sv3za
As filed with the Securities
and Exchange Commission on December 10, 2007
Registration No. 333-147593
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Sterling Construction Company,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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1600
(Primary standard industrial
classification code number)
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25-1655321
(I.R.S. employer
identification number)
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20810 Fernbush Lane
Houston, Texas 77073
(281) 821-9091
(Address, including zip
code, and telephone number, including area code, of
registrant’s principal executive offices)
Patrick T. Manning
Chief Executive Officer
20810 Fernbush Lane
Houston, Texas 77073
(281) 821-9091
(Name, address,
including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
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Geoffrey K. Walker
Scott L. Olson
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
Telephone:
(713) 220-4757
Facsimile:
(713) 238-7433
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Christopher J. Voss
Stoel Rives LLP
600 University St., Suite 3600
Seattle, Washington 98101
Telephone: (206) 624-0900
Facsimile: (206) 386-7500
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box. o
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed
to register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box. o
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said section 8(a), may determine.
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
DECEMBER 7, 2007
PRELIMINARY PROSPECTUS
1,600,000 Shares
Sterling Construction Company,
Inc.
Common Stock
We are offering to sell 1,600,000 shares of our common
stock. Our common stock is listed on The NASDAQ Global Select
Market, or Nasdaq, under the symbol “STRL.” The last
reported sale price on Nasdaq on December 7, 2007 was
$23.49.
We have granted the underwriter the right to purchase up to
240,000 additional shares of common stock to cover any
over-allotments. The underwriter can exercise this right at any
time within 30 days after the offering.
Investing in our common stock involves risks, including those
incorporated by reference herein as described under “Risk
Factors” on page 8 of this prospectus.
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Per Share
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Total
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Offering price
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$
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$
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Discounts and commissions to underwriter
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$
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$
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Offering proceeds to us, before expenses
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$
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$
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The underwriter expects to deliver the shares of common stock to
investors on or
about ,
2007.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or has determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
D.A.
Davidson & Co.
The
date of this prospectus
is ,
2007
TABLE OF
CONTENTS
You should rely only on the information contained or
incorporated by reference in this prospectus or in any related
free writing prospectus filed with the Securities and Exchange
Commission and used or referred to in an offering to you of
these securities. We have not authorized anyone to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are offering to sell, and seeking offers to buy, shares
of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of our
common stock. Our business, financial condition, results of
operations and prospects may have changed since that date.
MARKET
DATA AND FORECASTS
Unless otherwise indicated, information in this prospectus
concerning economic conditions and our industry is based on
information from independent industry analysts and publications,
as well as our estimates. Our estimates are derived from
publicly available information released by third-party sources,
as well as data from our internal research, and are based on
such data and our knowledge of our industry. None of the
independent industry publications used in this prospectus were
prepared on our or our affiliates’ behalf and none of the
sources cited in this prospectus have consented to the inclusion
of any data from its reports, nor have we sought their consent.
These industry publications generally indicate that they have
obtained their information from sources believed to be reliable,
but the sources do not guarantee the accuracy and completeness
of their information.
i
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that may be important to you. You should read this
entire prospectus carefully, including the risks discussed under
“Risk Factors” and the consolidated financial
statements and notes thereto included elsewhere in this
prospectus. In this prospectus, all references to
“Sterling,” “Sterling Construction,”
“we,” “us” and “our” refer to
Sterling Construction Company, Inc. and its subsidiaries, unless
otherwise stated or indicated by context.
Our
Company
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch office in a new
market, often after having successfully bid on and completed a
project in that market, or by acquiring a company that gives us
an immediate entry into a market. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB, discussed below.
We operate in Texas and Nevada, two states that we believe
benefit from both positive long-term demographic trends as well
as an historical commitment to funding transportation and water
infrastructure projects. From 2000 to 2006, the population grew
12.7% in Texas and 24.9% in Nevada. Budgeted net expenditures
for transportation in 2007 totaled more than $7.6 billion
in Texas, an increase of 4% from 2006. In the recent November
election, Texas voters approved a $5 billion issuance of
bonds for highway improvements. In Nevada, total highway fund
revenue in 2006 reached $1.0 billion, an annual increase of
10.5% from 2001 levels, up 5% from 2005, and several large jobs
are scheduled to be let over the next year. We anticipate that
continued population growth and increased spending for
infrastructure in these markets will positively affect our
business opportunities over the coming years.
For the nine months ended September 30, 2007, we had
revenues of $217.9 million, 17.7% higher than the same
period in 2006. Over the same period, we had net income from
continuing operations of $9.8 million, modestly higher than
results for the same period in 2006. As of September 30,
2007, after giving effect to the RHB acquisition, we had a
backlog of approximately $494 million.
Road and
Highway Builders Acquisition
On October 31, 2007, we completed the acquisition of
privately-owned RHB, which is headquartered in Reno, Nevada. RHB
is a heavy civil construction business focused on the
construction of roads and highways throughout the state of
Nevada. We paid $53 million to acquire approximately 91.67%
of the equity interest in RHB. The remaining 8.33% interest is
owned by Mr. Richard Buenting, the chief executive officer
of RHB, who continues to run RHB as part of our senior
management team.
RHB’s largest customer is the Nevada Department of
Transportation, which is responsible for planning, construction,
operation and maintenance of the 5,400 miles of highway and
over 1,000 bridges that make up the state highway system. RHB is
focused on providing timely and profitable execution of
construction projects along with high-value deployment of
construction materials such as aggregates and mixes for asphalt
1
paving. RHB has concentrated its business in suburban and rural
highway and road system projects requiring high-volume
production and materials handling, and has not historically
pursued municipal work such as water or storm water systems or
high density urban projects. Since its founding in 1999, RHB has
experienced profitable growth, capitalizing on strong market
conditions and solid long-term demographics in Nevada.
For the nine months ended September 30, 2007, RHB generated
revenue, net income and earnings before income, taxes,
depreciation and amortization, or EBITDA, of $64.9 million,
$20.9 million and $21.5 million, respectively. This
high level of profitability in 2007 resulted from the
exceptional profitability of specific RHB projects, and we do
not expect this high level of profitability to be normal for RHB
going forward. We purchased RHB based on an assumed sustainable
trailing twelve month EBITDA of approximately $12 million
and with the expectation of further future growth. EBITDA is not
a financial measure calculated in accordance with generally
accepted accounting principles, or GAAP. See
“Business — Recent RHB Acquisition” for a
reconciliation of RHB’s net income, the most directly
comparable GAAP financial measure, to RHB’s EBITDA for the
nine months ended September 30, 2007. As of
September 30, 2007, RHB had a backlog of approximately
$127 million based on our methodology of calculating
backlog. See “Selected Historical Financial and Operating
Data” for information regarding our calculation of backlog.
We acquired RHB for a number of reasons, including those listed
below:
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expansion into growing western U.S. infrastructure
construction markets;
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strong management team with a shared corporate culture;
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expansion of our service lines into aggregates and asphalt
paving materials;
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opportunities to extend our municipal and structural
capabilities into Nevada; and
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RHB’s strong financial results and immediate accretion to
our earnings and earnings per share.
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Our
Competitive Strengths
We believe our competitive strengths include:
Comprehensive Infrastructure Construction
Capabilities. We provide comprehensive construction
services to our customers, which allows us to capture additional
profit margin and to more aggressively bid on contracts as
compared to some competitors more reliant upon subcontractors.
Long and Successful Track Record of Infrastructure
Construction. We have over 50 years of experience
in the construction industry and have developed the processes
and controls that allow us to provide high-quality contracting
services.
Leadership Position in Our Markets. We are an
established leader in our markets based on our longevity, our
management expertise and our reputation, as well as our in-depth
knowledge of construction conditions in our market areas.
Consistent History of Managing Construction Projects and
Contract Risk. Our significant experience and longevity
in our markets provides us with an understanding of the many
risks of infrastructure construction, which we monitor and
manage from bidding through completion of a contract.
Track Record of Sourcing and Completing
Acquisitions. We have successfully completed several
acquisition transactions over the past five years, which have
materially augmented our organic growth.
Experienced Management Team and Skilled
Workforce. With over 30 years of industry
experience at the CEO and President level, five senior managers
averaging over 25 years of industry experience, and 15
project managers averaging over 15 years of industry
experience, we believe that our management team and employees
are key factors to our success.
2
Our
Business Strategy
Key features of our business strategy include:
Continue to Add Construction Capabilities. By adding
capabilities that augment our core construction competencies, we
are able to improve gross margin opportunities, more effectively
compete for contracts and compete for contracts that might not
otherwise be available to us.
Increase Our Market Leadership in Our Core
Markets. We have a strong presence in a number of
attractive growing markets in Texas and Nevada, in which we
intend to continue to expand our presence.
Apply Core Competencies Across Our Markets. We
intend to capitalize on opportunities to export our Texas
experience constructing bridges and water and sewer systems into
RHB’s Nevada markets. Similarly, we believe RHB’s
experience in aggregates and asphalt paving materials will open
new opportunities for us in our Texas markets.
Expand into Attractive New Markets and Selectively Pursue
Strategic Acquisitions. We will continue to seek to
identify attractive new markets and opportunities in select
western and southeastern U.S. markets. We will also
continue to assess opportunities to extend our service
capabilities and expand our markets through acquisitions.
Position Our Business for Future Infrastructure
Spending. We believe there is a growing awareness of
the need to build, reconstruct and repair our country’s
infrastructure, including water, wastewater and storm drainage
systems, and our transportation infrastructure such as bridges,
highways and mass transit systems. We will continue to build our
expertise to capture this infrastructure spending.
Continue to Develop Our Employees. We believe that
our employees are a key to the successful implementation of our
business strategy, and we will continue allocating significant
resources in order to attract and retain talented managers and
supervisory and field personnel.
Risks
Related to Our Business and Strategy
You should carefully read and consider the information set forth
below under “Risk Factors,” together with all of the
other information set forth in this prospectus, before deciding
to invest in shares of our common stock.
3
The
Offering
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Nasdaq symbol
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“STRL”
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Common stock offered by us
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1,600,000 shares
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Common stock to be outstanding after the offering
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12,762,942 shares
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Use of proceeds
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We will use the net proceeds of approximately $34.9 million
from the offering, after deducting underwriting discounts and
fees of approximately $1.9 million in the aggregate and
estimated offering expenses of approximately $775,000:
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• to repay indebtedness outstanding under our
new $75 million revolving credit facility, which we refer
to as our credit facility; and
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• to strengthen our balance sheet, including our
working capital, in order to fund our business operations and
provide liquidity for future growth.
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Each $1.00 change in the actual per share offering price from
the price assumed in this prospectus would change by
approximately $1.5 million the amount of our net proceeds
available to strengthen our balance sheet after funding the
repayment of indebtedness referenced above. A 10% decrease in
the number of shares of common stock sold in this offering would
decrease the net proceeds to us from this offering by
approximately $3.6 million, after deducting estimated
underwriting discounts and commissions and offering expenses.
The number of shares of common stock outstanding before and
after this offering is based on the number of shares outstanding
as of December 5, 2007 and excludes:
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552,516 shares of common stock reserved for issuance upon
the exercise of outstanding stock options at a weighted average
exercise price per share of $7.802; and
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356,266 shares of common stock reserved for issuance upon
the exercise of outstanding warrants at an exercise price per
share of $1.50.
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Unless we indicate otherwise, the number of shares of common
stock shown to be outstanding after the offering, as well as
share, per share, holders of record, and financial information
in this prospectus:
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assumes a public offering price of $23.49 per share, which is
the last reported sales price per share of our common stock on
the Nasdaq on December 6, 2007;
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assumes no exercise by the underwriter of its option to purchase
up to 240,000 additional shares of our common stock to cover
over-allotments; and
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does not give effect to the use of proceeds of this offering.
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Our
Executive Offices
Our principal executive offices are located at 20810 Fernbush
Lane, Houston, Texas 77073, and our telephone number at this
address is (281) 821–9091. Our website is
www.sterlingconstructionco.com. Information on, or accessible
through, this website is not a part of, and is not incorporated
into, this prospectus.
4
Summary
Historical and Pro Forma Financial and Operating Data
The following table sets forth our summary historical and pro
forma financial and operating data for the periods indicated.
The summary historical condensed consolidated statement of
operations and cash flow data for the years ended
December 31, 2004, 2005 and 2006, and the summary
historical condensed consolidated balance sheet data as of
December 31, 2005 and 2006, have been derived from our
audited consolidated financial statements, which are included
elsewhere in this prospectus. The summary historical condensed
consolidated balance sheet data as of December 31, 2004,
have been derived from our audited consolidated balance sheet as
of December 31, 2004, which is not included in this
prospectus. The summary historical condensed consolidated
financial data as of and for the nine months ended
September 30, 2006 and 2007, are derived from our unaudited
condensed consolidated financial statements, which are included
elsewhere in this prospectus.
The unaudited condensed consolidated financial statements have
been prepared on the same basis as our audited consolidated
financial statements and include all adjustments, consisting of
normal and recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating
results for the unaudited periods. The summary financial and
operating data as of and for the nine months ended
September 30, 2007, are not necessarily indicative of the
results that may be obtained for a full year.
The summary pro forma condensed combined statement of operations
data for the year ended December 31, 2006 and nine months
ended September 30, 2007, gives effect on a pro forma basis
to the RHB acquisition as if it had been consummated on
January 1, 2006. The summary pro forma condensed combined
balance sheet information gives effect on a pro forma basis to
the consummation of the RHB acquisition, as if it had been
consummated on September 30, 2007.
The information presented below should be read in conjunction
with “Selected Historical Financial and Operating
Data,” “Unaudited Pro Forma Condensed Combined
Financial Information,” “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and the financial statements and the notes
thereto included elsewhere in this prospectus.
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Pro Forma(1)
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Historical
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Nine Months
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Nine Months Ended
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Year Ended
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Ended
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Year Ended December 31,
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September 30,
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December 31,
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September 30,
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2004
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2005
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2006
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2006
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2007
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2006
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2007
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(Unaudited)
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(Unaudited)
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(in thousands, except per share data)
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Statement of Operations Data:
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Revenues
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$
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132,478
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$
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219,439
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$
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249,348
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$
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185,233
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$
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217,877
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$
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286,511
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$
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282,797
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Cost of revenues
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119,217
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195,683
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220,801
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163,358
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196,284
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252,268
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240,399
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Gross profit
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13,261
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23,756
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28,547
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21,875
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21,593
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34,243
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42,398
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General and administrative expenses and other
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7,696
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9,091
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10,549
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7,928
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8,292
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10,462
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8,691
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Operating income
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5,565
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14,665
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17,998
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13,947
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13,301
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23,781
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33,707
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Interest expense (income), net
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1,456
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1,336
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(1,206
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(803
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(1,366
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1,576
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908
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Income from continuing operations before minority interest and
income taxes
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4,109
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13,329
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19,204
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14,750
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14,667
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22,205
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32,799
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Minority interest
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(962
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—
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—
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—
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—
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(518
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(1,734
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Income from continuing operations before income taxes
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3,147
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13,329
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19,204
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14,750
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14,667
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21,687
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31,065
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Income tax (benefit) expense
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(2,134
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2,788
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6,566
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5,027
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4,890
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7,410
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10,465
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|
Net income from continuing operations
|
|
|
5,281
|
|
|
|
10,541
|
|
|
|
12,638
|
|
|
|
9,723
|
|
|
|
9,777
|
|
|
|
14,277
|
|
|
|
20,600
|
|
Net income (loss) from discontinued operations
|
|
|
372
|
|
|
|
559
|
|
|
|
682
|
|
|
|
444
|
|
|
|
(25
|
)
|
|
|
682
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
|
$
|
14,959
|
|
|
$
|
20,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.99
|
|
|
$
|
1.36
|
|
|
$
|
1.19
|
|
|
$
|
0.93
|
|
|
$
|
0.89
|
|
|
$
|
1.34
|
|
|
$
|
1.87
|
|
Discontinued operations
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.06
|
|
|
$
|
1.43
|
|
|
$
|
1.25
|
|
|
$
|
0.97
|
|
|
$
|
0.89
|
|
|
$
|
1.40
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
1.08
|
|
|
$
|
0.84
|
|
|
$
|
0.83
|
|
|
$
|
1.21
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.80
|
|
|
$
|
1.16
|
|
|
$
|
1.14
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
|
$
|
1.27
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma(1)
|
|
|
|
Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
Weighted average number of shares outstanding used in computing
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,343
|
|
|
|
7,775
|
|
|
|
10,583
|
|
|
|
10,455
|
|
|
|
10,963
|
|
|
|
10,623
|
|
|
|
11,002
|
|
Diluted
|
|
|
7,028
|
|
|
|
9,538
|
|
|
|
11,714
|
|
|
|
11,640
|
|
|
|
11,765
|
|
|
|
11,754
|
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,449
|
|
|
$
|
22,267
|
|
|
$
|
28,466
|
|
|
$
|
18,996
|
|
|
$
|
14,894
|
|
|
|
|
|
|
$
|
23,924
|
|
Short-term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
26,169
|
|
|
|
22,585
|
|
|
|
32,630
|
|
|
|
|
|
|
|
—
|
|
Working capital
|
|
|
16,052
|
|
|
|
18,354
|
|
|
|
62,874
|
|
|
|
58,369
|
|
|
|
59,691
|
|
|
|
|
|
|
|
31,354
|
|
Total assets
|
|
|
89,544
|
|
|
|
118,455
|
|
|
|
167,772
|
|
|
|
171,293
|
|
|
|
187,107
|
|
|
|
|
|
|
|
222,903
|
|
Total debt
|
|
|
25,445
|
|
|
|
23,142
|
|
|
|
30,782
|
|
|
|
28,812
|
|
|
|
30,689
|
|
|
|
|
|
|
|
53,257
|
|
Total liabilities
|
|
|
54,336
|
|
|
|
69,843
|
|
|
|
76,781
|
|
|
|
83,950
|
|
|
|
85,172
|
|
|
|
|
|
|
|
125,383
|
|
Stockholders’ equity
|
|
|
35,208
|
|
|
|
48,612
|
|
|
|
90,991
|
|
|
|
87,343
|
|
|
|
101,935
|
|
|
|
|
|
|
|
97,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow data from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
4,171
|
|
|
$
|
31,266
|
|
|
$
|
23,089
|
|
|
$
|
9,846
|
|
|
$
|
14,648
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,809
|
)
|
|
|
(10,972
|
)
|
|
|
(52,358
|
)
|
|
|
(46,567
|
)
|
|
|
(28,586
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,436
|
|
|
|
(1,476
|
)
|
|
|
35,468
|
|
|
|
33,450
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(unaudited) (2)
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
$
|
30,626
|
|
|
$
|
39,842
|
|
Capital expenditures
|
|
|
3,555
|
|
|
|
11,392
|
|
|
|
27,055
|
|
|
|
24,706
|
|
|
|
23,033
|
|
|
|
27,268
|
|
|
|
27,394
|
|
Backlog at end of period (unaudited)(3)
|
|
|
232,000
|
|
|
|
307,000
|
|
|
|
395,000
|
|
|
|
418,000
|
|
|
|
367,000
|
|
|
|
|
|
|
|
494,000
|
|
|
|
|
(1) |
|
The high level of profitability for the nine months ended
September 30, 2007 reflects the exceptional profitability
of specific ongoing RHB prospects, and we do not expect the high
level of profitability to be normal for RHB going forward. |
|
|
|
(2) |
|
EBITDA is defined as net income before net interest expense,
income tax expense, and depreciation and amortization. EBITDA is
a non-GAAP financial measure that we use for our internal
budgeting process, which excludes the effects of financing
costs, income taxes and non-cash depreciation and amortization.
Although EBITDA is a common alternative measure of performance
used by investors, financial analysts and rating agencies to
assess operating performance for companies in our industry, it
is not a substitute for other GAAP financial measures such as
net income or operating income as calculated and presented in
accordance with GAAP. Furthermore, we believe that the non-GAAP
EBITDA financial measure is useful to investors in providing
greater transparency to the information used by management in
its operational and investment decision making. Our non-GAAP
financial measures may be different from such measures used by
other companies. We urge you to review the GAAP financial
measures included in this prospectus and our consolidated
financial statements, including the notes thereto, and the other
financial information contained in this prospectus and
incorporated herein by reference, and not to rely on any single
financial measure to evaluate our business. |
|
|
|
|
|
A reconciliation of net income to EBITDA for each of the
historical and pro forma fiscal periods indicated is as follows
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Net income
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
|
$
|
14,959
|
|
|
$
|
20,575
|
|
Depreciation and amortization
|
|
|
4,545
|
|
|
|
5,064
|
|
|
|
7,011
|
|
|
|
5,574
|
|
|
|
6,764
|
|
|
|
6,681
|
|
|
|
7,894
|
|
Interest expense (income), net
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
|
|
1,576
|
|
|
|
908
|
|
Income tax (benefit) expense
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
7,410
|
|
|
|
10,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
$
|
30,626
|
|
|
$
|
39,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures. |
|
|
|
(3) |
|
Historical information does not include RHB backlog; pro forma
backlog does include RHB backlog of approximately
$127 million as of September 30, 2007, based on our
methodology of calculating backlog. Backlog is our estimate of
the billings that we expect to make in future periods on our
construction contracts. We add the revenue value of new
contracts to our backlog, typically when we are the low bidder
on a public sector contract and management determines that there
are no apparent impediments to award of the contract. At
September 30, 2007, historical and pro forma backlog
included approximately $12 million of low bids where the
contracts had not been officially awarded. RHB had no such
backlog at that date. Historically, subsequent non-awards to us
of contracts relating to such low bids have not materially
affected our backlog or financial condition. As construction on
our contracts progresses, we increase or decrease backlog to
take account changes in estimated quantities under fixed unit
price contracts, as well as to reflect changed conditions,
change orders and other variations from initially anticipated
contract revenues and costs, including completion penalties and
bonuses. We subtract from backlog the amounts we bill on
contracts. |
7
An investment in our common stock involves various risks.
Before making an investment in our common stock, you should
carefully consider the following risks, as well as the other
information contained in this prospectus, including our
consolidated financial statements and the notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The risks described
below are those we believe to be the material risks we face. Any
of the risk factors described below could significantly and
adversely affect our business, prospects, financial condition
and results of operations. As a result, the trading price of our
common stock could decline, and you could lose a part or all of
your investment.
Risks
Relating to Our Business
If we are
unable to accurately estimate the overall risks or costs when we
bid on a contract that is ultimately awarded to us, we may
achieve a lower than anticipated profit or incur a loss on the
contract.
Substantially all of our revenues and backlog are typically
derived from fixed unit price contracts. Fixed unit price
contracts require us to perform the contract for a fixed unit
price irrespective of our actual costs. As a result, we realize
a profit on these contracts only if we successfully estimate our
costs and then successfully control actual costs and avoid cost
overruns. If our cost estimates for a contract are inaccurate,
or if we do not execute the contract within our cost estimates,
then cost overruns may cause us to incur losses or cause the
contract not to be as profitable as we expected. This, in turn,
could negatively affect our cash flow, earnings and financial
position.
The costs incurred and gross profit realized on such contracts
can vary, sometimes substantially, from the original projections
due to a variety of factors, including, but not limited to:
|
|
|
|
•
|
onsite conditions that differ from those assumed in the original
bid;
|
|
|
•
|
delays caused by weather conditions;
|
|
|
•
|
contract modifications creating unanticipated costs not covered
by change orders;
|
|
|
•
|
changes in availability, proximity and costs of materials,
including steel, concrete, aggregates and other construction
materials (such as stone, gravel, sand and oil for asphalt
paving), as well as fuel and lubricants for our equipment;
|
|
|
•
|
inability to predict the costs of accessing and producing
aggregates, and purchasing oil, required for asphalt paving
projects;
|
|
|
•
|
availability and skill level of workers in the geographic
location of a project;
|
|
|
•
|
our suppliers’ or subcontractors’ failure to perform;
|
|
|
•
|
fraud or theft committed by our employees;
|
|
|
•
|
mechanical problems with our machinery or equipment;
|
|
|
•
|
citations issued by any governmental authority, including the
Occupational Safety and Health Administration;
|
|
|
•
|
difficulties in obtaining required governmental permits or
approvals;
|
|
|
•
|
changes in applicable laws and regulations; and
|
|
|
|
|
•
|
claims or demands from third parties alleging damages arising
from our work or from the project of which our work is part.
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Many of our contracts with public sector customers contain
provisions that purport to shift some or all of the above risks
from the customer to us, even in cases where the customer is
partly at fault. Our experience has often been that public
sector customers have been willing to negotiate equitable
adjustments in the contract compensation or completion time
provisions if unexpected circumstances arise. If public sector
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customers seek to impose contractual risk-shifting provisions
more aggressively, we could face increased risks, which may
adversely affect our cash flow, earnings and financial position.
Economic
downturns or reductions in government funding of infrastructure
projects could reduce our revenues and profits and have a
material adverse effect on our results of operations.
Our business is highly dependent on the amount and timing of
infrastructure work funded by various governmental entities,
which, in turn, depends on the overall condition of the economy,
the need for new or replacement infrastructure, the priorities
placed on various projects funded by governmental entities and
federal, state or local government spending levels. Spending on
infrastructure could decline for numerous reasons, including
decreased revenues received by state and local governments for
spending on such projects, including federal funding. For
example, state spending on highway and other projects can be
adversely affected by decreases or delays in, or uncertainties
regarding, federal highway funding, which could adversely affect
us, particularly in Texas. We are reliant upon contracts with
the Texas Department of Transportation, or TXDOT, and the Nevada
Department of Transportation, or NDOT, for a significant portion
of our revenues. Recent public statements by TXDOT officials
indicate potential TXDOT funding shortfalls and reductions in
spending. In addition, the recent nationwide declines in home
sales and increases in foreclosures could adversely affect
expenditures by state and local governments, particularly in
Nevada. Decreases in government funding of infrastructure
projects could decrease the number of civil construction
contracts available and limit our ability to obtain new
contracts, which could reduce our revenues and profits.
The
cancellation of significant contracts could reduce our revenues
and profits and have a material adverse effect on our results of
operations.
Contracts that we enter into with governmental entities can
usually be canceled at any time by them with payment only for
the work already completed. In addition, we could be prohibited
from bidding on certain governmental contracts if we fail to
maintain qualifications required by those entities. A sudden
cancellation of a contract or our debarment from the bidding
process could cause our equipment and work crews to remain idled
for a significant period of time until other comparable work
became available, which could have a material adverse effect on
our business and results of operations.
We
operate in Texas and Nevada, and any adverse change to the
economy or business environment in Texas or Nevada could
significantly affect our operations, which would lead to lower
revenues and reduced profitability.
We operate in Texas and Nevada, and our Texas operations are
particularly concentrated in the Houston area. Because of this
concentration in specific geographic locations, we are
susceptible to fluctuations in our business caused by adverse
economic or other conditions in these regions, including natural
or other disasters. A stagnant or depressed economy in Texas or
Nevada generally, or in Houston specifically, or in any of the
other markets that we serve, could adversely affect our
business, results of operations and financial condition.
Our
acquisition strategy involves a number of risks.
In addition to organic growth of our construction business, we
intend to continue pursuing growth through the acquisition of
companies or assets that may enable us to expand our project
skill-sets and capabilities, enlarge our geographic markets, add
experienced management and increase critical mass to enable us
to bid on larger contracts. However, we may be unable to
implement this growth strategy if we cannot reach agreements for
potential acquisitions on acceptable terms or for other reasons.
Moreover, our acquisition strategy involves certain risks,
including:
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difficulties in the integration of operations and systems;
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difficulties applying our expertise in one market into another
market;
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the key personnel and customers of the acquired company may
terminate their relationships with the acquired company;
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we may experience additional financial and accounting challenges
and complexities in areas such as tax planning and financial
reporting;
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we may assume or be held liable for risks and liabilities
(including for environmental-related costs and liabilities) as a
result of our acquisitions, some of which we may not discover
during our due diligence;
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our ongoing business may be disrupted or receive insufficient
management attention; and
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we may not be able to realize cost savings or other financial
benefits we anticipated.
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These risks apply to our recent acquisition and integration of
RHB.
Future acquisitions may require us to obtain additional equity
or debt financing, as well as additional surety bonding
capacity, which may not be available on terms acceptable to us
or at all. Moreover, to the extent that any acquisition results
in additional goodwill, it will reduce our tangible net worth,
which might have an adverse effect on our credit and bonding
capacity.
Our
industry is highly competitive, with a variety of larger
companies with greater resources competing with us, and our
failure to compete effectively could reduce the number of new
contracts awarded to us or adversely affect our margins on
contracts awarded.
Essentially all of the contracts on which we bid are awarded
through a competitive bid process, with awards generally being
made to the lowest bidder, but sometimes recognizing other
factors, such as shorter contract schedules or prior experience
with the customer. Within our markets, we compete with many
national, regional and local construction firms. Some of these
competitors have achieved greater market penetration than we
have in the markets in which we compete, and some have greater
financial and other resources than we do. In addition, there are
a number of national companies in our industry that are larger
than we are and that, if they so desire, could establish a
presence in our markets and compete with us for contracts. In
some markets, such as Nevada, where home building projects have
slowed, construction companies that lack available work in the
home building market have begun bidding on highway construction
contracts. As a result, we may need to accept lower contract
margins in order to compete against competitors that have the
ability to accept awards at lower prices or have a pre-existing
relationship with a customer. If we are unable to compete
successfully in our markets, our relative market share and
profits could be reduced.
Our
dependence on subcontractors and suppliers of materials
(including petroleum-based products) could increase our costs
and impair our ability to complete contracts on a timely basis
or at all, which would adversely affect our profits and cash
flow.
We rely on third-party subcontractors to perform some of the
work on many of our contracts. We generally do not bid on
contracts unless we have the necessary subcontractors committed
for the anticipated scope of the contract and at prices that we
have included in our bid, except for trucking arrangements
needed for our Nevada operations. Therefore, to the extent that
we cannot engage subcontractors, our ability to bid for
contracts may be impaired. In addition, if a subcontractor is
unable to deliver its services according to the negotiated terms
for any reason, including the deterioration of its financial
condition, we may suffer delays and be required to purchase the
services from another source at a higher price. This may reduce
the profit to be realized, or result in a loss, on a contract.
We also rely on third-party suppliers to provide most of the
materials (including aggregates, concrete, steel and pipe) for
our contracts, except in Nevada where RHB sources and produces
most of its own aggregates. We do not own or operate any
quarries in Texas, and there are no naturally occurring sources
of aggregates in the Houston metropolitan area. We normally do
not bid on contracts unless we have commitments from suppliers
for the materials required to complete the contract and at
prices that we have included in our bid, except for some
aggregates that RHB uses in its construction projects. Thus, to
the extent that we cannot obtain commitments from our suppliers
for materials, our ability to bid for contracts may be impaired.
In addition, if a supplier is unable to deliver materials
according to the negotiated terms of a supply agreement for any
reason, including the deterioration of its financial condition,
we may suffer delays and be
10
required to purchase the materials from another source at a
higher price. This may reduce the profit to be realized, or
result in a loss, on a contract.
Diesel fuel and other petroleum-based products are utilized to
operate the plants and equipment on which we rely to perform our
construction contracts. In addition, RHB uses oil in combination
with aggregates to produce asphalt used in its road and highway
construction projects. Decreased supplies of such products
relative to demand, unavailability of petroleum supplies due to
refinery turnarounds, and other factors can increase the cost of
such products. Future increases in the costs of fuel and other
petroleum-based products used in our business, particularly if a
bid has been submitted for a contract and the costs of such
products have been estimated at amounts less than the actual
costs thereof, could result in a lower profit, or a loss, on a
contract.
We may
not accurately assess the quality, and we may not accurately
estimate the quantity, availability and cost, of aggregates we
plan to produce, particularly for projects in rural areas of
Nevada, which could have a material adverse effect on our
results of operations.
Particularly for projects in rural areas of Nevada, we typically
estimate these factors for anticipated aggregate sources that we
have not previously used to produce aggregates, which increases
the risk that our estimates may be inaccurate. Inaccuracies in
our estimates regarding aggregates could result in significantly
higher costs to supply aggregates needed for our projects, as
well as potential delays and other inefficiencies. As a result,
our failure to accurately assess the quality, quantity,
availability and cost of aggregates could cause us to incur
losses, which could materially adversely affect our results of
operations.
We may
not be able to fully realize the revenue anticipated by our
reported backlog.
Almost all of the contracts included in backlog are awarded by
public sector customers through a competitive bid process, with
the award generally being made to the lowest bidder. We add new
contracts to our backlog, typically when we are the low bidder
on a public sector contract and management determines that there
are no apparent impediments to award of the contract. As
construction on our contracts progresses, we increase or
decrease backlog to take account of changes in estimated
quantities under fixed unit price contracts, as well as to
reflect changed conditions, change orders and other variations
from initially anticipated contract revenues and costs,
including completion penalties and bonuses. We subtract from
backlog the amounts we bill on contracts.
Most of the contracts with our public sector customers can be
terminated at their discretion. If a customer cancels, suspends,
delays or reduces a contract, we may be reimbursed for certain
costs but typically will not be able to bill the total amount
that had been reflected in our backlog. Cancellation of one or
more contracts that constitute a large percentage of our
backlog, and our inability to find a substitute contract, would
have a material adverse effect on our business, results of
operations and financial condition.
If we are
unable to attract and retain key personnel and skilled labor, or
if we encounter labor difficulties, our ability to bid for and
successfully complete contracts may be negatively
impacted.
Our ability to attract and retain reliable, qualified personnel
is a significant factor that enables us to successfully bid for
and profitably complete our work. This includes members of our
management, project managers, estimators, supervisors, foremen,
equipment operators and laborers. The loss of the services of
any of our management could have a material adverse effect on
us. Our future success will also depend on our ability to hire
and retain, or to attract when needed, highly-skilled personnel.
Competition for these employees is intense, and we could
experience difficulty hiring and retaining the personnel
necessary to support our business. If we do not succeed in
retaining our current employees and attracting, developing and
retaining new highly-skilled employees, our reputation may be
harmed and our future earnings may be negatively impacted.
In Texas, we rely heavily on immigrant labor. Any adverse
changes to existing laws and regulations, or changes in
enforcement requirements or practices, applicable to employment
of immigrants could negatively impact the availability and cost
of the skilled personnel and labor we need, particularly in
Texas. We may not
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be able to continue to attract and retain sufficient employees
at all levels due to changes in immigration enforcement
practices or compliance standards or for other reasons.
In Nevada, a substantial portion of our equipment operators and
laborers are unionized. Any work stoppage or other labor dispute
involving our unionized workforce would have a material adverse
effect on our operations and operating results in Nevada.
Our
contracts may require us to perform extra or change order work,
which can result in disputes and adversely affect our working
capital, profits and cash flows.
Our contracts generally require us to perform extra or change
order work as directed by the customer even if the customer has
not agreed in advance on the scope or price of the extra work to
be performed. This process may result in disputes over whether
the work performed is beyond the scope of the work included in
the original project plans and specifications or, if the
customer agrees that the work performed qualifies as extra work,
the price that the customer is willing to pay for the extra
work. These disputes may not be settled to our satisfaction.
Even when the customer agrees to pay for the extra work, we may
be required to fund the cost of such work for a lengthy period
of time until the change order is approved by the customer and
we are paid by the customer.
To the extent that actual recoveries with respect to change
orders or amounts subject to contract disputes or claims are
less than the estimates used in our financial statements, the
amount of any shortfall will reduce our future revenues and
profits, and this could have a material adverse effect on our
reported working capital and results of operations. In addition,
any delay caused by the extra work may adversely impact the
timely scheduling of other project work and our ability to meet
specified contract milestone dates.
Our
failure to meet schedule or performance requirements of our
contracts could adversely affect us.
In most cases, our contracts require completion by a scheduled
acceptance date. Failure to meet any such schedule could result
in additional costs, penalties or liquidated damages being
assessed against us, and these could exceed projected profit
margins on the contract. Performance problems on existing and
future contracts could cause actual results of operations to
differ materially from those anticipated by us and could cause
us to suffer damage to our reputation within the industry and
among our customers.
Unanticipated
adverse weather conditions may cause delays, which could slow
completion of our contracts and negatively affect our current
and future revenues and cash flow.
Because all of our construction projects are built outdoors,
work on our contracts is subject to unpredictable weather
conditions, which could become more frequent or severe if
general climatic changes occur. For example, evacuations in
Texas due to Hurricane Rita resulted in our inability to perform
work on all Houston-area contracts for several days. Lengthy
periods of wet weather will generally interrupt construction,
and this can lead to under-utilization of crews and equipment,
resulting in less efficient rates of overhead recovery. For
example, during much of 2007, we experienced an above-average
number of days and amount of rainfall across our Texas markets,
which impeded our ability to work on construction projects and
reduced our gross profit. While revenues can be recovered
following a period of bad weather, it is generally impossible to
recover the efficiencies, and significant periods of bad weather
typically reduce profitability of affected contracts both in the
current period and during the future life of affected contracts.
Such reductions in contract profitability negatively affect our
results of operations in current and future periods until the
affected contracts are completed.
Timing of
the award and performance of new contracts could have an adverse
effect on our operating results and cash flow.
At any point in time, a substantial portion of our revenues may
be derived from a limited number of large construction
contracts. It is generally very difficult to predict whether and
when new contracts will be offered for tender, as these
contracts frequently involve a lengthy and complex design and
bidding process, which is affected by a number of factors, such
as market conditions, financing arrangements and governmental
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approvals. Because of these factors, our results of operations
and cash flows may fluctuate from quarter to quarter and year to
year, and the fluctuation may be substantial.
The uncertainty of the timing of contract awards may also
present difficulties in matching the size of our equipment fleet
and work crews with contract needs. In some cases, we may
maintain and bear the cost of more equipment and ready work
crews than are currently required, in anticipation of future
needs for existing contracts or expected future contracts. If a
contract is delayed or an expected contract award is not
received, we would incur costs that could have a material
adverse effect on our anticipated profit.
In addition, the timing of the revenues, earnings and cash flows
from our contracts can be delayed by a number of factors,
including adverse weather conditions such as prolonged or
intense periods of rain, storms or flooding, delays in receiving
material and equipment from suppliers and changes in the scope
of work to be performed. Such delays, if they occur, could have
adverse effects on our operating results for current and future
periods until the affected contracts are completed.
Our
dependence on a limited number of customers could adversely
affect our business and results of operations.
Due to the size and nature of our construction contracts, one or
a few customers have in the past and may in the future represent
a substantial portion of our consolidated revenues and gross
profits in any one year or over a period of several consecutive
years. For example, in 2006, approximately 84% of our revenue
was generated from three customers, and approximately 90% of
RHB’s revenue was generated from one customer. Similarly,
our backlog frequently reflects multiple contracts for
individual customers; therefore, one customer may comprise a
significant percentage of backlog at a certain point in time. An
example of this is TXDOT, with which we had 21 contracts
representing an aggregate of approximately 69% of our backlog at
September 30, 2007. Similarly, seven contracts with NDOT
represented 100% of RHB’s backlog at September 30,
2007. The loss of business from any one of such customers could
have a material adverse effect on our business or results of
operations. Because we do not maintain any reserves for payment
defaults, a default or delay in payment on a significant scale
could materially adversely affect our business, results of
operations and financial condition.
We may
incur higher costs to lease, acquire and maintain equipment
necessary for our operations, and the market value of our owned
equipment may decline.
We have traditionally owned most of the construction equipment
used to build our projects. To the extent that we are unable to
buy construction equipment necessary for our needs, either due
to a lack of available funding or equipment shortages in the
marketplace, we may be forced to rent equipment on a short-term
basis, which could increase the costs of performing our
contracts.
The equipment that we own or lease requires continuous
maintenance, for which we maintain our own repair facilities. If
we are unable to continue to maintain the equipment in our
fleet, we may be forced to obtain third-party repair services,
which could increase our costs. In addition, the market value of
our equipment may unexpectedly decline at a faster rate than
anticipated. Such a decline would reduce the borrowing base
under our credit facility, thereby reducing the amount of credit
available to us and impeding our ability to continue to expand
our business.
An
inability to obtain bonding could limit the aggregate dollar
amount of contracts that we are able to pursue.
As is customary in the construction business, we are required to
provide surety bonds to secure our performance under
construction contracts. Our ability to obtain surety bonds
primarily depends upon our capitalization, working capital, past
performance, management expertise and reputation and certain
external factors, including the overall capacity of the surety
market. Surety companies consider such factors in relationship
to the amount of our backlog and their underwriting standards,
which may change from time to time. Events that affect the
insurance and bonding markets generally may result in bonding
becoming more difficult to obtain in the future, or being
available only at a significantly greater cost. Our inability to
obtain
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adequate bonding, and, as a result, to bid on new contracts,
could have a material adverse effect on our future revenues and
business prospects.
Our
operations are subject to hazards that may cause personal injury
or property damage, thereby subjecting us to liabilities and
possible losses, which may not be covered by
insurance.
Our workers are subject to the usual hazards associated with
providing construction and related services on construction
sites, plants and quarries. Operating hazards can cause personal
injury and loss of life, damage to or destruction of property,
plant and equipment and environmental damage. We self-insure our
workers’ compensation claims, subject to stop-loss
insurance coverage. We also maintain insurance coverage in
amounts and against the risks that we believe are consistent
with industry practice, but this insurance may not be adequate
to cover all losses or liabilities that we may incur in our
operations.
Insurance liabilities are difficult to assess and quantify due
to unknown factors, including the severity of an injury, the
determination of our liability in proportion to other parties,
the number of incidents not reported and the effectiveness of
our safety program. If we were to experience insurance claims or
costs above our estimates, we might also be required to use
working capital to satisfy these claims rather than to maintain
or expand our operations. To the extent that we experience a
material increase in the frequency or severity of accidents or
workers’ compensation claims, or unfavorable developments
on existing claims, our operating results and financial
condition could be materially and adversely affected.
Environmental
and other regulatory matters could adversely affect our ability
to conduct our business and could require expenditures that
could have a material adverse effect on our results of
operations and financial condition.
Our operations are subject to various environmental laws and
regulations relating to the management, disposal and remediation
of hazardous substances and the emission and discharge of
pollutants into the air and water. We could be held liable for
such contamination created not only from our own activities but
also from the historical activities of others on our project
sites or on properties that we acquire or lease. Our operations
are also subject to laws and regulations relating to workplace
safety and worker health, which, among other things, regulate
employee exposure to hazardous substances. Immigration laws
require us to take certain steps intended to confirm the legal
status of our immigrant labor force, but we may nonetheless
unknowingly employ illegal immigrants. Violations of such laws
and regulations could subject us to substantial fines and
penalties, cleanup costs, third-party property damage or
personal injury claims. In addition, these laws and regulations
have become, and enforcement practices and compliance standards
are becoming, increasingly stringent. Moreover, we cannot
predict the nature, scope or effect of legislation or regulatory
requirements that could be imposed, or how existing or future
laws or regulations will be administered or interpreted, with
respect to products or activities to which they have not been
previously applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of
the regulatory agencies, could require us to make substantial
expenditures for, among other things, pollution control systems
and other equipment that we do not currently possess, or the
acquisition or modification of permits applicable to our
activities.
