UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| þ | | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Fiscal Year Ended January 31, 20082009
or
or | | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____________ to _____________
Commission File Number 001-31756
ARGAN, INC.
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | | 13-1947195 |
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| (State or Other Jurisdiction of Incorporation or Organization) | | (IRS.IRS Employer Identification No.) |
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One Church Street, Suite 401,201, Rockville, Maryland | | 20850 |
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| (Address of Principal Executive Offices) | | (Zip Code) |
301-315-0027
301-315-0027
(Issuer'sIssuer’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
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| | Name of Each Exchange |
| Title of Each Class | | on Which Registered |
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| Common Stock, $0.15 par value | | American Stock ExchangeNYSE Amex |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Noxþ.
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.o
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesxþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
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| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filero | | Smaller reporting companyo |
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noxþ
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $31,620,000$86,564,000 on July 31, 20072008 (the last business day of the Registrant’s second fiscal quarter), based upon the closing price on the NASDAQ Electronic Bulletin Board SystemNYSE Amex stock exchange (formerly the American Stock Exchange) reported on that date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of common stock outstanding as of April 21, 2008: 11,120,0268, 2009: 13,444,618 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 20082009 Annual Meeting of Stockholders to be held on June 18, 200823, 2009 are incorporated by reference in Part III.III.
ARGAN, INC. AND SUBSIDIARIES
2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.
Argan, Inc. (“Argan,” the “Company” or “we”Argan”) provides (1) a broad range of engineering, procurement and construction services to the power industry, (2) telecommunications infrastructure installation and maintenance services to utilities, government agencies and other commercial customers, and (3) manufacturing and distribution services to marketers of nutritional supplement products. Accordingly, we operate in three distinct business segments - Power Industry Services, Telecommunications Infrastructure Services and Nutritional Products - and we conduct ourconducts operations through our wholly ownedits wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS LLC”), Gemma Power, Inc., (“GPI”GPS”) and Gemma Power Systems California,that were acquired in December 2006, Vitarich Laboratories, Inc. (“GPS-California”VLI”) (collectively referred to as “GPS”),that was acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) and Vitarich Laboratories, Inc. (“VLI”), respectively. Wethat was acquired SMC, VLI and GPS in July 2003 August 2004(together referred to as the “Company,” “we,” “us,” or “our”). Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operations and December 2006,maintenance services to the power generation and renewable energy markets for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, we develop, manufacture and distribute premium nutritional products. Through SMC, we provide telecommunications infrastructure services including project management, construction and maintenance to the Federal Government, telecommunications and broadband service providers as well as electric utilities. Each of the wholly-owned subsidiaries represents a separate reportable segment — power industry services, nutritional products and telecommunications infrastructure services, respectively.
The net revenues of GPS, VLI and SMC represented approximately 87%91.6%, 8%4.5% and 5%3.9% of the Company’sour consolidated net salesrevenues for the fiscal year ended January 31, 2008.2009.
Holding Company Structure
We intend to make additional acquisitions and/or investments. We intend to have more than one industrial focus and to identify those companies that are in industries with significant potential to grow profitably both internally and through acquisitions. We expect that companies acquired in each of these industrial groups will be held in separate subsidiaries that will be operated in a manner that best provides cashflowcash flows for the Company and value for our stockholders.
We are Argan is a holding company with no operations other than ourits investments in GPS, SMC and VLI. At January 31, 2008,2009, there were no restrictions with respect to intercompanyinter-company payments from GPS, SMC and VLI to Argan.
We wereArgan was organized as a Delaware corporation in May 1961. On October 23, 2003, ourthe stockholders approved a plan providing for thean internal restructuring of the Company whereby weArgan became a holding company, and ourthe operating assets and liabilities relating to ourits Puroflow Incorporated (“Puroflow”) business were transferred to a newly-formed, wholly owned subsidiary. The subsidiary then changed its name to “Puroflow Incorporated” and wethe parent company changed ourits name from Puroflow Incorporated to “Argan, Inc.”
On October 31,In 2003, pursuant to a certain Stock Purchase Agreement (the “Stock Purchase Agreement”), weArgan completed the sale of Puroflow to Western Filter Corporation (“WFC”) for approximately $3.5 million. Proceeds in cash,the amount of which $300,000 is being heldwere placed in escrow, and were included in the consolidated balance sheet at January 31, 2008, in order to indemnify WFC from losses if aany damages resulting from any breach of the representations and warranties made by us pursuant to that sale should occur. During the twelve months ended January 31, 2005, WFC asserted that the Company and its executive officers breached certain representations and warranties under the Stock Purchase Agreement. On March 15, 2007,stock purchase agreement. This escrow fund was liquidated in December 2008 in connection with the District Court grantedsettlement of the Company and its executive officers’ motion for summary judgment, thereby dismissing WFC’s lawsuit againstlitigation with WFC (see additional discussion of the Company and its executive officers in its entirety. WFC has appealed this decision (this matter is discussed in Item 3litigation below).
Merger of Gemma Power Systems, LLC and its affiliates
Affiliates
Pursuant to Agreements and Plans of Merger, Argan acquired GPS on December 8, 2006. The results of operations for GPS have been included in the Company’sour consolidated financial statements since the date of the acquisition.
The acquisition purchase price was $33.1 million, consisting of $12.9 million in cash and $20.2 million from the issuance of 3,666,667 shares of Argan common stock.stock of Argan. The purchase price was funded, in part, by a newan $8.0 million, secured, 4-year term loan which carries an interest rate of LIBOR plus 3.25% (as discussed below). In addition, the Companywe raised $10.7 million through the private offering of 2,853,335 shares of Argan common stock of Argan at a purchase price of $3.75 per share (asas discussed below).below. Pursuant to the acquisition agreement, $12.0 million was deposited into an escrow account. Of this amount, $10.0 million secures a letter of credit to support the issuance of bonding (as discussed below). The remaining amount of $2.0 million was deposited at the closing of the acquisition with payment to the former owners of GPS dependent on the financial performance of GPS for the twelve months ended December 31, 2007. Subsequent toDuring the fiscal year ended January 31, 2008,2009, payment of the remaining $2.0 million was made to the former owners as the earnings before interest, taxes, depreciation and amortization (“EBITDA”) of GPS for the twelve months ended December 31, 2007, as defined in the acquisition agreement, was more than the required amount of $12.0 million.
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Private Sales of Common Stock in 2006
In July 2008, we completed a private placement sale of 2.2 million shares of our common stock to investors at a price of $12.00 per share that provided net proceeds of approximately $25 million. We expect that the proceeds will provide resources to support GPS’s cash requirements relating to the new wind-power energy subsidiary described below and will make available additional collateral to support the bonding requirements associated with future energy plant construction projects. On December 8, 2006, the Companywe completed a private offering of 2,853,335 shares of common stock at a price of $3.75 per share for aggregate proceeds of $10.7 million. The proceeds were used towards the purchase of GPS. Two of the investors, MSRI SBIC, L.P. (“MSRI”) and MSR Fund II, L.P., which acquired 92,793 and 440,540 shares in the offering, respectively, are controlled by Daniel Levinson, a director of the Company. Two other investors, Allen & Company LLC and Allen SBH Investments, LLC (“Allen SBH”) which acquired 80,000 and 266,667 shares in the offering, respectively, are affiliates of James Quinn, a director of the Company. In addition, Mr. Quinn acquired 26,667 shares for his own account.
On May 4, 2006, the Companywe completed a private offering of 760,000 shares of common stock at a price of $2.50 per share for aggregate proceeds of $1.9 million. The CompanyWe used $1.8 million of the proceeds to pay down an equal amount of the subordinated note due Kevin Thomas, the former owner of VLI. The remainder of the proceeds was used for general corporate purposes. Allen SBH and James Quinn acquired 120,000 and 40,000 shares in the offering, respectively. In addition, MSRI acquired 240,000 shares in the offering.
Amendment of Financing Arrangements
On December 11, 2006, Argan amended its financing arrangements with the Bank of America (the “Bank”). The newamended financing arrangements provided a 4-year term loan used in the acquisition of GPS in the amount of $8.0 million ($2.0 million of this loan was deposited into an escrow account at the Bank as discussed above), with interest at LIBOR plus 3.25%, and a revolving loan with a maximum borrowing amount of $4.25 million that is available until May 31, 2010, with interest at LIBOR plus 3.25%. The amended financing arrangement also reduced the interest rate on the then-existing 3-year term loan for VLI to LIBOR plus 3.25%. The principal balance of this loan on the amendment date was approximately $1.4 million. The original term loan was in the amount of $1.5 million with interest at LIBOR plus 3.45%. On August 31, 2006, the Companywe used the $1.5 million in borrowed funds to pay the remaining principal and interest due on the subordinated note with Mr. Thomas. The amended financing arrangements also provided for a new 4-year term loan used in the acquisition of GPS in the amount of $8.0 million with interest at LIBOR plus 3.25% ($2.0 million of this loan was deposited into an escrow account at the Bank as discussed above) and a revolving loan with a maximum borrowing amount of $4.25 million that is available until May 31, 2010, with interest at LIBOR plus 3.25%.
The CompanyWe may obtain standby letters of credit from the Bank in the ordinary course of business not to exceed $10.0 million for surety bonding. On December 11, 2006, the Company pledged $10.0 million to the Bank to secure a standby letter of credit issued by the Bank on behalf of Argan for the benefit of Travelers Casualty and Surety Company of America in connection with the $200.0 million bonding facility provided to GPS.
The financing arrangements require at the Company’s fiscal year-end and at each of the Company’s fiscal quarter-ends (using a rolling 12-month period) that the Company comply with certain financial covenants at its fiscal year-end and at each of its fiscal quarter-ends (using a rolling 12-month period) including covenants that (1) the ratio of total funded debt to EBITDA not exceed 2 to 1, (2) the fixed charge coverage ratio be not less than 1.25 to 1, and (3) the ratio of senior funded debt to EBITDA not exceed 1.50 to 1. The Bank’s consent continues to beis required for acquisitions and divestitures. The Company continues to pledgehas pledged the majority of the Company’s assets to secure the financing arrangements.
The amended financing arrangements contain an acceleration clause which allows the Bank to declare amounts outstanding under the financing arrangementsborrowed amounts due and payable if it determines in good faith that a material adverse change has occurred in the financial condition of the Company or any of its subsidiaries. We believe that the Company will continue to comply with its financial covenants under the financing arrangements. If the Company’s performance does not result in compliance with any of its financial covenants, or if the Bank seeks to exercise its rights under the acceleration clause referred to above, we would seek to modify the financing arrangements, butarrangements. However, there can be no assurance that the Bank would not exercise their rights and remedies under the financing arrangements including accelerating paymentsthe payment of all outstanding senior debt due and payable.debt. At January 31, 2008,2009, the Company was in compliance with the financial covenants of its amended financing arrangements.
Power Industry Services
Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operating and maintenance services to the energy market serving a wide range of customers, managing the completion of projects for public utilities, independent power project owners, municipalities, public institutions and private industry.
The extensive design, construction, start-up and operating experience of GPSour power industry services business has grown with the completion of projects for more than 70 facilities representing over 9,000 megawatts (“MW”) of power-generating capacity. Power projects have included combined-cycle cogeneration facilities, emergency peaking plants, boiler plant construction and renovation efforts, and utility system maintenance. In the current year, we substantially completed the construction of a natural gas-fired power plant in California and an electricity peaking facility in Connecticut.
We have broadened our experience into the rapidly growing alternative fuels industry by providing engineering, procurement and construction services to the owners of wood-fired power plants, wind plants and other alternative power energy facilities. During the past two years, we substantially completed construction of three biodiesel production plants in Texas with a fourth production facility scheduled for completion in fiscal year 2010. In the year ended January 31, 2008, we completed the construction of a natural gas-fired power plant in California and an electricity peaking facility in Connecticut. The net revenues of GPS, which represent our power industry services business segment, were $202.3 million for the fiscal year ended January 31, 2009, or 91.6% of our consolidated net revenues for the year.
In May 2008, we announced that GPS signed an engineering, procurement and construction agreement with Pacific Gas & Electric Company (“PG&E”) in the amount of $340 million for the design and construction of a natural gas-fired power plant in Colusa, California. This energy plant is designed to be a 640 megawatt combined cycle facility and construction is expected to be completed in 2010. We announced the receipt from PG&E of a full notice to proceed on this project in October 2008. GPS commenced activity on this project in the fourth quarter ended January 31, 2008 under an interim notice to proceed that it received from PG&E in December 2007.
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In October 2008, we announced that GPS signed an engineering, procurement and construction agreement and received a limited notice to proceed from Competitive Power Ventures Inc. (“CPV”) to design and build the Sentinel Power Project. This project, valued at $211 million, consists of eight simple cycle gas-fired peaking plants with a total power rating of 800 megawatts to be located in southern California. The project is currently expected to be completed in 2012. CPV has a power supply agreement with Southern California Edison.
ClimateWe anticipate sustained demand for engineering and construction services related to the development of new gas-fired power plants because these facilities are more efficient and produce fewer emissions than coal-fired power plants. In addition, climate change concerns combined withand foreign oil prices at unprecedented levelsdependency concerns are driving an increase in renewable energy legislation, government incentives and commercialization. Certain European countries and certain states in the USU.S. are requiring that upwards of 20% of future energy be produced from renewable energy sources in efforts to reduce carbon dioxide emissions that are blamed, in part, for global warming. In addition, theThe annual amount of investment capital flowing into renewable energy projects has climbed.climbed over recent years. Very large corporations as well as venture capital and other investment firms are directinghave directed funds to the renewable energy sector.
In June 2008, the current year, we substantially completed projectsCompany announced that GPS had entered into a business partnership with Invenergy Wind Management, LLC for a large biodiesel facility near Houston, Texas,the design and have projects underway for a biofuels production facility in Port Neches, Texas.
We substantially completed the construction of an energy plant during the fiscal year ended January 31, 2008 where we incurred a total project loss of approximately $10.8 million, including $12.0 million that was recordedwind-energy farms located in the current fiscal year. We incurred unexpected costs in connection with the completionUnited States and Canada. The business partners each own 50% of this work. Unexpected costs included labor productivity being below expectations and previous experience, labor rate increases due to overtime requirements to meet the completion date, equipment defects and engineering issues resulting in considerable rework and additional materials.
At January 31, 2008, GPS had a construction project which was in suspension pending the efforts of the customer to obtain financing to complete the construction of an ethanol facility. Under the terms of the amendednew company, Gemma Renewable Power, LLC (“GRP”). GRP provides engineering, procurement and construction agreement withservices for new wind farms generating electrical power including the customer (the “EPC Agreement”), March 19, 2008 wasdesign and construction of roads, foundations, and electrical collection systems, as well as the deadline for the customer to obtain financing for the project. If such financing was not obtained, GPS would be allowed to terminate the EPC Agreement at that time. GPS has served termination notice but the customer has not acknowledged the termination or released the construction bond. GPS continues to cooperate with the customer in its efforts to obtain financing. GPS is uncertain as to the ultimate resolutionerection of this matter, but does not anticipate any losses to arise from the resolution of this EPC Agreement.
In December 2007, we announced that GPS hastowers, turbines and blades. GRP received an interiminitial limited notice to proceed from Pacific Gas & Electric Company (“PG&E”) on an approximately $340 million contracta project to design and build the expansion of a natural gas-fired, combined cycle, power plantwind farm in Colusa, California. The Colusa facility will have a capacity of 640 MW with a planned completion date of August 1, 2010. GPS brings specific expertise inLaSalle County, Illinois; the management and constructionestimated contract value of this combined cycle power plant, having completed five facilities of this type to date. We expect to complete the engineering, procurement and construction contract negotiations and receive the full notice to proceed in the near term.project is $50 million.
MaterialsMaterials
ConcurrentIn connection with the engineering and construction of traditional power energy systems, biodiesel plants, ethanol production facilities and other power energy systems, we procure materials on behalf of our customers. Although weWe are not dependent upon any one source for materials that we use to complete thea particular project, we may experience pricing and availability pressures with respect to key components of the project. In the rapidly growing alternative energy industry as well as in the traditional power energy systems industry, materials are becoming increasingly expensive and not always available when needed. Wewe are not currently experiencing difficulties in procuring the necessary materials for our contracted projects. However, we cannot guarantee that in the future there will not be unscheduled delays in the delivery of ordered materials and equipment.
Competition
GPS competes with numerous, well capitalized private and public firms in the construction and engineering services industry. Competitors include SNC-Lavalin Group, Inc., a diversified Canadian construction and engineering firm with over 12,000 employees generating over $5.0 billion in annual revenues; EmcorCH2M HILL Companies, Ltd., a worldwide professional engineering services firm with approximately 24,000 employees and with annual revenues exceeding $5.5 billion; Foster Wheeler AG., an international provider of engineering and construction services and steam generation products with over 14,000 employees and with annual revenues exceeding $6.8 billion; Shaw Group Inc., a provider of mechanical and electricaldiversified firm with approximately 26,000 employees providing consulting, engineering, construction and facilities management services internationallyand with over 27,000 employeesannual revenues of approximately $7.0 billion; and over $5.0 billion in annual revenues; Fluor Corporation, an international engineering, procurement, construction and maintenance company with over 37,00042,000 employees and over $14$22.3 billion in annual revenues; and Shaw Group Inc., a diversified firm with over 27,000 employees providing consulting, engineering, construction and facilities management services and annual revenues exceeding $5.0 billion.revenues. Other large competitors in this industry include Washington Group International, Inc., Granite Construction Incorporated Foster Wheeler Ltd. and Perini Corporation.
business units of URS Corporation and EMCOR Group, Inc.
In order to compete with these firms, we intend to emphasize our expertise in the alternative fuel industry as well as our proven track record developing facilities and services for traditional power energy systems. We believe that we are uniquely positioned to assist in the development and delivery of innovative renewable energy solutions as world energy needs grow and efforts to combat global warming increase.
Customers
The mostThere were two significant customers of GPS for the fiscal year ended January 31, 2008 were four power industry services customers, Altra Biofuels Nebraska, LLC (“ALTRA”), Renewable Bio-Fuels Port Neches LLC (“RBF”), Green Earth Fuels of Houston LLC (“GEF”), and the Connecticut Municipal Electrical Energy Cooperative (“CMEEC”).2009. In total, GPS recognized approximately 90%98.2% of its net revenues for the fiscal year ended January 31, 20082009 under contracts with these two customers. The annual net revenues for these fourtwo customers represented approximately 26%, 22%, 18%49.7% and 13%40.2% of the Company’sour consolidated net revenues for the fiscal year ended January 31, 2008,2009, respectively.
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Contract Backlog
Contract backlog represents the total accumulated value of new workprojects awarded less the amount of net revenue recognized to date on contracts at a specific point in time. We believe contract backlog is an indicator of future net revenues and earnings potential. Although contract backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce contract backlog and the future revenues of GPS.
At January 31, 2008,2009, the Company had entered intoactive power industry service contracts for the construction of seventhree facilities, including four that were substantially completed in fiscal year 2008, representing a total contract backlog of $122$456 million compared to a total contract backlog of $171$122 million at January 31, 2007.
As described above, the Company has also received an interim notice to proceed on a power plant project that it estimates will provide approximately $340 million in revenue over a two and one-half (2 ½) year period.2008. The final notice to proceed is subject to the parties signing a definitive engineering, procurement and construction contract. The estimated value of this contract is not included in the contract backlog amountof GRP, our 50%-owned unconsolidated wind-energy construction company, was $30.8 million at January 31, 2008.2009.
At January 31, 2008, GPS had a construction project which was in suspension pending the efforts of the customer to obtain financing to complete the construction of an ethanol facility. Under the terms of the amended engineering, procurement and construction agreement with the customer (the “EPC Agreement”), March 19, 2008 was the deadline for the customer to obtain financing for the project. If such financing was not obtained, GPS would be allowed to terminate the EPC Agreement at that time. GPS has served termination notice but the customer has not acknowledged the termination or released the construction bond. GPS continues to cooperate with the customer in its efforts to obtain financing. GPS is uncertain as to the ultimate resolution of this matter, but does not anticipate any losses to arise from the resolution of this EPC Agreement.
Regulation
Our power industry service operations are subject to various federal, state and local laws and regulations including: licensing for contractors; building codes; permitting and inspection requirements applicable to construction projects; regulations relating to worker safety and environmental protection; and special bidding, procurement and security clearance requirements on government projects. Many state and local regulations governing construction require permits and licenses to be held by individuals who have passed an examination or met other requirements. We believe that we have all the licenses required to conduct our operations and that we are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses.
TelecommunicationTelecommunications Infrastructure Services
Through SMC, we provide telecommunicationtelecommunications infrastructure services to our regional customers. The services include the structuring, cabling, terminations and connectivity that provide the physical transport for high speed data, voice, video and security networks. We provide both inside plant and outside plant cabling services. The net revenues of SMC, which represent our telecommunications infrastructure services business segment, were $8.6 million for the fiscal year ended January 31, 2009, or 3.9% of our consolidated net revenues for the year.
We provide aThe wide range of inside plant and premises wiring services that we provide to our customers includinginclude AutoCAD design; cable installation; equipment room and telecom closet design and build-out; data rack and cabinet installation; raceway design and installation; and cable identification, testing, labeling and documentation. These services are provided primarily to federal government facilities on a direct and subcontract basis. Such facilities typically require regular upgrades to their wiring systems in order to accommodate improvements in security, telecommunications and network capabilities.
Services provided to our outside premises customers include trenchless directional boring and other underground services, aerial cabling services, and the installation of buried cable and wire communication and electric lines. Our sophisticated directional boring system is electronically guided and can place underground networks of various sizes with little or no restoration required. We utilize aerial bucket trucks, digger derrick trucks and experienced personnel to complete a variety of aerial projects. We also use our equipment and experienced personnel to perform trenching, plowing and back-hoeing for underground communication and power networks, to install a variety of network structures, and to restore work sites. We utilize aerial bucket trucks, digger derrick trucks and experienced personnel to complete a variety of aerial projects. These services are primarily provided to regional communications service providers, electric utilities and other commercial customers.
SMC may have seasonally weaker results in the first and fourth quarters of the fiscal year, and may produce stronger results in the second and third fiscal quarters. This seasonality may beis due to the effect of winter weather on construction and outside plant activities as well as reduced daylight hours and customer budgetary constraints. Certain customers tend to complete budgeted capital expenditures before the end of the calendar year, and postpone additional expenditures until the subsequent fiscal period.
Raw Materials
Generally, our telecommunicationtelecommunications infrastructure services customers supply most or all of the materials required for a particular job and we provide the personnel, tools and equipment to perform the installation services. However, with respect to a portion of our contracts, we may supply part or all of the materials required. In these instances, we are not dependent upon any one source for the materials that we customarily utilize to complete the project. We are not presently experiencing, nor do we anticipate experiencing, any difficulties in procuring an adequate supply of materials.
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Competition
SMC operates in the fragmented and competitive telecommunication and infrastructure services industry. We compete with service providers ranging from small regional companies, which service a single market, to larger firms servicing multiple regions, as well as large national and multi-national contractors. We believe that we compete favorably with the other companies in the telecommunication and utility infrastructure services industry.
We intend to emphasize our high quality reputation, outstanding customer base and highly motivated work force in competing for larger and more diverse contracts. We believe that our high quality and well maintained fleet of vehicles and construction machinery and equipment is essential to meet customers’ needs for high quality and on-time service. We are committed to invest in our repair and maintenance capabilities to maintain the quality and life of our equipment. Additionally, we invest annually in new vehicles and equipment.
Customers
The most significant customers of SMC for the fiscal year ended January 31, 20082009 were Electronic Data Systems Corporation (“EDS”), Southern Maryland Electrical Cooperative (“SMECO”), and Verizon Communications, Inc. (“Verizon”) and Electronic Data Systems Corporation (“EDS”). In total, SMC recognized approximately 82%80.1% of its net revenues for the fiscal year ended January 31, 20082009 under contracts with these customers. Revenues provided by theseHowever, none of SMC’s customers represented approximately 32%, 27% and 23%accounted for net revenues in excess of SMC’s10% of our consolidated net revenues for the fiscal year ended January 31, 2008, and together represented approximately 3.9% of the Company’s consolidated revenues for the current year.2009.
Since December 31, 2007, SMC has been operating without a contract renewal with Verizon. SMC continues to perform services for Verizon at a reduced level of activity while it attempts to work with local Verizon management in negotiating a contract renewal. In April 2008, SMC received an extension of the expiring contract until June 30, 2008. Verizon has been a customer of SMC for more than twenty years.
Contract Backlog
A major share of SMC’s revenue-producing activity is performed pursuant to work orders authorized by customers under master agreements. For example, a substantial number of the projects completed for Verizon, Southern Maryland Electrical Cooperative (“SMECO”)EDS, SMECO and EDSVerizon are completed under the terms of master agreements that include pre-negotiated labor rates.rates or line item prices. At January, 31, 20082009 and 2007,2008, the value of unfulfilled work orders and other customer orders that we believe to be firm was approximately $5.0 million and $3.6 million, and $6.5 million, respectively.
Regulation
Our telecommunicationtelecommunications infrastructure services operations are also subject to various federal, state and local laws and regulations including: licensing for contractors; building codes; permitting and inspection requirements applicable to construction projects; regulations relating to worker safety and environmental protection; and special bidding, procurement and security clearance requirements on government projects. Many state and local regulations governing construction require permits and licenses to be held by individuals who have passed an examination or met other requirements. We believe that SMC has all the licenses required to conduct its operations and that we are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses.
Nutritional Products
Through VLI, we provide research, development and contract manufacturing services focused on producing premium nutritional supplements, vitamins, and whole-food dietary supplements. These products, included in a separate category of foodstuffs called nutraceuticals, provide health benefits beyond standard nutrition such as positive physiological effects or the prevention or amelioration of chronic disease.
Customers include brand merchandisers; network marketers; and catalog, internet, and infomercial distributors. These customers market VLI’s products under various brand names directly to consumers, distributor networks or through vitamin/health food stores, pharmacies, mass merchandisers, and major retailers. Sales to five customers of VLI represented approximately 75% of VLI’s totalNet revenues for the current year. The loss of any one of these customers could have a material adverse effect on this business. However, none of VLI’s customers accounted for revenues in excess of 10% of the Company’s consolidated revenuesnutritional products business segment were approximately $10.1 million for the fiscal year ended January 31, 2009, representing 4.5% of consolidated net revenues. Net revenues from the sale of nutritional products were approximately $16.7 million for the year ended January 31, 2008.
The decrease in net revenues for nutritional products between years was approximately $6.6 million, or 39.6%. Sales to two of VLI’s five largest current year customers have decreased by approximately $3.4 million between years, and VLI lost three of its largest accounts that represented approximately $5.5 million of VLI’s net revenues for the year ended January 31, 2008.
VLI has received an “A” rating from the Natural Products Association (“NPA”) for its compliance with Good Manufacturing Practices (GMP), a certification that has been awarded to only 58less than 1% of the 7,500 members of NPA. Our manufacturing capabilities include high speed encapsulation and tableting, full liquid production, powder production and blending, and softgel and bilingual supplement production. We believe that we are also one of the few vitamin manufacturers to offer homeopathic manufacturing and pasteurization, a capability added in the current fiscal year.pasteurization. Our quality assurance program extends to all of our manufacturing processes including raw material selection, testing, FDA label compliance, and the maintenance of clinical lab conditions and advanced climate control. Quality control practices include a variety of techniques including in-process sampling, finished product inspections, stability studies and certified ingredient analyses.
We intendDespite the difficult business environment, VLI strives to enhance our position inrespond quickly and ably to new or changing customer product requirements. It is dedicated to the growing global nutrition industry through innovative product development and research. We believe that we will be able to expand our distribution channels by providing continuous quality assurance and by focusing on timely delivery of superior, high quality nutraceutical products.
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Competition
Our direct competition consists primarily of publicly and privately owned companies which tend to be highly fragmented in terms of both geographical market coverage and product categories. These companies compete with us on different levels in the development, manufacture, and marketing of nutritional supplements. Many of these companies have broader product lines and larger sales volume, are significantly larger than we are, have greater name recognition, financial, personnel, distribution, and other resources than we do, and may be better able to withstand volatile market conditions. There can be no assurance that our customers and potential customers will regard our products and services as sufficiently distinguishable from competitive products.those of competitors. Our inability to compete successfully would have a material adverse effect on our business.
We believe our competitive advantages include our highly rated manufacturing processes, our capability to produce products in a variety of forms, our record of delivering quality products with minimum lead times, and our ability to assist the customer with product research, development and design; the evaluation of packaging options; and marketing. We also believe that we are an efficient manufacturer of the products that are ordered. However, the market for nutritional products is highly competitive. As a result, we often encounter customers making buy decisions that are based, in large part, on price thus creating strong adverse pressure on VLI’s gross margin percentages.
Customers
Net sales of nutritional products were approximately $16.7 million for the year ended January 31, 2008, representing 8% of consolidated net sales. Net sales of nutritional products were approximately $20.8 million for the year ended January 31, 2007. The decrease in net sales of nutritional products between years of approximately $4.2 million, or 20%, was caused primarily by the loss of one of VLI’s largest customers, the Rob Reiss Companies, which represented approximately 20% of this segment’s net sales in the prior-year, and a 34% reduction in the level of net sales made to VLI’s largest customer, TriVita Corporation (“TriVita”). Net sales to TriVita comprised approximately 25% of VLI’s net sales for the current year. Despite an extremely competitive business environment, this business increased its sales to three of VLI’s largest customers, CyberWize, Renew Life and Market America, during the current year.
VLI is primarily a contract manufacturer of nutritional products. The ability to quickly replace lost customers or to increase the product offerings sold to existing customers is hampered by the long sales cycle inherent in our type of business. The length of time between the beginning of contract negotiation and the first sale to a new customer could exceed six months including extended periods of product testing and acceptance.
Customers include brand merchandisers; network marketers; and catalog, internet, and infomercial distributors. These customers market VLI’s products under various brand names directly to consumers, distributor networks or through vitamin/health food stores, pharmacies, mass merchandisers, and major retailers. Sales of products to the five largest customers of VLI represented approximately 70.4% of VLI’s product revenues for the current year. The loss of any one of these customers could have a material adverse effect on this business. However, none of VLI’s customers accounted for net revenues in excess of 10% of our consolidated net revenues for the fiscal year ended January 31, 2009.
Raw Materials
Raw materials used in VLI’s products consist of adaptogen extracts, herbal botanicals, minerals, nutrients, and flavorings in dry powder and/or liquid form, capsules, finished pills and tablets and packaging components necessary for distribution of finished products. We purchase the raw materials and components from manufacturers in the United States and foreign countries. Although we purchase materials from reputable suppliers, we continuously evaluate and test samples, obtain certificates of analysis, material safety data sheets, and supporting research and documentation of active and inactive ingredients. We have not experienced difficulty in obtaining adequate sources of supply, and generally a number of suppliers are available for most raw materials. However, we do obtain most of our adaptogen ingredient from a single overseas supplier. Due to the long lead-time associated with this ingredient, VLI typically issues large purchase orders that schedule product deliveries 3 to 6 months from the order date. In addition, VLI is required to make purchase deposits with the supplier that cover 25% to 50% of the initial purchase order amount. Although we cannot assure that adequate sources will continue to be available, we believe we should be able to secure sufficient raw materials in the future.
Research and Development Activities
Research and development is a key component of VLI’s business development efforts. VLI develops product formulations in conjunction with and for its customers. VLI focuses its research and development capabilities particularly on new and emerging raw materials and products. Research and development expenses relate primarily to VLI’s proprietary formulations and are expensed as incurred. VLI recorded $66,000 and $153,000 of research and development expenses during the years ended January 31, 2008 and 2007, respectively.
Order Backlog
Customers submit purchase orders to VLI that schedule the delivery of certain quantities of specified products at pre-negotiated prices. Typically, the product deliveries are scheduled for dates that are within 3 to 4 months from the date of the order. At January, 31, 20082009 and 2007,2008, the value of unfulfilled purchase orders that we believe to be firm was approximately $1.5 million and $2.0 million, and $4.3 million, respectively.
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Regulation
The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our nutraceutical products are subject to regulation by one or more federal agencies, including the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, the Environmental Protection Agency, and also by various agencies of the states, localities and foreign countries in which our products are sold. In particular, the FDA, pursuant to the Federal Food, Drug and Cosmetic Act (FDCA), regulates the formulation, manufacturing, packaging, labeling, distribution and sale of dietary supplements, including vitamins, minerals and herbs, and of over-the-counter (OTC) drugs, while the FTC has jurisdiction to regulate advertising of these products, and the Postal Service regulates advertising claims with respect to such products sold by mail order. The FDCA has been amended several times with respect to dietary supplements, most recently by the Nutrition Labeling and Education Act of 1990 and the Dietary Supplement Health and Education Act of 1994. Our inability to comply with these federal regulations may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions.
In addition, our nutraceutical products are also subject to regulations under various state and local laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising, and distribution of dietary supplements and OTC drugs.
Safety, Risk Management, Insurance and Performance Bonds
We are committed to ensuring that the employees of each of our businesses perform their work in a safe environment. We regularly communicate with our employees to promote safety and to instill safe work habits. GPS and SMC each have an experienced full time safety director committed to ensuring a safe work place, compliance with applicable contracts, insurance and local and environmental laws.
Contracts in the power and telecommunication infrastructure services industries may require performance bonds or other means of financial assurance to secure contractual performance. If we are unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we might be precluded from entering into additional contracts with certain of our customers. We have a $10.0 million irrevocable letter of credit in place as collateral to support a $200.0 million bonding requirement. See further discussioncommitment.
Employees
The total number of personnel employed by us is subject to seasonal fluctuations, the volume of construction in Note 5progress and the relative amount of work performed by subcontractors. In addition, for the accompanying consolidated financial statements.
Employees
completion of specific construction projects, we may employ union craftsmen. At January 31, 2008,2009, we had approximately 424524 employees, all of whom were full-time.full-time including approximately 155 union members. We believe that our employee relations are good. We did not have any unionized employees at January 31, 2008.
Materials Filed with the Securities and Exchange Commission
The public may read any materials that we file with the Securities and Exchange Commission (the “SEC”) at the SEC’s public reference room at 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We maintain a website on the Internet at www.arganinc.com. Information on our website is not incorporated by reference into this annual report.
Annual Report on Form 10-K.
Copies of the Annual Report on Form 10-K as filed with the Securities and Exchange Commission are available without charge upon written request to:
Argan, Inc.
Attention: Corporate Secretary
Argan, Inc.
Suite 401
One Church Street,
Suite 201
Rockville, Maryland 20850
(301) 315-0027
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ITEM 1A. RISK FACTORS
FACTORS.
Investing in our securities involves a high degree of risk. Our business, financial position and future results of operations may be impacted in a materially adverse manner by risks associated with the execution of our strategic plan and the creation of a profitable and cash-flow positive business in a tumultuous economic environment, our ability to obtain capital or to obtain capital on terms acceptable to us, the successful integration of acquired companies into our consolidated operations, our ability to successfully manage diverse operations remotely located, our ability to successfully compete in highly competitive industries, the successful resolution of ongoing litigation, our dependence upon key managers and employees and our ability to retain them, and potential fluctuations in quarterly operating results, among other risks. Before investing in our securities, please consider the risks summarized in this paragraph and those risks discussed below. Our future results may also be impacted by other risk factorsrisk-factors listed from time to time in our future filings with the SEC, including, but not limited to, our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q.
General Risks Relating to ourOur Company
FurtherA deepening economic downturnrecession may lead to less demand for our products and services.services, and may cause our financial position to weaken.
