Item 1. Business
Introduction
Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration, and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster-related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (“E2MS”). We provide internal corporate transportation services through our subsidiary Aduddell Financial Services, Inc. as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.
Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services. In 2006, we increased our scope of services providing services to the total exterior envelope of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In 2006, we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company. This transaction closed in December 2006 adding below grade waterproofing to our service offerings. Additionally, we established Global Specialty Group (GSG), a new consulting business to capitalize on the national reputation of Brent Anderson.
Our E2MS division had a very successful 2006 in positioning itself in the emergency response market as well as leveraging our relationships to provide growth in the roofing and restoration markets and continued these efforts in 2007. We have increased the scope of our emergency response to pre-event planning through our strategic relationship with James Lee Witt, and we have negotiated a number of pre-event contracts as first responders in the event of an emergency. In one of these contracts, E2MS has been named the preferred vendor for emergency planning and response by ASFONA, the Starwood Hotels franchise owners association, and our division president, Randall Oberlag, has been named as an honorary board member of that organization. Starwood Hotels & Resorts is one of the world’s largest hotel and leisure companies.
We are licensed in all fifty states as well as Puerto Rico and the Virgin Islands and have a unique capability of offering national account management to our customers. A direct result of this capability was the contract awarded to us by U.S. Communities in July of 2006. This three year contract with renewal opportunities awarded us the sole source opportunity to provide schools, cities, states and other non-profit organizations complete roofing services under the U. S. Communities government purchasing alliance. We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service. We continued our efforts to market the U.S. Communities purchasing alliance in 2007 and have begun to educate some member entities on this process. We performed the majority of our 2007 U.S. Communities work in Maryland, Ohio, Texas, Florida, and California.
Revenues from fixed-price construction and renovation contracts are generally accounted for on a percentage-of-completion basis using the cost-to-cost method. The cost-to-cost method measures the percentage completion of a contract based on total costs incurred to date compared to total estimated costs to completion. Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration, and repair. Typically, re-roofing, restoration, and repair jobs are more labor intensive and have higher margins than new roof construction.
The Marketplace
To meet the needs of a changing marketplace, Aduddell Industries is committed to providing additional building envelope protection services through organic and acquisition-based growth initiatives. We believe that we are leading the industry in providing products and services that proactively meet the needs inherent in four fundamental paradigm shifts:
•
Shift from local roofing resources to large national roofing companies
•
Expansion of the use of sophisticated metal roofing systems
•
Specific needs to provide innovative ways to restore the crumbling national infrastructure
•
National change in disaster consequence management from after-the-fact recovery services to pre-disaster planning consultation services
Shift from local roofing resources to large national roofing companies:
Aduddell Roofing has strategically positioned itself as a proven national commercial roofing resource for corporations and governmental agencies that are taking advantage of an industry change from employing independent local roofers to participating in national roof asset management programs and group purchasing alliances, which provide:
•
Best value products and services
•
Complete roof analysis reports
•
Controlled facility maintenance oversight
A prime example of a group taking advantage of this market opportunity is U.S. Communities, a nationwide non-profit strategic sourcing program designed by public purchasing professionals. The alliance is sponsored by the National Association of Counties (NACo), National Institute of Governmental Purchasing (NIGP), the Association of School Business Officials (ASBO), National League of Cities (NLC), and United States Conference of Mayors (USCM). More than 87,000 public entities are eligible to participate in the USC alliance, which currently has revenues of $1 billion.
We, working in a teaming relationship with Professional Services Industries, Inc., an industry-leading roof management consulting, engineering and testing firm, and W.P. Hickman Systems, a leading provider of protection products and services designed to maintain building assets, have won the exclusive national roofing services contract from USC. An additional entity, which is named HCS, was formed to serve the USC participating public agency member accounts nationally. The solicitation process for this contract took more than six months, and HCS was selected for best value over some of the largest companies in the roofing industry.
Expansion of the use of sophisticated metal roofing systems:
Architects and builders in large numbers nationally are specifying advanced metal roofing systems. Strategically positioned to answer this demand, Aduddell Roofing, with its Metal Roofing Systems division, is supplying leading-edge products and services in this important segment of the industry. The National Roofing Contractors Association 2004-2005 survey indicated the standing seam business category was the fastest growing segment of the roofing industry.
Specific needs to provide innovative ways to restore the crumbling national infrastructure:
The nation’s aging buildings, bridges, and highways are creating unprecedented government and private industry demand for structural repair, concrete restoration, and waterproofing. Aduddell Restoration and Waterproofing as well as Global Specialty Group’s purpose is to combine the latest technology with the best practices already in use, including repair, restoration, and waterproofing techniques and materials, and to provide the most innovative, cost effective solution to the client's restoration needs. The type of services that these subsidiaries provide are vital to America’s repairing its out-of-date, damaged infrastructure.
National change in disaster consequence management from after-the-fact recovery services to pre-disaster planning consultation:
Lessons learned from recent man made and natural disasters have created a dynamic need for professional disaster management organizations. The type of service needed is rapidly evolving from primarily being related to post-disaster recovery, to complex, comprehensive pre-disaster planning. E2MS, our emergency services subsidiary, provides comprehensive pre-event planning, event management and post event recovery services either directly or through one of our strategic alliances. It is not a question of if the next disaster will occur but when. We have responded very effectively and profitably over the last fifteen years to disaster, but with our pre-event contracts in place should achieve even greater results.
Services - Roofing
We provide a comprehensive range of commercial roofing services. We employ a knowledgeable and skilled workforce that utilizes standardized techniques and practices to determine a customer’s optimal roofing solution. These solutions are designed to maximize the average life of a new roofing system. Annual maintenance services, which can result in the identification at an early stage of problems within a roofing system, can add as many as 10 years to the useful life of a roof through repair and restoration. The following is a description of our roofing services.
Maintenance: Maintenance involves the physical inspection of an existing roof system to determine its current condition, detect weaknesses and failures and identify any potential future problems. Through a program of regularly scheduled annual or semi-annual inspections, our technicians assist owners in protecting their roofing investments by identifying damage in its early stages. Early detection of leaks and roofing system failures makes it possible for us to repair and extend the life of a roofing system through repair or restoration, which is significantly less expensive and time consuming than re-roofing. We also will soon offer to our customers a facility management program to coordinate maintenance, repair, restoration and re-roofing as needed. Although direct revenues from these preventive maintenance programs are relatively minor, we believe that these services enable us to cultivate strong relationships with our customers and establish a basis for recurring revenues.
Repair: Repair is a process where an existing roof system has additions and adjustments made to it, such as caulking, re-coating and repairing penetrations to fix leaks in the roofing system.
Restoration: Restoration involves the major repair of the roofing system, including the repair of all penetrations and re-surfacing of the roof to restore it to serviceable condition. The opportunity to perform restoration work normally exists two or three years before the end of a roof’s life cycle and before significant damage occurs. We are able to inform building owners when a roof is approaching the end of its 15-year average life cycle through our regularly scheduled maintenance and repair program. As many as ten years can be added to the useful life of the roof through restoration, and the cost of restoration is typically one-half the cost of re-roofing.
Re-Roofing: Re-roofing is the process of installing a new roof when an existing roofing system fails. Roofing system failure can be caused by a number of factors, including age, severe weather, poor workmanship, defective materials, improper specification of a roofing system, abuse and failure to maintain the roof through inspections. We perform re-roofing only when all repair and restoration alternatives are deemed incapable of bringing a roof back to serviceable condition, or at the specific request of a customer.
New Construction: New roof construction involves the construction of a variety of roofing systems, including metal roofing systems, built-up roofing membranes and single ply roofing systems. New roof construction coincides with the construction of a new building. New commercial roofing work usually begins with a proposal request from the building owner, property manager, general contractor or roof consultant. Initial meetings with the parties allow the roofing contractor to prepare preliminary and then more detailed design and product specifications, drawings and cost estimates. Once a project is awarded, it is conducted in scheduled phases, and progress billings are rendered to the owner of the building before payment, less a retention (defined as amounts withheld from progress billings until final and satisfactory contract completion) of 5% to 10% of the construction cost of the project. Actual field work (ordering of equipment and materials, fabrication or assembly of certain components, delivery of materials and components to the job site, scheduling of work crews and inspection and quality control) is coordinated during these phases. We generally provide the materials to be installed as a part of these contracts.