RHB’s lease of an aggregate quarry in Nevada could subject
us to costs and liabilities. A limited environmental assessment
report that we received in connection with the RHB acquisition
was inconclusive about potential environmental contamination at
the quarry resulting from various mining activities and landfill
operations that may have occurred on or near the property. Due
to the limited nature of the report, we are unable to assess the
extent of our liability, if any, at the quarry. As lessee and
operator of the quarry, RHB could be held responsible for any
contamination or regulatory violations resulting from activities
or operations at the quarry. Any such costs and liabilities
could be significant and could materially and adversely affect
our business, operating results and financial condition.
We may be
unable to sustain our historical revenue growth rate.
Our revenue has grown rapidly in recent years. However, we
may be unable to sustain these recent revenue growth rates for a
variety of reasons, including limits on additional growth in our
current markets, less
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success in competitive bidding for contracts, limitations on
access to necessary working capital and investment capital to
sustain growth, limitations on access to bonding to support
increased contracts and operations, inability to hire and retain
essential personnel and to acquire equipment to support growth,
and inability to identify acquisition candidates and
successfully acquire and integrate them into our business. A
decline in our revenue growth could have a material adverse
effect on our financial condition and results of operations if
we are unable to reduce the growth of our operating expenses at
the same rate.
Terrorist
attacks have impacted, and could continue to negatively impact,
the U.S. economy and the markets in which we operate.
Terrorist attacks, like those that occurred on
September 11, 2001, have contributed to economic
instability in the United States, and further acts of terrorism,
violence or war could affect the markets in which we operate,
our business and our expectations. Armed hostilities may
increase, or terrorist attacks, or responses from the United
States, may lead to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may
further contribute to economic instability in the United States.
These attacks or armed conflicts may affect our operations or
those of our customers or suppliers and could impact our
revenues, our production capability and our ability to complete
contracts in a timely manner.
Risks
Related to Our Financial Results and Financing Plans
Actual
results could differ from the estimates and assumptions that we
use to prepare our financial statements.
To prepare financial statements in conformity with GAAP,
management is required to make estimates and assumptions, as of
the date of the financial statements, which affect the reported
values of assets and liabilities, revenues and expenses, and
disclosures of contingent assets and liabilities. Areas
requiring significant estimates by our management include:
contract costs and profits and application of
percentage-of-completion accounting and revenue recognition of
contract change order claims; provisions for uncollectible
receivables and customer claims and recoveries of costs from
subcontractors, suppliers and others; valuation of assets
acquired and liabilities assumed in connection with business
combinations; and accruals for estimated liabilities, including
litigation and insurance reserves. Our actual results could
differ from, and could require adjustments to, those estimates.
In particular, as is more fully discussed in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting
Policies,” we recognize contract revenue using the
percentage-of-completion method. Under this method, estimated
contract revenue is recognized by applying the percentage of
completion of the contract for the period to the total estimated
revenue for the contract. Estimated contract losses are
recognized in full when determined. Contract revenue and total
cost estimates are reviewed and revised on a continuous basis as
the work progresses and as change orders are initiated or
approved, and adjustments based upon the percentage of
completion are reflected in contract revenue in the accounting
period when these estimates are revised. To the extent that
these adjustments result in an increase, a reduction or an
elimination of previously reported contract profit, we recognize
a credit or a charge against current earnings, which could be
material.
We may
need to raise additional capital in the future for working
capital, capital expenditures and/or acquisitions, and we may
not be able to do so on favorable terms or at all, which would
impair our ability to operate our business or achieve our growth
objectives.
Our growth has been funded in part by our utilization of net
operating loss carry-forwards, or NOLs, to reduce the amounts
that we have paid for income taxes, and we expect our NOLs to be
fully utilized in 2007. Paying taxes will reduce cash flows from
operations compared to prior periods, as we will be required to
fund the payment of taxes in 2008 and future periods. To the
extent that cash flow from operations is insufficient to fund
future investments, make acquisitions or provide needed
additional working capital, we may require additional financing
from other sources of funds.
Our ability to obtain such additional financing in the future
will depend in part upon prevailing capital market conditions,
as well as conditions in our business and our operating results;
such factors may adversely affect our efforts to arrange
additional financing on terms satisfactory to us. We have
pledged the proceeds
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and other rights under our construction contracts to our bond
sureties, and we have pledged substantially all of our other
assets as collateral in connection with our credit facility and
mortgage debt. As a result, we may have difficulty in obtaining
additional financing in the future if such financing requires us
to pledge assets as collateral. In addition, under our credit
facility, we must obtain the consent of our lenders to incur any
amount of additional debt from other sources (subject to certain
exceptions). If future financing is obtained by the issuance of
additional shares of common stock, our stockholders may suffer
dilution. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to make future
investments, take advantage of acquisitions or other
opportunities, or respond to competitive challenges.
We are
subject to financial and other covenants under our credit
facility that could limit our flexibility in managing our
business.
We have a revolving credit facility that restricts us from
engaging in certain activities, including restrictions on the
ability (subject to certain exceptions) to:
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make distributions and dividends;
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incur liens or encumbrances;
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incur indebtedness;
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guarantee obligations;
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dispose of a material portion of assets or otherwise engage in a
merger with a third party;
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make acquisitions; and
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incur negative income for two consecutive quarters.
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Our credit facility contains financial covenants that require us
to maintain specified fixed charge coverage ratios, asset ratios
and leverage ratios, and to maintain specified levels of
tangible net worth. Our ability to borrow funds for any purpose
will depend on our satisfying these tests. If we are unable to
meet the terms of the financial covenants or fail to comply with
any of the other restrictions contained in our credit facility,
an event of default could occur. An event of default, if not
waived by our lenders, could result in the acceleration of any
outstanding indebtedness, causing such debt to become
immediately due and payable. If such an acceleration occurs, we
may not be able to repay such indebtedness on a timely basis.
Acceleration of our credit facility could result in foreclosure
on and loss of our operating assets. In the event of such
foreclosure, we would be unable to conduct our business and
forced to discontinue operations.
Risks
Related to Our Common Stock and This Offering
Market
prices of our common stock have changed significantly and could
change further.
The market price of our common stock has substantially increased
since January 2005, at a rate exceeding our growth in earnings
generally. The market price may decline from its current levels
in response to various factors and events beyond our control,
including the following:
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a shortfall in operating revenue or net income from that
expected by securities analysts and investors;
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changes in securities analysts’ estimates of our financial
performance or the financial performance of our competitors or
companies in our industry generally;
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general conditions in our industry;
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announcements of significant contracts by us or our competitors;
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the passage of legislation or other regulatory developments that
affect us adversely;
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general conditions in the securities markets;
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the limited trading volume of our common stock;
|
|
|
•
|
investor expectations resulting from the filing of the
registration statement of which this prospectus is a part;
|
|
|
•
|
our seeking stockholder approval to increase the number of
shares of common stock that we are authorized to issue, which we
anticipate we may do in connection with our next annual meeting
of stockholders;
|
16
|
|
|
|
•
|
our issuance of a significant number of shares of our common
stock, including upon exercise of employee stock options or
warrants; and
|
|
|
•
|
the other risk factors described herein.
|
Limited
trading volume of our common stock may contribute to its price
volatility.
The average daily trading volume for our common stock as
reported by the Nasdaq during the first eleven months of 2007
was approximately 100,000 shares. Even if we achieve a
wider dissemination by means of the shares offered pursuant to
this prospectus, we are uncertain as to whether a more active
trading market in our common stock will develop. As a result,
relatively small trades may have a significant impact on the
price of our common stock.
Fluctuations
in our revenues, operating results and backlog may lead to
reduced prices for our common stock.
Because our operating results are primarily generated from a
limited number of significant construction contracts, operating
results in any given fiscal quarter can vary depending on the
progress achieved and changes in the estimated profitability of
those particular contracts being reported. We anticipate that
the exceptionally high profitability achieved by RHB on certain
contracts in 2007 is unlikely to be achievable in future periods
on a sustainable basis. Progress on contracts may also be
delayed by unanticipated adverse weather conditions, as occurred
in Texas during much of 2007. Such delays, if they occur, may
result in fluctuating quarterly operating results and reduced
profitability, which may in turn lead to reduced prices for our
common stock.
We
currently do not intend to pay dividends on our common stock
and, consequently, your only opportunity to achieve a return on
your investment will be if the market price of our common stock
appreciates above the price that you pay for it.
We currently do not plan to declare dividends on shares of our
common stock for the foreseeable future. Furthermore, the
payment of dividends by us is restricted by our credit facility.
See “Dividend Policy” for more information.
Consequently, your only opportunity to achieve a return on your
investment in our company will be if the market price of our
common stock appreciates and you are able to sell your shares at
a profit.
Future
sales of our common stock in the public market could lower our
stock price.
Our principal stockholders, directors and executive officers
will beneficially own approximately 1.9 million shares of
our common stock after completion of this offering. These
stockholders will be free to sell those shares, subject to the
limitations of Rule 144 or Rule 144(k) under the
Securities Act of 1933, as amended, or the Securities Act (which
are discussed under “Shares Eligible for Future
Sale”), and, subject to certain exceptions, the
90-day
lock-up
agreements that certain of these stockholders have entered into
with the underwriter. The holders of warrants to purchase
356,266 shares of our common stock have registration rights
that allow them to participate in any future public offering of
our shares (with certain exceptions). Registration of these
restricted shares of common stock or shares purchasable under
these warrants would permit their sale into the public market
immediately. We cannot predict when these stockholders may sell
their shares or in what volumes. However, the market price of
our common stock could decline significantly if these
stockholders sell a large number of shares into the public
market after this offering or if the market believes that these
sales may occur.
We may also issue our common stock from time to time as
consideration for future acquisitions and investments. In the
event that any such acquisition or investment is significant,
the number of shares of our common stock that we may issue could
in turn be significant. In addition, we may also grant
registration rights covering those shares in connection with any
such acquisition and investment.
Delaware
law, our charter documents and our rights agreement may impede
or discourage a takeover or change of control.
Our rights agreement, certain provisions of our restated and
amended certificate of incorporation, as amended, our bylaws and
the provisions of Delaware law, individually or collectively,
may impede a merger, takeover or other business combination
involving us or discourage a potential acquirer from making a
tender offer for our common stock, which could affect the market
price of our common stock.
17
CAUTIONARY
COMMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes statements that are, or may be
considered to be, “forward-looking statements” within
the meaning of Section 27A of the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These forward-looking statements
are included throughout this prospectus and in the materials
incorporated by reference into this prospectus and relate to
matters such as our industry, business strategy, goals and
expectations concerning our market position, future operations,
margins, profitability, capital expenditures, liquidity and
capital resources and other financial and operating information.
We have used the words “anticipate,”
“assume,” “believe,” “budget,”
“continue,” “could,” “estimate,”
“expect,” “goal,” “seek,”
“forecast,” “intend,” “may,”
“should,” “would,” “plan,”
“potential,” “predict,” “project,”
“will,” “future” and similar terms and
phrases to identify forward-looking statements in this
prospectus.
Forward-looking statements reflect our current expectations
regarding future events, results or outcomes. These expectations
may or may not be realized. Some of these expectations may be
based upon assumptions or judgments that prove to be incorrect.
In addition, our business and operations involve numerous risks
and uncertainties, many of which are beyond our control, that
could result in our expectations not being realized or otherwise
could materially affect our financial condition, results of
operations and cash flows.
Actual events, results and outcomes may differ materially from
our expectations due to a variety of factors. Although it is not
possible to identify all of these factors, they include, among
others, the following:
|
|
|
|
•
|
changes in general economic conditions and resulting reductions
or delays in, or uncertainties regarding, governmental funding
for infrastructure services;
|
|
|
•
|
adverse economic conditions in our markets;
|
|
|
•
|
delays or difficulties related to the commencement or completion
of contracts, including additional costs, reductions in revenues
or the payment of completion penalties or liquidated damages;
|
|
|
•
|
actions of suppliers, subcontractors, customers, competitors and
others which are beyond our control;
|
|
|
•
|
the estimates inherent in our percentage-of-completion
accounting policies;
|
|
|
•
|
possible cost increases;
|
|
|
•
|
our dependence on a few significant customers;
|
|
|
•
|
adverse weather conditions;
|
|
|
•
|
the presence of competitors with greater financial resources
than we have and the impact of competitive services and pricing;
|
|
|
•
|
our ability to successfully identify, complete and integrate
acquisitions; and
|
|
|
•
|
the other factors incorporated by reference as described under
“Risk Factors.”
|
In reading this prospectus, you should consider these factors
carefully in evaluating any forward-looking statements, and you
are cautioned not to place undue reliance on forward-looking
statements. Although we believe that our plans, intentions and
expectations reflected in, or suggested by, the forward-looking
statements that we make in this prospectus and in the documents
incorporated by reference into this prospectus are reasonable,
we can provide no assurance that they will be achieved.
The forward-looking statements included herein and in the
documents incorporated by reference into this prospectus are
made only as of the date hereof or thereof, and we undertake no
obligation to update any information contained in this
prospectus or in the documents incorporated herein by reference
or to publicly release the results of any revisions to any
forward-looking statements to reflect events or circumstances
that occur, or that we become aware of after the date of this
prospectus, except as may be required by applicable securities
laws.
18
We estimate that our net proceeds from the sale of
1,600,000 shares of our common stock in this offering,
assuming an offering price of $23.49 per share, will be
approximately $34.9 million ($40.3 million if the
underwriter’s option to purchase additional shares is
exercised in full), after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering:
|
|
|
|
•
|
to repay indebtedness outstanding under our credit
facility; and
|
|
|
|
|
•
|
to strengthen our balance sheet, including our working capital,
in order to fund our business operations and provide liquidity
for future growth.
|
The indebtedness to be repaid consists of revolving borrowings
under our credit agreement with Comerica Bank, as a lender and
as agent for the lenders from time to time party thereto.
Borrowings under our credit agreement currently bear interest at
an average rate of 7.75%. The credit agreement was entered into
October 31, 2007, when approximately $22.4 million was
borrowed to fund a portion of our costs in completing the
acquisition of RHB. The amount of borrowings under our credit
facility fluctuates from time to time. The actual amount of net
proceeds from the offering used to repay our indebtedness under
our credit facility will depend on the amounts that are
outstanding at the time of repayment.
Throughout this prospectus, we have assumed an offering price of
$23.49 per share, which is equal to the last reported sales
price per share of our common stock on the Nasdaq on
December 6, 2007. Each $1.00 change in the actual per share
offering price from the price assumed in the prospectus would
change by approximately $1.5 million the amount of our net
proceeds available to strengthen our balance sheet after funding
the repayment of indebtedness referenced above. A 10% decrease
in the number of shares of common stock sold in this offering
would decrease the net proceeds to us from this offering by
approximately $3.6 million, after deducting the estimated
underwriting discounts and commissions and offering expenses.
19
MARKET
PRICE OF COMMON STOCK
Our common stock traded on AMEX under the symbol “STV”
through January 19, 2006 and began trading on the Nasdaq
under the symbol “STRL” on January 20, 2006. The
quarterly market high and low sales prices for our common stock
for 2005, 2006 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.97
|
|
|
$
|
5.16
|
|
Second Quarter
|
|
$
|
9.00
|
|
|
$
|
6.70
|
|
Third Quarter
|
|
$
|
28.35
|
|
|
$
|
7.25
|
|
Fourth Quarter
|
|
$
|
26.98
|
|
|
$
|
16.06
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
24.85
|
|
|
$
|
15.05
|
|
Second Quarter
|
|
$
|
33.00
|
|
|
$
|
21.25
|
|
Third Quarter
|
|
$
|
30.99
|
|
|
$
|
16.51
|
|
Fourth Quarter
|
|
$
|
25.34
|
|
|
$
|
18.91
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
22.74
|
|
|
$
|
17.42
|
|
Second Quarter
|
|
$
|
23.86
|
|
|
$
|
18.90
|
|
Third Quarter
|
|
$
|
23.97
|
|
|
$
|
18.64
|
|
Fourth Quarter (through December 7, 2007)
|
|
$
|
26.98
|
|
|
$
|
22.00
|
|
On December 7, 2007, the closing sale price of our common
stock as reported on the Nasdaq was $23.49 per share. At
November 30, 2007, there were approximately 1,255 holders
of record of our common stock.
We have never paid any cash dividends on our common stock. For
the foreseeable future, we intend to retain any earnings in our
business, and we do not anticipate paying any cash dividends.
Whether or not we declare any dividends will be at the
discretion of our board of directors, considering then-existing
conditions, including our financial condition and results of
operations, capital requirements, bonding prospects, contractual
restrictions (including those under our revolving credit
agreements), business prospects and other factors that our board
of directors considers relevant.
20
The following table sets forth our capitalization as of
September 30, 2007:
|
|
|
|
•
|
on an actual basis;
|
|
|
•
|
on a pro forma basis, assuming the RHB acquisition and the
borrowing under our credit facility in connection therewith had
been effected on September 30, 2007; and
|
|
|
|
|
•
|
on a pro forma as adjusted basis, assuming the RHB acquisition
and the borrowing under our credit facility in connection
therewith had been effected on September 30, 2007 and
reflecting the application of the net proceeds from this
offering, after deducting approximately $1.9 million for
the underwriting discounts and commissions payable by us and
estimated offering expenses of approximately $775,000, as set
forth under “Use of Proceeds.”
|
For purposes of the pro forma as adjusted column of the
capitalization table below, we have assumed the net proceeds
from this offering will be $34.9 million after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us. A $1.00 increase or decrease in the
offering price would change each of the total stockholders’
equity and total capitalization line items by approximately
$1.5 million, after taking into account corresponding
changes in the underwriting discounts and commissions payable by
us. A 10% decrease in the number of shares of common stock sold
in this offering would decrease the net proceeds to us from this
offering by approximately $3.6 million, after deducting the
estimated underwriting discounts and commissions and offering
expenses.
You should read this table in conjunction with “Use of
Proceeds,” “Selected Historical Financial and
Operating Data,” “Unaudited Pro Forma Condensed
Combined Financial Information,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and
the notes thereto included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt(1)
|
|
$
|
123
|
|
|
$
|
190
|
|
|
$
|
190
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility(2)
|
|
|
30,000
|
|
|
|
52,400
|
|
|
|
17,470
|
|
Mortgages(1)
|
|
|
566
|
|
|
|
667
|
|
|
|
667
|
|
Other indebtedness
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
30,689
|
|
|
|
53,257
|
|
|
|
18,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 14,000,000 shares
authorized; 11,017,310 shares issued and outstanding,
actual; 11,058,012 shares issued and outstanding, pro
forma; 12,760,692 shares issued and outstanding, pro forma
as adjusted(3)
|
|
|
110
|
|
|
|
111
|
|
|
|
127
|
|
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accumulated deficit
|
|
|
(13,996
|
)
|
|
|
(13,996
|
)
|
|
|
(13,996
|
)
|
Additional paid-in capital
|
|
|
115,821
|
|
|
|
111,405
|
|
|
|
146,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
101,935
|
|
|
|
97,520
|
|
|
|
132,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
132,624
|
|
|
$
|
150,777
|
|
|
$
|
150,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage in the original principal amount of
$1.1 million on land and facilities where our headquarters
is located had a floating rate of interest at September 30,
2007 of 8.0% per annum, repayable |
21
|
|
|
|
|
over 15 years commencing in 2001. This mortgage is
cross-collateralized with a prior mortgage on the land and
equipment repair facilities, which were purchased in 1998, in
the original amount of $500,000, repayable over 15 years
with an interest rate of 9.3% per annum. |
|
|
|
(2) |
|
The revolving credit facility in place on September 30,
2007 provided for revolving loans up to a maximum of
$35.0 million with a maturity date of May 10, 2009.
The average interest rate on revolving debt outstanding during
the nine months ended September 30, 2007 was approximately
8.25%. |
|
|
|
(3) |
|
At September 30, 2007, we had 11,017,310 shares of
common stock outstanding; 657,446 shares of common stock
reserved for issuance upon the exercise of outstanding stock
options at a weighted average exercise price per share of $6.99;
and 356,266 shares of common stock reserved for issuance
upon the exercise of outstanding warrants at an exercise price
per share of $1.50. The issuance of shares in this offering will
reduce the total number of remaining authorized and unissued
shares, 415,650 of which will be available for future awards
under our stock option plan (78,276 if the underwriter’s
over-allotment option is exercised in full). |
22
SELECTED
HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth our summary historical financial
and operating data for the periods indicated. The summary
condensed consolidated statement of operations and cash flow
data for the years ended December 31, 2004, 2005 and 2006,
and the summary condensed consolidated balance sheet data as of
December 31, 2005 and 2006, have been derived from our
audited consolidated financial statements, which are included
elsewhere in this prospectus. The summary condensed consolidated
statement of operations and cash flow data for 2002 and 2003,
and the condensed consolidated balance sheet data as of
December 31, 2002, 2003 and 2004, have been derived from
our audited consolidated financial statements, which are not
included in this prospectus. The summary condensed consolidated
financial data as of and for the nine months ended
September 30, 2006 and 2007, are derived from our unaudited
consolidated financial statements, which are included elsewhere
in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as our audited
consolidated financial statements and include all adjustments,
consisting of normal and recurring adjustments, that we consider
necessary for a fair presentation of our financial position and
operating results for the unaudited periods. The summary
historical financial and operating data as of and for the nine
months ended September 30, 2007, are not necessarily
indicative of the results that may be obtained for a full year.
The information presented below should be read in conjunction
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
financial statements and the notes thereto included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
111,747
|
|
|
$
|
149,006
|
|
|
$
|
132,478
|
|
|
$
|
219,439
|
|
|
$
|
249,348
|
|
|
$
|
185,233
|
|
|
$
|
217,877
|
|
Cost of revenues
|
|
|
98,935
|
|
|
|
131,181
|
|
|
|
119,217
|
|
|
|
195,683
|
|
|
|
220,801
|
|
|
|
163,358
|
|
|
|
196,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,812
|
|
|
|
17,825
|
|
|
|
13,261
|
|
|
|
23,756
|
|
|
|
28,547
|
|
|
|
21,875
|
|
|
|
21,593
|
|
General and administrative expenses, and other
|
|
|
6,862
|
|
|
|
7,400
|
|
|
|
7,696
|
|
|
|
9,091
|
|
|
|
10,549
|
|
|
|
7,928
|
|
|
|
8,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,950
|
|
|
|
10,425
|
|
|
|
5,565
|
|
|
|
14,665
|
|
|
|
17,998
|
|
|
|
13,947
|
|
|
|
13,301
|
|
Interest expense (income), net
|
|
|
2,427
|
|
|
|
1,842
|
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
3,523
|
|
|
|
8,583
|
|
|
|
4,109
|
|
|
|
13,329
|
|
|
|
19,204
|
|
|
|
14,750
|
|
|
|
14,667
|
|
Minority interest
|
|
|
(873
|
)
|
|
|
(1,627
|
)
|
|
|
(962
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
2,650
|
|
|
|
6,956
|
|
|
|
3,147
|
|
|
|
13,329
|
|
|
|
19,204
|
|
|
|
14,750
|
|
|
|
14,667
|
|
Income tax (benefit) expense
|
|
|
(174
|
)
|
|
|
1,752
|
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
2,824
|
|
|
|
5,204
|
|
|
|
5,281
|
|
|
|
10,541
|
|
|
|
12,638
|
|
|
|
9,723
|
|
|
|
9,777
|
|
Net income (loss) from discontinued operations
|
|
|
528
|
|
|
|
215
|
|
|
|
372
|
|
|
|
559
|
|
|
|
682
|
|
|
|
444
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,352
|
|
|
$
|
5,419
|
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.56
|
|
|
$
|
1.02
|
|
|
$
|
0.99
|
|
|
$
|
1.36
|
|
|
$
|
1.19
|
|
|
$
|
0.93
|
|
|
$
|
0.89
|
|
Discontinued operations
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.66
|
|
|
$
|
1.06
|
|
|
$
|
1.06
|
|
|
$
|
1.43
|
|
|
$
|
1.25
|
|
|
$
|
0.97
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
1.08
|
|
|
$
|
0.84
|
|
|
$
|
0.83
|
|
Discontinued operations
|
|
|
0.09
|
|
|
|
0.03
|
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.55
|
|
|
$
|
0.83
|
|
|
$
|
0.80
|
|
|
$
|
1.16
|
|
|
$
|
1.14
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
|
Weighted average number of shares outstanding used in computing
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,062
|
|
|
|
5,090
|
|
|
|
5,343
|
|
|
|
7,775
|
|
|
|
10,583
|
|
|
|
10,455
|
|
|
|
10,963
|
|
Diluted
|
|
|
6,102
|
|
|
|
6,488
|
|
|
|
7,028
|
|
|
|
9,538
|
|
|
|
11,714
|
|
|
|
11,640
|
|
|
|
11,765
|
|
Balance sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,111
|
|
|
$
|
2,651
|
|
|
$
|
3,449
|
|
|
$
|
22,267
|
|
|
$
|
28,466
|
|
|
$
|
18,996
|
|
|
$
|
14,894
|
|
Short-term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,169
|
|
|
|
22,585
|
|
|
|
32,630
|
|
Working capital
|
|
|
9,556
|
|
|
|
6,834
|
|
|
|
16,052
|
|
|
|
18,354
|
|
|
|
62,874
|
|
|
|
58,369
|
|
|
|
59,691
|
|
Total assets
|
|
|
72,757
|
|
|
|
75,578
|
|
|
|
89,544
|
|
|
|
118,455
|
|
|
|
167,772
|
|
|
|
171,293
|
|
|
|
187,107
|
|
Total debt
|
|
|
32,784
|
|
|
|
20,058
|
|
|
|
25,445
|
|
|
|
23,142
|
|
|
|
30,782
|
|
|
|
28,812
|
|
|
|
30,689
|
|
Total liabilities
|
|
|
61,931
|
|
|
|
58,942
|
|
|
|
54,336
|
|
|
|
69,843
|
|
|
|
76,781
|
|
|
|
83,950
|
|
|
|
85,172
|
|
Stockholders’ equity
|
|
|
10,825
|
|
|
|
16,636
|
|
|
|
35,208
|
|
|
|
48,612
|
|
|
|
90,991
|
|
|
|
87,343
|
|
|
|
101,935
|
|
Cash flow data from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
5,004
|
|
|
$
|
18,185
|
|
|
$
|
4,171
|
|
|
$
|
31,266
|
|
|
$
|
23,089
|
|
|
$
|
9,846
|
|
|
$
|
14,648
|
|
Net cash used in investing activities
|
|
|
(6,801
|
)
|
|
|
(4,270
|
)
|
|
|
(5,809
|
)
|
|
|
(10,972
|
)
|
|
|
(52,358
|
)
|
|
|
(46,567
|
)
|
|
|
(28,586
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,288
|
|
|
|
(13,376
|
)
|
|
|
2,436
|
|
|
|
(1,476
|
)
|
|
|
35,468
|
|
|
|
33,450
|
|
|
|
366
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (unaudited)(1)
|
|
$
|
9,360
|
|
|
$
|
13,703
|
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
Capital expenditures
|
|
|
4,245
|
|
|
|
4,340
|
|
|
|
3,555
|
|
|
|
11,392
|
|
|
|
27,055
|
|
|
|
24,706
|
|
|
|
23,033
|
|
Backlog at end of period (unaudited)(2)
|
|
|
138,000
|
|
|
|
120,000
|
|
|
|
232,000
|
|
|
|
307,000
|
|
|
|
395,000
|
|
|
|
418,000
|
|
|
|
367,000
|
|
|
|
|
(1) |
|
EBITDA is defined as net income before net interest expense,
income tax expense, and depreciation and amortization. EBITDA is
a non-GAAP financial measure that we use for our internal
budgeting process, which excludes the effects of financing
costs, income taxes and non-cash depreciation and amortization.
Although EBITDA is a common alternative measure of performance
used by investors, financial analysts and rating agencies to
assess operating performance for companies in our industry, it
is not a substitute for other GAAP financial measures such as
net income or operating income as calculated and presented in
accordance with GAAP. Furthermore, we believe that the non-GAAP
EBITDA financial measure is useful to investors in providing
greater transparency to the information used by management in
its operational and investment decision making. Our non-GAAP
financial measures may be different from such measures used by
other companies. We urge you to review the GAAP financial
measures included in this prospectus and our consolidated
financial statements, including the notes thereto, and the other
financial information contained in this prospectus and
incorporated herein by reference, and not to rely on any single
financial measure to evaluate our business. |
|
|
|
|
|
A reconciliation of net income to EBITDA for each of the fiscal
periods indicated is as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Net income
|
|
$
|
3,352
|
|
|
$
|
5,419
|
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
Depreciation and amortization
|
|
|
3,755
|
|
|
|
4,690
|
|
|
|
4,545
|
|
|
|
5,064
|
|
|
|
7,011
|
|
|
|
5,574
|
|
|
|
6,764
|
|
Interest expense (income), net
|
|
|
2,427
|
|
|
|
1,842
|
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
Income tax (benefit) expense
|
|
|
(174
|
)
|
|
|
1,752
|
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
9,360
|
|
|
$
|
13,703
|
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures. |
|
|
|
(2) |
|
Historical information does not include RHB backlog, which was
approximately $127 million at September 30, 2007,
based on our methodology of calculating backlog, Backlog is our
estimate of the billings that we expect to make in future
periods on our construction contracts. We add the revenue value
of new contracts to our backlog, typically when we are the low
bidder on a public sector contract and management determines
that there are no apparent impediments to award of the contract.
At September 30, 2007, backlog included approximately
$12 million of low bids where the contracts had not been
officially awarded. RHB had no such backlog at that date.
Historically, subsequent non-awards to us of contracts relating
to such low bids have not materially affected our backlog or
financial condition. As construction on our contracts
progresses, we increase or decrease backlog to take account
changes in estimated quantities under fixed unit price
contracts, as well as to reflect changed conditions, change
orders and other variations from initially anticipated contract
revenues and costs, including completion penalties and bonuses.
We subtract from backlog the amounts we bill on contracts. |
25
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to our acquisition of a 91.67% interest
in RHB, accounted for as a business combination using the
purchase method of accounting. The preliminary allocation of the
purchase price used in the unaudited pro forma condensed
combined financial information is based on management’s
preliminary valuation. The estimates and assumptions are subject
to change upon the finalization of valuations, which are
contingent upon final appraisals of plant and equipment,
identifiable intangible assets, adjustments to contract-related
and other accounts and the results of operations in October
2007. Revisions to the preliminary purchase price allocation
could result in significant deviations from the accompanying pro
forma information.
The pro forma condensed combined statements of income reflect
the acquisition of RHB as if it occurred on January 1,
2006. The historical results of operations included in the
unaudited pro forma condensed combined statement of income for
the fiscal year ended December 31, 2006 were derived from
the audited financial statements of each entity, included
elsewhere in this prospectus. The historical results of
operations included in the unaudited pro forma condensed
combined statement of income for the nine months ended
September 30, 2007 were derived from the unaudited
financial statements of each entity, included elsewhere in this
prospectus.
The pro forma condensed combined balance sheet reflects the
acquisition of RHB as if it occurred on September 30, 2007.
The historical balance sheets of Sterling Construction and RHB
included in the unaudited pro forma condensed combined balance
sheet were derived from the unaudited financial statements of
each entity, included elsewhere in this prospectus.
This unaudited pro forma condensed combined financial
information has been prepared by management for illustrative
purposes only. The unaudited pro forma condensed combined
financial information is not intended to represent or be
indicative of the financial position or results of operations in
future periods or the results that actually would have been
realized had Sterling Construction and RHB been a combined
company during the specified periods. Additionally,
classifications of certain financial accounts of the acquired
company may differ from those of Sterling Construction. The
unaudited pro forma condensed combined financial information
reflects the acquisition of the interest in RHB, which we
financed with a combination of proceeds from the sale of
short-term investments, repayment of an amount receivable,
borrowings under our new credit facility and 40,702 shares
of common stock issued in the acquisition. The proceeds of this
offering, a portion of which will be used to repay our credit
facility borrowings, have not been reflected in the pro forma
results. The unaudited pro forma condensed combined financial
information, including the notes thereto, is qualified in its
entirety by reference to, and should be read in conjunction
with, the historical financial statements and notes thereto
included elsewhere in this prospectus.
26
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Highway Builders,
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Company, Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Amounts in Thousands)
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,894
|
|
|
$
|
0
|
|
|
$
|
9,030
|
(a)(b)(d)(e)(f)
|
|
$
|
23,924
|
|
Short-term investments
|
|
|
32,630
|
|
|
|
0
|
|
|
|
(32,630
|
) (e)
|
|
|
0
|
|
Contract receivables, including retention
|
|
|
52,498
|
|
|
|
5,434
|
|
|
|
|
|
|
|
57,932
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
7,247
|
|
|
|
553
|
|
|
|
|
|
|
|
7,800
|
|
Inventories
|
|
|
1,047
|
|
|
|
449
|
|
|
|
|
|
|
|
1,496
|
|
Due from related party
|
|
|
0
|
|
|
|
12,000
|
|
|
|
(12,000
|
) (a)
|
|
|
0
|
|
Deferred tax asset
|
|
|
1,038
|
|
|
|
0
|
|
|
|
|
|
|
|
1,038
|
|
Other current assets
|
|
|
1,968
|
|
|
|
237
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
111,322
|
|
|
|
18,673
|
|
|
|
(35,600
|
)
|
|
|
94,395
|
|
Property and Equipment
|
|
|
88,009
|
|
|
|
17,712
|
|
|
|
(566
|
) (c)(g)
|
|
|
105,155
|
|
Less: Accumulated depreciation
|
|
|
(25,619
|
)
|
|
|
(6,719
|
)
|
|
|
44
|
(c)
|
|
|
(32,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,390
|
|
|
|
10,993
|
|
|
|
(522
|
)
|
|
|
72,861
|
|
Investment in RHB
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
(f)(g)
|
|
|
0
|
|
Goodwill
|
|
|
12,735
|
|
|
|
0
|
|
|
|
42,252
|
(g)
|
|
|
54,987
|
|
Other assets
|
|
|
660
|
|
|
|
0
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
187,107
|
|
|
$
|
29,666
|
|
|
$
|
6,130
|
|
|
$
|
222,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
$
|
0
|
|
|
$
|
1,756
|
|
|
$
|
|
|
|
$
|
1,756
|
|
Current maturities of long term debt
|
|
|
123
|
|
|
|
67
|
|
|
|
|
|
|
|
190
|
|
Accounts payable
|
|
|
22,257
|
|
|
|
5,886
|
|
|
|
|
|
|
|
28,143
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
21,979
|
|
|
|
3,035
|
|
|
|
|
|
|
|
25,014
|
|
Accrued expenses
|
|
|
7,272
|
|
|
|
666
|
|
|
|
|
|
|
|
7,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
51,631
|
|
|
|
11,410
|
|
|
|
|
|
|
|
63,041
|
|
Long term debt, less current maturities
|
|
|
30,566
|
|
|
|
101
|
|
|
|
(22,400
|
) (d)
|
|
|
53,067
|
|
Deferred tax liability
|
|
|
2,975
|
|
|
|
0
|
|
|
|
|
|
|
|
2,975
|
|
Minority interest in RHB
|
|
|
0
|
|
|
|
0
|
|
|
|
(6,300
|
) (g)
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
85,172
|
|
|
|
11,511
|
|
|
|
(28,700
|
)
|
|
|
125,383
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
110
|
|
|
|
0
|
|
|
|
(1
|
) (f)
|
|
|
111
|
|
Additional paid-in capital
|
|
|
115,821
|
|
|
|
0
|
|
|
|
(4,416
|
) (f)(g)
|
|
|
111,405
|
|
Accumulated deficit
|
|
|
(13,996
|
)
|
|
|
0
|
|
|
|
|
|
|
|
(13,996
|
)
|
Members’ equity
|
|
|
0
|
|
|
|
18,155
|
|
|
|
18,155
|
(b)(c)(g)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
101,935
|
|
|
|
18,155
|
|
|
|
22,570
|
|
|
|
97,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
187,107
|
|
|
$
|
29,666
|
|
|
$
|
(6,130
|
)
|
|
$
|
222,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
Pro Forma Entries and Explanatory Notes
At September 30, 2007
|
|
|
|
|
|
|
|
|
Amounts in
|
|
Pro Forma Entries
|
|
Thousands
|
|
|
(a)
|
|
Collection in October 2007 of receivable due from Fisher Sand
& Gravel, a related party of RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
12,000
|
|
|
|
Due from related party
|
|
|
(12,000
|
)
|
(b)
|
|
October 2007 cash distributions to Members of RHB
|
|
|
|
|
|
|
Members’ equity
|
|
$
|
6,000
|
|
|
|
Cash
|
|
|
(6,000
|
)
|
(c)
|
|
October 2007 distribution of land and buildings to Members of
RHB
|
|
|
|
|
|
|
Accumulated depreciation
|
|
$
|
44
|
|
|
|
Property and equipment
|
|
|
(1,566
|
)
|
|
|
Members’ equity
|
|
|
1,522
|
|
(d)
|
|
Cash borrowed under new credit facility to purchase RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
22,400
|
|
|
|
Long-term debt
|
|
|
(22,400
|
)
|
(e)
|
|
Liquidation of investments to fund a portion of the purchase
price of RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
32,630
|
|
|
|
Short-term investments
|
|
|
(32,630
|
)
|
(f)
|
|
Cash and common stock paid to purchase investment in RHB
|
|
|
|
|
|
|
Investment in RHB
|
|
$
|
53,000
|
|
|
|
Cash
|
|
|
(52,000
|
)
|
|
|
Common stock
|
|
|
(1
|
)
|
|
|
Additional paid-in capital
|
|
|
(999
|
)
|
(g)
|
|
Entries in consolidation to reflect goodwill, step-up in
basis of
property and equipment and minority interest in RHB
|
|
|
|
|
|
|
Goodwill
|
|
$
|
42,252
|
|
|
|
Property and equipment
|
|
|
1,000
|
|
|
|
Additional paid-in capital
|
|
|
5,415
|
|
|
|
Members’ equity
|
|
|
10,633
|
|
|
|
Investment in RHB
|
|
|
(53,000
|
)
|
|
|
Minority interest in RHB (cost basis)
|
|
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Purchase Price
and Pro Forma Preliminary Allocation of Purchase
Price
|
|
|
|
|
|
|
Summary of Purchase Price —
|
|
|
|
|
|
|
Cash borrowed under new credit facility
|
|
$
|
22,400
|
|
|
|
Issuance of common stock
|
|
|
1,000
|
|
|
|
Cash from sale of short-term investments
|
|
|
29,600
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Preliminary Allocation of Purchase Price —
|
|
|
|
|
|
|
Working capital
|
|
$
|
1,263
|
|
|
|
Property and equipment
|
|
|
10,471
|
|
|
|
Long-term debt, less current maturities
|
|
|
(101
|
)
|
|
|
Goodwill
|
|
|
42,252
|
|
|
|
Minority interest
|
|
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
28
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Statements of
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Highway
|
|
|
|
|
|
Pro
|
|
|
Construction
|
|
|
Highway
|
|
|
|
|
|
Pro
|
|
|
|
Company,
|
|
|
Builders,
|
|
|
Pro Forma
|
|
|
Forma
|
|
|
Company,
|
|
|
Builders,
|
|
|
Pro Forma
|
|
|
Forma
|
|
|
|
Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
37,163
|
|
|
$
|
|
|
|
$
|
286,511
|
|
|
$
|
217,877
|
|
|
$
|
64,920
|
|
|
$
|
|
|
|
$
|
282,797
|
|
Costs of earned contract revenues
|
|
|
220,801
|
|
|
|
31,467
|
|
|
|
|
|
|
|
252,268
|
|
|
|
196,284
|
|
|
|
44,115
|
|
|
|
|
|
|
|
240,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,547
|
|
|
|
5,696
|
|
|
|
|
|
|
|
34,243
|
|
|
|
21,593
|
|
|
|
20,805
|
|
|
|
|
|
|
|
42,398
|
|
General and administrative expenses
|
|
|
(10,825
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
(11,287
|
)
|
|
|
(8,725
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
(9,124
|
)
|
Other operating income
|
|
|
276
|
|
|
|
549
|
|
|
|
|
|
|
|
825
|
|
|
|
433
|
|
|
|
0
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,998
|
|
|
|
5,783
|
|
|
|
|
|
|
|
23,781
|
|
|
|
13,301
|
|
|
|
20,406
|
|
|
|
|
|
|
|
33,707
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,426
|
|
|
|
487
|
|
|
|
(1,426
|
) (c)
|
|
|
487
|
|
|
|
1,421
|
|
|
|
471
|
|
|
|
(1,421
|
) (c)
|
|
|
471
|
|
Gain on sale of land & buildings
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
Interest expense
|
|
|
(220
|
)
|
|
|
(52
|
)
|
|
|
(1,792
|
) (a)
|
|
|
(2,064
|
)
|
|
|
(55
|
)
|
|
|
(70
|
)
|
|
|
(1,344
|
) (a)
|
|
|
(1,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
19,204
|
|
|
|
6,219
|
|
|
|
(3,218
|
)
|
|
|
22,205
|
|
|
|
14,667
|
|
|
|
20,897
|
|
|
|
(2,765
|
)
|
|
|
32,799
|
|
Minority interest
|
|
|
0
|
|
|
|
0
|
|
|
|
(518
|
) (d)
|
|
|
(518
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,734
|
) (d)
|
|
|
(1,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
19,204
|
|
|
|
6,219
|
|
|
|
(3,736
|
)
|
|
|
21,687
|
|
|
|
14,667
|
|
|
|
20,897
|
|
|
|
(4,499
|
)
|
|
|
31,065
|
|
Income tax expense
|
|
|
(6,566
|
)
|
|
|
0
|
|
|
|
(844
|
) (a)(b)(c)
|
|
|
(7,410
|
)
|
|
|
(4,890
|
)
|
|
|
0
|
|
|
|
(5,575
|
) (a)(b)(c)
|
|
|
(10,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
6,219
|
|
|
|
(4,580
|
)
|
|
|
14,277
|
|
|
|
9,777
|
|
|
|
20,897
|
|
|
|
(10,074
|
)
|
|
|
20,600
|
|
Income (loss) from discontinued operations, net
|
|
|
682
|
|
|
|
0
|
|
|
|
|
|
|
|
682
|
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
6,219
|
|
|
$
|
(4,580
|
)
|
|
$
|
14,959
|
|
|
$
|
9,752
|
|
|
$
|
20,897
|
|
|
$
|
(10,074
|
)
|
|
$
|
20,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
$
|
1.34
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
$
|
1.87
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
$
|
1.40
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
basic per share amounts
|
|
|
10,583
|
|
|
|
|
|
|
|
|
|
|
|
10,623
|
|
|
|
10,962
|
|
|
|
|
|
|
|
|
|
|
|
11,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
$
|
1.21
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
$
|
1.27
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
diluted per share amounts
|
|
|
11,714
|
|
|
|
|
|
|
|
|
|
|
|
11,754
|
|
|
|
11,765
|
|
|
|
|
|
|
|
|
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Statements of Income
Pro Forma Entries and Explanatory Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
Pro Forma Entries(1) —
|
|
December 31, 2006
|
|
|
September 30, 2007
|
|
|
|
|
|
(Amounts in Thousands)
|
|
|
(a)
|
|
Interest expense at 8 percent per annum on funds
borrowed to purchase interest in RHB
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(1,183
|
)
|
|
$
|
(887
|
)
|
|
|
Interest expense(2)
|
|
|
1,792
|
|
|
|
1,344
|
|
|
|
Income tax expense
|
|
|
(609
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
Income taxes on RHB’s income
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(1,938
|
)
|
|
$
|
(6,515
|
)
|
|
|
Income tax expense
|
|
|
1,938
|
|
|
|
6,515
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
Reduction in interest income for investments used in purchase
of RHB
|
|
|
|
|
|
|
|
|
|
|
Interest income(2)
|
|
$
|
1,426
|
|
|
$
|
1,421
|
|
|
|
Income tax expense
|
|
|
(485
|
)
|
|
|
(483
|
)
|
|
|
Retained earnings
|
|
|
(941
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
Minority interest in income of RHB
|
|
|
|
|
|
|
|
|
|
|
Minority interest - income statement
|
|
$
|
518
|
|
|
$
|
1,344
|
|
|
|
Minority interest - balance sheet
|
|
|
(518
|
)
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Explanatory Notes
|
|
|
(1) |
|
No depreciation expense on the step up in basis of property and
equipment has been reflected in the pro forma condensed combined
statements of income as any such expense would be an additional
cost of contract revenues and, on the percentage-of-completion
method of accounting, would increase revenues by approximately
the increase in costs plus the gross profit thereon. As the
amount of such depreciation on an annual basis, based on
preliminary valuation, and increase in revenues would be
approximately $200,000 each, the effect on the pro forma
combined results of operations would be immaterial for the
periods presented. |
|
(2) |
|
A change of
1/8
percent in the per annum interest rate based on pro forma
borrowings for the acquisition of RHB would change annual
interest expense by $28,000. |
30
On November 8, 2007, we reaffirmed the following guidance
for 2007, although we indicated that our expectations for 2007
results were at the lower end of the ranges, set forth below. On
December 5, 2007, we issued the initial guidance for 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except per share information)
|
|
|
Revenues
|
|
$
|
285,000
|
|
|
|
-
|
|
|
$
|
310,000
|
|
|
$
|
428,000
|
|
|
|
-
|
|
|
$
|
473,000
|
|
Income before income taxes
|
|
$
|
20,300
|
|
|
|
-
|
|
|
$
|
22,800
|
|
|
$
|
27,700
|
|
|
|
-
|
|
|
$
|
30,700
|
|
Net income
|
|
$
|
13,400
|
|
|
|
-
|
|
|
$
|
15,000
|
|
|
$
|
18,000
|
|
|
|
-
|
|
|
$
|
20,000
|
|
Net income per diluted share
|
|
$
|
1.13
|
|
|
|
-
|
|
|
$
|
1.26
|
|
|
$
|
1.51
|
|
|
|
-
|
|
|
$
|
1.68
|
|
Notes:
|
|
|
|
•
|
Our expectations for 2007 actual results are at the lower end of
the ranges set forth above.
|
|
|
|
|
•
|
Guidance for 2007 and 2008 does not reflect any effects from
this offering.
|
|
|
|
|
•
|
We expect that the completion of this offering, assuming full
exercise of the over-allotment option, would reduce 2008 net
income per diluted share by approximately $0.09.
|
|
|
|
|
•
|
Guidance reflects the results of operations of RHB and the new
credit facility beginning November 1, 2007.
|
|
|
|
|
•
|
Assumes 11,900,000 weighted average shares of common stock
outstanding.
|
Our current practice is to issue guidance about our expected
results of operations on an annual basis, and to update it, as
appropriate. Because of the seasonal variations in our business
and its susceptibility to adverse weather conditions and other
factors, it is not our practice to issue guidance as to
quarterly results of operations.