If the general level of economic activity continues to slow, ourOur customers may be impacted by the deepening economic recession in the U.S. caused by the decline in the housing market, constraints in the credit market and increasing unemployment. As a result, they may delay, curtail or cancel new projects or products. For example, economic downturnsproposed and existing projects; thus decreasing the overall demand for our products and services and adversely impacting our liquidity. In addition, project owners may find it more difficult to raise capital in the past have ledfuture in order to increased bankruptciesfinance the construction of power-generation plants and pricing pressures. These factors contributerenewable fuel production facilities due to substantial limitations on the delayavailability of credit and cancellation of projects and the introduction of new products, and could impact our operations and ability to continue to grow at expected levels. A number of other factors, including financing conditions for the industries we serve, could further adversely affect our customers and their ability or willingness to fund capital expendituresuncertainties in the future,credit markets. Customers may be reluctant to establish new supply relationships or payas the condition of the economy causes demand for past services.their products to decline. In addition, consolidation, competition or capital constraints in the industries of our customers may result in reduced spending by such customers. If general, if overall economic conditions do not improve, the demand for our products and services may be adversely affected.
In addition, certain customers may find it increasingly difficult to pay invoices for our products and services on a timely basis, which could lead to an increase in our accounts receivable and/or to increased write-offs of uncollectible invoices. Any inability to collect our invoices when due could have adverse impacts on our future results of operations and liquidity. We have incurred losses in the past; we may experience additional losses in the future.
The Company has historically incurred losses. The Company’s accumulated deficit at January 31, 20082009 was approximately $18.4$8.3 million resulting primarily from operating losses in prior years. In addition,Although we reported consolidated net income of approximately $10.0 million for our fiscal year ended January 31, 2009, we incurred a net loss of approximately $3.2 million for the fiscal year ended January 31, 2008. Future losses may occur in thisone or othermore segments of our business. If net losses were to continue,recur, we could experience cash flow and liquidity shortfalls having adverse affects on our ability to successfully execute our business plan.plans.
Our dependence on one or a few customers could adversely affect us.
The size of the energy plant construction projects of our power industry services segment frequently results in one or a few project owners contributing a substantial portion of our consolidated net revenues as described in Note 18 to our consolidated financial statements. In addition, our telecommunications infrastructure business is based to a significant degree on our relationships with three primary customers and the net sales of our nutritional products business are derived from orders placed by a few key customers. Similarly, our backlog of business at any time frequently reflects contracts and unfilled purchase orders received from only a few major customers. Should we fail to replace projects that are completed by GPS with new projects or should we lose any one of the few key customers of SMC or VLI, future net revenues and profits may be adversely affected.
Our dependence on large construction contracts may result in uneven quarterly financial results.
Our power industry service activities in any one fiscal quarter are typically concentrated on a few large construction projects for which we use the percentage-of-completion accounting method to determine contract revenues. To a substantial extent, construction contract revenues are recognized as services are provided as measured by the amount of costs incurred. As the timing of equipment purchases, subcontractor services and other contract events may not be evenly distributed over the lives of our contracts, the amount of total contract costs may vary from quarter to quarter, creating uneven amounts of quarterly contract net revenues. In addition, the timing of contract commencements and completions may exacerbate the uneven pattern. As a result of the foregoing, future amounts of consolidated net revenues, cash flow from operations, net income and earnings per share reported on a quarterly basis may vary in an uneven pattern and may not be indicative of the operating results expected for any other quarter or for an entire fiscal year, thus rendering consecutive quarter comparisons of our consolidated operating results a less meaningful way to assess the growth of our business.
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We may be unsuccessful at generating internal growth which could result in an overall decline in our business.
Although the Company reported a significant increase in consolidated net sales for the year ended January 31, 2008 compared with the prior year, from $68.9 million to $206.8 million, ourOur ability to expand by achieving overallprofitable organic growth of the Company will be affected by, among other factors, our success in:
expanding the range of services and products we offer to customers in order to address their evolving needs;
| · | expanding the range of services and products we offer to customers to address their evolving needs; |
attracting new customers;
| · | attracting new customers; |
hiring and retaining employees; and
| · | hiring and retaining employees; and |
controlling operating and overhead expenses.
| · | reducing operating and overhead expenses. |
Many of the factors affecting our ability to generate internal growth may be beyond our control. Our strategies may not be successful and we may not be able to generate cash flow sufficient to fund our operations and to support internal growth. Our inability to achieve internal growth could materially and adversely affect our business, financial condition and results of operations.
Our results of operations could be adversely affected as a result of impairment adjustments to goodwill and other purchased intangible assets.
When we acquire a business, we record an asset called "goodwill" equal to the excess amount paid for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business acquired. In 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations" which requires that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142") provides that goodwill and other intangible assets that have indefinite useful lives not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. Statement 142 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. Statement 142 requires management to make certain estimates and assumptions to allocate goodwill to reporting units and to determine the fair value of reporting unit net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value is determined using discounted estimated future cash flow. Absent any impairment indicators, we perform impairment tests annually each November 1. The aggregate amount of goodwill and other purchased intangible assets with indefinite lives carried in our consolidated balance sheet as of January 31, 2008 was approximately $20.6 million, or approximately 14% of total assets.
Long-lived assets, including purchased intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be assessed pursuant to FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” At January 31, 2008, our consolidated balance sheet included an aggregate balance of $5.1 million in purchased intangible assets with finite lives, including amounts related to customer contracts and relationships, trade names and non-compete agreements. This aggregate amount represented approximately 3% of total assets as of January 31, 2008. We determine whether any impairment exists by comparing the carrying values of these long-lived assets to the undiscounted future cash flows expected to result from the use of these assets. In the event that we determine that an impairment of an intangible asset exists, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or valuation techniques such as the present value of expected future cash flows, appraisals, or other pricing models as appropriate.
The declining financial performance of VLI caused us to record impairment losses in the current year related to goodwill and other purchased intangible assets of VLI in the total amount of $6.8 million that are reflected in the reported net loss in the statement of operations for the year ended January 31, 2008. Should the operating results of VLI continue to deteriorate, or should the operating results of any of our other acquired companies experience unexpected deterioration, the Company could be required to record additional impairment losses related to purchased intangible assets. Impairment adjustments, if any, would be recognized as operating expenses and would adversely affect profitability.
Future acquisitions and/or investments may not occur which could limit the growth of our business.
We completed our acquisition of GPS in December 2006. Prior to our acquisition of GPS, we acquired VLI in August 2004 and SMC in July 2003. Argan, Inc. isare a holding company with no operations other than our investments in GPS, SMC, VLI and GPS.VLI. The successful execution of our overall business plan could be based, in part, on our making additional acquisitions and/or investments that would provide positive cash flow to the Companyus and value to theour stockholders. Additional companies that meetmeeting these criteria,criterion, and that provide products and/or services to growth industries and that are available for purchase at attractive prices may be difficult to find. Accordingly,
It is likely that any potential future acquisition or strategic investment transaction would require the use of cash as a component of the purchase price. Using cash for acquisitions limits our financial flexibility and makes us more likely to seek additional capital through future debt or equity financings. We cannot readily predict the timing, size and success of our acquisition efforts and therefore the capital we will need for these efforts. If adequate funds are not available on terms acceptable to us, our ability to finance future business acquisitions and/or investments and to otherwise pursue our business plan would be significantly limited.
We have pledged the majority of our assets to secure the financing arrangements with our Bank. The Bank’s consent is required for acquisitions, divestitures, the participation in joint ventures and certain other investments. There can be no assurance that our Bank will consent to future transactions. If we are unable to obtain such consents, our ability to consummate acquisitions, to make investments or to enter into other arrangements for the purpose of growing our business may be limited.
We may not be able to comply with certain of our debt covenants which may interfere with our ability to successfully execute our business plan.
Our Bank financing arrangements require that we maintain compliance with certain financial covenants at each fiscal quarter-end and include an acceleration clause which allows the Bank to declare amounts outstanding under the debt arrangements due and payable if it determines in good faith that a material adverse change has occurred in our financial condition or any of our subsidiaries.
We are currently in compliance with our debt covenants, but there can be no assurance that future acquisitionswe will occur,continue to be in compliance. If our performance does not result in compliance with any of our financial covenants, or if they occur, willthe Bank seeks to exercise its rights under the acceleration clause referred to above, we would seek to modify the financing arrangements, but there can be beneficial to usno assurance that the Bank would not exercise its rights and remedies under the debt arrangements, including accelerating payments of all outstanding senior debt. These payments would have a significantly adverse impact on our liquidity and our stockholders.ability to obtain additional capital thereby jeopardizing our ability to successfully execute our business plan.
The integration of acquired companies may not be successful.
WeEven if we do complete acquisitions in the future, we may not be able to successfully integrate such acquired companies that we acquire with our other operations without substantial costs, delays or other operational or financial problems. Integrating acquired companies involves a number of special risks which could materially and adversely affect our business, financial condition and results of operations, including:
failure of acquired companies to achieve the results we expect;
| · | failure of acquired companies to achieve the results we expect; |
diversion of management’s attention from operational matters;
| · | diversion of management's attention from operational matters; |
difficulties integrating the operations and personnel of acquired companies;
| · | difficulties integrating the operations and personnel of acquired companies; |
inability to retain key personnel of acquired companies;
| · | inability to retain key personnel of acquired companies; |
risks associated with unanticipated events or liabilities;
| · | risks associated with unanticipated events or liabilities; |
the potential disruption of our business; and
| · | the potential disruption of our business; and |
the difficulties of maintaining uniform standards, controls, procedures and policies.
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| · | the difficulty of maintaining uniform standards, controls, procedures and policies. |
If one of our acquired companies suffers customer dissatisfaction or performance problems, the reputation of our entire company could be materially and adversely affected. In addition, future acquisitions could result in issuances of equity securities that would reduce our stockholders'stockholders’ ownership interest, the incurrence of debt, contingent liabilities, deferred stock basedstock-based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs.
We may notOur results of operations could be able to raise additional capital and,adversely affected as a result of additional impairment losses related to goodwill and other purchased intangible assets.
When we acquire a business, we record goodwill equal to the excess amount paid for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business acquired. Generally accepted accounting principles require that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. The balances of goodwill and other intangible assets that have indefinite useful lives are not amortized, but instead must be tested at least annually for impairment. The amounts of intangible assets that do have finite lives are amortized over their useful lives. However, should poor performance or other conditions indicate that the carrying value of a business or long-lived asset may nothave suffered an impairment, a determination of fair value is required to be ableperformed in the period that such conditions are noted. If the carrying value of a business or of an individual purchased intangible asset is found to successfully executeexceed the fair values, impairment losses are recorded.
The aggregate carrying amount of goodwill, other purchased intangible assets with indefinite lives and long lived purchased intangible assets included in our business plan.
consolidated balance sheet as of January 31, 2009 was approximately $22.1 million, or approximately 16.4% of total consolidated assets.
We will needperform impairment tests annually each November 1, or more often if we identify indications of impairment. We conducted a series of impairment assessments over the last two years and recorded impairment losses reflecting the declining financial performance of VLI and SMC and relating to raise additional capital to finance future business acquisitions and/or investments. Additional financing may not be available on terms that are acceptable to us or at all. If we raise additional funds throughgoodwill, other purchased intangible assets and the issuancefixed assets of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced. Additionally, these securities might have rights, preferences and privileges senior to those of our current stockholders. If adequate funds are not available on terms acceptable to us, our ability to finance future business acquisitions and/or investments and to otherwise pursue our business plan would be significantly limited.
We cannot readily predict the timing, size and success of our acquisition efforts and therefore the capital we will need for these efforts. Using cash for acquisitions limits our financial flexibility and makes us more likely to seek additional capital through future debt or equity financings. When we seek additional debt or equity financings, we cannot be certain that additional debt or equity will be available to us at all or on terms acceptable to us.
We may not be able to comply with certain of our debt covenants which may interfere with our ability to successfully execute our business plan.
We have borrowed funds from our bank. Substantial portions of this debt are outstanding currentlybusinesses in the formtotal amounts of multi-year installment term loans relating to VLI$3.1 million and GPS that are due on August$6.8 million in the fiscal years ended January 31, 2009 and December 31, 2010, respectively, and that had principal amounts payable at January 31, 2008, respectively. These losses were reflected in the amounts of $792,000reported consolidated operating results for the corresponding fiscal years and $5,833,000, respectively.
The debt arrangements require thatessentially eliminated the Company maintain compliance with certain financial covenants at each fiscal quarter-end and include an acceleration clause which allows the bank to declare amounts outstanding under the debt arrangements due and payable if it determines in good faith that a material adverse change has occurred in the financial conditioncarrying values of the Companycorresponding assets. Should the operating results of GPS or any of its subsidiaries.future acquired company experience unexpected deterioration, we could be required to record additional significant impairment losses related to purchased intangible assets. Impairment adjustments, if any, would be recognized as operating expenses and would adversely affect future profitability.
We are currently in compliance with our debt covenants, but there can be no assurance that we will continue to be in compliance. If the Company’s performance does not result in compliance with any of its financial covenants, or if the bank seeks to exercise its rights under the acceleration clause referred to above, we would seek to modify the financing arrangements, but there can be no assurance that the bank would not exercise its rights and remedies under the debt arrangements including accelerating payments of all outstanding senior debt due and payable. Such payments would have a significantly adverse impact on our liquidity and our ability to obtain additional capital thereby jeopardizing our ability to successfully execute our business plan.
Our officers and directors have limited experience in managing our business and may be unsuccessful in doing so.
In April 2003, Rainer H. Bosselmann became Chairman and Chief Executive Officer, H. Haywood Miller, III became Executive Vice President and Arthur F. Trudel became our Senior Vice President and Chief Financial Officer. Upon consummation of the private placement in April 2003, four of our directors resigned and were replaced by Mr. Bosselmann and three new directors designated by Mr. Bosselmann (DeSoto S. Jordan, James W. Quinn and Daniel A. Levinson). In addition, W.G. Champion Mitchell was elected to our Board of Directors at our 2003 Annual Meeting in October 2003 and William F. Leimkuhler was elected to our Board of Directors at our 2007 Annual Meeting in June 2007. On April 7, 2006, Mr. Miller resigned his position with us. Although Messrs. Bosselmann, Trudel, Jordan, Quinn, Levinson, Mitchell and Leimkuhler have experience as executive officers and directors of other public companies, they have limited experience in managing our business and, as a result, may be unsuccessful in doing so.
Our business growth could outpace the capabilitycapabilities of our corporatesenior management infrastructure which could adversely affect our ability to complete the execution of our business plan.
We cannot be certain that our current management team will be adequate to support our operations as they expand. Future growth could impose significant additional responsibilities on members of our senior management, including the need to recruit and integrate new senior level managers and executives. We cannot be certain that we can recruit and retain such additional managers and executives. To the extent that we are unable to attract and retain additional qualified management members in order to manage our growth effectively, we may not be able to expand our operations or execute our business plan. Our financial condition and results of operations could be materially and adversely affected as a result.
Loss of key personnel could prevent us from effectively managing our business.
Our future success is substantially dependent on the continued service and performance of our current executive team and the senior management members of our businesses. We cannot be certain that any such individual will continue in such capacity or continue to perform at a high level for any particular period of time. Our ability to maintain productivityoperate productively and profitability willprofitably, particularly in the power services industry, may also be limited by our ability to attract, employ, retain and train skilled personnel necessary to meet our future requirements. We cannot be certain that we will be able to maintain management teams and an adequate skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor expenses will not increase as a result of a shortage in the supply of these skilled personnel. Labor shortages or increased labor costs could impair our ability or maintain our business or grow our net revenues.
We depend on the continued efforts of our executive officers and on senior management of the businesses we acquire. We cannot be certain that any individual will continue in such capacity for any particular period of time. The loss of key personnel, or the inability to hire and retain qualified employees in the future, could negatively impact our ability to manage our business.
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Lawsuits could adversely affect our business.
From time to time, we, our directors and/or certain of our current officers are named as a party to lawsuits. A discussion of our material lawsuits appears in Item 3 of this Annual Report on Form 10-K and Note 12 to our consolidated financial statements. It is not possible at this time to predict the likely outcome of these actions with certainty, and an adverse result in any of these lawsuits could have a material adverse effect on us. Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us could result in significant damage claims and other losses. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could adversely affect our financial condition, results of operations or cash flows.
Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements, which may reduce our profits.
To prepare consolidated financial statements in conformity with generally accepted accounting principles, we are 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. For example, we may recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include:
the application of the “percentage-of-completion” method of accounting and revenue recognition on contracts, change orders and contract claims;
the valuation of assets acquired and liabilities assumed in connection with business combinations;
the value of goodwill and recoverability of other purchased intangible assets;
provisions for income taxes and related valuation allowances;
accruals for estimated liabilities, including litigation reserves;
provisions for uncollectible receivables, obsolete and overstocked inventories, and recoveries of costs from subcontractors, vendors and others; and
the valuation of stock-based compensation expense.
Our actual business and financial results could differ from those estimates, which may reduce our profits.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which would harm our business and the trading price of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We devote significant attention to establishing and maintaining effective internal controls. Implementing changes to our internal controls required compliance training of our officers and employees. Over the last two years, substantial costs have been incurred and significant efforts have been expended in order to evaluate, test and remediate our internal controls over financial reporting. We cannot be certain that these measures and future measures will ensure that we will successfully implement and maintain adequate controls over our financial reporting processes and related reporting requirements. Any failure to implement required new or improved controls or difficulties encountered in their implementation could affect our operating results or cause us to fail to meet our reporting obligations and could result in a breach of a covenant in our Bank financing arrangements in future periods. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our common stock.
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We rely on information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.
The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to operational malfunctions and security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent unanticipated downtime or security breaches. The unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.
Specific Risks Relating to Our Power Industry Services
Failure to successfully operate our power industry services business will adversely affect our Company.us.
We acquired GPS in December 2006. Consequently, we do not have significant experience in the engineering, procurement and construction of alternative energy and traditional power energy plants. Moreover, theThe operations of our power industry services business conducted by GPS represent a significant portion of our Company’s net salesrevenues and profits. ForThe net revenues of this business segment were $202.3 million for the fiscal year ended January 31, 2008, the revenues of GPS represented 87%2009, representing 91.6% of consolidated net salesrevenues. Income from these operations for the current fiscal year was $27.7 million. Consolidated income from operations for the current year was $14.9 million, reflecting the operating losses incurred by our other two businesses and provided approximately $10.8 million in income before income taxes.corporate expenses. Our inability to successfully develop, manage and providegrow our power industry services business will adversely affect our overall business operationsconsolidated operating results and financial condition.
Interruption of power plant construction projects could adversely affect future results of operations.
At any time, GPS has a limited number of construction contracts. For example, two customers represented approximately 98.2% of the net revenues of the power industry services business for the fiscal year ended January 31, 2009. Should any unexpected suspension, termination or delay of the work under such contracts occur, our results of operations may be materially and adversely affected.
If financing for new energy plants is unavailable, construction of such plants may not occur.
Traditional gas-fired power plants have been constructed typically by large utility companies. However, to a large extent, the construction of new energy plants, including alternative and renewable energy facilities, is being conducted by private investment groups. For example, investors in the owner of two of the biodiesel plants completed by GPS last year, include The Carlyle Group and Goldman Sachs. The owner of the Sentinel project described above is Competitive Power Ventures, Inc. which is owned by Warburg Pincus, certain individual investors and members of its management team. The challenge for these types of project owners to secure and maintain financing in the midst of the current credit crisis is significant. Should debt financing for the construction of new energy facilities, including alternative or renewable energy plants, not be available, investors may not be able to invest in such projects, thereby adversely affecting the likelihood that GPS or GRP will obtain contracts to construct such plants.
The inability of our customers to receive or to avoid delay in receiving the applicable regulatory and environmental approvals relating to projects may result in lost of postponed net revenues for us.
The commencement and/or execution of many of the construction projects performed by our power industry services segment are subject to numerous regulatory permitting processes. Applications for permits may be opposed by individuals or environmental groups, resulting in delays and possible non-issuance of the permits. There are no assurances that our customers will obtain the necessary permits for these projects, or that the necessary permits will be obtained in order to allow construction work to proceed as scheduled. Failure to commence or complete construction work as anticipated could have material adverse impacts on our future net revenues, profits and cash flows from operations.
Intense competition in the engineering and construction industry could reduce our market share and profits.
We serve markets that are highly competitive and in which a large number of multinational companies compete. Among our competitors are U.S. companies,compete such as Fluor Corporation, EMCOR Group, Inc., The Shaw Group Inc., URS Corporation (the Washington Group International, Inc.Division), and Perini Corporation, and international companies, such as SNC Lavalin Group, Inc. and, Foster Wheeler AG, CH2M HILL Companies, Ltd., and EMCOR Group, Inc. In particular, the engineering and construction markets are highly competitive and require substantial resources and capital investment in equipment, technology and skilled personnel. Competition also places downward pressure on our contract prices and profit margins. Intense competition is expected to continue in these markets, presenting us with significant challenges in our ability to maintain strong growth rates and acceptable profit margins. If we are unable to meet these competitive challenges and replace completed projects with new customers or projects, we could lose market share to our competitors and experience an overall reduction in our profits.
The cyclical nature of the markets we serve may adversely affect future operating results.
The demand for our services and products is dependent upon the existence of projects with engineering, procurement, construction and management needs. Although downturns can impact our business our power markets exemplify businesses that are cyclical in nature. The power markets have historically been and will continue tocould be vulnerable to general downturns and are cyclical in nature. As a result, our past results have varied considerably and may continue to vary depending upon the demand for future projects in these industries.
Our inability to attract and retain qualified management and personnel wouldmaterially adversely affect the growth of this business.affected.
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Our future success is substantially dependent on the continued services and on the performance of the Vice Chairmen of GPS. Joel M. Canino and William F. Griffin, Jr., the founding executive officers of GPS, have extended the terms of their employments agreements to June 2009. In addition, GPS hired Timothy Curran in November 2007 to serve as the president and chief executive officer of GPS under an employment contract that expires on October 31, 2008 with automatic one-year extensions. There can be no assurance that Mr. Canino, Mr. Griffin or Mr. Curran will renew his employment agreement upon expiration of its term. The loss of the services of any one of these executives could materially and adversely affect our business. Our ability to achieve our development will also depend on our ability to attract and retain additional qualified and skilled personnel. Recruiting personnel in the energy power industry is competitive. We do not know whether we will be able to attract or retain additional qualified personnel. Our inability to attract and retain qualified personnel, or the departure of key employees, could materially and adversely affect our development and, therefore, our business, prospects, results of operations and financial condition.
Our backlog is subject to unexpected adjustments, delays and cancellations, and is, therefore,may be an uncertain indicator of our future earnings.net revenues.
As of January 31, 2008,2009, our construction contract backlog was approximately $122 million.$456 million, not including $30.8 million representing the contract backlog of Gemma Renewable Power, LLC (“GRP”). We expect that our performance of the work contemplated by thisthe contract backlog of GPS and GRP will earn a substantial portion of this revenuepotential source of net revenues in the fiscal year ending January 31, 2009.2010. However, projectsa project may remain included in our backlog for an extended period of time. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog andthat could reduce the dollar amount of our backlog and the revenuenet revenues and profits that we actually earn. Project terminations, suspensions or scope adjustments may occur from time to time with respect to contractsFor example, the current year termination of a contract for the construction of an ethanol production facility resulted in the elimination of contract backlog of approximately $47 million; this amount was included in our backlog. Finally, poor project ortotal construction contract performance could also impact our backlog and profits. As a result, weof $122 million at January 31, 2008. We cannot guarantee that the revenuenet revenues projected inbased on our backlog at January 31, 2009 will be realized or profitable.
If financing for alternative energy plants is unavailable, construction of such plants may not occur.
Traditional coal-fired and gas-fired power plants have been constructed typically by large utility companies. However, to a large extent, the financing for the construction of alternative energy plants is being provided by private investment groups. For example, investors in Green Earth Fuels of Houston, LLC, the owner of the bio diesel plant completed by GPS in the current fiscal year, include The Carlyle Group and Goldman Sachs.
As of January 31, 2008, the contract backlog of GPS included approximately $47 million related to an ethanol-production facility under construction in Nebraska. However, construction activity has been suspended pursuant to an agreement between the parties as the owner of the plant is currently conducting a search for financing necessary to complete the project. We believe that the increase in the price of corn used to make ethanol has adversely affected the financial viability of this project. Further, we believe that the challenge of securing financing in light of this development is being exacerbated by the general state of uncertainty in the bond markets.
Should debt financing for the construction of alternative or renewable energy plants not be available, investors may not be able to invest in such projects, thereby adversely affecting the likelihood that GPS will obtain contracts to construct such plants.
Failure to negotiate a definitive contract to build the Colusa power plant would adversely affect future results of operations.
In December 2007, we announced that GPS received an interim notice to proceed from Pacific Gas & Electric Company (“PG&E”) on a $340 million contract to design and build a natural gas-fired, combined cycle, power plant in Colusa, California with a planned completion date of August 1, 2010. We expect to complete the negotiation of the definitive contract for the construction of this power plant on favorable terms.
This contract is expected to comprise a significant portion of our revenues for the fiscal year ending January 31, 2009. Therefore, in the event that we do not consummate this contract, our results of operations for fiscal year 2009 may be materially and adversely affected.
If the development of renewable energy sources does not occur, the demand for our construction services could decline.
Over half of the states have passed legislation requiring that utilities include a percentage of renewable energy in the mix of power they generate and buy. These future percentages may be as high as 10%-20%, and the requirements are contributing to the increased momentum of efforts to develop sources of renewable energy, including wind, solar, water, geothermal and biofuels.
Should these government requirements be extended or repealed, the pace of the development of alternative or renewable energy sources may slow, thereby reducing the future opportunities for GPS to construct such plants.
If tax credits are repealed, the development of alternative energy power plants may not be economical.
Current legislation offers tax credits and incentives to those utilizing alternative sources of energy. For example, federal legislation passed in 2005 established a tax credit that is intended to lower the cost of wind-powered energy for developers to equal the cost of energy produced by coal-fired power plants. However, this credit is set to expire at the end of 2008. Previous tax credits for wind power expired after one year. Tax incentives for the development of renewable energy sources are expected to be extended. However, in the event that new legislation is enacted which decreases or cancels such credits or incentives, the construction and use of alternative energy sources may not be economically viable. A decrease in the construction of alternative energy power plants will adversely affect our business operations.
Future work delays and cost overruns could adversely affect our completion of construction projects.
The engineering and construction of plants for the generation of electric power or the production of alternative sources of energy such as ethanol and bio-diesel will be subject to the risks of delay or cost overruns resulting from numerous factors, including, but not limited to, the following:
| · | shortages of skilled labor, materials and energy plant equipment including power turbines; |
| · | unscheduled delays in the delivery of ordered materials and equipment; |
| · | engineering problems, including those relating to the commissioning of newly designed equipment; |
| · | cost increases, such as increases in the price of commodities such as corn or soybean or increases in or the availability of land at reasonable prices to grow corn and soybean; |
| · | price decreases for a barrel of oil; |
| · | inability to develop or non-acceptance of new technologies to produce alternative fuel sources; and |
| · | difficulty in obtaining necessary permits or approvals. |
During the year ended January 31, 2008, GPS experienced an unexpected increase in costs related to one of its contracts. Unexpected costs included labor productivity being below expectations and previous experience, labor rate increases due to overtime requirements to meet the completion date, equipment defects and engineering issues resulting in considerable rework and additional materials. The Company recorded a loss of approximately $12.0 million on this contract in the current year (including the reversal of approximately $1.2 million of profit on this contract initially recorded in the prior year).
Although management believes that the loss on this GPS contract was due to very unusual circumstances, and that no such loss will be incurred related to current contracts, there can be no assurance that unexpected losses will not be incurred and recorded related to current and future contracts.
As we bear the risk of cost overruns in the dollar-value of our contracts, we may experience reduced profits or, in some cases, losses under these contracts if costs increase above our estimates.
We conduct our business under various types of contractual arrangements. We bear a significant portion of the risk for cost overruns. Under fixed price contracts, contract prices are established in part on cost and scheduling estimates which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of labor, equipment and materials, and other exigencies. If these estimates prove inaccurate, or circumstances change such as unanticipated technical problems, changes in local laws or labor conditions, weather delays, costs of raw materials or our suppliers’ or subcontractors’ inability to perform, cost overruns may occur and we could experience reduced profits, or in some cases, a loss for that project. From time to time, we may also assume a project’s technical risk, which means that we may have to satisfy certain technical requirements of a project despite the fact that at the time of project award, we may not have previously produced the system or product in question.
As described elsewhere in this report, during the year ended January 31, 2008, GPS experienced an unexpected increase in costs related to one of its contracts. Because the form of contract for this project was fixed-price, GPS had to absorb the full amount of the cost overrun resulting in the Company incurring a total loss of approximately $10.8 million on this contract.
If we guarantee the timely completion or performance standards of a project, we could incur additional costs to cover our guarantee obligations.
In some instances and in many of our fixed price contracts, we guarantee a customer that we will complete a project by a scheduled date. We sometimes provide that the project, when completed, will also achieve certain performance standards. If we subsequently fail to complete the project as scheduled, or if the project subsequently fails to meet guaranteed performance standards, we may be held responsible for cost impacts to the customer resulting from any delay or modifications to the plant in order to achieve the performance standards, generally in the form of contractually agreed-upon liquidated damages. If these events would occur, the total costs of the project would exceed our original estimate, and we could experience reduced profits or a loss for that project.
Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded revenues or profits.
Under our accounting procedures, we measure and recognize a large portion of our profits and revenues under the percentage-of-completion accounting methodology. This methodology allows us to recognize revenues and profits ratably over the life of a contract by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The effect of revisions to revenues and estimated costs is recorded when the amounts are known and can be reasonably estimated, and these revisions can occur at any time and could be material. Given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenues and profits. On the loss contract discussed above, approximately $1.2 million of the loss that was recorded in the year ended January 31, 2008 represented the reversal of profit recognized in the prior year.
Future bonding requirements may adversely affect our ability to compete for new energy plant construction projects.
Our construction contracts frequently require that we obtain from surety companies and provide to our customers payment and performance bonds from surety companies on behalf of our customers as a condition to the award of such contracts. Such surety bonds secure our payment and performance obligations.
Surety market conditions have in the last few years become more difficult as a result of significant losses incurred by many surety companies, both in the construction industry as well as in certain large corporate bankruptcies. Consequently, less overall bonding capacity is available in the market than in the past, and surety bonds have become more expensive and restrictive. Historically, we have had a strong bonding capacity but, under standard terms in the surety market, surety companies issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing any bonds.
Current or future market conditions, as well as changes in our surety'ssurety’s assessment of its own operating and financial risk, could cause our surety company to decline to issue, or substantially reduce the amount of, bonds for our work and could increase our bonding costs. These actions can be taken on short notice. If our surety company were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit, or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, we may be unable to compete for or work on certain projects.
Investment in the wind energy design and construction business partnership may occur without expected returns.
In June 2008, we announced that GPS has entered into a business partnership with lnvenergy Wind Management, LLC for the design and construction of wind energy farms located in the United States and Canada. The partners each own 50% of the company, GRP. A goal for GRP is that it will annually provide engineering, procurement and construction services for new wind energy farms generating more than an estimated 300 megawatts of electrical power including the design and construction of roads, foundations and electrical collection systems as well as the erection of towers, turbines and blades. Should the future construction and other related services of GRP be at lower revenue levels than anticipated, or should GRP fail to profitably execute the projects that it may obtain, GPS may fail to receive returns from GRP as planned which may adversely affect our future results of our operations.
Success on this joint project also depends in large part on whether our joint venture partner satisfies its contractual obligations. If our joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if we are unable to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability to us, harm our reputation, and reduce our profit on a project.
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As we bear the risk of cost overruns in the completion our construction contracts, we may experience reduced profits or, in some cases, losses under these contracts if actual costs exceed our estimates.
We conduct our business under various types of contractual arrangements including fixed price contracts. We bear a significant portion of the risk for cost overruns on these types of contracts where contract prices are established in part on cost and scheduling estimates. Our estimates may be based on a number of assumptions about future economic conditions and the future prices and availability of labor, equipment and materials, and other exigencies. From time to time, we may also assume a project’s technical risk, which means that we may have to satisfy certain technical requirements of a project despite the fact that at the time of project award, we may not have previously produced the system or product in question. Unexpected or increased costs on our contracts may occur due the following factors among others:
shortages of skilled labor, materials and energy plant equipment including power turbines;
unscheduled delays in the delivery of ordered materials and equipment;
engineering problems, including those relating to the commissioning of newly designed equipment;
inability to develop or non-acceptance of new technologies to produce alternative fuel sources; and
the difficulty in obtaining necessary permits or approvals.
If our estimates prove inaccurate, or circumstances change, cost overruns may occur and we could experience reduced profits, or in some cases, incur a loss on a particular project.
If we guarantee the timely completion or performance standards of a project, we could incur additional costs to cover our guarantee obligations.
In some instances and in many of our fixed price contracts, we guarantee a customer that we will complete a project by a scheduled date. We sometimes provide that the project, when completed, will also achieve certain performance standards. If we subsequently fail to complete the project as scheduled, or if the project subsequently fails to meet guaranteed performance standards, we may be held responsible for cost impacts to the customer resulting from any delay or modifications to the plant in order to achieve the performance standards, generally in the form of contractually agreed-upon liquidated damages. If these events would occur, the total costs of the project would exceed our original estimate, and we could experience reduced profits or a loss for that project.
If we are unable to collect amounts billed to project owners as scheduled, our cash flows may be materially and adversely affected.
Many of our contracts require us to satisfy specified design, engineering, procurement or construction milestones in order to receive payment for work completed or equipment or supplies procured prior to achievement of the applicable contract milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of services prior to receipt of payment. If the customer determines not to proceed with the completion of the project, delays in making payment of billed amounts or defaults on its payment obligations, we may face delays or other difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies. Such problems may impact the planned cash flows of affected projects and result in unanticipated reductions in the amounts of future cash flows from operations.
Our dependence upon third parties to complete many of our contracts may adversely affect our performance under future energy plant construction contracts.
Much of the work performed under our energy plant construction contracts is actually performed by third-party subcontractors we hire. We also rely on third-party equipment manufacturers or suppliers to provide much of the equipment used for our energy projects. If we are unable to hire qualified subcontractors or find qualified equipment manufacturers or suppliers, our ability to successfully complete a project could be impaired. If the amount we are required to pay for subcontractors or equipment and supplies exceeds what we have estimated, especially inwhen we are operating under a lump sum or a fixed-price type construction contract, we may suffer losses on these contracts. If a supplier, manufacturer or subcontractor fails to provide supplies, equipment or services as required under a negotiated contract for any reason, we may be required to source these supplies, equipment or services on a delayed basis or at a higher price than anticipated which could impairimpact contract profitability.profitability in an adverse manner.
Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded net revenues or profits.
Under our accounting procedures, we measure and recognize a large portion of our net revenues under the percentage-of-completion accounting methodology. This methodology allows us to recognize revenues and contract profits ratably over the life of a contract by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The effects of revisions to revenues and estimated costs are recorded when the amounts are known and can be reasonably estimated, and these revisions can occur at any time and could be material. Given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded net revenues and profits.
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The nature of our engineering and construction business exposes us to potential liability claims and contract disputes which may reduce our profits.
We engage in engineering and construction activities for large energy plant facilities where design, construction or systems failures can result in substantial injury or damage to third parties. In addition, the nature of our business results in clients, subcontractors and vendors occasionally presenting claims against us for recovery of cost they incurred in excess of what they expected to incur, or for which they believe they are not contractually liable. We have been and may in the future be named as a defendant in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters. These claims generally arise in the normal course of our business.
In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilitiesany liability may exceed our policy limits. Further, we may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. Our professional liability coverage is on a “claims-made” basis covering only claims actually made during the policy period currently in effect. In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which claims may reduce our future profits and cash available for operations.