Services - Restoration and Waterproofing
Concrete is a primary element of practically every kind of construction. We have sought and developed the finest skills and expertise required to provide the numerous specialized concrete services, which have made us known for our workmanship and our continual drive to innovate. We are approved applicators of Carlisle, Kelmar, M Brace, Permaquik, Tremco, Sika, Sonneborn, Stellar Mark, Watson Bowman and many other repair and waterproofing products. Field technicians are completely trained and certified in all the repair and waterproofing services we provide, such as:
Epoxy Coatings
Epoxy Injection
Expansion Joints
Fiber Reinforced Polymers (FRP is often referred to as Carbon Fiber Reinforcement)
High Pressure Washing
Hot Fluid Applied Waterproofing
Penetrating Sealers
Post Tension Cable Repair (Certified by the Post Tensioning Institute: http://www.post-tensioning.org)
Grout and Sealing
Shot Blasting
Traffic Coatings
Urethane Foam Injection
Concrete repair can include basic, minor repair, chip and patch, multi-level structures, structural full depth, and reinforcement or replacement of steel beams. Waterproofing can be either above or below grade as well as vertical and horizontal. Our goal is to incorporate established techniques and technologies in conjunction with the latest advancements. We also understand that projects may require immediate response and completion or long-term monitoring and maintenance work; with this in mind, our scope of what we do is primarily to meet our clients’ needs and goals. In 2007, we expanded our footprint in the restoration and waterproofing services by starting a business unit in Tampa, Florida.
Services - Emergency Response
In 2004 and 2005, through the efforts of Oklahoma Development Group (ODG), we secured a subcontractor position to provide temporary roofing services related to damages caused by four different storm events. We partnered with Carothers Construction Inc. in the emergency response effort for the last two storms.
In 2006, we brought all services previously provided by ODG in house, and since that time, we have continued to pursue opportunities within the emergency response service categories in a proactive manner rather than a reactive manner. We have yet to capture any revenues associated with these endeavors, but we continued throughout 2007 with efforts to build relationships and poise ourselves for business opportunities in this category by focusing on trying to advance our strategic planning in this category.
Seasonal and Cyclical Nature of our Industry
The new construction industry is cyclical and is influenced by seasonal factors as construction activities are usually lower during winter months than other periods. The re-roofing and restoration businesses do not follow the new construction cycles. We attempt to increase winter productivity by concentrating our business in the southern half of the United States. Nevertheless, we expect our revenues and operating results generally to be lower in the first and fourth quarters of each year. Additionally, the industry is affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Since disaster-related work requires an immediate response and is typically covered by insurance, the margins are higher than on discretionary work.
Competition
The commercial roofing industry and restoration industry is highly fragmented with many contractors competing intensely with us on a local and regional basis. In the future, we may encounter competition from new entrants on a regional or national level. We believe that purchasing decisions in this industry are based on (i) price, (ii) reputation for reliability and quality of services provided, (iii) long-term customer relationships, and (iv) the range of services provided. We believe that our strategy of becoming a leading national provider of services for the full exterior envelope of a building will enhance our competitive position. In addition, we think that our reputation for quality and performance, brought about by our unique project management approach, and most of all safety, provides us with a distinct competitive advantage. We believe that the market for our services will expand as we establish experienced sales personnel on a national basis.
Customers
In 2007, we provided commercial roofing and restoration services to more than 200 customers. No individual customer accounted for more than 10.0% of our 2007 revenues. We provide roofing and restoration services to customers having a local, regional and national presence in a broad range of businesses, including the industrial, office, retail, hospitality, government and educational industries.
Suppliers
We purchase our roofing and restoration materials and other supplies from numerous suppliers and are not dependent on any one supplier for materials. Over the last calendar year, our expenses related to materials and supplies have increased, but we have had no significant problems obtaining the supplies and materials we need without extensive delays.
Sales and Marketing
We believe that our reputation for quality and performance has enabled us to obtain recurring business through customer referrals and new business. Like most competitors, we primarily use direct sales to market our services. Although our market presence is felt nationally, we have concentrated our efforts in the past in the southern half of the United States to minimize the seasonal fluctuations typically experienced within the construction industries. With the expansion efforts that our company has engaged in over the last 18 months, we continue to expect our roofing footprint to expand dramatically. In addition, our restoration and waterproofing businesses also operate nationwide, and we continue to expect our restoration footprint to expand as well.
We supplement our sales and marketing activities through participation in industry trade shows and conferences, our Internet website, and the yellow pages in the markets we serve. We have created a new business development group of marketing, financial and business development professionals as well as a corporate accounts program, which is intended to develop and manage our relationship with customers having a regional or national presence. Our logo and identifying marks are featured on service trucks, marketing materials and advertising.
In 2006, we significantly increased marketing efforts by the purchase of EyeOpener Communications in an effort to increase revenues, profits, and shareholder value. We believe this relationship can be leveraged into additional revenues in our current markets and also create new market opportunities. EyeOpener continues to provide us with marketing support while simultaneously supporting its diverse clientele base. In 2007, EyeOpener increased the number of clients that it serves as well as assisted with the marketing of the U.S. Communities contract. EyeOpener provided HCS with an educational Website tool with which to market its product to the over 87,000 potential customers.
Personnel, Training and Safety
We have a comprehensive job training program, which provides classroom and on-the-job training programs for our personnel based on the model training program developed by the NRCA. The program provides immediate training to roof laborers in our methods, procedures and standards with an emphasis on high quality service. Our training program is also designed to ensure that all of our roofing laborers meet safety standards established by us, our insurance carriers and Federal, state and local laws and regulations. Our training and safety program has been very effective as demonstrated by our EMR rating from our insurance company. This rating monitors the frequency of accidents nationally. The national average construction EMR is 1.0 and our historic EMR is 2007, .54, 2006, .54, 2005, .58. This is almost half the national average and represents one of the best, if not the best rating in the roofing industry.
Government Regulation
Our business and the activities of our roofing and restoration contractors are subject to various federal, state, and local laws, regulations and ordinances relating to, among other things, the licensing and certification of roofing contractors, OSHA standards, advertising, building and zoning regulations and environmental laws and regulations relating to the disposal of demolition debris and other solid wastes. We employ a full-time environmental specialist to assist us with environmental compliance and safety. Our expenses incurred in connection with compliance with environmental laws is not readily determinable as many of the expenses we incur, such as expenses for roof debris clean up, are aggregated with other expenses we incur when performing roofing projects. While we strive to utilize the best industry practices for waste disposal, there can be no assurance that we will not encounter future environmental claims, which could have a material adverse effect on our business, financial condition and results of operations.
In certain jurisdictions, we are required to be a licensed contractor. We are licensed in all fifty states, Puerto Rico and the Virgin Islands. In addition, certain jurisdictions require us to obtain a building permit for each roofing project. We are also subject to certain federal, state and local laws and regulations, which, among other things, regulate our advertising, warranties and disclosures to customers. Although we believe that we have been and are currently in compliance in all material respects with such laws and regulations, there can be no assurance that in the future our results of operations will not be materially adversely affected by existing or new laws or regulations applicable to our business.
Employees
At February 29, 2008, we had 369 full-time employees, including 262 employees in field operations and 107 managers and administrative employees. Our field operations employees are unionized and covered under a collective bargaining agreement. Our managers and administrative employees are non-unionized. We have not experienced any labor-related work stoppages, and we consider our relations with our employees to be good.
Item 1A.
Item 1A. Risk Factors
Item 1B.
Item 1B. Unresolved Staff Comments
Item 2.
Item 2. Description of Property
Facilities and Vehicles
We have a corporate office as well as our roofing office located in a suburban Oklahoma City industrial area. The roofing and corporate office covers 9,380 square feet and the shop and warehouse cover 11,142 square feet. In addition, we have our North Central Roofing Division and our subsidiary Aduddell Restoration and Waterproofing, Inc. offices in St. Paul, Minnesota, in an approximately 20,000 square foot building including warehouse space. We operate our South East Roofing division from a 2,200 square foot facility in Stuart, Florida. Each of the operating facilities also have equipment storage yards and all facilities are leased. We operate a fleet of approximately 140 trucks, vans and other vehicles. We believe that our facility and vehicles are well maintained and adequate for our current operations.
Item 3.
Item 3. Legal Proceedings
We have been sued by First Bankcentre (the "Bank") in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. A scheduling order has been entered in the case. Although a trial date has not been set, we anticipate trial in the spring of 2008. Written discovery has been exchanged between the parties. On April 8, 2008, the parties engaged in a mediation in Tulsa, Oklahoma and, although a settlement was not reached, negotiations are continuing. If settlement discussions fail, we intend to continue vigorously defending this lawsuit.
Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complained of our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claimed that the individual defendants breached their fiduciary duties to us, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff sought damages, imposition of a constructive trust, restitution and attorneys’ fees. We and the individual defendants denied the substantive allegations of the Complaint. On February 9, 2008, the parties participated in a mediation that resulted in a settlement of the lawsuit, including payment by us of $180,000 ($150,000 of which was paid from proceeds of our director and officer insurance) and certain non-monetary relief. After publication of the proposed settlement, and after noting no shareholder objection, the Honorable Joe Heaton approved the settlement as fair and reasonable and entered final judgment.