As of September 30, 2007, we estimate that our backlog (not
including RHB) was approximately $367 million, reflecting
new contracts of approximately $41 million added during our
third quarter through September 30, 2007.
The following discussion outlines certain factors applicable to
the issuance of guidance by us. Such guidance is forward-looking
information that is subject to risks and uncertainties as
described in “Risk Factors” and elsewhere in this
prospectus.
The preparation of budgets for a civil construction business
such as ours are inherently inaccurate as predictors of the
future due to the large number of variables, especially the need
to win contracts in a competitive bidding process, and the
effects that unusually good or bad weather can have on our
project performance.
Guidance is based on our budgets and reforecasts as appropriate.
Because our budget process reflects equipment and work crew
requirements, production goals and incentive compensation
benchmarks, and is subject to many assumptions, risks and
uncertainties, when we publish guidance as to expected results
of operations, we evaluate the likelihood of achieving those
budgets.
Our determination of budgeted revenues and operating profits
reflects the following factors, among other things:
|
|
|
|
•
|
The level and potential profitability of uncompleted contracts
in backlog;
|
|
|
•
|
The size of our equipment fleet, its suitability for the
contracts in backlog and expected to be added, and the capital
expenditures that may be required, or equipment rental costs if
such equipment is not required on a permanent basis;
|
|
|
•
|
Forecast depreciation, which is based on our existing fleet and
expected additions and disposals;
|
31
|
|
|
|
•
|
Our existing work crews, their suitability for the contracts in
backlog and expected to be added, and our ability to add further
crews if necessary;
|
|
|
•
|
The bidding climate, which affects our ability to replace
contracts built and also affects the gross margins that may be
achieved on new contract wins;
|
|
|
•
|
The levels of activity in the various geographic markets in
which we operate, and the opportunities available to enter new
markets;
|
|
|
•
|
Our competitors and their expected impacts on our markets;
|
|
|
•
|
Our expectations about efficiency, including the extent to which
we can best match our equipment and work crews to the mix of
contracts in backlog at any time;
|
|
|
|
|
•
|
Our expectations about the weather and the effects of weather on
our efficiency and project profitability. We assume that we
will suffer rain interruptions, particularly in Texas, based on
historical averages, and this is inherently inaccurate;
|
|
|
|
|
•
|
The expected availability and cost of bonding, which depends on
levels of working capital and stockholders’ equity, among
other factors;
|
|
|
|
|
•
|
Our expectations about changes in the availability and costs of
materials, subcontract services, fuel, and other expense items;
|
|
|
|
|
•
|
The extent to which our work-in-progress can absorb the indirect
costs of our equipment fleet;
|
|
|
•
|
Expectations about changes in the number and compensation of our
construction crews;
|
|
|
•
|
Expected additions to, and costs of, our supervisory and project
management staff;
|
|
|
•
|
Expected changes in overhead expense levels to support the level
of our business;
|
|
|
•
|
Employee incentive compensation, which is generally budgeted at
the level expected to be paid if the budget is achieved;
|
|
|
•
|
Our expected insurance costs, which are significant and can
fluctuate materially;
|
|
|
•
|
Other anticipated changes in our expenses; and
|
|
|
•
|
Our expectations as to the likelihood of incurring or achieving
any contract performance penalties or incentive awards that
depend on the timeliness of project completion.
|
The budgeting of corporate expenses reflects personnel
requirements, expected legal and accounting needs (especially
changes in the regulatory environment), public company costs,
expenses relating to existing and forecast stock option grants,
and other expected changes in the overhead structure or costs
thereof.
Interest costs are budgeted based on existing and anticipated
levels of cash and debt, and the expected costs of borrowing to
finance our equipment fleet and working capital needs. Taxation
is budgeted based on prevailing and expected federal and state
tax rates, and the expected impact of full utilization of our
NOLs in 2007.
Unless otherwise indicated, our guidance does not reflect any
possible future business acquisitions.
32
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. This discussion contains
forward-looking statements that are based on management’s
current expectations, estimates and projections about our
business and operations. The cautionary statements made in this
prospectus should be read as applying to all forward-looking
statements wherever they appear in this prospectus. Our actual
results may differ materially from those currently anticipated
and expressed in such forward-looking statements as a result of
a number of factors, including those we discuss under “Risk
Factors” and elsewhere in this prospectus.
Overview
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch office in a new
market, often after having successfully bid on and completed a
project in that market, or by acquiring a company that gives us
an immediate entry into a market. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB.
Critical
Accounting Policies
Our significant accounting policies are described in Note 1
of the Notes to Consolidated Financial Statements for the fiscal
year ended December 31, 2006, included in this prospectus.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Our business involves
making significant estimates and assumptions in the normal
course of business relating to our contracts due to, among other
things, the one-of-a-kind nature of most of our contracts, the
long-term duration of our contract cycle and the type of
contract utilized. Therefore, management believes that
“Revenue Recognition” is the most important and
critical accounting policy. The most significant estimates with
regard to these financial statements relate to the estimating of
total forecasted construction contract revenues, costs and
profits in accordance with accounting for long-term contracts.
Actual results could differ from these estimates and such
differences could be material.
Our estimates of contract revenue and cost are highly detailed.
We believe, based on our experience, that our current systems of
management and accounting controls allow management to produce
reliable estimates of total contract revenue and cost during any
accounting period. However, many factors can and do change
during a contract performance period, which can result in a
change to contract profitability from one financial reporting
period to another. Some of the factors that can change the
estimate of total contract revenue, cost and profit include
differing site conditions (to the extent that contract remedies
are unavailable), the failure of major material suppliers to
deliver on time, the performance of subcontractors, unusual
weather conditions,
33
our productivity and efficient use of labor and equipment and
the accuracy of the original bid estimate. Because we have a
large number of contracts in process at any given time, these
changes in estimates can sometimes offset each other without
affecting overall profitability. However, significant changes in
cost estimates on larger, more complex projects can have a
material impact on our financial statements and are reflected in
our results of operations when they become known.
When recording revenue from change orders on contracts that have
been approved as to scope but not price, we include in revenue
an amount equal to the amount that we currently expect to
recover from customers in relation to costs incurred by us for
changes in contract specifications or designs, or other
unanticipated additional costs. Revenue relating to change order
claims is recognized only if it is probable that the revenue
will be realized. When determining the likelihood of eventual
recovery, we consider such factors as evaluation of entitlement,
settlements reached to date and our experience with the
customer. When new facts become known, an adjustment to the
estimated recovery is made and reflected in the current period
results.
Revenue
Recognition
The majority of our contracts with our customers are “fixed
unit price.” Under such contracts, we are committed to
providing materials or services required by a contract at fixed
unit prices (for example, dollars per cubic yard of concrete
poured or per cubic yard of earth excavated). To minimize
increases in the material prices and subcontracting costs used
in tendering bids, we obtain firm quotations from our suppliers
and subcontractors. After we are advised that our bid is the
winning bid, we enter into firm contracts with our materials
suppliers and sub-contractors, thereby mitigating the risk of
future price variations affecting those contract costs. Such
quotations do not include any quantity guarantees, and we
therefore have no obligation for materials or subcontract
services beyond those required to complete the respective
contracts that we are awarded for which quotations have been
provided. The principal remaining risks under fixed price
contracts relate to labor and equipment costs and productivity
levels. As a result, we have rarely been exposed to material
price or availability risk on contracts in our backlog, except
with respect to fuel and other petroleum products. Most of our
state and municipal contracts provide for termination of the
contract for the convenience of the owner, with provisions to
pay us only for work performed through the date of termination.
We use the percentage of completion accounting method for
construction contracts in accordance with the American Institute
of Certified Public Accountants Statement of Position
81-1,
“Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.” Revenue and earnings on
construction contracts are recognized on the percentage of
completion method in the ratio of costs incurred to estimated
final costs. Contract cost consists of direct costs on
contracts, including labor and materials, amounts payable to
subcontractors and equipment expense (primarily depreciation,
fuel, maintenance and repairs). Depreciation is computed using
the straight-line method for construction equipment. Contract
cost is recorded as incurred, and revisions in contract revenue
and cost estimates are reflected in the accounting period when
known.
The accuracy of our revenue and profit recognition in a given
period is dependent on the accuracy of our estimates of the
total billings that will be rendered and the cost to finish
uncompleted contracts. Our cost estimates for all of our
significant contracts use a highly detailed “bottom
up” approach, and we believe our experience allows us to
produce reliable estimates. However, our contracts can be highly
complex, and in almost every case, the profit margin estimates
for a contract will either increase or decrease to some extent
from the amount that was originally estimated at the time of
bid. Because we have a large number of contracts of varying
levels of size and complexity in process at any given time,
these changes in estimates can sometimes offset each other
without materially impacting our overall profitability. However,
large changes in revenue or cost estimates can have a more
significant effect on profitability.
There are a number of factors that can contribute to changes in
estimates of contract cost and profitability. The most
significant of these include the completeness and accuracy of
the original bid, recognition of costs associated with scope
changes, extended overhead due to customer-related and
weather-related delays, subcontractor performance issues, site
conditions that differ from those assumed in the original bid
(to the extent contract remedies are unavailable), the
availability and skill level of workers in the
34
geographic location of the contract and changes in the
availability and proximity of materials. The foregoing factors,
as well as the stage of completion of contracts in process and
the mix of contracts at different margins, may cause
fluctuations in gross profit between periods, and these
fluctuations may be significant.
Valuation
of Long-Term Assets
Long-lived assets, which include property, equipment and
acquired identifiable intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Impairment evaluations involve management estimates of useful
asset lives and future cash flows. Actual useful lives and cash
flows could be different from those estimated by management, and
this could have a material effect on operating results and
financial position. In addition, we had goodwill with a value of
approximately $13 million at December 31, 2006, which
must be reviewed for impairment at least annually in accordance
with Statement of Financial Accounting Standards No. 142,
or SFAS 142. The impairment testing required by
SFAS 142 requires considerable judgment, and an impairment
charge may be required in the future. We completed our last
annual impairment review for goodwill as of October 1,
2006, and it did not result in an impairment. While the review
for impairment analysis of goodwill for 2007 has not been
completed, we do not expect any impairment.
Income
Taxes
Deferred tax assets and liabilities are recognized based on the
differences between the financial statement carrying amounts and
the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and establish a valuation
allowance based upon projected future taxable income and the
expected timing of the reversals of existing temporary
differences. Because realization of deferred tax assets related
to net operating loss carry forwards, or NOLs, is not assured,
our valuation allowance at the respective time represents the
amount of the deferred tax assets that we determine are more
likely than not to expire unutilized. Reflecting
management’s assessment of expected future operating
profitability, we expect to utilize all remaining NOLs;
therefore, we eliminated our valuation allowance in 2005. We had
previously reduced our valuation allowance in 2004 by
$18.9 million. We are subject to the alternative minimum
tax (AMT). Because we are still utilizing our NOLs to offset
taxable income, payment of AMT results in a reduction of our
deferred tax liability.
An ownership change, which may occur if there is a transfer of
ownership exceeding 50% of our outstanding shares of common
stock in any three-year period, may lead to a limitation in the
usability of, or a potential loss of some or all of, the NOLs.
In order to reduce the likelihood of an ownership change
occurring, our restated and amended certificate of
incorporation, as amended, prohibits transfers of our common
stock resulting in, or increasing, individual holdings in excess
of 4.5% of our common stock, unless such transfer is made by us
or with the consent of our board of directors.
Because the regulations governing NOLs are highly complex and
may be changed from time to time, and because our attempts to
prevent an ownership change from occurring may not be
successful, the NOLs could be limited or lost. We believe that
the NOLs are currently available in full, however, and intend to
take all reasonable and appropriate steps to ensure that they
will remain available. To the extent the NOLs become unavailable
to us, our future taxable income and that of any consolidated
affiliate will be subject to federal taxation, thus reducing
funds otherwise available for corporate purposes.
As of December 31, 2006, we had NOLs of approximately
$9.8 million, which will expire in 2020, if unused. We
expect that our NOLs will be fully utilized during 2007. After
the expiration or utilization of our NOLs, we have available to
us the excess tax benefit resulting from exercise of a
significant number of non-qualified in-the-money options
amounting to $4.1 million as of December 31, 2006.
However, because we will no longer have the significant offsets
provided by the NOLs, a comparison of our future cash flows to
our historic cash flows may not be meaningful.
On January 1, 2007, we adopted the provisions of Financial
Interpretation No. 48, (FIN 48) which establishes
the criteria that an individual tax position must meet for some
or all of the benefits of that position
35
to be recognized in our financial statements. Adoption of
FIN 48 did not have a material impact on our consolidated
financial statements.
Results
of Operations
The following compares our results of operations for the nine
months ended September 30, 2007 and 2006 and for the fiscal
years ended December 31, 2006, 2005 and 2004.
Three
months ended September 30, 2007 compared with three months
ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
(unaudited)
|
|
|
Revenues
|
|
$
|
77,714
|
|
|
$
|
68,743
|
|
|
|
13.1
|
%
|
Gross profit
|
|
|
7,915
|
|
|
|
7,878
|
|
|
|
0.5
|
%
|
Gross margin
|
|
|
10.2
|
%
|
|
|
11.5
|
%
|
|
|
(11.3
|
%)
|
General and administrative expenses and other
|
|
|
3,257
|
|
|
|
2,777
|
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,658
|
|
|
|
5,101
|
|
|
|
(8.7
|
%)
|
Operating margin
|
|
|
6.0
|
%
|
|
|
7.4
|
%
|
|
|
(18.9
|
%)
|
Interest income, net
|
|
|
467
|
|
|
|
253
|
|
|
|
84.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
5,125
|
|
|
|
5,354
|
|
|
|
(4.3
|
%)
|
Income taxes
|
|
|
1,682
|
|
|
|
1,809
|
|
|
|
(7.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
3,443
|
|
|
|
3,545
|
|
|
|
(2.9
|
%)
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
65
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,443
|
|
|
$
|
3,610
|
|
|
|
(4.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased approximately
$9 million (13%) during the third quarter of 2007 compared
with the third quarter of the prior year, reflecting continued
growth in our resources. Our workforce increased by
approximately 13% during the same period, and we have continued
to increase the size of our equipment fleet. However, the
increase in revenues in the third quarter of 2007 was less than
expected principally because of the above-average number of days
and amounts of heavy rainfall experienced across all our Texas
markets throughout the quarter.
Backlog. At the end of the third quarter of 2007,
our backlog of construction projects was $367 million,
which was down by about one month’s billings from the
$394 million backlog at the beginning of the quarter. We
added approximately $41 million of new contracts in the
third quarter of 2007. At September 30, 2007, we included
in backlog approximately $12 million of contracts on which
we were the apparent low bidder and expect to be awarded the
contracts, but as of the quarter-end these contracts had not
been officially awarded. Historically, subsequent non-awards of
such low bids have not materially affected our backlog or
financial condition.
Gross profit. Gross profit was flat at
$7.9 million for the period-to-period comparison. This
represents a decline in gross margins to 10.2% for the three
months ended September 30, 2007 from 11.5% in the
comparable period of the prior year. The decrease in gross
margins was due to, among other things, a lower average gross
margin in backlog and work in progress in 2007 compared to the
prior year in part because of a higher mix of lower margin
highway work, and the downward pressure that rainfall has had on
productivity. Due to the geographic diversity of our contracts
and their different stages of completion, it is difficult to
quantify the effect the rainfall has had. The lower productivity
resulted in lower utilization of our equipment during the third
quarter of 2007, causing our
work-in-progress
to bear a higher level of equipment cost than expected.
General and administrative expenses, net of other
income. General and administrative expenses, net,
increased by $480,000 predominantly due to the hiring of
additional personnel and higher salaries.
36
Operating income. The decrease in operating income
stems from the increase in general and administrative expenses
combined with flat gross profit.
Interest income and expense. In the third quarter of
2007, interest income increased by $151,000 compared with the
third quarter of the prior year. The increase was due to
interest earned on higher cash balances and investment in
short-term auction rate securities throughout the period, which
resulted principally from proceeds received from operating
activities, including proceeds received in the mobilization
phase of certain contracts, the unutilized portion of the
proceeds of our 2006 equity offering, and higher interest rates.
Interest expense in the third quarter of 2007 was approximately
$13,000 compared with interest expense of $76,000 in the
comparable period of the prior year.
Income taxes. Our effective income tax rate was
33.3% and 34.2% for the three months ended September 30,
2007 and 2006, respectively. The decrease in the effective tax
rate resulted from an increase in non-taxable income from
investments in municipal instruments. For the periods, our
federal income taxes were largely offset by net operating loss
carry-forwards.
Nine
Months Ended September 30, 2007 Compared to the Nine Months
Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
217,877
|
|
|
$
|
185,233
|
|
|
|
17.6
|
%
|
Gross profit
|
|
|
21,593
|
|
|
|
21,875
|
|
|
|
(1.3
|
%)
|
Gross margin
|
|
|
9.9
|
%
|
|
|
11.8
|
%
|
|
|
(16.1
|
%)
|
General and administrative expenses and other
|
|
|
8,292
|
|
|
|
7,928
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,301
|
|
|
|
13,947
|
|
|
|
(4.6
|
%)
|
Operating margin
|
|
|
6.1
|
%
|
|
|
7.5
|
%
|
|
|
(18.7
|
%)
|
Interest income, net
|
|
|
1,366
|
|
|
|
803
|
|
|
|
70.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
14,667
|
|
|
|
14,750
|
|
|
|
(0.6
|
%)
|
Income taxes
|
|
|
4,890
|
|
|
|
5,027
|
|
|
|
(2.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
9,777
|
|
|
|
9,723
|
|
|
|
0.6
|
%
|
Net (loss) income from discontinued operations
|
|
|
(25
|
)
|
|
|
444
|
|
|
|
(105.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,752
|
|
|
$
|
10,167
|
|
|
|
(4.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased approximately
$32.6 million in the first nine months of 2007 compared
with the first nine months of the prior year, reflecting the
continued expansion of our construction fleet, addition of a
concrete plant and addition of crews. We achieved 45% growth in
our state highway construction revenues during the first nine
months of 2007 as a result of increased state highway contracts
in the past two years. Our ability to be the successful low
bidder on these contracts was assisted by an improved bidding
climate principally due to a large state highway program which
increased total funding in the Houston area. We had a 16%
decrease in our municipal construction during the first nine
months of 2007 as a result of decreased contract awards in this
sector.
Our workforce grew by 13% year-over-year, and we purchased over
$25 million in property, plant and equipment within the
twelve month period ending September 30, 2007. Both of
these increases in resources have allowed us to increase our
volume when the poor weather did not restrict us from working on
projects.
Backlog. As of September 30, 2007, our backlog
of construction projects was $367 million, compared with
$395 million at the beginning of fiscal 2007. In the first
nine months of 2007, we added approximately $181 million of
new contracts.
Gross profit. Gross profits decreased by
$0.3 million, despite the higher revenues this year, due to
a decrease in gross margins to 9.9% for the nine months ended
September 30, 2007 from 11.8% in the prior year period. The
decrease in gross margins was due principally to the lower
average margin in backlog during
37
the nine months ended September 30, 2007 due to the change
in mix of construction of transportation versus water
infrastructure projects, compared with the comparable period in
the prior year, and to the wetter weather in the period, which
adversely affected productivity, including higher equipment
costs in the third quarter as discussed above.
General and administrative expenses, net of other
income. General and administrative expenses, net of
other income, increased $0.4 million during the first nine
months of 2007 compared with the comparable period in 2006 due
to the hiring of additional personnel and higher salaries.
Operating income. There was a decrease in operating
income of $0.6 million for the first nine months of 2007
compared to the comparable 2006 period due to the decreased
gross profit and an increase in general and administrative
expenses.
Interest income and expense. Through the third
quarter of 2007, net interest income increased by
$0.6 million compared with the comparable prior year’s
period. The increase was due to interest earned on higher cash
balances and investment in short-term auction rate securities
throughout the period, which resulted principally from net cash
provided by operating activities, including proceeds received in
the mobilization phase of certain contracts, the unutilized
proceeds of our 2006 equity offering, and higher interest rates.
Interest cost in the first nine months of 2007 was approximately
$79,000, of which $24,000 was capitalized as part of the
expansion of our office and shop facilities, compared with
interest expense of $190,000 in the comparable prior year period.
Income taxes. Our effective income tax rate was
33.3% and 34.1% for the nine months ended September 30,
2007 and 2006, respectively. The decrease in the effective tax
rate is a result of an increase in non-taxable income from
investments in municipal instruments. Through the periods
reported, our federal income taxes were largely offset by net
operating loss carryforwards.
Fiscal
Year Ended December 31, 2006 (2006) Compared with
Fiscal Year Ended December 31, 2005 (2005).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
219,439
|
|
|
|
13.6
|
%
|
Gross profit
|
|
|
28,547
|
|
|
|
23,756
|
|
|
|
20.2
|
%
|
Gross margin
|
|
|
11.4
|
%
|
|
|
10.8
|
%
|
|
|
5.6
|
%
|
General and administrative expenses and other
|
|
|
10,549
|
|
|
|
9,091
|
|
|
|
15.0
|
%
|
Operating income
|
|
|
17,998
|
|
|
|
14,665
|
|
|
|
22.7
|
%
|
Operating margin
|
|
|
7.2
|
%
|
|
|
6.7
|
%
|
|
|
7.5
|
%
|
Interest income
|
|
|
1,426
|
|
|
|
150
|
|
|
|
850.6
|
%
|
Interest expense
|
|
|
220
|
|
|
|
1,486
|
|
|
|
(85.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
44.1
|
%
|
Income taxes
|
|
|
6,566
|
|
|
|
2,788
|
|
|
|
135.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
19.9
|
%
|
Net income from discontinued operations, including gain on sale
|
|
|
682
|
|
|
|
559
|
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog, end of year
|
|
$
|
395,000
|
|
|
$
|
307,000
|
|
|
|
28.7
|
%
|
Revenues. Our revenue increase of
$29.9 million, or 14%, from 2005 to 2006 included a
substantial increase in revenues from state highway work of
$89.0 million, or 114%, to $166.3 million as we took
advantage of the very strong bidding climate in this sector and
the resultant increase in the proportion of state highway
contracts in our backlog. In particular, we saw a near-tripling
of revenues in the Dallas market, where we won several major
contracts in early 2006, and also good growth in the
San Antonio market. State highway contracts generally allow
us to achieve greater revenue and gross profit production from
our
38
equipment and work crews, although on average the gross margins
on this work are slightly lower than on our water infrastructure
contracts in the municipal markets.
At the same time there was a decrease in our municipal revenues
of $59.0 million, or 41.5%, to $83 million.
The overall revenue expansion was facilitated by an increase of
over one hundred employees in 2006, and a significant increase
in our equipment fleet. The increase was achieved despite a
generally wetter year in 2006 in most of our markets than in
2005, which adversely affected production rates, and the impact
of some significant delays in starting certain contracts in the
first three quarters of 2006, which were due to factors outside
our control.
Gross Profit. The improvement in gross profits in
2006 was due principally to the increase in revenues, combined
with the higher gross margins. This margin improvement was
attributable principally to a better margin mix in backlog
resulting from the improved bidding climate since 2004, and to
efficiencies resulting from the higher revenue levels achieved
in 2006. These factors overcame the negative impact on gross
margins of the wetter weather in 2006 and the delay in starting
certain contracts, as described above. They also helped offset
the downward pressure on gross margins arising from the
increased percentage of state highway work, from 39% in 2005 to
67% in 2006. In both years, we achieved a number of incentive
awards upon the successful completion of contract milestones.
Backlog. The $88 million increase in backlog in
2006 reflected the on-going broadening of our service platform
and the generally good bidding environment in our markets,
especially in the Dallas/Fort Worth area where our backlog
expanded significantly during the year.
General and Administrative Expenses, Net of Other Income and
Expense. The increase in general and administrative
expenses, or G&A, in 2006 was principally due to higher
employee expenses, including an increase in staff, increased
stock-based compensation expense resulting from our higher share
price in 2006, and higher legal and accounting fees. Despite
these increases in G&A expenses in support of the growing
business, our ratio of G&A expenses to revenue remained
essentially unchanged from 2005 to 2006, at 4%.
Operating Income. The 2006 increase in operating
income resulted principally from the higher revenues and gross
margins, which led to an increase in operating margin from 6.7%
to 7.2%.
Interest Expense Net of Interest Income. In 2006, we
invested cash raised in our public stock offering on which we
earned over $1.4 million of interest. In 2005, we incurred
$1.5 million of interest expense primarily on related party
debt which was repaid in January 2006 from the proceeds of our
public offering.
Income Taxes. In 2005, we recorded a reduction in
the valuation allowance related to the deferred tax asset
following management’s review of the likelihood that tax
loss carryforwards would be substantially utilized in the
future. This resulted in an effective tax rate of 21% in 2005.
In 2006, we recorded a more normal tax charge at 34.2% of income.
Net Income From Continuing Operations. The 2006
increase in net income from continuing operations was the result
of the various factors discussed above.
Effect of Income Tax Benefits. Although we have the
benefit of significant NOLs, which offset most of our income
from federal income taxes, we are required to reflect a full tax
charge in our financial statements through an adjustment to the
deferred tax asset. In addition, certain adjustments resulting
from our recovery of the deferred tax asset are recorded in the
income statement. Those adjustments resulted in a benefit of
$1.4 million in 2005. Assuming an income tax rate of 34%,
and disregarding adjustments to our deferred tax asset and other
timing differences, net income would have been $8.8 million
for 2005 so that, on a comparative basis, the net income level
of $13.3 million for 2006 represents an increase of
approximately 44%. Similarly, basic and fully diluted earnings
from continuing operations per common share for 2005, reflecting
an effective tax rate of 34%, would have been $1.13 and $0.92,
respectively, for 2005. A
39
reconciliation of reported net income for 2006 and 2005 to net
income as if a 34% tax rate had been applied is set forth in the
table below.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Income from continuing operations before income taxes, as
reported
|
|
$
|
19,204
|
|
|
$
|
13,329
|
|
Provision for income taxes (assuming a 34% effective rate)
|
|
|
6,529
|
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations as if a 34% rate had been
applied
|
|
$
|
12,675
|
|
|
$
|
8,797
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing operations per common share as if a
34% effective tax rate had been applied
|
|
$
|
1.20
|
|
|
$
|
1.13
|
|
Diluted income from continuing operations per common share as if
a 34% effective tax rate had been applied
|
|
$
|
1.08
|
|
|
$
|
0.92
|
|
Discontinued Operations, Net of Tax. Discontinued
operations for 2006 and 2005 represent the results of operations
of our distribution business, which was operated by Steel City
Products, LLC. The increase in the net income from discontinued
operations was primarily due to increases in gross margins from
16% in 2005 to 16.5% in 2006 through the date of sale.
The distribution business was sold on October 27, 2006. We
recorded proceeds from the sale of approximately
$5.4 million and paid $3.8 million to retire the Steel
City Products, LLC revolving line of credit. We recorded a
pre-tax gain on the sale of approximately $250,000 and recorded
$128,000 in income tax expense related to that gain.
Fiscal
Year Ended December 31, 2005 (2005) Compared with
Fiscal Year Ended December 31, 2004 (2004).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
219,439
|
|
|
$
|
132,478
|
|
|
|
65.6
|
%
|
Gross profit
|
|
|
23,756
|
|
|
|
13,261
|
|
|
|
79.1
|
%
|
Gross margin
|
|
|
10.8
|
%
|
|
|
10.0
|
%
|
|
|
8.2
|
%
|
General and administrative expenses and other
|
|
|
9,091
|
|
|
|
7,696
|
|
|
|
18.3
|
%
|
Operating income
|
|
|
14,665
|
|
|
|
5,565
|
|
|
|
163.5
|
%
|
Operating margin
|
|
|
6.7
|
%
|
|
|
4.2
|
%
|
|
|
59.1
|
%
|
Interest income
|
|
|
150
|
|
|
|
9
|
|
|
|
1,567
|
%
|
Interest expense
|
|
|
1,486
|
|
|
|
1,465
|
|
|
|
(8.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before minority interest and
taxes
|
|
|
13,329
|
|
|
|
4,109
|
|
|
|
224.4
|
%
|
Minority interest
|
|
|
—
|
|
|
|
962
|
|
|
|
(100.0
|
%)
|
Income taxes
|
|
|
2,788
|
|
|
|
(2,134
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
10,541
|
|
|
|
5,281
|
|
|
|
99.6
|
%
|
Net income from discontinued operations
|
|
|
559
|
|
|
|
372
|
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,100
|
|
|
$
|
5,653
|
|
|
|
96.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog, end of year
|
|
$
|
307,000
|
|
|
$
|
232,000
|
|
|
|
32.3
|
%
|
Revenues. The revenue increase from 2004 to 2005,
which includes an increase in revenues from state highway work
of $39.0 million, or 98%, to $77.4 million and an
increase in municipal revenues of $48.7 million, or 52%, to
$141.9 million was due to several factors, including:
|
|
|
|
•
|
a growing backlog, which enabled us to expand our equipment
fleet and to hire more field crews, especially in the
San Antonio and Austin markets;
|
|
|
•
|
the continuing expansion of our construction capabilities, which
allowed us to bid for and take on larger and more complex work;
|
40
|
|
|
|
•
|
certain water main contracts that included large diameter pipe,
facilitating greater revenues to be generated by our crews;
|
|
|
•
|
the increase in the proportion of state highway contracts, which
generally allow greater revenue production from our equipment
and work crews; and
|
|
|
•
|
generally better weather during 2005, which allowed for
continuous work on construction contracts, compared with one of
the wettest years on record in 2004.
|
Gross Profit. The improvement in gross profits in
2005 was due principally to the 66% revenue increase, combined
with the slightly higher gross margins. The margin improvement
was attributable to the gradual improvement in gross margins in
our backlog during 2005 combined with improved productivity
resulting from good weather during the year and the efficiencies
arising from having a greater number of larger and longer
duration contracts than in the past.
Backlog. The $75 million increase in backlog
reflected the on-going broadening of our service platform and
the continuation of a favorable bidding climate in our markets,
and included the winning of several large contracts,
particularly two TXDOT contracts with an aggregate value of
$103 million and a $46 million contract with Travelers
Casualty and Surety Company of America to complete a TXDOT
contract taken over by Travelers after a default by the original
contractor.
General and Administrative Expenses, Net of Other Income and
Expense. The increase in general and administrative
expenses, or G&A, in 2005 was principally due to higher
employee expenses, including an increase in staff, increased
variable compensation resulting from our improved profits, and
higher legal and accounting fees. Despite these increases in
G&A expenses in support of the growing business, the
significantly higher revenues in 2005 meant that the ratio of
G&A expenses to revenue decreased from 6% in 2004 to 4% in
2005.
Operating Income. The 2005 increase in operating
income and operating margin resulted from the higher gross
margins and lower ratio of G&A expenses to revenues.
Interest Expense Net of Interest Income. The
decrease in net interest expense in 2005 resulted from a
$141,000 increase in interest income earned on higher cash
balances.
Minority Interest. Because we acquired the remaining
19.9% of Sterling Houston Holdings, Inc. in December 2004, no
minority interest expense was recorded in 2005.
Income Taxes. In both 2005 and 2004, we recorded a
reduction in the valuation allowance related to the deferred tax
asset following management’s review of the likelihood that
tax loss carryforwards would be substantially utilized in the
future. This resulted in an effective tax rate of 21% in 2005
and a tax benefit in 2004.
Net Income From Continuing Operations. The 2005
increase in net income from continuing operations was the result
of the factors discussed above and resulted in the increase in
basic and diluted income per common share from continuing
operations.
41
Effect of Income Tax Benefits. Although we have the
benefit of significant NOLs, which offset most of our income
from federal income taxes, we are required to reflect a full tax
charge in our financial statements through an adjustment to the
deferred tax asset. In addition, certain adjustments resulting
from our recovery of the deferred tax asset are recorded in the
income statement. Those adjustments resulted in a benefit of
$1.4 million in 2005 and $1.9 million in 2004.
Assuming an income tax rate of 34%, and disregarding adjustments
to our deferred tax asset and other timing differences, net
income would have been $8.8 million for 2005 and
$2.1 million for 2004, and on the same basis, basic and
fully diluted earnings from continuing operations per common
share would have been $1.13 and $0.92, respectively, for 2005
compared with $0.39 and $0.30, respectively, for 2004. A
reconciliation of reported net income for 2005 and 2004 to net
income as if a 34% tax rate had been applied is set forth in the
table below.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Income from continuing operations before income taxes, as
reported
|
|
$
|
13,329
|
|
|
$
|
3,147
|
|
Provision for income taxes (assuming a 34% effective rate)
|
|
|
4,532
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations as if a 34% rate had been
applied
|
|
$
|
8,797
|
|
|
$
|
2,077
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing operations per common share as if a
34% rate had been applied
|
|
$
|
1.13
|
|
|
$
|
0.39
|
|
Diluted income from continuing operations per common share as if
a 34% rate had been applied
|
|
$
|
0.92
|
|
|
$
|
0.30
|
|
Discontinued Operations, Net of Tax. Discontinued
operations for 2005 and 2004 represent the results of operations
of our distribution business, which was operated by Steel City
Products, LLC. The increase in the net income of discontinued
operations was primarily due to a 2% increase in sales in 2005
combined with an improvement in gross margins from 15% to 16%.
Historical
Cash Flows
The following table sets forth information about our cash flows
for the years ended December 31, 2006, 2005 and 2004 and
for the nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents (at end of period)
|
|
$
|
28,466
|
|
|
$
|
22,267
|
|
|
$
|
3,449
|
|
|
$
|
14,894
|
|
|
$
|
18,996
|
|
Net cash provided by (used in) Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
23,089
|
|
|
|
31,266
|
|
|
|
4,171
|
|
|
|
14,648
|
|
|
|
9,846
|
|
Investing activities
|
|
|
(52,358
|
)
|
|
|
(10,972
|
)
|
|
|
(5,809
|
)
|
|
|
(28,586
|
)
|
|
|
(46,567
|
)
|
Financing activities
|
|
|
35,468
|
|
|
|
(1,476
|
)
|
|
|
2,436
|
|
|
|
366
|
|
|
|
33,450
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
495
|
|
|
|
(294
|
)
|
|
|
(977
|
)
|
|
|
—
|
|
|
|
782
|
|
Investing activities
|
|
|
4,739
|
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(38
|
)
|
Financing activities
|
|
|
(5,357
|
)
|
|
|
349
|
|
|
|
964
|
|
|
|
—
|
|
|
|
(743
|
)
|
Supplementary information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
24,849
|
|
|
|
11,392
|
|
|
|
3,555
|
|
|
|
23,033
|
|
|
|
24,706
|
|
Working capital (at end of period)
|
|
|
62,874
|
|
|
|
18,354
|
|
|
|
16,052
|
|
|
|
59,691
|
|
|
|
62,874
|
|
42
Operating
activities
Significant non-cash items included in operating activities are:
|
|
|
|
•
|
depreciation and amortization, which for the first nine months
of 2007 totaled $6.8 million, an increase of
$1.2 million from the first nine months of 2006, as a
result of the continued increase in the size of our construction
fleet in recent years; and
|
|
|
•
|
stock-based compensation expense increased by $0.2 million
as a result of restricted stock and stock option grants in the
first nine months of 2006 and 2007 that were issued at higher
grant prices due to increases in our stock price.
|
The significant components of the changes in working capital are
as follows:
|
|
|
|
•
|
contracts receivable increased $9.7 million in the first
nine months of 2007, compared with an increase of
$18.3 million in the first nine months of 2006, both of
which are attributable to revenue increases and to higher levels
of customer retentions;
|
|
|
•
|
cost and estimated earnings in excess of billings on uncompleted
contracts increased by $4.1 million in the first nine
months of 2007 compared to the first nine months of 2006
increase of $1.1 million, principally due to the start up
of several new jobs;
|
|
|
•
|
billings in excess of costs on uncompleted contracts increased
by $0.4 million in the first nine months of 2007, compared
with the first nine months of 2006 increase of
$6.8 million. These changes principally reflect
fluctuations in the timing and amount of mobilization payments
received for the
start-up of
certain contracts; and
|
|
|
•
|
trade payables, which increased by $4.9 million in the
first nine months of 2007, compared with a decrease of
$0.9 million in the first nine months of 2006; these
variations resulted from changes in the volume of materials and
sub-contractors in the respective periods due to the change in
the mix of contracts in progress.
|
Investing
activities
Expenditures for the replacement of certain equipment, to expand
our construction fleet, and to acquire real estate for materials
handling and future shop and office sites in Dallas and
San Antonio, totaled $23 million in the first nine
months of 2007, compared with a total of $24.7 million of
equipment purchases in the same period last year. In 2006, we
began investing surplus funds generated by our equity offering
into short-term auction rate securities.
Financing
activities
Financing activities in the first nine months of 2007 primarily
reflected no change in the outstanding revolving line of credit
balance. In the prior year period, funds generated by the
offering of common stock in January 2006 totaled approximately
$27.0 million, net of expenses, and funds generated from
the exercise of options and warrants in that period totaled
$742,000. In addition, in the first nine months of 2006,
$8.5 million of the offering proceeds was used to prepay
all of our outstanding 12% five-year promissory notes held by
members of management.
Liquidity
The level of working capital for our construction business
varies due to fluctuations in:
|
|
|
|
•
|
costs and estimated earnings in excess of billings;
|
|
|
•
|
billings in excess of costs and estimated earnings;
|
|
|
•
|
the size and status of contract mobilization payments and
progress billings;
|
|
|
•
|
customer receivables and contract retentions; and
|
|
|
•
|
the amounts owed to suppliers and subcontractors.
|
43
Some of these fluctuations can be significant.
The significant increase in our working capital in 2006, due in
part to our public offering in January 2006, was an important
element in enabling us to expand our bonding facilities and
therefore to bid on larger and longer-lived projects than in the
past.
We believe that we have sufficient liquid financial resources,
including the unused portion of our new credit facility
described below, to fund our requirements for the next twelve
months of operations, including our bonding requirements. We
expect no other material changes in our liquidity.
Sources
of Capital
Revolving
Credit Facility
In addition to cash provided from operations, we use our
revolving credit facility within Comerica Bank to finance
working capital needs and capital expenditures. Prior to
October 31, 2007, our credit facility had a maturity date
of May 10, 2009 and was a collateral-based facility with
total borrowing capacity, subject to a borrowing base, of up to
$35.0 million. At September 30, 2007,
$30.0 million in borrowings were outstanding under the
credit Facility and we had unused availability of
$5.0 million, in addition to cash and cash equivalents of
$14.9 million and short-term investment securities
available for sale of $32.6 million. We were in compliance
with all of the covenants under our credit facility in existence
at September 30, 2007.
On October 31, 2007, we entered into a new credit facility
with Comerica Bank, which replaced the prior credit facility and
will mature on October 31, 2012. The new credit facility is
also collateral-based with total borrowing capacity, subject to
a borrowing base, of up to $75.0 million. Borrowings under
the new credit facility were used to finance the RHB acquisition
and refinance indebtedness outstanding under the prior credit
facility, and will be used to finance working capital. At
October 31, 2007, the aggregate borrowings outstanding
under the new credit facility were $22.4 million, and the
aggregate amount of letters of credit outstanding under the new
credit facility was $1.5 million.
At our election, the loans under the new credit facility bear
interest at either a LIBOR-based interest rate or a prime-based
interest rate. The unpaid principal balance of each LIBOR-based
loan bears interest at a variable rate equal to LIBOR plus an
amount ranging from 1.25% to 2.25% depending on the pricing
leverage ratio that we achieve. The “pricing leverage
ratio” is determined by the ratio of our average total
debt, less cash and cash equivalents, to the EBITDA that we
achieve on a rolling four-quarter basis. The pricing leverage
ratio is measured quarterly. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or
(c) greater than or equal to 1.75 to 1.00, then the
applicable LIBOR margins will be 1.25%, 1.75% and 2.25%,
respectively. Interest on LIBOR-based loans is payable at the
end of the relevant LIBOR interest period, which must be one,
two, three or six months. The new credit facility is subject to
our compliance with certain covenants, including financial
covenants relating to fixed charges, leverage, tangible net
worth, asset coverage and consolidated net losses.
