canada, which include some of the largest and most prominent companies in communications, broadband and energy fields, as well as government agencies such as departments of transportation. The Company’s clients include incumbent local exchange carriers, broadband and satellite operators, public and private energy providers, long distance carriers, financial institutions and wireless service providers.

For the Three Months
Ended March 31,
2005 2004
Telecommunications $ 71,240 $ 45,774
Broadband 69,249 79,499
Energy 44,536 37,820
Government 32,745 31,614

$ 217,770 $ 194,707

      The Company grants credit, generally without collateral, to its customers. Consequently, the Company is subject to potential credit risk related to changes in business and economic factors. However, the Company generally has certain lien rights ~~on that work~~ and concentrations of credit risk are limited due to the diversity of the customer base. The Company believes the billing and collection policies are adequate to minimize potential credit risk. During the three months ended ~~June 30, 2004, 36.8%~~March 31, 2005, 40.9% of the Company’s total revenue was attributed to two customers. Revenue from these two customers accounted for ~~19.8%~~28.5% and ~~17.0%~~12.4% of the total revenue for the three months ended ~~June 30, 2004.~~March 31, 2005. During the three months ended ~~June 30, 2003, one customer accounted for 12.1% of total revenues after adjustment of discontinued operations (see Note 8). During the six months ended June 30,~~March 31, 2004, ~~35.9%~~36.1% of the Company’s total revenue was attributed to two customers. Revenue from these two customers accounted for ~~18.5%~~18.7% and 17.4% of the total revenue for the ~~six~~three months ended ~~June 30,~~March 31, 2004. ~~During the six months ended June 30, 2003, one customer accounted for 10.1% of the Company’s revenue after adjustment for discontinued operations.~~
      The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of clients to make required payments. Management analyzes historical bad debt experience, client concentrations, client credit-worthiness, the availability of mechanics and other liens, the existence of payment bonds and other sources of payment, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If judgments regarding the collectibility of accounts receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability. In addition, the Company’s reserve mainly covers the accounts receivable related to the unprecedented number of clients that filed for bankruptcy
18
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
protection during the year 2001 and general
17
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
economic climate of 2002. As of ~~June 30, 2004,~~March 31, 2005, the Company had remaining receivables from clients undergoing bankruptcy reorganization totaling ~~$24.9~~$14.8 million ~~net~~ of ~~$10.3~~which $9.0 million is included in specific reserves. As of December 31, ~~2003~~2004, remaining receivables from clients undergoing bankruptcy reorganization ~~totaling $21.2~~totaled $15.1 million ~~net~~ of which $9.4 million was included in specific reserves. Based on the analytical process described above, management believes that the Company will recover the net amounts recorded. The Company ~~maintains~~maintained an allowance for doubtful accounts of ~~$23.4 and $28.8~~$20.0 million as of ~~June 30, 2004~~March 31, 2005 and December 31, ~~2003, respectively,~~2004 for both specific customers and as a reserve against other past due balances. Should additional clients file for bankruptcy or experience difficulties, or should anticipated recoveries in existing bankruptcies and other workout situations fail to materialize, the Company could experience reduced cash flows and losses in excess of the current allowance.
~~Note 11 —~~
Note 10 – Equity Investment
      In September 2004, MasTec purchased a 49% interest in a limited liability corporation. The Company’s payments for its interest are due quarterly over three years beginning in September 2004. Equity payments fluctuate based on the venture’s sales. In addition, the Company is responsible for 49% of the venture’s net operating capital needs until the venture is self funding. The Company expects this venture will be able to fully fund its own operating capital requirements by mid to late 2005. The venture is intended to strengthen relationships with existing and future customers, and increase Company sales. The initial investment of $3.7 million will be paid over four quarters which commenced in the fourth quarter of 2004 with additional contingent payments of up to $1.3 million per quarter based upon the level of unit sales and profitability of the limited liability company for the two years following the period after the initial investment is fully funded.
      As of March 31, 2005, the Company’s investment exceeded the net equity of such investment and accordingly the excess is considered to be equity goodwill.
      The Company has accounted for this investment using the equity method as the Company has the ability to exercise significant influence over the operational policies of the Company. As of March 31, 2005, the Company had an investment balance of approximately $4.2 million in relation to this investment included in other assets with a corresponding liability related to the outstanding commitment which is included in other liabilities. Based upon the lack of significance to the financial information of the Company, no summary financial information for this equity investment has been provided.
Note 11 – Related Party Transactions
      MasTec purchases, rents and leases equipment used in its business from a number of different vendors, on a non-exclusive basis, including Neff Corp., in which Jorge Mas, the Company’s Chairman and Jose Mas, the Company’s Vice-Chairman and Executive Vice President, are directors and owners of a controlling interest. Juan Carlos Mas, the brother of Jorge and Jose Mas, is Chairman, Chief Executive Officer, a director and a shareholder of Neff Corp. During the three months ended ~~June 30,~~March 31, 2005 and 2004, ~~and 2003,~~ MasTec paid Neff ~~approximately $158,780~~$172,618 and ~~$218,026 respectively. During the six months ended June 30, 2004~~$283,816, respectively, for equipment purchases, rentals and ~~2003, MasTec paid Neff approximately $442,594 and $444,038, respectively.~~leases. MasTec believes the amount paid to Neff is equivalent to the payments that would have been made between unrelated parties for similar transactions acting at arm’s length.
      On January 1, 2002, MasTec entered into an employment agreement with Donald P. Weinstein relating to his employment as Executive Vice President and Chief Financial Officer. On January 7, 2004 (but effective as of December 1, 2003), the Company entered into an amended employment agreement with Mr. Weinstein. The agreement was for a term of three years and provided that Mr. Weinstein would be paid an annual base salary of $300,000 (with annual cost of living increases). Additionally, Mr. Weinstein was entitled to receive a total of $600,000 of deferred compensation over the term of the contract and was to be entitled to participate in a bonus plan for senior management, and would be entitled to a minimum annual performance bonus of $50,000 per year. Mr. Weinstein resigned effective March 11, 2004. In connection therewith, the Company entered into a severance agreement with Mr. Weinstein pursuant to which the Company ~~will pay~~paid him his base salary of $300,000 through December 2004, ~~provide~~provided him with certain employee and insurance benefits and ~~provide~~provided for the vesting of his stock options. The severance agreement was approved by the Compensation Committee on July 16, 2004. As a result of Mr. Weinstein’s severance agreement, the
18
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
Company recorded $199,500 in stock compensation expense infor the ~~six~~three months ended ~~June 30,~~March 31, 2004 related to the extension of the exercise period on Mr. Weinstein’s stock options. In addition, a severance accrual was recorded for $300,000 as of March ~~11,~~31, 2004 which ~~has been reduced as payments have been made.~~was subsequently paid.
      In July 2002, MasTec entered into an employment agreement with Eric J. Tveter as Executive Vice President and Chief Operations Officer with a two year term at an annual base salary of $300,000 (with annual cost of living increases) and a grant of 50,000 stock options, a guaranteed bonus for the year 2002 equal to one half of his base salary paid to him during the year 2002 and the right to participate in MasTec’s bonus plan for senior management beginning January 1, 2003. The agreement also contained noncompete and nonsolicitation provisions for a period of two years following the term of the agreement. Mr. Tveter resigned his position with the company on March 22, 2004. In connection therewith, wethe Company entered into a severance agreement with Mr. Tveter pursuant to which wethe Company paid him severance of $33,134 during 2004, paid him regular salary through July 14, 2004 at an annual rate of $306,837, ~~will provide~~provided him with certain employee benefits and ~~provide~~provided for the vesting of his stock options. The Compensation Committee approved Mr. Tveter’s severance agreement on
19
~~MASTEC, INC.~~
~~NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~June 30, 2004 and 2003~~
April 15, 2004 which ~~will be~~was the new measurement date of his stock options. As a result of Mr. Tveter’s severance agreement, the Company recorded approximately $216,800 in stock compensation expense infor the ~~six~~three months ended ~~June 30,~~March 31, 2004 related to the extension of the exercise period on Mr. Tveter’s stock options. In addition, a severance accrual was recorded as of March ~~22,~~31, 2004 for approximately $173,000 which ~~has been reduced~~was subsequently paid.
      Effective as ~~payments have been made.~~
     ~~In 2001 and~~of August 27, 2002, MasTec ~~paid $75,000 per year~~and Jorge Mas entered into a split dollar agreement wherein MasTec agreed to ~~Austin Shanfelter related~~pay the premiums due on two life insurance policies with an aggregate face amount of $50,000,000. Additionally, effective as of September 13, 2002, MasTec and Jorge Mas entered into a second split dollar agreement (as amended on December 1, 2002) wherein MasTec agreed to pay the premiums due on a life insurance policy. Under the terms of these agreements, MasTec is the sole owner and beneficiary of the policies and is entitled to recover all premiums it pays on the portion of the policy ~~which was cancelled~~subject to the agreement, plus interest equal to four percent, compounded annually, upon the death of the insured. During the three months ended March 31, 2005 and 2004, MasTec did not pay any premiums in ~~April 2002.~~connection with the split dollar agreements for Jorge Mas.
      On November 1, 2002, MasTec ~~was~~and Austin Shanfelter entered into a split dollar agreement wherein MasTec agreed to pay the premiums due on a life insurance policy. MasTec is the sole owner and beneficiary of the policy and is entitled, upon the death of the insureds, to recover all premiums it pays on the policy plus interest equal to four percent, compounded annually. The remainder of the policy’s proceeds will be ~~reimbursed by the insurance company upon~~paid in accordance with Mr. Shanfelter’s ~~death. Accordingly, a receivable was recorded at the time of the payments.~~designations. During the ~~six~~three months ended ~~June 30,~~March 31, 2005 and 2004, MasTec did not pay any premiums in connection with the ~~Company wrote off the receivable because the policy was cancelled~~split dollar agreement for Mr. Shanfelter and ~~all payments became taxable to Mr. Shanfelter.~~his family.
      Effective as of July 16, 2004, MasTec and Jose Mas entered into a split dollar agreement wherein MasTec agreed to pay premiums on a life insurance ~~policy with an aggregate face amount of $5.0 million.~~policy. Under the terms of the agreement, MasTec is the sole owner and beneficiary of the policy and is entitled to recover all premiums it pays on the policy plus interest equal to 3.5%, compounded annually, upon the death of the insured. ~~The remainder of the policy’s proceeds will be paid in accordance with Mr. Mas’ designations.~~ MasTec has agreed to make the premium payments until at least July 15, 2009.
~~Note 12 —~~ ~~New Accounting Pronouncements~~
~~On December 17, 2003,~~ During the ~~staff of the Securities~~three months ended March 31, 2005 and Exchange Commission (the “SEC”) published Staff Accounting Bulletin 104, “Revenue Recognition,” (“SAB 104”) to revise or rescind portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in U.S. generally accepted accounting principles. The adoption of SAB 104 during December 20032004, MasTec did not ~~have a material effect on~~pay any premiums in connection with the ~~Company’s results of operations or financial position.~~
~~Note 13 —~~ ~~Subsequent Events~~
split dollar agreement for Mr. Jose Mas.
Note 12 – New Accounting Pronouncements
      In ~~September~~December 2004, ~~MasTec purchased~~the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-Based Payment,” a ~~49% interest~~revision of SFAS 123. In March 2005, the SEC issued Staff Bulletin No. 107 (SAB 107) regarding its interpretation of SFAS 123R. The standard requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees. In accordance with the revised statement, the Company will be required to recognize the expense attributable to stock options granted or vested in ~~a limited liability corporation with an established marketing group.~~financial statement periods subsequent to December 31, 2005. The Company ~~payments for its equity interest are due quarterly~~is evaluating the requirements of SFAS 123R and a spread over three years beginning in September of 2004. Equity payments fluctuate up or down based on the venture’s sales. In addition, the Company is responsible for 49% of the venture’s net operating capital needs until the venture is self sufficient. The Company expects this venture will be able to fully fund its own operating capital requirements by mid- to late 2005. The venture is intended to strengthen relationships with existing and future customers, and increase Company sales.SAB 107. The Company has ~~paid approximately $1.2 million~~not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in ~~September and October 2004 for this investment and is accounting for this investment~~amounts that are similar to the current pro forma disclosures under ~~the equity method.~~SFAS 123 above.
2019
MasTec, Inc
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 13 – Subsequent Event
      On May 10, 2005, the Company entered into an amended and restated loan and security agreement in connection with the revolving credit facility which increased the maximum amount of availability to $150 million subject to reserves of $5.0 million, and other adjustments and restrictions pursuant to the terms of the amended and restated loan and security agreement. The term of the facility was extended to 2010. The terms and conditions of the amended credit facility are similar to the credit facility described in Note 5. In addition to the increase in the maximum availability and extension of term, the key differences include no monthly financial covenants if certain conditions are met, a release of the restricted cash in the amount of $7.3 million and an increase in borrowing availability based on higher advance rates on unbilled receivables and equipment. To the extent that certain conditions are not met, the Company must maintain a fixed charge ratio in excess of 1.2 to 1.
      Based upon the Company’s projections for 2005, the Company believes it will be in compliance with the amended credit facility’s terms and conditions as well as the fixed charge ratio covenant in 2005. The Company is dependent upon borrowings and letters of credit under this credit facility to fund operations. Should the Company be unable to comply with the terms and conditions of the amended credit facility, it would be required to obtain further modifications of the credit facility or another source of financing to continue to operate. The Company may not be able to achieve its 2005 projections and thus may not be in compliance with the amended credit facility’s financial covenants in 2005.
20
~~Item 2.~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
      This report contains forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but are the intent, belief, or current expectations, of our business and industry, and the assumptions upon which these statements are based. Words such as “anticipates”, “expects”, “intends”, “will”, “could”, “would”, “should”, “may”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and the negatives thereof and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in ~~“Risk Factor” and~~ “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2003 filed with the SEC.~~2004, including those described under “Risk Factors.” Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned to not place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Overview
      We serve providers of telecommunications services, broadband services (including cable, satellite and high speed Internet), energy services, ~~and~~ traffic control and homeland security systems.
      ~~Revenues~~Revenue by customer industry group ~~are~~is as follows (in thousands):

For Three Months Ended For Six Months Ended
June 30, June 30,
2003 2003
2004 As Restated 2004 As Restated
Telecommunications $ 60,582 $ 66,083 $ 112,612 $ 123,656
Broadband 94,052 53,337 173,504 93,192
Energy 41,157 45,389 78,977 86,211
Government 35,487 36,552 66,207 73,470

$ 231,278 $ 201,361 $ 431,300 $ 376,529

For the Three Months Ended
March 31, March 31,
2005 2004
Telecommunications $ 71,240 $ 45,774
Broadband 69,249 79,499
Energy 44,536 37,820
Government 32,745 31,614