In the future, we may bring claims against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope, both of which may result in additional cost. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we have used working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a negative impact on our liquidity and profitability.
If the development of renewable energy sources does not occur, the demand for our construction services could decline.
There are many provisions included in the American Recovery and Reinvestment Act of 2009 intended to benefit renewable energy. In addition, over half of the states in the U.S. have passed legislation requiring that utilities include a percentage of renewable energy in the mix of power they generate and buy. These future percentages may be as high as 20%, and the requirements are contributing to the increased momentum of efforts to develop sources of alternative renewable energy, including wind, solar, water, geothermal and biofuels. Should these government requirements fail to be extended or should they be repealed, the pace of the development of alternative renewable energy sources may slow, thereby reducing the future opportunities for GPS to construct such plants.
We could be subject to claims and liabilities undercompliance with environmental, health and safety laws and regulations that would add costs to our business.
Our operations are subject to compliance with United States federal, state and local environmental, health and safety laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. We continually evaluate whether we must take additional steps to ensure compliance with environmental laws, however, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future.
Specific Risks Relating to Our Telecommunications Infrastructure Services Business
Loss of a significant customer could adversely affect our SMC business.
Our largest customers assign work to us on a project-by-project basis under master service agreements. Under these agreements, the customers often have no obligation to assign work to us. Furthermore, a customer typically may cancel their contract on short notice, usually 30 to 90 days, even if we are not in default under the contract. The failure to replace any unexpected reduction in work performed for our largest customers or the loss of our insurance policies to cover allany one of the risks we face could result in material future losses.
In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurancethem as a significant customer could have a material adverse effect on our business, unless the loss is offset by the addition of a new customer or an increase in the amount of services provided to other customers.
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If we fail to compete successfully against current or future competitors, our business, financial condition and results of operations.
Specific Risks Relating to Our Telecommunications Infrastructure Business
Deterioration of regional economic conditions in our industryoperations could have a material adverse effect on our future operating results.
be materially and adversely affected.
We operate in highly competitive markets. We compete with service providers ranging from small regional companies which service a single market, to larger firms servicing multiple regions, as well as large national and multi-national entities. In addition, there are involvedfew barriers to entry in the telecommunications infrastructure servicesindustry. As a result, any organization that has adequate financial resources and construction industries, which can be negatively affected by rises in interest rates, downsizings in the economy and a general downturn in economic conditions. In addition,access to technical expertise may become one of our activities may be hampered by weather conditions and an inability to plan and forecast activity levels. Adverse economic conditionscompetitors.
Competition in the telecommunications infrastructure and construction industriesindustry depends on a number of factors, including price. Certain of our competitors may have lower overhead cost structures than we do and may, therefore, be able to provide their services at lower rates than we can. In addition, some of our competitors are larger and have significantly greater financial resources than we do. Our competitors may develop the expertise, experience and resources to provide services that are superior in price and quality to our services. Similarly, we may not be able to maintain or enhance our competitive position within our industry. We may also face competition from the in-house service organizations of our existing or prospective customers.
A significant portion of our business involves providing services, directly or indirectly as a material adverse effectsubcontractor, to the federal government under government contracts. The federal government may limit the competitive bidding on any contract under a small business or minority set-aside, in which bidding is limited to companies meeting the criteria for a small business or minority business, respectively. We are currently qualified as a small business concern, but not a minority business.
We may not be able to compete successfully against our competitors in the future. If we fail to compete successfully against our current or future operating results.competitors, our business, financial condition, and results of operations could be materially and adversely affected.
Rapid technological change and/or customer consolidations could reduce the demand for the telecommunication services we provide.
The telecommunications infrastructure industry is undergoing rapid change as a result of technological advances that could in certain cases reduce the demand for our services or otherwise negatively impact our business. New or developing technologies could displace the wireline systems used for voice, video and data transmissions, and improvements in existing technology may allow telecommunications companies to significantly improve their networks without physically upgrading them. In addition, consolidation, competition or capital constraints in the utility, telecommunications or computer networking industries may result in reduced spending or the loss of one or more of our customers.
Various factors could cause the operating results of SMC to vary significantly from quarter to quarter.
SMC provides telecommunications infrastructure services primarily in the mid-Atlantic region including Maryland, Virginia, Delaware and the District of Columbia. As such, conditions in this region may affect this business. For example, our operations can be expected to have seasonally weaker results in the first and fourth quarters of the year, and may produce stronger results in the second and third quarters. This seasonality is primarily due to the effect of winter weather on outside plant activities, as well as reduced daylight hours and customer budgetary constraints. Certain customers tend to complete budgeted capital expenditures before the end of the year, and postpone additional expenditures until the subsequent fiscal period.
We intend to actively pursue larger infrastructure projects with our customers. The positive impact of major contracts requires that we undertake extensive up front preparations with respect to staffing, training and relocation of equipment. Consequently, we may incur significant period costs in one fiscal period and realize the benefit of contractual revenues in subsequent periods.
Our quarterly results may also be materially affected by:
| · | variations in the margins or services performed during any particular quarter; |
| · | the budgetary spending patterns of customers, including government agencies; |
| · | the timing and volume of work under our service agreements; |
| · | the timing of our promotional activities; |
| · | losses experienced in our operations not otherwise covered by insurance; |
| · | the change in mix of our customers, contracts and business; |
| · | unexpected increases in construction and design costs. |
Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.
Our financial results are dependent on government programs and spending, the termination of which would have a material adverse effect on our business.
A significant portion of our business relates to structured cabling work for military and other government agencies. As such, our business is reliant upon military and other government programs. Reliance on government programs has certain inherent risks. Among others, contracts, direct or indirect, with United States government agencies are subject to unilateral termination at the convenience of the government, subject only to the reimbursement of certain costs plus a termination fee.
Our substantial dependence upon fixed price contracts may expose us to losses in the event that we fail to accurately estimate the costs that we will incur to complete such projects.
We currently generate, and expect to continue to generate, a significant portion of our net revenues under fixed price contracts. We must estimate the costs of completing a particular project to bid for these fixed price contracts. Although historically we have been able to estimate costs accurately, the cost of labor and materials may, from time to time, vary from costs originally estimated. These variations, along with other risks inherent in performing fixed price contracts, may cause actual revenuenet revenues and gross profits for a project to differ from those we originally estimated and could result in reduced profitability or losses on projects. Depending upon the size of a particular project, variations from the estimated contract costs can have a significant impact on our operating results for any fiscal quarter or year.
The failure to replace contracts as they are completed or expire will adversely affect future operating results.
Any of the following contingencies may have a material adverse effect on our business:
| · | our customers cancel a significant number of contracts; |
| · | we fail to win a significant number of our existing contracts upon re-bid; or |
| · | we complete the required work under a significant number of non-recurring projects and cannot replace them with similar projects. |
Many of our customers may cancel their contracts on short notice, typically 30 to 90 days, even if we are not in default under the contract. Certain of our customers assign work to us on a project-by-project basis under master service agreements. Under these agreements, the customers often have no obligation to assign work to us. Our operations could be materially and adversely affected if the volume of work we anticipate receiving from these customers is not assigned to us. Many of our contracts, including our master service agreements, are opened to public bid at the expiration of their terms. We may not be the successful bidder on existing contracts that come up for bid.
Loss of a significant customer could adversely affect our SMC business.
Revenues related to our three largest telecom infrastructure services customers, Southern Maryland Electric Cooperative (“SMECO”), Verizon Communications (“Verizon”) and Electronic Data Systems (“EDS”), represented most of our business in this segment during the year ended January 31, 2008. SMECO, Verizon and EDS accounted for approximately 32%, 27% and 23% of SMC’s revenues for the year ended January 31, 2008.
Since December 31, 2007, SMC has been operating without a contract renewal with Verizon. SMC continues to perform services for Verizon at a reduced level of activity while it attempts to work with local Verizon management in negotiating a contract renewal. SMC has experienced interruptions in assigned work levels during prior-year contract renewal periods. Verizon has been a customer of SMC for more than twenty years. In April 2008, SMC received an extension of the expiring contract until June 30, 2008.
The failure to replace any reduction in work performed for Verizon, or the loss of either SMECO or EDS as a significant customer will have a material adverse effect on our business, unless the loss is offset by increases in sales to other customers.
If we fail to compete successfully against current or future competitors, our business, financial condition and results of operations will be materially and adversely affected.
We operate in highly competitive markets. We compete with service providers ranging from small regional companies which service a single market, to larger firms servicing multiple regions, as well as large national and multi-national entities. In addition, there are few barriers to entry in the telecommunications infrastructure industry. As a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors.
Competition in the telecommunications infrastructure industry depends on a number of factors, including price. Certain of our competitors may have lower overhead cost structures than we do and may, therefore, be able to provide their services at lower rates than we can provide the same services. In addition, some of our competitors are larger and have significantly greater financial resources than we do. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price and quality to our services. Similarly, we may not be able to maintain or enhance our competitive position within our industry. We may also face competition from the in-house service organizations of our existing or prospective customers.
A significant portion of our business involves providing services, directly or indirectly as a subcontractor, to the United States government under government contracts. The United States government may limit the competitive bidding on any contract under a small business or minority set-aside, in which bidding is limited to companies meeting the criteria for a small business or minority business, respectively. We are currently qualified as a small business concern, but not a minority business.
We may not be able to compete successfully against our competitors in the future. If we fail to compete successfully against our current or future competitors, our business, financial condition, and results of operations would be materially and adversely affected.
Compliance with government regulations may increase the costs of our operations and expose us to substantial civil and criminal penalties in the event that we violate applicable law.
We provide, either directly as a contractor or indirectly as a sub-contractor, products and services to the United Statesfederal government under government contracts. United States government contracts and related customer orders subject us to various laws and regulations governing United Statesfederal government contractors and subcontractors, which generally which are more restrictive than for non-government contractors. These include subjecting us to examinations by government auditors and investigators, from time to time, to ensure compliance and to review costs. Violations may result in costs disallowed, and substantial civil or criminal liabilities (including, in severe cases, denial of future contracts).
If we are unable A loss or interruption in our ability to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we may be precluded from entering into additional contracts with certain ofperform work for the federal government would have a material adverse effect on our customers.business.
Contracts in the industries we serve may require performance bonds or other means of financial assurance to secure contractual performance. The market for performance bonds has tightened significantly. If we are unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we might be precluded from entering into additional contracts with certain of our customers.
Specific Risks Relating To Our Nutritional Products Business
The inability to replace lost customer business will continue to adversely affect operating results and financial condition.
Net sales of nutritional products were approximately $16.7 million for the year ended January 31, 2008, representing 8% of consolidated net sales. Net sales of nutritional products were approximately $20.8 million for the year ended January 31, 2007. The decrease in net sales of nutritional products between years of approximately $4.2 million, or 20%, was caused primarily by the loss of one of VLI’s largest customers, representing approximately 20% of this segment’s net sales in the prior-year, and a 34% reduction in the level of net sales made to VLI’s largest customer. Net sales to this customer comprised approximately 25% of VLI’s net sales for the current year. Despite an extremely competitive business environment, this business added one significant new customer this year and increased sales to three other of VLI’s largest customers.
However, VLI is primarily a contract manufacturer of nutritional products. The ability to quickly replace lost customers or to increase the product offerings sold to existing customers is hampered by the long sales cycle inherent in our type of business. The length of time between the beginning of contract negotiation and the first sale to a new customer could exceed six months including extended periods of product testing and acceptance.
Accordingly, we do not expect this business to recover quickly despite the existence of new business prospects. Further, the loss of any existing customers or unexpected reductions in the levels of sales to such customers would exacerbate the negative and material effects of the business reductions experienced inover the current year.last two fiscal years.
Negative publicity about us, our products and/or our industry could cause our business to suffer.
Our business depends, in part, upon the public’s belief in the safety and quality of our products. Although many of the ingredients in our products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, some of our products contain innovative ingredients or combinations of ingredients. Although we test the formulation and production of our products and we believe that all of our products are safe when used as directed, there may be little long-term experience with human consumption of certain of these product ingredients or combinations thereof. Further, we have not sponsored or conducted clinical studies on the effects of human consumption. Any adverse publicity about the safety or quality of our products or our competitors’ products, whether or not accurate, could negatively affect the public’s perception of us, our products, and/or our industry, resulting in a significant decline in the demand for our products and our future operating results. Our business and products could be adversely affected by negative publicity regarding, among other things:
| · | the nutritional supplements industry; |
the nutritional supplements industry;
| · | the safety and quality of our products and ingredients; and |
the safety and quality of our products and ingredients; and
| · | regulatory investigations of our products or competitors’ products. |
regulatory investigations of our products or competitors’ products.
Our inability to respond to changing consumers’consumer demands and preferences could adversely affect our business.
The nutritional industry is subject to rapidly changing consumer demands and preferences. There can be no assurance that customers will continue to favor the products provided and manufactured by us. In addition, products that gain wide acceptance with consumers may result in a greater number of competitors entering the market which could result in downward price pressure which could adversely impact our financial results. We believe that ourany growth of this business will be materially dependent upon our ability to develop new techniques and processes necessary to meet the needs of our current customers and potential new customers. Our inability to anticipate and respond to these rapidly changing demands could have an adverse effect on our business operations.
Failure to perform effectively in an intensely competitive industry will harm our business.
The market for nutritional products is highly competitive. Our direct competition consists primarily of publicly and privately owned companies, which tend to be highly fragmented in terms of both geographical market coverage and product categories. These companies compete with us on different levels in the development, manufacture and marketing of nutritional supplements. Many of these companies have broader product lines and larger sales volume, are significantly larger than us, have greater name recognition, financial personnel, distribution and other resources than we do and may be better able to withstand volatile market conditions. There can be no assurance that our customers and potential customers will regard our products as sufficiently distinguishable from competitive products. Our inability to compete successfully would have a material adverse effect on our business.
The successful fulfillment of customer orders depends on our ability to obtain the necessary raw materials in a timely manner.
Although we believe that there are adequate sources of supply for all of our principal raw materials we require, there can be no assurance that our sources of supply for our principal raw materials will be adequate in all circumstances. In the event that such sources are not adequate, we will have to find alternate sources. As a result we may experience delays in locating and establishing relationships with alternate sources which could result in product shortages and backorders for our products, with a resulting loss of revenue torevenues for us.
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Future product liability claims may expose us to unexpected damages and expenses which could adversely affect our results of operation and financial condition.
We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. To date, we have not been the subject of any product liability claims. However, we can make no assurances that we will not be exposed to future product liability claims. Such claims may include that our products contain contaminants, that we provide consumers with inadequate instructions regarding product use, or that we provide inadequate warnings concerning side effects or interactions of our products with other substances. We believe that we maintain adequate product liability insurance coverage. However, a product liability claim could exceed the amount of our insurance coverage or a product claim could be excluded under the terms of our existing insurance policy, which could adversely affect our future results of operations and financial condition.
A violation of government regulations or our inability to obtain necessary government approvals for our products could harm our business.
business.
The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our products are subject to regulation by one or more federal agencies, including the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, the Environmental Protection Agency, and also by various agencies of the states, localities and foreign countries in which our products are sold. In particular, the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA), regulates the formulation, manufacturing, packaging, labeling, distribution and sale of dietary supplements, including vitamins, minerals and herbs, and of over-the-counter (OTC) drugs, while the FTC has jurisdiction to regulate advertising of these products, and the US Postal Service regulates advertising claims with respect to such products sold by mail order. The FDCA has been amended several times with respect to dietary supplements, most recently by the Nutrition Labeling and Education Act of 1990 and the Dietary Supplement Health and Education Act of 1994. In addition, our products are also subject to regulations under various state and local laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of dietary supplements and OTC drugs. Our inability to comply with these numerous regulations could harm our business, resulting in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions.
In the future, we may become subject to additional laws or regulations administered by the FDA or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that we consider favorable, or to more stringent interpretations of current laws or regulations. We can neither predict the nature of such future laws, regulations, repeals or interpretations, nor can we predict what effect additional governmental regulation, when and if it occurs, would have on our business. These regulations could, however, require the reformation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation or other new requirements. Any of these developments could result in sales reductions and/or unanticipated expenses having material adverse effects on our business.
Our inability to adequately protect our products from replication by competitors could have a material adverse effect on our business.
We own proprietary formulas for certain of our nutritional products. We regard our proprietary formulas as valuable assets and believe they have significant value in the marketing of our products. Because we do not have patents or trademarks on our products, there can be no assurance that another company will not replicate and market one or more of our products, thereby causing us to lose business.
Risks Relating to Our Securities
Our acquisition strategy may result in dilution to our stockholders.
Our business strategy calls for the strategic acquisition of other businesses. In connection with our acquisitionacquisitions of GPS and VLI, among other consideration, we issued approximately 3,666,6673,667,000 and 1,785,000 respectively, shares of our common stock. In addition, we issued 2,853,335 shares of our common stock, respectively. In addition, we issued 2,200,000 shares and approximately 2,853,000 shares of our common stock, respectively, in our July 2008 and December 2006 private placement. We usedplacements. In the proceeds fromaggregate, the December 2006 private placementnumber of shares issued pursuant to fund the cash portionthese transactions represents approximately 78% of the acquisition costour outstanding shares of GPS.common stock as of January 31, 2009. We anticipate that future acquisitions will require cash and issuances of our capital stock, including our common stock. To the extent we are required to pay cash for any acquisition, we anticipate that we would be required to obtain additional equity and/or debt financing. Equity financing would result in dilution for our then current stockholders. Stock issuances and financing, if obtained, may not be on terms favorable to us and could result in substantial dilution to our stockholders at the time(s) of these stock issuances and financings.
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Our officers, directors and certain key employees have substantial control over Argan.
Argan, Inc.
As of January 31, 2008,2009, our executive officers and directors as a group owned approximately 17.5%15.25% of our voting shares (giving effect to an aggregate of 360,000440,000 shares of common stock that may be purchased upon exercise of warrants and stock options held by our executive officers and directors and 1,323,270 shares beneficially held in the name of MSR Advisors, Inc. and affiliates for which one of our directors is President). In addition, another 32.52% of our voting shares were owned by William F. Griffin, Jr. and therefore,Joel M. Canino (the former owners of GPS), by Allen & Company entities and by three unaffiliated stockholder. Therefore, this small group of stockholders may have the power tosignificant influence over corporate actions such as an amendment to our certificate of incorporation, the consummation of any merger, or the sale of all or substantially all of our assets, and may substantially influence the election of directors and other actions requiring stockholder approval.
In addition, asAs of January 31, 2008, William F.2009, Messrs. Griffin Jr. and Joel M. Canino executive officers of GPS, ownowned approximately 13.5%8.57% and 11.6%6.96% of our outstanding voting shares, respectively. Therefore, Messrs. Canino and Griffin,the owners of these shares, together or individually, may have the power to influence corporate actions.
As our common stock is thinly traded, the stock price may be volatile and youinvestors may have difficulty disposing of your investmenttheir investments at prevailing market prices.
In August 2007, our common stock was approved for listing on the NYSE Amex stock exchange (formerly the American Stock Exchange (“AMEX”)Exchange) and commenced trading under the symbol AGX. Until August 2007, our common stock traded over-the-counter under the symbol AGAX.OB. Our common stock was also listed on the Boston Stock Exchange under the symbol AGX from August 4, 2003 until its voluntary delisting in September 2007. However, there were no sales of the Company’s securities on the Boston Stock Exchange during the previous two years.
Despite the new listing on the larger stock exchange, our common stock remains thinly and sporadically traded and no assurances can be given that a larger market will ever develop, or if developed, that it will be maintained.
Availability of significant amounts of our common stock for sale could adversely affect its market price.
As of January 31, 2008, we had 11,110,301 outstanding shares of common stock. OnSince February 16,1, 2007, we filed a Form S-3 registration statementhave registered significant amounts of our common stock for issuance and resale of 3,666,667including 2,400,000 shares of our common stock issued in connection with the acquisition of GPS. We filed another Form S-3 registration statement on February 20, 2007 for the resale of 2,653,335 shares of our common stock issued in connection with our December 2006 private placement. In June 2006, we registered 1,751,192 shares of our common stock on Form S-3 for resale by the selling shareholders named therein relating to shares issued in connection with our private placement in May 2006 and our acquisition of VLI. In February 2005, we registered 954,032 shares of our common stock on Form S-3 for resale by the selling shareholders named therein consisting of shares issued in connection with (i) the private sale of our common stock and (ii) our acquisition of VLI.July 2008. If our stockholders sell substantial amounts of our common stock in the public market, including shares registered under any registration statement on Form S-3, the market price of our common stock could fall.
We may issue preferred stock with rights that are superior to our common stock.
Our Certificatecertificate of Incorporation,incorporation, as amended, permits our Board of Directors to authorize the issuance of shares of preferred stock and to designate the terms of the preferred stock. The issuance of shares of preferred stock by us could adversely affect the rights of holders of common stock by, among other factors, establishing dividend rights, liquidation rights and voting rights that are superior to the rights of the holders of the common stock.
Provisions of our certificate of incorporation and Delaware law could deter takeover attempts.
Provisions of our certificate of incorporation and Delaware law could delay, prevent, or make more difficult a merger, tender offer or proxy contest involving us. Among other things, under our certificate of incorporation, our board of directors may issue up to 500,000 shares of our preferred stock and may determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of these shares of preferred stock. In addition, Delaware law limits transactions between us and persons that acquire significant amounts of our stock without approval of our board of directors.
We do not expect to pay cash dividends for the foreseeable future.
We have not paid cash dividends on our common stock since our inception and intend to retain earnings, if any, to finance the development and expansion of our business. As a result, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of cash dividends, if any, will depend on our future earnings, capital requirements and financial position, plans for expansion, general economic conditions and other pertinent factors.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
COMMENTS.
None.
ITEM 2. PROPERTIES
PROPERTIES.
We occupy our corporate headquarters in Rockville, Maryland, under a lease that expires on June 30, 2009February 28, 2014 covering 1,4952,521 square feet of office space. The headquarters of GPS, located in Glastonbury, Connecticut, is occupied pursuant to a lease that expires in October 2012 and that covers 8,304 square feet of office space. The operations of VLI are located in Naples, Florida and occupy four leased facilities; one under a monthly lease, another pursuant to a lease that will expire on July 31, 2008 and two othersfacilities, three pursuant to leases with terms that will expire on February 28, 2011. One facility is leased from the former owner of VLI.2011 and one under a monthly lease. The four buildings of VLI include approximately 26,000 square feet of warehouse space; approximately 10,000 square feet of manufacturing space; approximately 8,000 square feet of office space; and approximately 1,000 square feet of laboratory space. SMC is located in Tracys Landing, Maryland, occupying facilities under a lease that expires on December 31, 2009 and that includes extension options available through January 1, 2020. The SMC facility includes approximately four acres of land, a 2,400 square foot maintenance facility and approximately 3,900 square feet of office space. SMC also leases twoa storage and staging lotslot in the nearby St. Mary’s and Calvert Counties ofCounty, Maryland, that expireexpires in December 2008 and September 2009, respectively.
2009.
The operations of GPS and SMC in the field may require us to occupy facilities on customer premises or job sites. Accordingly, we may rent local construction offices and equipment storage yards under arrangements that are temporary in nature. These costs are expensed as incurred and are included in cost of sales.revenues.
ITEM 3. LEGAL PROCEEDINGS
PROCEEDINGS.
| 1) | | On March 22, 2005, WFC filed a civil action against the Company, and its executive officers. The suit was filed in the Superior Court of the State of California for the County of Los Angeles. WFC purchased the capital stock of the Company'sCompany’s wholly owned subsidiary, Puroflow, Incorporated, pursuant to the terms of the Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company and its executive officers breached the Stock Purchase Agreement between WFC and the Company and engaged in misrepresentations and negligent conduct with respect to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and punitive damages in |
|
| | Although the Company maintained its belief that the plaintiff’s claims were without merit, the parties agreed to an amount to be proven at trial as well as the recoveryout-of-court settlement of attorney's fees. This action was removedthis litigation. Pursuant to the United States District Court forcorresponding agreement between the Central Districtparties, the Company made a payment to WFC in the amount of California.$750,000 in December 2008 in order to settle the lawsuit. This payment was funded, in part, with $300,000 previously held in escrow related to the sale of WFC. The Company andalso received reimbursement from its officers deny that any breachinsurance company in the amount of contract or that any misrepresentations or negligence occurred on their part.$250,000 related to the settlement. |
The case was scheduled for trial on April 10, 2007. On March 15, 2007, the District Court granted the Company and its executive officers' motion for summary judgment, thereby dismissing WFC's lawsuit against the Company and its executive officers in its entirety. WFC appealed the District Court’s decision to the Ninth Circuit Court of Appeals. The parties have filed their appellate briefs and are waiting for a date to be scheduled for oral arguments. We intend to vigorously defend the appeal of this litigation.
| 2) | | On August 27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit against the Company, VLI and ourthe Company’s Chief Executive Officer (the “CEO”) in the Circuit Court of Florida for Collier County. Mr. Thomas was the former owner of VLI. The Company acquired VLI by way of merger on August 31, 2004. Mr. Thomas alleges that the Company, VLI and ourthe CEO breached various agreements regarding his compensation and employment package that arose from the acquisition of VLI. Mr. Thomas has alleged contractual and tort-based claims arising from his compensation and employment agreements and seeks rescission of his covenant not to compete against VLI. The Company, VLI and ourthe CEO deny that any breach of contract or tortious conduct occurred on their part. The Company and VLI have also asserted four counterclaims against Mr. Thomas for breach of the merger agreement, breach of his employment agreement, breach of fiduciary duty and tortious interference with contractual relations because Mr. Thomas violated his non-solicitation, confidentiality and non-compete obligations after he left VLI. We intendThe Company intends to vigorously defend this lawsuit and prosecute its counterclaims (the “VLI Merger Litigation”).counterclaims. |
3) |
| | On March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current president in the Circuit Court of Florida for Collier County. Mr. Thomas owns VFI, which hasis owned by Kevin Thomas, supplied VLI with certain organic raw materials for manufacturing VLI'sused in the manufacture of VLI products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI'sVLI’s customers. The deadline for filing a responsive pleading to this complaint is April 18,VLI and its president filed their Answer and Affirmative Defenses on May 8, 2008. The defendants vigorouslyVLI and its president deny that VLI breached any contract or that VLI’sits president defamed VLI. WeVFI. The defendants intend to continue to vigorously defend this lawsuit. |
4) | | On March 4, 2008, Mr. Thomas has also filed a lawsuit against VLI’s president for defamation in the Circuit Court of Florida for Collier County. Mr. Thomas has filed this new lawsuit against VLI’s president for defamation. Mr. Thomas alleges that VLI’s president made false statements to third-parties regarding Mr. Thomas'Thomas’ conduct that is the subject of counterclaims by the Company and VLI in the VLI Merger Litigationlitigation matter discussed above and that these statements have caused him damage to his business reputation. The deadline for filing a responsive pleading to this complaint is April 18,VLI’s president filed his answer with the court on May 8, 2008. VLI’s president vigorously denies that he defamed Mr. Thomas and intends to continue to vigorously defend this lawsuit. |
|
| | Although the Company has reviewed the claims of Mr. Thomas and VFI and believes that they are without merit, the Company’s consolidated balance sheet at January 31, 2009 included an amount in accrued expenses reflecting the Company’s estimate of the amount of future legal fees that it expects to be billed in connection with these matters. Although management does not believe that a material loss is reasonably possible related to the lawsuits in the Kevin Thomas litigation, individually or in the aggregate, the ultimate resolution of the litigation with Mr. Thomas could result in a material adverse effect on the results of operations of the Company for a particular future reporting period. |
| 3) | | On or about September 19, 2007, Tampa Bay Nutraceutical Company, Inc. (“Tampa Bay”) filed a civil action in the Circuit Court of Florida for Collier County against VLI. The current causes of action relate to an order for product issued by Tampa Bay to VLI in June 2007 and sound in (1) breach of contract; (2) promissory estoppel; (3) fraudulent misrepresentation; (4) negligent misrepresentation; (5) breach of express warranty; (6) breach of implied warranty of merchantability; (7) breach of implied warranty of fitness for a particular purpose; and (8) non-conforming goods. Tampa Bay alleges compensatory damages in excess of $9,000,000. Depositions, originally scheduled for August 2008, have not been completed. |
|
| | We are vigorously defending this litigation. Although we believe that VLI has meritorious defenses, it is impracticable to assess the likelihood of an unfavorable outcome of a trial or to estimate a likely range of potential damages, if any, at this state of the litigation. Our consolidated balance sheet at January 31, 2009 included an amount in accrued expenses reflecting our estimate of the amount of future legal fees that we expect to be billed through trial in connection with this matter. The ultimate resolution of the litigation with Tampa Bay could result in a material adverse effect on the results of operations of the Company for a particular future reporting period. |
In the normal course of business, the Company has pending claims and legal proceedings. It is our opinion, based on information available at this time, that none of the other current claims and proceedings will have a material effect on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
In August 2007, our common stock was approved for listing on the NYSE Amex stock exchange (formerly the American Stock Exchange (“AMEX”)Exchange) and commenced trading under the symbol AGX. The following table sets forth the high and low closing prices for our common stock on the NYSE Amex stock exchange for theour fiscal quarters commencing with the third quarter ended October 31, 2007, January 31, 2008 and April 30, 2008.2007.
| | | | | | | | | | |
| | | | High | | Low | |
| | | | Close | | Close | |
| | | High Close | | Low Close | | |
| Fiscal Year Ended January 31, 2008 | | | | | | | | |
| 3rd Quarter (commencing August 22, 2007) | | $ | 10.25 | | $ | 7.55 | | | $ | 10.25 | | $ | 7.55 | |
| 4th Quarter | | | 13.39 | | | 9.94 | | | 13.39 | | 9.94 | |
| | | | | | | | | |
Fiscal Year Ending January 31, 2009 | | | | | | | | |
| 1st Quarter (through March 12, 2008) | | $ | 12.25 | | $ | 11.51 | | |
| Fiscal Year Ended January 31, 2009 | | |
| 1st Quarter | | | $ | 14.65 | | $ | 11.35 | |
| 2nd Quarter | | | 18.01 | | 11.95 | |
| 3rd Quarter | | | 17.16 | | 11.64 | |
| 4th Quarter | | | 12.52 | | 8.50 | |
| | | |
| Fiscal Year Ending January 31, 2010 | | |
| 1st Quarter (through April 8, 2009) | | | $ | 14.08 | | $ | 11.37 | |
Prior to the listing on AMEX,NYSE Amex, the common stock traded over-the-counter under the symbol AGAX.OB. The following table sets forth the high and low bid quotations for our common stock for the periods indicated. These quotations represent inter-dealer prices and do not include retail markups, markdowns or commissions and may not necessarily represent actual transactions.
| | | High Bid | | Low Bid | |
| Fiscal year Ended January 31, 2006 | | | | | | | |
| 1st Quarter | | $ | 6.12 | | $ | 5.70 | |
| 2nd Quarter | | | 6.15 | | | 5.05 | |
| 3rd Quarter | | | 5.05 | | | 1.01 | |
| 4th Quarter | | | 2.65 | | | 1.90 | |
| | | | | | | | |
| Fiscal year Ended January 31, 2007 | | | | | | | |
| 1st Quarter | | $ | 2.35 | | $ | 1.90 | |
| 2nd Quarter | | | 2.70 | | | 1.80 | |
| 3rd Quarter | | | 6.40 | | | 2.00 | |
| 4th Quarter | | | 7.00 | | | 2.95 | |
| | | | | | | | |
| Fiscal year Ended January 31, 2008 | | | | | | | |
| 1st Quarter | | $ | 7.20 | | $ | 6.00 | |
| 2nd Quarter | | | 8.50 | | | 6.20 | |
| 3rd Quarter (through August 21, 2007) | | | 7.75 | | | 7.16 | |
Our common stock was also listed on the Boston Stock Exchange under the symbol AGX from August 4, 2003 until its voluntary delisting in September 2007. However, there were no sales of the Company’s securities on the Boston Stock Exchange during the periods presented above.
| | | | | | | | | |
| | | High Bid | | | Low Bid | |
| | | | | | | | | |
| Fiscal year Ended January 31, 2008 | | | | | | | | |
| 1st Quarter | | $ | 7.20 | | | $ | 6.00 | |
| 2nd Quarter | | | 8.50 | | | | 6.20 | |
| 3rd Quarter (through August 21, 2007) | | | 7.75 | | | | 7.16 | |
As of April 4, 2008,8, 2009, we had approximately 234373 stockholders of record.
To date, we have not declared or paid cash dividends to our stockholders. We have no plans to declare and pay cash dividends in the near future as we plan to use the Company’s working capital on growing our business operations.
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Equity Compensation Plan Information
The following table sets forth certain information, as of January 31, 2008,2009, concerning securities authorized for issuance under warrants and options to purchase our common stock.
| | | | | | | | | | | | | |
| | | Number of | | | Weighted- | | | Number of | |
| | | Securities | | | Average Exercise | | | Securities | |
| | | Issuable under | | | Price of | | | Remaining | |
| | | Outstanding | | | Outstanding | | | Available for | |
| | | Warrants and | | | Warrants and | | | Future | |
| | | Options | | | Options | | | Issuance (2) | |
| | | | | | | | | | | | | |
| Equity Compensation Plans Approved by the Stockholders (1) | | | 511,600 | | | $ | 8.31 | | | | 511,750 | |
| | | | | | | | | | | | | |
| Equity Compensation Plans Not Approved by the Stockholders | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Totals | | | 511,600 | | | $ | 8.31 | | | | 511,750 | |
| | | | | | | | | | |
| | | Number of Securities Issuable under Outstanding Warrants and Options | | Weighted- Average Exercise Price of Outstanding Warrants and Options | | Number of Securities Remaining Available for Future Issuance (2) | |
| | | | | | | | |
| Equity Compensation Plans Approved by the Stockholders (1) | | | 425,275 | | $ | 6.07 | | | 206,225 | |
| | | | | | | | | | | |
| Equity Compensation Plans Not Approved by the Stockholders | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Totals | | | 425,275 | | $ | 6.07 | | | 206,225 | |
| | | |
| (1) | | Approved Plans include the Company’s 2001 Stock Option Plan. As of January 31, 2008,2009, a total of 650,0001,150,000 shares of Common Stock had been authorized for issuance under the Option Plan by the stockholders. |
| |
| (2) | | Excludes the number of securities reflected in the first column of this table. |
Stock Options and Warrants
The Company’s 2001 Stock Option Plan was established in August 2001 (the “Option Plan”). Under the Option Plan, our Board of Directors may grant stock options to officers, directors and key employees. The Option Plan was amended in June 20072008 in order to authorize the grant of options for up to 650,0001,150,000 shares of common stock. Stock options that are granted may be Incentive Stock Options (“ISOs”) or nonqualified stock options” (NSOs”(“NSOs”). ISOs granted under the Option Plan have an exercise price per share at least equal to the common stock’s fair market value per share at the date of grant, a ten-year term, and typically become fully exercisable one year from the date of grant. NSOs may be granted at an exercise price per share that differs from the common stock’s fair market value per share at the date of grant, may have up to a ten-year term, and become exercisable as determined by the Board of Directors.
In connection with the Company’s private placement offering of our common stock that occurred in April 2003, we also issued warrants to purchase 230,000 shares of common stock to various parties. Included were (1) warrants to purchase an aggregate of 180,000 shares of common stock that were issued to three individuals (including the current CEO and CFO) who became executive officers of the Company upon completion of the offering, and (2) warrants to purchase 50,000 shares of common stock that were issued to MSR Advisors, Inc. One of the members of our Board of Directors is the President of MSR Advisors, Inc. The purchase price per share of common stock under all of these warrants is $7.75; the warrants expire in April 2013.December 2012. As of January 31, 2008,2009, warrants to purchase 226,000200,000 shares of common stock were outstanding.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
DATA.