The unpaid principal balance of each prime-based loan will bear
interest at a variable rate equal to Comerica’s prime rate
plus an amount ranging from 0% to 0.50% depending on the pricing
leverage ratio that we achieve. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or
(c) greater than or equal to 1.75 to 1.00, then the
applicable prime margins will be 0.0%, 0.25% and 0.50%,
respectively.
Mortgages
In 2001, we completed the construction of a new headquarters
building on land owned by us adjacent to our equipment repair
facility in Houston. The building was financed principally
through an additional mortgage of $1.1 million on the land
and facilities at a floating interest rate which at
September 30, 2007 was 8.0% per annum, repayable over
15 years. This mortgage is cross-collateralized with a
prior mortgage on the land and equipment repair facilities,
which were purchased in 1998, in the original amount of
$500,000, repayable over 15 years with an interest rate of
9.3% per annum. In addition, we have available to us a long-
44
term facility of up to $1.5 million repayable over
15 years to finance the expansion of our office building
and maintenance facilities.
Uses of
Capital
Contractual
Obligations
The following table sets forth our fixed, non-cancelable
obligations at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
1–3 Years
|
|
|
4–5 Years
|
|
|
5 Years
|
|
|
|
(Amounts in thousands)
|
|
|
Revolving credit facility
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating leases
|
|
|
3,502
|
|
|
|
1,010
|
|
|
|
2,024
|
|
|
|
468
|
|
|
|
—
|
|
Mortgages
|
|
|
782
|
|
|
|
123
|
|
|
|
248
|
|
|
|
146
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,284
|
|
|
$
|
1,133
|
|
|
$
|
32,272
|
|
|
$
|
614
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our obligations for interest are not included in the table above
as these amounts vary according to the levels of debt
outstanding at any time. Interest on our revolving credit
facility is paid monthly and fluctuates with the balances
outstanding during the year, as well as with fluctuations in
interest rates. In 2006 that interest was approximately $92,000.
All other debt is expected to have future annual interest
expense payments of approximately $67,000 in 2007, $147,000 in
the one to three year period, and $63,000 in the four to five
year period.
To manage risks of changes in the material prices and
subcontracting costs used in tendering bids for construction
contracts, we obtain firm quotations from our suppliers and
subcontractors before submitting a bid. These quotations do not
include any quantity guarantees, and we have no obligation for
materials or subcontract services beyond those required to
complete the contracts that we are awarded for which quotations
have been provided.
Capital
Expenditures
Our capital expenditures during 2006 and the first nine months
of 2007 were $27.3 million and $23.0 million,
respectively, and consisted primarily of expenditures to
purchase heavy construction equipment. In 2008, we expect that
our capital expenditure spending will be at similar levels to
2006.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements. Our operating leases
are described in the notes to our financial statements.
New
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities —
Including an amendment to FASB Statement No. 115”
(“SFAS No. 159”). This statement allows a
company to irrevocably elect fair value as a measurement
attribute for certain financial assets and financial liabilities
with changes in fair value recognized in the results of
operations. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
impact of adoption on our results of operations and financial
position.
In May 2007, the FASB issued FASB Staff Position
FIN 48-1,
an amendment to FIN 48, which provides guidance on how an
entity is to determine whether a tax position has effectively
been settled for purposes of recognizing previously unrecognized
tax benefits. Specifically, this guidance states that an entity
would recognize a benefit when a tax position is effectively
settled using the following criteria: (1) the taxing
45
authority has completed its examination including all appeals
and administrative reviews; (2) the entity does not plan to
appeal or litigate any aspect of the tax position; and
(3) it is remote that the taxing authority would examine or
reexamine any aspect of the tax position, assuming the taxing
authority has full knowledge of all relevant information
relative to making their assessment on the position. We applied
the provisions of this FASB Staff Position in conjunction with
the adoption of FIN 48 on January 1, 2007, and their
application did not have a material adverse effect on our
results of operations or financial position.
Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to certain market risks from transactions that
are entered into during the normal course of business. Our
primary market risk exposure is related to changes in interest
rates. We manage our interest rate risk by balancing in part our
exposure to fixed and variable interest rates while attempting
to minimize interest costs.
Financial derivatives are used as part of our overall risk
management strategy. These instruments are used to manage risk
related to changes in interest rates. Our portfolio of
derivative financial instruments consists of interest rate swap
agreements, which are used to convert variable interest rate
obligations to fixed interest rate obligations, thereby reducing
the exposure to increases in interest rates. Amounts paid or
received under interest rate swap agreements are accrued as
interest rates fluctuate, with the offset recorded in interest
expense.
An increase of 1% in the market rate of interest would have
increased our interest expense for the nine months ended
September 30, 2007 by approximately $6,000.
We apply SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” pursuant to which our
interest rate swaps have not been designated as hedging
instruments; therefore changes in fair value are recognized in
current earnings.
Because we derive no revenues from foreign countries and have no
obligations in foreign currency, we experience no direct foreign
currency exchange rate risk. However, prices of certain raw
materials, construction equipment and consumables, such as oil,
steel and cement, may be affected by currency fluctuations.
46
General
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch office in a new
market, often after having successfully bid on and completed a
project in that market, or by acquiring a company that gives us
an immediate entry into a market. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB.
Recent
RHB Acquisition
On October 31, 2007, we completed the acquisition of
privately-owned RHB, which is headquartered in Reno, Nevada. RHB
is a heavy civil construction business focused on the
construction of roads and highways throughout the state of
Nevada. We paid $53 million, of which $1 million was
paid with 40,702 shares of our common stock, to acquire
approximately 91.67% of the equity interest in RHB and 100% of
the equity interests in Road and Highway Builders Inc., a Nevada
corporation. The remaining 8.33% interest in RHB is owned by
Mr. Richard Buenting, the chief executive officer of RHB,
who continues to run RHB as part of our senior management team.
Approximately $29.6 million of the RHB purchase price was funded
with available cash on hand and repayment of an amount
receivable, $1.0 million with the issuance of 40,702 shares of
our common stock to Mr. Buenting and the balance with funds
borrowed under our new $75 million revolving credit
facility.
RHB’s largest customer is the Nevada Department of
Transportation, or NDOT, which is responsible for planning,
constructing, operating and maintaining the 5,400 miles of
highway and over 1,000 bridges that make up the state highway
system. RHB is focused on providing timely and profitable
execution of construction projects along with high-value
deployment of construction materials such as aggregates and
mixes for asphalt paving. RHB has concentrated its business in
suburban and rural highway and road system projects requiring
high-volume production and materials handling, and has not
historically pursued municipal work such as water or storm water
systems or high density urban projects. Since its founding in
1999, RHB has experienced profitable growth, capitalizing on
strong market conditions and solid long-term demographics in
Nevada.
For the nine months ended September 30, 2007, RHB generated
revenue, net income and EBITDA of $64.9 million,
$20.9 million and $21.5 million, respectively. This
high level of profitability in 2007 resulted from the
exceptional profitability of specific RHB projects, and we do
not expect this high level of profitability to be normal for RHB
going forward. We purchased RHB based on an assumed sustainable
trailing twelve month EBITDA of approximately $12 million
and with the expectation of further future growth. EBITDA is
defined as net income before net interest expense, income tax
expense, and depreciation and amortization. EBITDA is a non-GAAP
financial measure that we use for our internal budgeting
process, which excludes the effects of financing costs, income
taxes and non-cash depreciation and amortization. Although
EBITDA is a common alternative measure of performance used by
investors, financial analysts and rating agencies to assess
operating performance for companies in our industry, it is not a
substitute for other
47
GAAP financial measures such as net income or operating income
as calculated and presented in accordance with GAAP.
Furthermore, we believe that the non-GAAP EBITDA financial
measure is useful to investors in providing greater transparency
to the information used by management in its operational and
investment decision making. Our non-GAAP financial measures may
be different from such measures used by other companies. We urge
you to review the GAAP financial measures included in this
prospectus and our consolidated financial statements, including
the notes thereto, and the other financial information contained
in this prospectus and incorporated herein by reference, and to
not rely on any single financial measure to evaluate our
business. A reconciliation of RHB’s net income to
RHB’s EBITDA for the nine months ended September 30,
2007 is as follows (in thousands):
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
Net income(1)
|
|
$
|
20,896
|
|
Depreciation and amortization
|
|
|
1,130
|
|
Interest expense (income), net
|
|
|
(490
|
)
|
Income tax (benefit) expense(1)
|
|
|
—
|
|
|
|
|
|
|
EBITDA
|
|
$
|
21,536
|
|
|
|
|
|
|
|
|
|
(1) |
|
RHB’s income was taxed to its members, and therefore its
net income was equal to its income before income tax. |
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures.
As of September 30, 2007, RHB had a backlog of
approximately $127 million based on our methodology of
calculating backlog. See “Selected Historical Financial and
Operating Data” for information regarding our calculation
of backlog.
Rationale
for the RHB Acquisition
We acquired RHB for a number of reasons, including those listed
below:
Expansion into a Growing Western U.S. Infrastructure
Construction Markets. RHB provides us entry into an
attractive Nevada market, which we believe will continue to have
strong long-term demographic growth, driving the need for
infrastructure investment. RHB’s Nevada business also
provides diversification and counterbalances factors affecting
our Texas markets such as weather, state and local government
funding shifts, and federal allocations of transportation
expenditures. In addition, Nevada is adjacent to a number of
additional growing western state markets.
Strong Management Team with a Shared Corporate
Culture. Mr. Buenting and his team of managers and
employees have been responsible for significant and profitable
growth at RHB. This success has been built on experience,
technical expertise, excellent customer relationships and a
strong work ethic. We believe these shared values will foster
effective integration and can serve as a platform for continued
growth and success in Nevada and adjacent markets.
Expansion of Our Service Lines into Aggregates and Asphalt
Paving Materials. RHB focuses on projects that have
high volumes of materials, such as aggregates and mixes for
asphalt paving. In Texas, we historically have not provided our
own materials, but rather have sourced them from other
suppliers. We
48
believe that RHB’s expertise in aggregates and asphalt
paving operations add to our capabilities, and we anticipate
opportunities to apply them in Texas and other markets in
addition to Nevada.
Opportunities to Extend Our Municipal and Structural
Capabilities into Nevada. RHB does not currently pursue
municipal work such as construction of water, wastewater and
storm water systems. It also typically subcontracts structural
work such as bridges. We believe there are a number of
attractive opportunities to utilize our expertise with municipal
and structural work, both within RHB’s current project
backlog and in future bid opportunities in RHB’s markets.
RHB’s Strong Financial Results and Immediate Accretion
to Our Earnings and Earnings Per Share. RHB has
produced strong historical profitability. We believe the
acquisition will be immediately accretive to our earnings and
our earnings per share.
Competitive
Strengths
We believe that our principal competitive strengths include:
Comprehensive Infrastructure Construction
Capabilities. We provide comprehensive construction
services to our customers, including concrete and asphalt
paving, concrete slip forming, installation of large-diameter
water and wastewater systems, construction of bridges and other
large structures, light rail infrastructure construction,
concrete batch plant operations, concrete crushing, and, with
the acquisition of RHB, aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews and believe that our emphasis on
providing comprehensive construction services allows us to
capture additional profit margin and to more aggressively bid on
contracts compared to some competitors more reliant upon
subcontractors.
Long and Successful Track Record of Infrastructure
Construction. We have over 50 years of experience
in the construction industry. Over this period of time, we have
developed the processes and controls that allow us to provide
high-quality contracting services for building roads, highways,
bridges, light rail facilities and water, wastewater and storm
water infrastructure.
Leadership Position in Our Markets. We are an
established leader in our markets based on our longevity, our
management expertise and our reputation, as well as our in-depth
knowledge of construction conditions in our market areas. Our
scale of operations allows us to deploy and redeploy work crews,
materials and equipment across multiple projects and provides us
with advantages in competitive bidding environments.
Consistent History of Managing Construction Projects and
Contract Risk. Our significant experience and longevity
in our markets provides us with an understanding of the many
risks of infrastructure construction. We monitor and manage risk
throughout a contract’s duration, including the bid
process, the pre-construction planning activities and the
construction process. In Texas, our project managers lead our
estimating process, and our senior management reviews all bid
proposals prior to submission, thereby increasing project
managers’ accountability and understanding of the financial
and operating risks and opportunities of our contracts. In
Nevada, the chief executive officer of RHB has been primarily
responsible for all aspects of the bidding and construction
process.
Track Record of Sourcing and Completing
Acquisitions. We believe that it is important to
augment our organic growth through selective acquisitions of
companies that meet our return on investment goals and strategic
objectives. In particular, we seek companies with talented
management teams in growth markets with a focus on
infrastructure construction services. Ideal candidates may also
provide the opportunity to cross-utilize complementary
construction capabilities. In 2002, we acquired the Kinsel Heavy
Highway construction business. In 2006, we completed the
acquisition of the assets of Rathole Drilling, Inc., a drill
shaft subcontracting operation. In 2007, we completed the RHB
acquisition.
Experienced Management Team and Skilled
Workforce. We believe our management team and employees
are key factors to our success. Our Chief Executive Officer and
our President each has over 30 years of industry
experience, our five senior managers have an average of over
25 years of industry experience, and our
49
15 senior project managers average over 15 years of
industry experience in the infrastructure construction market.
We expend significant resources to attract, retain and train our
employees.
Business
Strategy
Key features of our business strategy to create shareholder
value include:
Continue to Add Construction Capabilities. By adding
capabilities that augment our core construction competencies, we
are able to improve gross margin opportunities, more effectively
compete for contracts and compete for contracts that might not
otherwise be available to us. We continue to investigate
opportunities to augment our staff with employees or management
teams that would bring us additional service capabilities. We
also continue to explore opportunities for acquisitions, such as
RHB, which added to our construction materials capabilities.
Increase Our Market Leadership in Our Core
Markets. We have a strong presence in a number of
growing markets in Texas and Nevada. We intend to continue to
expand our presence in these markets, as well as complementary
adjacent markets. We believe our core markets are generally
experiencing strong growth in infrastructure spending caused by
factors such as an increasing population, robust demand for oil
and gas and for hard mineral resources, the need for new water
sources, flood and subsidence control activities and increased
federally-funded highway construction.
Apply Core Competencies Across Our Markets. We
intend to capitalize on opportunities to export our Texas
experience constructing bridges and water and sewer systems into
RHB’s Nevada markets. Similarly, we believe RHB’s
experience in aggregates and asphalt paving materials will open
new opportunities for us in our Texas markets.
Expand into Attractive New Markets and Selectively Pursue
Strategic Acquisitions. We will continue to seek to
identify attractive new markets and opportunities in select
western and southeastern U.S. markets. We seek markets with
strong demographic trends, growing new infrastructure
requirements and deferred maintenance spending on existing
infrastructure. We will also continue to assess opportunities to
extend our service capabilities and expand our markets through
acquisitions. With our strong financial position and publicly
traded common stock, we believe that we are an attractive
acquiror for heavy civil construction firms who have limited
opportunities to achieve liquidity with their business.
Position Our Business for Future Infrastructure
Spending. We believe there is a growing awareness of
the need to build, reconstruct and repair our country’s
infrastructure, including water, wastewater and storm drainage
systems and our transportation infrastructure such as bridges,
highways and mass transit systems. We will continue to seek to
build our expertise in the civil construction market for
transportation and water infrastructure, seek to develop new
capabilities to serve these markets, and seek to maintain our
human and capital resources to effectively meet demand.
Continue to Develop Our Employees. We believe that
our employees are a key to the successful implementation of our
business strategy. We plan to continue allocating significant
resources in order to attract and retain talented managers and
supervisory and field personnel.
Markets
and Customers
Market
Opportunity
We operate in the heavy civil construction segment for
infrastructure projects, specializing in transportation and
water infrastructure. Demand for this infrastructure depends on
a variety of factors, including overall population growth,
economic expansion and vitality of a market area, as well as
unique local topographical, structural and environmental issues.
For example, the City of Houston experiences flooding and
subsidence, which has led to various municipal mandates
requiring substantial new construction to reorganize and expand
the collection, treatment and distribution of water throughout
the area. In addition to these factors, demand for the
replacement of infrastructure is driven by the general aging of
infrastructure and the need for technical improvements to
achieve more efficient or safer use of infrastructure and
resources.
50
Our geographic markets have experienced steady and significant
growth over the last 10 years. According to the 2006
census, as ranked by population, Texas is the second largest
state in the United States with 23.5 million people. The
population in Texas has grown by 12.7% since 2000, almost double
the 6.4% growth rate for the United States as a whole over the
same period. According to the 2006 census, Houston ranks as the
fourth largest city in the country, San Antonio as the
seventh largest, Dallas as the ninth largest and Austin as the
sixteenth largest. Nevada has undergone even more rapid growth,
with the state’s population expanding 24.9% since 2000 to
2.5 million in 2006. These rapidly growing population bases
continue to enhance the need for expanded transportation and
water infrastructure.
In addition to our core geographical markets, we operate in
large and growing construction sectors that have experienced
solid and sustained national growth over the past several years.
According to data from the U.S. Census Bureau, the annual
value of public construction
put-in-place
in the United States for transportation, highway, street and
water/wastewater infrastructure has grown at a 5.1% compound
annual growth rate since 2002 and was $137 billion in 2006,
the last year for which data are available. This includes 4.4%
annual growth in the $99 billion transportation,
construction and highway/street market and 7.2% growth in the
$38 billion water/wastewater market. McGraw-Hill, an
industry data source, projects that nationwide construction
spending on highways and bridges and environmental public works
(which include river/harbor improvements, sewers and water
supply systems) is expected to grow by 5% and 3%, respectively,
in 2008. Based on dollars spent for construction of highways and
bridges and for sewer systems in 2007, Texas was ranked third in
the nation in both categories by McGraw-Hill.
Our highway and bridge work is generally funded through federal
and state authorizations. The federal government enacted the
SAFETEA-LU bill, which authorized $286 billion for
transportation spending through 2009, an average 30% increase
from the prior spending bill. Of this total, TXDOT and NDOT were
originally allocated approximately $14.5 billion and
$1.3 billion, respectively. Actual SAFETEA-LU
appropriations have been somewhat reduced from the original
allocations. We are reliant upon TXDOT and NDOT contracts for a
significant portion of our revenues. Recent public statements by
TXDOT officials indicate potential TXDOT funding shortfalls and
reductions in spending. Transportation leaders have identified
$188 billion in needed construction projects to create an
acceptable transportation system in Texas by 2030. NDOT
expenditures totaled $740 million in 2006, and have had an
annual increase of 9.9% since 2001.
Our water and wastewater, underground utility, light transit and
non-highway paving work is generally funded by municipalities
and local authorities. The size and growth rates of these
markets is difficult to compute as a whole given the number of
municipalities, the differences in funding sources and
variations in local budgets. However, management estimates that
the municipal markets in which we could potentially do business
are in excess of $1 billion annually.
Our
Markets and Customers
For decades, we have concentrated our operations in Texas. We
are headquartered in Houston, and we serve the top markets in
Texas, including Houston, San Antonio,
Dallas/Fort Worth and Austin. With the RHB acquisition, we
have expanded our operations into Nevada.
Although we occasionally undertake contracts for private
customers, the vast majority of our contracts are for public
sector customers. In Texas, these customers include TXDOT,
county and municipal public works departments, the Metropolitan
Transit Authority of Harris County, Texas, or Metro, the Harris
County Toll Road Authority, regional transit authorities, port
authorities, school districts and municipal utility districts.
In Nevada, RHB’s primary public sector customer has been
NDOT.
Our largest revenue customer is TXDOT. In 2006, contracts with
TXDOT represented 67% of our revenues, and other public sector
revenue generated in Texas represented 33% of our revenues. In
2006, contracts with NDOT represented 90% of RHB’s
revenues, and other public sector revenue generated in Nevada
represented 10% of RHB’s revenues. In both Texas and
Nevada, we provide services to these customers exclusively
pursuant to contracts awarded through competitive bidding
processes.
51
In Texas, our municipal customers in 2006 included the City of
Houston (12% of our 2006 revenues) and Harris County, Texas (5%
of our 2006 revenues). We have also completed the construction
of certain infrastructure for new light rail systems in Houston,
Dallas and Galveston. We anticipate that revenues obtained from
the City of Houston will continue to increase due to the
metropolitan area’s steady gain in population through
migration of new residents and annexation of surrounding
communities. In both Texas and Nevada, we provide services to
our municipal customers exclusively pursuant to contracts
awarded through competitive bidding processes.
Competition
Our competitors are companies that we bid against for
construction contracts. We estimate that Texas Sterling has
approximately 150 competitors in the Texas markets that we
primarily serve, and they include large national and regional
construction companies as well as many smaller contractors. In
Nevada, we estimate that RHB’s construction business has
approximately 10 competitors in the markets that it primarily
serves, and they include both large national and regional
construction companies as well as smaller contractors.
Historically, the construction business has not typically
required large amounts of capital, which can result in relative
ease of market entry for companies possessing acceptable
qualifications. Factors influencing our competitiveness include
price, our reputation for quality, our equipment fleet, our
financial strength, surety bonding capacity and
prequalification, our knowledge of local markets and conditions,
and our project management and estimating abilities. Although
some of our competitors are larger than we are and may possess
greater resources or provide more vertically-integrated
services, we believe that we are well-positioned to compete
effectively and favorably in the markets in which we operate on
the basis of the foregoing factors.
We are unable to determine the size of many competitors because
they are privately owned, but we believe that we are one of the
larger participants in our Texas markets and one of the largest
contractors in Houston engaged in municipal civil construction
work. In Nevada, we believe that RHB is a leading asphalt paving
contractor in suburban and rural highway projects. We believe
that being one of the largest firms in the Houston municipal
civil construction market provides us with several advantages,
including greater flexibility to manage our backlog in order to
schedule and deploy our workforce and equipment resources more
efficiently; more cost-effective purchasing of materials,
insurance and bonds; the ability to provide a broader range of
services that otherwise would be provided through
subcontractors; and the availability of substantially more
capital and resources to dedicate to each of our contracts.
Because we own and maintain most of the equipment required for
our Texas contracts and have the experienced workforce to handle
many types of municipal civil construction, we are able to bid
competitively on many categories of contracts, especially
complex, multi-task projects.
In the state highway markets, most of our competitors are large
regional contractors, and individual contracts tend to be larger
and require more specialized skills than those in the municipal
markets. Some of these competitors have the advantage of being
much more vertically-integrated, or they specialize in certain
types of projects such as construction over water. However, such
competitors, particularly in Texas, often have the disadvantage
of temporarily using a local workforce to complete each of their
state highway contracts. In contrast, we permanently employ the
workers who perform our state highway contracts in Texas,
although we do rely on a temporary, unionized workforce for
performance of a portion of our state highway contracts in
Nevada. For the nine months ended September 30, 2007, state
highway work accounted for 69% of our consolidated revenues,
compared with 67% in 2006 and 39% in 2005. During the same
period, state highway work accounted for 97% of RHB’s
revenues, compared with 90% in 2006 and 96% in 2005.
Backlog
Backlog is our estimate of the billings that we expect to make
in future periods on our construction contracts. We add the
revenue value of new contracts to our backlog, typically when we
are the low bidder on a public sector contract and management
determines that there are no apparent impediments to award of
the contract. As construction on our contracts progresses, we
increase or decrease backlog to take account of changes in
estimated quantities under fixed unit price contracts, as well
as to reflect changed conditions,
52
change orders and other variations from initially anticipated
contract revenues and costs, including completion penalties and
bonuses. We subtract from backlog the amounts we bill on
contracts.
As of September 30, 2007, our backlog was approximately
$367 million, and RHB had backlog of approximately
$127 million, based on our methodology for calculating
backlog. At September 30, 2007, we included approximately
$12 million of contracts in backlog on which we were the
apparent low bidder and expected to be awarded the contracts,
but as of that date, those contracts had not been officially
awarded. Historically, subsequent non-awards of such low bids
have not materially affected our backlog or financial condition.
Substantially all of the contracts in our backlog may be
canceled at the election of the customer; however, neither our
backlog nor our results of operations have been materially
adversely affected by contract cancellations or modifications in
the past. See “Contracts—Contract Management
Process.”
Contracts
Types
of Contracts
We provide our services by using traditional general contracting
arrangements, which are predominantly fixed unit price contracts
awarded based on the lowest bid. A small amount of our revenues
is produced under change orders or emergency contracts arranged
on a cost plus basis.
Fixed unit price contracts are generally used in
competitively-bid public civil construction contracts and, to a
lesser degree, building construction contracts. Contractors
under fixed unit price contracts are generally committed to
provide all of the resources required to complete a contract for
a fixed price per unit. Fixed unit price contracts generally
transfer more risk to the contractor but offer the opportunity,
under favorable circumstances, for greater profits. These
contracts are generally subject to a negotiated change order,
frequently due to a difference in site conditions from those
anticipated when the bid is placed. Typically, one change order
is issued upon completion of a contract to account for all of
the quantity deviations from the original contract that were
made during the construction process. Some contracts provide for
penalties if the contract is not completed on time, or
incentives if it is completed ahead of schedule.
Contract
Management Process
We identify potential contracts from a variety of sources,
including through subscriber services that notify us of
contracts out for bid, through advertisements by federal, state
and local governmental entities, through our business
development efforts and through meetings with other participants
in the construction industry. After determining which contracts
are available, we decide which contracts to pursue based on such
factors as the relevant skills required, contract size and
duration, the availability of our personnel and equipment, the
size and makeup of our current backlog, our competitive
advantages and disadvantages, prior experience, the contracting
agency or customer, the source of contract funding, geographic
location, likely competition, construction risks, gross margin
opportunities, penalties or incentives and the type of contract.
As a condition to pursuing certain contracts, we are sometimes
required to complete a prequalification process with the
applicable agency or customer. Some customers, such as TXDOT and
NDOT, require yearly prequalification, and other customers have
experience requirements specific to the contract. The
prequalification process generally limits bidders to those
companies with operational experience and financial capability
to effectively complete the particular contract in accordance
with the plans, specifications and construction schedule.
There are several factors that can create variability in
contract performance and financial results compared to our bid
assumptions on a contract. The most significant of these include
the completeness and accuracy of our original bid analysis,
recognition of costs associated with added scope changes,
extended overhead due to customer and weather delays,
subcontractor performance issues, changes in productivity
expectations, site conditions that differ from those assumed in
the original bid, and changes in the availability and proximity
of materials. In addition, each of our original bids is based on
the contract customer’s estimates of the quantities needed
to complete a contract; if the quantities ultimately needed are
different, our backlog
53
and financial performance on the contract will change. All of
these factors can lead to inefficiencies in contract
performance, which can increase costs and lower profits.
Conversely, if any of these or other factors is more positive
than the assumptions in our bid, contract profitability can
improve.
The estimating process for our contracts in Texas typically
involves three phases. Initially, we consider the level of
anticipated competition and our available resources for the
prospective project. If we then decide to continue considering a
project, we undertake the second phase of the contract process
and spend two to six weeks performing a detailed review of the
plans and specifications, summarize the various types of work
involved and related estimated quantities, determine the
contract duration and schedule and highlight the unique and
riskier aspects of the contract. Concurrent with this process,
we estimate the cost and availability of labor, material,
equipment, subcontractors and the project team required to
complete the contract on time and in accordance with the plans
and specifications. Substantially all of our estimates are made
on a per unit basis for each line item, with the typical
contract containing 50 to 400 line items. The final phase
consists of a detailed review of the estimate by management,
including, among other things, assumptions regarding cost,
approach, means and methods, productivity, risk and the
estimated profit margin. This profit amount will vary according
to management’s perception of the degree of difficulty of
the contract, the current competitive climate and the size and
makeup of our backlog. Our project managers are intimately
involved throughout the estimating and construction process so
that contract issues, and risks relating thereto, can be
understood and addressed on a timely basis.
Historically, the contracting process for RHB’s contracts
in Nevada has been primarily the responsibility of the chief
executive officer of the company. He has reviewed all of the
plans and specifications for a proposed project, estimated the
costs to complete the project and the risks involved, added in
an appropriate profit level, and, based on all of that
information, determined whether to submit a bid on a project. As
part of our process for integrating RHB into our overall
operations, we anticipate that the process used to bid on
contracts in Nevada will substantially conform to the process
used in Texas as described above.
To manage risks of changes in material prices and subcontracting
costs used in tendering bids for construction contracts, we
obtain firm quotations from our suppliers and subcontractors
before submitting a bid. These quotations do not include any
quantity guarantees, and we have no obligation for materials or
subcontract services beyond those required to complete the
respective contracts that we are awarded for which quotations
have been provided.
Substantially all of our contracts are entered into with
governmental entities and are generally awarded to the lowest
bidder after a solicitation of bids by the project owner.
Requests for proposals or negotiated contracts with public or
private customers are generally awarded based on a combination
of technical capability and price, taking into consideration
factors such as contract schedule and prior experience. In
either case, bidders must post a bid bond for generally 5% to
10% of the amount bid, and on winning the bid, must post a
performance and payment bond for 100% of the contract amount.
Upon completion of a contract, before receiving final payment on
the contract, a contractor must post a maintenance bond for
generally 1% of the contract amount for one to two years.
During the construction phase of a contract, we monitor our
progress by comparing actual costs incurred and quantities
completed to date with budgeted amounts and the contract
schedule and periodically (at a minimum on a monthly basis)
prepare an updated estimate of total forecasted revenue, cost
and expected profit for the contract.
During the normal course of most contracts, the customer, and
sometimes the contractor, initiates modifications or changes to
the original contract to reflect, among other things, changes in
quantities, specifications or design, method or manner of
performance, facilities, materials, site conditions and period
for completion of the work. In many cases, final contract
quantities may differ from those specified by the customer.
Generally, the scope and price of these modifications are
documented in a “change order” to the original
contract and reviewed, approved and paid in accordance with the
normal change order provisions of the contract. We are often
required to perform extra or change order work as directed by
the customer even if the customer has not agreed in advance on
the scope or price of the work to be performed. This process may
result in disputes over whether the work performed is beyond the
scope of the work included in the original
54
contract plans and specifications or, even if the customer
agrees that the work performed qualifies as extra work, the
price that the customer is willing to pay for the extra work.
These disputes may not be settled to our satisfaction. Even when
the customer agrees to pay for the extra work, we may be
required to fund the cost of such work for a lengthy period of
time until the change order is approved and funded by the
customer. In addition, any delay caused by the extra work may
adversely impact the timely scheduling of other work on the
contract (or on other contracts) and our ability to meet
contract milestone dates.
The process for resolving contract claims varies from one
contract to another but, in general, we attempt to resolve
claims at the project supervisory level through the normal
change order process or, if necessary, with higher levels of
management within our organization and the customer’s
organization. Regardless of the process, when a potential claim
arises on a contract, we typically have the contractual
obligation to perform the work and must incur the related costs.
We do not recoup the costs unless and until the claim is
resolved, which could take a significant amount of time.
Most of our construction contracts provide for termination of
the contract for the convenience of the customer, with
provisions to pay us only for work performed through the date of
termination. Our backlog and results of operations have not been
materially adversely affected by these provisions in the past.
We act as the prime contractor on almost all of the construction
contracts that we undertake. We complete the majority of our
contracts with our own resources, and we typically subcontract
specialized activities such as traffic control, electrical
systems, signage and trucking. As the prime contractor, we are
responsible for the performance of the entire contract,
including subcontract work. Thus, we are subject to increased
costs associated with the failure of one or more subcontractors
to perform as anticipated. We manage this risk by reviewing the
size of the subcontract, the financial stability of the
subcontractor and other factors. Although we generally do not
require that our subcontractors furnish a bond or other type of
security to guarantee their performance, we require performance
and payment bonds on many specialized or large subcontract
portions of our contracts. Disadvantaged business enterprise
regulations require us to use our best efforts to subcontract a
specified portion of contract work performed for governmental
entities to certain types of subcontractors, including minority-
and women-owned businesses. We have not experienced significant
costs associated with subcontractor performance issues.
Insurance
and Bonding
All of our buildings and equipment are covered by insurance,
which our management believes to be adequate. In addition, we
maintain general liability and excess liability insurance, all
in amounts consistent with our risk of loss and industry
practice. We self-insure our workers’ compensation claims
subject to stop-loss insurance coverage.
As a normal part of the construction business, we generally are
required to provide various types of surety and payment bonds
that provide an additional measure of security for our
performance under public sector contracts. Typically, a bidder
for a contract must post a bid bond generally for 5% to 10% of
the amount bid, and on winning the bid, must post a performance
and payment bond for 100% of the contract amount. Upon
completion of a contract, before receiving final payment on the
contract, a contractor must post a maintenance bond for
generally 1% of the contract amount for one to two years. Our
ability to obtain surety bonds depends upon our capitalization,
working capital, aggregate contract size, past performance,
management expertise and external factors, including the
capacity of the overall surety market. Surety companies consider
such factors in light of the amount of our backlog that we have
currently bonded and their current underwriting standards, which
may change from time to time. As is customary, we have agreed to
indemnify our bonding company for all losses incurred by it in
connection with bonds that are issued, and we have granted our
bonding company a security interest in certain assets as
collateral for such obligation.
Employees
As of December 1, 2007, we had approximately 1,200
employees, including 15 project managers and over 50
superintendents who manage over 120 fully-equipped crews in our
construction business. Of such employees, 737 were located in
our Houston headquarters and 10 in our Reno office, with most of
the others
55
being field personnel. Of our employees, 72, all of whom are in
Nevada, are union members represented by three unions.
Our business is dependent upon a readily available supply of
management, supervisory and field personnel. Substantially all
of our employees who work on our contracts in Texas are a
permanent part of our workforce, and we generally do not rely on
temporary employees to complete these contracts. In contrast,
many of our employees who work on our contracts in Nevada are
temporary employees. In the past, we have been able to attract
sufficient numbers of personnel to support the growth of our
operations. Although we do not anticipate any shortage of labor
in the near term, we may not be able to continue to attract and
retain sufficient employees at all levels due to changes in
immigration enforcement practices or compliance standards or for
other reasons.
We conduct extensive safety training programs, which has allowed
us to maintain a high safety level at our worksites. All
newly-hired employees undergo an initial safety orientation, and
for certain types of projects, we conduct specific hazard
training programs. Our project foremen and superintendents
conduct weekly
on-site
safety meetings, and our full-time safety inspectors make random
site safety inspections and perform assessments and training if
infractions are discovered. In addition, all of our
superintendents and project managers are required to complete an
OSHA-approved safety course.
Properties
We own our headquarters office building in Houston, Texas, which
is located on a seven acre parcel of land on which our Texas
equipment repair center is also located. We also own land in
Dallas and San Antonio on which we plan to construct
regional offices and repair facilities. Pending completion of
these regional offices, we lease office facilities in these
locations. In order to complete most contracts in Texas, we
lease small parcels of real estate near the site of a contract
job site to store materials, locate equipment, conduct concrete
crushing and pugging operations, and provide offices for the
contracting customer, its representatives and our employees.
For our Nevada operations, we lease office space in Reno,
Nevada, and we have an office and repair facilities located on a
forty-five acre parcel of land in Lovelock, Nevada. RHB also has
a quarry lease in Carson City, Nevada. Unlike in Texas where we
acquire aggregates from third-party suppliers, in Nevada, RHB
sources and produces its own aggregates, whether from the
Lovelock quarry or from other sources near job sites where it
enters into short-term leases to acquire the aggregates
necessary for the job. In order to complete most contracts in
Nevada, we also lease small parcels of real estate near the site
of a contract job site to store materials, locate equipment, and
provide offices for the contracting customer, its
representatives and our employees.
Government
and Environmental Regulations
Our operations are subject to compliance with numerous
regulatory requirements of federal, state and local agencies and
authorities, including regulations concerning safety, wage and
hour, and other labor issues, immigration controls, vehicle and
equipment operations and other aspects of our business. For
example, our construction operations are subject to the
requirements of the Occupational Safety and Health Act, or OSHA,
and comparable state laws directed toward the protection of
employees. In addition, most of our construction contracts are
entered into with public authorities, and these contracts
frequently impose additional governmental requirements,
including requirements regarding labor relations and
subcontracting with designated classes of disadvantaged
businesses.
All of our operations are also subject to federal, state and
local laws and regulations relating to the environment,
including those relating to discharges into air, water and land,
the handling and disposal of solid and hazardous waste, the
handling of underground storage tanks and the cleanup of
properties affected by hazardous substances. For example, we
must apply water or chemicals to reduce dust on road
construction projects and to contain contaminants in storm
run-off water at construction sites. In certain circumstances,
we may also be required to hire subcontractors to dispose of
hazardous wastes encountered on a project in accordance with a
plan approved in advance by the customer. Certain environmental
laws impose substantial
56
penalties for non-compliance and others, such as the federal
Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, impose strict, retroactive, joint and several
liability upon persons responsible for releases of hazardous
substances.
CERCLA and comparable state laws impose liability, without
regard to fault or the legality of the original conduct, on
certain classes of persons that contributed to the release of a
“hazardous substance” into the environment. These
persons include the owner or operator of the site where the
release occurred and companies that disposed or arranged for the
disposal of the hazardous substances found at the site. Under
CERCLA, these persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances
that have been released into the environment, for damages to
natural resources and for the costs of certain health studies.
CERCLA also authorizes the federal Environmental Protection
Agency, or EPA, and, in some instances, third parties, to act in
response to threats to the public health or the environment and
to seek to recover from the responsible classes of persons the
costs they incur.
Solid wastes, which may include hazardous wastes, are subject to
the requirements of the Federal Solid Waste Disposal Act, the
federal Resource Conservation and Recovery Act, referred to as
RCRA, and comparable state statutes. Although we do not generate
solid waste, we occasionally dispose of solid waste on behalf of
customers. From time to time, the EPA considers the adoption of
stricter disposal standards for non-hazardous wastes. Moreover,
it is possible that additional wastes will in the future be
designated as “hazardous wastes.” Hazardous wastes are
subject to more rigorous and costly disposal requirements than
are non-hazardous wastes.
Legal
Proceedings
We are, and may in the future be involved as, a party to various
legal proceedings, which are incidental to the ordinary course
of business. We regularly analyze current information and, as
necessary, provide accruals for probable liabilities on the
eventual disposition of these matters. In the opinion of
management, after consultation with legal counsel, there are
currently no threatened or pending legal matters that would
reasonably be expected to have a material adverse impact on our
consolidated results of operations, financial position or cash
flows.
57
The following table sets forth the names and ages of each of our
current directors and executive officers and the positions they
held as of December 1, 2007:
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
Patrick T. Manning
|
|
Chairman of the Board of Directors and Chief Executive Officer
|
|
|
61
|
|
Joseph P. Harper, Sr.
|
|
President, Chief Operating Officer and Treasurer and a Director
|
|
|
61
|
|
James H. Allen, Jr.
|
|
Senior Vice President and Chief Financial Officer
|
|
|
66
|
|
Roger M. Barzun.
|
|
Senior Vice President, Secretary and General Counsel
|
|
|
66
|
|
Richard H. Buenting
|
|
Chief Executive Officer of Road and Highway Builders, LLC
|
|
|
39
|
|
John D. Abernathy.
|
|
Director
|
|
|
70
|
|
Robert W. Frickel
|
|
Director
|
|
|
63
|
|
Donald P. Fusilli, Jr.
|
|
Director
|
|
|
56
|
|
Maarten D. Hemsley
|
|
Director
|
|
|
58
|
|
Christopher H. B. Mills
|
|
Director
|
|
|
55
|
|
Milton L. Scott
|
|
Director
|
|
|
51
|
|
David R. A. Steadman
|
|
Director
|
|
|
70
|
|
Patrick T. Manning. Mr. Manning joined the
predecessor of Texas Sterling Construction Co., our Texas
construction subsidiary, which along with its predecessors we
refer to as TSC, in 1971 and led its move from Detroit, Michigan
into the Houston market in 1978. He has been TSC’s
President and Chief Executive Officer since 1998 and our
Chairman of the Board of Directors and Chief Executive Officer
since July 2001. Mr. Manning has served on a variety of
construction industry committees, including the Gulf Coast
Trenchless Association and the Houston Contractors’
Association, where he served as a member of the board of
directors and as President from 1987 to 1993. He attended
Michigan State University from 1969 to 1972.
Joseph P. Harper, Sr. Mr. Harper has been
employed by TSC since 1972. He was Chief Financial Officer of
TSC for approximately 25 years until August 2004, when he
became Treasurer of TSC. In addition to his financial
responsibilities, Mr. Harper has performed both estimating
and project management functions. Mr. Harper has been a
director and our President and Chief Operating Officer since
July 2001, and in May 2006 was elected our Treasurer.
Mr. Harper is a certified public accountant.
James H. Allen, Jr. Mr. Allen became our Chief
Financial Officer in July 2007. He spent approximately
30 years with Arthur Andersen & Co., including
19 years as an audit and business advisory partner and as
head of the firm’s Houston office construction industry
practice. After being retired for several years, he became chief
financial officer of a process chemical manufacturer and served
in that position for over three years prior to joining our
company. Mr. Allen is a certified public accountant.
Roger M. Barzun. Mr. Barzun has been our Vice
President, Secretary and General Counsel since August 1991, was
elected a Senior Vice President from May 1994 until July 2001
and again in March 2006. Mr. Barzun has been a lawyer since
1968 and is a member of the bar of New York and Massachusetts.
Mr. Barzun also serves as general counsel to other
corporations from time to time on a part-time basis.
Richard H. Buenting. Mr. Buenting joined
Sterling in October 2007 upon the acquisition of RHB. He
currently serves as Chief Executive Officer of RHB, a position
he has held since founding that company in 1999. Previously,
Mr. Buenting served in a number of roles, including Vice
President and Project Manager for Granite Construction, a
publicly traded civil construction firm. While at Granite,
Mr. Buenting worked in the California and Nevada markets.
John D. Abernathy. Mr. Abernathy was Chief
Operating Officer of Patton Boggs LLP, a Washington D.C. law
firm, from January 1995 through May 2004 when he retired. He is
also a director of Par Pharmaceutical Companies, Inc., an
NYSE-listed company that manufactures generic and specialty
drugs, and Neuro-Hitech, Inc., a development-stage drug company.
Mr. Abernathy is a certified public accountant. In December
2005, Mr. Abernathy was elected Lead Director by the
independent members of our board of directors.
Robert W. Frickel. Mr. Frickel is the founder
and President of R.W. Frickel Company, P.C., a public
accounting firm that provides audit, tax and consulting services
primarily to companies in the construction industry. Prior to
the founding of R.W. Frickel Company in 1974, Mr. Frickel
was employed by Ernst & Ernst. Mr. Frickel is a
certified public accountant.
58
Donald P. Fusilli, Jr. Mr. Fusilli is an
independent consultant. From May 1973 until September 2006,
Mr. Fusilli served in a variety of capacities at Michael
Baker Corporation, a public company listed on the American Stock
Exchange that provides a variety of professional engineering
services spanning the complete life cycle of infrastructure and
managed asset projects. Mr. Fusilli joined Michael Baker
Corporation as an engineer and over the course of his career
rose to president and chief executive officer in April 2001.