$ 217,770 $ 194,707

      ~~We perform a majority~~A significant portion of our ~~work under~~revenue is derived from service agreements. Some of these agreements are billed on a time and materials basis and revenue is recognized as the services are rendered. The remainder of these agreements are referred to as master service agreements, because they are exclusive (with certain exceptions) up to a specified dollar amount per work order within a defined geographic area. Work performed under service agreements is typically generated by work orders, each of which is performed for a fixed fee. The majority of these services typically are of a maintenance nature and to a lesser extent ~~are for~~ upgrade services. These service agreements are frequently awarded on a competitive bid basis, although clients are often willing to negotiate contract extensions beyond their original terms without re-bidding. Our service agreements have various terms, depending upon the nature of the services provided and are typically subject to termination by the client on short notice. ~~Our~~Under our master service and similar type service agreements, ~~provide that~~ we ~~will~~ furnish various specified units of service each for a separate fixed price per unit of service. We recognize revenue as the related unit of service is performed. Profitability will be reduced if the actual costs to complete each unit exceed original estimates on fixed price service agreements. We also immediately recognize the full amount of any estimated loss on these fixed fee work orders if estimated costs to complete the remaining units for the work order exceed the revenue to be received from such units.
      The remainder of our work is provided pursuant to contracts for specific installation/construction projects or jobs. For installation/construction projects we recognize revenue on the units-of-delivery or percentage-of-completion methods. For certain clients with unit based construction/installation contracts, we recognize revenue after the service is
21
performed and work orders are approved to ensure that collectibility is probable from these clients. Revenue from completed work orders not collected in accordance with the payment terms established with these clients is not recognized until collection is assured. Revenue on unit based projects is recognized using the units-of-delivery method. Under the units-of-delivery method, revenue is recognized as the units are completed at the contractually agreed
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price per unit. Revenue on non-unit based contracts is recognized using the percentage-of-completion method. Under the percentage-of-completion method, we record revenue as work on the contract progresses. The cumulative amount of ~~revenues~~revenue recorded on a contract at a specified point in time is that percentage of total estimated ~~revenues~~revenue that incurred costs to date bear to estimated total contract costs. Clients are billed with varying frequency: weekly, monthly or upon attaining specific milestones. Such contracts generally include retainage provisions under which 2% to 15% of the contract price is withheld from us until the work has been completed and accepted by the client.
      Revenue by type of contract is as follows (in thousands):

Three Months Ended Six Months Ended
June 30, June 30,
2003
2004 2003 2004 As Restated
Master service and other service agreements $ 166,264 $ 132,124 $ 315,824 $ 241,380
Installation/construction projects agreements 65,014 69,237 115,476 135,149

$ 231,278 $ 201,361 $ 431,300 $ 376,529

For the Three Months
Ended March 31,
2005 2004
Master service and other service agreements $ 141,516 $ 146,415
Installation/construction projects agreements 76,254 48,292

$ 217,770 $ 194,707

      Our costs of revenue include the costs of providing services or completing the projects under our contracts including operations payroll and benefits, accrued losses on contracts, fuel, subcontractor costs, equipment rental, materials not provided by our clients, and insurance. Profitability will be reduced if the actual costs to complete each unit exceed original estimates on fixed price service agreements. We also immediately recognize the full amount of any estimated loss on these fixed fee work orders if estimated costs to complete the remaining units for the work order exceed the revenue to be received from such units.
      Our clients generally supply materials such as cable, conduit and telephone equipment. Customer furnished materials are not included in revenue and cost of sales due to these materials being purchased by the customer. The customer determines the specifications of the materials that are to be utilized to perform installation/construction services. We are only responsible for the performance of the installation/construction services and not the materials for any contract that includes customer furnished materials nor do we not have any risk associated with customer furnished materials. Our customers retain the financial and performance risk of all customer furnished materials.
      General and administrative expenses include all costs of our management and administrative personnel, severance payments, reserves for bad debts, rent, utilities, travel and business development efforts and back office administration such as financial services, insurance, administration, professional ~~costs~~ and legal fees as well as clerical and administrative overhead.
      In March 2004, we ceased performing contractual services for customers in Brazil, abandoned all assets in our Brazil subsidiary and made a determination to exit the Brazil market. During the ~~six~~three months ended ~~June 30,~~March 31, 2004, we wrote off approximately $12.3 million of goodwill and the net investment in our Brazil subsidiary of approximately $6.8 million which consisted of the accumulated foreign currency translation loss of ~~$21.4~~$21.3 million less a deficit in assets of ~~$14.6~~$14.5 million. The abandoned Brazil subsidiary has been classified as a discontinued operation. The net loss from operations for the Brazil subsidiary was ~~$129,000 and $955,000~~approximately $20.0 million for the three months ~~and six months~~ ended June 30, 2004, respectively. The abandoned Brazil subsidiary has been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations forMarch 31, 2004. For the three months ~~and six months~~ ended ~~June 30, 2003 for Brazil have been reclassified to loss from discontinued operations. The net loss from operations for~~March 31, 2005, the Brazil subsidiary ~~was $952,000 and $1,222,000 for~~had no activity as the ~~three months and six months ended June 30, 2003 respectively.~~entity is in the process of being liquidated. In November 2004, ~~we petitioned, and~~ the subsidiary applied for relief and was adjudicated bankrupt by a Brazilian bankruptcy court. The subsidiary is currently being liquidated under court supervision.
      During the fourth quarter 2004, we committed to sell our Network Services division and exit this service market. This division has been classified as a discontinued operation. The net loss for the Network Services division for the three months ended March 31, 2004 was reclassified to discontinued operations in the amount of $1.8 million. The net loss for the three months ended March 31, 2005 included in discontinued operations was $445,000.
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Critical Accounting Policies and Estimates
      Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with ~~United States~~accounting principles generally accepted ~~accounting principles.~~in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, intangible assets, reserves and accruals, impairment of assets, income taxes, insurance reserves and litigation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities, that are not readily apparent from other sources. Actual results may differ from these estimates if conditions change or if certain key assumptions used in making these estimates ultimately prove to be materially incorrect.
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      We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
      Revenue and related costs for master and other service agreements billed on a time and materials basis are recognized as the services are rendered. There are also some master service agreements that are billed on a fixed fee basis. Under our fixed fee master service and similar type service agreements we furnish various specified units of service for a separate fixed price per unit of service. We recognize revenue as the related unit of service is performed. For service agreements on a fixed fee basis, profitability will be reduced if the actual costs to complete each unit exceed original estimates. We also immediately recognize the full amount of any estimated loss on these fixed fee projects if estimated costs to complete the remaining units exceed the revenue to be received from such units.
      We recognize revenue on unit based construction/installation projects using the units-of-delivery method. Our unit based contracts relate primarily to contracts that require the installation or construction of specified units within an infrastructure system. Under the units-of-delivery method, revenue is recognized at the contractually agreed upon price as the units are completed and delivered. Our profitability will be reduced if the actual costs to complete each unit exceed our original estimates. We are also required to immediately recognize the full amount of any estimated loss on these projects if estimated costs to complete the remaining units for the project exceed the ~~revenues~~revenue to be earned on such units. For certain clients with unit based construction/installation contracts we recognize revenue after service has been performed and work orders are approved to ensure that collectibility is probable from these clients. Revenue from completed work orders not collected in accordance with the payment terms established with these clients is not recognized until collection is assured.
      Our non-unit based, fixed price installation/construction contracts relate primarily to contracts that require the construction, design and installation of an entire infrastructure system. We recognize revenue and related costs as work progresses on non-unit based, fixed price contracts using the percentage-of-completion method, which relies on contract revenue and estimates of total expected costs. We estimate total project costs and profit to be earned on each long-term, fixed-price contract prior to commencement of work on the contract. We follow this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Under the percentage-of-completion method, we record revenue and recognize profit or loss as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date bear to estimated total contract costs, after adjusting estimated total contract costs for the most recent information. If, as work progresses, the actual contract costs exceed our estimates, the profit we recognize from that contract decreases. We recognize the full amount of any estimated loss on a contract at the time our estimates indicate such a loss.
      Our clients generally supply materials such as cable, conduit and telephone equipment. Customer furnished materials are not included in revenue and cost of sales as these materials are purchased by the customer. The customer determines the specification of the materials that are to be utilized to perform installation/construction services. We ~~have commenced legal action against some~~are only responsible for the performance of ~~our clients in connection with work performed in 2003. In addition,~~the installation/construction services and not the materials for any contract that
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includes customer furnished materials nor do we have ~~made claims for amounts~~any risk associated with customer furnished materials. Our customers retain the financial and performance risk of all customer furnished materials.
      Billings in excess of ~~the agreed~~costs and estimated earnings on uncompleted contracts are classified as current liabilities. Any costs and estimated earnings in excess of billings are classified as current assets. Work in process on contracts is based on work performed but not billed to clients as per individual contract price (or amounts not included in the original contract price) that we seek to collect from clients for delays we believe were caused by the clients, errors in specifications and designs, change orders in dispute or unapproved as to either scope or price, or other causes of unanticipated additional costs. Although any costs for the work related to these claims have been included in costs of revenue, since we cannot reliably estimate what amounts, if any, of these claims are probable of collection, we have not recognized any of these claims as revenue to date. We may not be successful in collecting any of these claims.terms.
Allowance for Doubtful Accounts
      We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our clients to make required payments. Management analyzes past due balances based on invoice date, historical bad debt experience, client concentrations, client credit-worthiness, client financial condition and credit reports, the availability of mechanics’ and other liens, the existence of payment bonds and other sources of payment, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. We review the adequacy of reserves for doubtful accounts on a quarterly basis. If our estimates of the collectibility of accounts receivable are incorrect, adjustments to the allowance for doubtful accounts may be required, which could reduce our profitability.
      Our estimates for our allowance for doubtful accounts are subject to significant change during times of economic weakness or uncertainty in either the overall U.S. economy or the industries we serve, and our loss experience has increased during such times.
      We recorded provisions against earnings for doubtful accounts of ~~$1.4~~$1.0 million, and ~~$2.8~~$1.4 million for the three months ~~and six months~~ ended ~~June 30,~~March 31, 2005 and 2004, respectively. The provisions in the three months ended March 31, 2005 and 2004 were due to a monthly
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provision being recorded based on the Company’s write-off history. ~~In the three months and six months ended June 30, 2003 no provision was necessary as the reserves were at an adequate level at June 30, 2003.~~
Inventories
      Inventories consist of materials and supplies for construction projects, and are typically purchased on a project-by-project basis. Inventories are valued at the lower of cost (using the specific identification method) or market. Construction projects are completed pursuant to customer specifications. The loss of the customer or the cancellation of the project could result in an impairment of the value of materials purchased for that customer or project. Technological or market changes can also render certain materials obsolete. Allowances for inventory obsolescence are determined based upon the specific facts and circumstances for each project and market conditions. During the three months ~~and six months~~ ended ~~June 30,~~March 31, 2005 and 2004, we recorded approximately $0 and $900,000, respectively, in obsolescence provisions ~~respectively~~ that have been included in “Costs of revenue” in the accompanying condensed unaudited consolidated statements of operations. The provisions in the three months ended March 31, 2004 were mainly due to inventories that were purchased for specific jobs no longer in process.
Depreciation
      We depreciate our property and equipment over estimated useful lives using the straight-line method. We periodically review changes in technology and industry conditions, asset retirement activity and salvage values to determine adjustments to estimated remaining useful lives and depreciation rates.
      Effective November 30, 2002, we implemented the results of a review of the estimated service lives of our property and equipment in use. Useful lives were adjusted to reflect the extended use of much of our equipment. In addition, the adjustments make the estimated useful lives for similar equipment consistent among all operating units. Depreciation expense was reduced by ~~$1.5 million and $3.0~~$1.3 million for the three months ~~and six months~~ ended ~~June 30,~~March 31, 2004 ~~respectively,~~ from the amount of expense which would have been reported using the previous useful lives as a result of the change of estimate.
     ~~During~~ The adjustment took place in 2003 and 2004. During 2004 and first quarter 2005, we continued to dispose of excess assets and increase our reliance on operating leases to finance equipment needs, thereby reducing our depreciation expense. We do ~~not~~ anticipate continued declines in our overall equipment costs, since we ~~believe we have disposed of the majority of our excess assets as of June 30, 2004.~~continue to use more lease opportunities.
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Valuation of Long-Lived Assets
      We review long-lived assets, consisting primarily of property and equipment and intangible assets with finite lives, for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). In analyzing potential impairment, we use projections of future undiscounted cash flows from the assets. These projections are based on our views of growth rates for the related business, anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. However, economic conditions, interest rates, the anticipated cash flows of the businesses related to these assets and our business strategies are all subject to change in the future. If changes in growth rates, future economic conditions or discount rates and estimates of terminal values were to occur, long-lived assets may become impaired. During the three months ended March 31, 2005 and 2004, we recognized impairment losses and write-offs of long-lived assets of approximately $327,000 and $605,000, respectively, relating to long-lived assets no longer in use and held for sale, certain assets in use and long-lived assets related to the discontinued operations in Brazil.
Valuation of Intangible Assets ~~and Investments~~
      In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we conduct, on at least an annual basis, a review of our reporting units to determine whether their carrying value exceeds fair market ~~value.~~value using a discounted cash flow methodology for each unit. Should this be the case, the value of our goodwill may be impaired and written down. ~~The valuations employ a combination of present value techniques to measure fair value corroborated by comparisons to estimated market multiples.~~
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      In connection with the disposition of the Brazil subsidiary as discussed in Note 8,7, we wrote off goodwill associated with this reporting ~~entity.~~entity in the amount of $12.3 million in the three months ended March 31, 2004.
      We could record additional impairment losses if, in the future, profitability and cash flows of our reporting units decline to the point where the carrying value of those units exceed their market value.
Insurance Reserves
      We presently maintain insurance policies subject to per claim deductibles of $2 million for our workers’ compensation, ~~automobile~~ and general liability ~~policies.~~policies and $3 million for our automobile liability policy. We have excess umbrella coverages up to ~~$70~~$100 million per claim and in the aggregate. We are required to post letters of credit to secure our obligation to reimburse the insurance carrier for amounts that have been or could potentially be advanced by the carrier within the deductible ~~layer.~~layer and also post letters of credit to our surety company. Such letters of credit amounted to ~~$51.7~~$63.3 million at ~~June 30, 2004.~~March 31, 2005. We actuarially determine any liabilities for unpaid claims and associated expenses, including incurred but not reported losses, and reflect those liabilities in our balance sheet as other current and non-current liabilities. The determination of such claims and expenses and the appropriateness of the related liability is reviewed and updated ~~quarterly and our accruals are based upon known facts and historically trends.~~quarterly. However, insurance liabilities are difficult to assess and estimate due to the many relevant factors, the effects of which are often unknown, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. For example, when we were conducting our audit for the year ended December 31, 2003, we determined that we had understated our self-insurance reserves at December 31, 2000, 2001 and 2002. Based in part on this information, we decided that it would be appropriate to restate our financial information beginning with the year ended December 31, 2000. We are working with our insurance carrier to resolve claims more quickly in an effort to reduce our exposure. We are also attempting to accelerate the claims process where possible so that amounts incurred can be reported rather than estimated. ~~Known~~In addition, known amounts for claims that are in the process of being settled, but that have been paid in periods subsequent to those being reported, are booked in such reporting period to increase insurance reserves. For example, Reliance Insurance Company, our insurance carrier for certain liabilities through July 2000, was placed into receivership in 2001. We have considered the financial condition of Reliance in the determination of our unpaid claims, including our estimate of claims incurred but not reported, that would be subject to reimbursement by Reliance.period. Our accruals are based upon known facts, ~~and~~ historical trends and our reasonable estimate of future expenses and we believe such accruals to be adequate.
     ~~Nonetheless, if in the future~~ If we do not accurately estimate the losses resulting from these claims, we may experience losses in excess of our estimated liability, which may reduce our profitability.
      In the three months ended March 31, 2005, we were required to post additional cash collateral with our current insurance carrier in the amount of $4.5 million which is included in other assets. We also posted additional cash collateral in April 2005 of $4.5 million. We expect to be required to post an additional $9.0 million in cash collateral in 2005 and we may be required to post additional collateral ~~with~~in the ~~insurance carrier,~~future which ~~could~~may reduce our liquidity, or pay increased insurance premiums, which could decrease our profitability.
     ~~On January 1, 2004,~~25
Valuation of Equity Investments
      We have one common stock investment which we ~~formed~~account for by the equity method because we own between 20% and 50% of the common stock and we have a ~~captive insurance subsidiary, JMC Insurance Company, Inc.~~non-controlling ownership interest. Our share of the earnings or losses in this investment is included in the condensed unaudited consolidated statements of operations. As of March 31, 2005, our investment exceeded the net equity of such investment and accordingly the excess is considered to be equity goodwill. We evaluate the equity goodwill for impairment under Accounting Principles Board No. 18, “The Equity Method of Accounting for Investments in Common Stock”, a South Carolina corporation, to write a portion of our own workers compensation, general liability and automobile liability coverages under deductible reinsurance policies. JMC Insurance Company, Inc., which is our first formation and management of a captive insurance company, was capitalized with a $1 million letter of credit.as amended.
Income ~~Tax Liability~~Taxes
      We record income taxes using the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequence of temporary differences between the financial statement and income tax bases of our assets and liabilities. We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. The recording of a net deferred tax asset assumes the realization of such asset in the future. ~~In assessing the ability~~Otherwise a valuation allowance must be recorded to ~~realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.~~reduce this asset to its net realizable value. We consider future pretax income and ongoing prudent and feasible tax planning strategies in
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assessing the need for such a valuation allowance. In the event that we determine that we may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made.
      As a result of our operating losses, we have recorded valuation allowances aggregating $37.2 million and $32.3 million as of March 31, 2005 and December 31, 2004, respectively, to reduce certain of our net deferred Federal, foreign and state tax assets to their estimated net realizable value.
Restructuring Charges
      During the second quarter of 2002, we initiated a study to determine the proper balance of downsizing and cost cutting in relation to our ability to respond to current and future work opportunities in each of our service offerings. The review not only evaluated our current operations, but also the growth and opportunity potential of each service offering as well as the consolidation of back-office processes. As a result of this review, we implemented a restructuring ~~program which included:~~program.
• ~~Elimination or reduction in the scope of service offerings that no longer fit into our core business strategy or long-term business plan.~~
• Reduction or elimination of services that do not produce adequate revenue or margins to support the level of profitability, return on investment or investments in capital resources. This includes exiting contracts that do not meet the minimum rate of return requirements and aggressively seeking to improve margins and reduce costs.
• ~~Analysis of businesses that provide adequate profit contributions but still need margin improvements which includes aggressive cost reductions and efficiencies.~~
• ~~Review of new business opportunities in similar business lines that can utilize our existing human and physical resources.~~
The following is a reconciliation of the restructuring accruals as of ~~June 30, 2004~~March 31, 2005 (in thousands):