In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve employment claims or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, are likely to have a material adverse effect on our financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No items were submitted to a vote of our security holders during the fourth quarter of 2007.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the OTC Bulletin Board and is quoted under the symbol “ADDL.OB”. The following table sets forth, for the periods presented, the high and low bid quotations in the over-the-counter market as quoted on the OTC Bulletin Board. The bid quotations reflect inter-dealer prices without adjustment for retail markups, markdowns, or commissions and may not reflect actual transactions. The reported quotations were obtained from the OTC Bulletin Board website.
Holders of our Common Stock
At the date of this report, we had 90 shareholders of record for our common stock. One of the shareholders of record is CEDE & CO and represents over 1,000 independent shareholders holding over 30 million shares.
Dividend Policy
Our dividend policy for holders of common stock is to retain earnings to support the expansion of operations through organic growth or by strategic acquisitions. We have not previously paid any cash dividends, and we do not intend to pay cash dividends in the near future. Any future cash dividends will depend on our future earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors.
Equity Compensation Plan Information
(a)
(b)
( c)
Plan Categories
Number of securities to be issued upon exercise of options
Weighted average exercise price
Number of securities remaining for future issuance
Equity compensation plans approved by Security holders
2005 Stock Incentive Plan
3,625,000
$ .76
1,375,000
Equity compensation plans not approved by security holders
-
-
-
Total
3,625,000
$ .76
1,375,000
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected financial and statistical data, computed as a percentage of net sales, for the years ended December 31, 2007, 2006, 2005, 2004, and 2003. The selected financial data are derived from our audited consolidated financial statements and should be read in conjunction with them and the notes thereto. The results of operations for the periods presented are not necessarily indicative of our future operations.
Statistical Data As a Percentage of Net Sales
Cost of revenues
108 %
97 %
70 %
84 %
84 %
Operating Income (Loss)
(31)%
(16)%
25 %
9 %
8 %
General and admin.
22 %
18 %
5 %
7 %
7 %
Comprehensive net income (loss)
(23)%
(9)%
16 %
5 %
7 %
Cash Flow Data
Net cash provided by (used in)
Operating activities
$
(676,716)
$
(22,120,388)
$
21,805,758
$
3,333,887
$
548,465
Net cash provided by (used in)
Investing activities
$
258,880
$
(9,996,151)
$
(1,219,507)
$
(123,875)
$
(82,208)
Net cash provided by (used in)
Financing activities
$
1,439,771
$
9,785,788
$
(756,061)
$
(1,109,858)
$
(678,694)
Balance Sheet Data
Total assets
$
32,906,610
$
33,340,732
$
32,703,847
$
11,048,298
$
8,239,663
Total liabilities
$
28,925,422
$
20,164,870
$
18,003,086
$
5,686,622
$
4,413,352
Stockholders Equity
$
3,981,188
$
11,657,054
$
14,700,761
$
5,361,676
$
3,826,311
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and notes thereto.
Introduction
Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (“E2MS”). We provide internal corporate transportation services through our subsidiary Aduddell Financial Services, Inc. as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.
Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services. In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In the third quarter of 2006 we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company. This transaction closed in December 2006 adding below grade waterproofing to our service offerings. In May 2007, we established an additional business unit in Tampa, Florida, that is responsible for selling and finding market opportunities within the concrete restoration and waterproofing market primarily but also find business opportunities within the commercial roofing market.
Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair. Typically, re-roofing, restoration and repair jobs are more labor intensive and have higher margins than new roof construction.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, the useful lives of fixed assets, impairment of long-lived assets and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for 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 under different assumptions or conditions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
Revenue Recognition
We recognize fixed price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, interest, depreciation and supplies. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.
We account for our investments in marketable securities using Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders' equity.
Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2007 and 2006, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in our Consolidated Statement of Operations.
Fair Value of Financial Instruments
Our financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities' fair values are estimates based on quoted market prices. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). This standard requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry -forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years.
Net Income (Loss) Per Share
We compute net income (loss) per share in accordance with SFAS No. 128, Earnings per Share (“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated using straight-line and accelerated methods over the estimated useful lives of the assets, which range from five to thirty-nine years.
Changes from the Prior Period
We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates of assumptions.
Relationship with Oklahoma Development Group
In 2004 ODG, an entity owned by Tim Aduddell, Chairman of the Board, and David Aduddell, a Company Director, secured four subcontract positions for hurricane related work and engaged Aduddell Roofing to perform the work. In 2005 ODG prepared and submitted a bid to become a prime contractor on hurricane related work in 2005. As the designated manager of the activities of the JV formed by Aduddell and Carothers in response to Hurricane Katrina, ODG managed the pre-event activities, labor procurement, housing and administrative responsibilities and all close out duties including final inspections and repairs associated with the work. Prior to forming the joint venture and signing the contract with the USACE, ODG implemented the planning and readiness program, procured required hurricane response items and, along with Aduddell Roofing and Carothers, prepared the proposal and all documentation that was submitted to the USACE. ODG earned approximately $8,900,000 for the year ended December 31, 2005, and $1,300,000 for the year ended December 31, 2004.
Corporate Governance Matters
We continue to evaluate our corporate governance policies and procedures, and after implementing certain new policies, including the policies required as a result of our settlement of the Eric Beitchman v. Timothy Aduddell, et al. litigation , we believe they are satisfactory for a controlled company of our size. We are dedicated to further implementing sound corporate governance policies for a company within our demographics. As a growing company, we anticipate that our corporate governance policies and procedures will soon be enhanced due to our being subject to (i) the requirements of Regulation S-K rather than Regulation S-B, (ii) the corporate governance requirements of a national securities exchange or a Nasdaq market, if we become listed thereon, and (iii) the disclosure obligations under the SEC’s proposed executive compensation and related party disclosure rules (Release No. 33-8655). We are sensitive to our status as a controlled entity, our related-party transactions with ODG and Tim Aduddell, and our stockholders’ desires for enhanced, cost-effective corporate governance policies and procedures. With the assistance of securities counsel, we will continue to consider enhancements of our corporate governance polices as we grow and our stock is hopefully listed on a national securities exchange or Nasdaq market.
Results of Operations
Comparison of 2007 and 2006
Revenues. Revenues increased from $31,660,657 for the year ended December 31, 2006, to $47,233,614 for the year ended December 31, 2007. Our revenues primarily increased as a result of the acquisition-related revenue associated with Brent Anderson & Associates combined with the efforts of those formerly associated with Merit Construction, Inc. Revenues derived from the results of our acquisitions exceeded $20,000,000.
Operating Expenses. Operating expenses for the year ended December 31, 2006, were $36,652,575, or 116% of revenue, compared to $62,172,019, or 132% of revenue, for the year ended December 31, 2007. Operating expenses for the year ended December 31, 2007, as a percentage of revenue were affected by expenditures for national account marketing, acquisition pursuit and execution as well as expanded support structure. In the third and fourth quarters of 2007, we worked to reduce our overhead expenses by reducing support staff, relocating our corporate headquarters in OKC to the local Aduddell Roofing location, and selling the airplane that we formerly had thereby eliminating higher travel costs, insurance costs, and regular maintenance costs.
Income(Loss) before Provision for Income Taxes. Operating loss before taxes for the year ended December 31, 2006, was $4,978,638 compared to a loss of $14,780,282 for the year ended December 31, 2007. The decrease in our 2007 operating income was attributable to higher interests costs on the order of almost a difference of $1,000,000 as a result of advancing on our line of credit to finance our growth and provide working capital for our existing lines of business, higher selling, general, and administrative costs associated with increases in personnel, higher travel costs associated with traveling to multiple locations as well as the increase in fuel costs, and poorer sales results than anticipated.
Net Income. The net loss for the year ended December 31, 2006, was $2,886,366, compared to a net loss of $10,640,245 for the year ended December 31, 2007. These results were influenced by the factors identified above under Revenues, Operating Expenses, and Income (Loss) before Provision for Income Taxes.
Comparison of 2006 and 2005
Revenues. Revenues increased from $59,227,145 for the year ended December 31, 2005, to $31,660,657 for the year ended December 31, 2006. Our revenues were significantly affected by the absence of natural disaster related work such as tornados, hurricanes and other windstorms. Revenues for 2006 included a 46.9% organic growth in our roofing business as well as $6,303,155 of revenue in our new business line, restoration services.