Not required for companies allowed to use the scaled disclosures for smaller reporting company.companies.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FININCIALFINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATION.
The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of January 31, 2008,2009, and the results of operations for the years ended January 31, 20082009 and 2007,2008, and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in Item 8 of this Annual Report on Form 10-K.
Cautionary Statement Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 7 and elsewhere in ourthis Annual Report on Form 10-K that may constitute “forward-looking statements”. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described elsewhere in Item 1A of this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Introduction
Argan, Inc. (the “Company,” “we,” “us,” or “our”) conducts operations through our wholly ownedwholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”) that we acquired in December 2006, Vitarich Laboratories, Inc. (“VLI”) that we acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) that we acquired in July 2003. Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services to the power generation and renewable energy marketmarkets for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, we develop, manufacture and distribute premium nutritional products. Through SMC, we provide telecommunications infrastructure services including project management, construction and maintenance to the Federal Government,federal government, telecommunications and broadband service providers as well as electric utilities. ThroughEach of the wholly-owned subsidiaries represents a separate reportable segment — power industry services, nutritional products and telecommunications infrastructure services, respectively.
Overview and Outlook
For the fiscal year ended January 31, 2009, consolidated net revenues were $220.9 million which represented an increase of $14.1 million, or 6.8%, over net revenues of $206.8 million for the prior year. Net income for the fiscal year ended January 31, 2009 was $10.0 million, or $0.78 per diluted share. We reported a net loss of $3.2 million, or $(0.29) per diluted share for the fiscal year ended January 31, 2008. We increased our balance of cash and cash equivalents during the current year by $7.9 million to $74.7 million at January 31, 2009.
The increase in net revenues between years was due primarily to an increase in the net revenues of the power industry services business, which represented 91.6% of consolidated net revenues for the current fiscal year, offset partially by decreases in the net revenues of the telecommunications infrastructure and nutritional products businesses. Primarily due to the addition during the current year of the two contracts to construct power generation facilities in California, the contract backlog of GPS increased to $456 million at January 31, 2009 from $122 million at January 31, 2008.
Income from operations improved in the fiscal year ended January 31, 2009 to $14.9 million; we incurred a loss from operations of $4.2 million in the fiscal year ended January 31, 2008. Several significant factors were reflected in this improvement including 1) a favorable adjustment made to cost of revenues in the amount of $7.1 million related to the settlement by GPS of accrued amounts on a terminated construction contract, 2) the reduction between years in amortization expense related to the purchased intangible assets in the amount of $4.8 million, and 3) a $3.7 million decrease between years in impairment losses. In addition, the prior year results included a $12.0 million loss on a completed power plant contract. However, both SMC and VLI incurred losses from operations in the current fiscal year due primarily to reductions in the annual net revenues of both companies and inventory losses of $1.6 million recorded by VLI in the current year. Corporate expenses increased between years due primarily to an increase in stock option compensation expense of $635,000 and an increase in legal expenses of $351,000 relating to the WFC and Thomas matters discussed in Item 3 of this Annual Report on Form 10-K.
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During the current fiscal year, we develop, manufactureraised approximately $25 million in net cash proceeds from the private placement sale of shares of our common stock. However, our operating activities used $11.5 million cash in the current year, due primarily to a $25.0 million decrease in the balance of billings in excess of costs and distribute premiumestimated earnings. We reduced our long-term debt by $2.6 million to a balance of $4.1 million. This long-term debt amount represented only 5.2% and 3.1% of total stockholders’ equity and consolidated total assets as of January 31, 2009, respectively. Our business is not capital equipment intensive. Although our businesses made capital expenditures totaling $370,000 in the current year, the balance of net fixed assets represented less than 1% of consolidated total assets at January 31, 2009. During the current fiscal year, we also used cash to make $2.0 million in additional payments due to the former owners of GPS and to make a $1.6 million investment in GRP.
Including the performance of work included in the contract backlog of GPS and GRP at January 31, 2009, we expect to continue the growth of the Company’s consolidated net revenues in the next fiscal year and to report operating results that are profitable and that include net cash provided by operations.
However, current economic conditions in the U.S., including a deepening recession and severe disruptions in the credit markets, could adversely affect our results of operations in future periods, particularly if the economic recession is prolonged or if government efforts to stabilize financial institutions, to restore order to credit markets, to stimulate spending and to arrest rising unemployment are not effective. The current instability in the financial markets may make it difficult for certain of our customers, particularly for projects funded by private investment, to access the credit markets to obtain financing for new construction projects on satisfactory terms or at all. Although our construction project backlog has increased in the current fiscal year, we may encounter increased levels of deferrals and delays related to new construction projects in the future. Difficulty in obtaining adequate financing due to the unprecedented disruption in the credit markets may significantly increase the rate at which our customers defer, delay or cancel proposed new construction projects. Such deferrals, delays or cancellations could have an adverse impact on our future operating results. For example, the inability of a customer to obtain financing for the completion of an ethanol-production facility resulted in the current year termination of our engineering, procurement and construction services contract and the reduction of approximately $47 million in backlog.
We anticipate that the increased political focus on energy independence and the negative environmental impact of fossil fuels may spur the development of alternative and renewable power facilities which should result in new power facility opportunities for us in the future. More than half of the states have adopted formal green-energy goals and federal support for infrastructure spending remains strong. An energy infrastructure renewal program is included in the U.S. Government economic stimulus package, making funds available for water and energy projects and including tax incentives to encourage capital investment in renewable energy sources. In order to capitalize on emerging opportunities in a portion of this market, we formed a joint venture with a wind-energy development firm in June 2008 for the purpose of constructing wind-energy farms for project owners. The venture has received an initial limited notice to proceed on a project to design and build the expansion of a wind farm in Illinois. We are nearing the completion of the construction of a biodiesel production plant in Texas, the fourth such project that we will complete within a two-year period, and are pursuing other alternative fuel-production opportunities.
Moreover, we continue to observe renewed interest in gas-fired generation as electric utilities and independent power producers look to diversify their generation options. We believe that the initiatives in many states to reduce emissions of carbon dioxide and other “greenhouse gases,” and utilities’ desire to fill demand for additional power prior to the completion of more sizeable or controversial projects, are also stimulating renewed demand for gas-fired power plants. As described above, both the Colusa and Sentinel power projects are gas-fired electricity-generation plants. While it is unclear what the impact of current economic conditions might have on the timing or financing of such future projects, we expect that gas-fired power plants will continue to be an important component of long-term power generation development in the U.S. and believe our capabilities and expertise will position us as a market leader for these projects.
In summary, it is uncertain what impacts the current recession and financial/credit crisis in the U.S. may have on our business. We are continuously alert for effects of this crisis that may be impacting our business currently and any new developments that may affect us going forward. Moreover, the continuing global uncertainty and deteriorating economic conditions may impair our visibility to an unusual degree. Current or deteriorating future conditions could potentially lead to the delay, curtailment or cancellation of proposed and existing projects, thus decreasing the overall demand for our services, adversely impacting our results of operations and weakening our financial condition.
Nevertheless, we remain cautiously optimistic about our long-term growth opportunities. We are focused on expanding our position in the growing power markets where we expect investments to be made based on forecasts of increasing electricity demand covering decades into the future. We believe that our expectations are reasonable and that our future plans are based on reasonable assumptions. However, such forward-looking statements, by their nature, involve risks and uncertainties, and they should be considered conjunction with the risk factors included in Item 1A of this Annual Report on Form 10-K.
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Comparison of the Results of Operations for the Years Ended January 31, 2009 and 2008
The following schedule compares the results of our operations for the years ended January 31, 2009 and 2008. Except where noted, the percentage amounts represent the percentage of net revenues for the corresponding year. As analyzed below the schedule, we reported net income of $10.0 million for the fiscal year ended January 31, 2009, or $0.78 per diluted share. For the fiscal year ended January 31, 2008, we reported a net loss of $3.2 million, or $(0.29) per diluted share.
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| Net revenues | | | | | | | | | | | | | | | | |
| Power industry services | | $ | 202,298,000 | | | | 91.6 | % | | $ | 180,414,000 | | | | 87.2 | % |
| Nutritional products | | | 10,075,000 | | | | 4.5 | % | | | 16,669,000 | | | | 8.1 | % |
| Telecommunications infrastructure services | | | 8,553,000 | | | | 3.9 | % | | | 9,693,000 | | | | 4.7 | % |
| | | | | | | | | | | | | |
| Net revenues | | | 220,926,000 | | | | 100.0 | % | | | 206,776,000 | | | | 100.0 | % |
| | | | | | | | | | | | | |
| Cost of revenues ** | | | | | | | | | | | | | | | | |
| Power industry services | | | 169,046,000 | | | | 83.6 | % | | | 162,418,000 | | | | 90.0 | % |
| Nutritional products | | | 11,868,000 | | | | 117.8 | % | | | 14,714,000 | | | | 88.3 | % |
| Telecommunications infrastructure services | | | 7,127,000 | | | | 83.3 | % | | | 8,059,000 | | | | 83.1 | % |
| | | | | | | | | | | | | |
| Cost of revenues | | | 188,041,000 | | | | 85.1 | % | | | 185,191,000 | | | | 89.6 | % |
| | | | | | | | | | | | | |
| Gross profit | | | 32,885,000 | | | | 14.9 | % | | | 21,585,000 | | | | 10.4 | % |
| Selling, general and administrative expenses | | | 14,858,000 | | | | 6.7 | % | | | 18,983,000 | | | | 9.2 | % |
| Impairment losses | | | 3,134,000 | | | | 1.5 | % | | | 6,826,000 | | | | 3.2 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 14,893,000 | | | | 6.7 | % | | | (4,224,000 | ) | | | (2.0 | )% |
| Interest expense | | | (410,000 | ) | | | * | | | | (699,000 | ) | | | * | |
| Investment income | | | 1,755,000 | | | | * | | | | 3,311,000 | | | | 1.6 | % |
| Equity in net income of unconsolidated subsidiary | | | 507,000 | | | | * | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Income (loss) from operations before income taxes | | | 16,745,000 | | | | 7.6 | % | | | (1,612,000 | ) | | | * | |
| Income tax expense | | | (6,726,000 | ) | | | (3.1 | )% | | | (1,593,000 | ) | | | * | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 10,019,000 | | | $ | 4.5 | % | | $ | (3,205,000 | ) | | | (1.5 | )% |
| | | | | | | | | | | | | |
| | |
| * | | Less than 1%. |
|
| ** | | The cost of revenues percentage amounts represent the percentage of net revenues of the applicable segment. |
Net Revenues
Power Industry Services
Net revenues of power industry services were $202.3 million for the year ended January 31, 2009, and represented 91.6% of consolidated net revenues. For the fiscal year ended January 31, 2008, the net revenues of the power industry services business were $180.4 million, which represented 87.2% of consolidated net revenues.
Our energy-plant construction contract backlog was $456 million at January 31, 2009, not including the backlog of GRP in the amount of $30.8 million (see the discussion of our investment in this unconsolidated subsidiary below). The comparable construction contract backlog was $122 million at January 31, 2008.
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Two significant customers of the power industry services business for the current year represented approximately 54.3% and 43.9% of the net revenues of this business segment for the current year, respectively, and represented approximately 49.7% and 40.2% of our consolidated net revenues for the current year, respectively. In the aggregate, four significant customers of the power industry services business represented approximately 90.7% of its net revenues for the year ended January 31, 2008. Individually, the four customers represented approximately 30.0%, 25.4%, 20.1% and 15.3% of the net revenues of this business segment for the prior year, respectively, and they represented approximately 26.2%, 22.1%, 17.5% and 13.3% of our consolidated net revenues for the prior fiscal year, respectively. The projects for three of these four customers have been completed; one project was terminated during the current year as discussed in Note 16 to the consolidated financial statements. Projects completed by GPS over the last two years included the construction of biodiesel production facilities in Texas, a gas-fired energy power plant in California, and a gas-fired peaking power facility in Connecticut.
In May 2008, we announced that GPS signed an engineering, procurement and construction agreement with Pacific Gas & Electric Company (“PG&E”) in the amount of $340 million for the design and construction of a natural gas-fired power plant in Colusa, California. This energy plant is planned to be a 640 megawatt combined cycle facility and construction is expected to be completed in 2010. We announced the receipt from PG&E of a full notice to proceed on this project in October 2008. GPS commenced activity on this project in the fourth quarter ended January 31, 2008 under an interim notice to proceed that it received from PG&E in December 2007.
In October 2008, we announced that GPS signed an engineering, procurement and construction agreement and received a limited notice to proceed from Competitive Power Ventures Inc. (“CPV”) to design and build the Sentinel Power Project. This project, valued at $211 million, consists of eight simple cycle gas-fired peaking plants with a total power rating of 800 megawatts to be located in southern California. The project is currently expected to be completed in 2012. CPV has a power supply agreement with Southern California Edison.
Telecommunications Infrastructure Services
Net revenues of telecommunications infrastructure services were approximately $8.6 million for the year ended January 31, 2009 compared to $9.7 million for the year ended January 31, 2008, representing a decrease in the net revenues of telecommunications infrastructure services between years of approximately $1.1 million, or 11.8%. The net revenues of telecommunications services for the years ended January 31, 2009 and 2008 were 3.9% and 4.7% of consolidated net revenues for the corresponding years, respectively.
Net revenues related to inside premises customers increased by approximately 31.0% for the year ended January 31, 2009 compared with the prior year due to increases in revenues related to EDS and other customers. However, this strong performance was more than offset by a 31.9% reduction between years in the net revenues related to outside plant customers. Although SMC signed a new eighteen-month contract with Verizon during the current year and net revenues related to this customer recovered gradually during the current year, the level of business from this customer declined between years. Work performed for SMC’s other large outside plant customer also decreased between years.
Nutritional Products
The net revenues from the sale of nutritional products by VLI were $10.1 million for the fiscal year ended January 31, 2009, and represented 4.5% of consolidated net revenues. The net revenues from the sale of nutritional products were $16.7 million for the fiscal year ended January 31, 2008. This amount represented 8.1% of consolidated net revenues for the prior year. The decrease in the net revenues of nutritional products was $6.6 million, or 39.6%. The decrease primarily was due to the loss of several large customers and lower than expected sales of products, in the aggregate, to VLI’s largest current customers during the current year, resulting in net sales declines between fiscal years of $5.5 million and $1.4 million, respectively. VLI is primarily a contract manufacturer of nutritional products. The ability to quickly replace lost customers or to increase the product offerings sold to existing customers is hampered by the long sales cycle inherent in our type of business. The length of time between the beginning of contract negotiation and the first sale to a new customer could exceed six months including extended periods of product testing and acceptance.
Cost of Revenues
On a consolidated basis and expressed as a percentage of net revenues, our cost of revenues decreased to 85.1% for the year ended January 31, 2009 compared with 89.6% for the prior year. Our overall gross profit increased by $11.3 million, or 52.4%, to $32.9 million for the current fiscal year from $21.6 last year. Our gross profit percentage increased to 14.9% for the current year from 10.4% for the prior year. The gross profit improvements were due to the current year performance of GPS.
The cost of revenues for the power industry services business of GPS increased in the fiscal year ended January 31, 2009 to $169.0 million from $162.4 million in the fiscal year ended January 31, 2008. The cost of revenues as a percentage of corresponding net revenues was 83.6% for the current year compared with 90.0% last year. The gross profit of GPS for the current year was favorably affected by the adjustment to cost of revenues in the net amount of $7.1 million that is discussed below and the recognition in net revenues of earned incentive fees related to construction services that totaled approximately $3.2 million.
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During the fiscal year ended January 31, 2009, GPS recorded favorable adjustments related to the settlement of accrued amounts on a terminated construction contract that are discussed in Note 16 to the consolidated financial statements. The adjustments reduced cost of revenues for the fiscal year ended January 31, 2009 by approximately $7.1 million, net of related expenses.
Cost of revenues for the telecommunication infrastructure services business of SMC decreased by $932,000, or approximately 11.6%, in the current year compared with the prior year, but increased slightly as a percentage of corresponding net revenues to 83.3% in the current year from 83.1% last year. On an overall basis, direct labor and related costs were reduced between the years by $1.2 million. Despite increased inside plant work causing increases of $321,000 and $222,000 between fiscal years in costs incurred for subcontractors and job supplies, respectively, the profitability of the inside plant work improved between the years. On the other hand, the effects of reduced net revenues and competitive pricing pressures decreased the profit of the outside plant work between the years.
Although the cost of revenues for the nutritional products business of VLI decreased in the year ended January 31, 2009 by $2.8 million to $11.9 million from $14.7 million in the year ended January 31, 2008, the cost of revenues expressed as a percentage of corresponding net revenues increased to 117.8% in the current year from a percentage of 88.3% last year. The cost of revenues for the current year included a total provision for obsolete and overstocked inventory of $1.6 million which represented 16.2% of current year net revenues. The comparable provision amount for the prior fiscal year was $434,000. In addition, the declining sales and competitive product pricing pressures continued to squeeze gross margins and increased the recurring cost of excess production capacity. Direct labor and related manufacturing overhead costs were reduced between years by $338,000 and $277,000, or 18% and 15%, respectively. However, the reductions did not occur in proportion to the 39.6% reduction in net revenues between fiscal years.
Selling, General and Administrative Expenses
These expenses decreased to $14.9 million, or 6.7% of consolidated net revenues, for the fiscal year ended January 31, 2009 from $19.0 million, or 9.2% of consolidated net revenues, for the fiscal year ended January 31, 2008, a reduction of $4.1 million, or 21.7%.
Amortization expense related to purchased intangible assets decreased by approximately $4.8 million in the current year period compared with last year as the amortization expense related to contractual and other customer relationships decreased between years by approximately $4.2 million. Most of this decrease was scheduled and attributable to backlog for construction contracts completed by GPS last year. The impairment losses recorded by VLI last year served to reduce its amortization expense related to customer relationships and the noncompete agreement prospectively, and the amortization of propriety formulas was completed last year. Partially offsetting the favorable effects of the amortization expense reductions in the current year and reductions in expenses at GPS and VLI were increases in certain corporate expenses. Stock option compensation expense increased between years by $635,000 and legal costs and fees, related primarily to the WFC and Kevin Thomas matters, increased by $351,000 between years.
Impairment of Goodwill and Long-Lived Assets
As discussed above and in Note 9 to the consolidated financial statements, we recorded impairment losses in the current fiscal year related to purchased intangible and fixed assets of VLI in the aggregate amount of $2.0 million and related to purchased intangible assets of SMC in the amount of $1.1 million. These amounts are included in the statement of operations for the fiscal year ended January 31, 2009.
The statement of operations for the fiscal year ended January 31, 2008 included VLI impairment losses related to goodwill and other purchased intangible assets in the aggregate amount of approximately $6.8 million. Through scheduled depreciation and amortization for the long-lived assets and the impairment losses recorded by VLI during the current and prior years, the carrying values of the goodwill, other purchased intangible assets and fixed assets of VLI have been substantially eliminated. Likewise, the carrying values goodwill and the contractual customer relationships of SMC were eliminated by the impairment losses recorded in the current year.
Other Income and Expense
Our investment income includes primarily amounts received monthly on excess cash balances invested in liquid collective funds offered by the Bank. We reported investment income of $1.8 million for the fiscal year ended January 31, 2009 compared to investment income of $3.3 million for the year ended January 31, 2008, reflecting the significant decline in short-term investment returns over the last year. Interest expense, which relates primarily to two Bank term loans, declined to $410,000 in the current year from $699,000 last year due to the overall reduction in the level of debt between years.
In June 2008, we announced that GPS has entered into a business partnership for the design and construction of wind energy farms located in the United States and Canada. The business partners each own 50% of the new company, GRP, which has begun a construction project to expand a wind farm in LaSalle County, Illinois with the addition of 166 wind turbines. Our share of the net income of GRP for the current fiscal year was approximately $507,000.
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Income Tax Expense
For the fiscal year ended January 31, 2009, we incurred income tax expense of $6.7 million representing an effective income tax rate of 40.2%. The effective tax rate for the current year differs from the expected federal income tax rate of 34% due primarily to the effect of state income taxes and the unfavorable net effect of permanent differences, in particular the impairment losses of approximately $1.9 million related to the goodwill of VLI and SMC that are not deductible for income tax reporting purposes. In addition, we established a valuation allowance during the current year related to the deferred state taxes of VLI in the amount of $206,000. The unfavorable effects of these factors were offset partially in the current year by the favorable effect of a credit to the deferred tax provision in the approximate amount of $122,000 reflecting the effect of the current year change in state income tax rates applied to our deferred tax items.
Despite reporting a loss before income taxes of $1.6 million for the year ended January 31, 2008, we incurred income tax expense of approximately $1.6 million for the year. The prior year goodwill impairment loss related to VLI of approximately $5.6 million was not deductible for income tax reporting purposes, and represented a permanent difference between financial and income tax reporting. In addition, we were adversely impacted by our inability to utilize certain current operating losses for state income tax reporting purposes.
Liquidity and Capital Resources
Cash and cash equivalents increased during the current year by approximately $7.9 million to approximately $74.7 million as of January 31, 2009 compared to $66.8 million as of January 31, 2008 due primarily to the addition of the net proceeds of the private placement sale of common stock completed in July 2008. At January 31, 2009, cash equivalents included investments in collective funds managed by the Bank that invest primarily in debt securities issued or guaranteed by the federal government. Our consolidated working capital increased during the current year from approximately $16.5 million as of January 31, 2008 to approximately $53.6 million as of January 31, 2009. We also have an available balance of $4.3 million under our revolving line of credit financing arrangement with the Bank. During the current year, we reached agreement with the Bank extending the availability of the revolving line of credit to May 2010.
Although we reported net income of approximately $10.0 million for the current fiscal year and our net non-cash expenses were approximately $5.9 million, we used net cash of $11.5 million in operations. We experienced unfavorable changes between years in the amounts of several operating asset and liability accounts. During the current fiscal year, the decrease in the amount of billings in excess of costs and estimated earnings represented a $25.0 million use of cash as we approached completion of the construction of two biodiesel plants in Texas. The $6.1 million increase in the amount of costs and estimated earnings in excess of billings during the current year was due to the ramp-up in activity related to the construction of a gas-fired power plant in California. Additionally, an increase in accounts receivable during the current fiscal year used $5.1 million in cash with most of this amount provided by an increase in the amount of outstanding contract accounts receivable of GPS. Cash was provided during the current year as $4.4 million was released from escrow accounts as described in Note 4 to the consolidated financial statements. In addition, an increase in the combined amount of accounts payable and accrued expenses provided approximately $4.1 million in cash. The significant items included in our non-cash expenses for the current year were impairment losses of $3.1 million, amortization expense related to purchased intangible assets of $1.4 million, stock option compensation expense of $1.2 million and depreciation and other amortization of $992,000. As identified in Note 5 to the consolidated financial statements, a non-cash transaction resulted in reductions to accounts receivable and billings in excess of costs and estimated earnings in the amount of $22.2 million.
For the fiscal year ended January 31, 2008, despite a net loss of $3.2 million, net cash provided by operations was $42.5 million. The net amount of non-cash expenses in the prior year, including impairment losses of $6.8 million and the amortization of purchased intangible assets in the amount of $6.2 million, was approximately $12.7 million. Billings in excess of cost and earnings provided approximately $36.6 million in cash flow due primarily to an increase in cash collections as a result of a growth in operating activity. In addition, the Company reduced the amount of unbilled receivables during the prior fiscal year by approximately $11.8 million. Cash was used as accounts receivable rose by approximately $7.1 million last year. Cash was also used to reduce the level of accounts payable and accrued expenses by approximately $7.3 million during the prior year.
During the fiscal year ended January 31, 2009, investing activities consisted of the payment of $2.0 million in contingent acquisition price to the former owners of GPS (see Note 4 to the consolidated financial statements) and the capital contributions of $1.6 million made to GRP in connection with the formation and start-up of this unconsolidated subsidiary. We also purchased equipment with a net cost of $370,000 during the current year. During the year ended January 31, 2008, net cash provided by investing activities was approximately $1.4 million. The sale of investments provided net cash of $2.3 million. We used approximately $873,000 in cash to purchase equipment and other fixed assets.
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Net cash of approximately $23.2 million was provided by financing activities during the fiscal year ended January 31, 2009. We completed the private placement sale of 2.2 million shares of our common stock in July 2008, providing net cash proceeds of approximately $25.0 million, and issued approximately 124,000 shares of our common stock in connection with the exercise of stock options and warrants, providing net cash proceeds of approximately $823,000. We used cash to make debt principal payments of $2.6 million. For the year ended January 31, 2008, net cash used in financing activities was approximately $2.5 million, including primarily monthly debt installment payments. We also received cash proceeds of $77,000 during the year from the exercise of warrants and options to purchase common stock.
The Bank financing arrangements provide for the measurement at our fiscal year end and at each of our fiscal quarter ends (using a rolling 12-month period) of certain financial covenants including requirements that the ratio of total funded debt to EBITDA, as defined therein, not exceed 2 to 1, that the ratio of senior funded debt to EBITDA, as defined, not exceed 1.50 to 1, and that the fixed charge coverage ratio not be less than 1.25 to 1. At January 31, 2009 and 2008, we were in compliance with each of these financial covenants. The Bank’s consent is required for acquisitions and divestitures. We continue to pledge the majority of our assets to secure the financing arrangements.
The Bank financing arrangements contain an acceleration clause which allows the Bank to declare amounts outstanding under the financing arrangements due and payable if it determines in good faith that a material adverse change has occurred in the financial condition of any of our companies. We believe that we will continue to comply with the financial covenants under the financing arrangement. If our performance results in non-compliance with any of the financial covenants, or if the Bank seeks to exercise its rights under the acceleration clause referred to above, we would seek to modify the financing arrangement, but there can be no assurance that the Bank would not exercise their rights and remedies under the financing arrangement including accelerating payment of all outstanding senior debt due and payable.
During the current year, we demonstrated an ability to acquire growth capital despite soft capital markets as we raised approximately $25.0 million in net cash proceeds from the private placement sale of 2.2 million shares of our common stock at a price of $12 per share. We will use these proceeds to maintain an increased level of working capital liquidity in support of the growth of GPS, particularly to meet the increasing liquidity requirements of construction bond providers as the size of our construction contracts increases.
Including the cash raised in the private placement transaction, excess cash at January 31, 2009 in the aggregate amount of $70.7 million was invested in a government reserve money market fund sponsored by an investment division of the Bank. The fund invests in high quality, first-tier, money market investments with at least 80% of its net assets including U.S. Government and U.S. Treasury obligations. Operating bank accounts are maintained with Bank of America.
We believe that cash and cash equivalents on hand, cash generated from our future operations and funds available under our line of credit will be adequate to meet our operating cash needs in the foreseeable future. However, any future acquisitions, or other significant unplanned cost or cash requirement may require us to raise additional funds through the issuance of debt and/or equity securities. There can be no assurance that such financing will be available on terms acceptable to us, or at all. If additional funds are raised by issuing equity securities, significant dilution to the existing stockholders may result.
Earnings before Interest, Taxes, Depreciation and Amortization (Non-GAAP Measurement)
We believe that Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) is a meaningful presentation that enables us to assess and compare our operating cash flow performance on a consistent basis by removing from our operating results the impacts of our capital structure, the effects of the accounting methods used to compute depreciation and amortization and the effects of operating in different income tax jurisdictions. Further, we believe that EBITDA is widely used by investors and analysts as a measure of performance.
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The following table presents the determinations of EBITDA for the years ended January 31, 2009 and 2008.
| | | | | | | | | |
| | | EBITDA | |
| | | Years Ended January 31, | |
| | | 2009 | | | 2008 | |
| Net income (loss), as reported | | $ | 10,019,000 | | | $ | (3,205,000 | ) |
| Interest expense | | | 410,000 | | | | 699,000 | |
| Income tax expense | | | 6,726,000 | | | | 1,593,000 | |
| Depreciation and other amortization | | | 992,000 | | | | 1,277,000 | |
| Amortization of purchased intangible assets | | | 1,404,000 | | | | 6,184,000 | |
| | | | | | | |
| EBITDA | | $ | 19,551,000 | | | $ | 6,548,000 | |
| | | | | | | |
As EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles (“GAAP”), we do not believe that this measure should be considered in isolation from, or as a substitute for, the results of our operations presented in accordance with GAAP that are included in our consolidated financial statements. In addition, our EBITDA does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs.
As we believe that our net cash flow from operations is the most directly comparable performance measure determined in accordance with GAAP, the following table reconciles the amounts of EBITDA for the applicable periods, as presented above, to the corresponding amounts of net cash flows provided by (used in) operating activities that are presented in on our consolidated statements of cash flows.
| | | | | | | | | |
| | | Reconciliations of EBITDA | |
| | | Years Ended January 31, | |
| | | 2009 | | | 2008 | |
| EBITDA | | $ | 19,551,000 | | | $ | 6,548,000 | |
| Current income tax expense | | | (8,895,000 | ) | | | (4,298,000 | ) |
| Interest expense | | | (410,000 | ) | | | (699,000 | ) |
| Impairment losses related to goodwill and other purchased intangible assets | | | 3,134,000 | | | | 6,826,000 | |
| Non-cash stock option compensation expense | | | 1,196,000 | | | | 561,000 | |
| Provision for inventory obsolescence | | | 1,637,000 | | | | 434,000 | |
| Equity in net income of unconsolidated subsidiary | | | (507,000 | ) | | | — | |
| Decrease in escrowed cash | | | 4,398,000 | | | | 633,000 | |
| Increase in accounts receivable, net | | | (5,095,000 | ) | | | (7,099,000 | ) |
| Change related to the timing of scheduled billings | | | (31,075,000 | ) | | | 48,369,000 | |
| Other, net | | | 4,598,000 | | | | (8,775,000 | ) |
| | | | | | | |
| Net cash (used in) provided by operations | | $ | (11,468,000 | ) | | $ | 42,500,000 | |
| | | | | | | |
Off-Balance Sheet Arrangements
As of January 31, 2009, the Company’s “Off-Balance Sheet” arrangements, as that term is described by the Securities and Exchange Commission, included a $10.0 million standby letter of credit issued to support our bonding capacity provided by an insurance company. The letter of credit was issued by our bank and renews annually effective January 1.
Seasonality
The operations of our power industry and telecommunications infrastructure services segments are expected to have seasonally weaker results in the first and fourth quarters of the fiscal year, and may produce stronger results in the second and third quarters. This seasonality is primarily due to the effect of winter weather on outside plant activities as well as reduced daylight hours. The significance of seasonality on GPS depends on the geographic regions in which GPS contracts are located in any given year.
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Inflation
Our monetary assets, consisting primarily of cash, cash equivalents and accounts receivables, and our non-monetary assets, consisting primarily of goodwill and other purchased intangible assets, are not affected significantly by inflation. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and benefits, which may not be readily recoverable in the price of services offered by us.
Critical Accounting Policies
We consider the accounting policies related to revenue recognition on long-term construction contracts, the valuation of goodwill and other purchased intangiblelong-lived assets, income tax reporting and the reporting of legal matters to be most critical to the understanding of our financial position and results of operations. Critical accounting policies are those related to the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. These estimates, judgments, and assumptions affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.
We recognize a significant portion of revenues in connection with performance under long-term construction contracts pursuant to Statement of Position (SOP) No.81-1No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The types of contracts may vary and include agreements under which revenue isrevenues are based on a fixed price basis andor cost-plus-fee. Revenues from cost-plus-fee construction agreements are recognized on the basis of costs incurred during the period plus the fee earned, measured using the cost-to-cost method. Revenues from fixed price construction agreements, including a portionportions of estimated profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentage of completion method. Therefore, changes to the total estimated contract cost of a fixed price contract may affect the amount of profit or the extent of loss. The effect of the change on profit or loss is recorded in the period when the change in estimated total contract cost is determined. We review the estimates of total cost on each significant contract monthly. However, as indicated above, we recorded a loss of approximately $12.0 million during the current fiscal year in completing an energy plant in California. In the current year, we experienced unexpected costs in connection with the completion of this work caused primarily by labor productivity being below expectations and previous experience, labor rate increases due to overtime requirements to meet the completion date, equipment defects and engineering issues resulting in considerable rework and additional materials. The loss recorded in the current included the reversal of profit on this contract initially recorded in the prior year in the amount of $1.2 million.
In connection with the acquisitions of GPS, VLI and SMC, we recorded substantial amounts of goodwill and other purchased intangible assets including contractual and other customer relationships, proprietary formulas, non-compete agreements and trade names. Other than goodwill, most of our purchased intangible assets are determined to have finite useful lives. At February 1, 2007,2008, the beginning of our most recent fiscal year, goodwill and other purchased intangible assets together represented approximately 30%18% of consolidated total assets. In accordance with FASStatement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,”Assets” (“FAS No. 142”), the Company reviews goodwill for impairment at least annually. The Company tests for the impairment of goodwill pursuant to the requirements of FAS No. 142 and of the other purchased intangible assets pursuant to the requirements of FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” more frequently if events or changes in circumstances indicate that an asset value might be impaired. We utilize the assistance of professional appraisal firms in the initial determination of the fair value of these intangible assets using various techniques. Certain techniques require us to make estimates and assumptions about the future financial performance of the acquired businesses that may change in the future. The loss of businessdeclining sales and the operating losses experienced by VLI during the current year suggestedlast two years indicated that the carrying valuevalues of VLI’s goodwill and other long-lived intangible assets contractual customer relationships and non-compete agreements, may have beenwas impaired. Accordingly, the Company performed assessments of the carrying values and determined that the net unadjusted carrying values of these assets exceeded the current fair values. Accordingly, we recorded asset impairment losses related to VLI in the total amountamounts of $2.0 million and $6.8 million for the yearyears ended January 31, 2008.
2009 and 2008, respectively.
As of January 31, 20082009 and 2007,2008, our consolidated balance sheets included deferred tax assets in the total amounts of $2,423,000$4.9 million and $512,000,$2.2 million, respectively, resulting from our future deductible temporary differences. In assessing the realizability ofwhether deferred tax assets may be realizable, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our ability to realize our deferred tax assets depends primarily upon the generation of sufficient future taxable income to allow for the utilization of our deductible temporary differences and tax planning strategies. If such estimates and assumptions change in the future, we may be required to record additional valuation allowances against some or all of the deferred tax assets resulting in additional income tax expense in our consolidated statement of operations. At this time, based substantially on the strong earnings performance of our power industry services business segment, we believe that it is more likely than not that we will realize the benefit forof our net deferred tax assets.
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As discussed in Note 12 to the consolidated financial statements, we are involved in several legal matersmatters relating to VLI where litigation has been initiated against us. As discussed in Note 12, weWe deny the alleged wrongdoings and intend to vigorously defend ourselves in each case. We have concludedManagement does not believe that a material loss is reasonably possible related to the likelihood of an unfavorable outcomelawsuits in each case is neither probable nor remote as those terms are definedthe Kevin Thomas litigation, individually or in FAS No. 5, “Accounting for Contingencies.”the aggregate. However, we do maintain accrued expense balances for the estimated amounts of legal costs expected to be billed related to each matter. The aggregate amount of the legal fee reserves included in accrued expenses at January 31, 2008 was approximately $321,000. Should these estimates change, or should our assessments of the outcomes of these caseslegal matters change, losses or additional costs may be recorded.