Accrued costs at December 31, 2003 $ 600
Cash payments (180 )

Accrued costs at June 30, 2004 $ 420

Accrued costs at December 31, 2004 $ 212
Cash payments (100 )

Accrued costs at March 31, 2005 $ 112

Litigation and Contingencies
      Litigation and contingencies are reflected in our condensed unaudited consolidated financial statements based on our assessments, with legal counsel, of the expected outcome of such litigation or expected resolution of such contingency. If the final outcome of such litigation and contingencies differs significantly from our current expectations, such outcome could result in a charge to earnings. See Note 98 to our condensed unaudited consolidated financial statements in Part I Item 1 to this Form 10-Q for description of legal proceedings and commitments and contingencies.
~~Results of Operations~~
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~~Restatement of Financial Statements~~
     In connection with the annual audit of the Company’s 2003 financial statements, the Company identified errors in amounts previously reported in its financial statements for the three months and six months ended June 30, 2003. The restatements related to overstatements due to irregularities in revenues recorded by the Company’s Canadian operations in the amount of $1.0 million and $1.3 million for the three months and six months ended June 30, 2003. In addition, the quarterly information was restated for previously recognized revenues related primarily to work performed on undocumented or unapproved change orders and other matters which are being disputed by the Company’s clients in the amount of $300,000 for the three months and six months ended June 30, 2003. The total amount of restatement on income from continuing operations
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~~before provision for income taxes and minority interest in the three months and six months ended June 30, 2003 was $1.3 million and $1.5 million, respectively.~~

For the Three Months Ended For the Six Months Ended
June 30, 2003 June 30, 2003
As Previously As As Previously As
Reported Restated* Reported Restated*
(In thousands) (In thousands)
Revenues $ 209,108 $ 207,841 $ 389,677 $ 388,139
Income from continuing operations before provision for income taxes and minority interest $ 4,631 $ 3,364 $ 1,947 $ 409
Net income $ 2,765 $ 2,019 $ 1,177 $ 272
Results of Operations
* ~~Before effect of reclassifying the 2003 results of operations of the Brazil operations to loss from discontinued operation.~~
Comparison of Quarterly Results
      The following table reflects our consolidated results of operations in dollar and percentage of revenue terms for the periods indicated including the reclassification of ~~2003 results of operations~~the three months ended March 31, 2004 net loss for the ~~Brazil~~Network Services operations to discontinued operations.

For the Three Months Ended June 30, For the Six Months Ended June 30,
2003 2003
2004 As Restated 2004 As Restated
Revenue $ 231,278 100.0 % $ 201,361 100.0 % $ 431,300 100.0 % $ 376,529 100.0 %
Costs of revenue 206,261 89.2 % 169,031 83.9 % 400,834 92.9 % 316,871 84.2 %
Depreciation 4,481 1.9 % 7,200 3.6 % 9,466 2.3 % 15,550 4.1 %
Amortization 175 0.1 % 132 0.1 % 351 0.1 % 283 0.1 %
General and administrative expenses 16,717 7.2 % 15,066 7.5 % 38,037 8.8 % 32,326 8.6 %
Interest expense, net 4,664 2.0 % 4,754 2.4 % 9,567 2.2 % 9,368 2.5 %
Other (income) expense, net (444 ) (0.2 )% 307 0.1 % (304 ) (0.1 )% (250 ) (0.1 )%

(Loss) income from continuing operations before benefit for income taxes and minority interest (576 ) (0.2 )% 4,871 2.4 % (26,651 ) (6.2 )% 2381 0.6 %
Provision (benefit) for income taxes - - 1,900 0.9 % - - 887 0.2 %
Minority interest (35 ) 0.0 % 0 0.0 % (35 ) 0.0 % - 0.0 %

(Loss) income from continuing operations (611 ) (0.2 )% 2,971 1.5 % (26,686 ) (6.2 )% 1,494 0.4 %
Discontinued operations (129 ) (0.1 )% (952 ) (0.5 )% (20,120 ) (4.7 )% (1,222 ) (0.3 )%

Net (loss) income $ (740 ) (0.3 )% $ 2,019 1.0 % $ (46,806 ) (10.9 )% $ 272 0.1 %

For the Three Months Ended March 31,
2005 2004
(dollars in thousands)
Revenue $ 217,770 100.0 % $ 194,707 100.0 %
Costs of revenue, excluding depreciation 204,970 94.1 % 188,574 96.9 %
Depreciation 4,965 2.3 % 4,831 2.5 %
General and administrative expenses 16,460 7.6 % 20,513 10.5 %
Interest expense, net of interest income 4,851 2.2 % 4,903 2.5 %
Other (income) expense, net (1,973 ) (0.9 )% 166 0.1 %

Loss from continuing operations before minority interest $ (11,503 ) (5.3 )% $ (24,280 ) (12.5 )%
Minority interest (66 ) 0.0 % — 0.0 %

Loss from continuing operations $ (11,569 ) (5.3 )% $ (24,280 ) (12.5 )%
Discontinued Operations (445 ) (0.2 )% (21,786 ) (11.2 )%