Operating Expenses. Operating expenses for the year ended December 31, 2005, were $44,579,679, or 75% of revenue, compared to $36,652,575, or 116% of revenue, for the year ended December 31, 2006. Operating expenses for the year ended December 31, 2006, as a percentage of revenue were affected by expenditures for national account marketing, acquisition pursuit and execution as well as expanded support structure.
Income(Loss) before Provision for Income Taxes. Operating income before taxes for the year ended December 31, 2005, was $14,943,736 compared to a loss of $4,978,638 for the year ended December 31, 2006. The decrease in our 2006 operating income was attributable to the lack of higher margin disaster work, $2.9 million increase in infra structure as well as $2.7 million expenditure on national account marketing and acquisition pursuit and $590,321 loss on investment.
Net Income. The net income for the year ended December 31, 2005, was $9,339,085, compared to a net loss of $2,886,366 for the year ended December 31, 2006. These results were influenced by the factors identified above under Revenues and Operating Expenses.
Off-Balance Sheet Arrangements
We have operating leases and guaranties that are not accrued on the balance sheet. The payments due under these leases are disclosed in a contingent loan guaranty in footnote 16 of our consolidated financial statements. Other than the lease and note guaranty, we have no contractual commitments that do not appear on the balance sheet as of December 31, 2007.
Seasonality
The construction industry, including the roofing industry, is influenced by seasonal factors, as construction activities are usually lower during winter months than other periods. We attempt to increase winter productivity by concentrating our business in the southern half of the United States and by expanding our sales and marketing efforts to control project scheduling. Nevertheless, our revenues and operating results potentially will be lower in the first and fourth quarters.
The roofing industry is also affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Because of the need for immediate repairs and since the costs of repair are typically covered by insurance, the margins are higher on disaster-related work than on discretionary work. Since
disaster-related work requires an immediate response, we maintain a capacity that is scalable to respond to these needs. The absence of natural disasters will result in lower revenues and higher relative administrative expenses per revenue dollar.
Commitments and Contingencies
In regard to the sale of assets and liquidation of Zenex Communications in 2002, we are a guarantor on notes with an outstanding balance of $ 151,103 at December 31, 2007, with approximately $6,353 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations.
We warrant our work in the normal course of business. In management's opinion, there were no outstanding claims which would have a material effect on our operations or financial position.
Information regarding our legal proceedings are discussed earlier in this document under, “Item 3. Legal Proceedings.”
Liquidity and Capital Resources
Year Ended December 31, 2007
Total assets decreased from $33,340,732 to $32,906,610, liabilities increased from $21,683,678 to $28,925,422 and shareholders’ equity decreased from $11,657,054 to $3,981,188 from December 31, 2006, to December 31, 2007. The decrease in assets comes from a lower income tax receivable and fixed assets and intangibles with more cash and trade receivables. The increase in liabilities results primarily from an increase in our draw on the line of credit as well as earn out provisions on our acquisition.
For the year ended December 31, 2007, net cash used by operating activities was ($676,716) compared to ($22,120,388) for the year ended December 31, 2006. Net cash provided by investing activities during this period was $258,880 compared to $9,996,151 used by investing activities for the year ended December 31, 2006. Net cash provided by financing activities during this period was $1,439,711 compared to net cash provided of $9,785,788 from financing activities for the year ended December 31, 2006. At December 31, 2007, we had working capital of ($9,628,097) compared to working capital at December 31, 2006, of ($865,202). The decrease in working capital resulted from our growth and the integration of our acquisitions while also operating at a loss.
We have a $10,000,000 revolving line of credit. The line bears interest at 3.375% over LIBOR (currently 8.61%) and is secured by all accounts, property and equipment. The line matured on December 15, 2007, and we are presently operating under a temporary forbearance agreement through August 15, 2008. The outstanding advances at December 31, 2007, and the outstanding advance at December 31, 2006, were $9,151,283 and $9,407,272 respectively.
At December 31, 2007, we had $1,199,527 of long-term debt as compared to $1,518,808 of long-term debt at December 31, 2006.
Adequacy of Current Liquidity
We presently meet all of our funding needs for ongoing operations with internally generated cash flows from operations, existing cash and short-term investment balances and additional privately placed term debt or equity. We are unable to draw on our existing line of credit at the present time and are presently operating under a temporary forbearance agreement through August 15, 2008. We continue to actively pursue alternative financing plans to meet our requirements that include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital. However, there is no guarantee that we will receive sufficient funding in the near future to either (i) sustain operations and implement any future business plans, or (ii) have sufficient funds to pay off our line of credit when our forbearance agreement terminates on August 15, 2008. If we cannot timely find alternative sources of financing, we may be forced to seek protection under Federal bankruptcy laws.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
Total
Less than 1 Year
1 - 3 Years
3 - 5 Years
More than 5 Years
Operating leases
$205,370
$42,810
$121,920
$40,640
N/A
Total
$205,370
$42,810
$121,920
$40,640
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk relates to changes in interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
At December 31, 2007, we had $9.15 million drawn on our revolving line of credit. Interest on the revolving line of credit is variable and is equal to LIBOR plus 3.375%. Amounts drawn of the revolving line of credit are the only variable rate debt we have outstanding. A one-percentage point change in the interest rate for our revolving line of credit would change our cash interest payments on an annual basis by approximately $91,500.
Item 8.
Item 8. Financial Statements
Financial Statements and Financial Statement Schedules - See Index to Consolidated Financial Statements and Schedules immediately following the signature page of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Sutton Robinson Freeman & Co., P.C. has audited our financial statements for the years covered by this report. There are no disagreements with the independent accountants regarding matters of accounting or financial reporting.
Item 9A.
Item 9A. Controls and Procedures
It is the responsibility of our chief executive officer and our chief financial officer to ensure that we maintain controls and other procedures designed to ensure that the information required to be disclosed by us in reports that we file with the Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified by in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As of December 31, 2007, management, including the chief executive officer and chief financial officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded the disclosure controls and procedures currently in place were effective. On March 21, 2008, however, our Interim chief financial officer resigned, creating a material weakness in our disclosure controls and procedures and resulting in an untimely filing of this report with the SEC. Management is attempting to correct this material weakness by engaging a new chief financial officer. Until a new chief financial officer is engaged, Tim Aduddell is acting as interim chief financial officer.
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our controls are designed to provide reasonable assurance that our assets are protected from unauthorized use and that transactions are executed in accordance with established authorizations and properly recorded. In 2007, we engaged a consultant to assist us in the review and enhancement of our internal controls. The engagement was to ensure our internal controls were supported by written policies and complemented by competent and qualified external resources, which would be used to assist in testing the operating effectiveness of our internal control over financial reporting. Because of our liquidity issues in late 2007, the engagement, and thus the full review and enhancement of our internal controls, was not completed. Through the limited review and enhancement procedures that were undertaken, however, our management concluded that the design and operations of our internal controls over financial reporting at December 31, 2007 were effective and provided reasonable assurance that the books and records accurately reflected the transactions of the Company.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
With the exception of Tim Aduddell acting as both interim chief financial officer and chief executive officer. there have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed their evaluation. This report is only signed by Tim Aduddell, as the chief financial officer of the Company in 2007, Josh Brock, has resigned his position with the Company.
This report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Item 9B.
Item 9B. Other Information
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our Board of Directors is currently composed of five (5) persons. The term of each director is one-year ending at the 2008 Annual Meeting or until he resigns or is succeeded by another qualified director who has been elected. The following is a list of the current members of our Board of Directors and our executive officers, including each person’s age, the year he became a director of the Company and his current position with the Company:
The following presents a brief biographical description of each current member of the Board of Directors and our executive officers:
Timothy Aduddell
Timothy Aduddell has served as our Chairman since November 2006. Mr. Aduddell is the founder and Chairman of Aduddell Roofing & Sheet Metal, Inc. (“Aduddell Roofing”), a nationwide commercial roofing contractor and was the sole owner of Aduddell Roofing until we acquired it in October 2002. On January 3, 2005, Mr. Aduddell became President of Aduddell Roofing. Prior to Mr. Aduddell resuming the role of President of Aduddell Roofing in 2005, he performed various sales and public relations services for Aduddell Roofing and served as its Chairman. Mr. Aduddell is presently serving as President, Chief Executive Officer, and Interim Chief Financial Officer.
Doug Bruns
Mr. Bruns currently serves as our Chief Operating Officer. Mr. Bruns has served as the president of our restoration division since the purchase of his company, Merit Construction, in April 2006. Mr. Bruns has spent over twenty years in the concrete restoration business and is widely recognized in that field. He has been primarily responsible for the integration of our largest acquisition, Brent Anderson & Associates, Inc.