Since September 2006, Mr. Fusilli has been an independent
consultant providing strategic planning, marketing development
and operations management services. Mr. Fusilli is a
director of RTI International Metals, Inc., an NYSE-listed
company that is a leading U.S. producer of titanium mill
products and fabricated metal components. He holds a Civil
Engineering degree from Villanova University, a Juris Doctor
degree from Duquesne University School of Law and attended the
Advanced Management Program at the Harvard Business School.
Maarten D. Hemsley. Mr. Hemsley served as our
President and Chief Operating Officer from 1988 until 2001, and
as Chief Financial Officer from 1998 until August 2007. From
January 2001 to May 2002, Mr. Hemsley was also a consultant
to, and thereafter has been an employee of, JO Hambro Capital
Management Limited, which is part of JO Hambro Capital
Management Group Limited, or JOHCMG, an investment management
company based in the United Kingdom. Mr. Hemsley has served
since 2001 as Fund Manager of JOHCMG’s
Leisure & Media Venture Capital Trust, plc, and since
February 2005, as Senior Fund Manager of its Trident
Private Equity II LLP investment fund. Mr. Hemsley is
a director of Tech/Ops Sevcon, Inc., a U.S. public company
that manufactures electronic controls for electric vehicles and
other equipment, and of a number of privately-held companies in
the United Kingdom. Mr. Hemsley is a Fellow of the
Institute of Chartered Accountants in England and Wales.
Christopher H. B. Mills. Mr. Mills is a
director of JOHCMG. Prior to founding JOHCMG in 1993,
Mr. Mills was employed by Montagu Investment Management and
its successor company, Invesco MIM, as an investment manager and
director, from 1975 to 1993. He is the Chief Executive of North
Atlantic Smaller Companies Investment Trust plc, which is a part
of JOHCMG and is a 4.48% holder of our common stock.
Mr. Mills is a director of four U.S. public companies:
Lesco, Inc., which manufactures and sells fertilizer and lawn
products; NetBank, Inc., a financial holding company that
operates a family of businesses focused primarily on consumer
and small business banking as well as conforming mortgage
lending; W-H Energy Services, Inc., which is in the oilfield
services industry; and SunLink Healthcare Systems, Inc., a
non-urban community healthcare provider for seven hospitals and
related businesses in four states in the Southwest and Midwest.
Mr. Mills also serves as a director of a number of public
and private companies outside of the U.S. in which JOHCMG
funds have investments.
Milton L. Scott. Mr. Scott is currently
chairman and chief executive officer of the Togas Group, a
strategic advisory and services company in supply chain
management, transportation and logistics, and integrated supply.
He was previously associated with Complete Energy Holdings, LLC,
a company of which he was Managing Director until January 2006
and which he co-founded in January 2004 to acquire, own and
operate power generation assets in the United States. From March
2003 to January 2004, Mr. Scott was a Managing Director of
The StoneCap Group, an entity formed to acquire, own and operate
power generation assets. From October 1999 to November 2002,
Mr. Scott served as Executive Vice President and Chief
Administrative Officer at Dynegy Inc., a public company that was
a market leader in power distribution, marketing and trading of
gas, power and other commodities, midstream services and
electric distribution. From July 1977 to October 1999,
Mr. Scott was with the Houston office of Arthur Andersen
LLP, a public accounting firm, where he served as partner in
charge of the Southwest Region Technology and Communications
practice. Mr. Scott is currently the lead director and
chairman of the audit committee of W-H Energy Services, an
NYSE-listed company that is in the oilfield services industry.
David R. A. Steadman. Mr. Steadman is President
of Atlantic Management Associates, Inc., a management services
and investment group. An engineer by profession, he served as
Vice President of the Raytheon Company from 1980 until 1987
where he was responsible for commercial telecommunications and
data systems businesses in addition to setting up a corporate
venture capital portfolio. Subsequent to that time and until
1989, Mr. Steadman was Chairman and Chief Executive Officer
of GCA Corporation, a manufacturer of semiconductor production
equipment. Mr. Steadman serves as a director of Aavid
Thermal Technologies, Inc., a provider of thermal management
solutions for the electronics industry, a privately-held
company. Mr. Steadman also serves as Chairman of Tech/Ops
Sevcon, Inc., a public company that manufactures electronic
controls for electric vehicles and other equipment.
Mr. Steadman is a Visiting Lecturer in Business
Administration at the Darden School of the University of
Virginia.
59
The following table sets forth information regarding the
beneficial ownership of our common stock at December 5,
2007, for:
|
|
|
|
•
|
each person known by us to own beneficially more than 5% of our
outstanding common stock;
|
|
|
•
|
each of our executive officers named above in
“Management”;
|
|
|
•
|
each of our directors; and
|
|
|
•
|
all of our executive officers and directors as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and includes sole or shared voting or investment
power with respect to securities. Except as indicated by
footnote, and subject to applicable community property laws, the
persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as
beneficially owned by them, and their address is 20810 Fernbush
Lane, Houston, Texas 77073. The percentage of beneficial
ownership is based on 11,162,942 shares of common stock
outstanding at December 5, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Shares
|
|
|
Total
|
|
|
|
|
|
|
Common
|
|
|
Subject to
|
|
|
Beneficial
|
|
|
Percent of
|
|
Name of Beneficial Owner
|
|
Stock Owned
|
|
|
Purchase*
|
|
|
Ownership
|
|
|
Class
|
|
|
Patrick T. Manning
|
|
|
132,500
|
|
|
|
65,120
|
|
|
|
197,620
|
|
|
|
1.8
|
%
|
Joseph P. Harper, Sr. (1)
|
|
|
560,141
|
|
|
|
172,574
|
|
|
|
732,715
|
|
|
|
6.5
|
%
|
James H. Allen, Jr.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Roger M. Barzun
|
|
|
22,161
|
|
|
|
3,710
|
|
|
|
25,871
|
|
|
|
†
|
|
Richard H. Buenting (2)
|
|
|
40,702
|
|
|
|
—
|
|
|
|
40,702
|
|
|
|
†
|
|
John D. Abernathy (3)
|
|
|
29,801
|
|
|
|
27,166
|
|
|
|
56,967
|
|
|
|
†
|
|
Robert W. Frickel (3)
|
|
|
64,805
|
|
|
|
17,000
|
|
|
|
81,805
|
|
|
|
†
|
|
Donald P. Fusilli, Jr. (3)
|
|
|
1,598
|
|
|
|
—
|
|
|
|
1,598
|
|
|
|
†
|
|
Maarten D. Hemsley
|
|
|
191,924
|
|
|
|
88,400
|
|
|
|
280,324
|
|
|
|
2.5
|
%
|
Christopher H. B. Mills (3)(4)
|
|
|
514,805
|
|
|
|
5,000
|
|
|
|
519,805
|
|
|
|
4.7
|
%
|
Milton L. Scott(3)
|
|
|
2,805
|
|
|
|
—
|
|
|
|
2,805
|
|
|
|
†
|
|
David R. A. Steadman (3)
|
|
|
16,805
|
|
|
|
5,000
|
|
|
|
21,805
|
|
|
|
†
|
|
Dreman Value Management, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harborside Financial Center
Plaza 10, Suite 800
Jersey City, New Jersey 07311 (5)
|
|
|
934,183
|
|
|
|
—
|
|
|
|
934,183
|
|
|
|
8.4
|
%
|
All directors and executive officers as a group
(12 persons) (6)
|
|
|
1,573,047
|
|
|
|
383,970
|
|
|
|
1,957,017
|
|
|
|
17.0
|
%
|
|
|
|
* |
|
These are shares that the person, entity or group could acquire
within 60 days of November 16, 2007. |
|
† |
|
Represents beneficial ownership of less than one percent (1%). |
|
(1) |
|
This number includes 8,000 shares held by Mr. Harper
as custodian for his grandchildren. |
|
(2) |
|
Mr. Buenting also owns an 8.33% equity interest in Road and
Highway Builders, LLC. |
60
|
|
|
(3) |
|
This number includes, or in the case of Mr. Fusilli
consists entirely of, 1,598 shares subject to restrictions
that expire on the day preceding the 2008 Annual Meeting of
Stockholders, but earlier if the director dies or becomes
disabled or if there is a change in control of the Company. The
shares are forfeited before the expiration of the restrictions
if the director ceases to be a director other than because of
his death or disability. |
|
(4) |
|
According to a Form 13G/A (Amendment No. 3) filed
with the SEC on February 6, 2007, each of North Atlantic
Smaller Companies Investment Trust plc, Mr. Mills and North
Atlantic Value Management LLC claims shared voting and
investment power over these shares. This number consists of the
500,000 shares owned by NASCIT; 5,000 shares owned by
Mr. Mills personally over which he claims sole voting and
investment power; and 1,598 shares owned by Mr. Mills
that are subject to the same restrictions as are described in
footnote (3), above. |
|
(5) |
|
According to a Form 13G filed with the SEC on
February 14, 2007, Dreman Value Management, LLC is an
investment adviser with sole voting and dispositive power over
these shares. |
|
(6) |
|
See the footnotes above for a description of certain of the
shares included in this total. |
61
SHARES
ELIGIBLE FOR FUTURE SALE
We cannot predict the effect, if any, that sales of shares or
the availability of shares for sale will have on the market
price of our common stock prevailing from time to time.
Nevertheless, sales of significant amounts of our common stock
in the public market, or the perception that those sales may
occur, could adversely affect prevailing market prices and
impair our future ability to raise capital through the sale of
our equity at a time and price we deem appropriate.
Upon the completion of this offering and assuming no exercise of
outstanding warrants or options, we will have 12,762,942 shares
(or in the event the underwriter’s over-allotment option is
exercised in full, 13,002,942 shares) of our common stock
outstanding. Of these shares, 9,510,748 shares (or in the event
the underwriter’s over-allotment option is exercised in
full, 9,750,748 shares) will be freely tradable without
restriction, except for any shares of our common stock purchased
in this offering by our “affiliates,” as that term is
defined in Rule 144 under the Securities Act, which would
be subject to the limitations and restrictions described below.
The remaining 3,252,194 shares of our common stock to be
outstanding upon completion of this offering are deemed
“restricted securities,” as that term is defined under
Rule 144 of the Securities Act, are held by affiliates and
must be sold in compliance with Rule 144 or are subject to
the lock-up
agreements described in “Underwriting.” Securities
that are restricted or held by affiliates may be sold in the
U.S. public market only if registered or if they qualify
for an exemption from registration under the provisions of
Rule 144 or Rule 144(k) under the Securities Act,
which rules are described below. Of the 3,252,194 shares of
our common stock that are deemed restricted and that will be
outstanding upon completion of this offering,
2,216,398 shares would qualify for exemption under
Rule 144(k) and 1,035,796 shares would qualify for
exemption under Rule 144.
Rule 144
In general, under Rule 144 as currently in effect, a
person, or persons whose shares must be aggregated, who has
beneficially owned restricted shares of our common stock for at
least one year is entitled to sell within any three-month period
a number of shares that does not exceed the greater of the
following:
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•
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one percent of the number of shares of common stock then
outstanding, which will equal approximately 127,629 shares
(or, in the event the underwriter’s over-allotment option
is exercised in full, 130,029 shares) immediately after
this offering, or
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•
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the average weekly trading volume of our common stock on the
Nasdaq during the four calendar weeks preceding the date of
filing of a notice on Form 144 with respect to the sale.
|
Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person, or persons whose shares must
be aggregated, who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell the shares
under Rule 144(k) without complying with the manner of
sale, public information, volume limitations or notice or public
information requirements of Rule 144. Therefore, unless
otherwise restricted, the shares eligible for sale under
Rule 144(k) may be sold immediately upon the completion of
this offering.
Amendments
to Rule 144
On November 15, 2007, the SEC adopted amendments to
Rule 144. These amendments will, among other things, reduce
the holding period for resales of restricted securities of
reporting companies from one year to six months where the issuer
has been a reporting company for at least 90 days and
eliminate most requirements under Rule 144 for resales of
restricted securities by persons who are not (and have not been
within the three months preceding the resale) affiliates of the
issuer, except for the current information requirement. These
amendments, which are set forth in a final rule issued by the
SEC on December 6, 2007, will be effective 60 days
after the release is published in the Federal Register.
Lock-Up
Agreements
For a description of the
90-day
lock-up
agreements with the underwriter that restrict sales of shares by
us and by certain of our executive officers and directors, see
“Underwriting—Lock-Up
Agreements.”
62
Subject to the terms and conditions set forth in the
underwriting agreement, the underwriter named below has agreed
to purchase, and we have agreed to sell to such underwriter, the
number of shares of common stock set forth opposite its name
below:
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Underwriter
|
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Number of Shares
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D.A. Davidson & Co.
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1,600,000
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The underwriter is offering the shares of common stock subject
to its acceptance of the shares from us. The underwriting
agreement provides that the obligation of the underwriter to
purchase the shares of common stock offered by this prospectus
is subject to the satisfaction of the conditions contained in
the underwriting agreement. The underwriter must purchase all of
the shares of common stock offered hereby if any of the shares
are purchased, except for the shares covered by the
over-allotment option described below, unless and until the
option is exercised.
The underwriter has advised us that it proposes to offer the
shares of common stock directly to the public at the public
offering price set forth on the cover page of this prospectus,
and to dealers at the public offering price less a selling
concession not in excess of $ per
share. The underwriter also may allow, and dealers may reallow,
a concession not in excess of $
per share to brokers and dealers. After the offering, the
underwriter may change the offering price and other selling
terms. Our common stock is offered subject to receipt and
acceptance thereof by the underwriter and to the other
conditions set forth in the underwriting agreement, including
the right to reject orders in whole or in part. We and the
underwriter will determine the offering price of our common
stock through negotiation. This price will not necessarily
reflect the price at which investors in the market will be
willing to buy and sell our shares following this offering.
Over-Allotment
Option
We have granted the underwriter an option to purchase up to
240,000 additional shares of our common stock at the public
offering price less the underwriting discount. The underwriter
may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. The
underwriter may exercise this option, in whole or in part, at
any time and from time to time for 30 days from the date of
the underwriting agreement. To the extent that the underwriter
exercises this option, the underwriter will be committed, as
long as the conditions of the underwriting agreement are
satisfied, to purchase the shares of common stock, and we will
be obligated to sell the shares of common stock to the
underwriter. If purchased, the additional shares will be sold by
the underwriter on the same terms as those on which the other
shares are sold. We will pay the expenses associated with the
exercise of this option.
Underwriting
Discount and Offering Expenses
The following table shows the per share and total public
offering price, underwriting discount to be paid to the
underwriter, and the net proceeds to us before expenses. This
information is presented assuming both no exercise and full
exercise by the underwriter of its over-allotment option.
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Total
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Without
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With
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Over-
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Over-
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Allotment
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Allotment
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Per Share
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Exercise
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Exercise
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Public offering price
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$
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$
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$
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Underwriting discount payable by us
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$
|
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$
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$
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Proceeds, before expenses, to us
|
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$
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|
$
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$
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In addition to the underwriting fees described above, we have
agreed to pay the underwriter a
non-accountable
expense allowance of $100,000. Including this amount, we
estimate that the expenses of this offering payable by us,
exclusive of the underwriting discount, will be approximately
$775,000.
63
Stabilizing
Transactions
In connection with the offering, the underwriter may purchase
and sell our common stock in the open market. These transactions
may include over-allotment and stabilizing transactions,
syndicate covering transactions and penalty bids.
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•
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Over-allotment transactions involve sales by the underwriter of
shares in excess of the number of shares the underwriter is
obligated to purchase, which creates a syndicate short position.
The short position may be either a covered short position or a
naked short position. In a covered short position, the number of
shares over-allotted by the underwriter is not greater than the
number of shares that it may purchase under the over-allotment
option. In a naked short position, the number of shares involved
is greater than the number of shares in the over-allotment
option. The underwriter may close out any short position by
exercising its over-allotment option
and/or
purchasing shares in the open market.
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•
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Stabilizing transactions consist of bids or purchases of our
common stock made to prevent or retard a decline in the market
price of our common stock.
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•
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Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriter will consider, among other things, the
price of shares available for purchase in the open market
compared to the price at which it may purchase shares through
the over-allotment option. If an underwriter sells more shares
than could be covered by the over-allotment option (i.e., a
naked short position), the position can only be closed out by
buying shares in the open market. A naked short position is more
likely to be created if an underwriter is concerned that there
could be downward pressure on the price of the common stock in
the open market after pricing that could adversely affect
investors who purchase shares in this offering.
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•
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Penalty bids permit the underwriter to reclaim a selling
concession from a selling group member when the common stock
originally sold by the member is purchased in a stabilizing or
syndicate covering transaction to cover syndicate short
positions.
|
These activities may stabilize, maintain or otherwise affect the
market price of our common stock, which may be greater than the
price that might otherwise prevail in the open market. These
activities, if commenced, may be discontinued at any time. These
transactions may be effected on the Nasdaq, in the
over-the-counter market or otherwise. Neither we nor the
underwriter makes any representation or prediction as to the
effect that the transactions described above may have on the
market price of the shares.
Discretionary
Accounts
The underwriter has informed us that it does not intend to
confirm sales of shares of our common stock being offered to
accounts over which it exercises discretionary authority.
Lock-Up
Agreements
We anticipate that we, certain of our executive officers and
directors will agree with the underwriter that, during the
period ending 90 days after the date of this prospectus,
which we refer to as the restricted period, none of us will,
without the prior consent of the underwriter, directly or
indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities which may be converted into or
exchanged or exercised for any such shares of common stock, or
enter into any swap or other arrangement that transfers to
another person, in whole or in part, any of the economic
consequences of ownership of our common stock. The restricted
period is subject to a limited extension in certain
circumstances if shares of our common stock are not
“actively traded securities,” as defined in
Rule 101(c)(1) of Regulation M under the Exchange Act.
64
The foregoing restrictions do not apply to:
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•
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the sale by us of shares of common stock to the underwriter;
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•
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the issuance by us of shares of common stock pursuant to, or the
grant of options under, our existing stock option plan or
outstanding warrants;
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•
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the sale of shares of common stock pursuant to existing
Rule 10b5-1
trading plans implemented by certain of our executive officers;
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•
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the sale of shares of common stock acquired in the public market
after the closing of this offering; or
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•
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transfers of shares of common stock or securities convertible
into or exercisable or exchangeable for common stock by any of
the persons subject to a
lock-up
agreement (a) as bona fide gift or gifts, (b) by will
or intestacy or (c) to any affiliate or member of such
person’s immediate family or a trust created for the direct
or indirect benefit of such person or the immediate family
thereof; provided that, in any such case the transferee
or transferees shall execute and deliver to the underwriter,
before such transfer, an agreement to be bound by the
restrictions on transfer described above.
|
In addition, during the restricted period, subject to certain
exceptions, we have also agreed not to file any registration
statement for the registration of any shares of common stock or
any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of the
underwriter.
Indemnification
We will indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act. If we are unable
to provide this indemnification, we will contribute to payments
that the underwriter may be required to make in respect of those
liabilities.
Other
Relationships
In 2006, we engaged the underwriter to provide financial
advisory services to us in connection with potential financial
and strategic opportunities, including mergers, acquisitions,
divestitures and capital raising transactions. In accordance
with this engagement, we paid the underwriter $1,000,000 in
connection with our acquisition of RHB. The underwriter and its
affiliates may in the future provide various investment banking
and other financial advisory services for us and our affiliates,
for which services they may in the future receive customary
fees. The underwriter has advised us that, except as
specifically contemplated in the underwriting agreement, it owes
no fiduciary or other duties to us in connection with this
offering, and it has agreements and relationships with, and owes
duties to, third parties, including potential purchasers of the
securities in this offering, that may create actual, potential
or apparent conflicts of interest between the underwriter and us.
65
The validity of the shares of common stock offered in this
prospectus will be passed upon for us by Andrews Kurth LLP,
Houston, Texas. The underwriter has been represented by Stoel
Rives LLP, Seattle, Washington.
The consolidated financial statements of Sterling Construction
Company, Inc. as of December 31, 2006 and 2005 and for the
three years in the period ended December 31, 2006, and
management’s assessment of the effectiveness of internal
control over financial reporting as of December 31, 2006
either included or incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by
Grant Thornton LLP, independent registered public accountants,
as indicated in their reports with respect thereto, and are
included or incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
The audited financial statements of Road and Highway Builders,
LLC as of and for the years ended December 31, 2006 and
2005 have been included in this prospectus in reliance on the
report of McGladrey & Pullen, LLP, an independent
auditor, given on the authority of said firm as experts in
auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Exchange Act
and file reports, proxy statements and other information with
the SEC. We have filed with the SEC a registration statement to
register the common stock offered by this prospectus. This
prospectus, which forms part of the registration statement, does
not contain all of the information included in the registration
statement. For further information about us and the common stock
offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy the
registration statement and any other document that we file with
the SEC at the SEC’s Public Reference Room,
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. In addition, the SEC maintains a web site that contains
registration statements, reports, proxy statements and other
information regarding registrants, such as us. The address of
the web site is www.sec.gov.
The SEC allows us to “incorporate by reference” the
information that we file with the SEC, which means that we can
disclose information to you by referring to those documents. The
information incorporated by reference is an important part of
this prospectus, and information we file later with the SEC will
automatically update this information. We are incorporating by
reference in this prospectus the following documents filed with
the SEC under the Exchange Act (other than any portions of the
respective filings that were furnished pursuant to
Item 2.02 or 7.01 of Current Reports on
Form 8-K
or other applicable SEC rules):
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•
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Annual Report on
Form 10-K
for the year ended December 31, 2006;
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•
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Quarterly Reports on
Form 10-Q
for the periods ended March 31, 2007, June 30, 2007
and September 30, 2007;
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•
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Current Reports on
Form 8-K,
as filed with the SEC on January 17, 2007, March 19,
2007, August 10, 2007, November 1, 2007 (as amended),
November 13, 2007 and November 26, 2007; and
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•
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The description of our common stock contained in our
registration statement on Form 8A, filed on
January 11, 2006, including any amendment or report
updating the description.
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66
Any statements made in a document incorporated by reference in
this prospectus are deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement in
this prospectus or in any other subsequently filed document,
which is also incorporated by reference, modifies or supersedes
the statement. Any statement made in this prospectus is deemed
to be modified or superseded to the extent a statement in any
subsequently filed document, which is incorporated by reference
in this prospectus, modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of this
prospectus.
The information relating to us contained in this prospectus
should be read together with the information in the documents
incorporated by reference. In addition, certain information,
including financial information, contained in this prospectus or
incorporated by reference in this prospectus should be read in
conjunction with documents we have filed with the SEC.
In addition, we incorporate by reference all documents that we
will file with the SEC in the future under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until the termination of
this offering. We refer to these documents, and the documents
listed above, in this prospectus as “incorporated
documents.”
You may request, without charge, a copy of any incorporated
document (excluding exhibits, unless we have specifically
incorporated an exhibit in an incorporated document) by writing
or telephoning us at our principal executive offices at the
following address:
Sterling Construction Company, Inc.
Attention: Controller
20810 Fernbush Lane
Houston, Texas 77073
(281) 821-9091
67
INDEX
TO FINANCIAL STATEMENTS
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Page
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|
Audited Financial Statements of Sterling Construction
Company, Inc.:
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F-2
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F-3
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F-4
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F-5
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|
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F-6
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|
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F-7
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|
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Unaudited Interim Financial Statements of Sterling
Construction Company, Inc.:
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|
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F-35
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|
|
|
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F-36
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|
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F-37
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|
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F-38
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F-39
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Audited Financial Statements of Road and Highway Builders,
LLC:
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|
|
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F-46
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|
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F-47
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F-48
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F-49
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F-50
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F-51
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|
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Unaudited Interim Financial Statements of Road and Highway
Builders, LLC:
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F-55
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F-56
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F-57
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F-58
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F-59
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F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sterling Construction Company, Inc.
We have audited the accompanying consolidated balance sheets of
Sterling Construction Company, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2006. 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 audit 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Sterling Construction Company, Inc. and subsidiaries
as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), “Share-Based
Payment”, on a modified prospective basis as of
January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Sterling Construction Company, Inc. and
subsidiaries’ internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 14, 2007, not
separately included herein, expressed an unqualified opinion on
management’s assessment of the effectiveness of internal
control over financial reporting and an unqualified opinion on
the effectiveness of internal control over financial reporting.
Houston, Texas
March 14, 2007
F-2
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31, 2006 and 2005
(Amounts in thousands, except per share data)
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2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,466
|
|
|
$
|
22,267
|
|
Short-term investments
|
|
|
26,169
|
|
|
|
—
|
|
Accounts receivable, other
|
|
|
276
|
|
|
|
—
|
|
Contracts receivable
|
|
|
42,805
|
|
|
|
34,912
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
3,157
|
|
|
|
2,199
|
|
Inventories
|
|
|
965
|
|
|
|
—
|
|
Deferred tax asset
|
|
|
4,297
|
|
|
|
4,224
|
|
Assets of discontinued operations held for sale
|
|
|
—
|
|
|
|
8,969
|
|
Note receivable, current
|
|
|
300
|
|
|
|
—
|
|
Other
|
|
|
973
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
107,408
|
|
|
|
73,627
|
|
Property and equipment, net
|
|
|
46,617
|
|
|
|
27,271
|
|
Goodwill
|
|
|
12,735
|
|
|
|
12,735
|
|
Deferred tax asset, net
|
|
|
—
|
|
|
|
4,288
|
|
Note receivable, long term
|
|
|
325
|
|
|
|
—
|
|
Other assets
|
|
|
687
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,747
|
|
|
|
17,557
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
167,772
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|
|
$
|
118,455
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|
|
|
|
|
|
|
|
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|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
17,373
|
|
|
$
|
20,416
|
|
Billings in excess of cost and estimated earnings on uncompleted
contracts
|
|
|
21,536
|
|
|
|
13,635
|
|
Short-term debt, related parties
|
|
|
—
|
|
|
|
8,449
|
|
Current maturities of long term obligations
|
|
|
123
|
|
|
|
123
|
|
Liabilities of discontinued operations held for sale
|
|
|
—
|
|
|
|
8,385
|
|
Other accrued expenses
|
|
|
5,502
|
|
|
|
4,265
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,534
|
|
|
|
55,273
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
30,659
|
|
|
|
14,570
|
|
Deferred tax liability, net
|
|
|
1,588
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,247
|
|
|
|
14,570
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share; authorized
1,000,000 shares, none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $0.01 per share; authorized
14,000,000 shares, 10,875,438 and 8,165,123 shares
issued
|
|
|
109
|
|
|
|
82
|
|
Additional paid in capital
|
|
|
114,630
|
|
|
|
82,822
|
|
Accumulated deficit
|
|
|
(23,748
|
)
|
|
|
(34,292
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
90,991
|
|
|
|
48,612
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
167,772
|
|
|
$
|
118,455
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-3
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
219,439
|
|
|
$
|
132,478
|
|
Cost of revenues
|
|
|
220,801
|
|
|
|
195,683
|
|
|
|
119,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,547
|
|
|
|
23,756
|
|
|
|
13,261
|
|
General and administrative expenses
|
|
|
10,825
|
|
|
|
9,375
|
|
|
|
7,692
|
|
Other income (loss)
|
|
|
276
|
|
|
|
284
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,998
|
|
|
|
14,665
|
|
|
|
5,565
|
|
Interest income
|
|
|
1,426
|
|
|
|
150
|
|
|
|
9
|
|
Interest expense
|
|
|
220
|
|
|
|
1,486
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
4,109
|
|
Minority interest
|
|
|
—
|
|
|
|
—
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
3,147
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
310
|
|
|
|
257
|
|
|
|
169
|
|
Deferred
|
|
|
6,256
|
|
|
|
2,531
|
|
|
|
(2,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
6,566
|
|
|
|
2,788
|
|
|
|
(2,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
5,281
|
|
Income from discontinued operations, including gain on disposal
of $121, net of income taxes of $308, $313 and $216
|
|
|
682
|
|
|
|
559
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
$
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
|
$
|
0.99
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.25
|
|
|
$
|
1.43
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
basic per share amounts
|
|
|
10,582,730
|
|
|
|
7,775,476
|
|
|
|
5,342,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.08
|
|
|
$
|
1.11
|
|
|
$
|
0.75
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.14
|
|
|
$
|
1.16
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
diluted per share amounts
|
|
|
11,714,310
|
|
|
|
9,537,923
|
|
|
|
7,027,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-4
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2006, 2005 and 2004
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at December 31, 2003
|
|
|
5,140
|
|
|
$
|
51
|
|
|
$
|
67,631
|
|
|
$
|
(51,045
|
)
|
|
$
|
(1
|
)
|
|
$
|
16,636
|
|
Stock issued upon option exercise
|
|
|
220
|
|
|
|
2
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
Conversion of debt to stock
|
|
|
450
|
|
|
|
5
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
1,719
|
|
Shares issued upon settlement of Put
|
|
|
1,569
|
|
|
|
16
|
|
|
|
8,051
|
|
|
|
|
|
|
|
|
|
|
|
8,067
|
|
Purchase of minority interest of SCPL
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Reduction of valuation allowance deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
2,396
|
|
|
|
|
|
|
|
|
|
|
|
2,396
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,653
|
|
|
|
|
|
|
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
7,379
|
|
|
|
74
|
|
|
|
80,527
|
|
|
|
(45,392
|
)
|
|
|
(1
|
)
|
|
|
35,208
|
|
Stock issued upon option exercise
|
|
|
786
|
|
|
|
8
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
463
|
|
Tax benefit of stock option exercise
|
|
|
|
|
|
|
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
1,013
|
|
Cancellation of treasury stock of SCPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,100
|
|
|
|
|
|
|
|
11,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
8,165
|
|
|
|
82
|
|
|
|
82,822
|
|
|
|
(34,292
|
)
|
|
|
—
|
|
|
|
48,612
|
|
Stock issued upon option/warrant exercise
|
|
|
701
|
|
|
|
7
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
913
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
991
|
|
Stock issued in equity offering, net of expenses
|
|
|
2,003
|
|
|
|
20
|
|
|
|
27,019
|
|
|
|
|
|
|
|
|
|
|
|
27,039
|
|
Issuance of restricted stock
|
|
|
6
|
|
|
|
—
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
Available excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,775
|
|
|
|
(2,775
|
)
|
|
|
|
|
|
|
—
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,320
|
|
|
|
|
|
|
|
13,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
10,875
|
|
|
$
|
109
|
|
|
$
|
114,630
|
|
|
$
|
(23,748
|
)
|
|
$
|
—
|
|
|
$
|
90,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement
F-5
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2005 and 2004
(Amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
$
|
5,653
|
|
Net income from discontinued operations
|
|
|
682
|
|
|
|
559
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
5,281
|
|
Adjustments to reconcile income from continuing operations to
net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,011
|
|
|
|
5,064
|
|
|
|
4,545
|
|
(Gain) loss on sale of property and equipment
|
|
|
(276
|
)
|
|
|
(279
|
)
|
|
|
4
|
|
Deferred tax expense (benefit)
|
|
|
6,256
|
|
|
|
2,531
|
|
|
|
(2,303
|
)
|
Stock based compensation expense
|
|
|
1,108
|
|
|
|
463
|
|
|
|
381
|
|
Minority interest in net earnings of subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
962
|
|
Fair value of induced conversion of debt to equity
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
Other changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in contracts receivable
|
|
|
(7,893
|
)
|
|
|
(8,662
|
)
|
|
|
254
|
|
(Increase) decrease in costs and estimated earnings in excess of
billings on uncompleted contracts
|
|
|
(958
|
)
|
|
|
3,685
|
|
|
|
(4,603
|
)
|
Increase in inventories
|
|
|
(965
|
)
|
|
|
—
|
|
|
|
—
|
|
(Increase) decrease in prepaid expenses and other assets
|
|
|
(46
|
)
|
|
|
730
|
|
|
|
370
|
|
(Decrease) increase in trade payables
|
|
|
(3,043
|
)
|
|
|
6,034
|
|
|
|
4,487
|
|
Increase (decrease) in billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
7,901
|
|
|
|
9,158
|
|
|
|
(5,265
|
)
|
Increase (decrease) in accrued compensation and other liabilities
|
|
|
1,356
|
|
|
|
2,001
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
23,089
|
|
|
|
31,266
|
|
|
|
4,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing operations investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of certain assets of RDI
|
|
|
(2,206
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash paid upon acquisition of TSC minority interest
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,446
|
)
|
Additions to property and equipment
|
|
|
(24,849
|
)
|
|
|
(11,392
|
)
|
|
|
(3,555
|
)
|
Proceeds from sale of property and equipment
|
|
|
866
|
|
|
|
420
|
|
|
|
192
|
|
Purchases of short-term securities, available for sale
|
|
|
(144,192
|
)
|
|
|
—
|
|
|
|
—
|
|
Sales of short-term securities, available for sale
|
|
|
118,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations investing activities
|
|
|
(52,358
|
)
|
|
|
(10,972
|
)
|
|
|
(5,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing operations financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative daily drawdowns — revolver
|
|
|
106,025
|
|
|
|
139,593
|
|
|
|
102,531
|
|
Cumulative daily reductions — revolver
|
|
|
(89,813
|
)
|
|
|
(139,134
|
)
|
|
|
(95,770
|
)
|
Repayments under related party long term debt
|
|
|
(8,449
|
)
|
|
|
(2,649
|
)
|
|
|
(3,995
|
)
|
Repayments under long-term obligations
|
|
|
(123
|
)
|
|
|
(113
|
)
|
|
|
(735
|
)
|
Increase in deferred loan costs
|
|
|
(123
|
)
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock pursuant to warrants and options
|
|
|
913
|
|
|
|
827
|
|
|
|
405
|
|
Net proceeds from sale of common stock
|
|
|
27,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations financing
activities
|
|
|
35,468
|
|
|
|
(1,476
|
)
|
|
|
2,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents from continuing
operations
|
|
|
6,199
|
|
|
|
18,818
|
|
|
|
798
|
|
Cash provided by (used in) discontinued operating activities
|
|
|
495
|
|
|
|
(294
|
)
|
|
|
(977
|
)
|
Cash used in discontinued operations investing activities
|
|
|
4,739
|
|
|
|
—
|
|
|
|
(34
|
)
|
Cash (used in) provided by discontinued operations financing
activities
|
|
|
(5,357
|
)
|
|
|
349
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(123
|
)
|
|
|
55
|
|
|
|
(47
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
22,267
|
|
|
|
3,449
|
|
|
|
2,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
28,466
|
|
|
$
|
22,267
|
|
|
$
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
521
|
|
|
$
|
1,916
|
|
|
$
|
2,097
|
|
Cash paid during the period for taxes
|
|
$
|
300
|
|
|
$
|
355
|
|
|
$
|
14
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations for new equipment
|
|
|
—
|
|
|
$
|
83
|
|
|
$
|
26
|
|
224,000 shares of common stock were issued upon the
conversion of $560 of convertible debt in 2004.
1,569,000 additional shares of common stock were issued
upon the conversion of $901 of zero coupon notes in 2004 upon
settlement of the Put.
The accompanying notes are an integral part of these
consolidated financial statements
F-6
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary
of Business and Significant Accounting Policies
|
Basis
of Presentation:
Sterling Construction Company, Inc. (“Sterling” or the
“Company”) owns two subsidiaries; Sterling Houston
Holdings, Inc and Steel City Products, LLC. Sterling Houston
Holdings is a 99% limited partner of Texas Sterling Construction
Company, LP a Texas limited partnership that operates the
construction business and that was, in a different form, the
predecessor of Sterling Houston Holdings. For ease of reference,
Sterling Houston Holdings, Inc. and Texas Sterling Construction,
L.P. are referred to collectively as “Construction” or
“TSC”, and Steel City Products, LLC is referred to as
“Distribution” or “SCPL”. The assets and
liabilities of the business of SCPL were sold in October 2006.
The accompanying consolidated financial statements include the
accounts of subsidiaries in which the Company has a greater than
50% ownership interest and all significant intercompany accounts
and transactions have been eliminated in consolidation. For all
years presented, the Company had no subsidiaries with ownership
interests of less than 50%.
Organization
and business:
The Company’s primary business consists of the operations
of TSC, a heavy civil construction company based in Houston,
Texas. Until October 27, 2006, the Company also operated a
smaller business, which consisted of the operations of SCPL, a
wholesale distributor of automotive accessories, pet supplies
and lawn and garden products, based in McKeesport, Pennsylvania.
In August 2005 management identified SCPL as held for sale and
accordingly reclassified its consolidated financial statements
for all periods to separately present Distribution as
discontinued operations. See Note 2 for a discussion on the
sale of the business of SCPL.
Use of
Estimates:
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain of the Company’s accounting policies require higher
degrees of judgment than others in their application. These
include the recognition of revenue and earnings from
construction contracts under the percentage of completion
method, the valuation of long-term assets, estimates for the use
of the Company’s net operating loss carryforwards and the
allowance for doubtful accounts. Management evaluates all of its
estimates and judgments on an on-going basis.
Revenue
Recognition:
Construction
The Company’s primary business since July 2001 has been as
a general contractor in the State of Texas where it engages in
various types of heavy civil construction projects principally
for public owners. Credit risk is minimal with public
(government) owners since the Company ascertains that funds have
been appropriated by the governmental project owner prior to
commencing work on such projects. While most public contracts
are subject to termination at the election of the government
entity, in the event of termination the Company is entitled to
receive the contract price for completed work and reimbursement
of termination-related costs. Credit risk with private owners is
minimized because of statutory mechanics liens, which give the
Company high priority in the event of lien foreclosures
following financial difficulties of private owners.
F-7
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenues are recognized on the percentage-of-completion method,
measured by the ratio of costs incurred up to a given date to
estimated total costs for each contract.
Contract costs include all direct material, labor, subcontract
and other costs and those indirect costs related to contract
performance, such as indirect salaries and wages, equipment
repairs and depreciation, insurance and payroll taxes.
Administrative and general expenses 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, including those changes arising from
contract penalty provisions and final contract settlements may
result in revisions to costs and income and are recognized in
the period in which the revisions are determined. An amount
attributable to contract claims is included in revenues when
realization is probable and the amount can be reliably
estimated. The Company generally provides a one-year warranty
for workmanship under its contracts. Warranty claims
historically have been inconsequential.
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.
Distribution
Distribution’s revenue was earned primarily from the sale
of products to retail companies. Revenue was recognized when all
of the following criteria were met:
|
|
|
|
•
|
Persuasive evidence of an arrangement existed
|
|
|
•
|
Delivery had occurred or service was rendered
|
|
|
•
|
Distribution’s price to the buyer had been fixed or was
determinable, and
|
|
|
•
|
Collectibility was reasonably assured.
|
Cash
and Cash Equivalents:
The Company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
Included in cash and cash equivalents at December 31, 2006
and 2005 are uninsured temporary cash investments of
$40.1 million and $26.2 million, respectively, in a
money market fund stated at fair value. Additionally, the
Company maintains cash in bank deposit accounts that at times
may exceed federally insured limits. For the years ended
December 31, 2006, 2005 and 2004, the Company recorded
interest income of $1.4 million, $150,000 and $9,000,
respectively.
Short-Term
Investments
The Company classifies its short-term investments (including
auction-rate securities) as securities available for sale in
accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities”. At
December 31, 2006, the Company had short-term securities
available for sale of $26.2 million.
Contracts
Receivable:
Contracts receivable are based on contracted prices. Based upon
a review of outstanding contracts receivable, historical
collection information and existing economic conditions,
management has determined that all contracts receivable at
December 31, 2006 and 2005 are fully collectible, and
accordingly, no allowance for doubtful accounts against
contracts receivable is required. Contracts receivable are
written off based on individual credit evaluation and specific
circumstances of the customer, when such treatment is warranted.
F-8
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accounts
Receivable:
The Company maintained an allowance for doubtful accounts for
Distribution, which was reviewed periodically based on customer
credit history reports and other factors including payment
history and sales levels. Past due balances over 90 days
and other higher risk accounts were reviewed individually for
collectibility. Account balances were charged against the
allowance after all collection efforts had been exhausted and
the potential for recovery was considered remote. The allowance
decreased in 2005 by $163,000 due to the write-off of the debt
owed by a bankrupt customer, which had been completely reserved.
The allowance for doubtful accounts, included in the assets of
discontinued operations held for sale was $853,000 in 2005. Upon
sale of the Distribution business, the Company retained an
accounts receivable from Ames Department Stores (a bankrupt
customer of SCPL) in the net carrying amount of $18,000. Because
of the nature of the receivable, the Company believes the
collection is reasonably assured.
Retainage:
Many of the contracts under which Construction performs work
contain retainage provisions. Retainage refers to that portion
of billings made by the Company but held for payment by the
customer pending satisfactory completion of the project. Unless
reserved, the Company assumes that all amounts retained by
customers under such provisions are fully collectible. Retainage
on active contracts is classified as a current asset regardless
of the term of the contract. Retainage is generally collected
within one year of the completion of a contract. Retainage was
approximately $16.4 million and $14.3 million at
December 31, 2006 and December 31, 2005, respectively,
of which $7.1 million at December 31, 2006 is expected
to be collected beyond 2007. At December 31, 2005,
retainage expected to be collected beyond 2006 was
$1.4 million.
Inventories:
The Company’s Construction inventories are stated at the
lower of cost or market as determined by the average cost
method. Inventories at December 31, 2006 consist primarily
of raw materials, such as concrete and millings which are
expected to be utilized in construction projects in the future.
The cost of inventory includes labor, trucking and other
equipment costs. At December 31, 2005, Construction did not
have inventories. Distribution held inventories at the lower of
cost or market as determined by the
first-in
first-out (FIFO) method. Inventories at Distribution were
included in the assets of discontinued operations at
December 31, 2005. Pursuant to the agreement for the sale
of Distribution’s business, the Company recorded a
liability of $50,000 representing the estimated cost of certain
Distribution inventory not expected to be sold by the buyer
following the sale of the business.
Property
and Equipment:
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method. The
estimated useful lives used for computing depreciation and
amortization are as follows:
|
|
|
Building
|
|
39 years
|
Construction equipment
|
|
5-15 years
|
Land improvements
|
|
5-15 years
|
Office furniture and fixtures
|
|
3-10 years
|
Transportation equipment
|
|
5 years
|
Leasehold improvements*
|
|
3-10 years, depending on lease term
|
Warehouse equipment*
|
|
3-10 years
|
|
|
|
* |
|
All leasehold improvements and warehouse equipment were owned by
SCPL, which was sold on October 27, 2006. |
F-9
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation expense was approximately $6.9 million,
$5.1 million, and $4.5 million in 2006, 2005 and 2004,
respectively, for continuing operations, and approximately
$0.1 million for discontinued operations in each of 2006,
2005 and 2004.
Deferred
Loan Costs:
Deferred loan costs represent loan origination fees paid to the
lender and related professional fees. These fees are amortized
over the term of the loan. In 2006, TSC renewed its line of
credit and substantially increased its borrowing limit. The
Company incurred loan costs in the amount of $123,000 upon
renewal of the line, which are being amortized over the three
year term of the line of credit. Loan cost amortization expense
for fiscal years 2006, 2005 and 2004 was $99,000, $56,000 and
$82,000, respectively.
Financial
instruments:
The Company’s financial instruments are cash and cash
equivalents, contracts receivable, accounts payable, mortgages
payable and long-term debt. The recorded values of cash and cash
equivalents, contracts receivable and accounts payable
approximate their fair values based on their short-term nature.