Net loss $ (12,014 ) (5.5 )% $ (46,066 ) (23.7 )%

~~Three Months Ended June 30,~~
Three Months Ended March 31, 2005
Compared to Three Months Ended March 31, 2004 ~~Compared to Three Months Ended June 30, 2003~~
      Revenue.Our revenue was ~~$231.3~~$217.8 million for the three months ended ~~June 30, 2004,~~March 31, 2005, compared to ~~$201.4~~$194.7 million for the same period in ~~2003,~~2004, representing an increase of ~~$29.9~~$23.1 million or ~~14.9%~~11.8%. This increase was due primarily to the increased revenue of approximately ~~$40.2~~$28.2 million received from ~~our two largest customers. The increase in revenue was offset by a decrease in revenue from other customers who had unusually high activity in~~DirecTV. In addition, the fiber-to-home installations for Verizon Communications commenced towards the end of 2004. During the three months ended ~~June 30, 2003.~~March 31, 2005 revenue related to Verizon increased by approximately $23.6 million. We expect to continue to see an increase in revenue from these two customers throughout 2005. The increases were offset by a significant decrease in upgrade work from Comcast. In first quarter 2004, the Comcast projects were fully operational and proceeding at full schedule. In first quarter 2005, the Comcast upgrade work was minimal because the majority of the work was completed in the fourth quarter 2004.
      Costs of Revenue.Our costs of revenue were ~~$206.3~~$205.0 million or ~~89.2%~~94.1% of revenue for the three months ended ~~June 30, 2004,~~March 31, 2005, compared to ~~$169.0~~$188.6 million or ~~83.9%~~96.9% of revenue for the same period in ~~2003~~2004 reflecting ~~that we increased costs more rapidly as revenue increased.~~an improvement in margins. The decrease was due to obsolescence provisions, insurance expense and loss accruals. In the three months ended ~~June 30,~~March 31, 2004, ~~the Company recorded losses on percentage of completion contracts~~we had obsolescence provisions in ~~the amount~~inventory of approximately ~~$1.4 million.~~
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~~No losses~~$900,000 mainly due to inventories that were ~~accrued~~purchased for specific jobs which were no longer in process. There was no provision necessary during the three months ended March 31, 2005. In addition, in the three months ended ~~June 30, 2003.~~March 31, 2005, the cost of sales portion of insurance expense decreased $9.5 million from the three months ended March 31, 2004. In the three months ended March 31, 2004, there were an increased number of claims. The increasing trends and the loss history in 2004 caused insurance expense based on actuarial assumptions to increase in 2004. These trends leveled off throughout 2004 and 2005 causing insurance reserves to be consistent; resulting in a significant decrease in insurance expense. Lastly, loss accruals on construction projects decreased $1.8 million from $2.5 million in the three months ended March 31, 2004 to $700,000 in the three months ended March 31, 2005. These decreases were offset by increases in subcontractor and labor costs. In the first quarter of 2005, we started reducing the use of subcontractors and
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increasing the proportion of our employees on DirecTV. As a result we hired additional personnel to perform services for DirecTV which required extensive upfront training costs to these employees. As we transitioned to greater use of employees, subcontractors were still being used, increasing overall cost of sales during the transition. In addition, we use subcontractors on our two largest customers. Therefore, as revenues increase on these customers, subcontractor expense as a percentage of total revenue will increase. Operations payroll also increasedthere were more projects with high material installations during the three months ended ~~June 30, 2004 compared~~March 31, 2005 causing materials expense to be higher than in the three months ended June 30, 2003 due to two projects that were started in the second quarter of 2004 which required more work upfront. The increase in subcontractors, operational payroll and accrued losses were slightly offset by the decrease in repairs and maintenance expense as a percentage of revenue. We have begun an initiative to keep equipment at jobsites fairly new resulting in a decrease in repair costs.
March 31, 2004.
      Depreciation.Depreciation was ~~$4.5~~$5.0 million ~~or 1.9% of revenue~~ for the three months ended ~~June 30, 2004,~~March 31, 2005, compared to ~~$7.2~~$4.8 million ~~or 3.6% of revenue~~ for the same period in ~~2003,~~2004, representing ~~a decrease~~an increase of ~~$2.7~~approximately $200,000 or 2.8%. In the three months ended March 31, 2004, depreciation expense was reduced by $1.3 million ~~or 37.8%. We reduced depreciation expense~~related to the change in estimate in useful lives that occurred in November 30, 2002. There was no such reduction in the three months ended ~~June 30,~~March 31, 2005. However, this reduction in 2004 was offset in 2005 by ~~reducing~~continuing to reduce capital expenditures and disposing of excess equipment during ~~2003~~2004 and ~~2004.~~the first quarter of 2005.
      ~~Amortization.~~General and administrative expenses ~~Amortization of intangibles was $175,000~~. General and administrative expenses were $16.5 million or ~~0.1%~~7.6% of revenue for the three months ended ~~June 30, 2004,~~March 31, 2005, compared to ~~$132,000~~$20.5 million or ~~0.1%~~10.5% of revenue for the same period in ~~2003,~~2004, representing ~~an increase~~a decrease of ~~$43,000 or 32.6%. The increase is related to an increase in the non-compete agreement entered into in July 2003 with an employee of the Company.~~
~~General and Administrative.~~ ~~General and administrative expenses were $16.7~~$4.0 million or ~~7.2% of revenue for the three months ended June 30, 2004, compared to $15.1 million or 7.5% of revenue for the same period in 2003 representing an increase of $1.7 million or 11.0%~~19.8%. The increase in general and administrative expenses is partially due to an increase in provision of doubtful accounts of $1.4 million. The provision in the three months ended June 30, 2004 was based on our write-off history. In the three months ended June 30, 2003, this provision was not necessary as the reserves were adequate. In addition, general and administrative expenses increased $2.7 million due to additional professionalProfessional fees incurred in the ~~second~~first quarter 2004 were approximately $6.0 million related to ~~the~~our audit, ~~increased~~ fees to a third party in assisting us with Sarbanes-Oxley compliance and ~~the increase in~~ legal fees related to our defense inand settlement of various litigation matters. The increase in general and administrative expenses was offset by overall general decreases in overhead expenses as a result of cost cutting initiatives. In addition, there was a decrease in payroll and benefits from overhead and support employees mainly from certain divisions which were consolidated during 2003. As employees are reduced, related overhead expenses also decrease such as insurance, supplies and travel.
~~Interest Expense, Net.~~ Interest expense, net of interest income, was $4.7 million or 2.0% of revenue for the three months ended June 30, 2004, compared to $4.8 million or 2.4% of revenue for the same period in 2003, representing a decrease of $90,000 or 1.9%.
~~Other (Income) Expense, Net.~~ ~~Other income was $444,000 or 0.2% of revenue for the three months ended June 30, 2004, compared to other expense of $307,000 or 0.1% of revenue~~Professional fees in the three months ended ~~June 30, 2003, representing an increase~~March 31, 2005 were approximately $3.0 million which mainly consisted of ~~$751,000 or 244.6%.~~audit and legal fees. In addition, the ~~three months ended June 30, 2004 we sold a lot of equipment at auction~~general and ~~recognized gains on these sales. In the three months ended June 30, 2003, items were written off and disposed of resulting in losses during the period.~~
~~Provision for Income Taxes.~~ For the three months ended June 30, 2004, we did not record any income tax expense or benefit as compared to an income tax expense of $1.9 million for the three months ended June 30, 2003. The increase is mainly due to the loss from continuing operations in the three months ended June 30, 2004 compared to income in the same period prior year. During the three months ended June 30, 2004, we placed a full valuation allowance against our otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing or realization of the benefits of net operating loss carryforwards in future tax returns. We believe that sustained financial performance is necessary before the recognition of any further deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely that not that all or aadministrative portion of ~~deferred tax assets will not be realized, we establish a valuation allowance.~~
~~Minority Interest.~~ ~~Minority interest was $35,000 or 0.0% of revenue for the three months ended June 30, 2004, compared to $0 or 0.0% of revenue for the same period in 2003 representing an increase of $35,000 or~~
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100%. We entered into a joint venture with a third party in 2004 of which we own 51%. This subsidiary had net income in the three months ended June 30, 2004 which resulted in minority interest. The subsidiary did not exist in 2003.
~~Discontinued Operations.~~insurance expense decreased by $1.5 million. In the three months ended March 31, 2004, there were an increased number of claims. The increasing trends and the loss history in 2004 caused insurance expense to increase in 2004 based on actuarial assumptions. These trends leveled off throughout 2004 causing insurance reserves to be consistent resulting in a decrease in the general and administrative component of insurance expense in the three months ended March 31, 2005. In addition, we no longer had international operations in the three months ended March 31, 2005 resulting in a decrease of approximately $400,000.
Interest expense, net.Interest expense, net of interest income, remained consistent at $4.9 million for both periods.
Other (income) expense.Other income was $2.0 million for the three months ended March 31, 2005, compared to other expense of $166,000 in the three months ended March 31, 2004, representing an increase of $2.2 million. The increase mainly relates to sales of fixed assets in the first quarter of 2005 resulting in $1.6 million of gains on these sales. In the first quarter of 2004, we had $400,000 of gains on sale of assets but those gains were offset by $500,000 of write-offs.
Discontinued operations.In the first quarter 2004, we ceased performing contractual services for customers in Brazil, abandoned all assets in our Brazil subsidiary and made a determination to exit the Brazil market. ~~The abandoned Brazil subsidiary has been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations for~~During the three months ended June 30, 2003 for Brazil have been reclassified to loss from discontinued operations. The net loss from operations for the Brazil subsidiary was $129,000 and $952,000 for the three months ended June 30, 2004 and 2003, respectively. In November 2004, we petitioned, and the subsidiary was adjudicated bankrupt by a Brazilian bankruptcy court. The subsidiary is currently being liquidated under court supervision.
~~Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003~~
~~Revenue.~~ Our revenue was $431.3 million for the six months ended June 30, 2004, compared to $376.5 million for the same period in 2003, representing an increase of $54.8 million or 14.5%. This increase was due primarily to the increased revenue of approximately $80.2 million received from two of our largest customers. We continued to see an increase from these customers in 2004. The increase in revenue was offset by a decrease in projects performed in the Southern states of $13.6 million during the six months ended June 30, 2004 and a decrease in volume in other customers compared to the same period in 2003.
~~Costs of Revenue.~~ Our costs of revenue were $400.8 million or 92.9% of revenue for the six months ended June 30, 2004, compared to $316.9 million or 84.2% of revenue for the same period in 2003 reflecting that we increased costs more rapidly as revenues increased. In the six months ended June 30, 2004, the Company recorded losses on percentage of completion contracts in the amount of $3.9 million. In addition, we use subcontractors on our two largest customers. Therefore, as we increase revenue on these customers subcontractor expense as a percentage of total revenue will increase. In addition, we recorded obsolescence provisions in inventory of $900,000 mainly due to inventories that were purchased for specific jobs no longer in process. In the six months ended June 30, 2003, this provision was not necessary. In addition, cost of sales increased due to insurance. Insurance expense increased in the six months ended June 30, 2004 due to the number of increased claims. As a result of the increased claims and loss history since the beginning of 2004, we adjusted our actuarial assumptions and increased our reserves and expenses by $12.6 million in the six months ended June 30, 2004. The increase in subcontractors, insurance and accrued losses were slightly offset by the decrease in repairs and maintenance as a percentage of revenue. We have begun an initiative to keep equipment at jobsites fairly new resulting in a decrease in repair costs.
~~Depreciation.~~ Depreciation was $9.5 million for the six months ended June 30, 2004, compared to $15.6 million for the same period in 2003, representing a decrease of $6.1 million. We reduced depreciation expense in the six months ended June 30, 2004 by continuing to reduce capital expenditures and disposing of excess equipment in 2003 and 2004.
~~Amortization.~~ Amortization of intangibles was $351,000 for the six months ended June 30, 2004 compared to $283,000 for the six months ended June 30, 2003 representing an increase of $68,000 or 24.0%. The increase is related to an increase in the non-compete agreement entered into in July 2003 with an employee of the Company.
~~General and Administrative.~~ General and administrative expenses were $38.0 million or 8.8% of revenue for the six months ended June 30, 2004, compared to $32.3 million or 8.6% of revenue for the same period in 2003, representing an increase of $5.7 million or 17.7%. The increase in general and administrative expenses was due to the increase in provisions for doubtful accounts of $2.8 million. The provision in the six months ended June 30, 2004 was based on our write-off history. In the six months ended June 30, 2003, this provision was not necessary due to the reserves being at an adequate level. In addition, general and administrative expenses increased $6.6 million due to additional professional fees incurred in the six months ended June 30, 2004 related to the audit, increased fees to third party in assisting us with Sarbanes-Oxley compliance and the increase in legal fees related to our defense in various litigation matters. The increase in
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general and administrative expenses was offset by overall general decreases in overhead expenses as a result of cost cutting initiatives. In addition, there was a decrease in payroll and benefits from overhead and support employees mainly from certain divisions which were consolidated during 2003. As employees are reduced, overhead expenses also decrease such as insurance, supplies and travel.
~~Interest Expense, Net.~~ Interest expense, net of interest income, was $9.6 million or 2.2% of revenue for the six months ended June 30, 2004, compared to $9.4 million or 2.5% of revenue for the same period in 2003, representing an increase of $199,000 or 2.1%.
~~Other (Income) Expense.~~ Other income was $304,000 or 0.1% of revenue for the six months ended June 30, 2004, compared to $250,000 or 0.1% of revenue for the six months ended June 30, 2003, representing an increase of $54,000 or 21.6%.
~~Provision of Income Taxes.~~ For the six months ended June 30, 2004, we did not record any income tax expense or benefit as compared to an income tax expense of $887,000 for the six months ended June 30, 2003. The increase is mainly due to the loss from continuing operations in the six months ended June 30, 2004 compared to income in the same period prior year. During the six months ended June 30, 2004, we placed a full valuation allowance against our otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing or realization of the benefits of net operating loss carryforwards in future tax returns. We believe that sustained financial performance is necessary before the recognition of any further deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely that not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance.
~~Minority Interest.~~ Minority interest was $35,000 or 0.0% of revenue for the six months ended June 30, 2004, compared to $0 or 0.0% of revenue for the same period in 2003 representing an increase of $35,000 or 100%. We entered into a joint venture with a third party in 2004 in which we own 51%. This subsidiary had net income in the six months ended June 30, 2004 which resulted in minority interest. The subsidiary did not exist in 2003.
~~Discontinued Operations.~~ In the six months ended June 30, 2004, we ceased performing contractual services for customers in Brazil, abandoned all assets in our Brazil subsidiary and made a determination to exit the Brazil market. The abandoned Brazil subsidiary has been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations for the six months ended June 30, 2003 for Brazil have been reclassified to loss from discontinued operations. During the six months ended June 30,March 31, 2004, we wrote off approximately $12.3 million of goodwill and the net investment in the Brazil subsidiary of approximately $6.8 million which consisted of the accumulated foreign currency translation loss of ~~$21.1~~$21.3 million less a deficit in assets of ~~$13.7~~$14.5 million. The net loss ~~from operations~~ for the Brazil subsidiary ~~was $955,000 and $1.2 million~~ for the ~~six~~three months ended ~~June 30,~~March 31, 2004 ~~and 2003, respectively.~~was approximately $20.0 million. There was no activity in the three months ended March 31, 2005 because the subsidiary was in the process of liquidation. In November 2004, ~~we petitioned,~~our subsidiary applied for relief and ~~the subsidiary~~ was adjudicated bankrupt by a Brazilian bankruptcy court. The subsidiary is currently being liquidated under court supervision. During the fourth quarter 2004, we committed to sell our Network Services division and exit this service market. This division has been classified as a discontinued operation. The results of operations for the three months ended March 31, 2004 have been reclassified to loss from discontinued operations. The net loss for the Network Services division was $445,000 and $1.8 million for the three months ended March 31, 2005 and 2004, respectively. The loss decreased due to decreased activity in the division pending sale.
Financial Condition, Liquidity and Capital Resources
      Our primary sources of liquidity are cash flows from continuing operations, borrowings under revolving lines of credit, ~~other borrowings~~ and proceeds from sales of assets and investments. We expect to continue selling vehicles and equipment ~~during 2004~~ as we see the need to upgrade with new equipment. We expect to continue to obtain proceeds from these sales in excess of $1.0 million per quarter depending upon market conditions. Our primary liquidity needs are for working capital, capital expenditures, letters of credit and debt service. In addition to ordinary course working capital requirements, we will
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continue to spend at least $10.0 to $15.0 million per year on capital expenditures in order to keep our equipment new and in good condition. ~~In addition, interest~~We also expect our annual lease payments to increase as we place greater reliance on operating leases to meet our equipment needs. We also have paid $9.0 million in 2005 to our insurance company for cash collateral on our insurance claims. We expect to pay an additional $9.0 million in 2005. Interest payments of approximately $7.6 million are due each February and August under our subordinated debt ~~agreement~~agreement. In 2004, we purchased a 49% interest in a limited liability company with an established marketing group. The initial investment of $3.7 million will be paid over four quarters which commenced in the ~~aggregate amount~~third quarter of ~~approximately $7.7 million.~~2004 with additional contingent payments of up to $1.3 million per quarter based upon the level of unit sales and profitability of the limited liability company for the two years following the period after the initial investment is fully funded.
      We anticipate that funds generated from continuing operations, together with borrowings under our credit facility, ~~other borrowings~~ and proceeds from sales of assets and investments will be sufficient to meet our working capital requirements, anticipated capital expenditures, insurance collateral requirements, equity investment obligations, letters of credit, and debt service obligations for at least the next twelve months.
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      We need working capital to support seasonal variations in our business, primarily due to the impact of weather conditions on external construction and maintenance work, and the corresponding spending by our clients on their annual capital expenditure budgets. Our business is slower in the first and fourth quarters of each calendar year and stronger in the second and third quarters. We generally experience seasonal working capital needs from approximately April through September to support growth in unbilled revenue and accounts receivable, and to a lesser extent, inventory. Our billing terms are generally net 30 to 60 days, although some contracts allow our clients to retain a portion (from 2% to 15%) of the contract amount until the contract is completed to their satisfaction. We maintain inventory to meet the material requirements of some of our contracts. Some of our clients pay us in advance for a portion of the materials we purchase for their projects, or allow us to pre-bill them for materials purchases up to a specified amount.
      Our vendors generally offer us terms ranging from 30 to 90 days. Our agreements with subcontractors usually contain a “pay-when-paid” provision, whereby our payments to subcontractors are made after we are paid by our clients.
      As of ~~June 30, 2004,~~March 31, 2005, we had ~~$124.5~~$124.6 million in working capital compared to ~~$113.4~~$134.5 million as of December 31, ~~2003.~~2004. The ~~increase~~decrease in working capital was due to ~~the increase in inventories related to increased purchases for projects with one of our major customers. Working capital also increased due to the~~a decrease ~~in accounts payable from year end due to the decreased activity in 2004 and receipt of payments of invoices in 2004. The increase in working capital was slightly offset by the change~~ in accounts receivable and ~~cash. Accounts receivable at June 30,~~inventories due to revenue decreasing from the fourth quarter 2004 ~~was $204.1 million, as compared~~ to ~~$208.2~~March 31, 2005. Our business is traditionally slower in the first quarter. Cash and cash equivalents increased from $19.5 million at December 31, ~~2003. The decrease of $13.3~~2004 to $23.6 million at March 31, 2005. At March 31, 2005, the cash balance includes $7.3 million in ~~accounts receivable at June 30, 2004 from December 31, 2003 is due~~restricted cash related to the corresponding decrease in revenues from the fourth quarter of 2003. Cash and cash equivalents decreased from $19.4 million at December 31, 2003 to $16.8 million at June 30, 2004 mainly due to the interest payment on the subordinated debt made in February 2004 in the amount of $8.2 million offset by collections of accounts receivable.collateral for our credit facility.
      Net cash provided by operating activities from continuing operations was $2.3 million for the three months ended March 31, 2005 compared to net cash used in operating activities from continuing operations ~~was $1.1~~of $15.1 million for the ~~six~~three months ended ~~June 30, 2004 compared to $1.9 million~~March 31, 2004. The net cash provided by operating activities from continuing operations in the ~~six~~three months ended ~~June 30, 2003.~~March 31, 2005 was primarily related to timing of cash collections from customers and payments to vendors as well as installations of inventory to projects offset by the net loss from continuing operations. The net cash used in operating activities from continuing operations in the three months ended March 31, 2004 ~~and 2003~~ was primarily related to the net loss from continuing operations, ~~in the six months ended June 30, 2004 and 2003~~purchases of inventory and timing of cash collections from customers and payments to vendors. In addition, in 2004 we now purchase inventory for one of our significant customers. In the six months ended June 30, 2003, the inventory was handled directly by the customer. The cash used in operating activities in the six months ended June 30, 2003 was offset by a receipt of a $22.7 million income tax refund resulting from losses incurred in 2002. Proceeds from the income tax refund were used to repay all borrowings under our credit facility at the time of receipt.
      Net cash provided by investing activities of continuing operations was ~~$1.5~~$1.0 million for the ~~six~~three months ended ~~June 30, 2004~~March 31, 2005 compared to ~~$2.2 million~~$2,000 for the ~~six~~three months ended ~~June 30, 2003. The net~~March 31, 2004. Net cash provided by investing activities from continuing operations in ~~2004 and 2003 was~~the three months ended March 31, 2005 primarily related to $3.9 million in net proceeds from sales of assets ~~slightly~~ offset by capital expenditures ~~increased~~in the amount of $1.9 million and payments related to our equity investment in the amount of $1.1 million. Net cash provided by investing activities from ~~$4.6 million~~continuing operations in the three months ended March 31, 2004 primarily related to ~~$5.1~~$2.9 million in ~~the current period. Net proceeds from the sale of assets and investments increased from $6.2 million to $6.5 million. In addition to~~net proceeds from sales of assets offset by capital expenditures in the amount of $2.9 million.