In addition to evaluating estimates relating to the items discussed above, we also consider other estimates and judgments, including, but not limited to, those related to our allowances for doubtful accounts and inventory obsolescence. A description of the Company’s significant accounting policies, including those discussed above, are described in Note 2 to the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
New Accounting Pronouncements
As discussedIn December 2008, the Financial Accounting Standards Board (the “FASB”) announced the issuance of FASB Staff Position (“FSP”) FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in the Note 15Variable Interest Entities.” This FSP requires public entities to the accompanying consolidated financialprovide additional disclosures until proposed FASB statements, we have adopted“Accounting for Transfers of Financial Assets: an Amendment of FASB Statement No. 140” and “Amendments to FASB Interpretation No. 48,46(R)”, become effective. This FSP was effective for our consolidated financials statements for the fiscal year ending January 31, 2009. However, it did not have a material effect on our consolidated financial statements.
In November 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached consensus on Issue 08-6, “Equity Method Investment Accounting Considerations.” This issue clarifies the accounting for some transactions and impairment considerations involving all investments accounted for under the equity method. Guidance is provided regarding (1) how the initial carrying value of an equity investment should be determined, (2) how an impairment assessment of an underlying indefinite-lived intangible asset of an equity-method investment should be performed, (3) how an equity-method investee’s issuance of shares should be accounted for and, (4) how to account for a change in an investment from the equity method to the cost method. This EITF will be effective for us for our fiscal year ending January 31, 2010 and interim periods therein. We do not expect that adoption of this guidance will have a significant impact on our consolidated financial statements.
In November 2008, the EITF reached consensus on Issue No. 08-7, “Accounting for UncertaintyDefensive Intangible Assets.” Defensive assets are assets acquired in Income Taxes”. Othera business combination that the acquirer (a) does not intend to use or (b) intends to use in a way other than this change, there have been no significant changesthe assets’ highest and best use as determined by an evaluation of market participant assumptions. Defensive assets also are referred to our criticalas “locked-up assets” because while the asset is not being actively used, it is likely contributing to an increase in the value of other assets owned by the acquiring entity. This issue addresses the accounting policies during the year endedfor defensive intangible assets subsequent to initial recognition and would be effective for intangible assets acquired by us subsequent to January 31, 2008.2009. Adoption of this issue will not have a significant impact on our consolidated financial statements.
In November 2008, the EITF also reached consensus on Issue No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary.” This EITF will be effective for us for our fiscal year ending January 31, 2010 and interim periods therein. Adoption of this guidance will not have a significant impact on our consolidated financial statements.
On February 1, 2006, we adoptedIn October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” in order to clarify the application of FASB Statement of Financial Accounting StandardStandards No. 123R, “Share-based Payments,157, “Fair Value Measurements,” which requires(“SFAS No. 157”) in a market that is not active and to provide an example to illustrate the measurementkey considerations in the application of this guidance. It emphasizes that the use of a reporting entity’s own assumptions about future cash flows and recognition of compensation expense for all share-based payment awards made to employees and directors using aan appropriately risk-adjusted discount rate in determining the fair value based option pricing model,for a financial asset is acceptable when relevant observable inputs are not available. This FSP was effective upon its issuance. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and eliminatedexpands disclosures about fair value measurements. Certain provisions of this standard relating to financial assets and financial liabilities were effective for us beginning February 1, 2008. The effective provisions did not have a material impact on the alternative intrinsic value methodconsolidated financial statements. Adoption of the other provisions of this standard relating primarily to nonfinancial assets and nonfinancial liabilities will first be required for our consolidated financial statements covering the quarter ending April 30, 2009. The adoption of these provisions is not expected to have a material impact on our consolidated financial statements. The significant nonfinancial items included in our consolidated balance sheet include property and equipment, goodwill and other purchased intangible assets.
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In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This statement identifies the sources of accounting principles and the framework for share-based payments.selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the “GAAP Hierarchy”) and mandates that the GAAP Hierarchy reside in the accounting literature as opposed to the audit literature. This pronouncement became effective November 15, 2008 following approval by the SEC. This pronouncement did not have a material impact our consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) and intends to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement of Financial Accounting Standards No. 141R (see description below) and other U.S. generally accepted accounting principles. This FSP is effective for our interim and annual financial statements beginning in the fiscal year commencing February 1, 2009. We applieddo not expect the modified prospective transition method; accordingly,adoption of this FSP to have a material impact on our consolidated financial statements.
In March 2008, the Company recorded compensation expenseFASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about an entity’s derivative and hedging activities with the intent of improving the transparency of financial reporting as the use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Currently, we use interest rate swap agreements to hedge the risks related to stock optionsthe variable interest paid on our term loans. The current effects of our hedging activities are not significant to the consolidated financial statements. However, the new standard will require us to provide an enhanced understanding of 1) how and warrantswhy we use derivative instruments, 2) how we account for derivative instruments and the related hedged items, and 3) how derivatives and related hedged items affect our financial position, financial performance and cash flows. In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” a new pronouncement intended to improve the disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial statements beginning February 1, 2006 (amounting to $561,000of the sellers of these instruments and $237,000by requiring additional disclosure about the current status of the payment/performance risk of a guarantee. Adoption of FASB Statement No. 161 will first be required for our consolidated financial statements covering the quarter ending April 30, 2009. The provisions of the FSP that amend FASB Statement No. 133 and Interpretation No. 45 were adopted for our consolidated financial statements for the yearsyear ending January 31, 2008 and 2007, respectively), with no restatement of prior periods. The compensation expense relates to awards that have been granted, modified, repurchased or cancelled on or after February 1, 2006, as well to awards previously granted that were not vested as of February 1, 2006.
2009 without a material effect.
In December 2007, the FASB issued Statement of Financial Accounting StandardStandards No. 141(R),141R, “Business Combinations”. FASCombinations,” (“SFAS No. 141(R)141R”) which replaces FASSFAS No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. FASSFAS No. 141(R)141R requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, establishes principles and requirements for how an acquirer recognizes and measures any non-controlling interest in the acquiree and the goodwill acquired, and requires the acquirer to disclose the nature and financial effect of the business combination. Among other changes, this statement also requiredrequires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred and that any deferred tax benefits resulted inresulting from a business combination arebe recognized in income from continuing operations in the period of the combination. For us, FASSFAS No. 141R will be effective forapply generally to our business combinations occurring subsequent to January 31, 2009. WeThe accounting for future acquisitions, if any, may be affected by this pronouncement and will assess the impactbe evaluated by us at that SFAS 141R may have on its financial position and results of operations. time.
In December 2007, the FASB also issued FASStatement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” that establishes accounting and reporting standards for minority interests in consolidated subsidiaries. This standard will be effective for us on February 1, 2009, and its adoption wouldwill not affect our current consolidated financial statements.
In February 2007, the FASB issued FASStatement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159This standard permits companies to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of FAS No. 159 will bethis new standard were effective for us beginning February 1, 2008. We do2008 and did not expect FAS No. 159 to have a significant impact on the consolidated financial statements.
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In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. We plan to adopt FAS No. 157 on February 1, 2008, as required. The adoption of FAS No. 157 is not expected to have a material impact on our financial condition and results of operations.
Comparison of the Results of Operations for the Years Ended January 31, 2008 and 2007
The following schedule compares the results of our operations for the years ended January 31, 2008 and 2007. Except where noted, the percentage amounts represent the percentage of net sales for the corresponding year.
| | | 2008 | | 2007 | |
| Net sales | | | | | | | | | | | | | |
| Power industry services | | $ | 180,414,000 | | | 87.2 | % | $ | 33,698,000 | | | 48.9 | % |
| Nutritional products | | | 16,669,000 | | | 8.1 | % | | 20,842,000 | | | 30.3 | % |
| Telecommunications infrastructure services | | | 9,693,000 | | | 4.7 | % | | 14,327,000 | | | 20.8 | % |
| Net sales | | | 206,776,000 | | | 100.0 | % | | 68,867,000 | | | 100.0 | % |
| Cost of sales ** | | | | | | | | | | | | | |
| Power industry services | | | 162,418,000 | | | 90.0 | % | | 30,589,000 | | | 90.8 | % |
| Nutritional products | | | 14,714,000 | | | 88.3 | % | | 16,549,000 | | | 79.4 | % |
| Telecommunications infrastructure services | | | 8,059,000 | | | 83.1 | % | | 11,479,000 | | | 80.1 | % |
| Cost of sales | | | 185,191,000 | | | 89.6 | % | | 58,617,000 | | | 85.1 | % |
| Gross profit | | | 21,585,000 | | | 10.4 | % | | 10,250,000 | | | 14.9 | % |
| Selling, general and administrative expenses | | | 18,983,000 | | | 9.2 | % | | 9,863,000 | | | 14.3 | % |
| Impairment losses of VLI | | | 6,826,000 | | | 3.3 | % | | — | | | — | |
| Loss from operations | | | (4,224,000 | ) | | (2.0 | )% | | 387,000 | | | * | |
Interest expense and amortization of subordinated debt issuance costs | | | (699,000 | ) | | * | | | (708,000 | ) | | (1.0 | )% |
| Interest and other income | | | 3,311,000 | | | 1.6 | % | | 297,000 | | | * | |
Loss from operations before income taxes | | | (1,612,000 | ) | | * | | | (24,000 | ) | | * | |
| Income tax expense | | | (1,593,000 | ) | | * | | | (89,000 | ) | | * | |
| Net loss | | $ | (3,205,000 | ) | $ | (1.6 | )% | $ | (113,000 | ) | | * | |
| | | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.29 | ) | | | | $ | (0.02 | ) | | | |
| | | | | | | | | | | | | | |
| Weighted average number of shares | | | 11,097,000 | | | | | | 5,338,000 | | | | |
* Less than 1%.
** The cost of sales percentage amounts represent the percentage of net sales of the applicable segment.
The following analysis provides information as to the results of our operations for the fiscal years ended January 31, 2008 and 2007. In December 2006, we completed the acquisition of GPS, a transaction that is significant to our financial statements. As the results of operations for the current year include the operating results of GPS for the entire year and the operating results of the prior year do not, a comparison of our current year results to pro forma prior-year results follows this analysis below. The pro forma results are presented as if the acquisition of GPS and certain related transactions occurred on February 1, 2006. The acquisition of GPS represented the establishment of our power industry services business segment.
Net Sales
Power Industry Services
Net revenues of power industry services were $180.4 million for the year ended January 31, 2008, and represented 87.2% of consolidated net sales. For the period December 8, 2006 (the date of the GPS acquisition) through January 31, 2007, the net revenues of the power industry services business were $33.7 million, which represented 48.9% of consolidated net sales for the year ended January 31, 2007.
During the year ended January 31, 2008, most of the operating activities of the power industry services business related to the construction of seven facilities, including four that were substantially completed in fiscal year 2008. In the current year, GPS substantially completed two construction projects for a large biodiesel facility near Houston, Texas, built a gas-fired energy power plant in California, and constructed a gas-fired peaking power facility in Connecticut. It has projects underway managing the completion of biofuel production facilities in Texas which we expect to complete in fiscal year 2009.
The most significant customers of power industry services business for the fiscal year ended January 31, 2008 were Altra Biofuels Nebraska, LLC (“ALTRA”), Renewable Bio-Fuels Port Neches LLC (“RBF”), Green Earth Fuels of Houston LLC (“GEF”), and the Connecticut Municipal Electrical Energy Cooperative (“CMEEC”). In total, GPS recognized approximately 90% of its revenues for the fiscal year ended January 31, 2008 under contracts with these customers. The annual revenues for these four customers represented approximately 30%, 25%, 20% and 15% of the revenues of this business segment for the fiscal year ended January 31, 2008, respectively, and represented approximately 26%, 22%, 18% and 13% of the Company’s consolidated net sales for the fiscal year ended January 31, 2008, respectively.
At January 31, 2008, the total contract backlog of this business was $122 million compared to a total contract backlog of $171 million at January 31, 2007. At the end of the current year, GPS had a construction project which was in suspension pending the efforts of the customer to obtain financing to complete the construction of an ethanol facility. Under the terms of the amended engineering, procurement and construction agreement with the customer (the “EPC Agreement”), March 19, 2008 was the deadline for the customer to obtain financing for the project. If such financing was not obtained, GPS would be allowed to terminate the EPC Agreement at that time. GPS has served termination notice but the customer has not acknowledged the termination or released the construction bond. GPS continues to cooperate with the customer in its efforts to obtain financing. The amount owed to GPS by the project owner is included in accounts receivable in the consolidated balance sheet at January 31, 2008 and is approximately equal to the amount of billings in excess of cost and earnings for the project. GPS is uncertain as to the ultimate resolution of this matter, but does not anticipate any losses to arise from the resolution of this EPC Agreement.
In December 2007, the Company announced that GPS had received an interim notice to proceed from Pacific Gas & Electric Company (“PG&E”) on an approximately $340 million contract to design and build a natural gas-fired, combined cycle, power plant in Colusa, California. The Colusa facility has a planned completion date of August 1, 2010. The Company expects to complete the engineering, procurement and construction contract negotiations and receive the full notice to proceed in the first quarter of the new fiscal year. The estimated value of this contract is not included in the contract backlog amount at January 31, 2008.
Telecommunications Infrastructure Services
Net revenues of telecommunications infrastructure services were approximately $9.7 million for the year ended January 31, 2008 compared to $14.3 million for the year ended January 31, 2007, representing a decrease in the net revenues of telecommunications infrastructure services between years of $4.6 million, or 32%. The net revenues of telecommunications services for the years ended January 31, 2008 and 2007 were 4.7% and 20.8% of consolidated net sales for the corresponding years, respectively.
The decline in SMC’s revenue between years primarily relates to a reduced level of service provided to SMC’s largest inside premises customer in the amount of approximately $2.7 million. A combination of increased competition and an overall reduction in the amount of work being conducted by the customer has adversely affected the level of our business between years. Net revenue related to services provided to SMC’s outside premises customers declined by approximately $1.1 million compared to the net revenue of the prior year.
The most significant customers of SMC for the fiscal year ended January 31, 2008 were Southern Maryland Electrical Cooperative (“SMECO”), Verizon Communications, Inc. (“Verizon”) and Electronic Data Systems Corporation (“EDS”). In total, SMC recognized approximately 82% of its revenues for the fiscal year ended January 31, 2008 under contracts with these customers. Revenues provided by these customers represented approximately 32%, 27% and 23% of SMC’s revenues for the fiscal year ended January 31, 2008, and together represented approximately 3.9% of the Company’s consolidated revenues for the current year.
Since December 31, 2007, SMC has been operating without a contract renewal with Verizon. SMC continues to perform services for Verizon at a reduced level of activity while it attempts to work with local Verizon management in negotiating a contract renewal. In April 2008, SMC received an extension of the expiring contract until June 30, 2008. Verizon has been a customer of SMC for more than twenty years.
Nutritional Products
Net sales of nutritional products were $16.7 million for the year ended January 31, 2008, and represented 8.1% of consolidated net sales. Net sales of nutritional products were $20.8 million for the year ended January 31, 2007. This amount represented 30.3% of consolidated net sales for the prior-year period. The decrease in net sales of nutritional products of approximately $4.2 million, or 20%, primarily was due the loss of one of VLI’s largest customers, the Rob Reiss Companies, which represented approximately 20% of this segment’s net sales in the prior-year, and a 34% reduction in the level of net sales made to VLI’s largest customer, TriVita Corporation (“TriVita”). Net sales to TriVita comprised approximately 25% of VLI’s net sales for the current year. Despite an extremely competitive business environment, this business increased its sales to three of VLI’s largest customers, CyberWize, Renew Life and Market America, during the current year.
VLI is primarily a contract manufacturer of nutritional products. The ability to quickly replace lost customers or to increase the product offerings sold to existing customers is hampered by the long sales cycle inherent in our type of business. The length of time between the beginning of contract negotiation and the first sale to a new customer could exceed six months including extended periods of product testing and acceptance.
Cost of Sales
On an overall basis, cost of sales increased due primarily to the addition of the power industry services business for an entire year. As a percentage of net sales, cost of sales increased to 89.6% for the year ended January 31, 2008 compared with 85.1% for the prior year.
For the year ended January 31, 2008, the cost of revenues for power industry services was $162.4 million, or approximately 90.0% of corresponding net revenues. As indicated above, GPS substantially completed an energy plant in California during the current year. GPS incurred a total loss on this project of approximately $10.8 million, including $12.0 million that was recorded in the current fiscal year (including the reversal of profit on this contract initially recorded in the prior year). GPS incurred unexpected costs in connection with the completion of this work caused primarily by labor productivity being below expectations and previous experience, labor rate increases due to overtime requirements to meet the completion date, equipment defects and engineering issues resulting in considerable rework and additional materials. The total loss amount has been recorded in the accounts, and this project is now substantially complete. The profitable performance of services for the Company’s other GPS construction projects underway during the current year more than offset the loss on the California project.
For the year ended, January 31, 2008, the cost of revenues for telecommunications infrastructure services was approximately $8.1 million, or 83.1% of corresponding net revenues, compared to $11.5 million for the year ended January 31, 2007, or 80.1% of corresponding net revenues. Certain direct costs increased between years despite the decrease in revenues, causing an overall decrease in the gross profit percentage. These costs included gasoline and oil, field office and equipment rents, construction supplies and equipment depreciation. In addition, direct labor costs, and related benefit and insurance costs, did not decline substantially between years.
For the year ended January 31, 2008, the cost of sales for nutritional products was $14.7 million, or 88.3% of corresponding net sales, compared to $16.5 million, or 79.4% of corresponding net sales for the year ended January 31, 2007. The mix of products sold changed for VLI during the year, with lower-margin powder products sold to a new customer comprising a greater portion of sales. In addition, the loss of the sales volume related to the VLI customers discussed above caused VLI to re-evaluate its inventory for additional obsolete quantities. As a result, VLI recorded charges for inventory obsolescence and overstocked products that totaled $555,000 for the year. In the prior year, the inventory obsolescence charges were $96,000. These amounts were included in the cost of sales for nutritional products in the consolidated statements of operations for the corresponding periods.
Selling, General and Administrative Expenses
For the year ended January 31, 2008, selling, general and administrative expenses were $19.0 million or 9.2% of consolidated net sales compared to $9.9 million or 14.3% of consolidated net sales for the year January 31, 2007, an increase between years of approximately $9.1 million. The inclusion of a full year of such expenses for GPS increased the amount by approximately $8.6 million.
Corporate general and administrative expenses increased between years, from approximately $2.4 million for the year ended January 31, 2007 to approximately $3.8 million for the year ended January 31, 2008, due to increased litigation costs, increased professional fees including audit, tax and SOX internal control-related compliance fees, and increased stock option compensation expense.
Impairment of Goodwill and Other Purchased Intangible Assets
Due to VLI’s loss of key customer accounts, the continuing overall decline in the net sales of VLI, and the operating loss incurred by VLI during the current year, we conducted analyses of the operations of VLI in order to identify any impairment in the carrying value of the goodwill related to this business. The unadjusted amount of goodwill related to VLI prior to our analyses was approximately $6,565,000. In general, this business has reported operating results that are below expected levels. Analyzing this business using both an income approach and a market approach suggested that the current fair value of this business exceeded its carrying value. Based on these analyses, we recorded goodwill impairment losses of approximately $5.6 million during the current year, thereby reducing the goodwill related to VLI to an adjusted balance of $921,000 as of January 31, 2008.
The loss of business also suggested that the carrying value of VLI’s long-lived intangible assets, non-contract customer relationships and non-compete agreements, may be impaired. In fact, we determined that the net unadjusted carrying values of these assets exceeded the estimated amounts of undiscounted future cash flows attributable to these assets. Using fair values based on the estimated amounts of discounted cash flows, we recorded asset impairment losses in the amounts of $578,000 and $603,000, respectively, during the current year, thereby reducing the adjusted carrying values of these long-lived assets to approximately $125,000 and $12,000, respectively, as of January 31, 2008.
Interest Income and Expense
We had a decrease in interest expense to $699,000 for the year ended January 31, 2008 from $708,000 for the year ended January 31, 2007. The current year amount primarily consisted of interest related to the two bank term loans discussed above; these loans were outstanding for the entire year. The prior year amount included only partial year portions (the loans relating to VLI and GPS were drawn in September 2006 and December 2006, respectively), but included $135,000 in interest related to the subordinated note due to the former owner of VLI (the note was paid-off in the prior year), $132,000 in interest related to our Bank revolving credit line and $257,000 in amortization of debt issuance costs (amortization was completed in the prior year).
Interest and other income increased substantially between years, from $297,000 in the prior year to $3,311,000 in the current year related to the increase during the year in cash equivalents and investments that was primarily related to strong cash flow from operations.
Income Tax Expense
Despite reporting a loss before income taxes of $1.6 million for the year ended January 31, 2008, we incurred income tax expense of approximately $1.6 million for the year. The current year goodwill impairment loss of approximately $5.6 million is not deductible for income tax reporting purposes, and represents a permanent difference between financial and income tax reporting. In addition, for the current year, the Company was adversely impacted by our inability to utilize certain current operating losses for state income tax reporting purposes. For the year ended January 31, 2007, we reported a loss before income taxes of $24,000, and income tax expense of $89,000. For the prior year, the amortization of the debt issuance costs identified above in the amount of $257,000 was not deductible for income tax reporting purposes.
Comparison of the Results of Operations for the Year Ended January 31, 2008 to the Unaudited Pro Forma Results of Operations for the Year Ended January 31, 2007
The following statements compare the historical results of our operations for the year ended January 31, 2008 to the unaudited pro forma results of operations for the year ended January 31, 2007 which reflect the effects of the acquisition of GPS, the new bank financing of $8.0 million and the private offering of 2,853,335 shares as if these transactions were completed on February 1, 2006.
The unaudited pro forma statement for the prior year does not purport to be indicative of the actual results that would have been reported if the transactions described above had occurred on February 1, 2006 or that may be obtained in the future. GPS previously reported its results of operations using a calendar year-end. We believe that no material events have occurred subsequent to these reporting periods that would require adjustment to our unaudited pro forma statement of operations.
| | | 2008 | | 2007 | |
| Net sales | | | | | | | |
| Power industry services | | $ | 180,414,000 | | $ | 134,410,000 | |
| Nutritional products | | | 16,669,000 | | | 20,842,000 | |
| Telecommunications infrastructure services | | | 9,693,000 | | | 14,327,000 | |
| Net sales | | | 206,776,000 | | | 169,579,000 | |
| Cost of sales | | | | | | | |
| Power industry services | | | 162,418,000 | | | 124,005,000 | |
| Nutritional products | | | 14,714,000 | | | 16,549,000 | |
| Telecommunications infrastructure services | | | 8,059,000 | | | 11,479,000 | |
| Cost of sales | | | 185,191,000 | | | 152,033,000 | |
| Gross profit | | | 21,585,000 | | | 17,546,000 | |
| Selling and general and administrative expenses | | | 18,983,000 | | | 13,042,000 | |
| Impairment losses of VLI | | | 6,826,000 | | | — | |
| Income (loss) from operations | | $ | (4,224,000 | ) | $ | 4,504,000 | |
Net Sales
The net revenues from power industry services were approximately $180.4 million for the year ended January 31, 2008 compared with approximately $134.4 million of corresponding pro forma net revenues for the year ended January 31, 2007. The net revenues from power industry services increased between years primarily due to increased revenues from ongoing new projects that were started during the year ended January 31, 2007, including an ethanol facility, several bio-diesel projects and a power peaking facility.
The reductions in the net sales of nutritional products and telecommunication infrastructure services between periods are discussed above.
Cost of Sales
For the year ended January 31, 2008, total cost of sales of $185.2 million represented approximately 89.6% of net sales. The pro forma cost of sales for the year ended January 31, 2007 was $152.0 million, or 89.7% of net sales.
The cost of revenues for power industry services was approximately $162.4 million, or 90.0% of corresponding net revenues for the current year, compared to pro forma cost of revenues of approximately $124.0 million, or 92.3% of corresponding pro forma net revenues for the year ended January 31, 2007. The current year increase in the level of construction activity by GPS caused the increase in the cost of revenue amounts between years. The profitable performance of services on the other GPS construction projects underway during the current fiscal year more than offset the losses of approximately $12.0 million recorded on the California project during the current year.
The reductions in the cost of sales of nutraceutical products and telecommunication infrastructure services between periods are discussed above.
Selling, General and Administrative Expenses
For the year ended January 31, 2008, selling, general and administrative expenses were approximately $19.0 million, or 9.2% of consolidated net sales, compared to the pro forma amount of approximately $13.0 million for the year ended January 31, 2007, or 7.7% of consolidated pro forma net sales.
The increase of approximately $5.9 million in expenses between years was due primarily to the increased level of business activity of GPS in the current year. In addition, corporate general and administrative costs have increased between years due to increased litigation costs, increased other professional fees, including audit, tax and SOX internal control-related compliance fees, and increased stock option compensation expense.
Impairment Losses
As discussed above, we recorded impairment losses in the current year related to the goodwill and other purchased intangible assets of VLI in the total amount of $6.8 million. Accordingly, the asset impairment charges were included in the consolidated statement of operations for the year ended January 31, 2008.
Liquidity and Capital Resources
Cash and cash equivalents were approximately $66.8 million as of January 31, 2008 compared to $25.4 million as of January 31, 2007. At January 31, 2008, cash equivalents included investments in collective funds managed by our bank that invest primarily in debt securities issued by US Government-sponsored agencies. We also have an available balance of $4.3 million under our revolving line of credit financing arrangement with our bank. Our consolidated working capital has increased during the current year from approximately $12.9 million as of January 31, 2007 to approximately $16.5 million as of January 31, 2008.
Net cash provided by operations for the year ended January 31, 2008, was approximately $42.5 million compared with approximately $13.3 million of cash that was used by operations during the year ended January 31, 2007.
The Company’s non-cash expenses increased during the year ended January 31, 2008 compared to the year ended January 31, 2007. Amortization of purchased intangibles increased by approximately $3.9 million to $6.2 million for the current year, reflecting an entire current year of amortization expense related to certain GPS purchased intangible assets. In addition, current year non-cash expenses included intangible asset impairment losses of $6.8 million related to the goodwill and other purchased intangible assets of VLI. Non-cash stock option compensation expense was $561,000 for the current year compared with $237,000 for the prior year, reflecting primarily the award of stock options to GPS employees and key employees hired during the year.
Deferred income tax benefit increased to approximately $2.7 million for the year ended January 31, 2008 from a benefit of $1.0 million for the prior year.
During the year ended January 31, 2008, billings in excess of estimated earnings provided approximately $36.6 million in cash flow due primarily to the growth in operating activity. In addition, the Company reduced the amount of unbilled receivables during the current fiscal year by approximately $11.8 million; this amount was partially offset by an increase in accounts receivable of $7.1 million. Cash was used to reduce the level of accounts payable and accrued expenses by approximately $7.3 million during the current year.
During the year ended January 31, 2008, net cash provided by investing activities was approximately $1.4 million. The sale of investments provided net cash of $2.3 million. We used approximately $873,000 in cash to purchase equipment and other fixed assets. During the prior year, $22.0 million was provided by investing activities as the acquisition of GPS added approximately $23.0 million in cash. The purchase of equipment and other fixed assets in the prior year used $935,000 in cash.
For the year ended January 31, 2008, net cash used in financing activities was approximately $2.5 million, primarily including monthly installment payments on the two Bank term loans. We also received cash proceeds of $77,000 during the current year from the exercise of warrants and options to purchase our common stock. During the year ended January 31, 2007, financing activities provided $16.7 million in cash including $12.5 million in net cash proceeds received from the sale of 3.6 million shares of our common stock and $9.5 million in cash proceeds provided under the new term loan financing arrangements with the Bank. These proceeds were partially offset by $1.2 million in net payments made to pay-off amounts owed under our revolving Bank line of credit, by $3.3 million in final payments on the subordinated debt owed to the former owner of VLI, and by $796,000 in long-term debt principal payments.
The Bank financing arrangements provide for the measurement at the Company’s fiscal year end and at each of the Company’s fiscal quarter ends (using a rolling 12-month period) of certain financial covenants including requirements that the ratio of total funded debt to EBITDA not exceed 2 to 1, that the ratio of senior funded debt to EBITDA not exceed 1.50 to 1, and that the fixed charge coverage ratio not be less than 1.25 to 1. At January 31, 2008 and 2007, we were in compliance with each of these financial covenants. The Bank’s consent is required for acquisitions and divestitures. We continue to pledge the majority of the Company’s assets to secure the financing arrangements. Subsequent to January 31, 2008, the Bank agreed to extend the expiration date of the revolving line of credit to May 31, 2010.
The amended financing arrangement contains an acceleration clause which allows the Bank to declare amounts outstanding under the financing arrangements due and payable if it determines in good faith that a material adverse change has occurred in the financial condition of any of our companies. We believe that the Company will continue to comply with its financial covenants under the financing arrangement. If the Company’s performance does not result in compliance with any of its financial covenants, or if the Bank seeks to exercise its rights under the acceleration clause referred to above, we would seek to modify the financing arrangement, but there can be no assurance that the Bank would not exercise their rights and remedies under the financing arrangement including accelerating payment of all outstanding senior debt due and payable.
Management believes that cash on hand, cash generated from the Company’s future operations and funds available under the Company’s line of credit will be adequate to meet the Company’s future operating cash needs. Any future acquisitions, or other significant unplanned cost or cash requirement may require us to raise additional funds through the issuance of debt and/or equity securities. There can be no assurance that such financing will be available on terms acceptable to us, or at all. If additional funds are raised by issuing equity securities, significant dilution to the existing stockholders may result.
Earnings before Interest, Taxes, Depreciation and Amortization (Non-GAAP Measurement)
We present Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) in order to provide investors with a supplemental measure of our operating performance. The following table shows the reconciliation of our reported net losses for the years ended January 31, 2008 and 2007 to our EBITDA for the corresponding years:
| | | 2008 | | 2007 | |
| Net loss, as reported | | $ | (3,205,000 | ) | $ | (113,000 | ) |
| Interest expense and amortization of debt issuance costs | | | 699,000 | | | 708,000 | |
| Income tax expense | | | 1,593,000 | | | 89,000 | |
| Amortization of purchased intangible assets | | | 6,184,000 | | | 2,328,000 | |
| Impairment of VLI goodwill and other intangible assets | | | 6,826,000 | | | — | |
| Depreciation and other amortization | | | 1,277,000 | | | 1,108,000 | |
| Stock option compensation expense | | | 561,000 | | | 237,000 | |
| | | | | | | | |
| EBITDA | | $ | 13,935,000 | | $ | 4,357,000 | |
Management uses EBITDA, a non-GAAP financial measure, for planning purposes, including the preparation of operating budgets and to determine appropriate levels of operating and capital investments. We include in EBITDA non-cash impairment losses related to goodwill and other purchased intangible assets. Management believes that EBITDA provides additional insight for analysts and investors in evaluating the Company's financial and operational performance and in assisting investors in comparing the Company's financial performance to those of other companies in the Company's industry. However, EBITDA is not intended to be an alternative to financial measures prepared in accordance with GAAP and should not be considered in isolation from our GAAP results of operations. Pursuant to the requirements of SEC Regulation G, a detailed reconciliation between the Company's GAAP and non-GAAP financial results is provided above and investors are advised to carefully review and consider this information as well as the GAAP financial results that are disclosed in our SEC filings.
Off-Balance Sheet Arrangements
As of January 31, 2008, the Company’s “Off-Balance Sheet” arrangements, as that term is described by the Securities and Exchange Commission, included a $10.0 million standby letter of credit to support $200.0 million in bonding capacity provided by an insurance company. The letter of credit was issued by our bank and renews annually on January 1.
Seasonality
The operations of our power industry and telecommunications infrastructure services segments are expected to have seasonally weaker results in the first and fourth quarters of the fiscal year, and may produce stronger results in the second and third quarters. This seasonality is primarily due to the effect of winter weather on outside plant activities as well as reduced daylight hours. The significance of seasonality on GPS depends on the geographic regions in which GPS contracts are located in any given year.
Inflation
Our monetary assets, consisting primarily of cash, cash equivalents and accounts receivables, and our non-monetary assets, consisting primarily of goodwill and other purchased intangible assets, are not affected significantly by inflation. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and benefits, which may not be readily recoverable in the price of services offered by us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK.
Not required for companies allowed to use the scaled disclosures for smaller reporting company.companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATADATA.
See the Index to the Consolidated Financial Statements on page 41.
46 of this Annual Report.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
DISCLOSURE.
None.
ITEM 9A(T).9A. CONTROLS AND PROCEDURES
PROCEDURES.
Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8, of this Annual Report on Form 10-K sets forth the report of Grant Thornton LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting and of our assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the report of Grant Thornton LLP for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure Controls”) as of the end of the period covered by this Annual Report on Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report, which is set forth below.
The evaluation of our Disclosure Controls included a review of the control’s objectives and design, the Company’s implementation of the controls, and their effect on the information generated for the use in this Form 10-K. In the course of the controls evaluation, we reviewed identified data errors, control problems, or acts of fraud, and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. The overall goals of the evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
Based on the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our Disclosure Controls, were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC, and the material information related to Argan, Inc. and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reposting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed our internal control over financial reporting as of January 31, 2008,2009, the end of the fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our outsourced internal auditing firm.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. In addition, on a quarterly basis we will evaluate any changes to our internal control over financial reporting to determine if material change occurred.
This Annual Report on Form 10-K does not include an attestation report of the Company’sOur independent registered public accounting firm, regardingGrant Thornton LLP, audited management’s assessment and independently assessed the effectiveness of our internal control over financial reporting. Management’sreporting and has issued an audit report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary ruleson our system of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.internal control over financial reporting, which is included below.
Changes in Internal Controls
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 31, 20082009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions of deterioration in the degree of compliance with policies or procedures.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of Argan, Inc.
We have audited the internal control over financial reporting of Argan, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 31, 2009, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established inInternal Control—Integrated Frameworkissued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of January 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended and our report dated April 13, 2009 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
Baltimore, Maryland
April 13, 2009
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ITEM 9B. OTHER INFORMATION
INFORMATION.
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
GOVERNANCE.
The information required by this item will be incorporated by reference to our 20082009 Proxy Statement relating to the election of directors and other matters, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION.
The information required by this item will be incorporated by reference to our 20082009 Proxy Statement relating to the election of directors and other matters, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
MATTERS.
The information required by this item will be incorporated by reference to our 20082009 Proxy Statement relating to the election of directors and other matters, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
INDEPENDENCE.
The information required by this item will be incorporated by reference to our 20082009 Proxy Statement relating to the election of directors and other matters, which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
SERVICES.
The information required by this item will be incorporated by reference to our 20082009 Proxy Statement relating to the election of directors and other matters which is expected to be filed by us pursuant to Regulation 14A, within 120 days after the close of our fiscal year.