David Aduddell
David Aduddell has served on the board of directors since 2005. In 2002, Mr. Aduddell founded and was Managing Partner of Oklahoma Development Group, LLC, where his solid background in corporate planning, marketing and business development built one of Oklahoma’s fastest growing private companies. Mr. Aduddell has a strong sense of commitment to community and charitable causes and currently serves on the Board of Directors and is actively involved in several Non-Profit Organizations.
Jerry Whitlock
Mr. Whitlock is the Chairman and owner of Whitlock Packaging Corp., the United States’ largest non-carbonated beverage packaging and distribution company, and has served in such capacities since 1980. He is also the Chairman and owner of Universal Promotion Services, LLC and serves on the Board of Directors of Strategic Food & Beverages, Inc.
Thomas Parrish
Mr. Parrish has been the President of Parrish Interests, a real estate and investment firm, since 1999. Prior to that, from 1985 to 1999, he was the President and Chief Executive Officer of Southwestern Bank & Trust Company, and from 1979 to 1985, he was the President of Exchange National Bank. Mr. Parrish has more than twenty years experience in commercial/consumer banking and real estate development industries. Mr. Parrish serves on the Board of Directors and the Audit Committee of Aquis Communications Group, Inc. and First National Bank of Oklahoma.
Ron Carte
Ron Carte, our former President and Chief Executive Officer, became a director in March 2002. In November of 2006, Mr. Carte resigned as our President and Chief Executive Officer but has remained a member of our Board of Directors. He has extensive experience in the banking industry. Mr. Carte was a founder and Chairman of Edmond Bank and Trust, Edmond, Oklahoma, from September 1999 to April 2002. From 1997 to 2002, he was President and CEO of Milestone Construction, a commercial general contractor. From 1993 to 1997, Mr. Carte was a Regional Vice President of Liberty Bank with supervisory responsibility over four branches in the Edmond, Oklahoma area. From 1982 to 1993, he was the President and CEO of First Oklahoma Bank and Trust, Oklahoma City, Oklahoma. He has also been very active in civic and community affairs having served as City Treasurer for the City of Edmond, and served as President of the Edmond Board of Education.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the best of our knowledge, there were no late filings in 2007.
Code of Ethics
We have adopted a Code of Ethics that applies to our directors and executive officers, including our Chief Executive Officer, Chief Financial Officer, and Controller. A copy of the Code of Ethics is filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 and is available on our web site at www.aduddell.com.
Audit Committee
The Board of directors maintains an Audit Committee which is composed of two members; Messrs. Parrish (Chairman) and Carte. Mr. Parrish qualifies as “independent” and “financially literate”, as defined under the Nasdaq Stock Market listing standards and as an “audit committee financial expert”, as defined under SEC regulations.
Item 11.
Item 11. Executive Compensation
The following table sets forth the total compensation for the years ending December 31, 2007 and 2006 paid to our “Named Executive Officers.” Our Named Executive Officers include (i) our current principal executive officer and principal financial officer, (ii) our chief operating officer, (iii) our former president and chief executive officer, (iv) two former chief financial officers, and (v) our form Director of Corporate Development, who would have been one of our three most highly compensated executive officers as of December 31, 2007 if he remained employed by us.
SUMMARY COMPENSATION TABLE
(1)
The amounts in the “Option Awards” column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal years ended December 31, 2007 and 2006, respectively, in accordance with FAS 123(R) of awards pursuant to the 2005 Stock Incentive Plan. These amounts include awards that were made prior to 2006 or 2007 that vested in 2006 or 2007. These amounts reflect our accounting expense recognized in 2006 and 2007 for these awards including the impact of estimated forfeitures, which is excluded from recognition in the financial statements, and do not correspond to the actual value that will be recognized by the named executive officers. The stock options held by David Aduddell and Stan Genega were cancelled in 2007. The vesting of the stock options held by Reggie Cook was accelerated upon his resignation pursuant to an agreement between us and Mr. Cook.
(2)
The following table shows the components of “All Other Compensation” in the previous table.
(3)
Mr. Bruns was granted a bonus in the discretion of our Chief Executive Officer, which was approved by the Board, in recognition of outstanding performance during the 2006 fiscal year.
(4)
Mr. Brock was hired by us in 2007 and was appointed as our Interim Chief Financial Officer effective September 5, 2007. Mr. Brock resigned as Interim Chief Financial Officer effective March 21, 2008.
(5)
Mr. David Aduddell resigned from his position of Director of Corporate Development effective June 1, 2007.
(6)
Mr. Cook resigned from his position as our Chief Financial Officer effective September 5, 2007.
(7)
Mr. Genega was appointed our President and Chief Executive Officer in November, 2006 and resigned from that position effective September 5, 2007.
Employment Agreement
Aduddell Roofing is a party to an employment agreement with Doug Bruns dated April 1, 2006. None of our other Named Executive Officers have employment agreements. Mr. Bruns’ employment agreement has a term of three years and provides that Mr. Bruns will serve as the President of the Waterproofing and Concrete Restoration Division of Aduddell Roofing. The employment agreement provides that Mr. Bruns’ base salary will be $175,000 per year subject to increase (but not decrease) at the discretion of Aduddell Roofing. Additionally, the employment agreement provides that Mr. Bruns’ will be paid an annual bonus equal to 10% of the EBIT (earnings before interest and taxes) of the Waterproofing and Concrete Restoration Division of Aduddell Roofing up to a maximum of $500,000, based on continued annual revenue growth within the division.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007
(1) Mr. Cook’s options became fully vested upon his resignation on September 5, 2007 pursuant to an agreement between us and Mr. Cook.
Potential Payments Upon Termination or Changes in Control
We do not have employment or severance agreements with our Named Executive Officers other than Mr. Bruns. Upon a change in control, our Named Executive Officer will become 100% vested in their outstanding unvested awards under our 2005 Stock Incentive Plan. At December 31, 2007, none of the options were in-the-money and, as a result, no value would have been realized by the Named Executive Officers assuming a change in control occurred on that date.
Director Compensation
We did not pay any compensation to our non-management directors for the year ended December 31, 2007.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Beneficial Owners
To the best of our knowledge, no person beneficially owned more than 5% of our common stock at the close of business on March 31, 2008, except for Timothy and David Aduddell (see Director and Executive Officer Ownership Table below) and except as set forth below:
Directors and Executive Officers
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 31, 2008, by (i) each of our directors, (ii) each of our Named Executive Officers, and (iii) all directors and executive officers as a group. Unless indicated otherwise, each person has sole voting and dispositive power with respect to such shares. The number of shares of common stock outstanding for each listed person includes any shares the individual has the right to acquire within 60 days after March 31, 2008. For purposes of calculating each person’s or group’s percentage ownership, stock options exercisable within 60 days are included for that person or group, but not for the stock ownership of any other person or group. We have not included beneficial ownership information regarding Josh Brock, Reggie Cook or Stan Genega, three former employees who are deemed to be our Named Executive Officers under SEC rules and regulations for purposes of this report. Because these former officers no longer have reporting requirements with respect to their ownership of our common stock, we do not have current information regarding their ownership.
*
Less than one percent.
(1)
Mr. Timothy Aduddell’s share totals include presently exercisable options covering 28,528,818 shares, exercisable at $.04 per share, which he acquired in our acquisition of Aduddell Roofing. See “Certain Relationships and Related Party Transactions”.
(2)
Mr. Timothy Aduddell owns 50% of Oklahoma Development Group, LLC and, as such, is deemed to have beneficial ownership of designated shares in his partnership account. 2,364,254 of the shares owned by ODG, LLC are included in Timothy Aduddell’s total beneficial ownership in the table above.
(3)
Mr. David Aduddell owns 50% of Oklahoma Development Group, LLC and, as such, is deemed to have beneficial ownership of designated shares in his partnership account. 3,364,255 of the shares owned by ODG, LLC are included in David Aduddell’s total beneficial ownership in the table above.
(4)
Includes 250,000 shares Mr. Bruns acquired through the asset purchase of his company Merit Construction.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
We lease Aduddell Roofing’s office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly owned by Tim Aduddell. The lease agreement is for one year and expires on September 30, 2008, with monthly rentals of $16,250. We are responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rental expense under this lease amounted to $195,000 for each of the years ended December 31, 2007, 2006 and 2005, respectively.
We leased Aduddell Restoration and Waterproofing’s office, warehouse, and yard facilities in Minnesota from BDA Development, LLP, an entity owned by Brent Anderson who is our employee. The lease is on a month-to-month basis with monthly rentals of $29,442. Rental expense under this lease amounted to $353,310 for the year ended December 31, 2007. We have since relocated Aduddell Restoration and Waterproofing’s office, warehouse, and yard facilities.