      Net cash provided by financing activities from continuing operations was $500,000 for the three months ended March 31, 2005 compared to net cash used in financing activities from continuing operations of $300,000 for the three months ended March 31, 2004. Net cash provided by financing activities from continuing operations in the three months ended March 31, 2005 was primarily related to issuance of common stock offset by repayments of borrowings and capital ~~expenditures during the six months ended June 30, 2003, we paid approximately $1.9 million in contingent consideration related to acquisitions and we received $2.7 million from sub-leases.~~
lease payments. Net cash used in financing activities from continuing operations in the three months ended
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March 31, 2004 was ~~$2.4~~due to repayment of our credit facility of $1.1 million offset by proceeds from issuance of common stock.
      On May 10, 2005, we entered into an amended and restated loan and security agreement in connection with the revolving credit facility which increased the maximum amount of the revolver to $150 million subject to a reserve of $5.0 million and ~~$2.4 million for~~other adjustments and restrictions pursuant to the ~~six months ended June 30, 2004~~terms and ~~2003 mainly related~~conditions of the amended and restated loan and security agreement. The term of the facility was extended to ~~repayments on our borrowings. These repayments were offset by receipts from~~2010. The terms and conditions of the ~~issuance~~amended credit facility are similar to the credit facility outstanding as of ~~our common stock~~March 31, 2005 described below. In addition to the increase in the maximum availability and extension of term, the key differences include no monthly financial covenants if certain conditions are met, a release of the restricted cash in the amount of ~~approximately $1.1~~$7.3 million and ~~$99,000~~an increase in borrowing availability based on higher advance rates on unbilled receivables and equipment. To the ~~six months ended June 30, 2004 and 2003, respectively.~~extent that certain conditions are not met, we must maintain a fixed charge ratio in excess of 1.2 to 1.
      Based upon our projections for 2005, we believe we will be in compliance with the terms and conditions of the amended credit facility. We ~~have a~~are dependent upon borrowings and letters of credit under this credit facility to fund operations. Should we be unable to comply with the terms and covenants of the amended credit facility, we would be required to obtain further modifications of the credit facility or another source of financing to continue to operate. We may not be able to achieve our 2005 projections and thus may not be in compliance with the amended credit facility’s financial covenants in 2005.
      The terms and conditions of the credit facility at March 31, 2005 are described below:
      As of March 31, 2005, the revolving credit facility for our North American operations ~~that provides~~provided for borrowings up to an aggregate of $125.0 million. The amount that we can borrow at any given time is based upon a formula that takes into account, among other things, ~~fixed assets,~~ eligible billed and unbilled accounts receivable, which can result in borrowing availability of less than the full amount of the facility. ~~Fixed assets are based on a percentage of liquidation value.~~ As of ~~June 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, net availability under the credit facility totaled ~~$21.0~~$7.8 million and ~~$37.9~~$25.5 million, net of outstanding standby letters of credit aggregating
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~~$51.8~~ $66.8 million ~~and $54.5~~each period. At March 31, 2005, $63.3 million ~~respectively. Substantially all~~ of the outstanding letters of credit are issued to support our casualty insurance requirements or surety needs. These letters of credit mature at various dates through December 31, 2005, and except for Letters of Credit totaling $10.0 million, most have automatic renewal provisions subject to prior notice of cancellation. ~~There were~~We had no outstanding draws under the credit facility ~~as of June 30, 2004~~on March 31, 2005 and ~~December 31, 2003 although we periodically borrowed against the revolving credit facility during the periods.~~2004. The revolving credit facility matures on January 22, 2007. The revolving credit facility at March 31, 2005 is collateralized by a first priority security interest in substantially all of our North American assets including $7.3 million in restricted cash which is included in cash and cash equivalents at March 31, 2005 and a pledge of the stock of certain of ~~the~~our operating subsidiaries. All wholly owned subsidiaries collateralize the facility. Interest under the facility accrues at rates based, at our option, on the agent bank’s base rate plus a margin of between 0.75% and 1.75% or its LIBOR rate (as defined in the credit facility) plus a margin of between 2.25% and 3.25%, each margin depending on certain financial thresholds. The facility includes an unused facility fee of 0.50%, which may be adjusted to as low as 0.375% or as high as 0.625% depending on the ~~achievement~~amount of ~~certain financial thresholds.~~
the total commitment which is unused.
      The revolving credit facility outstanding at March 31, 2005 contains customary events of default (including cross-default) provisions and covenants related to our North American operations that prohibit, among other things, making investments and acquisitions in excess of a specified amount, incurring additional indebtedness in excess of a specified amount, paying cash dividends, making other distributions in excess of a specified amount, making capital expenditures in excess of a specified amount, creating liens against our assets, prepaying other indebtedness including our 7.75% senior subordinated notes, and engaging in certain mergers or combinations without the prior written consent of the lenders. In addition, any deterioration in the quality of billed and unbilled receivables would reduce availability under our revolving credit facility.
      ~~Under the revolving credit facility we~~We are required to be in compliance with certain financial covenants measured on a monthly ~~financial and reporting covenants.~~basis. The credit facility was amended on ~~July 22, 2004~~March 17, 2005 modifying ~~these covenants.~~certain financial covenants and we were in compliance with our amended credit facility’s financial covenants at March 31, 2005. Under the amended agreement, our North American operations must maintain a minimum tangible net worth ~~equal to:~~
• ~~$62 million beginning April 1, 2004; plus~~
• ~~50% of the consolidated net income of our operations from April 1, 2004 through the date of determination.~~
~~Our North American operations must also maintain a~~requirements as well as minimum fixed charge coverage ratio, computed on a monthly basis, beginning in May 2004. The fixed charge coverage ratio is generally defined to mean the ratio of our net income before interest expense, income tax expense, depreciation expense, and amortization expense plus $1.1 million to consolidated interest expense and current maturities of debt for the period of determination. For the purposes of determining the current maturities of ~~long term~~long-term debt during the period from April 2004 through March 2005
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used in determining the fixed charge coverage ratio the amount of current maturities of long term debt as of any month during this period is multiplied by a fraction, the numerator of which is the number of cumulative months since April 2004, and the denominator of which is 12.
~~Period~~ ~~Ratio~~
~~For the 2 month period ending May 31, 2004~~ ~~1.00 to 1.00~~
~~For the 3 month period ending June 30, 2004~~ ~~1.50 to 1.00~~
~~For each of the 4, 5 and 6 month periods ending July 31, August 31 and September 30 2004, respectively~~ ~~1.75 to 1.00~~
~~For each of the 7, 8 and 9 month periods ending October 31, November 30, and December 31, 2004~~ ~~2.00 to 1.00~~
~~For each of the 10 and 11 month periods ending January 31 and February 28, 2005~~ ~~2.00 to 1.00~~
~~For the 12 month period ending on March 31, 2005 and each 12 month period ending on the last day of each calendar month thereafter~~ ~~2.00 to 1.00~~
     Based upon our performance to date, we are not in compliance with the credit facility’s financial covenants in the second quarter of 2004. We have not received a notice of default from our lender on these covenant violations. We have requested a waiver of the covenant conditions and expect such waiver to be
32
~~allowed although there is no assurance that we will obtain such a waiver and there is no assurance that such a waiver can be obtained without costs to the Company.~~
     We are dependent upon borrowings and letters of credit under this $125 million credit facility to fund our operations. Letters of credit increased $16.2 million from $51.8 million on June 30, 2004 to December  10, 2004. The credit facility was amended on October 4, 2004 to allow for the issuance of these additional letters of credit, principally for our casualty insurance program and for its surety provider. In addition, in December 2004 we issued a $2.6 million of credit to collateralize a bond that posted as part of an appeal in a legal matter. We have a total amount of letters of credit outstanding at December 10, 2004 of $70.6 million. Should we be unable to obtain a waiver of the covenants of the $125 million credit facility, we will be required to obtain further modifications of the facility or another source of financing to continue to operate. In addition, we may be unable to renew our outstanding letters of credit. We may be required to obtain advances on our current credit facility or other source of financing to collateralize the required reserves associated with these letters of credit.
      As of ~~June 30, 2004,~~March 31, 2005, we have outstanding $195.9 million in principal amount of its 7.75% senior subordinated notes due in February 2008, with interest due semi-annually. The notes also contain default (including cross-default) provisions and covenants restricting many of the same transactions as under our credit facility. The indenture which governs our 7.75% senior subordinated notes allows us to incur the following additional indebtedness: the credit facility (up to $150 million), renewals to existing debt permitted under the indenture plus an additional $25 million of indebtedness. The indenture prohibits incurring ~~additional~~further indebtedness unless our fixed charge coverage ratio is at least 2:1 for the four most recently ended fiscal quarters determined on a proforma basis as if ~~the~~that additional debt ~~had~~has been incurred at the beginning of the period. The definition of our fixed charge coverage ratio under the indenture is essentially equivalent to that under our credit agreement. If we fail to maintain the required ratio under the indenture, our borrowings are limited to the credit facility, the subordinated indenture, renewals of existing debt that is permitted under the indenture plus an additional $25.0 million of indebtedness. The note also contains default (including cross default) provisions and covenants restricting many of the same transactions as under the credit facility. We have not met our covenants under the credit facility and we are currently seeking a waiver of such covenant requirements. The cross default provisions under the notes are not triggered until acceleration under the credit facility occurs. Our primary lender has not notified us that a default has occurred and we, in light of past practice with the primary lender and current ongoing favorable discussions with the primary lender, believe the possibility of receiving a notice of default under the credit facility from the primary lender is remote. Therefore, we believe the likelihood of cross default under the notes as a result of such acceleration is also remote. In the event the primary lender does declare us in default and accelerates the credit facility, the balance on the notes will be reclassified as a current liability.
      ~~Section 404~~The audit of ~~the Sarbanes-Oxley Act of 2002 requires, beginning with~~ our 2004 ~~Annual Report, our management to report on our internal controls over~~ financial reporting and for our independent certified registered public accounting firm to attest this report. We are in the process of pursuing compliance with Section 404. As mentioned in Item 4, our independent certified registered public accounting firm identified an overallstatements disclosed a material weakness in our internal controls during our audit as of December 31, 2003. As such, we may not be successful in complying with Section 404 prior to the due date of our 2004 Annual Report. Failure to comply with Section 404 could result in a reduced ability to obtain financing, the loss of clients, decreased stock price, penalties and additional expenditures to meet the Section 404 requirements.
     Our credit standing and senior subordinated notes are rated by various agencies. In August 2004, Standard & Poor’s withdrew our corporate credit, senior secured and subordinated debt. In its press release, Standard & Poor’s stated that the withdrawal was due to insufficient financial information available to support a ratings opinion due to the delays in our Form 10-Q filings for 2004. This withdrawal has not had an impact on our liquidity or ability to obtain necessary financing.
     In 2003 we performed work on undocumented or unapproved change orders or other matters which are being disputed by our clients. We did not recognize this work as revenue in 2003 or in the six months ended June 30, 2004. However, expenses for the work associated with these change orders and other matters were included in costs of revenues in 2003 resulting in a 45% decline in our 2003 margins. This has also affected our liquidity since we still have not been paid for the work performed. We have commenced legal action against
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some of our clients in connection with work performed in 2003. In addition, we have made claims for amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers for delays we believe were caused by the customer, errors in specifications and designs, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Our customers may counterclaim against us for contract damages, liquidated damages and/or indemnification. If the customers can establish a contract entitlement, that entitlement could reduce any amounts otherwise due us from the customer (including any remaining outstanding accounts receivable from the customer under the contract price) and/or create liabilities for us. Should we be successful in collecting some of these claims we would recognize them as revenue when received. When revenue is recognized the margins will increase during such period of recognition since the costs have already been recorded and paid in 2003. However, we may not be successful in collecting any of these claims.
     ~~The audit of our 2003 financial statements disclosed weaknesses in our internal controls and financial reporting processes.~~over inventory. See “Item 4. Controls and Procedures”~~. We are in~~ for remediation procedures we performed during the ~~process of correcting these deficiencies. We are also incurring expenses~~first quarter 2005 related to ~~comply with Section 404 of~~ the ~~Sarbanes-Oxley Act of 2002. Consequently, we expect to incur more expense on our financial reporting processes and controls in 2004 than we have in prior years.~~material weakness.
      Some of our contracts require us to provide performance and payment bonds, which we obtain from a surety company. If we were unable to meet our contractual obligations to a client and the surety company paid our client the amount due under the bond, the surety company would seek reimbursement of such payment from us. At ~~June 30, 2004,~~March 31, 2005, performance and payment bonds outstanding on our behalf totaled ~~$164.5~~$125.1 million.
New Accounting Pronouncements
      See Note 12 to our condensed unaudited consolidated financial statements in Part 1 Item 1 to this Form 10-Q for certain new accounting pronouncements.
Seasonality
      Our North American operations are historically seasonally slower in the first and fourth quarters of the year. This seasonality is primarily the result of client budgetary constraints and preferences and the effect of winter weather on network activities. Some of our clients, particularly the incumbent local exchange carriers, tend to complete budgeted capital expenditures before the end of the year and defer additional expenditures until the following budget year.
Impact of Inflation
      The primary inflationary factor affecting our operations is increased labor costs. We ~~have not experienced significant~~are also affected by increases in ~~labor~~fuel costs which increased significantly in 2004 and first quarter 2005 and are expected to ~~date.~~continue to increase in 2005.
Risk Factors
      In the course of operations, ~~the Company is~~we are subject to certain risk factors, including but not limited to, risks related to rapid technological and structural changes in the industries it serves, the volume of work received from clients, contract cancellations on short notice, operating strategies, economic downturn, collectibility of receivables, significant fluctuations in quarterly results, effect of continued efforts to streamline operations, management of growth, dependence on key personnel, availability of qualified employees, competition, recoverability of goodwill, and potential exposures to environmental liabilities and political and economic instability in foreign operations. For information about additional risks, see the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2003.~~
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2004.
~~Item 3.~~ ~~Quantitative and Qualitative Disclosures About Market Risk~~
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      We are exposed to market risk related to changes in interest rates and fluctuations in foreign currency exchange rates. Our variable rate credit facility exposes us to interest rate risk. However, we had no borrowings under the credit facility at ~~June 30, 2004.~~March 31, 2005.
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Interest Rate Risk
      Less than 5% of our outstanding debt at ~~June 30, 2004~~March 31, 2005 was subject to variable interest rates. The remainder of our debt has fixed interest rates. Our fixed interest rate debt includes $196.0 million (face value) in senior subordinated notes. The carrying value and market value of our debt at ~~June 30, 2004~~March 31, 2005 was ~~$196.6~~$196.1 million and ~~$197.5,~~$190.3 million, respectively. Based upon debt balances outstanding at ~~June 30, 2004,~~March 31, 2005, a 100 basis point (i.e. 1%) addition to our weighted average effective interest rate for variable rate debt would increase our interest expense by less than ~~$0.2 million~~$200,000 on an annual basis.
Foreign Currency Risk
      We have an investment in a subsidiary in Canada and sell our services into this foreign market.
     ~~Our foreign currency risk in Mexico is insignificant.~~
      Our foreign net asset/exposure (defined as assets denominated in foreign currency less liabilities denominated in foreign currency) for Canada at ~~June 30, 2004~~March 31, 2005 of U.S. dollar equivalents was ~~$9.4~~$2.2 million as of ~~June 30, 2004~~March 31, 2005 and ~~$7.4~~$2.7 million at December 31, ~~2003.~~2004.
      Our Canada subsidiary sells services and ~~pay~~pays for products and services in Canadian dollars. A decrease in the Canadian foreign currency relative to the U.S. dollar could adversely impact our margins. An assumed 10% depreciation of ~~these~~the foreign currency relative to the U.S. dollar over the ~~six~~three months ended ~~June 30, 2004~~March 31, 2005 (i.e., in addition to actual exchange experience) would have resulted in a translation reduction of our ~~revenues~~revenue by ~~$310,000 and $663,000~~$190,222 for the ~~three months and six months ended June 30, 2004.~~first quarter 2005.
      As the assets, liabilities and transactions of our Canada subsidiary are denominated in Canadian dollars, the results and financial condition are subject to translation adjustments upon their conversion into U.S. dollars for our financial reporting purposes. A 10% decline in this foreign currency relative to the U.S. dollar over the course of ~~six~~the three months ended ~~June 30, 2004~~March 31, 2005 (i.e., in addition to actual exchange experience) would have ~~reduced~~not changed materially our foreign subsidiaries’ translated operating ~~loss from $2.7 million to $2.5 million.~~loss.
      See our Annual Report on Form 10-K in Note 1 of Notes to Consolidated Financial Statements for further disclosures about market risk.
~~Item 4.~~
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     MasTec is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and are subject to certain limitations, including the exercise of judgment by individuals, the difficulty in identifying unlikely future events, and the difficulty in eliminating misconduct completely.
     Based upon an assessment of the impact of various adjustments to our financial results, we have restated our previously reported financial information on Form 10-K for the years ended December 31, 2002 and 2001. Our 2003 quarterly financial information in our Form 10-K has also been restated to reflect adjustments to our previously reported financial information on Form  10-Q for the quarters ended March 31, 2003, June 30, 2003, and September 30, 2003.
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     In connection with our audit for the fiscal year ended December 31, 2003, we and our independent certified registered public accounting firm identified certain reportable conditions that together constitute an overall material weakness in our internal control over our financial reporting process. As a result of this material weakness, we recorded a significant number of adjustments in preparing our financial statements for the year ended December 31, 2003, including the following adjustments.
• In March 2004, our management discovered certain intentional overstatements of revenues, inventories and work in progress related to our Canadian subsidiary. Our Audit Committee retained independent counsel to conduct a thorough investigation; counsel, in turn, retained an independent forensic accounting firm to assist its investigation. Based on that investigation, our Audit Committee concluded that these intentional overstatements of revenues, inventories and work in progress were limited to the unauthorized actions of certain employees at our Canadian operations. We immediately terminated the employment of these individuals. Based on the investigation of independent counsel, our Audit Committee found no evidence that any employee outside of its Canadian operations was aware of this misinformation before this matter came to light in the second week of March 2004. We have also instituted other personnel and reporting changes at our Canadian operations, including reorganizing the accounting reporting line responsible for these operations and increasing our analysis of inventory balances and transactions related to these operations. Adjustments with respect to our Canadian subsidiary aggregated $3.8 million. The $3.8 million adjustment consisted of a $1.46 million adjustment to work in progress, an $852,173 reduction in inventory, a $1.07 million increase in the allowance for doubtful accounts, a $286,416 accrual for unrecorded liabilities and a $130,914 miscellaneous loss. We believe that we have satisfactorily resolved the issues related to this matter.
• During the 2003 financial statement audit, audit procedures revealed that we had recognized revenue in excess of amounts provided for in certain energy substation contracts for which there was no signed or approved change order. The revenue had been recorded for work actually performed by us at the request of a client or as necessary extra-contractual work. We initially recorded the revenue under SOP 81-1 as an unpriced change order based upon its favorable historical collection experience in its other lines of business. However, because the contracts for these change orders were in a new line of business, we revised our approach and determined that the revenue should not be recorded until a signed change order or cash was received. We reversed a total of $6.1 million of revenue for work performed on undocumented or unapproved change orders and other matters which are being disputed by our clients. We reversed $272,000 in revenue from the first quarter of 2003 and $5.8 million from the third quarter of 2003. The revenue reversed from the first and third quarters related primarily to three customers: ABB Power, MSE Power Systems and the University of California. We have commenced proceedings to collect $2 million from ABB Power, $8 million from MSE Power Systems and $2.2 million from a subcontractor on the University of California contract. Any amounts recovered in these actions will be recorded as revenue when the amounts are received. All change orders must be now signed and approved before work is begun. We believe we have satisfactorily resolved all issues related to this matter.
• We made several adjustments to our self-insurance reserves during the 2003 financial statement audit. First, we adjusted our 2003 self-insurance reserve to reflect the current uncertainty of payment from the insolvency of Reliance, our insurance carrier for automobile, workers’ compensation and general liability prior to July 2000. This adjustment, which was accounted for as a change in estimate, was based on our current estimate of the expected recovery from the Reliance estate and individual state guaranty funds, based on developments to date in the Reliance insolvency. The adjustment to the 2003 self-insurance reserve for the Reliance insolvency amounted to $1.3 million. Second, we made an adjustment to our insurance reserves for the years ended December 31, 2000, 2001 and 2002 based on recalculation of our liability for amounts in excess of an aggregate deductible for automobile, workers’ compensation and general liability claims. Previously, our actuarially computed self-insurance reserves for those years were calculated based on the assumption that our aggregate deductible was fixed. In April 2004, Reliance asserted the position that the policies permitted it to adjust the aggregate deductible based on a payroll audit. We have disputed that position. Although Reliance had never