The recorded values of mortgages payable and long-term debt
approximate their fair values, and interest approximates market
rates.
Goodwill:
Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at the dates of
acquisition.
The Company accounts for goodwill in accordance with Statement
of Financial Accounting Standards No. 142 “Goodwill
and Other Intangible Assets” (SFAS 142).
SFAS 142 requires that: (1) goodwill and indefinite
lived intangible assets are no longer amortized,
(2) goodwill is tested for impairment at least annually at
the reporting unit level, (3) the amortization period of
intangible assets with finite lives is no longer limited to
forty years, and (4) intangible assets deemed to have an
indefinite life are tested for impairment at least annually by
comparing the fair value of these assets with their recorded
amounts.
Goodwill impairment is tested on the first day of the last
quarter of each calendar year. The first step compares the book
value of the Company’s stock to the fair market value of
the shares as reported on a widely recognized internet web site.
If the fair market value of the stock is greater than the
calculated book value of the stock, the goodwill is deemed not
to be impaired and no further testing is required. If the fair
market value is less than the calculated book value, additional
steps of determining fair value of additional assets can be
taken to determine impairment. Step one indicated the fair
market value of the Company’s stock was in excess of the
book value and no further testing was required. Based on the
results of such tests for impairment, the Company concluded that
no impairment of goodwill existed on October 1, 2006.
Intangible assets that have finite lives continue to be subject
to amortization. In addition, the Company must evaluate the
remaining useful life in each reporting period to determine
whether events and circumstances warrant a revision of the
remaining period of amortization. If the estimate of an
intangible assets remaining life is changed, the remaining
carrying amount of such asset is amortized prospectively over
that revised remaining useful life. There have been no changes
in goodwill in 2006 and 2005.
Equipment
Under Capital Leases:
The Company’s policy is to account for capital leases,
which transfer substantially all the benefits and risks incident
to the ownership of the property to the Company, as the
acquisition of an asset and the incurrence of an obligation.
Under this method of accounting, the recorded value of the
leased asset is amortized principally using the straight-line
method over its estimated useful life and the obligation,
including
F-10
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
interest thereon, is reduced through payments over the life of
the lease. Depreciation expense on leased equipment and the
related accumulated depreciation is included with that of owned
equipment. Capital leases were included in the assets and
liabilities of discontinued operations until the sale date of
October 27, 2006.
Shipping
and Handling Costs:
Shipping costs at Distribution were recorded in cost of goods
sold. Expenses incurred for handling goods in preparation for
shipment to customers totaled $829,000 and $772,000 during
fiscal years 2005 and 2004, respectively and were $679,000
through October 27, 2006, the date of the sale of the
business. These expenses were primarily related to warehouse
personnel. Shipping and handling revenues were not significant.
Federal
and State Income Taxes:
Sterling accounts for income taxes using an asset and liability
approach. Deferred tax liabilities and assets are recognized for
the future tax consequences of events that have already been
recognized in the financial statements or tax returns. Net
deferred tax assets are recognized to the extent that management
believes that realization of such benefits is considered more
likely than not. Changes in enacted tax rates or laws may result
in adjustments to the recorded deferred tax assets or
liabilities in the period that the tax law is enacted (see
Note 8).
Stock-Based
Compensation:
The Company has five stock-based incentive plans which are
administered by the Compensation Committee of the Board of
Directors. Prior to August 2006, the Company used the closing
price of its common stock on the trading day immediately
preceding the date the option was approved as the grant date
market value. Since July 2006, the Company’s policy has
been to use the closing price of the common stock on the date of
the meeting at which a stock option award is approved as the
option’s per-share exercise price. The term of the grants
do not exceed 10 years. Stock options generally vest over a
three to five year period. Refer to Note 10 for further
information regarding the stock-based incentive plans.
Effective January 1, 2006, the Company adopted the
provisions of SFAS 123(R), using the modified prospective
transition method and therefore has not restated financial
results for prior periods. Since January 1, 2003, the
Company has accounted for its stock-based compensation under the
provisions of SFAS No. 148 “Accounting for
Stock-Based Compensation — Transition and
Disclosure” which amended SFAS Statement
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. Because the Company had
utilized the fair value method for expensing stock options in
the past several years, the impact on financial results of the
transition to SFAS 123(R) at January 1, 2006 for
unvested options was not material. The Company utilizes the
Black-Scholes valuation model to estimate the fair value of its
stock option grants. The fair value is recognized on a
straight-line basis over the vesting period.
The Company recorded compensation expense of approximately
$84,000 and $315,000 in 2005 and 2004, respectively, related to
options granted between June 2000 and January 2003 under option
plans that were subject to variable option accounting. The Board
of Directors amended these plans in March 2004 with the result
that the market price at which these options are measured as
compensation expense throughout their vesting periods was fixed
at the date of such amendment.
F-11
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123,
“Accounting for Stock-Based Compensation”, to
stock-based employee compensation (amounts in thousands, except
per share data). Because the Company has net operating loss
carryforwards to offset taxable income, it is unable to
recognize excess tax benefits generated from the exercise of
non-qualified stock options until the net operating loss
carryforwards are exhausted. Therefore, there was no impact on
cash flows from operating activities and financing activities
upon adoption of SFAS 123(R).
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income from continuing operations, as reported
|
|
$
|
10,541
|
|
|
$
|
5,281
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
463
|
|
|
|
381
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(418
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
Proforma net income from continuing operations
|
|
|
10,586
|
|
|
|
5,545
|
|
Net income from discontinued operations
|
|
|
559
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
Proforma net income
|
|
$
|
11,145
|
|
|
$
|
5,917
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
From continuing operations:
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
1.36
|
|
|
$
|
0.99
|
|
Diluted, as reported
|
|
$
|
1.11
|
|
|
$
|
0.75
|
|
Proforma, basic
|
|
$
|
1.36
|
|
|
$
|
1.03
|
|
Proforma, diluted
|
|
$
|
1.11
|
|
|
$
|
0.79
|
|
From discontinued operations:
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
Diluted, as reported
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Proforma, basic
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
Proforma, diluted
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Total:
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
1.43
|
|
|
$
|
1.06
|
|
Diluted, as reported
|
|
$
|
1.16
|
|
|
$
|
0.80
|
|
Proforma, basic
|
|
$
|
1.43
|
|
|
$
|
1.10
|
|
Proforma, diluted
|
|
$
|
1.16
|
|
|
$
|
0.84
|
|
F-12
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net
Income Per Share:
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares
outstanding during the period. Diluted net income per common
share is the same as basic but assumes the exercise of
convertible subordinated debt securities and includes dilutive
stock options and warrants using the treasury stock method. The
following table reconciles the numerators and denominators of
the basic and diluted per common share computations for net
income for 2006, 2005 and 2004 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations, as reported
|
|
$
|
12,638
|
|
|
$
|
10,541
|
|
|
$
|
5,281
|
|
Interest on convertible debt, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations before interest on
convertible debt
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
5,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
|
682
|
|
|
|
559
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before interest on convertible debt
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
$
|
5,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
10,583
|
|
|
|
7,775
|
|
|
|
5,343
|
|
Shares for dilutive stock options and warrants
|
|
|
1,131
|
|
|
|
1,763
|
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
conversions — diluted
|
|
|
11,714
|
|
|
|
9,538
|
|
|
|
7,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
|
$
|
0.99
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.25
|
|
|
$
|
1.43
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.08
|
|
|
$
|
1.11
|
|
|
$
|
0.75
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.14
|
|
|
$
|
1.16
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 81,500 options granted in 2006 were considered antidilutive
at December 31, 2006 as the option exercise price exceeded
the average share price. No options or warrants were considered
antidilutive at December 31, 2005 and 2004.
Derivatives
Financial derivatives, consisting of interest rate swap
agreements, are used as part of the Company’s overall risk
management strategy to manage the risk related to changes in
interest rates. Interest rate swap agreements are used to modify
variable rate obligations to fixed rate obligations, thereby
reducing the exposure to higher interest rates. Amounts paid or
received under interest rate swap agreements are accrued as
interest rates change with the offset recorded in interest
expense.
The Company applies SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”
Under SFAS No. 133, the Company’s interest
rate swaps have not been designated as hedging instruments;
therefore changes in fair value are recognized in current
earnings.
F-13
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest
Costs
During 2006, TSC began expansion of its maintenance facilities
and office building. Construction was in progress at
December 31, 2006. Accordingly, approximately $14,000 of
interest related to the construction of qualifying assets is
capitalized as part of construction costs in accordance with
SFAS No..34 “Capitalization of Interest
Cost”.
Self-Insurance
The Company is primarily self-insured for workers’
compensation insurance, up to $250,000 per occurrence, with a
maximum of $2.7 million per year.. Operations are charged
with the cost of claims reported and an estimate of claims
incurred but not reported. A liability for unpaid claims and
associated expenses, including incurred but not reported claims,
is reflected in the balance sheet as an accrued liability. At
December 31, 2006 and 2005, the Company’s accrued
liability for such claims was $575,000 and $673,000,
respectively.
The Company also has a self-insured health plan for its
employees and has purchased stop-loss insurance to limit its
exposure. See Note 16 for details of the health insurance
plan.
Recent
Accounting Pronouncements:
In February 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 155, “Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB
Statements No. 133 and 140” which is effective for
fiscal years beginning after September 15, 2006. The
statement was issued to clarify the application of FASB
Statement No. 133 to beneficial interests in securitized
financial assets and to improve the consistency of accounting
for similar financial instruments, regardless of the form of the
instruments. The Company has evaluated the new statement and
determined that the potential impact on its financial statements
will not be material.
In March 2006, the FASB issued Statement of Financial Accounting
Standards No. 156, “Accounting for Servicing of
Financial Assets — an amendment of FASB Statement
No. 140” which is effective for fiscal years beginning
after September 15, 2006. This statement was issued to
simplify the accounting for servicing rights and to reduce the
volatility that results from using different measurement
attributes. The Company has evaluated the new statement and has
determined that it will not have a significant impact on the
determination or reporting of its financial results.
In July 2006, the FASB issued Interpretation 48, Accounting
for Uncertainty in Income Taxes: an interpretation of FASB
Statement No. 109. Interpretation 48, which clarifies
Statement 109, Accounting for Income Taxes, establishes
the criterion that an individual tax position has to meet for
some or all of the benefits of that position to be recognized in
the Company’s financial statements. On initial application,
Interpretation 48 will be applied to all tax positions for which
the statute of limitations remains open. Only tax positions that
meet the more-likely-than-not recognition threshold at the
adoption date will be recognized or continue to be recognized.
The cumulative effect of applying Interpretation 48 will be
reported as an adjustment to retained earnings at the beginning
of the period in which it is adopted. Interpretation 48 is
effective for fiscal years beginning after December 15,
2006, and was adopted by the Company on January 1, 2007.
The Company does not believe that the adoption of Interpretation
48 will have a significant effect on its financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, “Fair Value
Measurements” (SFAS 157). SFAS 157 clarifies the
principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability
and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed
by level within the fair value hierarchy. SFAS 157 is
effective for
F-14
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
financial statements for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years, with early adoption permitted. The Company does not
expect the implementation of SFAS 157 to have a material
impact on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”
(SAB 108). SAB 108 provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. Under this bulletin, registrants should quantify
errors using both a balance sheet and an income statement
approach and evaluate whether either approach results in
quantifying a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material.
SAB 108 is effective for fiscal years ending on or after
November 15, 2006. Adoption of SAB 108 did not have a
material impact on the Company’s consolidated financial
statements.
In September 2006, the FASB ratified a consensus opinion reached
by the Emerging Issues Task Force (EITF) on EITF Issue
06-5,
“Accounting for Purchases of Life Insurance —
Determining the Amount That Could Be Realized in Accordance with
FASB Technical
Bulletin No. 85-4.”
The guidance in EITF Issue
06-5
requires policyholders to consider other amounts included in the
contractual terms of an insurance policy, in addition to cash
surrender value, for purposes of determining the amount that
could be realized under the terms of the insurance contract. If
it is probable that contractual terms would limit the amount
that could be realized under the insurance contract, those
contractual limitations should be considered when determining
the realizable amounts. The amount that could be realized under
the insurance contract should be determined on an individual
policy (or certificate) level and should include any amount
realized on the assumed surrender of the last individual policy
or certificate in a group policy.
EITF Issue
06-5 is
effective for fiscal years beginning after December 15,
2006. The Company intends to adopt EITF Issue
06-5
effective January 1, 2007, and does not believe that the
adoption will have a significant effect on its financial
statements.
Reclassifications:
Certain prior years’ balances (other income and interest
income) have been reclassified to conform to current year
presentation.
|
|
2.
|
Discontinued
operations/Sale of the operations of SCPL
|
In 2005 management identified SCPL as held for sale and
accordingly, reclassified its consolidated financial statements
for all periods to separately present Distribution as
discontinued operations.
On October 27, 2006, the Company sold the operations of
SCPL to an industry buyer based in Toledo, Ohio. The Company
received proceeds from the sale of $5.4 million, which
included a two-year promissory note in the amount of $650,000.
From the proceeds, the Company paid SCPL’s revolving line
of credit in full and retained and settled certain liabilities
primarily related to severance and bonus payments. The Company
reported a pre-tax gain of $249,000 on the sale, equal to
$121,000 after taxes. The Company retained an accounts
receivable, which it believes is fully collectible and recorded
liabilities related to the right of the purchaser to request
payment for certain inventory not sold within a year and for
legal claims which remained unresolved at the sale date.
F-15
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized financial information for discontinued operations is
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006*
|
|
|
2005
|
|
|
2004
|
|
|
Net sales
|
|
$
|
17,661
|
|
|
$
|
22,029
|
|
|
$
|
21,700
|
|
Income before income taxes
|
|
|
741
|
|
|
|
872
|
|
|
|
588
|
|
Income taxes
|
|
|
180
|
|
|
|
313
|
|
|
|
216
|
|
Gain on disposal, net of tax of $128
|
|
|
121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
$
|
682
|
|
|
$
|
559
|
|
|
$
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
through the date of sale, October 27, 2006 |
The following is a summary of the assets and liabilities of
discontinued operations (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
Current assets
|
|
$
|
8,286
|
|
Deferred tax asset, current
|
|
|
312
|
|
|
|
|
|
|
Total current assets
|
|
|
8,598
|
|
Property, plant and equipment, net
|
|
|
210
|
|
Goodwill
|
|
|
128
|
|
Deferred tax asset, long-term
|
|
|
30
|
|
Other assets
|
|
|
3
|
|
|
|
|
|
|
|
|
$
|
8,969
|
|
Liabilities
|
|
|
|
|
Current liabilities*
|
|
$
|
8,326
|
|
Long-term obligations, net of current portion
|
|
|
59
|
|
|
|
|
|
|
|
|
$
|
8,385
|
|
|
|
|
|
|
Net assets
|
|
$
|
584
|
|
|
|
|
|
|
|
|
|
* |
|
The SCPL revolver is included in current liabilities. |
F-16
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
3.
|
Property
and Equipment
|
Property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Construction equipment
|
|
$
|
56,406
|
|
|
$
|
35,663
|
|
Transportation equipment
|
|
|
7,685
|
|
|
|
5,204
|
|
Buildings
|
|
|
1,488
|
|
|
|
1,488
|
|
Office equipment
|
|
|
435
|
|
|
|
490
|
|
Construction in progress
|
|
|
259
|
|
|
|
—
|
|
Land
|
|
|
1,204
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,477
|
|
|
|
43,027
|
|
Less accumulated depreciation
|
|
|
(20,860
|
)
|
|
|
(15,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,617
|
|
|
$
|
27,271
|
|
|
|
|
|
|
|
|
|
|
Warehouse equipment financed under capital leases by SCPL
amounted to $124,000 at December 31, 2005, and accumulated
depreciation related to such leased assets was $39,000. These
assets were included in the assets of discontinued operations
and were sold as part of the sale of the business.
|
|
4.
|
Investment
in Affiliated Company (“Sterling
Transaction”)
|
In July 2001, the Company completed a transaction (the
“Sterling Transaction”) in which it increased its
equity ownership in TSC from 12% to 80.1%.
Total consideration for the 80.1% ownership interest in TSC was
$24.6 million, including the Company’s previous
investment in TSC of $3.5 million, and consisted of
(a) cash payment of $9.9 million, (b) conversion
of a $1.3 million TSC subordinated note receivable into
Sterling equity, (c) issuance of subordinated notes and
warrants, and (d) the sale and issuance of the
Company’s common stock. For accounting purposes, the value
of the 1,124,536 shares of common stock sold was determined
based on the average trading price of the Company’s common
shares over the
5-day period
before and after the closing date.
As part of the Sterling Transaction, the Company granted the
selling shareholders a “Put” option for the remaining
19.9% of TSC stock owned by them, pursuant to which they had the
right to sell those TSC shares to the Company at a date of their
choosing between July 2004 and July 2005 at a minimum price of
$105 per TSC share. The Company recorded the fair value of the
Put as a $4.1 million liability at July 18, 2001. The
fair value of the Put was reviewed quarterly and changes were
reflected as components of pre-tax earnings. Effective
July 19, 2004, the Selling Shareholders exercised the Put.
The purchase price of the TSC shares was computed as a multiple
of TSC’s EBITDA for the twelve months preceding the
exercise, with a minimum price of $12 million. A
compilation of the financial statements of TSC for the period
from July 2003 through June 2004 was completed in November 2004
and the Put (purchase) price was fixed at $15.1 million.
Settlement of the Put transaction occurred in December 2004,
following which the Company owned 100% of TSC.
The Put price was satisfied in cash of approximately
$2.4 million (derived from borrowings on available
long-term bank facilities), five-year notes with an original
principal amount of approximately $6.4 million, and the
balance through the issuance of approximately
1,569,000 shares of the Company’s common stock at a
negotiated value of $4.00 per share, which represented a premium
to the market price on the date of the Put exercise in July
2004. At the date the terms were settled and announced,
November 13, 2004, the common
F-17
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock was recorded at fair value of $5.14 per share. The cash
owed to the selling shareholders and the notes issued in
connection with the Put accrued interest from November 13,
2004 until the date of closing.
The final settlement of the Put transaction resulted in an
increase of approximately $5.1 million to the
Company’s reported amount of goodwill related to TSC. The
Company determined that there were no adjustments to the fair
value of the underlying value of the assets and liabilities of
TSC, as book value approximated market value in all material
aspects.
The settlement of the Put triggered the repayment of
approximately $7.9 million of the Company’s debt owed
to management and others who funded the Sterling Transaction in
2001. The Company paid this amount with a combination of cash of
approximately $2.4 million (from borrowings on available
long-term bank facilities), issuance of five-year notes with an
original principal amount of approximately $4.7 million and
the balance through the issuance of approximately
225,000 shares of the Company’s common stock, at a
fair value of $5.14 per share.
|
|
5.
|
Line of
Credit and Long-Term Obligations
|
Long-term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
TSC Revolving Credit Agreement, due May 2009
|
|
$
|
30,000
|
|
|
$
|
13,788
|
|
SCPL Revolving Credit Agreement, due May 2007
|
|
|
—
|
|
|
|
4,261
|
|
TSC mortgages due monthly through June 2016
|
|
|
782
|
|
|
|
905
|
|
Management/Director Notes
|
|
|
—
|
|
|
|
2,279
|
|
Management Notes
|
|
|
—
|
|
|
|
6,170
|
|
Other
|
|
|
—
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,782
|
|
|
|
27,486
|
|
Less current maturities of long-term obligations
|
|
|
(123
|
)
|
|
|
(123
|
)
|
Less short-term debt, related parties
|
|
|
—
|
|
|
|
(8,449
|
)
|
Amounts included in discontinued operations
|
|
|
—
|
|
|
|
(4,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,659
|
|
|
$
|
14,570
|
|
|
|
|
|
|
|
|
|
|
TSC
Revolver
In conjunction with the Sterling Transaction in 2001, TSC
entered into a three-year agreement providing for a bank
revolving line of credit with a maximum line of
$13.0 million, subject to a borrowing base, computed on the
value of capital equipment (the “TSC Revolver”). The
line of credit carried interest at prime, subject to achievement
of certain financial targets and is secured by the equipment of
TSC and guarantees by the parent company. In December 2004, TSC
entered into an amendment of the agreement providing for a
maximum line of $17 million with a maturity date of
May 1, 2007, under substantially the same terms as the
original line. In April 2006, the terms of the TSC Revolver were
modified to renew the line for a term of three years, maturing
on May 31, 2009 and to provide for an increase in the line
from $17.0 million to $35.0 million. The facility was
also modified to add the Company as a co-borrower. The interest
rate may vary quarterly, based on the Company’s ratio of
debt to tangible net worth. The credit facility continues to be
subject to restrictive covenants including the maintenance of
certain financial ratios and a prescribed level of tangible net
worth. In addition, the bank has made available a long-term
facility of up to $1.5 million repayable over 15 years
to finance the expansion of the Company’s office building
and maintenance facilities in Houston, Texas. The TSC Revolver
requires the payment of a quarterly commitment fee of 0.25% per
annum of the unused portion of the line of credit. Borrowing
interest rates are based on the bank’s prime rate
F-18
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
or on a Eurodollar rate at the option of the Company. The
interest rate on funds borrowed under this revolver during the
year ended December 31, 2006 ranged from 7.25% to 8.25%.
Availability on the line at December 31, 2006 was
$5 million.
Management believes that the TSC Revolver will provide adequate
funding for TSC’s working capital, debt service and capital
expenditure requirements, including seasonal fluctuations at
least through March 31, 2008.
The TSC Revolver contains restrictions on the ability to:
|
|
|
|
•
|
Make distributions and dividends;
|
|
|
•
|
Incur liens and encumbrances;
|
|
|
•
|
Incur further indebtedness;
|
|
|
•
|
Guarantee obligations;
|
|
|
•
|
Dispose of a material portion of assets or merge with a third
party;
|
|
|
•
|
Incur negative income for two consecutive quarters.
|
SCPL
Revolver
Distribution maintained a revolving line of credit with a
maximum line of $5.0 million, subject to a borrowing base,
computed on levels of accounts receivable and inventory. At
December 31, 2005, the outstanding balance on the line of
credit was $4.3 million and the effective rate of interest
was 7.25% and the line was included in the liabilities of
discontinued operations. The line of credit was paid in full
from the proceeds of the sale of the distribution business.
TSC
Mortgages
In 2001 TSC completed the construction of a headquarters
building and financed it principally through an additional
mortgage of $1.1 million on the land and facilities, at an
interest rate of 8.5% per annum, repayable over 15 years.
This mortgage is cross-collateralized with a mortgage on the
land and facilities which was obtained in 1998 in the amount of
$500,000, repayable over 15 years with an interest rate of
9.3% per annum.
Related
Party Notes
Management
Notes/NASCIT note
The Sterling Transaction in 2001 was funded in part through the
sale of zero coupon notes combined with the issuance of zero
coupon notes to certain selling shareholders of TSC. Warrants
for Sterling common stock were issued in connection with the
zero coupon notes and are exercisable for ten years from closing
at $1.50 per share. The zero coupon notes were discounted at a
rate of 12%, matured four years from the date of closing of the
Sterling Transaction, and were subject to earlier payment in the
event the TSC Put was exercised before such date. Employee
selling shareholders of TSC received an aggregate face value of
$3.8 million in zero coupon notes: James D. Manning and
Joseph P. Harper, Sr., the Company’s President,
received zero coupon notes in the face amount of $799,000 and
$1.0 million, respectively, and warrants to purchase
63,498 shares and 81,301 shares, respectively. North
Atlantic Smaller Companies Investment Trust plc
(“NASCIT”), an investor in TSC, received a note in the
face value of $4 million. In December 2003, a prepayment of
$1.3 million was made on the zero coupon note issued to
NASCIT in consideration of the forgiveness of six months’
interest on such note. Accretion on the zero coupon notes was
$617,000 and $744,000 in fiscal 2004 and 2003, respectively.
F-19
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Put was exercised in July 2004, and this triggered repayment
of all the zero coupon notes. Upon settlement of the Put in
December 2004, the employee selling shareholders received a cash
payment of $783,000 utilizing funding from long-term borrowings
under TSC’s line of credit. Of the balance of the zero
coupon notes, $901,000 was converted into 225,326 shares of
common stock, and the remaining $1.9 million was converted
into five-year notes bearing interest at 12%, with principal and
interest payable quarterly beginning March 31, 2005. NASCIT
received a cash payment of $834,000, with the balance of
$1.4 million converted into a five-year note bearing
interest at 12%, with principal and interest payable quarterly
beginning March 31, 2005.
In February 2005, the Board approved a change in the date, from
January 2006 to January 2005, on which all outstanding warrants
would first become exercisable, and an agreement was reached
between the Company, NASCIT and certain holders of debt issued
to the Selling Shareholders, as well as Robert M. Davies, a
former director, and Maarten D. Hemsley, the Company’s
Chief Financial Officer (the “Noteholders”), whereby
NASCIT exercised all its warrants in March 2005, providing a
payment to the Company of approximately $484,000. That amount
funded a partial principal prepayment to NASCIT of its five-year
note on March 31, 2005. The other Noteholders agreed to
defer certain principal payments otherwise due to them in March
and June 2005, sufficient to facilitate the prepayment of the
balance of NASCIT’s note by June 2005.
The remaining related party notes were paid in full in January
2006, following the completion of the Company’s equity
offering as described in Note 14..
Management/Director
Notes
Notes with an aggregate face amount of $1.3 million issued
in connection with the October 1999 purchase of the second
tranche of shares of TSC were restructured as part of the
Sterling Transaction in 2001. Of the total, notes for $800,000
were issued to several members of Sterling’s management,
including Joseph P. Harper, who was appointed the Company’s
President in July 2001. Notes totaling approximately $559,000
were due to Robert M. Davies, and, through a participation
agreement, Maarten D. Hemsley. In consideration for the
extension of the maturity dates of these notes, the principal
amounts were increased in July 2001 by an aggregate of
approximately $342,000. Furthermore, certain amounts owed by the
Company to Messrs. Davies and Hemsley aggregating
approximately $355,000 were converted into notes. All such notes
matured over four years and bore interest at 12%.
Pursuant to a Restructuring Agreement entered into in September
2003, the exercise of the Put in July 2004 triggered payment of
the Management/Director notes, with one half of the balance of
the notes paid in cash utilizing funding from long-term
borrowings under the TSC line of credit and the remainder
converted into five-year notes bearing interest at 12%, payable
quarterly beginning March 31, 2005. Upon settlement of the
Put, Mr. Davies, Mr. Harper, Mr. Hemsley and
Mr. James D. Manning received cash payments of $166,876,
$1,045,764, $208,397 and $460,458, respectively.
Pursuant to the previously-described agreement reached in
February 2005, among the Company, NASCIT and certain holders of
debt issued to the Selling Shareholders, as well as
Messrs. Davies and Hemsley (the “Noteholders”),
NASCIT exercised all its warrants in March 2005, providing a
payment to the Company of approximately $484,000. That amount
funded a principal repayment to NASCIT on March 31, 2005.
The other Noteholders agreed to defer certain principal payments
otherwise due to them in March and June 2005, sufficient to
facilitate the repayment of all of NASCIT’s note by June
2005.
The management/director notes were paid in full in January 2006,
following the completion of the equity offering.
F-20
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
Debt
The Company acquired certain warehouse and computer equipment
through capital leases, usually with five-year lease terms, with
expiration dates through December 2009. These assets were leased
by SCPL, were included in the assets of discontinued operations,
and were acquired by the buyer of the operations of SCPL, which
also assumed the related lease obligations in October 2006.
Maturity
of Debt
The Company’s long-term obligations mature in future years
as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2007
|
|
$
|
123
|
|
2008
|
|
|
102
|
|
2009
|
|
|
30,073
|
|
2010
|
|
|
73
|
|
2011
|
|
|
73
|
|
Thereafter
|
|
|
338
|
|
|
|
|
|
|
|
|
$
|
30,782
|
|
|
|
|
|
|
SFAS No. 107, “Disclosure About Fair Value of
Financial Instruments” defines the fair value of
financial instruments as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.
Due to their near-term maturities, the carrying amounts of
accounts receivable and accounts payable are considered
equivalent to fair value. As the interest rates on the TSC
Revolver and SCPL Revolver are variable, their fair value
approximates their carrying value.
The Company’s other debt (which was repaid in January
2006) was owed to management and directors, and book value
was considered to be equal to fair value, as these notes were
subordinated to the Company’s lines of credit, and were
subject to a greater degree of risk. Management believed that
the 12% interest rate on these notes approximated market rates
of interest for similar subordinated debt.
TSC has two mortgages, at 8.5% and 9.3%, which contain
pre-payment penalties. To determine the fair value of the
mortgages, the amount of future cash flows was discounted using
TSC’s borrowing rate on its Revolver. At December 31,
2006 and December 31, 2005, the carrying value of the
mortgages was $782,000 and $905,000, respectively. At
December 31, 2006 and December 31, 2005, the fair
value of the mortgages was $741,000 and $890,000, respectively.
TSC has one interest rate swap agreement which matures in
November 2007, which is adjusted quarterly to its fair value and
is included as a component of current assets, other on the
consolidated balance sheet.
The Company does not have any off-balance sheet financial
instruments.
|
|
7.
|
Derivative
Financial Instruments
|
During fiscal 2002, in connection with certain long-term debt,
TSC entered into two interest rate swap agreements to manage
exposure to fluctuations in interest rates on a portion of the
loan balances.
F-21
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Under the interest rate swap agreements, the Company exchanged
variable rate interest on a portion of the loan balances, equal
to a notional amount of $3,000,000 each, with fixed rates of
5.87% and 6.57%. The swap agreement with a rate of 5.87% matured
in November 2005.
During the years ended December 31, 2006 and
December 31, 2005, TSC recorded interest expense of $12,000
and a credit to interest expense of $78,300 to adjust the
carrying amounts of the derivative to reflect its face value of
$42,546 and $55,092, respectively.
|
|
8.
|
Income
Taxes and Deferred Tax Asset
|
At December 31, 2006, Sterling had the benefit of net
operating tax loss carryforwards (the “Tax Benefits”)
of approximately $9.8 million, which expire in 2020 and
which offset a portion of income of Sterling and its
subsidiaries from federal income taxes through part of 2007. The
availability of the net operating tax loss carryforwards may be
adversely affected by future ownership changes of Sterling. At
this time, such changes cannot be predicted. Under IRC
Section 382, if a corporation undergoes an ownership
change, generally defined as a change of control of greater than
50% in any three year period, the amount of net operating losses
available to offset taxable income in a taxable period may be
subject to limitation under these provisions. In order to reduce
the likelihood of such a change of control occurring,
Sterling’s Certificate of Incorporation includes
restrictions on the registration of transfers of stock resulting
in, or increasing, individual holdings exceeding 4.5% of the
Company’s common stock.
The Company has available to it excess tax benefits resulting
from the exercise of non-qualified stock options. Under the
provisions of SFAS 123(R), the Company cannot recognize
these benefits as deferred tax assets until its existing net
operating losses are fully utilized, and therefore, the deferred
tax asset related to net operating loss carryforwards differs
from the amount available on its federal tax returns. The
Company has approximately $5.3 million of excess tax
benefits from the exercise of stock options available to reduce
future tax liabilities.
Deferred tax assets and liabilities of continuing operations
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Current
|
|
|
Long Term
|
|
|
Current
|
|
|
Long Term
|
|
|
ASSETS related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,346
|
|
|
$
|
—
|
|
|
$
|
3,311
|
|
|
$
|
5,738
|
|
Accrued compensation
|
|
|
974
|
|
|
|
162
|
|
|
|
913
|
|
|
|
129
|
|
AMT carryforward
|
|
|
—
|
|
|
|
1,289
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,384
|
|
|
|
1,451
|
|
|
|
4,224
|
|
|
|
5,881
|
|
LIABILITIES related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract accounting
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
—
|
|
|
|
(3,039
|
)
|
|
|
—
|
|
|
|
(1,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
4,297
|
|
|
$
|
(1,588
|
)
|
|
$
|
4,224
|
|
|
$
|
4,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2005, the valuation allowance was reduced to zero
following a reassessment based on future taxable income
forecasts. Fluctuations in market conditions and trends and
other changes in the Company’s earnings base, such as
subsidiary acquisitions and disposals, warrant periodic
management reviews of the recorded tax asset to determine if an
increase or decrease in the recorded valuation allowance is
necessary to change the tax asset to an amount that management
believes will more likely than not be realized.
F-22
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In fiscal 1990, SCPL underwent a quasi-reorganization. As a
result, any subsequent recognition of net operating loss
carryforwards generated before the quasi-reorganization resulted
in an adjustment to paid-in capital. At February 28, 2001,
the Company had approximately $147 million in net operating
losses generated before the quasi-reorganization. Of this
amount, approximately $18 million had previously been
recognized and then subsequently re-reserved, resulting in a
charge to earnings of approximately $6.1 million in prior
years. During fiscal 2001, most of these net operating loss
carryforwards were either utilized to offset current taxable
income or the valuation allowance was reduced based on the
evaluation of the deferred tax assets when accounting for the
TSC acquisition. At December 31, 2006, the Company has
utilized all net operating losses that relate to the period
prior to the quasi-reorganization.
The deferred tax effects of temporary differences relate
primarily to the difference between book and tax depreciation
for additions to fixed assets in 2006. Current income tax
expense represents federal alternative minimum tax. Until such
time as the NOL’s are fully utilized, the Company will
recognize alternative minimum tax payments as a credit to its
deferred tax liability.
The income tax provision differs from the amount using the
statutory federal income tax rate of 34% applied to income or
loss from continuing operations, for the following reasons (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tax expense at the U.S. federal statutory rate
|
|
$
|
6,787
|
|
|
$
|
4,829
|
|
|
$
|
1,270
|
|
State income tax expense, net of refunds and federal benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Decrease in deferred tax asset valuation allowance
|
|
|
—
|
|
|
|
(1,390
|
)
|
|
|
(3,787
|
)
|
Adjustment to value of net operating loss carryforward
|
|
|
—
|
|
|
|
(364
|
)
|
|
|
—
|
|
Non-deductible costs
|
|
|
86
|
|
|
|
98
|
|
|
|
558
|
|
Other
|
|
|
—
|
|
|
|
(70
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
6,874
|
|
|
$
|
3,104
|
|
|
$
|
(1,918
|
)
|
Income tax on discontinued operations including taxes on the
gain on sale in 2006
|
|
|
308
|
|
|
|
315
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax on continuing operations
|
|
$
|
6,566
|
|
|
$
|
2,788
|
|
|
$
|
(2,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2006, the State of Texas revised its
existing franchise tax to include most business entities
(“the Texas Margins Tax”), which will become effective
for franchise tax reports due after January 1, 2008. The
Company has assessed the impact the Texas Margins Tax has on its
existing deferred tax liabilities, which was immaterial for the
year ended December 31, 2006.
|
|
9.
|
Costs and
Estimated Earnings and Billings on Uncompleted
Contracts
|
Costs and estimated earnings and billings on uncompleted
contracts at December 31, 2006 and 2005 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Costs incurred and estimated earnings on uncompleted contracts
|
|
$
|
222,170
|
|
|
$
|
156,916
|
|
Billings on uncompleted contracts
|
|
|
(240,549
|
)
|
|
|
(168,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,379
|
)
|
|
$
|
(11,436
|
)
|
|
|
|
|
|
|
|
|
|
F-23
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Included in accompanying balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
3,157
|
|
|
$
|
2,199
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(21,536
|
)
|
|
|
(13,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,379
|
)
|
|
$
|
(11,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Stock
Options and Warrants
|
Options
In fiscal 1991, the Board of Directors granted options to
purchase 194,388 shares of the Company’s common stock
to key employees and to certain members of the Board of
Directors. The exercise price of the options, which was equal to
the market value of the stock at the date of the grant, was
$2.75.
In fiscal 1994, the Board of Directors adopted and shareholders
approved two stock option plans, the 1994 Omnibus Stock Plan
(the “1994 Omnibus Plan”) and the 1994 Non-Employee
Director Stock Option Plan (the “Director Plan”).
Under both plans, the exercise price of options granted may not
be less than the fair market value of the common stock on the
date of the grant and the term of the grant may not exceed ten
years.
The 1994 Omnibus Plan initially provided for the issuance of a
maximum of 350,000 shares of the Company’s common
stock pursuant to the grant of incentive stock options to
employees of Sterling and its subsidiaries and the grant of
non-qualified stock options, stock or restricted stock to
employees, consultants, directors and officers of Sterling and
its subsidiaries. Subsequently, the number of shares available
for issuance under the plan was increased to
950,000 shares. The options generally vest over a four-year
period and expire ten years from the date of the grant.
The Director Plan (a “formula plan”) provided for the
issuance of up to 100,000 shares of common stock pursuant
to options granted to directors who were not employees of the
Company. The plan provided that on every May 1, each
non-employee director holding office on such date would
automatically receive a fully-exercisable, fully vested,
ten-year option to purchase 3,000 shares at the market
value on such date. Each director’s options expire
180 days after he or she ceases to be a director. Options
covering the final 7,000 shares that remained under the
plan were issued in May 2001.
In December 1998, the Board of Directors adopted and in October
2001 shareholders approved the 1998 Stock Incentive Plan
(the “1998 Plan”). Under the 1998 Plan, the exercise
price of the options granted may not be less than the fair
market value of the common stock on the date of grant and the
term of the grant may not exceed ten years. The 1998 Plan
provides for the issuance of 700,000 shares of the
Company’s common stock. Stock options granted under the
plan generally vest over a three-year period.
In July 2001, the Board of Directors adopted and in October
2001 shareholders approved the 2001 Stock Incentive Plan
(the “2001 Plan”). The 2001 Plan provides for the
issuance of stock awards for up to 500,000 shares of the
Company’s common stock. Under the 2001 Plan, stock options
may be granted at an exercise price not less than the fair
market value of the common stock on the date of grant. The
Company’s and its subsidiaries’ directors, officers,
employees, consultants and advisors are eligible to be granted
awards under the plan. Stock options granted under the 2001 Plan
generally vest over three to five years and can be exercised no
more than 10 years after the date of the grant. The plan
also provides for stock grants; in 2006 stock grants were made
to independent directors totaling 6,035 shares.
F-24
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Beginning in 1998 and as part of the Sterling Transaction in
2001, certain stock options granted to Robert M. Davies and
Maarten D. Hemsley were extended beyond their normal expiration
date under a standstill agreement, to help protect the
Company’s tax loss carryforwards. At the time of the
standstill agreement, the fair value of the stock was lower than
the option exercise price.
In May 2006 the independent directors of the Company were each
granted 1,207 shares of restricted stock with one-year
vesting at the market price on the day of grant of $28.99. Total
compensation cost for the stock grants was $175,000, of which
$116,000 was recognized through December 2006.
Shareholders in May 2006 approved an amendment to the 2001 Stock
Incentive Plan to increase the number of shares issuable under
the Plan from 500,000 to 1,000,000. At December 31, 2006
there were 441,745 shares of common stock available under
the 2001 Plan for issuance pursuant to future stock option and
share grants. No shares are or will be available for grant under
the Company’s other option plans, all of which have been
terminated except with respect to stock options outstanding
under those plans.
Certain options granted in 2004 to employees of Steel City
Products remained unvested at the date the business was sold.
The Board of Directors approved the acceleration of vesting of
these options with an expiration of 75 days past the date
of sale of the business. The Company expensed an additional
$15,300 in connection with the accelerated vesting.
The following tables summarize the activity under the five plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1991 Plan
|
|
|
Director Plan
|
|
|
1994 Omnibus Plan
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at December 31, 2003:
|
|
|
84,420
|
|
|
$
|
2.75
|
|
|
|
87,502
|
|
|
$
|
1.77
|
|
|
|
770,384
|
|
|
$
|
1.48
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
2.75
|
|
|
|
(37,170
|
)
|
|
$
|
1.77
|
|
|
|
(162,192
|
)
|
|
$
|
1.95
|
|
Expired/forfeited
|
|
|
—
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
(29,996
|
)
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004:
|
|
|
84,420
|
|
|
$
|
2.75
|
|
|
|
47,332
|
|
|
$
|
1.67
|
|
|
|
578,196
|
|
|
$
|
1.29
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
2.75
|
|
|
|
(3,000
|
)
|
|
$
|
1.83
|
|
|
|
(154,000
|
)
|
|
$
|
0.99
|
|
Expired/forfeited
|
|
|
—
|
|
|
|
|
|
|
|
(13,166
|
)
|
|
$
|
2.75
|
|
|
|
—
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005:
|
|
|
84,420
|
|
|
$
|
2.75
|
|
|
|
31,166
|
|
|
$
|
1.58
|
|
|
|
424,196
|
|
|
$
|
1.40
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(55,996
|
)
|
|
$
|
2.75
|
|
|
|
(18,000
|
)
|
|
$
|
2.05
|
|
|
|
(166,016
|
)
|
|
$
|
1.08
|
|
Expired/forfeited
|
|
|
—
|
|
|
$
|
2.75
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006:
|
|
|
28,424
|
|
|
$
|
2.75
|
|
|
|
13,166
|
|
|
$
|
0.94
|
|
|
|
258,180
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Plan
|
|
|
2001 Plan
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31, 2003:
|
|
|
540,500
|
|
|
$
|
0.56
|
|
|
|
214,100
|
|
|
$
|
1.58
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
157,800
|
|
|
$
|
3.10
|
|
Exercised
|
|
|
(20,375
|
)
|
|
$
|
1.05
|
|
|
|
(420
|
)
|
|
$
|
2.04
|
|
Expired/forfeited
|
|
|
(1,500
|
)
|
|
$
|
1.00
|
|
|
|
(7,180
|
)
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004:
|
|
|
518,625
|
|
|
$
|
0.54
|
|
|
|
364,300
|
|
|
$
|
2.48
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
117,600
|
|
|
$
|
10.88
|
|
Exercised
|
|
|
(289,500
|
)
|
|
$
|
0.50
|
|
|
|
(17,540
|
)
|
|
$
|
2.06
|
|
Expired/forfeited
|
|
|
—
|
|
|
|
|
|
|
|
(7,200
|
)
|
|
$
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005:
|
|
|
229,125
|
|
|
$
|
0.58
|
|
|
|
457,160
|
|
|
$
|
4.66
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
81,500
|
|
|
$
|
16.36
|
|
Exercised
|
|
|
(225,875
|
)
|
|
$
|
0.57
|
|
|
|
(64,057
|
)
|
|
$
|
2.46
|
|
Expired/forfeited
|
|
|
—
|
|
|
|
|
|
|
|
(4,400
|
)
|
|
$
|
7.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006:
|
|
|
3,250
|
|
|
$
|
1.00
|
|
|
|
470,203
|
|
|
$
|
8.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Remaining Contractual Life
|
|
|
Exercise Price Per
|
|
|
Number of
|
|
|
Exercise Price Per
|
|
Range of Exercise Price Per Share
|
|
Shares
|
|
|
(years)
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
$0.50 - $0.88
|
|
|
165,346
|
|
|
|
3.40
|
|
|
$
|
0.88
|
|
|
|
165,346
|
|
|
$
|
0.88
|
|
$1.00 - $1.50
|
|
|
62,050
|
|
|
|
4.06
|
|
|
$
|
1.43
|
|
|
|
62,050
|
|
|
$
|
1.43
|
|
$1.73 - $2.00
|
|
|
40,100
|
|
|
|
5.57
|
|
|
$
|
1.73
|
|
|
|
30,900
|
|
|
$
|
1.73
|
|
$2.75 - $3.38
|
|
|
313,087
|
|
|
|
4.32
|
|
|
$
|
2.95
|
|
|
|
188,208
|
|
|
$
|
2.85
|
|
$6.87
|
|
|
20,000
|
|
|
|
8.39
|
|
|
$
|
6.87
|
|
|
|
20,000
|
|
|
$
|
6.87
|
|
$9.69
|
|
|
62,800
|
|
|
|
3.55
|
|
|
$
|
9.69
|
|
|
|
—
|
|
|
$
|
0.00
|
|
$16.87
|
|
|
28,540
|
|
|
|
3.70
|
|
|
$
|
16.87
|
|
|
|
5,660
|
|
|
$
|
16.87
|
|
$24.96
|
|
|
62,800
|
|
|
|
4.55
|
|
|
$
|
24.96
|
|
|
|
—
|
|
|
$
|
0.00
|
|
$25.21
|
|
|
18,500
|
|
|
|
4.69
|
|
|
$
|
25.21
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773,223
|
|
|
|
|
|
|
$
|
5.80
|
|
|
|
472,164
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic Value
|
|
|
Total outstanding in-the-money options at 12/31/06
|
|
|
691,923
|
|
|
$
|
12,605,000
|
|
Total vested in-the-money options at 12/31/06
|
|
|
472,164
|
|
|
$
|
9,217,000
|
|
Total options exercised during 2006
|
|
|
529,944
|
|
|
$
|
12,636,000
|
|
Aggregate intrinsic value represents the total pretax intrinsic
value (the difference between the Company’s closing stock
price on December 31, 2006 ($21.76) and the exercise price,
multiplied by the number of in-the-money options) that would
have been received by the option holders had all option holders
exercised their options on December 31, 2006.