We have an unwritten policy that all future related party transactions must be approved by a majority of disinterested directors. Our policy concerning related party transactions applies to all transactions between us or our subsidiaries and our employees, directors or 5% shareholders, when reviewing related party transactions, we look at
(i) whether the proposed transaction is on the same terms and conditions that we could obtain in an arms-length transaction; and
(ii) whether the transaction is fair to us.
Item 14.
Item 14. Principal Accounting Fees and Services
FEES PAID TO INDEPENDENT AUDITORS
During 2007 and 2006, the Audit Committee pre-approved all audit and non-audit services to be rendered to us by Sutton Robinson as well as the fees associated with such services.
The following table sets forth the aggregate fees and costs paid to Sutton Robinson during the last two fiscal years for professional services rendered to us:
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements. See index to Consolidated Financial Statements immediately following the signature page of this report.
(a)(2) Financial Statement Schedules. See index to Consolidated Financial Statements immediately following the signature page of this report.
(a)(3) Exhibits
Exhibit No.
Description of Exhibit
2.1
Agreement and Plan of Split-off and Merger, dated as of September 27, 2002, by and among Zenex International, its subsidiary and Aduddell Roofing (filed as exhibit to our Form 8-K/A filed on November 15, 2002 and incorporated by reference herein)
3.1
Amended and Restated Articles of Incorporation of Zenex (filed as exhibit to our Form S-3 Registration Statement filed on August 2, 2000 and incorporated by reference herein)
3.2
Amended and Restated Bylaws of Zenex (filed as exhibit to our Form S-3 Registration Statement filed on August 2, 2000 and incorporated by reference herein).
3.3
Amendment to the Articles of Incorporation of Lone Wolf Energy, Inc. changing the name to Zenex Telecom, Inc. effective November 29, 2001 (filed as exhibit to our Form 8-K filed on November 28, 2001 and incorporated by reference herein)
3.4
Amendment to the Articles of Incorporation changing Zenex Telecom, Inc. to Zenex International, Inc. effective August 6, 2002 (filed as exhibit to our Form 8-K filed on August 15, 2002 and incorporated by reference herein)
10.1
Service Agreement dated February 9, 2005 between Zenex International, Inc. and Oklahoma Development Group, LLC (filedaas an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated by reference herein)
Code of Ethics for Principal Executive and Senior Financial Officers (filed as exhibit to our Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference herein)
21.1
Subsidiaries of Registrant
23.1
Consent of Independent Auditors
31.1
Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer
32.1
Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Tim Aduddell
Director
April 30, 2008
/s/ David Aduddell
Director
April 30, 2008
/s/ Ron Carte
Director
April 30, 2008
/s/ Thomas Parrish
Director
April 30, 2008
/s/ Jerry Whitlock
Director
April 30, 2008
INDEX TO EXHIBITS
Exhibit No.
Description
Method of Filing
2.1
Agreement and Plan of Split-off and Merger, dated as of September 27, 2002, by and among Zenex International, its subsidiary and Aduddell Roofing
Incorporated by reference
3.1
Amended and Restated Articles of Incorporation of Zenex
Incorporated by reference
3.2
Amended and Restated Bylaws of Zenex
Incorporated by reference
3.3
Amendment to the Articles of Incorporation of Lone Wolf Energy, Inc. changing the name to Zenex Telecom, Inc. effective November 29, 2001
Incorporated by reference
3.4
Amendment to the Articles of Incorporation changing Zenex Telecom, Inc. to Zenex International, Inc. effective August 6, 2002
Incorporated by reference
10.1
Service Agreement dated February 9, 2005 between Zenex International, Inc. and Oklahoma Development Group, LLC
Incorporated by reference
Code of Ethics for Principal Executive and Senior Financial Officers
Incorporated by reference
21.1
Subsidiaries of Registrant
Filed herewith electronically
23.1
Consent of Independent Auditors
Filed herewith electronically
31.1
Rule 13a-14 Certification of Chief Executive Officer and
Interim Chief Financial Officer
Filed herewith electronically
32.1
Section 1350 Certification of Chief Executive Officer and
Interim Chief Financial Officer
Filed herewith electronically
Aduddell Industries, Inc.
Consolidated Financial Statements
And
Report of Independent Registered Public Accounting Firm
Years Ended December 31, 2007, 2006 and 2005
Aduddell Industries, Inc.
Page
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
as of December 31, 2007 and 2006
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Cash Flows
for the years ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
[Logo]
SUTTON
ROBINSON
FREEMAN
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Aduddell Industries, Inc.
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Aduddell Industries, Inc. (an Oklahoma corporation) as of December 31, 2007 and 2006, and the related statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aduddell Industries, Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations, changes in stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2007 in conformity with United States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred recurring losses from operations, and the Company is in default under its bank line of credit and is operating under a temporary forbearance agreement. These circumstances create substantial doubt about the Company’s ability to continue as a going concern and are discussed in Note 2. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not contain any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
We were not engaged to examine management’s assertion about the effectiveness of Aduddell Industries, Inc. internal controls over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
Sutton Robinson Freeman & Co., P.C.
Certified Public Accountants
Tulsa, Oklahoma
April 10, 2008
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2007, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
The accompanying notes are an integral part of these financial statements.
ADUDDELL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Aduddell Industries, Inc. (the “Company”) is engaged in the commercial and industrial roofing and re-roofing, specialty-roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary, Aduddell Enviro & Emergency Management Services, Inc (“E2MS”). We provide internal corporate transportation services through our subsidiary, Aduddell Financial Services, Inc., as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.
Our revenues are derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, concrete restoration and waterproofing, and emergency pre- and post-event response services. We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service.
Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services. The financial statements include all adjustments that in the opinion of management, are necessary in order to make the financial statements not misleading. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs and a allocation of certain indirect costs related to contract performance, such as indirect labor, interest, depreciation, supplies, selling and general and administrative expenses. General and administrative expenses not allocated to contract costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.
Accounts Receivable and Allowance For Doubtful Accounts
Contracts and other accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. The Company establishes an estimated allowance for doubtful contracts and accounts receivable based on various factors, including revenue, historical credit loss experience, current trends, and any specific customer collection issues that the Company has identified. Uncollectible contracts and accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when the Company has determined that the balance will not be collected.
Inventory
Inventories consist of construction materials and are stated at the lower of cost (first-in, first-out) or market (net realizable value).
Investments
The Company accounts for its investments in marketable securities using Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders’ equity.
Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2007 and 2006, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.
Intangible Assets
The Company accounts for intangible assets under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) which primarily addresses accounting for goodwill and intangible assets subsequent to acquisition. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives are no longer amortized, but reviewed annually (or more frequently if impairment indicators arise) for impairment. In accordance with SFAS No. 142, intangibles with finite useful lives, which include customer lists, continue to be amortized over their estimated useful life. The Company amortizes customer lists using the straight-line method with an estimated useful life of five years. Impairment, if any, is calculated for all intangibles as the excess of the asset carrying value over its fair value and is charged to expense when discovered. No impairment was recorded for the years ended December 31, 2007 and 2006. Accumulated amortization at December 31, 2007 and 2006 totaled $1,399,304 and $104,678, respectively. Amortization expense for the years ended December 31, 2007 and 2006 was $1,294,626 and $104,678, respectively. The estimated amortization of intangible assets for 2008 is $1,289,784 with amortization of $1,274,740, $1,259,632, and $1,165,222 in years 2009, 2010, and 2011 respectively.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities’ fair values are estimates based on quoted market prices or approximate fair values. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.
Share-Based Compensation
The Company recognizes expense for its share-based compensation based on the fair value of awards that are granted in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payments. The fair value of common stock options is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange-traded stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. The measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.
Depreciation
Depreciation for financial statement purposes is provided on the straight-line method over the estimated useful lives of the various assets. Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $1,646,858, $841,631 and $220,691 respectively. For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences. Estimated useful lives for financial statement reporting purposes are as follows:
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry-forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates. Significant discreet items are separately recognized in the income tax provision in the quarter in which they occur.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings per Share and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2 - GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As shown in the financial statements, the Company has incurred significant recurring operating losses in 2007 and 2006. In addition, at December 31, 2007, the Company was in default on its line of credit agreement with its primary lender, and was operating under a temporary forbearance agreement. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company continues to actively pursue alternative financing plans to meet the Company’s requirements, and those plans include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital. In addition, the Company continues to explore opportunities to secure additional sources of debt or other financings as a means of more cost effectively conducting its roofing and concrete restoration businesses. However, there is no guarantee that the Company will receive sufficient funding to sustain operations and/or implement any future business plans.