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audited payroll, we conducted our own payroll audit to determine the potential adjustments to our deductible aggregates, if Reliance’s interpretation of the policies ultimately prevails, which resulted in the $1.3 million adjustment described above. We have initiated internal controls on a quarterly basis to ensure all reserves are properly recorded in any given period.
• During the 2002 financial statement audit, we prepared a tax strategy to support the carrying value of our total deferred tax asset. This tax strategy did not consider the separate components of state taxes and federal taxes. During the 2003 financial statement audit, the Company considered, for the first time, the issue of whether the tax strategy was sufficient to support a certain portion of the deferred tax asset related to state taxes. Under this revised analysis considering the impact of state taxes as well as federal taxes, MasTec determined that its reserves for 2002 and 2003 were understated. Specifically, we determined that the estimated gain from the sale of certain assets and expected revenues apportioned to each state would be insufficient to offset losses in certain states. MasTec therefore restated its 2002 financial statements to reduce the carrying amount of its deferred tax asset by $4.9 million and MasTec adjusted its 2003 financial statements to record an additional $3.4 million valuation allowance. Our valuation allowance and projections supporting the recoverability of deferred tax assets are now reviewed on a quarterly basis.
• Adjustments for inadequate controls over our financial statement closing process resulting in a significant number of audit adjustments and a delay in the filing of this Annual Report on Form 10-K, including a lack of appropriate supporting documentation for certain transactions and inadequate review processes at the subsidiary and corporate controller levels.
     We have undertaken a thorough review of the effectiveness of our internal controls and procedures, including financial reporting, as part of our continuing efforts to strengthen the control process and prepare for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. For the closing process in the three months ended March 31, 2004 and June 30, 2004, we began to institute improved procedures and measures, and in the future plan to continue to work on strengthening these and other procedures and measures, to increase the effectiveness of our internal controls. We have:
• ~~improved our process for a more timely analysis of anticipated losses under percentage-of-completion contracts.~~
• implemented procedures for improved quarterly inventory analyses and pricing reconciliations for one of our service groups, including the performance of additional physical inventory counts for that service line during 2004, and
• ~~hired additional professional staff in our finance departments at service lines and corporate office.~~
     We have also implemented procedures to identify any potential amounts to be collected from clients associated with unapproved change orders or claims and to exclude from revenues such amounts until such change orders are approved by our clients as to scope and price or until such claims are paid by our clients.
     Given the effort needed to fully remedy the internal control weaknesses identified, we may not be able to remedy these weaknesses and take other actions required for compliance with Section 404 of the Sarbanes-Oxley Act by the December 31, 2004 deadline.
      As ~~required by Rule 13a-15(b)~~ of the ~~Exchange Act,~~end of the period covered by our 2004 Form 10-K, we ~~have~~ carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and ~~procedures. The evaluation examined those disclosure controls and~~ procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as ~~of June 30, 2004, the end of the period covered by this report.~~amended). Based upon ~~the~~that evaluation, ~~our management, including our Chief Executive Officer and Chief Financial Officer~~we had concluded that as of ~~June 30,~~December 31, 2004, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed in ~~our~~ reports ~~filed~~that we file or ~~submitted~~submit under the Exchange Act ~~was accumulated~~were recorded, processed, summarized and ~~communicated~~reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of the end of the period covered by this Form 10-Q, we carried out another evaluation of inventory. Due to the extent of manual procedures performed and the improvements that still need to be made, we have concluded that as of March 31, 2005, our disclosure controls and procedures are still ineffective.
Internal Control over Financial Reporting
      As of December 31, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, ~~as appropriate to allow timely decisions regarding required disclosure due~~of the effectiveness of the design and operation of our internal controls and procedures. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. The results of management’s assessment and review were reported to the ~~late filing~~Audit Committee of ~~this Form 10-Q.~~the Board of Directors.
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Based on management’s assessment using the criteria set out above, management believes that we did not maintain an effective internal control over financial reporting as of December 31, 2004, as a result of the following material weakness:
      In the course of management’s investigation, management noted one matter involving internal control and its operation that management considered a material weakness under standards established by the Public Company Accounting Oversight Board. Reportable conditions involve matters relating to significant deficiencies in the design or operation of internal control that could adversely affect our ability to record, process, summarize, and report financial data consistent with the assertions of management in the consolidated financial statements. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by errors or fraud in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.
      Management’s consideration of internal control would not necessarily disclose all matters in internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, management did identify weaknesses in internal controls involving inventory practices and policies in our ITS division, with respect to inventory pricing on receipt and the related costs of sales, and inventory tracking prior to sale or use. Management believes this constitutes a material weakness in internal control over the financial reporting process.
Remediation Steps to Address Material Weaknesses and Other Deficiencies in Internal Control over Financial Reporting
      Since December 31, 2004, we have significantly expanded our procedures to include additional analysis and other post-closing procedures to improve the system of internal controls related to inventory processing at our ITS division. We are also in the process of implementing the inventory module into our Oracle System. Once this system can be relied upon and tested, management will no longer need to perform manual procedures. An effective internal control framework requires the commitment of management to require competence, diligence, and integrity on the part of its employees. Control activities include policies and procedures adopted by management to ensure the execution of management directives, and to help advance the successful achievement of our objectives.
      In order to remediate the material weakness in internal control over financial reporting and ensure the integrity of our financial reporting processes in the first quarter of 2005, we performed the following procedures on ITS inventory:
•   performed physical inventory at all locations at March 31, 2005;
•   independent internal observers were used to test count at each location once the initial inventory was completed;
•   reviewed pricing of all inventory items;
•   independent internal verification of inventory price testing by inventory item to ensure no pricing errors existed in the inventory list;
•   analytically compared by location inventory from December 31, 2004 to March 31, 2005 to ensure all activity by location was reasonable based on activity on specific jobs at that location;
•   performed extensive cutoff testing to ensure accruals and inventory were proper and accurate at March 31, 2005; and
•   hired additional accounting staff who specialize in cost accounting and developing improved internal controls.
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      In addition, in an effort to improve internal control over financial reporting, we continue to emphasize the importance of establishing the appropriate environment in relation to accounting, financial reporting and internal control over financial reporting and the importance of identifying areas of improvement and to create and implement new policies and procedures where material weaknesses or significant deficiencies exist. In addition, we sample tested many controls in the three months ended March 31, 2005 throughout the control environment and found no significant deficiencies or material weaknesses in our testing, except for the items identified at December 31, 2004. Furthermore, in an effort to improve internal control over financial reporting, we have hired individuals with additional accounting expertise in management positions in certain divisions.
Changes in Internal Control over Financial Reporting –There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
~~Item 1.~~ ~~Legal Proceedings~~
ITEM 1. LEGAL PROCEEDINGS
      In the second quarter of 2004, purported class action complaints were filed against us and certain of our officers in the United States District Court for the Southern District of Florida and one was filed in the United States District Court for the Southern District of New York. These cases have been consolidated by court order in the Southern District of Florida. The complaints allege certain violations of Sections
10(b) and 20(a) of the Securities ~~and~~ Exchange Act of 1934, as amended, related to current and prior period earnings reports. ~~The actions were consolidated by court order and~~On January 25, 2005, a ~~first amended complaint~~motion for leave to file a Second Amended Complaint was filed ~~October 8, 2004. Plaintiff’s~~by Plaintiffs which the Court granted. Plaintiffs filed their Second Amended Complaint on February 22, 2005. Plaintiffs’ contend that our financial statements during the purported ~~Class Period~~class period of August 12, 2003 to May 11, 2004 were materially misleading in the following areas: 1) the financials for the third quarter of 2003 were allegedly overstated by ~~some $6.0~~$5.8 million in revenue from unapproved change orders ~~connected with the Coos Bay project;~~from a variety of our projects; and 2) the financials for the second quarter of 2003 were overstated by some $1.3 million as a result of the intentional overstatement of ~~revenues,~~revenue, inventories and work in progress at our Canadian subsidiary. Plaintiffs seek damages, not quantified, for the difference between the stock price Plaintiffs paid and the stock price Plaintiffs believe they should have paid, plus interest and attorney fees. We believe the claims are without merit. We will vigorously defend these lawsuits but may be unable to successfully resolve these disputes without incurring significant expenses. Due to the early stage of these proceedings, any potential loss cannot presently be determined with respect to this litigation.
      On July 28, 2004, our Board of Directors received a demand from a shareholder that ~~they~~the Board take appropriate steps to remedy breaches of fiduciary duty, mismanagement and corporate waste, all arising from the same factual predicate set out in the shareholder class actions described above. On November 18, 2004, ~~our~~the Board of Directors authorized ~~our~~its Executive Committee to establish appropriate procedures and form a special litigation committee, as contemplated by Florida law, to investigate these allegations and to determine whether it is in our best interest to pursue an action or actions based on said allegations. On December 22, 2004, a derivative action was filed by the shareholder. On January 10, 2005, the Executive Committee formed a special litigation committee to investigate this matter. By agreement of counsel, the derivative action has been stayed during the pendency of any motion dismiss in the securities class action.
      We contracted to construct a natural gas pipeline for Coos County, Oregon in 2003. Construction work on the pipeline ceased in December 2003 after the County refused payment due on regular contract invoices of $6.3 million and refused to process change orders ~~totaling $4.3 million~~ for additional work submitted to the County on or after November 29, ~~2003 totaling $4.3 million.~~2003. In February 2004, we brought an action for breach of contract against Coos County in Federal District Court in Oregon, seeking payment for work done, interest and anticipated profits. In April 2004, Coos County announced it was terminating the contract and seeking another company to complete the project. Coos County subsequently counterclaimed for breach of contract and other causes in the Federal District Court action. The amount of revenue recognized on the Coos County project that remained uncollected at ~~June 30, 2004~~March 31, 2005 amounted to $6.3 million representing amounts due to us on normal progress payment invoices submitted under the contract. In addition to these uncollected receivables, we also ~~had~~have additional claims for payment and interest in excess of $6.0 million, including all of ~~its~~our change order billings and retainage, which we ~~had~~have not recognized as revenue but to which we believe ~~we are entitled~~is due to us under the terms of the contract. In addition, we were made party to a number of citizen initiated actions arising from the Coos County project. A complaint alleging failure to comply with prevailing wage requirements was issued by the Oregon Bureau of ~~labor~~Labor and Industry. A number of individual property owners brought claims in Oregon state courts against us for property damages and related claims; a number of citizens’ groups brought an action in federal court for alleged violations of the Clean Water Act. ~~Five~~All but one of the individual property claims ~~were settled~~has been settled; one is set for ~~$30,000~~trial in ~~August 2004; three remain pending.~~2005. We will vigorously defend these actions, but may incur significant expense in connection with that defense.
      In connection with the Coos County pipeline project, the United States Army Corps of Engineers and the Oregon Division of State Land, Department of Environmental Quality ~~has~~ issued cease and desist orders and notices of non-compliance to Coos County and to us with respect to the County’s project. A cease and desist order was issued by the Corps on October 31, 2003 and addressed sedimentary disturbances and the discharge of bentonite, an inert clay mud
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employed for this kind of drilling, resulting from directional boring under stream beds along a portion of the natural gas pipeline route then under construction. The County and usMasTec received a subsequent cease and desist order from the Corps on December 22, 2003. The order addressed
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additional sedimentary discharges caused by clean up efforts along the pipeline route. MasTec and the County were in substantial disagreement with the United States Army Corps of Engineers and the Oregon Division of State Land as to whether the subject discharges were permitted pursuant to Nationwide Permit No. 12 (utility line activities) or were otherwise prohibited pursuant to the Clean Water Act. However, we have been cooperating with Corps of Engineers and the Oregon Division of State Land, Department of Environmental Quality to mitigate any adverse impact as a result of construction. Corps of Engineer and Oregon Division of State Land notices or complaints focused for the largest part on runoff from the construction site and from nearby construction spoil piles which may have increased sediment and turbidity in adjacent waterways and roadside ditches. Runoff was the result of an extremely wet and snowy weather, which produced exceptionally high volumes of runoff water. WeMasTec employed two erosion control consulting firms to assist. As weather permitted weand sites became available, MasTec moved spoil piles to disposal ~~sites as those sites became available.~~sites. Silt fences, sediment entrapping blankets and sediment barriers were employed in the meantime to prevent sediment runoff. Ultimately, when spring weather permitted, open areas were filled, rolled and seeded to eliminate the runoff. To date, mitigation efforts have cost us approximately ~~$1.3~~$1.4 million. These costs were included in the ~~accrued loss~~costs on the project at March 31, 2005 and December 31, ~~2003 and June 30,~~ 2004.
No further mitigation expenses are anticipated. The only additional anticipated liability arises from possible fines or penalties assessed, or to be assessed by the Corps of Engineers and/or Oregon Division of State Land. The County accepted a fine of $75,000 to settle this matter with the Corp of Engineers; the County has not concluded with the Oregon Department of Environmental Quality. No fines or penalties have been assessed against usthe Company by the Corp of Engineers to date. On August 9, 2004, the Oregon Division of State Land Department of Environmental Quality issued a Notice of Violation and Assessment of Civil Penalty to MasTec North America in the amount of ~~$205,658. We~~$126,000. MasTec North America has denied liability for the civil penalty and requested a formal contested case hearing on the ~~issue.~~same.
      The potential loss for all Coos Bay matters and settlements reached described above is estimated to be ~~$205,000~~$175,000 at ~~June 30, 2004,~~March 31, 2005, which ishas been recorded ~~in our condensed unaudited~~on the accompanying consolidated balance sheet as ~~accrued expenses.~~
     The labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. (“Sintel”), a former MasTec subsidiary, initiated an investigative action with a Spanish federal court that commenced in July 2001 alleging that five former members of the board of directors of Sintel, including Jorge Mas, the Chairman of the Board of MasTec, and his brother Juan Carlos Mas, approved a series of allegedly unlawful transactions that led to the bankruptcy of Sintel. We are also named as a potentially liable party. The union alleges Sintel and its creditors were damaged in the approximate amount of 13 billion pesetas ($95.1 million at June 30, 2004). The Court has taken no action to enforce a bond order pending since July 2001 for the amount of alleged damages. The Court has conducted extensive discovery, including the declarations of certain present and former executives of MasTec, Inc. and intends to conduct additional discovery. To date, no actions have been taken by the Court against us or any of the named individuals. Our directors’ and officers’ insurance carrier agreed to reimburse us for approximately $1.2 million in legal fees already incurred and agreed to fund legal expenses for the remainder of the litigation. The amount of loss, if any, relating to this matter cannot presently be determined.
     On January 9, 2002, Harry Schipper, a MasTec shareholder, filed a shareholder derivative lawsuit in the U.S. District Court for the Southern District of Florida against us as nominal defendant and against certainother current and former members of the our Board of Directors and senior management, including Jorge Mas, Chairman of the Board, and Austin J. Shanfelter, President and Chief Executive Officer. The lawsuit alleges mismanagement, misrepresentation and breach of fiduciary duty as a result of a series of allegedly fraudulent and criminal transactions, including the Sintel matter described above, the severance paid the our former chief executive officer, and the investment in and financing of a client that subsequently filed for bankruptcy protection, as well as certain other matters. The lawsuit seeks damages and injunctive relief against the individual defendants on MasTec’s behalf. The Board of Directors formed a special litigation committee, as contemplated by Florida law, to investigate the allegations of the complaint and to determine whether it is in the best interests of MasTec to pursue the lawsuit. On July 16, 2002, Mr. Schipper made a supplemental demand on our Board of Directors by letter to investigate allegations that we reported greater revenue in an
39
unspecified amount on certain contracts than permitted under the contract terms and that we recognized between $3 to $5 million in income for certain projects on the books of two separate subsidiaries. These additional allegations were referred to the special committee for investigation. The Special Litigation Committee issued its report on December  11, 2003, as amended on April 22, 2004. The report concluded that the settlement was in our best interest and our shareholders, that it was not in the best interest of MasTec to pursue claims against the our officers and directors and, specifically with respect to the improper recognition of revenue allegations in Mr. Schipper’s supplemental demand the report concluded, that there was no evidence that any improper conduct had been involved. A settlement was entered into between the parties pursuant to which we agreed to implement certain corporate governance policies. Our directors’ and officers’ liability insurance carrier paid $1 million into a settlement fund; $300,000 of this fund was paid to plaintiff’s counsel to cover fees and expenses and the remaining $700,000 was used to pay our legal fees related to this matter.
     In 2003, our quarterly financial information was restated for $6.1 million of previously recognized revenue related primarily to work performed on undocumented or unapproved change orders and other matters disputed by our clients. The revenue restatement was related to projects performed for ABB Power, MSE Power Systems, the University of California, and in connection with restated Canadian revenue. Recovery of those revenues and related revenues from subsequent periods not restated is now the subject of several independent collection actions. MasTec provided services to ABB, in the amount $2 million, now subject to dispute. The parties have attempted arbitration, which has been unsuccessful. A legal action on the claim will be filed by us. MasTec provided services to MSE on five separate projects in Pennsylvania, New York and Georgia, with invoices in excess of $8 million now in dispute. An action has been brought against MSE in New York state court. We experienced cost overruns in excess of $2.7 million in completing a networking contract for the University of California as the result of a subcontractor’s refusal to complete a fixed price contract. An action has been brought against that subcontractor to recover cost overruns. Finally, we experienced a revenue adjustment resulting from correction of intentionally overstated WIP and revenue in amount of $1.3 million in a Canadian subsidiary. The individuals responsible for the overstatement were terminated and an action against them has been brought to recover damages resulting from the overstatement.liabilities.
      In November 2004, we entered into, and bonded a conditional $2.6 million settlement of litigation brought for subcontract work done by Hugh O’Kane Electric for ~~MasTec~~us on a ~~New York~~ telecommunication project ~~constructed~~ for ~~Telergy.~~Telergy in New York. Telergy is in bankruptcy and did not pay us for the Hugh O’Kane work. The settlement iswas conditioned on the outcome of ~~a pending~~an interlocutory appeal brought by us. The appeal ~~seeks~~sought to enforce contract terms ~~of the contract between us and Hugh O’Kane~~ which ~~relieve~~relieved us of our obligation to pay Hugh O’Kane when we dowere not ~~get paid.~~paid by Telergy. New York’s appellate level court upheld the enforceability of the term of our contract, but remanded the case to the trial court to determine whether we were estopped from using this contract provision as a defense. We ~~are pursuing~~expect to recover the bond posted in connection with the appeal, and will continue to contest this ~~appeal vigorously.~~matter in the trial court. The amount of the loss, if any, relating to this matter cannot ~~presently~~ be ~~determined.~~determined at this time.
      We are also a party to other pending legal proceedings arising in the normal course of business. ~~We believe~~While complete assurance cannot be given as to the outcome of any legal claims, management believes that any financial impact would not be material to our results of operations, financial position or cash flows.
ITEM 6. EXHIBITS
~~Item 5.~~Exhibit No.
~~Other Information~~ Description
10.32* Employment Agreement dated February 1, 2004 between Michael G. Nearing and MasTec, Inc.
21.1* Subsidiaries of MasTec
31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     Based upon our performance to date, we are not in compliance with the credit facility’s financial covenants in the second quarter of 2004. We have not received a notice of default from our primary lender on these covenant violations. We have requested a waiver of the covenant conditions and expect such waiver to be granted although there is no assurance that we will obtain such a waiver nor is there any assurance that such a waiver can be obtained without costs to the Company. We are dependent upon borrowings and letters of credit under this $125 million credit facility to fund our operations. Should we be unable to obtain a waiver of the covenants of the $125 million credit facility, we will be required to obtain further modifications of the facility or another source of financing to continue to operate.36
40
~~Item 6.~~32.2 ~~Exhibits~~ Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit
No. Description
31 .1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31 .2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 .1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32 .2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Exhibits filed with this Form 10-Q.
4137
SIGNATURE
      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MASTEC, INC.