F-26
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Compensation expense for options granted during 2006, 2005 and
2004 were calculated using the Black-Scholes option pricing
model using the following assumptions in each year:
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
Fiscal 2005
|
|
Fiscal 2004
|
|
Risk free interest rate
|
|
4.9%
|
|
4.2%
|
|
4.0%
|
Expected volatility
|
|
76.3%
|
|
77.8%
|
|
78.0%
|
Expected life of option
|
|
5.0 years
|
|
6.0 years
|
|
10.0 years
|
Expected dividends
|
|
None
|
|
None
|
|
None
|
The risk-free interest rate is based upon interest rates that
match the contractual terms of the stock option grants. The
expected volatility is based on historical observation and
recent price fluctuations. The expected life is based on
evaluations of historical and expected future employee exercise
behavior, which is not less than the vesting period of the
options. The Company does not currently pay dividends. The
weighted average fair value of stock options granted in 2006,
2005 and 2004 was $16.36, $7.32 and $2.55, respectively.
Pre-tax compensation expense was $991,000 ($652,000 after tax
effects of 34.2%), $463,000 ($306,000 after tax effects of
34.0%), and $381,000 ($251,000 after tax effects of 34.0%), in
2006, 2005 and 2004, respectively. Proceeds received by the
Company from the exercise of options in 2006, 2005 and 2004 were
$657,000, $827,000 and $405,000, respectively. At
December 31, 2006, total unrecognized stock-based
compensation expense related to unvested stock options was
approximately $1.4 million, which is expected to be
recognized over a weighted average period of approximately
2.1 years.
Prior to the adoption of SFAS 123(R), all tax benefits
resulting from the exercise of non-qualified stock options (or
disqualifying dispositions of incentive stock options) were
presented as operating cash flows in the Consolidated Statements
of Cash Flows. SFAS 123(R) requires that cash flows from
the exercise of such stock options resulting from tax benefits
in excess of recognized cumulative compensation cost (excess tax
benefits) be classified as financing cash flows. Because the
Company has not fully utilized its net operating loss
carryforwards, the tax benefit cannot be recorded until it can
be realized. Upon adoption of SFAS 123(R), the Company
recorded $2.8 million of these benefits as a component of
stockholders’ equity. During 2006 approximately another
$2.6 million of excess tax benefits will become available
to the Company when it fully utilizes its net operating loss
carryforwards.
Warrants
As part of the Sterling Transaction in July 2001, warrants
attached to zero coupon notes were issued to certain members of
TSC management, to NASCIT and to KTI, Inc. These ten-year
warrants to purchase shares of the Company’s common stock
at $1.50 per share were exercisable 54 months from the
issue date. Following settlement of the Put, the date the
warrants first become exercisable was changed to January 2005.
In April 2003, a loan made to the Company by KTI, Inc. was
prepaid, and as part of the consideration for the prepayment,
warrants to purchase 394,302 shares were cancelled. As part
of an agreement to prepay its note, in March 2005 NASCIT
exercised its warrant to purchase 322,661 shares. At
December 31, 2005 and 2004 warrants to purchase 527,339 and
850,000 shares, respectively remained outstanding. In
January 2006 KTI, Inc. and Linda Manning (former spouse of
Patrick Manning, the Company’s Chief Executive Officer)
exercised warrants purchasing 141,266 shares and sold the
shares in the Company’s public equity offering. During 2006
an additional 29,807 warrants were exercised. The Company
received proceeds in the amount of $257,000 in connection with
the exercise of warrants in 2006. At December 31, 2006,
356,266 warrants were outstanding.
F-27
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
11.
|
Employee
Benefit Plan
|
The Company and its subsidiaries maintain defined contribution
profit-sharing plans covering substantially all persons employed
by the Company and its subsidiaries, whereby employees may
contribute a percentage of compensation, limited to maximum
allowed amounts under the Internal Revenue Code. The Plans
provides for discretionary employer contributions, the level of
which, if any, may vary by subsidiary and is determined annually
by each company’s board of directors. The Company and TSC
made aggregate matching contributions of $325,000, $276,000 and
$328,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
Operations of TSC are conducted from an owned building in
Houston, Texas. TSC also leases incidental office space in
Fort Worth and San Antonio, Texas on month-to-month
agreements.
In 2005 and 2006, TSC entered into several long-term operating
leases for equipment with lease terms of approximately three to
five years. Certain of these lease structures allows TSC to
purchase the equipment on or before the end of the lease term in
October 2011. If TSC does not purchase the equipment at the fair
market value, the equipment is returned to the lender. One lease
obligates TSC to pay a guaranteed residual not to exceed 20% of
the original equipment cost. The Company is accruing this
liability, which is not expected to exceed $200,000. Lease
expense for those equipment leases was approximately $576,000 in
2006 and $562,000 in 2005.
Minimum annual rentals for all operating leases having initial
non-cancelable lease terms in excess of one year are as follows
(in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2007
|
|
|
1,010
|
|
2008
|
|
|
776
|
|
2009
|
|
|
624
|
|
2010
|
|
|
624
|
|
2011
|
|
|
468
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
Total future minimum rental payments
|
|
$
|
3,502
|
|
|
|
|
|
|
Total rent expense for all operating leases (including
discontinued operations) amounted to approximately $995,000,
$1,013,000 and $614,000 in fiscal years 2006, 2005 and 2004,
respectively.
The following table shows contract revenues generated from
TSC’s largest customers which accounted for more than 10%
of revenues (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Contract
|
|
|
% of
|
|
|
Contract
|
|
|
% of
|
|
|
Contract
|
|
|
% of
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Texas State Department of Transportation
|
|
$
|
166,333
|
|
|
|
67.1
|
%
|
|
$
|
84,827
|
|
|
|
38.8
|
%
|
|
$
|
44,461
|
|
|
|
33.6
|
%
|
City of Houston
|
|
$
|
29,848
|
|
|
|
12.1
|
%
|
|
$
|
49,437
|
|
|
|
22.6
|
%
|
|
$
|
16,512
|
|
|
|
12.5
|
%
|
Harris County
|
|
*
|
|
|
|
*
|
|
|
|
$
|
29,796
|
|
|
|
13.6
|
%
|
|
*
|
|
|
|
*
|
|
|
|
|
|
* |
|
represents less than 10% of revenues |
F-28
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In January 2006, the Company completed a public offering of
approximately 2.0 million shares of its common stock at
$15.00 per share. The Company received proceeds, net of
underwriting commissions, of approximately $28.0 million
($13.95 per share) and paid approximately $907,000 in related
offering expenses. In addition, the Company received
approximately $484,000 from the exercise of warrants and options
to purchase 321,758 shares, such shares were sold by the
option and warrant holders in the offering. From the proceeds of
the offering, the Company repaid all its outstanding related
party promissory notes in January 2006. Executive management,
directors and former directors received proceeds as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Principal
|
|
|
Interest
|
|
|
Total Payment
|
|
|
Patrick T. Manning
|
|
$
|
318,592
|
|
|
|
2,867
|
|
|
$
|
321,459
|
|
James D. Manning
|
|
$
|
1,855,349
|
|
|
|
16,698
|
|
|
$
|
1,872,047
|
|
Joseph P. Harper, Sr
|
|
$
|
2,637,422
|
|
|
|
23,737
|
|
|
$
|
2,661,159
|
|
Maarten D. Hemsley
|
|
$
|
181,205
|
|
|
|
1,631
|
|
|
$
|
182,836
|
|
Robert M. Davies
|
|
$
|
452,909
|
|
|
|
4,076
|
|
|
$
|
456,985
|
|
During the first quarter of 2006, the Company utilized a portion
of the offering proceeds to purchase additional capital
equipment for the construction business and to replenish funds
used for the acquisition of RDI (see note below). In the second
through fourth quarters, a portion of the offering proceeds was
also used to purchase additional capital equipment for the
construction business.
|
|
15.
|
Purchase
of certain assets of Rathole Drilling, Inc.
(“RDI”)
|
In January, 2006, TSC acquired certain assets of the crane
division of RDI. The acquisition included the purchase of
construction equipment at its appraised value of approximately
$2.0 million, the trade name RDI and the assumption by TSC
of certain RDI contracts. TSC paid cash for the acquired assets
of $2.2 million. The size of the acquisition and the amount
of assets acquired were not material in relation to the
Company’s historical business.
|
|
16.
|
Commitments
and Contingencies
|
Employment
Agreements
Joseph P. Harper, Sr. and Patrick T. Manning and certain
other officers of TSC have employment agreements with the
general partner of TSC which provide for payments of annual
salary, bonuses and certain benefits if their employment is
terminated without cause.
In July 2005, Mr. Hemsley entered into a new employment
agreement with the Company. The employment agreement provides
for payments of annual salary, bonuses and certain benefits if
his employment is terminated without cause.
SCPL had an employment agreement with its President, Terrance W.
Allan that provided for payments of annual salary, a bonus and
certain benefits if his employment was terminated without cause.
As part of the sale of the Distribution business, a termination
agreement was reached with Mr. Allan.
F-29
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Self-Insurance
TSC is self-insured for employee health claims. Its policy is to
accrue the estimated liability for known claims and for
estimated claims that have been incurred but not reported as of
each reporting date. The Company has obtained reinsurance
coverage for the policy period from June 1, 2006 through
May 31, 2007 as follows:
|
|
|
|
•
|
Specific excess reinsurance coverage for medical and
prescription drug claims in excess of $60,000 for each insured
person with a maximum lifetime reimbursable of $2,000,000.
|
|
|
•
|
Aggregate reinsurance coverage for medical and prescription drug
claims with a plan year maximum of approximately
$1.1 million which is the estimated maximum claims and
fixed cost based on the number of employees.
|
For the twelve months ended December 31, 2006, TSC incurred
$1.2 million in expenses related to this plan, compared
with $1.0 million in 2005 and $803,000 in 2004.
TSC is also self-insured for workers’ compensation claims
up to $250,000 per occurrence, with a maximum aggregate
liability of $2.7 million per year. Its policy is to accrue
the estimated liability for known claims and for estimated
claims that have been incurred but not reported as of each
reporting date. At December 31, 2006 and 2005, TSC had
recorded an estimated liability of $575,000 and $673,000,
respectively, which it believes is adequate based on its claims
history. TSC has a safety and training program in place to help
prevent accidents and injuries and works closely with its
employees and the insurance company to monitor all claims.
In 2006, TSC had outgrown the bonding limits of its bonding
company, but was successful in obtaining increased bonding
capacity through Travelers Casualty and Surety Company of
America, for future construction contracts. As is customary, the
Company indemnifies Travelers for all losses incurred by it in
connection with bonds that are issued. The Company has granted
Travelers a security interest in certain personal property for
that obligation.
Guarantees
The Company typically indemnifies contract owners for claims
arising during the construction process and carries insurance
coverage for such claims, which in the past have not been
material.
The Company’s Certificate of Incorporation provides for
indemnification of its officers and directors. The Company has a
Director and Officer insurance policy that limits its exposure.
At December 31, 2006 the Company had not accrued a
liability for this guarantee, as the likelihood of incurring a
payment obligation in connection with this guarantee is remote.
Litigation
The Company is involved in certain claims and lawsuits occurring
in the normal course of business. Management, after consultation
with outside legal counsel, does not believe that the outcome of
these actions will have a material impact on the financial
statements of the Company.
Purchase
Commitments
To manage the risk of changes in material prices and
subcontracting costs used in tendering bids for construction
contracts, we obtain firm quotations from our suppliers and
subcontractors before submitting a bid. These quotations do not
include any quantity guarantees. As soon as we are advised that
our bid is the lowest, we enter into firm contracts with our
materials suppliers and most sub-contractors, thereby mitigating
the risk of future price variations affecting the contract costs.
F-30
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During fiscal 1993, the cumulative dividends on SCPL’s
Series A Preferred Stock exceeded SCPL’s net income
for that year, thus creating a loss attributable to SCPL’s
common stockholders in excess of the minority interest, and
accordingly, the Company reduced to zero the minority interest
related to SCPL. In October 2003, the Board of Directors of SCPL
approved a 1 for 300,000 share reverse stock split of
SCPL’s common stock. The transaction was approved by the
Company, SCPL’s majority shareholder. In March 2004 the
reverse stock split of SCPL’s common stock was completed
with the result that the Company became SCPL’s sole
shareholder.
From July 2001 to December 2004, the Company had an 80.1%
investment in TSC. A minority interest liability of
$5.3 million was reflected in the consolidated balance
sheet for fiscal year 2003. In December 2004, the Company
purchased the remaining 19.9% of TSC. Minority interest expense
of $962,000 is reflected in the consolidated results of
operations for fiscal 2004.
|
|
18.
|
Related
Party Transactions
|
In October 1999, certain shareholders of TSC exercised their
right to sell a second tranche of equity securities to Oakhurst
Technology, Inc. (a wholly owned subsidiary of the Company)
(“OTI”) thereby increasing the Company’s
consolidated equity ownership of TSC from 7% to 12%. The equity
purchase was financed through the issuance of two notes. One of
these notes reflecting loans in the amount of $559,000, was
issued to Robert M. Davies (the “First Note”) in which
Maarten D. Hemsley had a participation of $116,000. The second
of the notes in the amount of $800,000 (the “Manning
Note”) was issued to James D. Manning, the brother of
Patrick T. Manning and one of the TSC shareholders who sold TSC
equity securities to OTI. The First Note provided for interest
at 14% payable quarterly and was due in October 2000; however,
no interest payments were made and the First Note was not repaid
in October 2000. In connection with the transaction in July 2001
in which the Company increased its ownership of TSC to 80.1%,
(the “Sterling Transaction”), accrued unpaid interest
in the amount of $134,000 on the First Note was added to the
principal, the maturity date of the First Note was extended to
July 2005, and the interest rate was reduced to 12%. In
connection with the Sterling Transaction, the Company also
issued an additional four-year 12% promissory note to each of
Messrs. Hemsley ($136,421) and Davies ($250,623) (the
“Second Notes”) to repay certain amounts due to them
from the Company or OTI, including deferred compensation, the
fee (and related interest) owed to them in connection with the
acquisition of the second tranche of TSC equity in October 1999,
the fee due in July 2001 to them in connection with the Sterling
Transaction and a fee for the extension of the First Note.
In connection with the Sterling Transaction, the maturity date
of the Manning Note also was extended to July 2005 and the
interest rate was reduced from 14% to 12%. In consideration for
the extension of the maturity date and interest rate reduction,
James D. Manning received a zero coupon promissory note due in
July 2005 with principal and interest payable at maturity in the
aggregate amount of $187,000. Interest and principal on the
First Note, the Second Notes and the Manning Note were payable
prior to maturity only to the extent of cash available to
Sterling for these payments and as permitted by institutional
lenders to Sterling or its subsidiaries.
After the Sterling Transaction, Joseph P. Harper, Sr. and
another officer of TSC purchased $370,000 and $123,000,
respectively, of James D. Manning’s notes. As a result,
Mr. Harper held a separate note in the principal amount of
$370,000, an officer of TSC held a separate note in the
principal amount of $123,000, and James D. Manning held a note
in the principal amount of $493,500, in each case, on the same
terms and conditions as the Manning Note.
In September 2003, the First Note, the Manning Note and the
Second Notes were amended to provide for a maturity date that
was the date the Company was required to purchase the remaining
shares of TSC if the
F-31
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
holders of those shares exercised their rights to sell such
shares to the Company, and to provide for payment of those notes
with a combination of cash and five-year notes of the Company.
In December 2003 prepayments of accrued interest and principal
were made to certain of these noteholders. Mr. Harper
received a prepayment totaling $86,000 and Mr. Davies
received a prepayment totaling $411,000. Mr. Hemsley waived
any prepayment of his notes at that time.
In July 2004, the remaining shareholders of TSC exercised their
right to sell their shares of TSC to the Company (the
“Put”) for consideration (paid in December
2004) consisting of a combination of cash (funded through
long-term borrowings), stock and five-year notes of the Company
bearing interest at an annual rate of 12%. The exercise of the
Put triggered the acceleration of the maturity of the other debt
issued in July 2001. Those obligations were satisfied in
December 2004 through a payment of cash, the issuance of shares
and the issuance of the same form of five-year notes. The cash
paid and shares and notes issued were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Cash
|
|
|
Shares
|
|
|
Five-year Notes
|
|
|
Patrick T. Manning
|
|
$
|
460,458
|
|
|
|
135,474
|
|
|
$
|
365,831
|
|
James D. Manning
|
|
$
|
660,649
|
|
|
|
218,357
|
|
|
$
|
2,124,633
|
|
Joseph P. Harper, Sr.
|
|
$
|
1,045,764
|
|
|
|
345,437
|
|
|
$
|
3,020,201
|
|
Maarten D. Hemsley
|
|
$
|
208,397
|
|
|
|
—
|
|
|
$
|
207,504
|
|
Robert M. Davies
|
|
$
|
166,876
|
|
|
|
—
|
|
|
$
|
518,641
|
|
James D. Manning is employed by an operating subsidiary of TSC
under a three-year employment agreement that commenced January
1999 and that was extended for an additional three-year term in
July 2001 and again in July 2004 pursuant to which he was
entitled to receive an annual salary of $75,000 plus $75.00 per
hour for each hour worked in excess of 1,000 hours during
any calendar year. In addition, he was entitled to receive
incentive compensation of up to 100% of his base pay if certain
financial goals were met. In fiscal 2004 and 2005, he earned his
maximum bonus of $50,000. In late 2005, Mr. Manning’s
employment agreement was changed to a consulting agreement for
which he receives a monthly retainer of $2,000 plus $800 per day
worked. The agreement limits the ability of Mr. Manning to
compete for a period of two years after he ceases to be an
employee if he terminates his employment without good reason or
TSC terminates his employment for good cause, and for a period
of one year after he ceases to be an employee if he terminates
his employment for good reason or TSC terminates his employment
without good cause; provided that these non-competition
obligations may be avoided by Mr. Manning if TSC terminates
the employment agreement other than for good cause.
From March 2001 until May 2002, Mr. Hemsley provided
consulting services to, and since May 2002 he has been an
employee of JO Hambro Capital Management Limited as
Fund Manager of Leisure & Media Venture Capital
Trust plc, and since February 2005 as Senior Fund Manager
of its Trident Private Equity II LLP investment fund,
neither of which funds were or are an investor in the Company or
any of its affiliates.
In December 2001, in order to strengthen SCPL’s working
capital position, Sterling obtained funding in the amount of
$500,000 from members of management and directors, including
Robert W. Frickel, Joseph P. Harper, Sr. and Maarten D.
Hemsley, who loaned $155,000, $100,000 and $25,000,
respectively. The notes, which ranked senior to debt incurred in
the Sterling Transaction, bore interest at 12%, payable monthly.
The notes were convertible into shares of common stock of the
Company at a conversion price of $2.50 per share at any time
prior to the maturity date in December 2004. All holders of
these notes converted their debt into common stock on
December 31, 2004.
In January 2003 certain members of management, including Joseph
P. Harper, Sr. ($70,000) and Maarten D. Hemsley ($25,000),
loaned an aggregate of $250,000 to SCPL for working capital.
Under the original terms of the loan, interest at an annual rate
of 10% was paid monthly, with a maturity date of July 2003. The
maturity date was later extended to December 2003 with the
addition of a guarantee by the Company and was
F-32
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
extended again to July 2004 with an increase in the interest
rate to 12%. These notes were repaid in three installments in
January and February 2005.
In July 2001, Mr. Frickel was elected to the Board of
Directors. He is President of R.W. Frickel Company, P.C.,
an accounting firm based in Michigan that performs certain
accounting and tax services for TSC. Fees paid or accrued to
R.W. Frickel Company for 2006, 2005 and 2004 and were
approximately $57,500, $113,000 and $82,000, respectively.
In July 2005, Patrick Manning married Amy Peterson, the sole
beneficial owner of Paradigm Outdoor Supply, LLC and Paradigm
Outsourcing, Inc., both of which are women-owned business
enterprises. The Paradigm companies provide materials and
services to the Company and to other contractors. From July
2005, when Ms. Peterson and Mr. Manning were married,
through December 31, 2005, the Company paid approximately
$6.0 million to the Paradigm companies for materials and
services. In 2006, the Company paid approximately
$3.3 million to Paradigm for materials and services.
At December 31, 2006 the authorized capital stock of the
Company consisted of 14,000,000 shares of common stock, par
value $0.01 per share and 1,000,000 shares of preferred
stock, par value $0.01 per share.
Holders of common stock are entitled to one vote for each share
on all matters voted upon by the stockholders, including the
election of directors, and do not have cumulative voting rights.
Subject to the rights of holders of any then outstanding shares
of preferred stock, common stockholders are entitled to receive
ratably any dividends that may be declared by the Board of
Directors out of funds legally available for that purpose.
Holders of common stock are entitled to share ratably in net
assets upon any dissolution or liquidation after payment of
provision for all liabilities and any preferential liquidation
rights of our preferred stock then outstanding. Common stock
shares are not subject to any redemption provisions and are not
convertible into any other shares of capital stock. The rights,
preferences and privileges of holders of common stock are
subject to those of the holders of any shares of preferred stock
that may be issued in the future.
The Board of Directors may authorize the issuance of one or more
classes or series of preferred stock without stockholder
approval and may establish the voting powers, designations,
preferences and rights and restrictions of such shares. No
preferred shares have been issued.
In December 1998, the Company entered into a rights agreement
with American Stock Transfer & Trust, as rights agent,
providing for a dividend of one purchase right for each
outstanding share of common stock for stockholders of record on
December 29, 1998. Holders of shares of common stock issued
since that date are issued rights with their shares. The rights
trade automatically with the shares of common stock and become
exercisable only if a takeover attempt of the Company occurs.
The rights will expire on December 29, 2008, unless
redeemed or exchanged before that time.
F-33
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
20.
|
Quarterly
Financial Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total
|
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
56,480
|
|
|
$
|
60,010
|
|
|
$
|
68,743
|
|
|
$
|
64,115
|
|
|
$
|
249,348
|
|
Gross profit
|
|
|
6,686
|
|
|
|
7,310
|
|
|
|
7,878
|
|
|
|
6,673
|
|
|
|
28,547
|
|
Pre-tax income from continuing operations
|
|
|
4,563
|
|
|
|
4,832
|
|
|
|
5,354
|
|
|
|
4,455
|
|
|
|
19,204
|
|
Net income from continuing operations
|
|
|
3,022
|
|
|
|
3,156
|
|
|
|
3,545
|
|
|
|
2,915
|
|
|
|
12,638
|
|
Net income from discontinued operations, including gain on sale
of $121 in 2006
|
|
|
171
|
|
|
|
208
|
|
|
|
65
|
|
|
|
238
|
|
|
|
682
|
|
Net income
|
|
$
|
3,193
|
|
|
$
|
3,364
|
|
|
$
|
3,610
|
|
|
$
|
3,153
|
|
|
$
|
13,320
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations:
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
$
|
1.19
|
|
From discontinued operations:
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic:
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.27
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.24
|
|
|
$
|
1.08
|
|
From discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted:
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.25
|
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total
|
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
39,413
|
|
|
$
|
57,228
|
|
|
$
|
61,163
|
|
|
$
|
61,635
|
|
|
$
|
219,439
|
|
Gross profit
|
|
|
3,358
|
|
|
|
6,005
|
|
|
|
6,902
|
|
|
|
7,491
|
|
|
|
23,756
|
|
Pre-tax income from continuing operations
|
|
|
903
|
|
|
|
3,266
|
|
|
|
4,126
|
|
|
|
5,034
|
|
|
|
13,329
|
|
Net income from continuing operations
|
|
|
596
|
|
|
|
2,156
|
|
|
|
2,723
|
|
|
|
5,066
|
|
|
|
10,541
|
|
Net income from discontinued operations
|
|
|
231
|
|
|
|
245
|
|
|
|
57
|
|
|
|
26
|
|
|
|
559
|
|
Net income
|
|
$
|
827
|
|
|
$
|
2,401
|
|
|
$
|
2,780
|
|
|
$
|
5,092
|
|
|
$
|
11,100
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations:
|
|
$
|
0.08
|
|
|
$
|
0.28
|
|
|
$
|
0.35
|
|
|
$
|
0.65
|
|
|
$
|
1.36
|
|
From discontinued operations:
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic:
|
|
$
|
0.11
|
|
|
$
|
0.31
|
|
|
$
|
0.36
|
|
|
$
|
0.65
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.06
|
|
|
$
|
0.23
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
1.11
|
|
From discontinued operations
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted:
|
|
$
|
0.08
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts
in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,894
|
|
|
$
|
28,466
|
|
Short-term investments
|
|
|
32,630
|
|
|
|
26,169
|
|
Contracts receivable, including retainage
|
|
|
52,498
|
|
|
|
42,805
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
7,247
|
|
|
|
3,157
|
|
Inventories
|
|
|
1,047
|
|
|
|
965
|
|
Deferred tax asset
|
|
|
1,038
|
|
|
|
4,297
|
|
Other, net
|
|
|
1,968
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
111,322
|
|
|
|
107,408
|
|
Property and equipment, net
|
|
|
62,390
|
|
|
|
46,617
|
|
Goodwill
|
|
|
12,735
|
|
|
|
12,735
|
|
Note receivable, long-term
|
|
|
31
|
|
|
|
325
|
|
Other assets, net
|
|
|
629
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,785
|
|
|
|
60,364
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
187,107
|
|
|
$
|
167,772
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,257
|
|
|
$
|
17,373
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
21,979
|
|
|
|
21,536
|
|
Current maturities of long term obligations
|
|
|
123
|
|
|
|
123
|
|
Other accrued expenses
|
|
|
7,272
|
|
|
|
5,502
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,631
|
|
|
|
44,534
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
30,566
|
|
|
|
30,659
|
|
Deferred tax liability
|
|
|
2,975
|
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,541
|
|
|
|
32,247
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 14,000,000 shares
authorized, 11,017,310 issued and outstanding at
September 30, 2007; 10,875,438 issued and outstanding at
December 31, 2006
|
|
|
110
|
|
|
|
109
|
|
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding at
September 30, 2007 and December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
115,821
|
|
|
|
114,630
|
|
Accumulated deficit
|
|
|
(13,996
|
)
|
|
|
(23,748
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
101,935
|
|
|
|
90,991
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
187,107
|
|
|
$
|
167,772
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-35
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts
in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
77,714
|
|
|
$
|
68,743
|
|
|
$
|
217,877
|
|
|
$
|
185,233
|
|
Cost of revenues
|
|
|
69,799
|
|
|
|
60,865
|
|
|
|
196,284
|
|
|
|
163,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,915
|
|
|
|
7,878
|
|
|
|
21,593
|
|
|
|
21,875
|
|
General and administrative expenses
|
|
|
3,257
|
|
|
|
2,866
|
|
|
|
8,725
|
|
|
|
8,175
|
|
Other income
|
|
|
0
|
|
|
|
89
|
|
|
|
433
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,658
|
|
|
|
5,101
|
|
|
|
13,301
|
|
|
|
13,947
|
|
Interest income
|
|
|
480
|
|
|
|
329
|
|
|
|
1,421
|
|
|
|
993
|
|
Interest expense
|
|
|
13
|
|
|
|
76
|
|
|
|
55
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
5,125
|
|
|
|
5,354
|
|
|
|
14,667
|
|
|
|
14,750
|
|
Income taxes
|
|
|
1,682
|
|
|
|
1,809
|
|
|
|
4,890
|
|
|
|
5,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
3,443
|
|
|
|
3,545
|
|
|
|
9,777
|
|
|
|
9,723
|
|
Income (loss) from discontinued operations, net of income taxes
of $0, $45, $0 and $290, respectively
|
|
|
0
|
|
|
|
65
|
|
|
|
(25
|
)
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,443
|
|
|
$
|
3,610
|
|
|
$
|
9,752
|
|
|
$
|
10,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
0.31
|
|
|
$
|
0.33
|
|
|
$
|
0.89
|
|
|
$
|
0.93
|
|
Net income from discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.89
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding Used in computing
basic per share amounts
|
|
|
11,003,346
|
|
|
|
10,779,232
|
|
|
|
10,962,009
|
|
|
|
10,455,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.83
|
|
|
$
|
0.84
|
|
Net income from discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.83
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding Used in computing
diluted per share amounts
|
|
|
11,774,116
|
|
|
|
11,793,285
|
|
|
|
11,765,287
|
|
|
|
11,639,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-36
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
Balance at January 1, 2007
|
|
|
10,875
|
|
|
$
|
109
|
|
|
$
|
114,630
|
|
|
$
|
(23,748
|
)
|
|
$
|
90,991
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,752
|
|
|
|
9,752
|
|
Stock issued upon option/warrant exercises
|
|
|
132
|
|
|
|
1
|
|
|
|
209
|
|
|
|
—
|
|
|
|
210
|
|
Restricted stock grants
|
|
|
10
|
|
|
|
—
|
|
|
|
146
|
|
|
|
—
|
|
|
|
146
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
836
|
|
|
|
—
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
11,017
|
|
|
$
|
110
|
|
|
$
|
115,821
|
|
|
$
|
(13,996
|
)
|
|
$
|
101,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-37
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
9,752
|
|
|
$
|
10,167
|
|
|
|
|
|
Net (loss) income from discontinued operations
|
|
|
(25
|
)
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
9,777
|
|
|
|
9,723
|
|
|
|
|
|
Adjustments to reconcile income from operations to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,764
|
|
|
|
5,574
|
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
(390
|
)
|
|
|
(247
|
)
|
|
|
|
|
Deferred tax expense
|
|
|
4,646
|
|
|
|
5,027
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
982
|
|
|
|
783
|
|
|
|
|
|
Other changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in contracts receivable
|
|
|
(9,693
|
)
|
|
|
(18,286
|
)
|
|
|
|
|
Increase in costs and estimated earnings in excess of billings
on uncompleted contracts
|
|
|
(4,090
|
)
|
|
|
(1,100
|
)
|
|
|
|
|
Increase in inventories
|
|
|
(82
|
)
|
|
|
—
|
|
|
|
|
|
Decrease in other assets
|
|
|
176
|
|
|
|
2
|
|
|
|
|
|
Increase (decrease) in accounts payable
|
|
|
4,884
|
|
|
|
(938
|
)
|
|
|
|
|
Increase in billings in excess of costs and estimated earnings
on uncompleted contracts
|
|
|
443
|
|
|
|
6,777
|
|
|
|
|
|
Increase in other accrued expenses
|
|
|
1,231
|
|
|
|
2,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
14,648
|
|
|
|
9,846
|
|
|
|
|
|
Cash flows from continuing operations investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of certain assets of RDI
|
|
|
—
|
|
|
|
(2,206
|
)
|
|
|
|
|
Additions to property and equipment
|
|
|
(23,033
|
)
|
|
|
(22,500
|
)
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
908
|
|
|
|
724
|
|
|
|
|
|
Purchases of short-term securities, available for sale
|
|
|
(92,832
|
)
|
|
|
(106,795
|
)
|
|
|
|
|
Sales of short-term securities, available for sale
|
|
|
86,371
|
|
|
|
84,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations investing activities
|
|
|
(28,586
|
)
|
|
|
(46,567
|
)
|
|
|
|
|
Cash flows from continuing operations financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative daily drawdowns — revolvers
|
|
|
75,000
|
|
|
|
68,000
|
|
|
|
|
|
Cumulative daily reductions — revolvers
|
|
|
(75,000
|
)
|
|
|
(53,788
|
)
|
|
|
|
|
Repayments under long-term obligations
|
|
|
(93
|
)
|
|
|
(8,543
|
)
|
|
|
|
|
Payments received on note receivable
|
|
|
249
|
|
|
|
—
|
|
|
|
|
|
Issuance of common stock pursuant to the exercise of options
|
|
|
210
|
|
|
|
742
|
|
|
|
|
|
Net proceeds from the sale of common stock
|
|
|
—
|
|
|
|
27,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations financing activities
|
|
|
366
|
|
|
|
33,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents of continuing
operations
|
|
|
(13,572
|
)
|
|
|
(3,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by discontinued operating activities
|
|
|
—
|
|
|
|
782
|
|
|
|
|
|
Cash used for discontinued operations investing activities
|
|
|
—
|
|
|
|
(38
|
)
|
|
|
|
|
Cash provided by discontinued operations financing activities
|
|
|
—
|
|
|
|
(743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
28,466
|
|
|
|
22,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,894
|
|
|
$
|
18,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accrual of discontinued operations
|
|
$
|
25
|
|
|
|
—
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
55
|
|
|
$
|
448
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
530
|
|
|
$
|
18
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-38
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)
Sterling Construction Company, Inc. (“Sterling” or
“the Company”) is a leading heavy civil construction
company that specializes in the building, reconstruction and
repair of transportation and water infrastructure in large and
growing markets in Texas. Our transportation infrastructure
projects include highways, roads, bridges and light rail, and
our water infrastructure projects include water, wastewater and
storm drainage systems. We provide general contracting services
primarily to public sector clients utilizing our own employees
and equipment for activities including excavating, paving, pipe
installation and concrete placement. We purchase the necessary
materials for our contracts, perform approximately
three-quarters of the work required by our contracts with our
own crews, and generally engage subcontractors only for
ancillary services. As described in Note 11, on
October 31, 2007 the Company purchased a 91.67% interest in
Road and Highway Builders, LLC and all the outstanding capital
stock of Road and Highway Builders Inc. thereby expanding its
construction activities to Nevada.
Until October 2006, the Company had two operating entities,
Texas Sterling Construction, L.P., which operates the
Company’s heavy highway construction business and is based
in Houston, Texas and Steel City Products, LLC (referred to
herein as “Distribution” or “SCPL”).
Substantially all of SCPL’s assets were sold in October
2006, and on May 14, 2007, SCPL was merged into Sterling.
In the periods presented herein, SCPL’s operating results
are presented as discontinued operations. Effective
June 29, 2007, Texas Sterling Construction L.P., merged
into its general partner, Sterling General, Inc. (a wholly-owned
subsidiary of the Company) and changed its name to Texas
Sterling Construction Co.
The condensed consolidated financial statements included herein
have been prepared by Sterling, without audit, in accordance
with the rules and regulations of the Securities and Exchange
Commission (SEC) and should be read in conjunction with the
Company’s Annual Report on
Form 10-K
for the year ended December 31, 2006. The condensed
consolidated financial statements reflect, in the opinion of
management, all normal recurring adjustments necessary to
present fairly the Company’s financial position at
September 30, 2007 and the results of operations and cash
flows for the periods presented. Certain information and
footnoted disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or
omitted pursuant to SEC rules and regulations. Interim results
may be subject to significant seasonal variations and the
results of operations for the three and nine months ended
September 30, 2007 are not necessarily indicative of the
results to be expected for the full year.
The accompanying condensed consolidated financial statements
include the accounts of subsidiaries in which the Company has a
greater than 50% ownership interest, and all intercompany
balances and transactions have been eliminated in consolidation.
For all periods presented, the Company had no subsidiaries with
ownership interests less than 50%.
|
|
2.
|
Recent
Accounting Pronouncements
|
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial
Liabilities — Including an amendment to FASB Statement
No. 115” (“SFAS No. 159”).
This statement allows a company to irrevocably elect fair value
as a measurement attribute for certain financial assets and
financial liabilities with changes in fair value recognized in
the results of operations. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is
currently evaluating the impact of adoption on its results of
operations and financial position.
In May 2007, the FASB issued FASB Staff Position
FIN 48-1,
an amendment to FIN 48, which provides guidance on how an
entity is to determine whether a tax position has effectively
been settled for purposes of
F-39
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recognizing previously unrecognized tax benefits. Specifically,
this guidance states that an entity would recognize a benefit
when a tax position is effectively settled using the following
criteria: (1) the taxing authority has completed its
examination including all appeals and administrative reviews;
(2) the entity does not plan to appeal or litigate any
aspect of the tax position; and (3) it is remote that the
taxing authority would examine or reexamine any aspect of the
tax position, assuming the taxing authority has full knowledge
of all relevant information relative to making their assessment
on the position. The Company applied the provisions of this FASB
Staff Position in conjunction with the adoption of FIN 48.
|
|
3.
|
Critical
Accounting Policies
|
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Management’s
estimates, judgments and assumptions are continually evaluated
based on available information and experience; however, actual
amounts could differ from those estimates. The Company’s
significant accounting policies are more fully described in
Note 1 of the Notes to Consolidated Financial Statements in
the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006.
On an ongoing basis, the Company evaluates the critical
accounting policies used to prepare its condensed consolidated
financial statements, including, but not limited to, those
related to:
|
|
|
|
•
|
revenue recognition
|
|
|
•
|
contracts receivable
|
|
|
•
|
Inventories
|
|
|
•
|
income taxes
|
|
|
•
|
self-insurance; and
|
|
|
•
|
stock-based compensation
|
The Company accounts for uncertain tax positions in accordance
with the provisions of FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes”
(FIN 48), which it adopted on January 1, 2007. The
implementation of FIN 48 required the Company to make
subjective assumptions and judgments regarding income tax
exposure. Interpretations of and guidance surrounding income tax
laws and regulations change over time, and these may change the
Company’s subjective assumptions, which in turn, may affect
amounts recognized in the condensed consolidated balance sheets
and statements of income. Other than the adoption of
FIN 48, there have been no material changes in significant
accounting policies as more fully described in the
Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006. Adoption of
FIN 48 is described more fully in Note 10.
|
|
4.
|
Short-term
Investments
|
The Company invests in short-term auction-rate securities to
provide liquidity for its operating cash needs. These
auction-rate securities are municipal bonds and municipal bond
funds with long-term scheduled maturities and periodic interest
rate reset dates, usually 28 days or less. Due to the
liquidity provided by the interest rate reset mechanism and the
short-term nature of the investment in these securities, there
was no unrealized gain or loss on these securities at
September 30, 2007 and December 31, 2006, as the
market value of these securities approximated their cost. No
gain or loss was realized on these securities during the nine
months ended September 30, 2007 and 2006.
F-40
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company classifies its short-term investments (including
auction-rate securities) as securities available for sale in
accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities”. At
September 30, 2007 and December 31, 2006, the Company
had short-term securities available for sale of
$32.6 million and $26.2 million, respectively.
The Company’s inventories are stated at the lower of cost
or market as determined by the average cost method. Inventories
at September 30, 2007 consist of raw materials, such as
broken concrete and millings, which are expected to be utilized
in construction projects in the future. The cost of inventory
includes labor, trucking and equipment costs.
|
|
6.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Construction equipment
|
|
$
|
74,014
|
|
|
$
|
56,406
|
|
Transportation equipment
|
|
|
9,012
|
|
|
|
7,685
|
|
Buildings
|
|
|
1,488
|
|
|
|
1,488
|
|
Office equipment
|
|
|
479
|
|
|
|
435
|
|
Construction in progress
|
|
|
453
|
|
|
|
259
|
|
Land
|
|
|
2,562
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,008
|
|
|
|
67,477
|
|
Less accumulated depreciation
|
|
|
(25,619
|
)
|
|
|
(20,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,389
|
|
|
$
|
46,617
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Discontinued
operations
|
On October 27, 2006, the Company sold substantially all of
the assets of SCPL to an industry buyer based in Toledo, Ohio.
The Company received proceeds from the sale of
$5.4 million, which included a two-year promissory note in
the amount of $650,000. From the proceeds, the Company repaid
SCPL’s revolving line of credit in full and retained and
settled certain liabilities primarily related to severance and
bonus payments. The Company reported income from discontinued
operations of $444,000 after taxes. The Company retained an
account receivable, which it believes is fully collectible, and
recorded liabilities related to the right of the purchaser to
request payment for certain inventory not sold within a year and
for legal claims which remained unresolved at the sale date.
In the first nine months of 2007, the Company resolved certain
of the legal claims and adjusted its liability related to the
payment of unsold inventory, which resulted in a $25,000 expense
for the nine month period.
F-41
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized financial information for discontinued operations is
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
4,608
|
|
|
$
|
—
|
|
|
$
|
16,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
—
|
|
|
|
110
|
|
|
|
(25
|
)
|
|
|
734
|
|
Income taxes
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
—
|
|
|
$
|
65
|
|
|
$
|
(25
|
)
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares
outstanding for the period. Diluted net income per common share
is computed giving effect to all potentially dilutive common
stock options and warrants using the treasury stock method.
Stock options at September 30, 2007 and 2006 that were
anti-dilutive were not included in the computation of diluted
net income per share. At September 30, 2007 and 2006, there
were 84,100 and 81,500, respectively, common stock options with
a weighted average exercise price per share of $24.90 and
$16.36, respectively, that were excluded from the calculation of
diluted income per share as they were anti-dilutive. The
following table reconciles the numerators and denominators of
the basic and diluted net income per common share computations
for the three and nine months ended September 30, 2007 and
September 30, 2006, respectively, (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income from continuing operations, as reported
|
|
$
|
3,443
|
|
|
$
|
3,545
|
|
Net income from discontinued operations, as reported
|
|
|
—
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,443
|
|
|
$
|
3,610
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
11,003
|
|
|
|
10,779
|
|
Shares for dilutive stock options, restricted stock and warrants
|
|
|
771
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
conversions — diluted
|
|
|
11,774
|
|
|
|
11,793
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.31
|
|
|
$
|
0.33
|
|
From discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
From discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
F-42
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income from continuing operations, as reported
|
|
$
|
9,777
|
|
|
$
|
9,723
|
|
Net (loss) income from discontinued operations, as reported
|
|
|
(25
|
)
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,752
|
|
|
$
|
10,167
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
10,962
|
|
|
|
10,455
|
|
Shares for dilutive stock options, restricted stock and warrants
|
|
|
803
|
|
|
|
1,185
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
conversions — diluted
|
|
|
11,765
|
|
|
|
11,640
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.89
|
|
|
$
|
0.93
|
|
From discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.89
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.83
|
|
|
$
|
0.84
|
|
From discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.83
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Stock-Based
Compensation
|
The Company has five stock plans which are administered by the
Compensation Committee of the Board of Directors. In general,
the plans provide for all grants to be issued with a per-share
exercise price equal to the fair market value of a share of
common stock on the date of grant. The original terms of the
grants typically do not exceed 10 years. Stock options
generally vest over a three to five year period.