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ITEM 15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this annual report:
Annual Report on Form 10-K:
| | | | |
| Exhibit No. | | Description |
| | | | | |
| 3.1 | | | Certificate of Incorporation, as amended. Incorporated by reference to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 27, 2004. |
| | | | | |
| 3.2 | | | Bylaws. Incorporated by reference to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on October 15, 1991, (Registration No. 33-43228). (c) |
| | | | |
| 4.1 | | | Stock Purchase Agreement dated as of May 4, 2006 between Argan, Inc. and the purchasers identified on Schedule A attached thereto. (b)(a) |
| | | | | |
4.2.1 | 4.2 | | | Escrow Agreement dated as of May 4, 2006 between Argan, Inc. and the purchasers identified on Schedule A attached thereto. (b)(a) |
| | | | | |
| 4.3 | | | Stock Purchase Agreement dated as of December 8, 2006 by and among Argan, Inc. and the purchasers identified on Schedule A attached thereto. (e)(b) |
| | | | | |
| 4.4 | | | Stock Purchase Agreement dated as of December 8, 2006 by and between Argan, Inc. and Argan Investments LLC. (e)(b) |
| | | | | |
| 4.5 | | | Registration Rights Agreement dated December 8, 2006 by and between Argan, Inc. and Argan Investments LLC.(e)(b) |
| | | | | |
| 4.6 | | | Escrow Agreement dated as of December 8, 2006 by and among Argan, Inc., the purchasers identified on Schedule A attached thereto and Robinson & Cole LLP. (e)(b) |
| | | | | |
| 4.7 | | | Registration Rights Agreement dated as of December 8, 2006 by and among Argan, Inc., William F. Griffin, Jr. and Joel M. Canino.(e)(b) |
| | | | | |
| 4.8 | | | Escrow Agreement, dated as of December 8, 2006 by and among the Argan, Inc., William F. Griffin, Jr., Joel M. Canino, Michael Price and Curtin Law Roberson Dunigan & Salans, P.C(e)(b) |
| | | | | |
| 4.9 | | | Form of Subscription and Investment Agreement, relating to a private placement of 2.2 million shares of the Company’s common stock completed July 2, 2008. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 7, 2008. |
| | | | |
| 10.1 | | | 2001 Incentive Stock Option Plan. Incorporated by reference to the Company’s Proxy Statement filed on Schedule 14A with the Securities and Exchange Commission on August 6, 2001. |
| | | | | |
| 10.2 | | | Form of Common Stock Purchase Warrant dated April 29, 2003. Incorporated by reference to Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 27, 2004. |
| | | |
10.3 | | Employment Agreement dated as of August 31, 2004 by and between AGAX/VLI Acquisition Corporation and Kevin J. Thomas. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 7, 2004. |
| 10.4 | | | Employment Agreement dated as of January 3, 2005 by and between Argan, Inc. and Rainer H. Bosselmann. Incorporated by reference to the Company’s Form 8-K dated January 3, 2005, filed with the Securities and Exchange Commission on January 5, 2005. |
| | | | | |
| 10.5 | | | Employment Agreement dated as of January 3, 2005 by and between Argan, Inc. and Arthur F. Trudel, Jr. Incorporated by reference to the Company’s Form 8-K dated January 3, 2005, filed with the Securities and Exchange Commission on January 5, 2005. |
| | | |
10.6 | | Debt Subordination Agreement dated as of January 31, 2005 by and among Argan, Inc.,Kevin J. Thomas, Southern Maryland Cable, Inc., and Bank of America, N.A. (included as Exhibit A, a Form of Subordinated Term Note). Incorporated by reference to the Company’s Form 8-K dated January 31, 2005, filed with the Securities and Exchange Commission on February 4, 2005. |
| | |
10.7 | 10.6 | Subscription Agreement dated as of January 28, 2005 between Argan, Inc. and MSR I SBIC, L.P. Incorporated by reference to the Company’s Form 8-K, dated January 28, 2005, filed with the Securities and Exchange Commission on February 2, 2005. |
| | | |
10.8 | | Registration Rights Agreement dated as of January 28, 2005 between Argan, Inc. and MSR I SBIC, L.P. Incorporated by reference to the Company’s Form 8-K, dated January 28, 2005, filed with the Securities and Exchange Commission on February 2, 2005. |
| | |
10.9 | | Debt Subordination Agreement dated as of January 31, 2005 by and among Argan, Inc., Kevin J. Thomas, Southern Maryland Cable, Inc. and Bank of America, N.A. Incorporated by reference to the Company’s Form 8-K, dated January 31, 2005, filed with the Securities and Exchange Commission on February 4, 2005. |
| | |
10.10 | | Letter Agreement dated July 5, 2005 by and among Argan, Inc., Vitarich Laboratories, Inc. and Kevin J. Thomas. Incorporated by reference to the Company’s Form 8-K, dated July 5, 2005, filed with the Securities and Exchange Commission on July 7, 2005. |
| | |
10.11 | | Subordinated Term Note, effective as of June 30, 2005, issued by Argan, Inc. to Kevin J. Thomas. Incorporated by reference to the Company’s Form 8-K, dated July 5, 2005, filed with the Securities and Exchange Commission on July 7, 2005. |
| | |
10.12 | | Amended and Restated Debt Subordination Agreement, effective as of June 30, 2005, by and among Argan, Inc., Kevin J. Thomas, Southern Maryland Cable, Inc. and Bank of America, N.A. Incorporated by reference to the Company’s Form 8-K, dated July 5, 2005, filed with the Securities and Exchange Commission on July 7, 2005. |
| | |
10.13 | | Letter Agreement dated January 28, 2005 by and among Argan, Inc., Vitarich Laboratories, Inc. and Kevin J. Thomas. Incorporated by reference to the Company’s Form 8-K, dated August 19, 2005, filed with the Securities and Exchange Commission on August 22, 2005. |
| | |
10.14 | | Second Amended and Restated Debt Subordination Agreement dated as of May 5, 2006 by and among Kevin J. Thomas, Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc. and Bank of America, N.A. (d)
|
| | |
10.15 | | Amended and Restated Subordinated Term Note dated May 5, 2006 issued in favor of Kevin J. Thomas. (d)
|
| | |
10.16 | | Membership Interest Purchase Agreement, dated as of December 6, 2006, by and among, Argan, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California, William F. Griffin, Jr. and Joel M. Canino. (e)(b) |
| | | | | |
10.17 | 10.7 | | | Stock Purchase Agreement, dated as of December 8, 2006, by and among Argan, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California, William F. Griffin, Jr. and Joel M. Canino. (e)(b) |
| | | | | |
10.18 | 10.8 | | | Employment Agreement dated as of December 8, 2006 by and between Gemma Power Systems, LLC and Joel M. Canino. (e)(b) |
| | | | | |
10.19 | 10.9 | | | Employment Agreement dated as of December 8, 2006 by and between Gemma Power Systems, LLC and William M. Griffin, Jr. (e)(b) |
| | | | |
| 10.10 | | | First Amendment to the Employment Agreement of Joel M. Canino, dated February 29, 2008. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2008. |
10.20 | | | | |
| Exhibit No. | | Description |
| | | | |
| 10.11 | | | First Amendment to the Employment Agreement of William F. Griffin, dated February 29, 2008. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2008. |
| | | | |
| 10.12 | | | Second Amendment to the Employment Agreement of Joel M. Canino, dated March 5, 2009. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 9, 2009. |
| | | | |
| 10.13 | | | Second Amendment to the Employment Agreement of William F. Griffin, dated March 5, 2009. Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 9, 2009. |
| | | | |
| 10.14 | | | Second Amended and Restated Financing and Security Agreement dated December 11, 2006 by and among Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California, Gemma Power Hartford, LLC and Bank of America, N.A.(e)(b) |
| | | | | |
10.21 | 10.15 | | | Fourth Amended and Restated Revolving Credit Note dated December 11, 2006, issued by Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California and Gemma Power Hartford, LLC in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.22 | 10.16 | | | Amended and Restated 2006 Term Note dated December 11, 2006, issued by Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California and Gemma Power Hartford, LLC in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.23 | 10.17 | | | Acquisition Term Note dated December 11, 2006, issued by Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California and Gemma Power Hartford, LLC in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.24 | 10.18 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Argan, Inc. (on behalf of Southern Maryland Cable, Inc.) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.25 | 10.19 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Argan, Inc. (on behalf of Vitarich Laboratories, Inc.) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.26 | 10.20 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Argan, Inc. (on behalf of Gemma Power Systems, LLC) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.27 | 10.21 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Argan, Inc. (on behalf of Gemma Power, Inc.) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.28 | 10.22 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Argan, Inc. (on behalf of Gemma Power Systems California) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.29 | 10.23 | | | Pledge, Assignment and Security Agreement dated as of December 8, 2006 by Gemma Power Systems, LLC (on behalf of Gemma Power Hartford, LLC) in favor of Bank of America, N.A.(e)(b) |
| | | | | |
10.30 | 10.24 | | | Pledge and Assignment Agreement dated as of December 8, 2006 by Argan, Inc. in favor of Bank of America, N.A. for the benefit of Travelers Casualty and Surety Company of America.(e)(b) |
| | | | | |
10.31 | 10.25 | | | First Amendment to Second Amended and Restated Financing and Security Agreement, dated March 28, 2008, by and among Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California, Inc., Gemma Power Hartford, LLC and Bank of America, N.A.(f)Incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 24, 2008. |
| | | | | |
| 10.26 | | | Second Amendment to Second Amended and Restated Financing and Security Agreement, dated June 3, 2008, by and among Argan, Inc., Southern Maryland Cable, Inc., Vitarich Laboratories, Inc., Gemma Power Systems, LLC, Gemma Power, Inc., Gemma Power Systems California, Inc., Gemma Power Hartford, LLC and Bank of America, N.A.(c) |
- 42 -
| | | | |
| Exhibit No. | | Description |
| | | | |
| 14.1 | | | Code of Ethics. Incorporated by reference to Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 27, 2004. |
| | | | | |
| 14.2 | | | Argan, Inc. Code of Conduct (Amended January 2007). Incorporated by reference to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 26, 2007.
|
16
| | | | |
| 21 | | | Letter from Ernst & Young, LLP to U.S. Securities and Exchange Commission dated May 23, 2006.(c)
|
21 | | Subsidiaries of the Company. Incorporated by reference to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 26, 2007. (c) |
| | | | | |
| 23.1 | | | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.(f)(c) |
| | | | | |
| 31.1 | | | Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002.(f)(c) |
| | | | | |
| 31.2 | | | Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002.(f)(c) |
| | | | |
| 32.1 | | | Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002.(f)(c) |
| | | | | |
| 32.2 | | | Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002.(f)(c) |
| (b) | Incorporated by reference to the Company’s Form 8-K, dated May 4, 2006, filed with the Securities and Exchange Commission on May 9, 2006. |
| |
(c)(b) | Incorporated by reference to the Company’s Form 8-K, dated May 18, 2006, filed with the Securities and Exchange Commission on May 23, 2006. |
| (d) | Incorporated by reference to the Company’s Form 8-K, dated May 5, 2006, filed with the Securities and Exchange Commission on May 11, 2006. |
| (e) | Incorporated by reference to the Company’s Form 8-K, dated December 8, 2006, filed with the Securities and Exchange Commission on December 14, 2006. |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ARGAN, INC.
|
| | |
| | By:ARGAN, INC.
|
|
| By: | /s/ Rainer H. Bosselmann | |
| | | Rainer H. Bosselmann | |
| | Chairman of the Board and Chief Executive Officer |
Dated: April 13, 2009 | | Dated: April 23, 2008 |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | |
| Name | | Title | | Date |
| | | | | |
/s//s/ Rainer H. BosselmannRainer H. Bosselmann | | Chairman of the Board and Chief Executive Officer | | April 23, 2008 |
Rainer H. Bosselmann | |
(Principal Executive Officer) | | April 13, 2009 |
| | | | | |
/s//s/ Arthur F. TrudelArthur F. Trudel | | Senior Vice President, Chief Financial Officer and | | April 23, 2008 |
Arthur F. Trudel | | Secretary | | |
| |
(Principal Accounting and Financial Officer) | | April 13, 2009 |
| | | | | |
/s//s/ Henry A. CrumptonHenry A. Crumpton | | Director | | April 23, 2008 |
Henry A. Crumpton | | | | 13, 2009 |
| | | | | |
/s//s/ DeSoto S. JordanDeSoto S. Jordan | | Director | | April 23, 2008 |
DeSoto S. Jordan | | | | 13, 2009 |
| | | | | |
/s//s/ William F. LeimkuhlerWilliam F. Leimkuhler | | Director | | April 23, 2008 |
William F. Leimkuhler | | | | 13, 2009 |
| | | | | |
/s//s/ Daniel A. LevinsonDaniel A. Levinson | | Director | | April 23, 2008 |
Daniel A. Levinson | | | | 13, 2009 |
| | | | | |
/s//s/ W. G. Champion MitchellW. G. Champion Mitchell | | Director | | April 23, 2008 |
W. G. Champion Mitchell | | | | 13, 2009 |
| | | | | |
/s//s/ James W. QuinnJames W. Quinn | | Director | | April 23, 2008 |
James W. Quinn | | | | 13, 2009 |
ARGAN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
JANUARY 31, 20082009
The following financial statements and schedule (including the notes thereto and the Report of the Independent Registered Public Accounting Firm with respect thereto), are filed as part of this Annual Report onForm 10-K.
10-K.
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| | 45 | 49 | |
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| | 46 | 50 | |
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| | 67 | 72 | |
- 45 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Argan, Inc.
We have audited the accompanying consolidated balance sheets of Argan, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 31, 20082009 and 2007,2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. Our audits of the basic financial statements included the financial statement Schedule II -— Valuation and Qualifying Accounts. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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. The Company is not required to have, nor were we engaged to perform an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas 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 Argan, Inc. and subsidiaries as of January 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussedWe also have audited, in Note 2 toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial statements, effective February 1, 2007,reporting as of January 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 13, 2009 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
April 23, 200813, 2009
ARGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
| | | | | | | | | | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
ASSETS | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 66,827,000 | | $ | 25,393,000 | | | $ | 74,666,000 | | $ | 66,827,000 | |
| Accounts receivable, net of allowance for doubtful accounts | | | 30,239,000 | | | 23,185,000 | | | 12,986,000 | | 30,239,000 | |
| Investments available for sale | | | — | | | 2,283,000 | | |
| Escrowed cash | | | 14,398,000 | | | 15,031,000 | | | 10,000,000 | | 14,398,000 | |
| Estimated earnings in excess of billings | | | 242,000 | | | 12,003,000 | | |
| Costs and estimated earnings in excess of billings | | | 6,325,000 | | 242,000 | |
| Inventories, net of obsolescence reserve | | | 2,808,000 | | | 2,387,000 | | | 1,347,000 | | 2,808,000 | |
| Prepaid expenses and other current assets | | | 1,330,000 | | | 643,000 | | | 768,000 | | 1,330,000 | |
| Deferred income tax assets | | | 406,000 | | | 409,000 | | | 1,660,000 | | 406,000 | |
| | | | | | | |
TOTAL CURRENT ASSETS | | | 116,250,000 | | | 81,334,000 | | | 107,752,000 | | 116,250,000 | |
| Property and equipment, net of accumulated depreciation | | | 2,892,000 | | | 3,250,000 | | | 1,214,000 | | 2,892,000 | |
| Goodwill, net of impairment losses | | | 20,337,000 | | | 23,981,000 | | |
| Other purchased intangible assets, net of accumulated amortization and impairment losses | | | 5,296,000 | | | 12,661,000 | | |
| Goodwill | | | 18,476,000 | | 20,337,000 | |
| Intangible assets, net of accumulated amortization and impairment losses | | | 3,655,000 | | 5,296,000 | |
| Investment in unconsolidated subsidiary | | | 2,107,000 | | — | |
| Deferred income tax assets | | | 828,000 | | | — | | | 1,743,000 | | 828,000 | |
| Other assets | | | 260,000 | | | 313,000 | | | 217,000 | | 260,000 | |
| | | | | | | |
TOTAL ASSETS | | $ | 145,863,000 | | $ | 121,539,000 | | | $ | 135,164,000 | | $ | 145,863,000 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 35,483,000 | | $ | 44,255,000 | | | $ | 31,808,000 | | $ | 35,483,000 | |
| Accrued expenses | | | 9,370,000 | | | 5,873,000 | | | 14,929,000 | | 9,370,000 | |
| Billings in excess of cost and earnings | | | 52,313,000 | | | 15,705,000 | | |
| Billings in excess of cost and estimated earnings | | | 5,102,000 | | 52,313,000 | |
| Current portion of long-term debt | | | 2,581,000 | | | 2,586,000 | | | 2,301,000 | | 2,581,000 | |
| | | | | | | |
TOTAL CURRENT LIABILITIES | | | 99,747,000 | | | 68,419,000 | | | 54,140,000 | | 99,747,000 | |
| Long-term debt | | | 4,134,000 | | | 6,715,000 | | | 1,833,000 | | 4,134,000 | |
| Deferred income tax liabilities | | | — | | | 1,880,000 | | |
| Other liabilities | | | 116,000 | | | 14,000 | | | 85,000 | | 116,000 | |
| | | | | | | |
TOTAL LIABILITIES | | | 103,997,000 | | | 77,028,000 | | | 56,058,000 | | 103,997,000 | |
| | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES – See Notes 11 and 12 | | | | | | | | |
| | | | | | | | | |
STOCKHOLDERS' EQUITY: | | | | | | | | |
Preferred stock, par value $0.10 per share – 500,000 shares authorized; no shares issued and outstanding | | | — | | | — | | |
Common stock, par value $0.15 per share – 30,000,000 shares authorized; 11,113,534 and 11,097,245 shares issued at 1/31/08 and 1/31/07, and 11,110,301 and 11,094,012 shares outstanding at 1/31/08 and 1/31/07 | | | 1,667,000 | | | 1,664,000 | | |
COMMITMENTS AND CONTINGENCIES(Notes 11 and 12) | | |
| | | |
STOCKHOLDERS’ EQUITY: | | |
| Preferred stock, par value $0.10 per share — 500,000 shares authorized; no shares issued and outstanding | | | — | | — | |
| Common stock, par value $0.15 per share — 30,000,000 shares authorized; 13,437,684 and 11,113,534 shares issued at 1/31/09 and 1/31/08, and 13,434,451 and 11,110,301 shares outstanding at 1/31/09 and 1/31/08 | | | 2,015,000 | | 1,667,000 | |
| Warrants outstanding | | | 834,000 | | | 849,000 | | | 738,000 | | 834,000 | |
| Additional paid-in capital | | | 57,861,000 | | | 57,190,000 | | | 84,786,000 | | 57,861,000 | |
| Accumulated other comprehensive loss | | | (107,000 | ) | | (8,000 | ) | |
| Accumulated other comprehensive losses | | | | (63,000 | ) | | | (107,000 | ) |
| Accumulated deficit | | | (18,356,000 | ) | | (15,151,000 | ) | | | (8,337,000 | ) | | | (18,356,000 | ) |
| Treasury stock at cost – 3,233 shares at both 1/31/08 and 1/31/07 | | | (33,000 | ) | | (33,000 | ) | |
TOTAL STOCKHOLDERS' EQUITY | | | 41,866,000 | | | 44,511,000 | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 145,863,000 | | $ | 121,539,000 | | |
| Treasury stock at cost — 3,233 shares at both 1/31/09 and 1/31/08 | | | | (33,000 | ) | | | (33,000 | ) |
| | | | | | | |
TOTAL STOCKHOLDERS’ EQUITY | | | 79,106,000 | | 41,866,000 | |
| | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | $ | 135,164,000 | | $ | 145,863,000 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
ARGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
| | | 2008 | | 2007 | |
| | | | | | |
| Net sales | | | | | |
| Power industry services | | $ | 180,414,000 | | $ | 33,698,000 | |
| Nutritional products | | | 16,669,000 | | | 20,842,000 | |
| Telecommunications infrastructure services | | | 9,693,000 | | | 14,327,000 | |
| Net sales | | | 206,776,000 | | | 68,867,000 | |
| Cost of Sales | | | | | | | |
| Power industry services | | | 162,418,000 | | | 30,589,000 | |
| Nutritional products | | | 14,714,000 | | | 16,549,000 | |
| Telecommunications infrastructure services | | | 8,059,000 | | | 11,479,000 | |
| Cost of sales | | | 185,191,000 | | | 58,617,000 | |
| Gross profit | | | 21,585,000 | | | 10,250,000 | |
| | | | | | | | |
| Selling, general and administrative expenses | | | 18,983,000 | | | 9,863,000 | |
| Impairment losses of Vitarich Laboratories, Inc. | | | 6,826,000 | | | — | |
| (Loss) income from operations | | | (4,224,000 | ) | | 387,000 | |
| | | | | | | | |
| Interest expense and amortization of debt issuance costs | | | (699,000 | ) | | (708,000 | ) |
| Interest income | | | 3,311,000 | | | 297,000 | |
| Loss from operations before income taxes | | | (1,612,000 | ) | | (24,000 | ) |
| Income tax expense | | | (1,593,000 | ) | | (89,000 | ) |
| Net loss | | $ | (3,205,000 | ) | $ | (113,000 | ) |
| | | | | | | | |
| Basic and diluted loss per share | | $ | (0.29 | ) | $ | (0.02 | ) |
| Weighted average number of shares outstanding, basic and diluted | | | 11,097,000 | | | 5,338,000 | |
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
Net revenues | | | | | | | | |
| Power industry services | | $ | 202,298,000 | | | $ | 180,414,000 | |
| Nutritional products | | | 10,075,000 | | | | 16,669,000 | |
| Telecommunications infrastructure services | | | 8,553,000 | | | | 9,693,000 | |
| | | | | | | |
| Net revenues | | | 220,926,000 | | | | 206,776,000 | |
| Cost of revenues | | | | | | | | |
| Power industry services | | | 169,046,000 | | | | 162,418,000 | |
| Nutritional products | | | 11,868,000 | | | | 14,714,000 | |
| Telecommunications infrastructure services | | | 7,127,000 | | | | 8,059,000 | |
| | | | | | | |
| Cost of revenues | | | 188,041,000 | | | | 185,191,000 | |
| | | | | | | |
Gross profit | | | 32,885,000 | | | | 21,585,000 | |
| | | | | | | | | |
| Selling, general and administrative expenses | | | 14,858,000 | | | | 18,983,000 | |
| Impairment losses | | | 3,134,000 | | | | 6,826,000 | |
| | | | | | | |
Income (loss) from operations | | | 14,893,000 | | | | (4,224,000 | ) |
| | | | | | | | | |
| Interest expense | | | (410,000 | ) | | | (699,000 | ) |
| Investment income | | | 1,755,000 | | | | 3,311,000 | |
| Equity in the net income of unconsolidated subsidiary | | | 507,000 | | | | — | |
| | | | | | | |
Income (loss) from operations before income taxes | | | 16,745,000 | | | | (1,612,000 | ) |
| Income tax expense | | | (6,726,000 | ) | | | (1,593,000 | ) |
| | | | | | | |
Net income (loss) | �� | $ | 10,019,000 | | | $ | (3,205,000 | ) |
| | | | | | | |
| | | | | | | | | |
Earnings per share: | | | | | | | | |
| Basic | | $ | 0.80 | | | $ | (0.29 | ) |
| | | | | | | |
| Diluted | | $ | 0.78 | | | $ | (0.29 | ) |
| | | | | | | |
| | | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | |
| Basic | | | 12,465,000 | | | | 11,097,000 | |
| | | | | | | |
| Diluted | | | 12,779,000 | | | | 11,097,000 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
ARGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JANUARY 31, 20082009 AND 20072008
| | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | Other | | Additional | | | | | | | | | Accumulated | | | | | | | |
| | | Outstanding Shares | | Par Value | | Warrants | | Comprehensive Losses | | Paid-In Capital | | Accumulated Deficit | | Treasury Stock | | Totals | | | Common Stock | | Additional | | Other | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Outstanding | | Par | | Paid-in | | Comprehensive | | Accumulated | | Treasury | | | |
| Balance, February 1, 2006 | | | 3,814,010 | | $ | 572,000 | | $ | 849,000 | | $ | — | | $ | 25,336,000 | | $ | (15,038,000 | ) | $ | (33,000 | ) | $ | 11,686,000 | | |
| | | | Shares | | Value | | Warrants | | Capital | | Losses | | Deficit | | Stock | | Totals | |
| | | |
Balance, February 1, 2007 | | | 11,094,012 | | $ | 1,664,000 | | $ | 849,000 | | $ | 57,190,000 | | $ | (8,000 | ) | | $ | (15,151,000 | ) | | $ | (33,000 | ) | | $ | 44,511,000 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | — | | — | | — | | — | | (113,000 | ) | | — | | (113,000 | ) | | — | | — | | — | | — | | — | | | (3,205,000 | ) | | — | | | (3,205,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | — | | | — | | | (8,000 | ) | | — | | | — | | | — | | | (8,000 | ) | | — | | — | | — | | — | | | (99,000 | ) | | — | | — | | | (99,000 | ) |
| | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | (121,000 | ) | | | (3,304,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock in private offerings, net of offering costs of $58,000 | | | 3,613,335 | | 542,000 | | — | | — | | 12,000,000 | | — | | — | | 12,542,000 | | |
| | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock in connection with the GPS acquisition | | | 3,666,667 | | 550,000 | | — | | — | | 19,617,000 | | — | | — | | 20,167,000 | | |
| | | | | | | | | | | | | | | | | | | | |
| Stock option vesting | | | — | | | — | | | — | | | — | | | 237,000 | | | — | | | — | | | 237,000 | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance, January 31, 2007 | | | 11,094,012 | | | 1,664,000 | | | 849,000 | | | (8,000 | ) | | 57,190,000 | | | (15,151,000 | ) | | (33,000 | ) | | 44,511,000 | | |
| | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | — | | — | | — | | — | | (3,205,000 | ) | | — | | (3,205,000 | ) | |
| | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | — | | | — | | | (99,000 | ) | | — | | | — | | | — | | | (99,000 | ) | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | (3,304,000 | ) | |
| | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | | | 12,500 | | 2,000 | | — | | — | | 44,000 | | — | | — | | 46,000 | | | 12,500 | | 2,000 | | — | | 44,000 | | — | | — | | — | | 46,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Exercise of stock warrants | | | 4,000 | | 1,000 | | (15,000 | ) | | — | | 45,000 | | — | | — | | 31,000 | | | 4,000 | | 1,000 | | | (15,000 | ) | | 45,000 | | — | | — | | — | | 31,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Stock option vesting | | | — | | — | | — | | — | | 561,000 | | — | | — | | 561,000 | | | — | | — | | — | | 561,000 | | — | | — | | — | | 561,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Other | | | (211 | ) | | — | | | — | | | — | | | 21,000 | | | — | | | — | | | 21,000 | | | | (211 | ) | | — | | — | | 21,000 | | — | | — | | — | | 21,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Balance, January 31, 2008 | | | 11,110,301 | | $ | 1,667,000 | | $ | 834,000 | | $ | (107,000 | ) | $ | 57,861,000 | | $ | (18,356,000 | ) | $ | (33,000 | ) | $ | 41,866,000 | | | 11,110,301 | | 1,667,000 | | 834,000 | | 57,861,000 | | | (107,000 | ) | | | (18,356,000 | ) | | | (33,000 | ) | | 41,866,000 | |
| | | | | |
| | | |
| Net income | | | — | | — | | — | | — | | — | | 10,019,000 | | — | | 10,019,000 | |
| | |
| Other comprehensive income | | | — | | — | | — | | — | | 44,000 | | — | | — | | 44,000 | |
| | | | | |
| Total comprehensive income | | | 10,063,000 | |
| | | | | |
| | | |
| Sale of common stock, net of offering costs of $1,424,000 | | | 2,200,000 | | 330,000 | | — | | 24,646,000 | | — | | — | | — | | 24,976,000 | |
| | | |
| Exercise of stock options | | | 98,150 | | 14,000 | | — | | 608,000 | | — | | — | | — | | 622,000 | |
| | | |
| Exercise of stock warrants | | | 26,000 | | 4,000 | | | (96,000 | ) | | 293,000 | | — | | — | | — | | 201,000 | |
| | | |
| Stock option vesting | | | — | | — | | — | | 1,196,000 | | — | | — | | — | | 1,196,000 | |
| | | |
| Income tax benefit | | | — | | — | | — | | 182,000 | | — | | — | | — | | 182,000 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
Balance, January 31, 2009 | | | 13,434,451 | | $ | 2,015,000 | | $ | 738,000 | | $ | 84,786,000 | | $ | (63,000 | ) | | $ | (8,337,000 | ) | | $ | (33,000 | ) | | $ | 79,106,000 | |
| | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
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ARGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
| | | | | | | | | | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss | | $ | (3,205,000 | ) | $ | (113,000 | ) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
| Net income (loss) | | | $ | 10,019,000 | | $ | (3,205,000 | ) |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | |
| Impairment losses on goodwill and other purchased intangible assets | | | 6,826,000 | | | — | | | 3,134,000 | | 6,826,000 | |
| Amortization of purchased intangible assets | | | 6,184,000 | | | 2,328,000 | | | 1,404,000 | | 6,184,000 | |
| Depreciation and other amortization | | | 1,277,000 | | | 1,365,000 | | | 992,000 | | 1,277,000 | |
| Deferred income taxes | | | (2,705,000 | ) | | (1,003,000 | ) | | | (2,169,000 | ) | | | (2,705,000 | ) |
| Non-cash stock option compensation expense | | | 561,000 | | | 237,000 | | | 1,196,000 | | 561,000 | |
| Provision for inventory obsolescence | | | 555,000 | | | 133,000 | | | 1,637,000 | | 434,000 | |
| Equity in net income of unconsolidated subsidiary | | | | (507,000 | ) | | — | |
| Loss on sale of assets | | | 74,000 | | | 13,000 | | | 108,000 | | 74,000 | |
| Provision for losses on accounts receivable | | | 45,000 | | | 96,000 | | | 129,000 | | 45,000 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Escrowed cash | | | 4,398,000 | | 633,000 | |
| Accounts receivable | | | (7,099,000 | ) | | (10,820,000 | ) | | | (5,095,000 | ) | | | (7,099,000 | ) |
| Escrowed cash | | | 633,000 | | | (10,039,000 | ) | |
| Estimated earnings in excess of billings | | | 11,761,000 | | | (10,210,000 | ) | |
| Costs and estimated earnings in excess of billings | | | | (6,083,000 | ) | | 11,761,000 | |
| Inventories | | | (976,000 | ) | | 890,000 | | | | (176,000 | ) | | | (855,000 | ) |
| Prepaid expenses and other assets | | | (791,000 | ) | | (375,000 | ) | | 458,000 | | | (791,000 | ) |
| Accounts payable and accrued expenses | | | (7,278,000 | ) | | 13,890,000 | | | 4,066,000 | | | (7,278,000 | ) |
| Billings in excess of estimated earnings | | | 36,608,000 | | | 446,000 | | |
| Billings in excess of costs and estimated earnings | | | | (24,992,000 | ) | | 36,608,000 | |
| Other | | | 30,000 | | | (136,000 | ) | | 13,000 | | 30,000 | |
| Net cash provided by (used in) operating activities | | | 42,500,000 | | | (13,298,000 | ) | |
| | | | | | | |
| Net cash (used in) provided by operating activities | | | | (11,468,000 | ) | | 42,500,000 | |
| | | | | | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Payment of contingent acquisition price | | | | (2,000,000 | ) | | — | |
| Investment in unconsolidated subsidiary | | | | (1,600,000 | ) | | — | |
| Purchase of investments | | | (19,997,000 | ) | | — | | | — | | | (19,997,000 | ) |
| Proceeds from the sale of investments | | | 22,268,000 | | | — | | | — | | 22,268,000 | |
| Purchases of property and equipment | | | (873,000 | ) | | (935,000 | ) | | | (370,000 | ) | | | (873,000 | ) |
| Proceeds from the sale of property and equipment | | | 45,000 | | | 15,000 | | | 59,000 | | 45,000 | |
| Net cash provided in connection with the acquisition of GPS | | | — | | | 24,895,000 | | |
| Cash escrowed to fund contingent purchase price | | | — | | | (2,000,000 | ) | |
| Net cash provided by investing activities | | | 1,443,000 | | | 21,975,000 | | |
| | | | | | | |
| Net cash (used in) provided by investing activities | | | | (3,911,000 | ) | | 1,443,000 | |
| | | | | | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Net proceeds from the sale of common stock | | | 24,976,000 | | — | |
| Principal payments on long-term debt | | | (2,586,000 | ) | | (796,000 | ) | | | (2,581,000 | ) | | | (2,586,000 | ) |
| Proceeds from the exercise of stock options and warrants | | | 77,000 | | | — | | | 823,000 | | 77,000 | |
| Net proceeds from the sale of common stock | | | — | | | 12,542,000 | | |
| Line of credit borrowings | | | — | | | 8,511,000 | | |
| Long-term debt borrowings | | | — | | | 9,500,000 | | |
| Principal payments on line of credit | | | — | | | (9,754,000 | ) | |
| Principal payments on subordinated note | | | — | | | (3,292,000 | ) | |
| Net cash (used in) provided by financing activities | | | (2,509,000 | ) | | 16,711,000 | | |
| | | | | | | |
| Net cash provided by (used in) financing activities | | | 23,218,000 | | | (2,509,000 | ) |
| | | | | | | |
| | | | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 41,434,000 | | | 25,388,000 | | | 7,839,000 | | 41,434,000 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 25,393,000 | | | 5,000 | | | 66,827,000 | | 25,393,000 | |
| | | | | | | |
CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 66,827,000 | | $ | 25,393,000 | | | $ | 74,666,000 | | $ | 66,827,000 | |
| | | | | | | |
The accompanying notes are an integral part of these financial statements.
ARGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 20082009 AND 20072008
NOTE 1 –— ORGANIZATION
Nature of Operations
Argan, Inc. (“AI” or the “Company”Argan”) conducts its operations through its wholly owned subsidiaries, Gemma Power Systems, LLC and subsidiariesaffiliates (“GPS”) which waswere acquired in December 2006, Vitarich Laboratories, Inc. (“VLI”) which was acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) which was acquired in July 2003. Argan and its consolidated wholly-owned subsidiaries are hereinafter referred to as the “Company.” Through GPS, the Company provides a full range of development, consulting, engineering, procurement, construction, commissioning, operating and maintenance services to the power generation and renewable energy marketmarkets for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, the Company develops, manufactures and distributes premium nutritional supplements, whole-food dietary supplements and personal care products. Through SMC, the Company provides telecommunications infrastructure services including project management, construction, installation and maintenance to the Federal Government,federal government, telecommunications and broadband service providers, as well asand electric utilities primarily in the Mid-Atlantic region.
AI was organized as a Delaware corporation in May 1961. On October 23, 2003, the Company’s stockholders approved a plan providing for the internal restructuring Each of the Company whereby AI becamewholly-owned subsidiaries represents a holding company and its operating assets and liabilities relating to its Puroflow business were transferred to a newly-formed, wholly-owned subsidiary. The subsidiary then changed its name to “Puroflow Incorporated” (“PI”) and AI changed its name from Puroflow Incorporated to “Argan, Inc.” At the time of the transfer, SMC was the only wholly owned operating subsidiary of AI.separate reportable segment.
On October 31, 2003, the Company completed the sale of PI to Western Filter Corporation (“WFC”) for approximately $3.5 million in cash of which $300,000 is currently being held in escrow to indemnify the buyer from any damages resulting if a breach of representations and warranties under the Stock Purchase Agreement should occur.
Management’s Plans, Liquidity and Business Risks
As of January 31,In June 2008, the Company had an accumulated deficit of approximately $18.4 million. The Company operates in three separate and distinct competitive markets. The successful execution ofannounced that GPS entered into a business partnership with Invenergy Wind Management LLC, for the Company’s business plan is dependent upon the Company’s ability to integrate acquired companies and their related assets into its operations, its ability to increase and retain its customers, the ability to maintain compliance with significant government regulation, the ability to attract and retain key employees and the Company’s ability to manage its growth and expansion, among other factors. During the year ended January 31, 2007, the Company completed two significant transactions that strengthened its balance sheet, enhanced its liquidity and improved its operating results
On December 8, 2006, the Company acquired all of the outstanding membership interests in Gemma Power Systems, LLC (“GPS LLC”) and all of the issued and outstanding shares of capital stock of Gemma Power, Inc. (“GPI”) and Gemma Power Systems California, Inc. (“GPS-California”) (collectively referred to as “GPS”). GPS is located in Glastonbury, Connecticut and is engaged in the engineeringdesign and construction of biodieselwind farms located in the United States and ethanol production facilities and traditional power energy systemsCanada (see Note 4)8).