Date: May 10, 2005
/s/ Austin J. Shanfelter
Austin J. Shanfelter
President and Chief Executive Officer
(Principal Executive Officer)

~~/s/ AUSTIN J. SHANFELTER~~
~~Austin J. Shanfelter~~
~~President and Chief Executive Officer~~
~~(Principal Executive Officer)~~

/s/ C. ~~ROBERT CAMPBELL~~Robert Campbell

C. Robert Campbell
Chief Financial Officer

(Principal Financial and Accounting Officer)
~~Date: December 23, 2004~~38
42



			Three Months Ended						Six Months Ended
			June 30,						June 30,

						2003						2003
			2004			As Restated			2004			As Restated


			(In thousands, except per share amounts)
Revenue			$	231,278		$	201,361		$	431,300		$	376,529
Costs of revenue, excluding depreciation				206,261			169,031			400,834			316,871
Depreciation				4,481			7,200			9,466			15,550
Amortization				175			132			351			283
General and administrative expenses				16,717			15,066			38,037			32,326
Interest expense, net				4,664			4,754			9,567			9,368
Other (income) expense, net				(444	)		307			(304	)		(250	)

(Loss) income from continuing operations before provision for income taxes and minority interest				(576	)		4,871			(26,651	)		2,381
Provision for income taxes				—			1,900			—			887
Minority interest				(35	)		—			(35	)		—

(Loss) income from continuing operations				(611	)		2,971			(26,686	)		1,494
Discontinued operations:
	Loss on discontinued operations, net of tax benefit			(129	)		(952	)		(955	)		(1,222	)
	Loss on write off of assets of discontinued operations, net			—			—			(19,165	)		—

Net (loss) income			$	(740	)	$	2,019		$	(46,806	)	$	272

Basic weighted average common shares outstanding				48,385			48,030			48,354			48,024

Basic net (loss) income per share:
	Continuing operations		$	(.01	)	$	.06		$	(.55	)	$	.03
	Discontinued operations			(.01	)		(.02	)		(.42	)		(.02	)

	Total basic net (loss) income per share		$	(.02	)	$	.04		$	(.97	)	$	.01

Diluted weighted average common shares outstanding				48,385			48,215		$	48,354			48,086

Diluted (loss) income per share:
	Continuing operations		$	(.01	)	$	.06		$	(.55	)	$	.03
	Discontinued operations			(.01	)		(.02	)		(.42	)		(.02	)

		Total diluted net (loss) income per share	$	(.02	)	$	.04		$	(.97	)	$	.01


			June 30,			December 31,
			2004			2003

			(Unaudited)			(Audited)

			(In thousands, except
			share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	16,781		$	19,415
	Accounts receivable, unbilled revenue and retainage, net			204,098			208,211
	Inventories			42,765			32,781
	Income tax refund receivable			2,396			4,667
	Prepaid expenses and other current assets			34,962			31,801

		Total current assets		301,002			296,875
Property and equipment, net				75,394			85,832
Goodwill				138,640			150,984
Deferred taxes				56,346			55,083
Other assets				26,752			35,151

		Total assets	$	598,134		$	623,925


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current maturities of debt		$	95		$	4,709
	Accounts payable and accrued expenses			115,233			100,698
	Other current liabilities			61,178			78,108

		Total current liabilities		176,506			183,515
Other liabilities				33,927			27,636
Long-term debt				196,091			196,956

		Total liabilities		406,524			408,107

Shareholders’ equity:
	Preferred stock, no par value; authorized shares — 5,000,000; issued and outstanding shares — none			—			—
	Common stock $0.10 par value; authorized shares — 100,000,000; issued and outstanding shares — 48,392,000 and 48,222,000 shares, respectively			4,839			4,822
	Additional paid-in capital			351,290			349,823
	Accumulated deficit			(164,653	)		(117,847	)
	Foreign currency translation adjustments			134			(20,980	)

	Total shareholders’ equity			191,610			215,818

	Total liabilities and shareholders’ equity		$	598,134		$	623,925



				For the Six Months Ended
				June 30,

							2003
				2004			As Restated


				(In thousands)
Cash flows from operating activities of continuing operations:
	(Loss) income from continuing operations			$	(26,686	)	$	1,494
	Adjustments to reconcile net (loss) income from continuing operations to net cash (used in) operating activities of continuing operations:
		Depreciation and amortization			9,817			15,833
		Non-cash compensation expense			416			—
		Income tax refunds			1,008			24,131
		(Gain) loss on disposal of assets and investments			(227	)		38
		Provision of doubtful accounts			2,754			—
		Provision for inventory obsolescence			902			—
		Minority interest			35			—
		Changes in assets and liabilities:
			Accounts receivable, unbilled revenue and retainage, net		(2,259	)		(19,473	)
			Inventories		(11,021	)		(2,635	)
			Other assets, current and non-current portion		(620	)		(2,227	)
			Accounts payable and accrued expenses		16,723			820
			Other liabilities, current and non-current portion		8,009			(19,862	)