Note 10 — Stock Options and Warrants of the Notes
to the Consolidated Financial Statements contained in the Annual
Report on
Form 10-K
for the year ended December 31, 2006 should be referred to
for additional information regarding the stock-based incentive
plans.
We recorded compensation expense of $982,000 and $783,000 for
the nine-month periods ended September 30, 2007 and 2006,
respectively, (including $146,000 and $73,000, respectively,
related to restricted stock grants to independent directors
discussed below) and $124,000 and $291,000 for the quarters
ended September 30, 2007 and 2006, respectively, related to
restricted stock grants and stock options outstanding for the
periods then ended. Unrecognized compensation expense at
September 30, 2007 for the unvested portion of restricted
stock grants was $122,000 and for unvested options was $517,000.
In May 2007, the six independent directors of the Company were
each granted 1,598 shares of restricted stock at the market
price on the date of grant, or $21.90, which will vest over one
year. In the three months ended September 30, 2007, two
officers were issued options to purchase an aggregate of
16,507 shares of common stock at the closing quoted market
price on the date of grant. This same grant date is used in the
Black Scholes valuation model to calculate compensation expense.
Proceeds from the exercise of 13,000 and 132,000 options for the
three and nine months ended September 30, 2007,
respectively, were approximately $37,000 and $210,000,
respectively. At September 30,
F-43
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2007 there were 425,247 shares of common stock available
under the 2001 plan for issuance pursuant to future option
awards. During the nine months ended September 30, 2007 and
2006, the Company granted options to purchase 16,507 and
81,500 shares of common stock, respectively. No shares are
available for future stock option grants under any of the other
stock plans.
In June 2006, the FASB issued Financial Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). The interpretation
prescribes a recognition threshold and measurement attribute
criteria for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on classification,
interest and penalties, accounting in interim periods,
disclosure and transition.
The Company and its subsidiaries file income tax returns in the
United States federal jurisdiction and in various states. With
few exceptions, the Company is no longer subject to federal tax
examinations for years prior to 2001 and state income tax
examinations for years prior to 2004. The Company’s policy
is to recognize interest related to any underpayment of taxes as
interest expense, and penalties as administrative expenses. No
interest or penalties have been accrued at September 30,
2007.
The Company adopted FIN 48 on January 1, 2007.
Adoption did not result in an adjustment to retained earnings.
In its 2005 tax return, the Company used net operating tax loss
carryforwards (“NOL”) that would have expired during
that year instead of deducting compensation expense that
originated in 2005 as the result of stock option exercises.
Therefore, that compensation deduction was lost. Whether the
Company can choose not to take deductions for compensation
expense in the tax return and to instead use otherwise expiring
NOLs is considered by management to be an uncertain tax
position. In the event that the IRS examines the 2005 tax return
and determines that the compensation expense is a required
deduction in the tax return, then the Company would deduct the
compensation expense instead of the NOL used in the period;
however there would be no cash impact on tax paid due to the
increased compensation deduction. In addition, there would be no
interest or penalties due as a result of the change. As a result
of the Company’s detailed FIN 48 analysis, Management
has determined that it is more likely than not this position
will be sustained upon examination, and this uncertain tax
position was determined to have a measurement of $0.
The Company does not believe that its uncertain tax positions
will significantly change due to the settlement and expiration
of statutes of limitations prior to September 30, 2008.
The decrease in the effective income tax rate to 33.3% in the
first nine months of 2007 from 34.1% for the comparable period
in 2006 is a result of an increase in non-taxable income from
investments in municipal instruments.
On October 31, 2007, the Company purchased a 91.67%
interest in Road and Highway Builders, LLC (“RHB LLC”)
and all of the outstanding capital stock of Road and Highway
Builders, Inc., which was affiliated with RHB LLC through common
ownership.
RHB LLC is a heavy civil construction business located in Reno,
Nevada that builds roads, highways and bridges for local and
state agencies. Its assets consist of construction contracts,
road and bridge construction and aggregate mining machinery and
equipment, and approximately 44.5 acres of land with
improvements. RHB Inc’s sole asset is its right as a
co-lessee with RHB LLC under a long-term, royalty-based lease of
a Nevada quarry on which RHB LLC can mine aggregates for use in
its own construction business and for sale to third parties.
F-44
STERLING
CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company paid an aggregate purchase price for RHB of
$53.0 million of which $1.0 million was paid in the
form of 40,702 unregistered shares of the Company’s common
stock and the balance was paid in cash. The purchase price is
subject to a downward adjustment based on the working capital of
RHB LLC at the closing, collection of accounts receivable and
certain other items to be determined subsequent to closing. Ten
percent of the cash purchase price has been placed in escrow for
eighteen months as security for any breach of representations
and warranties made by the sellers. The cash portion of the
purchase price was funded by a $22.4 million drawdown under
a new $75 million five-year Credit Facility with Comerica
Bank and the balance from the Company’s available cash.
Effective with the execution of the new Credit Facility referred
to above, the Company terminated its existing $35 million
three-year Revolver with Comerica Bank dated as of May 10,
2006 that had substantially similar terms, except for the
maturity, to the new Credit Facility.
The minority interest owner of RHB LLC (who will remain with RHB
LLC as Chief Executive Officer) has the right to put, or require
the Company to buy, his remaining 8.33% interest in RHB LLC and
concurrently, the Company has the right to require that owner to
sell his 8.33% interest to the Company, both in 2011. The
purchase price in each case is 8.33% of the product of six times
the simple average of RHB LLC’s income before interest,
taxes, depreciation and amortization for the calendar years
2008, 2009 and 2010.
The purchase agreement contains certain terms restricting the
sellers from competing against the business of RHB LLC and from
soliciting its employees for a period of four years after the
closing of the purchase.
For the nine months ended September 30, 2007, RHB LLC had
unaudited revenues of approximately $65 million and
unaudited income before taxes of approximately
$21.0 million. The profitability of RHB LLC for the nine
months was higher than what is expected to continue due to some
unusually high margin contracts and may not be indicative of
future results of operations.
F-45
INDEPENDENT
AUDITOR’S REPORT
To the Members
Road and Highway Builders, LLC
(A Limited Liability Company)
Dickinson, North Dakota
We have audited the accompanying balance sheets of Road and
Highway Builders, LLC as of December 31, 2006 and 2005, and
the related statements of income, members’ equity and cash
flows for the years then ended. 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 auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit 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 financial position
of Road and Highway Builders, LLC as of December 31, 2006
and 2005, and the results of its operations and its cash flows
for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Sioux Falls, South Dakota
February 23, 2007
McGladrey & Pullen, LLP is a
member firm of RSM International,
an affiliation of separate and
independent legal entities.
F-46
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
BALANCE SHEETS
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
1,371,573
|
|
|
$
|
804,036
|
|
Interest (Note 5)
|
|
|
49,010
|
|
|
|
112,733
|
|
Due from related party (Note 5)
|
|
|
11,311,477
|
|
|
|
6,500,000
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 2)
|
|
|
104,709
|
|
|
|
400,060
|
|
Prepaid expenses
|
|
|
24,812
|
|
|
|
8,823
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,861,581
|
|
|
|
7,825,652
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
621,546
|
|
|
|
155,982
|
|
Buildings
|
|
|
1,184,842
|
|
|
|
84,842
|
|
Equipment (Note 3)
|
|
|
11,479,923
|
|
|
|
9,627,663
|
|
Furniture and fixtures
|
|
|
13,969
|
|
|
|
13,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,300,280
|
|
|
|
9,882,456
|
|
Less accumulated depreciation
|
|
|
5,588,570
|
|
|
|
4,088,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,711,710
|
|
|
|
5,793,572
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,573,291
|
|
|
$
|
13,619,224
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
$
|
723,670
|
|
|
$
|
447,118
|
|
Current maturities of long-term debt (Note 3)
|
|
|
133,387
|
|
|
|
247,308
|
|
Accounts payable (Note 5)
|
|
|
1,506,486
|
|
|
|
1,078,031
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 2)
|
|
|
12,027,108
|
|
|
|
7,553,311
|
|
Accrued expenses
|
|
|
73,828
|
|
|
|
74,539
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,464,479
|
|
|
|
9,400,307
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, less current maturities (Note 3)
|
|
|
150,603
|
|
|
|
79,310
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingency (Notes 4, 7 and 8)
|
|
|
|
|
|
|
|
|
Members’ Equity
|
|
|
5,958,209
|
|
|
|
4,139,607
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,573,291
|
|
|
$
|
13,619,224
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-47
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
STATEMENTS OF INCOME
Years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Earned contract revenues
|
|
$
|
37,162,769
|
|
|
$
|
39,207,908
|
|
Cost of earned contract revenues (Note 5)
|
|
|
31,466,891
|
|
|
|
35,300,239
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,695,878
|
|
|
|
3,907,669
|
|
Percent of sales
|
|
|
15.3
|
%
|
|
|
10.0
|
%
|
General and administrative expenses (Note 5)
|
|
|
461,618
|
|
|
|
467,017
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,234,260
|
|
|
|
3,440,652
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income (Note 5)
|
|
|
487,054
|
|
|
|
411,415
|
|
Interest expense
|
|
|
(51,571
|
)
|
|
|
(198,558
|
)
|
Miscellaneous
|
|
|
548,859
|
|
|
|
313,665
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,218,602
|
|
|
$
|
3,967,174
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-48
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
STATEMENTS OF MEMBERS’ EQUITY
Years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fisher Sand
|
|
|
Richard H.
|
|
|
|
|
|
|
& Gravel Co.
|
|
|
Buenting
|
|
|
Total
|
|
|
Balance, December 31, 2004
|
|
$
|
1,754,216
|
|
|
$
|
1,754,217
|
|
|
$
|
3,508,433
|
|
Distributions
|
|
|
(1,668,000
|
)
|
|
|
(1,668,000
|
)
|
|
|
(3,336,000
|
)
|
Net income
|
|
|
1,983,587
|
|
|
|
1,983,587
|
|
|
|
3,967,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,069,803
|
|
|
|
2,069,804
|
|
|
|
4,139,607
|
|
Distributions
|
|
|
(2,200,000
|
)
|
|
|
(2,200,000
|
)
|
|
|
(4,400,000
|
)
|
Net income
|
|
|
3,109,301
|
|
|
|
3,109,301
|
|
|
|
6,218,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
2,979,104
|
|
|
$
|
2,979,105
|
|
|
$
|
5,958,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-49
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
Years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,218,602
|
|
|
$
|
3,967,174
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,507,186
|
|
|
|
1,174,674
|
|
Loss on sale of property and equipment
|
|
|
6,500
|
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables
|
|
|
(503,814
|
)
|
|
|
740,736
|
|
(Increase) decrease in costs and estimated earnings in excess of
billings on uncompleted contracts
|
|
|
295,351
|
|
|
|
(400,060
|
)
|
(Increase) decrease in prepaid expenses
|
|
|
(15,989
|
)
|
|
|
189,261
|
|
Increase (decrease) in checks issued in excess of bank balance
|
|
|
276,552
|
|
|
|
(1,027,881
|
)
|
Increase (decrease) in accounts payable
|
|
|
428,455
|
|
|
|
(11,379
|
)
|
Increase in billings in excess of costs and estimated earnings
on uncompleted contracts
|
|
|
4,473,797
|
|
|
|
4,586,674
|
|
Increase (decrease) in accrued expenses
|
|
|
(711
|
)
|
|
|
43,702
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,685,929
|
|
|
|
9,262,901
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Principal advances on due from related party, net
|
|
|
(4,811,477
|
)
|
|
|
(1,750,000
|
)
|
Purchase of property and equipment
|
|
|
(3,217,820
|
)
|
|
|
(2,386,420
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,029,297
|
)
|
|
|
(4,136,420
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(256,632
|
)
|
|
|
(1,790,481
|
)
|
Cash distributions to members
|
|
|
(4,400,000
|
)
|
|
|
(3,336,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,656,632
|
)
|
|
|
(5,126,481
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
—
|
|
|
|
—
|
|
Cash
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
56,600
|
|
|
$
|
193,529
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
Property and equipment acquired by incurring debt
|
|
$
|
214,004
|
|
|
$
|
220,812
|
|
See Notes to Financial Statements.
F-50
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies
|
Nature of business: Road and Highway
Builders, LLC is organized as a limited liability company under
the laws of the State of Nevada. The members of the Company are
Fisher Sand & Gravel Co. (Fisher) and Richard H.
Buenting on an equal (50/50) basis. All profits, expenses and
proceeds from the sale of assets are to be shared equally by the
two members. The operating agreement terms provide that the
Company will exist in perpetuity.
The Company operates primarily as a general road construction
contractor in the state of Nevada. The work is performed under
construction contracts acquired by bid primarily from the Nevada
Department of Transportation. The length of the Company’s
contracts varies but typically is for one year or less. In
connection with its normal construction activities, the Company
may be required to acquire performance bonds. The surety issuing
the bonds has recourse against the Company’s assets in the
event the surety is required to honor the bonds.
A summary of the Company’s significant accounting policies
follows:
Use of estimates: The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual
results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the
near-term relate to the determination of the costs to complete
uncompleted contracts and the resultant determination of
percentage of completion.
Revenue and cost recognition: The
Company’s books and records are maintained on the
percentage of completion method. Revenues on construction
contracts are recognized when progress reaches a point where
experience is sufficient to estimate final results with
reasonable accuracy. Percentage of completion is measured and
revenue is accrued based on the percentage of costs incurred to
date to estimated total costs for each contract. This method is
used because management considers expended costs to be the best
available measure of progress on these contracts.
Contract costs include all direct material, labor costs and
those indirect costs related to contract performance. Selling,
general and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions and
estimated profitability, including those arising from contract
penalty provisions, and final contract settlements may result in
revisions to costs and income and 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: The Company maintains its cash in
bank deposit accounts which, at times, may exceed federally
insured limits. The Company has not experienced any losses in
such accounts. Management does not believe the Company is
exposed to any significant credit risk related to cash.
Contract receivables: Contract
receivables are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all
outstanding amounts on a periodic basis. Management determines
the allowance for doubtful accounts by identifying troubled
accounts and considering the customer’s financial
condition, credit history and current economic conditions.
Contract receivables are written off when deemed uncollectible.
Recoveries of contract receivables previously written off are
recorded when received. The Company may be able to file a lien
on the customer’s property to secure its contracts
receivable.
F-51
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL
STATEMENTS — (Continued)
At December 31, 2006 and 2005, contract receivables are
from customers within Nevada and are concentrated principally
with state and local governmental agencies. Receivables are
generally due when billed and the retainage is due upon
completion of the construction contract.
Contracts receivable consist of the following at
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
$
|
261,541
|
|
|
$
|
124,162
|
|
Retainage
|
|
|
1,110,032
|
|
|
|
679,874
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,371,573
|
|
|
$
|
804,036
|
|
|
|
|
|
|
|
|
|
|
No allowance for doubtful accounts has been provided since
management considers all accounts to be collectible.
Property and equipment: Property and
equipment is stated at cost. Depreciation is computed over the
following estimated useful lives of the assets:
|
|
|
|
|
|
|
Years
|
|
Buildings
|
|
|
39.5
|
|
Equipment, furniture and fixtures
|
|
|
5 - 7
|
|
Callbacks and warranties: The Company
accrues costs related to work necessary to be performed on
contracts, which are complete but have job performance issues,
when they become aware of the deficiencies and can reasonably
estimate the costs necessary to alleviate the deficiency. At
December 31, 2006 and 2005, there were no costs accrued
related to work to be performed subsequent to year end on
contracts which were complete at December 31, 2006 and 2005.
Income taxes: The Company is a limited
liability company under provisions of the Internal Revenue Code
and, as such, does not pay any federal or state income taxes.
The Company’s taxable income is included in the tax returns
of its members, who are responsible for the payment of income
taxes based upon the taxable income of the Company. The Company
intends to make distributions to its members that, at a minimum,
will allow the members to fund their income tax liability
associated with the taxable income of the Company.
Personal assets and liabilities: Road
and Highway Builders, LLC is a limited liability company and is
treated as a partnership for income tax purposes. In accordance
with the generally accepted method of presenting financial
statements for limited liability companies, the financial
statements do not include the personal assets and liabilities of
the members, including their obligation for income taxes on
their distributive shares of the net income of the company or
their rights to refunds on its net loss, nor any provision for
income tax expense or an income tax refund.
|
|
Note 2.
|
Costs and
Estimated Earnings on Uncompleted Contracts
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total amount of contracts in process
|
|
$
|
109,484,576
|
|
|
$
|
57,899,759
|
|
|
|
|
|
|
|
|
|
|
Cost incurred on uncompleted contracts
|
|
$
|
42,738,698
|
|
|
$
|
33,049,415
|
|
Estimated earnings
|
|
|
3,280,000
|
|
|
|
1,189,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,018,698
|
|
|
|
34,239,289
|
|
Less billings to date
|
|
|
57,941,097
|
|
|
|
41,392,540
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,922,399
|
)
|
|
$
|
(7,153,251
|
)
|
|
|
|
|
|
|
|
|
|
F-52
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL
STATEMENTS — (Continued)
Included in the accompanying balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
104,709
|
|
|
$
|
400,060
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(12,027,108
|
)
|
|
|
(7,553,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,922,399
|
)
|
|
$
|
(7,153,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
7% Note payable to finance company, due in monthly
installments of $6,624, including interest to January 2010,
secured by equipment
|
|
$
|
214,005
|
|
|
$
|
—
|
|
6% Note payable to finance company, due in monthly
installments of $6,501, including interest to July 2007, secured
by equipment
|
|
|
38,333
|
|
|
|
111,643
|
|
6% Notes payable to finance company, due in monthly
installments of $3,253, including interest to November 2007,
secured by equipment
|
|
|
31,652
|
|
|
|
70,509
|
|
Debt paid off in current year
|
|
|
—
|
|
|
|
144,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,990
|
|
|
|
326,618
|
|
Less current maturities
|
|
|
133,387
|
|
|
|
247,308
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,603
|
|
|
$
|
79,310
|
|
|
|
|
|
|
|
|
|
|
Approximate maturities of long-term debt are as follows: 2007
$133,000; 2008 $71,000; 2009 $76,000 and 2010 $4,000.
|
|
Note 4.
|
Lease
Obligations
|
The Company leases office space and equipment under long-term
lease agreements. These leases are classified as operating
leases and are due to expire through 2008. The Company is
required to pay a monthly common area charge in addition to the
base rent under the lease for office space.
Rental expense for operating leases was $89,241 and $178,096 for
the years ended December 31, 2006 and 2005, respectively.
Minimum lease payments for operating leases in future years are
as follows: 2007 $34,560 and 2008 $17,280.
|
|
Note 5.
|
Related
Party Transactions
|
Due from related party: The amount due
from related party (Fisher Sand & Gravel Co.) is due
on demand with interest accruing at a variable interest rate,
currently 6%. Total interest income recognized on this note was
$465,969 and $401,580 for the years ended December 31, 2006
and 2005, respectively. $49,010 and $112,733 of accrued interest
receivable is due from Fisher at December 31, 2006 and
2005, respectively.
Fisher charges a management fee for administrative services to
the Company. Total fees were $60,000 and $60,000 for the years
ended December 31, 2006 and 2005, respectively.
In addition, Fisher works as a subcontractor on certain
construction projects. Total amounts incurred to Fisher on
subcontracts was $551,694 and $219,655 for the years ended
December 31, 2006 and 2005,
F-53
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL
STATEMENTS — (Continued)
respectively. At December 31, 2006 and 2005, $204,277 and
$31,950, respectively, were included in accounts payable to
Fisher.
Following is a reconciliation of the backlog of signed contracts
on which work had commenced:
|
|
|
|
|
Balance of signed but unperformed work at December 31, 2005
|
|
$
|
23,660,470
|
|
New contracts and change orders during the year ended
December 31, 2006
|
|
|
76,968,177
|
|
|
|
|
|
|
|
|
|
100,628,647
|
|
Less contract revenue earned during the year ended
December 31, 2006
|
|
|
37,162,769
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
63,465,878
|
|
|
|
|
|
|
The Company has guaranteed the contract performance bonds of
Fisher Sand & Gravel Co. As of December 31, 2006,
there were no material claims pending against the surety of
these performance bonds.
|
|
Note 8.
|
Member
Purchase Agreement
|
An agreement dated February 21, 2006 between the members
gives Fisher Sand & Gravel Co. (Fisher) first option
to purchase Richard H. Buenting’s (Buenting) member
interest in Road and Highway Builders, LLC upon Buenting’s
death. Road and Highway Builders, LLC is required to carry
$10,000,000 of life insurance on Buenting, the death benefit
proceeds of which must be paid to Buenting’s wife in the
event of his death. This payment will be deemed to be the
exercise of Fisher’s option to purchase.
F-54
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Contracts
|
|
$
|
5,376,930
|
|
|
$
|
1,371,573
|
|
Interest
|
|
|
57,254
|
|
|
|
49,010
|
|
Due from related party
|
|
|
11,999,999
|
|
|
|
11,311,477
|
|
Inventory
|
|
|
448,636
|
|
|
|
—
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
553,127
|
|
|
|
104,709
|
|
Prepaid expenses
|
|
|
236,737
|
|
|
|
24,812
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,672,683
|
|
|
|
12,861,581
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
621,546
|
|
|
|
621,546
|
|
Water rights
|
|
|
200,000
|
|
|
|
—
|
|
Buildings
|
|
|
1,184,842
|
|
|
|
1,184,842
|
|
Equipment
|
|
|
15,688,298
|
|
|
|
11,479,923
|
|
Furniture and fixtures
|
|
|
17,569
|
|
|
|
13,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,712,255
|
|
|
|
13,300,280
|
|
Less accumulated depreciation
|
|
|
6,718,867
|
|
|
|
5,588,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,993,388
|
|
|
|
7,711,710
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,666,071
|
|
|
$
|
20,573,291
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
$
|
1,756,332
|
|
|
$
|
723,670
|
|
Current maturities of long-term debt
|
|
|
67,363
|
|
|
|
133,387
|
|
Accounts payable
|
|
|
5,886,127
|
|
|
|
1,506,486
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
3,034,652
|
|
|
|
12,027,108
|
|
Accrued expenses
|
|
|
665,975
|
|
|
|
73,828
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,410,449
|
|
|
|
14,464,479
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, less current maturities
|
|
|
100,913
|
|
|
|
150,603
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingency
|
|
|
|
|
|
|
|
|
Members’ Equity
|
|
|
18,154,709
|
|
|
|
5,958,209
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,666,071
|
|
|
$
|
20,573,291
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-55
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
CONDENSED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Earned contract revenues
|
|
$
|
28,583,357
|
|
|
$
|
14,594,400
|
|
|
$
|
64,919,898
|
|
|
$
|
29,588,474
|
|
Cost of earned contract revenues
|
|
|
18,695,453
|
|
|
|
12,845,108
|
|
|
|
44,114,876
|
|
|
|
24,798,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,887,904
|
|
|
|
1,749,292
|
|
|
|
20,805,022
|
|
|
|
4,790,220
|
|
Percent of revenues
|
|
|
34.6
|
%
|
|
|
12.0
|
%
|
|
|
32.0
|
%
|
|
|
16.2
|
%
|
General and administrative expenses
|
|
|
122,555
|
|
|
|
127,058
|
|
|
|
399,348
|
|
|
|
357,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,765,349
|
|
|
|
1,622,234
|
|
|
|
20,405,674
|
|
|
|
4,432,871
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
168,260
|
|
|
|
147,177
|
|
|
|
470,926
|
|
|
|
334,284
|
|
Interest expense
|
|
|
(3,438
|
)
|
|
|
(2,735
|
)
|
|
|
(70,286
|
)
|
|
|
(48,750
|
)
|
Miscellaneous
|
|
|
86,055
|
|
|
|
19,441
|
|
|
|
90,186
|
|
|
|
535,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,016,226
|
|
|
$
|
1,786,117
|
|
|
$
|
20,896,500
|
|
|
$
|
5,253,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-56
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
CONDENSED STATEMENTS OF MEMBERS’ EQUITY
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Balance at January 1, 2006
|
|
$
|
4,139,607
|
|
Distributions
|
|
|
(2,400,000
|
)
|
Net income
|
|
|
5,253,662
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
6,993,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Balance at January 1, 2007
|
|
$
|
5,958,209
|
|
Distributions
|
|
|
(8,700,000
|
)
|
Net income
|
|
|
20,896,500
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
18,154,709
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-57
ROAD AND
HIGHWAY BUILDERS, LLC
(A Limited Liability Company)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,896,500
|
|
|
$
|
5,253,662
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,130,296
|
|
|
|
1,107,005
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) in receivables
|
|
|
(4,013,601
|
)
|
|
|
(3,990,155
|
)
|
(Increase) in inventory
|
|
|
(448,636
|
)
|
|
|
—
|
|
(Increase) decrease in costs and estimated earnings in excess of
billings on uncompleted contracts
|
|
|
(448,418
|
)
|
|
|
169,602
|
|
(Increase) in prepaid expenses
|
|
|
(211,925
|
)
|
|
|
(283,737
|
)
|
Increase in checks issued in excess of bank balance
|
|
|
1,032,662
|
|
|
|
540,275
|
|
Increase in accounts payable
|
|
|
4,329,060
|
|
|
|
2,584,349
|
|
Increase (decrease) in billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
(8,992,456
|
)
|
|
|
3,770,135
|
|
Increase in accrued expenses
|
|
|
592,147
|
|
|
|
173,382
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,865,629
|
|
|
|
9,324,518
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Principal (advances) on due from related party, net
|
|
|
(688,522
|
)
|
|
|
(4,127,058
|
)
|
Purchase of property and equipment
|
|
|
(4,361,393
|
)
|
|
|
(2,562,544
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,049,915
|
)
|
|
|
(6,689,602
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(115,714
|
)
|
|
|
(234,916
|
)
|
Cash distributions to members
|
|
|
(8,700,000
|
)
|
|
|
(2,400,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(8,815,714
|
)
|
|
|
(2,634,916
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
—
|
|
|
|
—
|
|
Cash
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
70,286
|
|
|
$
|
48,750
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
Property and equipment acquired with accounts payable
|
|
$
|
50,581
|
|
|
$
|
—
|
|
See Notes to Condensed Financial Statements.
F-58
ROAD AND
HIGHWAY BUILDERS, LLC
(A limited Liability Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Note 1.
|
Basis of
Presentation and Significant Accounting Policies
|
The accompanying condensed balance sheet as of December 31,
2006 has been derived from audited financial statements. The
unaudited interim condensed financial statements of Road and
Highway Builders, LLC reflect all adjustments consisting only of
normal recurring adjustments that are, in the opinion of
management, necessary for a fair presentation of the
Company’s financial position and results of operations and
cash flows. The results for the three and nine months ended
September 30, 2007 are not necessarily indicative of the
results that may be expected for a full fiscal year. Certain
information and note disclosures normally included in annual
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although
the Company believes that the disclosures made are adequate to
make the information not misleading. These condensed financial
statements should be read in conjunction with the Company’s
audited financial statements and notes thereto as of and for the
year ended December 31, 2006. Significant changes to the
Company’s accounting policies and newly adopted standards
are disclosed below.
Inventory: Inventories are stated at
the lower of cost or market and consist of extracted raw
materials.
Property and equipment: Property and
equipment is stated at cost. Depreciation is computed over the
following estimated useful lives of the assets:
|
|
|
|
|
|
|
Years
|
|
Buildings
|
|
|
39.5
|
|
Water rights
|
|
|
30
|
|
Equipment, furniture and fixtures
|
|
|
5 - 7
|
|
Income taxes: The Company is organized
as a limited liability company under Nevada law. Under this type
of organization, the Company is treated as a partnership for
federal and state income tax purposes with earnings or losses
passing through to the members and being taxed at the member
level. Accordingly, no income tax provision is reflected in the
statements of income.
The Company files income tax returns in the U.S. federal
jurisdiction and (when required) various state jurisdictions.
Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the
Company is no longer subject to the U.S. federal, state or
local income tax examinations by tax authorities for the years
before 2004.
The provisions of Financial Accounting Standards Board
Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), were effective on January 1, 2007. The
Company recognized no financial statement impact on the adoption
of Interpretation 48 as it maintains that its tax status as a
pass through entity is proper.
Contract receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
$
|
4,905,147
|
|
|
$
|
261,541
|
|
Retainage
|
|
|
471,783
|
|
|
|
1,110,032
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,376,930
|
|
|
$
|
1,371,573
|
|
|
|
|
|
|
|
|
|
|
F-59
ROAD AND
HIGHWAY BUILDERS, LLC
(A limited Liability Company)
NOTES TO CONDENSED FINANCIAL
STATEMENTS — (Continued)
|
|
Note 3.
|
Costs and
Estimated Earnings on Uncompleted Contracts
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total amount of contracts in process
|
|
$
|
217,955,833
|
|
|
$
|
109,484,576
|
|
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
70,514,177
|
|
|
$
|
42,738,698
|
|
Estimated earnings
|
|
|
17,312,771
|
|
|
|
3,280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,826,948
|
|
|
|
46,018,698
|
|
Less billings to date
|
|
|
90,308,473
|
|
|
|
57,941,097
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,481,525
|
)
|
|
$
|
(11,922,399
|
)
|
|
|
|
|
|
|
|
|
|
Included in the accompanying balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
553,127
|
|
|
$
|
104,709
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(3,034,652
|
)
|
|
|
(12,027,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,481,525
|
)
|
|
$
|
(11,922,399
|
)
|
|
|
|
|
|
|
|
|
|
The Company operates primarily as a general road construction
contractor in the state of Nevada. The work is performed under
construction contracts acquired by bid primarily from the Nevada
Department of Transportation. The recognition of earnings based
upon estimates of percent complete on a contract by contract
basis is a particularly sensitive estimate that is subject to
significant change in the near term. During 2007, earnings were
recognized on various contracts which were disproportionate to
the percent of work completed during the period due to
negotiated and completed change orders, cost and expense
efficiencies, lower than expected materials costs, minimal
rework and favorable weather working conditions gained after
preliminary bidding and contract work. Cumulative profits
recognized as of December 31, 2006 and 2005, respectively,
were approximately $7,700,000 and $2,700,000 lower than it would
have been had the actual performance of these contracts,
including all final adjustments, been known as of
December 31, 2006 and 2005, respectively. Net income was
higher for the three and nine months ended September 30,
2007 by approximately $2,900,000 and $7,700,000, respectively.
Net income was higher for the three and nine months ended
September 30, 2006 by approximately $200,000 and
$2,700,000, respectively.
|
|
Note 4.
|
Related
Party Transactions
|
The amount due from related party (Fisher Sand &
Gravel Co.) is due on demand with interest accruing at a
variable interest rate, currently 5.32%. Total interest income
recognized on this note was $452,646 and $323,592 for the nine
months ended September 30, 2007 and 2006, respectively.
$57,254 of accrued interest receivable is due from Fisher at
September 30, 2007.
Fisher charges a management fee for administrative services to
the Company. Total fees were $45,000 for the nine months ended
September 30, 2007 and 2006, respectively.
In addition, Fisher works as a subcontractor on certain
construction projects. There were no amounts incurred to Fisher
on subcontracts for the nine months ended September 30,
2007 and $374,850 for the nine months ended September 30,
2006. At September 30, 2007, $148,708 was included in
accounts payable to Fisher.
F-60
ROAD AND
HIGHWAY BUILDERS, LLC
(A limited Liability Company)
NOTES TO CONDENSED FINANCIAL
STATEMENTS — (Continued)
Following is a reconciliation of the backlog of signed contracts
on which work had commenced:
|
|
|
|
|
Balance of signed but unperformed work at December 31, 2006
|
|
$
|
63,465,878
|
|
New contracts and change orders during the nine months ended
September 30, 2007
|
|
|
131,582,905
|
|
|
|
|
|
|
|
|
|
195,048,783
|
|
Less contract revenue earned during the nine months ended
September 30, 2007
|
|
|
64,919,898
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
130,128,885
|
|
|
|
|
|
|
The Company obtains surety bonding through a joint program with
Fisher Sand and Gravel Co. (Fisher). The maximum bonding
capacity in this program is $670,000,000. The Company and Fisher
have jointly guaranteed all outstanding bonds. The Company could
be compelled to honor construction contracts in the event of
nonperformance by Fisher Sand & Gravel on the
contracts. The Company retains the right to recourse against
Fisher Sand & Gravel in the event the guarantee is
called. As of September 30, 2007, there were no material
claims pending against the surety of these performance bonds. No
liability has been recognized for this guarantee.
|
|
Note 7.
|
Subsequent
Events
|
In October 2007, the Company made $6,000,000 in distributions to
its members.
On October 31, 2007, the members sold 91.67% of their
membership interest for $53,000,000 to Sterling Construction
Company, Inc.
F-61
1,600,000 Shares
Sterling Construction Company,
Inc.
Common Stock
PROSPECTUS
D.A. Davidson &
Co.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 14.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the various costs and expenses to
be paid by us in connection with the sale and distribution of
the shares of common stock being registered hereby, other than
the estimated underwriting discounts and commissions. All
amounts shown are estimates except for the SEC registration fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
1,377
|
|
Nasdaq listing fee
|
|
|
18,400
|
|
Transfer agent and registrar fees and expenses
|
|
|
10,000
|
|
Accounting fees and expenses
|
|
|
200,000
|
|
Legal fees and expenses
|
|
|
250,000
|
|
Unallocated underwriters’ expenses
|
|
|
100,000
|
|
Printing and engraving expenses
|
|
|
95,000
|
|
Miscellaneous
|
|
|
100,223
|
|
|
|
|
|
|
Total
|
|
$
|
775,000
|
|
|
|
|
|
|
|
|
Item 15.
|
Indemnification
of Directors and Officers
|
We are a Delaware corporation. Section 145 of the Delaware
General Corporation Law, or the DGCL, authorizes a court to
award, or a corporation’s board of directors to grant,
indemnity under certain circumstances to directors, officers,
employees or agents in connection with actions, suits or
proceedings, by reason of the fact that the person is or was a
director, officer, employee or agent, against expenses and
liabilities incurred in such actions, suits or proceedings so
long as they acted in good faith and in a manner the person
reasonably believed to be in, or not opposed to, the best
interests of the company, and with respect to any criminal
action if they had no reasonable cause to believe their conduct
was unlawful. With respect to suits by or in the right of such
corporation, however, indemnification is generally limited to
attorneys’ fees and other expenses actually and reasonably
incurred and is not available if such person is adjudged to be
liable to such corporation unless the court determines that
indemnification is appropriate.
As permitted by the DGCL, our restated and amended certificate
of incorporation, as amended, includes a provision that
eliminates the personal liability of our directors to us or our
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability:
|
|
|
|
•
|
for any breach of the director’s duty of loyalty to us or
our stockholders;
|
|
|
•
|
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
|
|
|
•
|
under section 174 of the DGCL regarding unlawful dividends
and stock purchases; or
|
|
|
•
|
for any transaction for which the director derived an improper
personal benefit.
|
As permitted by the DGCL, our restated and amended certificate
of incorporation, as amended, provides that:
|
|
|
|
•
|
we are required to indemnify our directors and officers to the
fullest extent permitted by Delaware law, subject to very
limited exceptions;
|
|
|
•
|
we may indemnify our other employees and agents to the fullest
extent permitted by Delaware law, subject to very limited
exceptions;
|
|
|
•
|
we are required to advance expenses, as incurred, to our
directors and officers in connection with a legal proceeding to
the fullest extent permitted by the DGCL, subject to very
limited exceptions;
|
|
|
•
|
we may advance expenses, as incurred, to our employees and
agents in connection with a legal proceeding; and
|
|
|
•
|
the rights conferred in our certificate of incorporation are not
exclusive.
|
II-1
The indemnification provisions in our restated and amended
certificate of incorporation, as amended, may be sufficiently
broad to permit indemnification of our directors and officers
for liabilities arising under the Securities Act.
Under Delaware law, corporations also have the power to purchase
and maintain insurance for directors, officers, employees and
agents. Sterling Construction Company, Inc. and its subsidiaries
are covered by liability insurance policies which indemnify our
directors and officers against loss arising from claims by
reason of their legal liability for acts as such directors,
officers or trustees, subject to limitations and conditions as
set forth in the policies.
The foregoing discussion of our restated and amended certificate
of incorporation, as amended, and Delaware law is not intended
to be exhaustive and is qualified in its entirety by such
certificate of incorporation or law.
The exhibits listed on the Exhibit Index to this
Registration Statement are hereby incorporated by reference.
a. The undersigned registrant hereby undertakes:
|
|
|
|
1.
|
To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
|
i. To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
|
|
|
|
ii.
|
To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement.
|
|
|
|
|
iii.
|
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
|
provided however, that paragraphs (a)(1)(i), (a)(1)(ii)
and (a)(1)(iii) of this section do not apply if the registration
statement is on
Form S-3
and the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with
or furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the
registration statement, or is contained in a form of prospectus
filed pursuant to Rule 424(b) that is part of the
registration statement.
|
|
|
|
2.
|
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
|
|
|
3.
|
To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
|
II-2
|
|
|
|
4.
|
That, for the purpose of determining liability under the
Securities Act of 1933 to any purchaser:
|
|
|
|
|
i.
|
Each prospectus filed by the registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration
statement; and
|
|
|
|
|
ii.
|
Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in
reliance on Rule 430B relating to an offering made pursuant
to Rule 415(a)(1)(i), (vii) or (x) for the
purpose of providing the information required by
section 10(a) of the Securities Act of 1933 shall be deemed
to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or
made in any such document immediately prior to such effective
date.
|
|
|
|
|
5.
|
That, for the purpose of determining liability of the registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities:
|
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
|
|
|
|
i.
|
Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed
pursuant to Rule 424;
|
|
|
|
|
ii.
|
Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred
to by the undersigned registrant;
|
|
|
|
|
iii.
|
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
|
|
|
|
|
iv.
|
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
|
|
|
|
|
b.
|
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the registrant’s annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee
benefit plan’s annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
|
|
|
c.
|
The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the
requirements of
Rule 14a-3
or
Rule 14c-3
under the Securities Exchange Act of 1934; and, where
|
II-3
|
|
|
|
|
interim financial information required to be presented by
Article 3 of
Regulation S-X
are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such
interim financial information.
|
|
|
|
|
d.
|
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
|
e. The undersigned registrant hereby undertakes that:
|
|
|
|
1.
|
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
|
|
|
2.
|
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
|
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-3
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Houston, Texas, on this 7th day of December, 2007.
STERLING CONSTRUCTION COMPANY, INC.
|
|
|
|
By:
|
/s/ Patrick
T. Manning
|
Name: Patrick T. Manning
|
|
|
|
Title:
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities held on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Patrick
T. Manning
Patrick
T. Manning
|
|
Chairman of the Board of Directors; Chief Executive Officer
(Principal Executive Officer)
|
|
December 7, 2007
|
|
|
|
|
|
/s/ Joseph
P. Harper, Sr.
Joseph
P. Harper, Sr.
|
|
President, Chief Operating Officer & Treasurer;
Director
|
|
December 7, 2007
|
|
|
|
|
|
/s/ James
H. Allen, Jr.
James
H. Allen, Jr.
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
December 7, 2007
|
|
|
|
|
|
*
John
D. Abernathy
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
*
Robert
W. Frickel
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
*
Donald
P. Fusilli, Jr.
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
*
Maarten
D. Hemsley
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
*
Christopher
H.B. Mills
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
*
Milton
L. Scott
|
|
Director
|
|
December 7, 2007
|
II-5
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
David
R.A. Steadman
|
|
Director
|
|
December 7, 2007
|
|
|
|
|
|
* /s/ Joseph
P. Harper, Sr.
Joseph
P. Harper, Sr.Attorney-in-Fact
|
|
|
|
|
II-6
EXHIBIT LIST
|
|
|
|
|
Number
|
|
Exhibit Title
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement between Sterling Construction
Company, Inc. and the underwriter named therein.
|
|
4
|
.1
|
|
Restated and Amended Certificate of Incorporation of Oakhurst
Company, Inc., dated as of September 25, 1995 (incorporated
by reference to Exhibit 3.1 to Sterling Construction
Company, Inc.’s Registration Statement on
Form S-1,
filed on November 17, 2005 (SEC File number
333-129780)).
|
|
4
|
.2
|
|
Certificate of Amendment of the Certificate of Incorporation of
Oakhurst Company, Inc., dated as of November 12, 2001
(incorporated by reference to Exhibit 3.2 to Sterling
Construction Company, Inc.’s Registration Statement on
Form S-1,
filed on November 17, 2005 (SEC File number
333-129780)).
|
|
4
|
.3
|
|
Bylaws of Oakhurst Company, Inc. (incorporated by reference to
Exhibit 3.2 to its Annual Report on
Form 10-K
for the fiscal year ended February 28, 1998, filed on
May 29, 1998 (SEC File
No. 000-19450)).
|
|
4
|
.4
|
|
Amendment to Bylaws of Oakhurst Company, Inc. (incorporated by
reference to Exhibit 3.1 to its Current Report on
Form 8-K,
filed on November 13, 2007 (SEC File
No. 001-31993)).
|
|
4
|
.5
|
|
Certificate of Designations of Oakhurst Company, Inc.’s
Series A Junior Participating Preferred Stock, dated as of
February 10, 1998 (incorporated by reference to
Exhibit 4.2 to its Annual Report on
Form 10-K,
filed on May 29, 1998 (SEC File
No. 000-19450)).
|
|
4
|
.6
|
|
Rights Agreement, dated as of December 29, 1998, by and
between Oakhurst Company, Inc. and American Stock
Transfer & Trust Company, including the form of
Series A Certificate of Designation, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively (incorporated by
reference to Exhibit 99.1 to Oakhurst Company, Inc.’s
Registration Statement on
Form 8-A,
filed on January 5, 1999 (SEC File
No. 000-19450)).
|
|
4
|
.7
|
|
Form of Common Stock Certificate of Sterling Construction
Company, Inc. (incorporated by reference to Exhibit 4.5 to
its
Form 8-A,
filed on January 11, 2006 (SEC File
No. 011-31993)).
|
|
5
|
.1+
|
|
Form of Opinion of Andrews Kurth LLP.
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23
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.1
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Consent of Grant Thornton LLP, independent registered public
accounting firm.
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23
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.2
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Consent of McGladrey & Pullen LLP, independent
auditors.
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23
|
.3+
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Form of Consent of Andrews Kurth LLP (included in
Exhibit 5.1).
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24
|
.1+
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Power of Attorney (included on the signature page and the page
following the signature page).
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* |
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To be filed by amendment. |