On December 11, 2006, the Company amended its financing arrangements with the Bank The partners each own 50% of America (the “Bank”a new company, Gemma Renewable Power, LLC (“GRP”). The amended financing arrangements reducedCompany expects that GRP will provide engineering, procurement and construction services for new wind farms generating electrical power including the interest rate ondesign and construction of roads, foundations, and electrical collection systems, as well as the 3-year term loan for VLI to LIBOR plus 3.25% per annum (from LIBOR plus 3.45% per annum). The principal balanceerection of this loan was approximately $1.4 million on the amendment date. The Company borrowed $1.5 million under this note on August 31, 2006 in order to pay the remaining amounts owed to the former owner of VLI under a subordinated note. The financing arrangements also 1) permitted the Company to borrow $8 million under a new 4-year term loan, the proceeds from which were used in the acquisition of GPS, that bears floating interest based on LIBOR plus 3.25% per annumtowers, turbines and 2) included a revolving loan facility with a maximum borrowing amount of $4.3 million. Borrowings under this facility would also bear interest at LIBOR plus 3.25% per annum (see Note 10). Subsequent to January 31, 2008, the Bank agreed to extend the expiration date of the revolving loan facility to May 31, 2010.blades.
At January 31, 2008, the Company had approximately $66.7 million in unrestricted cash and cash equivalents, and had an excess of current assets over current liabilities of approximately $16.4 million. Management believes that capital resources on hand, available under its renewed line of credit and cash generated from the Company’s future operations will be adequate to meet the Company’s future operating cash needs. Accordingly, the carrying value of the assets and liabilities in the accompanying balance sheet do not reflect any adjustments should the Company be unable to meet its future operating cash needs in the ordinary course of business. The Company continues to take various actions to align its cost structure to appropriately match its expected revenues, including limiting its operating expenditures and controlling its capital expenditures. Any future acquisitions, other significant unplanned costs or cash requirements may require the Company to raise additional funds through the issuance of debt and equity securities. There can be no assurance that such financing will be available on terms acceptable to the Company, or at all. If additional funds are raised by issuing equity securities, significant dilution to the existing stockholders may result.
NOTE 2 –— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation –— The consolidated financial statements include the accounts of AIArgan and its wholly-owned subsidiaries. The Company’s fiscal year ends on January 31. The results of companies acquired during a reporting period are included in the consolidated financial statements from the effective date of the acquisition. All significant inter-company balances and transactions have been eliminated in consolidation. The Company accounts for its investment in GRP using the equity method. In accordance with the requirements of Statement of Financial Accounting Standard (“FAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,”Note 18, the Company has provided certain financial information relating to the operating results and assets of its industry segments (see Note 17) based on the manner in which management disaggregates the Company’s financial reporting for purposes of making internal operating decisions. Certain amounts in the prior year consolidated financial statements have been reclassified to conform with the presentation in the current year consolidated financial statements.
Use of Estimates –— The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue, expenses, and certain financial statement disclosures. Management believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments and assumptions are made. Estimates are used for, but not limited to, the Company’s accounting for revenue recognition, allowance for doubtful accounts, inventory valuation, long livedlong-lived assets including goodwill and intangible assets, contingent obligations, and deferred taxes. Actual results could differ from these estimates.
Reclassifications– Certain amounts in the prior year consolidated financial statements have been reclassified to conform with the presentation in the current year consolidated financial statements.
Cash and Cash Equivalents –— The Company considers all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company holds cash or liquid mutual fund investments on deposit at banks in excess of federally insured limits. However, due to a belief in the financial strength of the financial institutions, primarily Bank of America (the “Bank”), management does not believe that the risk associated with keeping deposits in excess of federal deposit limits represents a material risk currently.
Fair Value of Financial Instruments— The carrying value amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are reasonable estimates of their fair values due to the short-term nature of these instruments. The carrying value amounts of the Company’s term loans approximate their fair values because the applicable interest rates are variable.
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Investments Available for Sale – The Company accounts for its investments in debt and equity securities in accordance withadopted Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”) during the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and reports its investments as available for sale securities at their fair value, with any unrealized gains and losses reflected in other comprehensive loss, a separate component of stockholders’ equity. If management determines that an investment has an other than temporary decline in fair value, generally defined as when the cost basisfirst quarter of the investment exceeds the fair value for approximately six months, the Company records the investment loss in the consolidated statement of operations. Management periodically evaluates its investments to determine if impairment charges are required. As of January 31, 2007, investments available for sale included municipal bonds with a cost and fair value of approximately $2.3 million. The bonds were sold during thefiscal year ended January 31, 2008.2009 which resulted in no material impact to the consolidated financial statements. SFAS No. 157 applies to all assets and liabilities that are being measured and reported on a fair value basis with the exception of nonfinancial assets and nonfinancial liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. SFAS No. 157 prescribes a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. Level 1 inputs include quoted market prices in an active market or the price of an identical asset or liability. The Company currently has no assets or liabilities for which it utilizes Level 1 inputs. Level 2 inputs are market data other than Level 1 that are observable either directly or indirectly including quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. The Company’s assets and liabilities that utilize Level 2 inputs include the interest rate swap liability associated with its long term debt. Level 3 inputs are unobservable and corroborated by little or no market data. The Company’s fair value measurements that utilize Level 3 inputs consist primarily of nonfinancial assets and nonfinancial liabilities for which the provisions of SFAS No. 157 have been deferred (see Note 3 to the consolidated financial statements).
Fair Value ofDerivative Financial Instruments –— The carrying amount of certainCompany uses interest rate swap agreements to hedge the fluctuations in variable interest rates related to long term debt. The Company recognizes these derivatives as either assets or liabilities in the consolidated balance sheet and they are carried at fair value. Such amounts, included in other liabilities at January 31, 2009 and 2008, were $63,000 and $107,000, respectively. As the interest rate swap agreements have been designated as cash flow hedging instruments and are effective as hedges, changes in the fair value amounts of the Company’s financial instruments, including accounts receivable and accounts payable, approximates fair value dueinterest rate swap agreements are recorded in accumulated other comprehensive income/loss. Any instrument that would not qualify for hedge accounting would be marked to the relatively short maturity of such instruments. The Company’s variable rate short-term line of credit and variable rate long-term debt approximate fair value because the interest rates are variable.market with changes recorded in current earnings.
Inventories–— Inventories are stated at the lower of cost or market (i.e., net realizable value). Cost is determined on the first-in first-out (FIFO) method and includes material, labor and overhead costs. Fixed overhead is allocated to inventory is based on the normal capacity of the Company’s production facilities. Any costs related to idle facilities, excess spoilage, excess freight or re-handling are expensed currently as period costs. Appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors (i.e. -— lot expiration dates, the ability to recertify or test for extended expiration dates, the number of products that can be produced using the available raw materials and the market acceptance or regulatory issues surrounding certain materials) in evaluating net realizable value.
Inventories consisted of the following amounts at January 31, 2008 and 2007:
| | | 2008 | | 2007 | |
| Raw materials | | $ | 2,846,000 | | $ | 2,264,000 | |
| Work-in-process | | | 43,000 | | | 100,000 | |
| Finished goods | | | 144,000 | | | 127,000 | |
| | | | 3,033,000 | | | 2,491,000 | |
| Less - reserves | | | (225,000 | ) | | (104,000 | ) |
| Inventories, net | | $ | 2,808,000 | | $ | 2,387,000 | |
Property and Equipment –— Property and equipment are stated at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which are generally from five to twenty years. Leasehold improvements are amortized on a straight-line basis over the estimated useful life of the related asset or the lease term, whichever is shorter. The costs of maintenance and repairs (totaling $315,000 and $588,000 for the years ended January 31, 2008 and 2007, respectively,) are expensed as incurred and major improvements are capitalized. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income.
Investment in Unconsolidated Subsidiary— The Company accounts for its investment in GRP using the equity method. Under this method, the Company records its proportionate share of GRP’s net income or loss based on the most recent available financial statements. As GRP follows a calendar year basis of financial reporting, the Company’s results of operations for the fiscal year ended January 31, 2009 included the Company’s share of GRP’s net income from May 27, 2008 (the date of formation) through December 31, 2008.
Goodwill and Other Indefinite-Lived Intangible Assets–— In connection with the acquisitions of GPS, VLI and SMC, the Company recorded substantial amounts of goodwill and other purchased intangible assets including contractual and other customer relationships, proprietary formulas, non-compete agreements and trade names. In accordance with FAS No. 142 “Goodwill and Other Intangible Assets,” theThe Company reviews for impairment, at least annually, the carrying values of goodwill and other purchased intangible assets deemed to have an indefinite life. The Company tests for impairment of goodwill and these other intangible assets more frequently if events or changes in circumstances indicate that the asset value might be impaired.
Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimatesestimate of fair value of a reporting unit, generally a Company’s operating segment, is determined using various valuation techniques, with the principal techniques being a discounted cash flow analysis and market multiple valuation. A discounted cash flow analysis requires making various judgmental assumptions, including assumptions about future cash flows, growth rates and discount rates. If afterAfter taking into consideration industry and Company trends, if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not deemed impaired and the second step of the impairment test is not performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Accordingly, the fair value of the reporting unit is allocated to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
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Long-Lived Assets including Definite-Lived Intangible Assets –— Long-lived assets, consisting primarily of purchased intangible assets with definite lives and property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amountamounts should be assessed pursuant to FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”assessed. The Company determines whether any impairment exists by comparing the carrying value of thesea long-lived assetsasset to the undiscounted future cash flows expected to result from the use of thesethe assets. In the event the Company determines that an impairment of value exists, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the assets,asset, which is generally determined by using quoted market prices or valuation techniques such as the present value of expected future cash flows, appraisals, or other pricing models as appropriate. The useful lives and amortization of purchased intangible assets are described in Note 9.
Derivative Financial Instruments – In the year ended January 31, 2007 the Company began using interest rate swaps to hedge the fluctuation in interest rates for long term debt. The Company recognizes these derivatives in the consolidated balance sheet as either assets or liabilities and they are measured at fair value. As the interest rate swaps have been designated as cash flow hedges, changes in the fair value of the interest rate swap agreements are recorded in accumulated other comprehensive loss for the effective portion of the hedges. Amounts are reclassified into earnings and are included as interest expense when the interest expense on the underlying borrowings is recognized.
Revenue Recognition – Gemma— Power Systems – GPSIndustry Services— This business segment recognizes revenuenet revenues pursuant to Statement of Position (SOP) No.81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue isRevenues are recognized under various construction agreements, including agreements under which revenue is based on a fixed price basis and cost-plus-fee. Revenues from cost-plus-fee construction agreements are recognized on the basis of costs incurred during the period plus the fee earned, measured using the cost-to-cost method. Revenues from fixed price construction agreements, including a portion of estimated profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentage of completion method. Changes to total estimated contract costcosts or losses, if any, are recognized in the period in which they are determined. Unapproved change orders, if any exist, are accounted for in revenuerevenues and costcosts when it is probable that the costcosts will be recovered through a change in the contract price. In circumstances where recovery is considered probable but the revenuerevenues cannot be reliably estimated, costcosts attributable to change orders isare deferred pending determination of contract price. Certain sales-type taxes that are assessed by government authorities and collected from customers are included in cost of revenues. Accordingly, these amounts are considered contract costs in the performance of percentage complete calculations and the determination of net revenues. The amounts of such costs were $5.9 million and $1.4 million for the fiscal years ended January 31, 2009 and 2008, respectively.
Revenue Recognition – Vitarich Laboratories, Inc. – Customer— Nutritional Products— Pursuant to purchase orders received from customers, sales are recognized at the time products are shipped andthat title passes, pursuant to the terms of the agreement with the customers,typically upon shipment, and the amount due from the customer is fixed and collectibilitythe collection of the amount is reasonably assured. Sales are recognized on a net basis which reflect reductions for certain product returns and discounts. All shipping and handling fees and related costs are recorded as components of cost of goods sold.
Revenue Recognition – Southern Maryland Cable, Inc. – The Company— Telecommunications Infrastructure Services— This business segment generates revenuenet revenues under various arrangements, including contracts under which revenue isrevenues are based on a fixed price basis and on a time and materials basis. Revenues from time and materials contracts are recognized when the related service isservices are provided to the customer. RevenueRevenues from fixed price contracts, including a portionportions of estimated profit, isare recognized as services are provided, based on costs incurred and estimated amounts of total contract costs using the percentage of completion method. Many of SMC’sthe contracts consist of multi-deliverables.include multiple deliverables. Because thetheses projects are fully integrated undertakings, SMCthe Company cannot separate each component of the services provided.provided into individual components. Losses on contracts, if any, are recognized in the periodperiods in which they become known.
Income Taxes – The Company accounts— Accounting for income taxes in accordance with FAS No. 109, “Accounting for Income Taxes”, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effecteffects of temporary differences between the book and tax bases of recorded assets and liabilities. FAS No. 109US GAAP also requires that a deferred tax assetsasset be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -— an interpretation of FASB Statement No. 109” (“FIN 48”), on February 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, in accordance with FAS No. 109, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company concluded that thereThere was no material effect on the consolidated financial statements as athe result of adopting this standard.
Earnings Per Share – Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the applicable period. Diluted earnings per share represent net income divided by the weighted average number of common shares outstanding including the effects of dilutive securities. Outstanding stock options and warrants for the purchase of 651,000 shares and 474,000 shares of common stock were not included in the weighted average number of shares outstanding during the years ended January 31, 2008 and 2007, respectively, due to the Company’s net loss in each of the years.
Stock-Based Compensation – On February 1, 2006, the Company adopted— In accordance with Statement of FASFinancial Accounting Standard No. 123R (revised 2004), “Share-based Payments,” which requires the measurementCompany measures and recognition ofrecognizes compensation expense for all share-based payment awards made to employees and directors using a fair value based option pricing model. Adoption ofWith its adoption on February 1, 2006, the expense provision of FAS No. 123R had a material impact on the Company’s results of operations. The Company applied the modified prospective transition method; accordingly, the Company has recorded compensation expense related to stock options and warrants in the financial statements beginning February 1, 2006, with no restatement of prior periods. Compensation expense is currently recorded for awards that are granted, modified, repurchased or cancelled on or after February 1, 2006, as well as
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Earnings Per Share— Basic income (loss) per share amounts for the portionyears ended January 31, 2009 and 2008, and diluted loss per share for the year ended January 31, 2008 were computed by dividing net income (loss) by the weighted average number of awards previously granted thatcommon shares outstanding during the applicable year. Diluted income per share for the current fiscal year was computed by dividing net income by the sum of the weighted average number of common shares outstanding plus 314,000 shares representing the total dilutive effect of outstanding stock options and warrants. For the purpose of computing diluted loss per share for the year ended January 31, 2008, outstanding options and warrants to purchase 651,000 shares of common stock were not vested asincluded with the weighted average number of February 1, 2006.shares outstanding due to the Company’s net loss for the year.
NOTE 3 –— RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2008, the Financial Accounting Standards Board (the “FASB”) announced the issuance of FASB Staff Position (“FSP”) FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP requires public entities to provide additional disclosures until proposed FASB statements, “Accounting for Transfers of Financial Assets: an Amendment of FASB Statement No. 140” and “Amendments to FASB Interpretation No. 46(R)”, become effective. This FSP was effective for the Company’s consolidated financial statements for the fiscal year ending January 31, 2009, however, it did not have a material effect.
In November 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached consensus on Issue 08-6, “Equity Method Investment Accounting Considerations.” This issue clarifies the accounting for some transactions and impairment considerations involving all investments accounted for under the equity method. Guidance is provided regarding (1) how the initial carrying value of an equity investment should be determined, (2) how an impairment assessment of an underlying indefinite-lived intangible asset of an equity-method investment should be performed, (3) how an equity-method investee’s issuance of shares should be accounted for and, (4) how to account for a change in an investment from the equity method to the cost method. This EITF will be effective for the Company for the fiscal year ending January 31, 2010 and interim periods therein. The Company does not expect that adoption of this guidance will have a significant impact on the consolidated financial statements.
In November 2008, the EITF reached consensus on Issue No. 08-7, “Accounting for Defensive Intangible Assets.” Defensive assets are assets acquired in a business combination that the acquirer (a) does not intend to use or (b) intends to use in a way other than the assets’ highest and best use as determined by an evaluation of market participant assumptions. Defensive assets also are referred to as “locked-up assets” because while the asset is not being actively used, it is likely contributing to an increase in the value of other assets owned by the acquiring entity. This issue addresses the accounting for defensive intangible assets subsequent to initial recognition and would be effective for intangible assets acquired by the Company subsequent to January 31, 2009. Adoption of this issue will not have a significant impact on the Company’s consolidated financial statements.
In November 2008, the EITF also reached consensus on Issue No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary.” This EITF will be effective for the Company for the fiscal year ending January 31, 2010 and interim periods therein. Adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” in order to clarify the application of FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS No. 157”) in a market that is not active and to provide an example to illustrate the key considerations in the application of this guidance. It emphasizes that the use of a reporting entity’s own assumptions about future cash flows and an appropriately risk-adjusted discount rate in determining the fair value for a financial asset is acceptable when relevant observable inputs are not available. This FSP was effective upon its issuance. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Certain provisions of this standard relating to financial assets and financial liabilities were effective for the Company beginning February 1, 2008. The effective provisions did not have a material impact on the consolidated financial statements. Adoption of the other provisions of this standard relating primarily to nonfinancial assets and nonfinancial liabilities will first be required for the Company’s consolidated financial statements covering the quarter ending April 30, 2009. The adoption of these provisions is not expected to have a material impact on the Company’s consolidated financial statements. The significant nonfinancial items included in the Company’s consolidated balance sheet include property and equipment, goodwill and other purchased intangible assets.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the “GAAP Hierarchy”) and mandates that the GAAP Hierarchy reside in the accounting literature as opposed to the audit literature. This pronouncement became effective on November 15, 2008 following approval by the SEC. This pronouncement did not have a material impact on the Company’s consolidated financial statements.
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In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) and intends to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement of Financial Accounting Standards No. 141R (see description below) and other U.S. generally accepted accounting principles. This FSP is effective for the Company’s interim and annual financial statements beginning in the fiscal year commencing February 1, 2009. The Company does not expect the adoption of this FSP to have a material impact on its consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about an entity’s derivative and hedging activities with the intent of improving the transparency of financial reporting as the use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Currently, the Company uses interest rate swap agreements to hedge the risks related to the variable interest paid on its term loans. The current effects of the Company’s hedging activities are not significant to the Company’s consolidated financial statements. However, the new standard will require the Company to provide an enhanced understanding of 1) how and why it uses derivative instruments, 2) how it accounts for derivative instruments and the related hedged items, and 3) how derivatives and related hedged items affect its financial position, financial performance and cash flows. In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” a new pronouncement intended to improve the disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial statements of the sellers of these instruments and by requiring additional disclosure about the current status of the payment/performance risk of a guarantee. Adoption of FASB Statement No. 161 will first be required for the Company’s consolidated financial statements covering the quarter ending April 30, 2009. The provisions of the FSP that amend FASB Statement No. 133 and Interpretation No. 45 were adopted for the Company’s consolidated financial statements for the year ending January 31, 2009 without material effect.
In December 2007, the FASB issued Statement of Financial Accounting Standards BoardNo. 141R, “Business Combinations,” (“FASB”SFAS No. 141R”) issued FAS No. 141(R), “Business Combinations”. FAS No. 141(R)which replaces FASSFAS No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. FASSFAS No. 141(R)141R requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, establishes principles and requirements for how an acquirer recognizes and measures any non-controlling interest in the acquiree and the goodwill acquired, and requires the acquirer to disclose the nature and financial effect of the business combination. Among other changes, this statement also requiredrequires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred and that any deferred tax benefits resulted inresulting from a business combination arebe recognized in income from continuing operations in the period of the combination. FASIn general, SFAS No. 141R iswill be effective for the Company for business combinations occurring subsequent to January 31, 2009. The accounting for whichfuture acquisitions, if any, may be affected by this pronouncement and will be evaluated by the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will assess the impactat that SFAS 141R may have on its financial position and results of operations.
time.
In December 2007, the FASB also issued FASStatement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” that establishes accounting and reporting standards for minority interests in consolidated subsidiaries. This standard will be effective for the Company on February 1, 2009, and its adoption would not affect the Company’s current consolidated financial statements.
In February 2007, the FASB issued FASStatement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159This standard permits companies to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of FAS No. 159 will bethis new standard were effective for the Company beginning February 1, 2008. The Company does2008 and did not expect FAS No. 159 to have a significant impact on the consolidated financial statements.
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In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements.” This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Company plans to adopt FAS No. 157 on February 1, 2008, as required. The adoption of FAS No. 157 is not expected to have a material impact on the Company’s financial condition and results of operations.
NOTE 4 – ACQUISITION OF GEMMA POWER SYSTEMS AND ITS AFFILIATES— CASH IN ESCROW
On December 8, 2006 (the “Closing Date”) and pursuant to Agreements and Plans of Merger, the Company acquired GPS, which provides a full range of development, consulting, engineering, procurement, construction, commissioning, operating and maintenance services to the power energy market for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. The results of operations for GPS have been included in the Company’s consolidated financial statements since the Closing Date.
The Company paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets as GPS has a broad range of experience in engineering and construction of traditional energy power plants, boiler plants, cogeneration facilities, wood fired power plants, wind plants and other alternative fuel powered facilities. In addition, GPS has a very experienced and committed management team and exposure to state-of-the-art biofuel, wind power and ethanol refining technology in the rapidly growing alternative fuels sources industry. GPS has managed the engineering, procurement and construction of power plants for over 70 facilities.
GPS had a backlog of gross revenue in the amount of $181.3 million as of the Closing Date for work to be performed on signed contracts within the following 18 months.
The acquisition purchase price was $33.1 million, including $12.9 million in cash and $20.2 million in common stock of AI, consisting of 3,666,667 shares of AI common stock. The cash funding was provided by a new $8.0 million secured 4-year term loan which carries an interest rate of LIBOR plus 3.25% (see Note 10). In addition, the Company raised $10.7 million through the private offering of 2,853,335 shares of AI common stock at a purchase price of $3.75 per share (see Note 13). Pursuant to the acquisition agreement $12.0 million was deposited with an escrow account, including $10.0 million as security for a letter of credit that supports the issuance of bonding (see Note 5) and $2.0 million that became payable at December 31, 2007 as the earnings before interest, taxes, depreciation and amortization (“EBITDA”) of GPS for the twelve months ended December 31, 2007, as defined in the acquisition agreement, exceeded the required amount of $12.0 million. This $2.0 million obligation to pay the former owners of Gemma was included in accrued liabilities in the accompanying consolidated balance sheet at January 31, 2008; the corresponding charge was recorded as an increase to goodwill.
The Company used the purchase method of accounting for this acquisition in accordance with the requirements of FAS 141. The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values, which were determined by an appraisal performed by a third-party. The excess of the purchase price over the aggregate of the fair values was recorded as goodwill. Goodwill relating to GPS in the amount of $12.3 million will be amortized for income tax reporting purposes on a straight line basis over 15 years. The remaining goodwill amount of $6.2 million is not amortizable for income tax reporting purposes. The Customer Relationships, Trade Name and Non-Compete Agreement will be amortized using the straight-line method.
The following table summarizes the allocation of the purchase price:
| | | | | Weighted- | |
| | | Estimated | | Average | |
| | | Fair Value | | Useful Life | |
| Cash and cash equivalents | | $ | 35,830,000 | | | | |
| Cash in escrow | | | 2,692,000 | | | | |
| Contract receivable | | | 8,955,000 | | | | |
| Investments available for sale | | | 2,293,000 | | | | |
| Cost in excess of billings | | | 1,118,000 | | | | |
| Other assets | | | 200,000 | | | | |
| Intangibles assets - | | | | | | | |
| Customer relationships | | | 6,678,000 | | | 7–18 months | |
| Trade name | | | 3,643,000 | | | 15 years | |
| Non-compete agreement | | | 534,000 | | | 5 years | |
| Goodwill | | | 18,476,000 | | | | |
| | | | | | | | |
| Total assets acquired | | $ | 80,419,000 | | | | |
| | | | | | | | |
| Liabilities | | $ | 46,484,000 | | | | |
| Deferred income taxes | | | 833,000 | | | | |
| | | | | | | | |
| Total liabilities assumed | | $ | 47,317,000 | | | | |
| | | | | | | | |
| Net assets acquired | | $ | 33,102,000 | | | | |
The total purchase price for the acquisition was comprised of the following:
| Cash payments made | | $ | 10,735,000 | |
| Cash payments due | | | 2,000,000 | |
| Direct costs of the acquisition | | | 200,000 | |
| Issuance of Argan common stock | | | 20,167,000 | |
| | | | | |
| Total purchase price | | $ | 33,102,000 | |
| | | | | |
| Cash payments included in the purchase price | | $ | 10,735,000 | |
| Direct costs of the acquisition | | | 200,000 | |
Unrestricted cash acquired from GPS | | | (35,830,000 | ) |
| | | | | |
| Net cash and cash equivalents acquired | | $ | 24,895,000 | |
The following unaudited pro forma consolidated results of operations assume thatcovering the acquisition of GPS, the secured term loan of $8.0 million and the private offering of 2,853,335 shares had occurred as of February 1, 2006.
| | | For the Year | |
| | | Ended | |
| | | January 31, 2007 | |
| | | | |
| Revenues | | $ | 169,579,000 | |
| Net income | | $ | 2,226,000 | |
| Basic and diluted earnings per share | | $ | 0.20 | |
Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the period presented, nor does it intend to be a projection of future results.
NOTE 5 – ESCROWED CASH
Pursuant to the GPS acquisition agreement, the Company deposited $12.0 million into an escrow account with the Bank. Of this amount, $10.0 million secures a letter of credit that was issued in support of a bonding commitment. The remaining amount of $2.0 million was set aside for the payment of up to $2.0 million of additional purchase price in the event that GPS would meet certain financial objectives in 2007. As the earnings before interest, taxes, depreciation and amortization (“EBITDA”) of GPS for the twelve months ended December 31, 2007, as describeddefined in the acquisition agreement, exceeded the required amount of $12.0 million, the $2.0 million in additional purchase price was paid to the former owners of GPS in March 2008. The obligation to pay the former owners was included in accrued liabilities in the accompanying consolidated balance sheet at January 31, 2008.
In 2003, Argan completed the sale of Puroflow Incorporated (“Puroflow”), a wholly-owned subsidiary, to Western Filter Corporation (“WFC”). Proceeds in the amount of $300,000 were placed in escrow, and were included in the consolidated balance sheet at January 31, 2008, to indemnify WFC from any damages resulting from any breach of representations and warranties under the stock purchase agreement. This escrow fund was liquidated in December 2008 in connection with the settlement of the litigation with WFC (see Note 4.
12).
For certain construction projects, cash ismay be held in escrow as a substitute for retainage. As of January 31, 2008, cashCash held in escrow for retainage was approximately $2.1 million which will be released to GPS upon completion of the applicable contract or project phase. Proceeds from the sale of PI to WFCat January 31, 2008 in the amount of $300,000 are being heldapproximately $2.1 million related to a completed project was released and paid to the Company in escrow to indemnify WFC from any damage which may result from the breachfirst quarter of representations and warranties under the related stock purchase agreement (see Note 12).current fiscal year.
NOTE 6 –5 — ACCOUNTS RECEIVABLERECEIVABLE; COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
AccountsBoth accounts receivable and costs and estimated earnings in excess of billings represent amounts due from customers for services rendered or products delivered. The timing of billingbillings to customers under construction-type contracts varies based on individual contracts and often differs from the periodperiods in which revenue isrevenues are recognized. The amountsamount of costs and estimated earnings in excess of billings at January 31, 2008 and 2007 were $242,000 and $12.0 million, respectively, and were2009 was approximately $6.3 million; this amount is expected to be billed and collected in the normal course of business. The comparable amount of costs and estimated earnings in excess of billings at January 31, 2008 was $242,000. Retainages included in accounts receivable represent amounts withheld by construction customers until a defined phase of a contract or project has been completed and accepted by the customer. Retainage amountsThe retainage amount included in accounts receivable were $5.6 million and $2.3 million at January 31, 2008 and 2007, respectively.was $5.6 million; there were no outstanding retainages as of January 31, 2009. The length of retainage periods may vary, but they are typically between six months and two years.
The Company conducts business and may extend credit to customers based on an evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on accounts receivable is expected to vary by customer due to the different financial condition of each customer. The Company monitors its exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances based on historical experience with uncollected accounts and a review of its current accounts receivables. The amounts of the Company’s allowancesallowance for doubtful accounts at January 31, 2009 and 2008 were $22,379,000 and 2007$75,000, respectively. During the current year, the allowance was increased by $22.2 million which was offset by the elimination of a corresponding amount of billings in excess of cost and estimated earnings.
NOTE 6 — INVENTORIES
Inventories consisted of the following amounts at January 31, 2009 and 2008:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Raw materials | | $ | 2,748,000 | | | $ | 2,846,000 | |
| Work-in-process | | | 118,000 | | | | 43,000 | |
| Finished goods | | | 171,000 | | | | 144,000 | |
| | | | | | | |
| | | | 3,037,000 | | | | 3,033,000 | |
| Less — reserves | | | (1,690,000 | ) | | | (225,000 | ) |
| | | | | | | |
| Inventories, net | | $ | 1,347,000 | | | $ | 2,808,000 | |
| | | | | | | |
The amounts expensed for inventory obsolescence were $70,000approximately $1,637,000 and $137,000,$434,000, respectively, during the fiscal years ended January 31, 2009 and 2008. The amounts of costs expensed during the fiscal years ended January 31, 2009 and 2008 related to excess manufacturing capacity at VLI were $1.4 million and $327,000, respectively.
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NOTE 7 -— PROPERTY AND EQUIPMENT
Property and equipment at January 31, 20082009 and 20072008 consisted of the following:
| | | | | | | | | | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| Leasehold improvements | | $ | 1,051,000 | | $ | 964,000 | | | $ | 973,000 | | $ | 1,051,000 | |
| Machinery and equipment | | | 3,778,000 | | | 3,424,000 | | | 2,594,000 | | 3,778,000 | |
| Trucks and other vehicles | | | 1,263,000 | | | 1,241,000 | | | 1,263,000 | | 1,263,000 | |
| | | | 6,092,000 | | | 5,629,000 | | | | | | |
| | | | 4,830,000 | | 6,092,000 | |
| Less accumulated depreciation | | | (3,200,000 | ) | | (2,379,000 | ) | | | (3,616,000 | ) | | | (3,200,000 | ) |
| | | | | | | |
| Property and equipment, net | | $ | 2,892,000 | | $ | 3,250,000 | | | $ | 1,214,000 | | $ | 2,892,000 | |
| | | | | | | |
Depreciation expense amounts for property and equipment, including assets under capital leases, for the fiscal years ended January 31, 2009 and 2008 were approximately $845,000 and 2007$1,120,000 respectively. The costs of maintenance and repairs were $490,000 and $545,000 for the years ended January 31, 2009 and 2008, respectively. During the current fiscal year, the Company recorded impairment losses in the amount of approximately $1.0 million related to the fixed assets of VLI as described in Note 9. Since then, the costs of fixed asset purchases at VLI have been expensed; such costs amounted to approximately $194,000 for the year ended January 31, 2009.
NOTE 8 — INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
In June 2008, the Company announced that GPS had entered into a business partnership with Invenergy Wind Management, LLC for the design and construction of wind-energy farms located in the United States and Canada. The business partners each own 50% of a new company, Gemma Renewable Power, LLC (“GRP”). GRP provides engineering, procurement and construction services for new wind farms generating electrical power including the design and construction of roads, foundations, and electrical collection systems, as well as the erection of towers, turbines and blades. In connection with the formation of GRP, GPS has made cash investments totaling $1.6 million. At January 31, 2009, the formation agreement provided for GPS to make an additional contribution of $1.4 million which has been deferred. The Company’s share of the net income for the current fiscal year was approximately $1,120,000 and $1,051,000, respectively.$507,000. The amount of the Company’s investment in GRP was included in the Company’s consolidated balance sheet at January 31, 2009.
NOTE 9 — PURCHASED INTANGIBLE ASSETS
NOTE 8 – GOODWILLImpairment Losses
DueDuring the fiscal year ended January 31, 2009, VLI continued to VLI’sreport operating results that were below expected results. The loss of key customer accounts,major customers and the continuing overall declinereduction in the amounts of orders received from current major customers caused net sales of VLI,revenues to continue to decline and this business to operate at a loss. Accordingly, during the operating loss incurred by VLI for the quarter ended October 31, 2007, the Companycurrent fiscal year, management conducted an analysis of the operations of VLIanalyses in order to identify anydetermine whether impairment inlosses had occurred related to the goodwill and the long-lived assets of VLI. Using the income and market approaches, the assessment analyses indicated that the carrying value of the goodwillbusiness exceeded its fair value. In addition, based on comparisons to estimated amounts of future undiscounted cash flows, it was determined that the carrying values of VLI’s long-lived assets were not recoverable and that the carrying values of these assets exceeded their corresponding fair values based on estimated amounts of discounted cash flows. As a result, VLI recorded impairment losses related to this business. goodwill, other purchased intangible assets, and fixed assets in the amounts of $921,000, $86,000 and $1,036,000, respectively. These impairment losses, which eliminated most of the carrying value of the corresponding assets, totaled approximately $2.0 million and have been included in the consolidated statement of operations for the fiscal year ended January 31, 2009.
The analysis was updated as of year-end. In general, this business has reported operating results that are below expected results. AnalyzingCompany had conducted previous asset impairment analyses related to VLI during the fiscal year ended January 31, 2008. After analyzing this business using both anthe income approach and a market approach suggested that the current fair value of this business was approximately $4.4 million. Based on the analyses,approaches, the Company recorded goodwill impairment losses of $5,644,000 duringapproximately $5.6 million. The declining financial performance also suggested that the carrying value of VLI’s long-lived intangible assets, including non-contract customer relationships and non-compete agreements, might be impaired. The Company determined that the net unadjusted carrying values of these assets exceeded estimated amounts based on the undiscounted future cash flows attributable to these assets. Using fair values based on the estimated amounts of discounted cash flows, the Company recorded asset impairment losses in the amounts of $578,000 and $603,000, respectively. The total amount of approximately $6.8 million for the impairment of goodwill and other purchased intangible assets was included in the consolidated statement of operations for the fiscal year ended January 31, 2008, thereby reducing2008.
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During the goodwill related VLIfiscal year ended January 31, 2009, the operating results of SMC declined. Net revenues decreased by approximately 11.8% during this period. Income before income taxes for this business declined to an adjusted balancea loss before impairment losses and income taxes of approximately $921,000.$112,000 for the fiscal year ended January 31, 2009. Primarily, the operating results have been adversely impacted by reductions in the amounts of outside plant work performed for both of SMC’s largest customers in this area. In light of these results and the depressed state of residential and commercial construction activity, the Company reduced its estimates of future operating results for this business. The impairment analysis conducted during the fourth quarter of the current fiscal year using the reduced estimates of future income and considering the reduced market values of comparable companies indicated that the net carrying value of this business exceeded its fair value. In addition, it was determined that the net carrying value of SMC’s purchased intangible asset relating to contractual customer relationships exceeded its fair value based on discounted estimated future cash flows. As a result, SMC recorded impairment losses related to goodwill impairment lossand its contractual customer relationships in the amounts areof $940,000 and $151,000 which were included in the consolidated statement of operations for the year ended January 31, 2008.
Goodwill
Additional purchase price of $2.0 million in cash became payable to the former owners of GPS during the fourth quarter of the currentlast year as the earnings of GPS before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for AI’s corporate overhead charge, exceeded the $12.0 million adjusted EBITDA target amount established and defined in the merger agreement for the twelve months ended December 31, 2007. The amount of this additional purchase price amount was recorded as goodwill.