NOTE 3 - ACQUISITIONS
On April 1, 2006, Aduddell Roofing acquired certain operating assets of Merit Construction Services, a privately held concrete restoration company. As a result of the acquisition, the Company established its restoration division, eliminated the need to outsource restoration projects, increased Merit’s market opportunity through our bonding capacity, and allowed us to cross sell services to customers.
The aggregate purchase price of $1,085,000 consisted of $880,000 in cash and 250,000 shares of Company common stock valued at $205,000. The value of the common shares issued was determined based on the closing market price of the Company’s common shares on the immediately preceding day of closing. Based on the fair value of the acquired assets, the Company allocated $487,463 of the purchase price to tangible property and equipment and $597,537 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and was considered to have an estimated useful life of five years.
In September 2006, we purchased the assets of EyeOpener Creative Communications, LLC, (“EyeOpener”) an integrated marketing company, to help develop and brand the Company’s operating business units. EyeOpener provides the Company with professional and targeted marketing and sales support through strategic advertising, branding, web-based communications, sales tools, and market research. EyeOpener has in house media, photography and video capabilities that are beneficial to all of our operating units. The aggregate purchase price of $212,550 consisted of $20,000 in cash, $103,800 in repayment of loans and 125,000 shares of Company common stock valued at $88,750. The value of the common shares issued was determined based on the closing market price of the Company’s common shares from the previous day.
On December 1, 2006 the Company purchased Brent Anderson Associates, Inc., a Minnesota-based restoration, roofing and waterproofing company, adding significant resources, including below grade waterproofing, to our service offerings. The aggregate purchase price of $9,072,415 consisted of $1,850,000 in cash, $4,026,915 repayment of loans, and $2,000,000 of Company common stock with a minimum conversion value of $1.00 per share valued at $1,400,000 (Actual value of the common shares issued was determined based on the closing market price of the Company’s common shares from the day previous to closing) and the right to earn an additional $2,565,000 of shares of the Company’s common stock with a minimum conversion price of $1.00 per share (Valued at $1,795,500 based on the share price at the day previous to closing). Based on the fair value of the acquired assets, the Company allocated $3,618,268 of the purchase price to tangible property and equipment and $5,454,147 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and is considered to have an estimated useful life of five years.
At 2006 year end, we signed a definitive purchase agreement to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York. We terminated our plans for these acquisitions in August 2007.
NOTE 4 - CONTRACTS RECEIVABLE
Contracts receivable consist of the following:
December 31,
December 31,
Completed contracts
$ 5,436,675
$ 2,465,564
Contracts in progress
6,963,029
9,139,408
Retainage
2,085,842
2,057,058
14,485,546
13,662,030
Less allowance for doubtful amounts
(325.000)
-
$ 14,160,546
$ 13,662,030
NOTE 5 - UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts, are as follows:
December 31,
December 31,
Costs incurred on uncompleted contracts
$ 24,775,827
$ 29,126,527
Estimated earnings
(278,653)
145,508
24,497,174
29,272,035
Billings to date
25,252,143
28,032,012
$ (754,969)
$ 1,240,023
Included in the accompanying balance sheets under the following captions:
December 31,
December 31,
Costs and estimated earnings in excess of billings on uncompleted contracts
$ 2,190,585
$ 2,298,191
Billings in excess of costs and estimated earnings on uncompleted contracts
(2,945,554)
(1,058,168)
$ (754,969)
$ 1,240,023
NOTE 6 - LETTER OF CREDIT
At December 31, 2007, the Company had a $175,000 letter of credit issued to its insurance carrier that matures on February 24, 2008.
NOTE 7 - LINE OF CREDIT
The Company has a $10,000,000 line of credit that matured on December 15, 2007. The Company is in default on the loan and is operating under a temporary forbearance agreement through August 15, 2008. The line bears interest at 3.375% over the published LIBOR Rate (currently 8.61%) and is secured by all accounts, property and equipment. The outstanding balance at December 31, 2007 and 2006 was $9,151,283 and $9,407,272 respectively.
Under the terms of the temporary forbearance agreement, the unpaid principal balance on the line of credit is capped at $9,151,283, with no additional borrowings allowed, and the Company’s principal officer and stockholder was required to personally guarantee a portion of the loan balance, limited to a maximum of $2,000,000. The agreement also requires that any income tax refunds received be utilized to reduce the outstanding loan principal.
NOTE 8 - LONG-TERM DEBT
The Company has the following long-term debt as of:
December 31,
December 31,
6.63% to 21% notes payable secured by equipment, due in varying monthly installments through May 2010
$ 44,696
$ 68,124
6% to 8.25% notes payable secured by transportation equipment, due in varying monthly installments through January 2012
619,100
686,194
663,796
754,318
Less: current portion of long-term debt
280,936
214,343
$ 382,860
$ 539,975
Estimated maturities of long-term debt as of December 31, 2007, are as follows:
Year
Amount
$ 255,270
85,868
39,227
2,495
$ 382,860
Interest expense was $1,043,936, $134,510 and $148,950 for the years ended December 31, 2007, 2006 and 2005, respectively.
NOTE 9 - PENSION PLAN
The Company sponsors a defined contribution plan that covers all non-union employees. Employees who are twenty-one years of age and have completed one year of service are eligible to participate. Employees may contribute from one to eighty percent of eligible salary limited to the amount allowed under the Internal Revenue Code. Company profit sharing contributions are discretionary each year. Currently the Company is matching contributions up to 4%. Employees are vested 100% in salary deferral contributions. Company contributions vest immediately. Company contributions for the years ended December 31, 2007, 2006, and 2005 totaled $94,401, $44,517 and $42,955, respectively.
NOTE 10 - STOCK OPTIONS
Common Stock Options and Other Warrants
The following table summarizes the Company's stock option activity for the years ended December 31, 2007, 2006 and 2005:
Options Issued Under 2005 Stock Incentive Plan
The Company’s 2005 Stock Incentive Plan (the “Plan”) was adopted on October 17, 2005. The Plan is administered by the Board of Directors. All officers, employees, directors and individual consultants of the Company are allowed to participate in the Plan. The Plan has a term of ten years. Accordingly, no grants may be made under the Plan after October 17, 2015, but the Plan will continue thereafter while previous grants remain subject to the Plan. The aggregate number of shares of common stock available under the Plan is five million shares. The Plan authorizes the Board of Directors to grant options that are incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non statutory stock options, and restricted stock. All grants under the Plan will be made at the discretion of the Board of Directors.
On October 17, 2005, the Company granted options exercisable for a total of 1,000,000 shares to Ron Carte in his role as President, and options exercisable for a total of 500,000 shares each to David Aduddell, Ron Carte, Tom Parrish and Jerry Whitlock in their roles as Directors at an exercise price of $0.78 per share. On April 1, 2006 the Company granted options exercisable for a total of 500,000 shares to Stan Genega in his role as a director, with an exercise price of $0.80 per share. Of the 1,000,000 options issued to Ron Carte as President, 500,000 options have vested with 500,000 rescinded with his resignation as President. The 500,000 options granted to each of Messrs. Aduddell, Carte, Parrish, Whitlock and Genega vest in five equal annual installments.
In connection with a consulting agreement dated November 21, 2005, the Company granted options to purchase 100,000 shares of common stock for $0.70 per share, vesting in one year.
On January 1, 2006, the Company granted options to purchase 250,000 shares of common stock for $0.49 per share, vesting in 5 equal annual installments, to the Chief Financial Officer. All options were vested and extended per the termination agreement with the Company.
In connection with a consulting agreement dated January 15, 2006, the Company granted options to purchase 200,000 shares of common stock for $0.66 per share, 100,000 have vested with 100,000 rescinded with the termination of the agreement.
In connection with an employment agreement dated May 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.38 per share, which have been rescinded with the termination of employment.
In connection with an employment agreement dated September 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.02 per share, 5,000 have vested with the remaining 20,000 rescinded with resignation.
In connection with an employment agreement dated October 16, 2006, the Company granted options to purchase 25,000 shares of common stock for $.74 per share which have been rescinded with the termination of employment.
Options Issued Prior to the 2005 Stock Incentive Plan
In connection with the terms of the Agreement and Plan of Split Off and Merger, signed September 27, 2002, Tim Aduddell was granted an option to purchase 30 million shares of common stock for $0.04 per share. On June 7, 2006, 1,471,182 of these options were exercised, and the underlying shares were redeemed in payment of his note receivable, leaving 28,528,818 options outstanding.