Net cash used in operating activities of continuing operations					(1,149	)		(1,881	)

Cash flows from investing activities of continuing operations:
	Capital expenditures				(5,118	)		(4,624	)
	Cash received (paid) for acquisitions and contingent consideration, net of cash acquired				190			(1,861	)
	Payments received from sub-leases				—			2,676
	Investments in life insurance policy				—			(168	)
	Investments in consolidated companies				(88	)		—
	Net proceeds from sale of assets and investments				6,505			6,178

Net cash provided by investing activities of continuing operations					1,489			2,201

Cash flows from financing activities of continuing operations:
	Proceeds from revolving credit facilities, net				—			96
	Payments from other borrowings and capital lease obligations, net				(3,447	)		(2,600	)
	Proceeds from issuance of common stock				1,059			99

Net cash used in financing activities of continuing operations					(2,388	)		(2,405	)

Net decrease in cash and cash equivalents					(2,048	)		(2,085	)
Net effect of currency translation on cash					28			(2,149	)
Cash and cash equivalents — beginning of period					19,415			8,730
Cash used in discontinued operations					(614	)		(273	)

Cash and cash equivalents — end of period				$	16,781		$	4,223

Cash paid during the period for:
	Interest			$	17,057		$	16,775

	Income taxes			$	62		$	51



		For the						For the
		Three Months Ended						Six Months Ended
		June 30,						June 30,

					2003						2003
		2004			As Restated			2004			As Restated

Net (loss) income, as reported		$	(740	)	$	2,019		$	(46,806	)	$	272
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards			(2,234	)		(970	)		(4,895	)		(1,916	)

Proforma net (loss) income		$	(2,974	)	$	1,049		$	(51,701	)	$	(1,644	)

Basic net (loss) income per share:
	As reported	$	(.02	)	$	.04		$	(.97	)	$	.01

	Proforma	$	(.06	)	$	.02		$	(1.07	)	$	(.03	)

Diluted net (loss) income per share:
	As reported	$	(.02	)	$	.04		$	(.97	)	$	.01

	Proforma	$	(.06	)	$	.02		$	(1.07	)	$	(.03	)


~~Note 4 —~~	~~Restatement of June 30, 2003 Financial Statements~~


*	~~Before effect of reclassifying the 2003 results of operations of the Brazil operations to loss from discontinued operation as discussed in Note 8.~~


~~Note 5 —~~	Note 4 – Other Assets and Liabilities


	•	~~$62 million beginning April 1, 2004; plus~~

	•	~~50% of the consolidated net income of the Company’s operations from April 1, 2004 through the date of determination.~~


~~Period~~	~~Ratio~~

~~For the 2 month period ending May 31, 2004~~		~~1.00 to 1.00~~
~~For the 3 month period ending June 30, 2004~~		~~1.50 to 1.00~~
~~For each of the 4, 5 and 6 month periods ending July 31, August 31 and September 30 2004, respectively~~		~~1.75 to 1.00~~
~~For each of the 7, 8 and 9 month periods ending October 31, November 30, and December 31, 2004~~		~~2.00 to 1.00~~
~~For each of the 10 and 11 month periods ending January 31 and February 28, 2005~~		~~2.00 to 1.00~~
~~For the 12 month period ending on March 31, 2005 and each 12 month period ending on the last day of each calendar month thereafter~~		~~2.00 to 1.00~~


~~Note 7 —~~	March 31, 2005. Note 6 – Restructuring Charges


	•	~~Elimination of service offerings that no longer fit into the Company’s long-term core business strategy.~~

	•	Reduction or elimination of services that do not produce adequate revenue or margins to support the level of profitability, return on investment or investments in capital resources. This included exiting contracts that did not meet the minimum rate on return requirements and aggressively seeking to improve margins and reduce costs.

	•	~~Analyses of businesses that provide adequate profit contributions but still need margin improvements that include aggressive cost reductions and efficiencies.~~

	•	~~Review new business opportunities in similar business lines that can utilize existing human and physical resources.~~


Accrued costs at December 31, 2003		$	600
	Cash payments		(180	)

Accrued costs at June 30, 2004		$	420


Accrued costs at December 31, 2004	$	212
Cash payments		(100	)

Accrued costs at March 31, 2005	$	112



	For Three Months						For Six Months
	Ended						Ended
	June 30,						June 30,

	2004			2003			2004			2003

Revenue	$	—		$	6,480		$	—		$	11,610
Cost of sales		—			(6,236	)		(5	)		(11,181	)
Operating expenses		(129	)		(1,196	)		(950	)		(1,651	)

Net loss	$	(129	)	$	(952	)	$	(955	)	$	(1,222	)


Revenue	$	—
Cost of revenue		(5	)
Operating expenses		(821	)

Income (loss) from operations before (provision) benefit for income taxes and minority interest	$	(826	)
(Provision) Benefit for income taxes		—
Minority interest		—

Net income (loss)	$	(826	)


~~Note 10 —~~	~~Concentrations of Risk and Segments~~


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



	For Three Months Ended				For Six Months Ended
	June 30,				June 30,

			2003				2003
	2004		As Restated		2004		As Restated

Telecommunications	$	60,582	$	66,083	$	112,612	$	123,656
Broadband		94,052		53,337		173,504		93,192
Energy		41,157		45,389		78,977		86,211
Government		35,487		36,552		66,207		73,470

	$	231,278	$	201,361	$	431,300	$	376,529


	For the Three Months Ended
	March 31,		March 31,
	2005		2004
Telecommunications	$	71,240	$	45,774
Broadband		69,249		79,499
Energy		44,536		37,820
Government		32,745		31,614

	$	217,770	$	194,707


	•	~~Elimination or reduction in the scope of service offerings that no longer fit into our core business strategy or long-term business plan.~~

	•	Reduction or elimination of services that do not produce adequate revenue or margins to support the level of profitability, return on investment or investments in capital resources. This includes exiting contracts that do not meet the minimum rate of return requirements and aggressively seeking to improve margins and reduce costs.

	•	~~Analysis of businesses that provide adequate profit contributions but still need margin improvements which includes aggressive cost reductions and efficiencies.~~

	•	~~Review of new business opportunities in similar business lines that can utilize our existing human and physical resources.~~



	For the Three Months Ended				For the Six Months Ended
	June 30, 2003				June 30, 2003

	As Previously		As		As Previously		As
	Reported		Restated*		Reported		Restated*


	(In thousands)				(In thousands)
Revenues	$	209,108	$	207,841	$	389,677	$	388,139
Income from continuing operations before provision for income taxes and minority interest	$	4,631	$	3,364	$	1,947	$	409
Net income	$	2,765	$	2,019	$	1,177	$	272



	For the Three Months Ended June 30,										For the Six Months Ended June 30,


						2003										2003
	2004					As Restated					2004					As Restated


Revenue	$	231,278		100.0	%	$	201,361		100.0	%	$	431,300		100.0	%	$	376,529		100.0	%
Costs of revenue		206,261		89.2	%		169,031		83.9	%		400,834		92.9	%		316,871		84.2	%
Depreciation		4,481		1.9	%		7,200		3.6	%		9,466		2.3	%		15,550		4.1	%
Amortization		175		0.1	%		132		0.1	%		351		0.1	%		283		0.1	%
General and administrative expenses		16,717		7.2	%		15,066		7.5	%		38,037		8.8	%		32,326		8.6	%
Interest expense, net		4,664		2.0	%		4,754		2.4	%		9,567		2.2	%		9,368		2.5	%
Other (income) expense, net		(444	)	(0.2	)%		307		0.1	%		(304	)	(0.1	)%		(250	)	(0.1	)%

(Loss) income from continuing operations before benefit for income taxes and minority interest		(576	)	(0.2	)%		4,871		2.4	%		(26,651	)	(6.2	)%		2381		0.6	%
Provision (benefit) for income taxes		-		-			1,900		0.9	%		-		-			887		0.2	%
Minority interest		(35	)	0.0	%		0		0.0	%		(35	)	0.0	%		-		0.0	%

(Loss) income from continuing operations		(611	)	(0.2	)%		2,971		1.5	%		(26,686	)	(6.2	)%		1,494		0.4	%
Discontinued operations		(129	)	(0.1	)%		(952	)	(0.5	)%		(20,120	)	(4.7	)%		(1,222	)	(0.3	)%

Net (loss) income	$	(740	)	(0.3	)%	$	2,019		1.0	%	$	(46,806	)	(10.9	)%	$	272		0.1	%


	For the Three Months Ended March 31,
	2005					2004
	(dollars in thousands)
Revenue	$	217,770		100.0	%	$	194,707		100.0	%
Costs of revenue, excluding depreciation		204,970		94.1	%		188,574		96.9	%
Depreciation		4,965		2.3	%		4,831		2.5	%
General and administrative expenses		16,460		7.6	%		20,513		10.5	%
Interest expense, net of interest income		4,851		2.2	%		4,903		2.5	%
Other (income) expense, net		(1,973	)	(0.9	)%		166		0.1	%

Loss from continuing operations before minority interest	$	(11,503	)	(5.3	)%	$	(24,280	)	(12.5	)%
Minority interest		(66	)	0.0	%		—		0.0	%

Loss from continuing operations	$	(11,569	)	(5.3	)%	$	(24,280	)	(12.5	)%
Discontinued Operations		(445	)	(0.2	)%		(21,786	)	(11.2	)%

Net loss	$	(12,014	)	(5.5	)%	$	(46,066	)	(23.7	)%


	~~Three Months Ended June 30,~~ Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 ~~Compared to Three Months Ended June 30, 2003~~


	*~~Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003~~*


~~Item 3.~~	*~~Quantitative and Qualitative Disclosures About Market Risk~~*


~~Item 4.~~	*ITEM 4. CONTROLS AND PROCEDURES* *Disclosure Controls and Procedures*


	•	In March 2004, our management discovered certain intentional overstatements of revenues, inventories and work in progress related to our Canadian subsidiary. Our Audit Committee retained independent counsel to conduct a thorough investigation; counsel, in turn, retained an independent forensic accounting firm to assist its investigation. Based on that investigation, our Audit Committee concluded that these intentional overstatements of revenues, inventories and work in progress were limited to the unauthorized actions of certain employees at our Canadian operations. We immediately terminated the employment of these individuals. Based on the investigation of independent counsel, our Audit Committee found no evidence that any employee outside of its Canadian operations was aware of this misinformation before this matter came to light in the second week of March 2004. We have also instituted other personnel and reporting changes at our Canadian operations, including reorganizing the accounting reporting line responsible for these operations and increasing our analysis of inventory balances and transactions related to these operations. Adjustments with respect to our Canadian subsidiary aggregated $3.8 million. The $3.8 million adjustment consisted of a $1.46 million adjustment to work in progress, an $852,173 reduction in inventory, a $1.07 million increase in the allowance for doubtful accounts, a $286,416 accrual for unrecorded liabilities and a $130,914 miscellaneous loss. We believe that we have satisfactorily resolved the issues related to this matter.

	•	During the 2003 financial statement audit, audit procedures revealed that we had recognized revenue in excess of amounts provided for in certain energy substation contracts for which there was no signed or approved change order. The revenue had been recorded for work actually performed by us at the request of a client or as necessary extra-contractual work. We initially recorded the revenue under SOP 81-1 as an unpriced change order based upon its favorable historical collection experience in its other lines of business. However, because the contracts for these change orders were in a new line of business, we revised our approach and determined that the revenue should not be recorded until a signed change order or cash was received. We reversed a total of $6.1 million of revenue for work performed on undocumented or unapproved change orders and other matters which are being disputed by our clients. We reversed $272,000 in revenue from the first quarter of 2003 and $5.8 million from the third quarter of 2003. The revenue reversed from the first and third quarters related primarily to three customers: ABB Power, MSE Power Systems and the University of California. We have commenced proceedings to collect $2 million from ABB Power, $8 million from MSE Power Systems and $2.2 million from a subcontractor on the University of California contract. Any amounts recovered in these actions will be recorded as revenue when the amounts are received. All change orders must be now signed and approved before work is begun. We believe we have satisfactorily resolved all issues related to this matter.

	•	We made several adjustments to our self-insurance reserves during the 2003 financial statement audit. First, we adjusted our 2003 self-insurance reserve to reflect the current uncertainty of payment from the insolvency of Reliance, our insurance carrier for automobile, workers’ compensation and general liability prior to July 2000. This adjustment, which was accounted for as a change in estimate, was based on our current estimate of the expected recovery from the Reliance estate and individual state guaranty funds, based on developments to date in the Reliance insolvency. The adjustment to the 2003 self-insurance reserve for the Reliance insolvency amounted to $1.3 million. Second, we made an adjustment to our insurance reserves for the years ended December 31, 2000, 2001 and 2002 based on recalculation of our liability for amounts in excess of an aggregate deductible for automobile, workers’ compensation and general liability claims. Previously, our actuarially computed self-insurance reserves for those years were calculated based on the assumption that our aggregate deductible was fixed. In April 2004, Reliance asserted the position that the policies permitted it to adjust the aggregate deductible based on a payroll audit. We have disputed that position. Although Reliance had never


		audited payroll, we conducted our own payroll audit to determine the potential adjustments to our deductible aggregates, if Reliance’s interpretation of the policies ultimately prevails, which resulted in the $1.3 million adjustment described above. We have initiated internal controls on a quarterly basis to ensure all reserves are properly recorded in any given period.

	•	During the 2002 financial statement audit, we prepared a tax strategy to support the carrying value of our total deferred tax asset. This tax strategy did not consider the separate components of state taxes and federal taxes. During the 2003 financial statement audit, the Company considered, for the first time, the issue of whether the tax strategy was sufficient to support a certain portion of the deferred tax asset related to state taxes. Under this revised analysis considering the impact of state taxes as well as federal taxes, MasTec determined that its reserves for 2002 and 2003 were understated. Specifically, we determined that the estimated gain from the sale of certain assets and expected revenues apportioned to each state would be insufficient to offset losses in certain states. MasTec therefore restated its 2002 financial statements to reduce the carrying amount of its deferred tax asset by $4.9 million and MasTec adjusted its 2003 financial statements to record an additional $3.4 million valuation allowance. Our valuation allowance and projections supporting the recoverability of deferred tax assets are now reviewed on a quarterly basis.

	•	Adjustments for inadequate controls over our financial statement closing process resulting in a significant number of audit adjustments and a delay in the filing of this Annual Report on Form 10-K, including a lack of appropriate supporting documentation for certain transactions and inadequate review processes at the subsidiary and corporate controller levels.


	•	~~improved our process for a more timely analysis of anticipated losses under percentage-of-completion contracts.~~

	•	implemented procedures for improved quarterly inventory analyses and pricing reconciliations for one of our service groups, including the performance of additional physical inventory counts for that service line during 2004, and

	•	~~hired additional professional staff in our finance departments at service lines and corporate office.~~