Following is a summary of stock options outstanding and exercisable at December 31, 2007:
NOTE 11 - INCOME TAXES
The income tax provision consists of the following:
December 31,
December 31,
December 31,
Current tax provision
$ (5,765,000)
$ (1,878,000)
$ 5,439,797
Deferred tax provision
1,604,086
(210,000)
179,000
Total provision for income taxes
$ (4,160,914)
$ (2,088,000)
$ 5,618,797
A reconciliation of the Company’s effective income tax rate to that determined by applying the statutory U.S. federal (34%) and state (5%) income tax rates to income before income taxes is as follows for the years ended:
December 31,
December 31,
December 31,
Statutory federal income tax rate
34.0%
34.0%
34.0%
State tax effective rate
5.0
5.0
5.0
Prior year assessments finalized
-
-
1.5
Difference in estimated and actual tax rates utilized
(5.0)
-
-
Change in valuation allowance
-
-
-
Temporary differences arising from business combinations
(5.2)
2.9
-
Other
(0.6)
-
(2.9)
28.2%
41.9%
37.6%
At December 31, 2007, the Company had net operating loss carry forwards of approximately $11 million available to reduce future federal and state taxable income. Unless utilized, the carry forward amounts will begin to expire in 2012. For federal and state tax purposes, approximately $800,000 of the Company’s net operating loss carry forward amounts are subject to an annual limitation due to a greater than 50% change in stock ownership which occurred in 2002, as defined by federal and state tax law.
Taxable temporary differences result principally from the excess of depreciation for tax purposes over the amount deducted for financial reporting purposes. Deductible temporary differences from the share based compensation deduction and the operating loss carry forward, giving rise to deferred tax assets, are reduced by a valuation allowance. The Company has established a valuation allowance for a portion of its net deferred tax assets due to the ownership change limitation on the use of the loss carry forward.
The net deferred tax asset consisted of the following components:
December 31,
December 31,
Deferred tax liability on depreciation
$ (988,000)
$ (150,000)
Deferred tax asset for loss carry forward and
share-based compensation
5,417,914
419,000
Deferred tax asset
4,429,914
269,000
Less: valuation allowance
203,000
203,000
Net deferred tax asset
$ 4,226,914
$ 66,000
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company engaged in certain transactions with Tim Aduddell, a majority shareholder of the Company, and entities owned by Tim Aduddell.
At June 6, 2006 the Company had a note receivable of $1,841,920 from an entity owned by Tim Aduddell. The loan was secured by marketable securities and a personal guaranty. Interest was accrued quarterly based on the federal mid-term rate and added to the note principal. Accrued interest income amounted to $40,787 and $ 70,793 for the years ended December 31, 2006 and 2005, respectively. On June 6, 2006, the Board of Directors voted to collect the receivable by redemption of a certain portion of Tim Aduddell’s stock options in an amount sufficient to satisfy the outstanding note receivable. For purposes of determining the redemption value of Mr. Aduddell’s options, the options were valued at the prior twenty day trading average ($1.52) discounted by 15% ($1.292), less the exercise price of the options ($.04) for a total value of $1.252 per option. Based upon this valuation, the Company accepted Tim Aduddell’s surrender of 1,471,182 options in satisfaction of the debt.
The Company leases its office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell. The lease is on a month to month basis with monthly rentals of $16,250. The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rental expense under this lease amounted to $195,000 for each of the years ended December 31, 2007, 2006 and 2005, respectively.
The Company leases its office, warehouse and yard facilities in Minnesota from BDA Development, LLP a entity owned by Brent Anderson who is a Company employee. The lease is on a month to month basis with monthly rentals of $29,442. Rental expense under this lease amounted to $353,310 for the year ended December 31, 2007.
NOTE 13 - BACKLOG
The amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements on which work had not yet begun at December 31, 2007 and 2006, was approximately $17,600,000 and $26,860,000 respectively.
NOTE 14 - SHARE BASED COMPENSATION
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2006, risk-free interest rates of 4.5%, no dividend yield or assumed forfeitures; expected lives of 10.0 years; and volatility of 94%. The amounts above are not likely to be representative of future years because there is no assurance that additional awards will be made each year.
NOTE 15 - EARNINGS PER SHARE
December 31,
December 31, 2006
December 31, 2005
Basic earnings per share:(in thousands)
Common shares outstanding
53,965,854
52,799,191
48,737,921
Weighted average shares outstanding
53,965,854
50,258,549
48,737,921
Earnings per share
$ -
$ -
$ .19
Fully diluted earnings per share:
Common shares outstanding
82,514,672
81,978,005
80,737,921
Weighted average shares outstanding
82,514,672
79,437,367
80,737,921
Earnings per share
$ -
$ - (.04)
$ .12
For the years ended December 31, 2007 and 2006, all options to purchase shares of common stock were omitted from the computation of loss per common share-assuming dilution because all options were anti-dilutive.
NOTE 16 - LEASES
The Company leases its corporate offices, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly owned by the Company’s president and principal stockholder, under an operating lease with monthly rentals of $16,250 through September 30, 2008. The Company is responsible for all taxes, maintenance and utilities on the leased premises.
The Company leases its former corporate office facilities under a four year operating lease with monthly rentals of $10,153 through April 30, 2010. Under the terms of this lease, the Company is responsible for its share of common area maintenance and operating expenses. The facility has been subleased through December 31, 2008 at monthly sublease rentals of $10,153.
The Company also leases office facilities for its Restoration and Minnesota roofing division, Florida roofing division and its Eyeopener division under operating leases which expire during 2008. The Company also routinely leases specialized construction equipment and storage facilities under short-term operating leases.
Rental expense under all operating leases, net of sublease rentals, amounted to approximately $1,019,700, $472,100 and $231,400 for the years ended December 31, 2007, 2006 and 2005, respectively.
As of December 31, 2007, the future minimum lease commitments under all noncancellable operating leases, net of aggregate future minimum noncancellable sublease rentals were as follows:
Year
Gross Rents
$ 42,810
121,920
40,640
$ 205,370
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The Company warrants its work in the normal course of business. In management's opinion, there were no outstanding claims which would have a material effect on the Company's operations or financial position at December 31, 2007.
The Company maintains cash balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000, and any amounts in excess of this would not be insured if the institution should fail. At times, cash in the deposit accounts may exceed the federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk.
In regard to the sale of assets and liquidation of Zenex Communications in 2002, the Company was guarantor to the purchaser on notes with a remaining balance of $151,103 at December 31, 2007, with approximately $6,353 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations.
Lawsuit
Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complained of our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claimed that the individual defendants breached their fiduciary duties to us, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff sought damages, imposition of a constructive trust, restitution and attorneys’ fees. We and the individual defendants denied the substantive allegations of the Complaint. On February 9, 2007, the parties participated in a mediation that resulted in a settlement of the lawsuit, including payment by us of $200,000 ($150,000 of which was paid from proceeds of our director and officer
insurance) and certain non-monetary relief. After publication of the proposed settlement, and after noting no shareholder objection, the Honorable Joe Heaton approved the settlement as fair and reasonable and entered final judgment.
We have been sued by First Bankcentre (the "Bank") in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. A scheduling order has been entered in the case. Although a trial date has not been set, we anticipate trial in the spring of 2008. Written discovery has been exchanged between the parties. On April 8, 2008, the parties engaged in a mediation in Tulsa, Oklahoma and, although a settlement was not reached, negotiations are continuing. If settlement discussions fail, we intend to continue vigorously defending this lawsuit.
In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve employment claims or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, are likely to have a material adverse effect on our financial condition or results of operations.
NOTE 18 - CONCENTRATIONS
In connection with providing service to customers, Aduddell Industries does not have contractual agreements with suppliers. The material and supplies used in the business are readily available from several vendors.
Aduddell Industries had a significant number of customers and for the year ended December 31, 2007 no customer accounted for 10% or more of total revenue. For the year ended December 31, 2006, one customer accounted for 40% of revenue. For the year ended December 31, 2005 the USACE accounted for 72% of revenue.
The Company’s contract receivables at are from a small number of companies in various industries which could be subject to business cycle variations. As of December 31, 2007 no customer accounted for 10% or more of contract receivables. As of December 31, 2006, the Company had one customer that accounted for 40% of contract receivables.
NOTE 19 - PREFERRED STOCK
In October 2007, Aduddell Industries closed a private placement of 20,000 shares of its Series A Preferred Stock, par value $.001 per share, for $100 per share, or total gross proceeds of $2,000,000. The Series A Preferred Stock carries a cash dividend of 14% per annum payable monthly. Each share of Series A Preferred Stock is convertible into the Company’s common stock at any time after the tenth anniversary of the date of issuance. The conversion price per share for the Series A Preferred Stock is the weighted (based on daily trading volume) average closing price per share of the Company’s common stock as reported in the public trading markets for the twenty trading days immediately preceding the date of conversion. The Company may redeem the Series A Preferred Stock at any time at a price equal to the per share liquidation value of $100 plus any accrued and unpaid dividends.