The changes in the carrying amount of goodwill for the years ended January 31, 20082009 and 20072008 were as follows:
| | | SMC | | VLI | | GPS | | Total | |
| Balance, February 1, 2006 | | $ | 940,000 | | $ | 6,565,000 | | $ | — | | $ | 7,505,000 | |
| Acquisition of GPS (see Note 4) | | | — | | | — | | | 16,476,000 | | | 16,476,000 | |
| Balance, January 31, 2007 | | | 940,000 | | | 6,565,000 | | | 16,476,000 | | | 23,981,000 | |
| | | | | | | | | | | | | | |
| Impairment charge | | | — | | | (5,644,000 | ) | | — | | | (5,644,000 | ) |
| Acquisition of GPS (see Note 4) | | | — | | | — | | | 2,000,000 | | | 2,000,000 | |
| Balance, January 31, 2008 | | $ | 940,000 | | $ | 921,000 | | $ | 18,476,000 | | $ | 20,337,000 | |
| | | | | | | | | | | | | | | | | |
| | | SMC | | | VLI | | | GPS | | | Total | |
| Balances, February 1, 2007 | | $ | 940,000 | | | $ | 6,565,000 | | | $ | 16,476,000 | | | $ | 23,981,000 | |
| Impairment losses | | | — | | | | (5,644,000 | ) | | | — | | | | (5,644,000 | ) |
| Acquisition of GPS | | | — | | | | — | | | | 2,000,000 | | | | 2,000,000 | |
| | | | | | | | | | | | | |
| Balances, January 31, 2008 | | | 940,000 | | | | 921,000 | | | | 18,476,000 | | | | 20,337,000 | |
| Impairment loss | | | (940,000 | ) | | | (921,000 | ) | | | — | | | | (1,861,000 | ) |
| | | | | | | | | | | | | |
| Balances, January 31, 2009 | | $ | — | | | $ | — | | | $ | 18,476,000 | | | $ | 18,476,000 | |
| | | | | | | | | | | | | |
For income tax reporting purposes, goodwill allocated to GPS in the approximate amount of $12.3 million (including $2.0 million added in the current fiscal year) is being amortized on a straight-line basis over periods of 15 years. The remaining amounts of the Company’s goodwill are not amortizable for income tax reporting purposes.
Other Purchased Intangible Assets
NOTE 9 – OTHER PURCHASED INTANGIBLE ASSETS
In connection with the acquisitions of GPS, VLI and SMC, the Company recorded substantial amounts of purchased intangible assets other than goodwill including contractual and other customer relationships, trade names, non-compete agreements and proprietary formulas. A description of each of the other purchased intangible asset categories is presented below.
Description of the Intangible Assets
Contractual Customer Relationships of SMC –— The fair value of SMC’s Contractual Customer Relationships (“CCR’s”) was determined at the time of the acquisition of SMC by discounting the cash flows expected from SMC’s continuing relationships with three customers. Expected cash flows were based on historical levels, current and anticipated projects and general economic conditions. The long-term nature of the relationships affected the discount rate used to discount expected cash flows as well as the Company’s estimated weighted average cost of capital and SMC’s asset mix. The Company iswas amortizing the fair value of the CCR’s over a seven-year weighted average life givenbefore recording an impairment loss for the long standing relationships that SMC has with tworemaining net carrying value of the three customers.this asset at January 31, 2009.
Contractual Customer Relationships of VLI –— The fair value of the Contractual Customer Relationships atof VLI (“VCCR’s”VCR’s”) was determined at the time of the acquisition of VLI by identifying long established customer relationships with which VLI had a pattern of recurring purchase orders and sales orders. The Companyby developing and discounting estimated expected cash flows attributable to these existing customer relationships factoring in market place assumptions regarding future contract renewals, customer attrition rates and forecasted expenses to maintain the installed customer base. These cash flows were then discounted based on a rate that reflected the perceived risk of the VCCR’s, the Company’s estimated weighted average cost of capital and the asset mix of VLI.relationships. The Company iswas amortizing the VCCR’sVCR’s over a five-year life based on expectationslife. VLI recorded impairment losses of continued cash flows from these relationships$578,000 last year and VLI’s history$86,000 during the current year thereby eliminating the remaining carrying value of maintaining relationships.this asset.
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Contractual Customer Relationships of GPS –— The fair value of the Contractual Customer Relationships at GPS (“GCCR’s”) was determined at the time of the acquisition of GPS by discounting cash flows expected from GPS’s contracts in place as of the acquisition date for the construction of electric power, ethanol and biodiesel production facilities, and for the renovation of existing facilities for a recurring customer. Expected cash flows were based on current and anticipated results of identified projects. The degree of difficulty inherent for the timely completion in accordance with contractual performance standards of construction projects affected the discount rate used to discount expected cash flows as well as the Company’s estimated weighted average cost of capital and the asset mix of GPS. The Company is amortizingamortized the GCCR’s over the estimated duration of the respective contracts which at the time of acquisition ranged from eight to eighteen months.
Trade Names –— The Company determined the fair values of the GPS and SMC Trade Names using a relief-from-royalty methodology. The Company also considered recognition by potential customers of a trade name such as GPS. The Company believes that the useful life of the GPS Trade Name is fifteen years, the period over which the Trade Name is expected to contribute to future cash flows. We concluded that the useful life of the SMC Trade Name was indefinite since it is expected to contribute directly to future cash flows in perpetuity. While SMC is not a nationally recognized trade name, it is a recognized name in the Mid-Atlantic region, SMC’s primary area of operations. The Company uses the relief-from-royalty method described above to test the SMC Trade Name for impairment annually on November 1 and on an interim basis if events or changes in circumstances between annual tests indicate the SMC Trade Name might be impaired.
Non-Compete Agreements –— The fair value amounts of three non-compete agreements with the former owners of acquired businesses were determined at the time of the acquisition by discounting the estimated reductions in the cash flows that would be expected if the key employees were to leave the Company. These key employees signed non-compete agreements prohibiting them from competing directly or indirectly for five years. The estimated reduced cash flows were discounted based on a rate that reflected the perceived risk of the applicable non-compete agreement, the estimated weighted average cost of capital and the asset mix of the acquired company. The Company is amortizing fair value amounts ascribed to the non-compete agreements over five years, the contractual length of the non-compete agreements. VLI recorded an impairment loss related to this asset of $603,000 during the fiscal year ended January 31, 2008.
Proprietary Formulas –— The fair value of the Proprietary Formulas (“PF’s”) was determined at the time of the acquisition of VLI. Cash flow forecasts were developed based on employing a technology contribution approach in order to determine the amounts of revenues associated with existing proprietary formulations. The amortization of the fair value amount was completed during the year ended January 31, 2008.
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Impairment ofChanges in Asset Carrying Values
The losschanges in the net carrying amounts of business experienced by VLI during the current year also suggested that the carrying value of VLI’sCompany’s other long-livedpurchased intangible assets contractual customer relationships and non-compete agreements, may have been impaired. Accordingly, the Company performed assessments of the carrying values and determined that the net unadjusted carrying values of these assets exceeded estimated amounts based on the undiscounted future cash flows attributable to these assets. Using fair values based on the estimated amounts of discounted cash flows, we recorded asset impairment losses related to contractual customer relationships and non-compete agreements in the amounts of $578,000 and $603,000, respectively. These impairment adjustments are reflected in the consolidated statement of operations for the yearyears ended January 31, 2008.2009 and 2008 were as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated | | | Balance | | | | | | | Impairment | | | | | | | Balance | |
| Description | | Useful Lives | | | January 31, 2008 | | | Additions | | | Charges | | | Amortization | | | January 31, 2009 | |
| Contractual customer relationships — | | | | | | | | | | | | | | | | | | | | | | | | |
| - SMC | | 7 years | | $ | 254,000 | | | $ | — | | | $ | (151,000 | ) | | $ | (103,000 | ) | | $ | — | |
| - VLI | | 5 years | | | 125,000 | | | | — | | | | (86,000 | ) | | | (39,000 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer relationships — GPS | | 1-2 years | | | 904,000 | | | | — | | | | — | | | | (904,000 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-compete agreements — | | | | | | | | | | | | | | | | | | | | | | | | |
| - VLI | | 5 years | | | 12,000 | | | | — | | | | — | | | | (8,000 | ) | | | 4,000 | |
| - GPS | | 5 years | | | 412,000 | | | | — | | | | — | | | | (107,000 | ) | | | 305,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name — GPS | | 15 years | | | 3,365,000 | | | | — | | | | — | | | | (243,000 | ) | | | 3,122,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name — SMC | | Indefinite | | | 224,000 | | | | — | | | | — | | | | — | | | | 224,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | | | | | $ | 5,296,000 | | | $ | — | | | $ | (237,000 | ) | | $ | (1,404,000 | ) | | $ | 3,655,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated | | | Balance | | | | | | | Impairment | | | | | | | Balance | |
| Description | | Useful Lives | | | February 1, 2007 | | | Additions | | | Charges | | | Amortization | | | January 31, 2008 | |
| Contractual customer relationships — | | | | | | | | | | | | | | | | | | | | | | | | |
| - SMC | | 7 years | | $ | 358,000 | | | $ | — | | | $ | — | | | $ | (104,000 | ) | | $ | 254,000 | |
| - VLI | | 5 years | | | 1,033,000 | | | | — | | | | (578,000 | ) | | | (330,000 | ) | | | 125,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer relationships — GPS | | 1-2 years | | | 5,722,000 | | | | — | | | | — | | | | (4,818,000 | ) | | | 904,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Proprietary formulas — VLI | | 3 years | | | 268,000 | | | | — | | | | — | | | | (268,000 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-compete agreements — | | | | | | | | | | | | | | | | | | | | | | | | |
| - VLI | | 5 years | | | 930,000 | | | | — | | | | (603,000 | ) | | | (315,000 | ) | | | 12,000 | |
| - GPS | | 5 years | | | 518,000 | | | | — | | | | — | | | | (106,000 | ) | | | 412,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name — GPS | | 15 years | | | 3,608,000 | | | | — | | | | — | | | | (243,000 | ) | | | 3,365,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name — SMC | | Indefinite | | | 224,000 | | | | — | | | | — | | | | — | | | | 224,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | | | | | $ | 12,661,000 | | | $ | — | | | $ | (1,181,000 | ) | | $ | (6,184,000 | ) | | $ | 5,296,000 | |
| | | | | | | | | | | | | | | | | | | | |
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Future Amortization Expense
The estimated amounts of amortization expense related to the purchased intangible assets (other than goodwill) for the next five fiscal years are presented below:
| | | | | |
| 2010 | | $ | 354,000 | |
| 2011 | | | 350,000 | |
| 2012 | | | 334,000 | |
| 2013 | | | 243,000 | |
| 2014 | | | 243,000 | |
| Thereafter | | | 1,907,000 | |
| | | | |
| Total | | $ | 3,431,000 | |
| | | | |
| | $ | 1,494,000 | |
| 2010 | | | 453,000 | |
| 2011 | | | 398,000 | |
| 2012 | | | 334,000 | |
| 2013 | | | 243,000 | |
| | | 2,150,000 | |
| Total | | $ | 5,072,000 | |
Changes in Asset Carrying Values
The changes in the net carrying amounts of the Company’s other purchased intangible assets for the years ended January 31, 2008 and 2007 were as follows.
| | | Estimated | | | | | | | | | | | |
| | | Useful | | Balance | | | | Impairment | | | | Balance | |
Description | | Lives | | January 31, 2007 | | Additions | | Charges | | Amortization | | January 31, 2008 | |
| Contractual customer relationships - | | | | | | | | | | | | | | | | | | | |
| - SMC | | | 7 years | | $ | 358,000 | | $ | - | | $ | - | | $ | (104,000 | ) | $ | 254,000 | |
| - VLI | | | 5 years | | | 1,033,000 | | | - | | | (578,000 | ) | | (330,000 | ) | | 125,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Customer relationships - GPS | | | 1-2 years | | | 5,722,000 | | | - | | | - | | | (4,818,000 | ) | | 904,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Proprietary formulas - VLI | | | 3 years | | | 268,000 | | | - | | | - | | | (268,000 | ) | | - | |
| | | | | | | | | | | | | | | | | | | | |
| Non-compete agreements - | | | | | | | | | | | | | | | | | | | |
| - VLI | | | 5 years | | | 930,000 | | | - | | | (603,000 | ) | | (315,000 | ) | | 12,000 | |
| - GPS | | | 5 years | | | 518,000 | | | - | | | - | | | (106,000 | ) | | 412,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Trade name - GPS | | | 15 years | | | 3,608,000 | | | - | | | - | | | (243,000 | ) | | 3,365,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Trade name - SMC | | | Indefinite | | | 224,000 | | | - | | | - | | | - | | | 224,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Totals | | | | | $ | 12,661,000 | | $ | - | | $ | (1,181,000 | ) | $ | (6,184,000 | ) | $ | 5,296,000 | |
| | | Estimated | | | | | | | | | | | |
| | | Useful | | Balance | | | | Impairment | | | | Balance | |
Description | | Lives | | February 1, 2006 | | Additions | | Charges | | Amortization | | January 31, 2007 | |
| Contractual customer relationships - | | | | | | | | | | | | | | | | | | | |
| - SMC | | | 7 years | | $ | 461,000 | | $ | - | | $ | - | | $ | (103,000 | ) | $ | 358,000 | |
| - VLI | | | 5 years | | | 1,433,000 | | | - | | | - | | | (400,000 | ) | | 1,033,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Customer relationships - GPS | | | 1-2 years | | | - | | | 6,678,000 | | | - | | | (956,000 | ) | | 5,722,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Proprietary formulas - VLI | | | 3 years | | | 726,000 | | | - | | | - | | | (458,000 | ) | | 268,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Non-compete agreements - | | | | | | | | | | | | | | | | | | | |
| - VLI | | | 5 years | | | 1,290,000 | | | - | | | - | | | (360,000 | ) | | 930,000 | |
| - GPS | | | 5 years | | | - | | | 534,000 | | | - | | | (16,000 | ) | | 518,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Trade name - GPS | | | 15 years | | | - | | | 3,643,000 | | | - | | | (35,000 | ) | | 3,608,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Trade name - SMC | | | Indefinite | | | 224,000 | | | - | | | - | | | - | | | 224,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Totals | | | | | $ | 4,134,000 | | $ | 10,855,000 | | $ | - | | $ | (2,328,000 | ) | $ | 12,661,000 | |
NOTE 10 –— DEBT
At January 31, 20082009 and 2007,2008, debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2009 | |
| | | | | | | | | | | | | | | Notional | | | | | | | |
| | | | | | | | | | | Stated | | | Amount of | | | Effective | | | | |
| | | | | | | | | | | Interest | | | Interest Rate | | | Interest | | | Swap | |
| | | 2009 | | | 2008 | | | Rate (1) | | | Swap | | | Rate (2) | | | Maturity | |
| Bank term loan, due December 2010 | | $ | 3,833,000 | | | $ | 5,833,000 | | | | 3.66 | % | | $ | 1,917,000 | | | | 6.09 | % | | | 12/31/09 | |
| Bank term loan, due August 2009 | | | 292,000 | | | | 792,000 | | | | 3.66 | % | | | 219,000 | | | | 7.52 | % | | | 7/31/09 | |
| Capital leases | | | 9,000 | | | | 90,000 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | 4,134,000 | | | | 6,715,000 | | | | | | | | 2,136,000 | | | | | | | | | |
| Less: current portion | | | 2,301,000 | | | | 2,581,000 | | | | | | | | 2,136,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Debt, long-term portion | | $ | 1,833,000 | | | $ | 4,134,000 | | | | | | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revolving credit facility | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2008 | |
| | | | | | | Stated Interest | | Notional Amount of Interest Rate | | Effective Interest | | Swap | |
| | | 2008 | | 2007 | | Rate (1) | | Swap | | Rate (2) | | Maturity | |
| Bank term loan, due December 2010 | | $ | 5,833,000 | | $ | 7,833,000 | | | 6.52% | | $ | 2,917,000 | | | 7.87% | | | 12/31/09 | |
| Bank term loan, due August 2009 | | | 792,000 | | | 1,292,000 | | | 6.52% | | | 594,000 | | | 7.97% | | | 7/31/09 | |
| Capital leases | | | 90,000 | | | 176,000 | | | | | | | | | | | | | |
| | | | 6,715,000 | | | 9,301,000 | | | | | | 3,511,000 | | | | | | | |
| Less: current portion | | | 2,581,000 | | | 2,586,000 | | | | | | 1,375,000 | | | | | | | |
| | | $ | 4,134,000 | | $ | 6,715,000 | | | | | $ | 2,136,000 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Revolving credit facility | | $ | — | | $ | — | | | | | | | | | | | | | |
| | | |
| (1) | | The stated interest rate is the floating interest rate as of January 31, 2008.2009. This is not necessarily an indication of future interest rates. |
| |
| (2) | | The effective interest rate includes the impact of the fixed interest rate swaps on the stated rate of interest. |
Maturities of all long-term debt obligations, outstanding, at January 31, 2008,2009, including capital leases, were as follows:
| | | | | |
| 2010 | | $ | 2,301,000 | |
| 2011 | | | 1,833,000 | |
| | | | |
| Total | | $ | 4,134,000 | |
| | | | |
| 2009 | | $ | 2,581,000 | |
| 2010 | | | 2,301,000 | |
| 2011 | | | 1,833,000 | |
| 2012 | | | — | |
| Total | | $ | 6,715,000 | |
On December 11, 2006, the Company amended itsThe financing arrangements with the Bank. The amended financing arrangements reduced the interest rate on the 3-yearBank cover two installment term loans — a 4-year term loan for VLI to LIBOR plus 3.25%. The principalwith a current balance of this loan was approximately $1.4$3.8 million atthat provided the amendment date. The original amount of this loan was $1.5Company with $8.0 million with interest at LIBOR plus 3.45%. The Company borrowed this amount on August 31, 2006 and paid the remaining principal and interest due on the subordinated note with Mr. Thomas. The outstanding principal balance of this Bank term loan at January 31, 2008 was $792,000.
The financing arrangements also included a new 4-year term loanin proceeds used in the acquisition of GPS (including $2.0 million in the amount of $8.0 million with interest at LIBOR plus 3.25% ($2.0 million of this loan was depositedfunds that were placed in escrow with the Bank as discussed in Note 4) and a 3-year installment term loan related to VLI with a current balance of $292,000. The Company makes monthly installment payments of principal on both term loans that bear interest at a rate of LIBOR plus 3.25%. The outstanding principal balance of this Bank term loan at January 31, 2008 was $5,833,000.
Finally, the amended financing arrangements providedalso provide a revolving loan facility with a maximum borrowing amount of $4.25 million. Amounts borrowed under the revolving loan facility would also bear interest at LIBOR plus 3.25%. Subsequent toDuring the fiscal year ended January 31, 2008,2009, the Bank agreed to extend the expiration date of the revolving loan facility to May 31, 2010.
The Bank financing arrangements require compliance with certain financial covenants at the Company’s fiscal year end and at each of the Company’s fiscal quarter ends (using a rolling 12-month period), including requirements that the ratio of total funded debt to EBITDA, as defined therein, not exceed 2 to 1, that the fixed charge coverage ratio be not less than 1.25 to 1, and that the ratio of senior funded debt to EBITDA, as defined, not exceed 1.50 to 1. The Bank’s consent continues to be required for acquisitions and divestitures. The Company continues to pledge the majority of the Company’s assets to secure the financing arrangements. The amended financing arrangements contain an acceleration clause which allows the Bank to declare amounts outstanding under the financing arrangements due and payable if it determines in good faith that a material adverse change has occurred in the financial condition of the Company or any of its subsidiaries. The Company believes that it will continue to comply with its financial covenants under the financing arrangements. If the Company’s performance does not result in compliance with any of its financial covenants, or if the Bank seeks to exercise its rights under the acceleration clause referred to above, the Company would seek to modify its financing arrangements, but there can be no assurance that the Bank would not exercise their rights and remedies under the financing arrangements including accelerating payments of all outstanding senior debt due and payable. At January 31, 2008,2009, the Company was in compliance with the covenants of its amended financing arrangements.
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During the year ended January 31, 2007, theThe Company entered intohas interest rate swap agreements with a total initial notional amount of $5,125,000 and terms of three years.that will expire during the fiscal year ending January 31, 2010. Under the swap agreements, the Company receives aagrees to exchange each month the difference between fixed and floating rate based on the LIBOR interest rate and pays fixed rates;amounts calculated by reference to the current notional principal balance. The Company’s weighted-average fixed rate related to its interest rate swap agreements is 5.22%. At January 31, 20082009 and 2007,2008, the Company recordedcarried liability amounts of $107,000$63,000 and $2,000,$107,000, respectively, in order to recognize the fair value of the interest rate swaps;swap agreements; these amounts were included in other long-term liabilities in the consolidated balance sheets.
Interest expense was $699,000$410,000 and $708,000$699,000 for the years ended January 31, 2009 and 2008, and 2007, respectively.
The Company may obtain standby letters of credit from the Bank in the ordinary course of business in amounts not to exceed $10.0 million in the aggregate. On December 11, 2006, the Company pledged $10.0 million in cash to the Bank in order to secure a standby letter of credit that was issued by the Bank for the benefit of Travelers Casualty and Surety Company of America in connection with its providing a $200.0 million bonding facilitycommittment to GPS.
NOTE 11 –— COMMITMENTS
The Company and its subsidiaries have entered into various non-cancelable operating leases for facilities, machinery, equipment and trucks. The Company leases office, warehouse and manufacturing facilities under operating leases expiring on various dates through October 2012.February 2014. None of the Company’s leases include significant amounts for incentives, rent holidays, penalties, or price escalations. Under the lease agreements, the Company is obligated to pay property taxes, insurance, and maintenance costs. Certain leases contain renewal options. Total rent expense amounts for all operating leases and other rental agreements was approximately $5,009,000were $2.9 million and $657,000$5.1 million for the years ended January 31, 20082009 and 2007,2008, respectively. The following is a schedule of future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of January 31, 2008:2009:
| | | | | |
| 2010 | | $ | 818,000 | |
| 2011 | | | 730,000 | |
| 2012 | | | 299,000 | |
| 2013 | | | 223,000 | |
| 2014 | | | 90,000 | |
| Thereafter | | | 7,000 | |
| | | | |
| | | | | |
| Total | | $ | 2,167,000 | |
| | | | |
| | $ | 708,000 | |
| 2010 | | | 593,000 | |
| 2011 | | | 470,000 | |
| 2012 | | | 201,000 | |
| | | 137,000 | |
| Thereafter | | | — | |
| Total | | $ | 2,109,000 | |
NOTE 12 –— LEGAL CONTINGENCIES
In the normal course of business, the Company has pending claims and legal proceedings. It is the opinion of the Company’s management, based on information available at this time, that none of current claims and proceedings will have a material effect on the Company’s consolidated financial statements other than the matters discussed below.
Western Filter Corporation Litigation
On March 22, 2005, WFC filed a civil action against the Company, and its executive officers. The suit was filed in the Superior Court of the State of California for the County of Los Angeles. WFC purchased the capital stock of the Company'sCompany’s wholly owned subsidiary, Puroflow, Incorporated, pursuant to the terms of the Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company and its executive officers breached the Stock Purchase Agreement between WFC and the Company and engaged in misrepresentations and negligent conduct with respect to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and punitive damages in an amount to be proven at trial as well as the recovery of attorney's fees. This action was removed to the United States District Court for the Central District of California. The Company and its officers deny that any breach of contract or that any misrepresentations or negligence occurred on their part.
This case was scheduled for trial on April 10, 2007. On March 15, 2007, the District Court granted the Company and its executive officers' motion for summary judgment, thereby dismissing WFC's lawsuit against the Company and its executive officers in its entirety. WFC appealed the District Court’s decision. The parties have filed their appellate briefs and are waiting for a date to be scheduled for oral arguments. The Company intends to vigorously defend the appeal of this litigation.
Although the Company has reviewed WFC’smaintained its belief that the plaintiff’s claims and believes that they arewere without merit, the Company’s consolidated balance sheet at January 31, 2008 included approximately $20,000parties agreed to an out-of-court settlement of this litigation. Pursuant to the corresponding agreement between the parties, the Company made a payment to WFC in accrued expenses reflecting the Company’s estimate of the remaining amount of legal fees that it expects$750,000 in December 2008 in order to be billedsettle the lawsuit. This payment was funded, in connectionpart, with this matter. It is possible however, that$300,000 previously held in escrow related to the ultimate resolutionsale of WFC. The Company also received reimbursement from its insurance company in the WFC litigation could result in a material adverse effect onamount of $250,000 related to the results of operations of the Company for a particular future reporting period.settlement.
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Kevin Thomas Litigation
On August 27, 2007, Kevin Thomas, the former owner of VLI, filed a lawsuit against the Company, VLI and the Company’s Chief Executive Officer (the “CEO”) in the Circuit Court of Florida for Collier County. The Company acquired VLI by way of merger on August 31, 2004. Mr. Thomas alleges that the Company, VLI and the CEO breached various agreements regarding his compensation and employment package that arose from the acquisition of VLI. Mr. Thomas has alleged contractual and tort-based claims arising from his compensation and employment agreements and seeks rescission of his covenant not to compete against VLI. The Company, VLI and the CEO deny that any breach of contract or tortious conduct occurred on their part. The Company and VLI have also asserted four counterclaims against Mr. Thomas for breach of the merger agreement, breach of his employment agreement, breach of fiduciary duty and tortious interference with contractual relations because Mr. Thomas violated his non-solicitation, confidentiality and non-compete obligations after he left VLI. The Company intends to vigorously defend this lawsuit and prosecute its counterclaims.
On March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current president in the Circuit Court of Florida for Collier County. VFI, which is owned by Kevin Thomas, supplied VLI with certain organic raw materials used in the manufacture of VLI products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI’s customers. VLI and its president filed their Answer and Affirmative Defenses on May 8, 2008. VLI and its president deny that VLI breached any contract or that its president defamed VFI. The defendants intend to continue to vigorously defend this lawsuit.
On March 4, 2008, Mr. Thomas filed a lawsuit against VLI’s president in the Circuit Court of Florida for Collier County. Mr. Thomas has filed this new lawsuit against VLI’s president for defamation. Mr. Thomas alleges that VLI’s president made false statements to third-parties regarding Mr. Thomas’ conduct that is the subject of counterclaims by the Company and VLI in the litigation matter discussed above and that these statements have caused him damage to his business reputation. VLI’s president filed his answer with the court on May 8, 2008. VLI’s president denies that he defamed Mr. Thomas and intends to continue to vigorously defend this lawsuit.
Although the Company has reviewed the claims of Mr. Thomas and VFI and believes that they are without merit, the Company’s consolidated balance sheet at January 31, 2008 includes approximately $301,0002009 included an amount in accrued expenses reflecting the Company’s estimate of the amount of future legal fees that it expects to be billed in connection with this matter. Itthese matters. Although management does not believe that a material loss is reasonably possible however, thatrelated to the lawsuits in the Kevin Thomas litigation, individually or in the aggregate, the ultimate resolution of the litigation with Mr. Thomas could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.
Tampa Bay Nutraceutical Company
On or about September 19, 2007, Tampa Bay Nutraceutical Company, Inc. (“Tampa Bay”) filed a civil action in the Circuit Court of Florida for Collier County against VLI. The current causes of action relate to an order for product issued by Tampa Bay to VLI in June 2007 and sound in (1) breach of contract; (2) promissory estoppel: (3) fraudulent misrepresentation; (4) negligent misrepresentation; (5) breach of express warranty; (6) breach of implied warranty of merchantability; (7) breach of implied warranty of fitness for a particular purpose; and (8) non-conforming goods. Tampa Bay alleges compensatory damages in excess of $9,000,000. Depositions, originally scheduled for August 2008, have not been completed.
The Company is vigorously defending this litigation. Although the Company believes it has meritorious defenses, it is impracticable to assess the likelihood of an unfavorable outcome of a trial or to estimate a likely range of potential damages, if any, at this state of the litigation. The Company’s consolidated balance sheet at January 31, 2009 included an amount in accrued expenses reflecting the Company’s estimate of the amount of future legal fees that it expects to be billed through trial in connection with this matter. The ultimate resolution of the litigation with Tampa Bay could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.
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NOTE 13 –— PRIVATE OFFERINGSOFFERING OF COMMON STOCK
On December 8, 2006,In July 2008, the Company completed a private offeringplacement sale of 2,853,3352.2 million shares of common stock to investors at a price of $3.75$12.00 per share for aggregatethat provided net proceeds of $10.7approximately $25 million.
On May 4, 2006, Management expects that the proceeds will provide resources to support GPS’s cash requirements relating to the new wind-power energy subsidiary described in Note 8 and will make available additional collateral to support the bonding requirements associated with future energy plant construction projects. Allen & Company completedLLC (“Allen”), a privatefirm considered to be a related party, served as placement agent for the stock offering and was paid a fee of 760,000 shares of common stock at a price of $2.50 per shareapproximately $1.3 million for aggregate proceeds of $1.9 million. The Company used $1.8 milliontheir services by the Company. One of the proceeds to pay downmembers of our Board of Directors is a subordinated note payable to the former ownermanaging director of VLI.Allen.
Additional information about these private offerings of the Company’s common stock and certain related party transactions is included in Note 16.
NOTE 14 –— STOCK-BASED COMPENSATION
The Company has a stock option plan that was established in August 2001 (the “Option Plan”). Under the Option Plan, the Company’s Board of Directors may grant stock options to officers, directors and key employees. The Option Plan was amended in June 20072008 in order to authorize the grant of options for up to 650,0001,150,000 shares of common stock. Stock options that are granted may be Incentive Stock Options (“ISOs”) or nonqualified stock options” (NSOs”). ISOs granted under the Option Plan have an exercise price per share at least equal to the common stock’s fair market value per share at the date of grant, a ten-year term, and typically become fully exercisable one year from the date of grant. NSOs may be granted at an exercise price per share that differs from the common stock’s fair market value per share at the date of grant, may have up to a ten-year term, and become exercisable as determined by the Board.
At January 31, 2009, there were 1,223,000 shares of the Company’s common stock reserved for issuance upon the exercise of stock options and warrants (see discussion of warrants below).
A summary of stock option activity under the Option Plan for the years ended January 31, 2009 and 2008 is presented below:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Weighted- | | | | |
| | | | | | | Weighted- | | | Average | | | Weighted- | |
| | | | | | | Average | | | Remaining | | | Average | |
| | | | | | | Exercise | | | Contract | | | Fair | |
| Options | | Shares | | | Price | | | Term (years) | | | Value | |
| Outstanding, February 1, 2007 | | | 244,000 | | | $ | 4.20 | | | | | | | | | |
| Granted | | | 212,000 | | | $ | 8.18 | | | | | | | | | |
| Exercised | | | (13,000 | ) | | $ | 3.70 | | | | | | | | | |
| Forfeited or expired | | | (18,000 | ) | | $ | 7.07 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outstanding, January 31, 2008 | | | 425,000 | | | $ | 6.07 | | | | 6.91 | | | $ | 3.61 | |
| Granted | | | 235,000 | | | $ | 11.95 | | | | | | | | | |
| Exercised | | | (98,000 | ) | | $ | 6.35 | | | | | | | | | |
| Forfeited or expired | | | (50,000 | ) | | $ | 10.13 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outstanding, January 31, 2009 | | | 512,000 | | | $ | 8.31 | | | | 6.48 | | | $ | 4.34 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Exercisable, January 31, 2009 | | | 277,000 | | | $ | 5.22 | | | | 6.08 | | | $ | 2.95 | |
| | | | | | | | | | | | | | | | |
The total intrinsic value amounts for the stock options exercised during the years ended January 31, 2009 and 2008 were $804,000 and $83,000, respectively. The aggregate intrinsic value amounts for outstanding and exercisable stock options at January 31, 2009 were $1,497,000 and $1,664,000, respectively.
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A summary of the change in the number of shares of common stock subject to non-vested options to purchase such shares for the years ended January 31, 2009 and 2008 is present below:
| | | | | | | | | |
| | | | | | | Weighted- | |
| | | | | | | Average | |
| | | | | | | Fair | |
| | | Shares | | | Value | |
| Nonvested, February 1, 2007 | | | 16,000 | | | | | |
| Granted | | | 212,000 | | | | | |
| Vested | | | (33,000 | ) | | | | |
| Forfeited | | | (5,000 | ) | | | | |
| | | | | | | | |
| Nonvested, January 31, 2008 | | | 190,000 | | | $ | 5.36 | |
| Granted | | | 235,000 | | | $ | 5.96 | |
| Vested | | | (140,000 | ) | | $ | 4.81 | |
| Forfeited | | | (50,000 | ) | | $ | 6.16 | |
| | | | | | | | |
| Nonvested, January 31, 2009 | | | 235,000 | | | $ | 5.96 | |
| | | | | | | | |
The weighted-average grant date fair value amounts per share for stock options awarded during the years ended January 31, 2009 and 2008 were $5.96 and $5.30, respectively. The total fair value amounts for shares vested during the years ended January 31, 2009 and 2008 were $673,000 and $144,000, respectively. Compensation expense amounts recorded in the years ended January 31, 2009 and 2008 were $1,196,000 and $561,000, respectively. At January 31, 2009, there was $509,000 in unrecognized compensation cost related to stock options granted under the Option Plan. The end of the period over which the compensation expense for these awards is expected to be recognized is December 2009.
The Company estimates the weighted average fair value of outstanding stock options vested using a Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of certain assumptions for each stock option that is awarded.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”), which became effective January 1, 2008. SAB 110 amends SAB 107 with regards to the use of a “simplified method” in developing an estimate of expected term of “plain-vanilla’’ share options. SAB 110 states that under certain circumstances, including a company having historical stock option exercise experience that is insufficient to provide a reasonable basis upon which to estimate expected terms, the SEC’s staff will continue to accept the simplified method beyond December 31, 2007. The Company utilized the simplified method to estimate the expected terms of its stock options granted during the fiscal year ended January 31, 2009.
The fair valuesvalue amounts per share of options to purchase shares of the Company’s common stock including options issued or assumed from acquisitions,awarded during the fiscal years ended January 31, 2009 and 2008 were determined at the dates of grant using the following weighted-average assumptions:
Risk-free interest rate | | | 5.00 | % |
Expected volatility | | | 67 | % |
Expected life | | | 5 years | |
Dividend yield | | | — | % |
A summary of stock option activity under the Option Plan for the years ended January 31, 2008 and 2007 is presented below:
Options | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contract Term (years) | | Weighted- Average Fair Value | |
| Outstanding, February 1, 2006 | | | 73,000 | | $ | 7.84 | | | | | | | |
| Granted | | | 176,000 | | $ | 2.81 | | | | | | | |
| Exercised | | | — | | | — | | | | | | | |
| Forfeited or expired | | | (5,000 | ) | $ | 7.79 | | | | | | | |
| Outstanding, January 31, 2007 | | | 244,000 | | $ | 4.20 | | | | | | | |
| Granted | | | 212,000 | | $ | 8.18 | | | | | | | |
| Exercised | | | (13,000 | ) | $ | 3.70 | | | | | | | |
| Forfeited or expired | | | (18,000 | ) | $ | 7.07 | | | | | | | |
| Outstanding, January 31, 2008 | | | 425,000 | | $ | 6.07 | | | 6.91 | | $ | 3.61 | |
| | | | | | | | | | | | | | |
| Exercisable, January 31, 2008 | | | 235,000 | | $ | 4.16 | | | 6.89 | | $ | 2.19 | |
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Risk-free interest rate | | | 3.87 | % | | | 5.00 | % |
| Expected volatility | | | 61.46 | % | | | 67 | % |
| Expected life | | | 4.28 years | | | | 5 years | |
| Dividend yield | | | — | % | | | — | % |
The weighted-average grant date fair value amounts per share for stock options granted during the years ended January 31, 2008 and 2007 were $5.30 and $1.55, respectively. Compensation expense amounts recorded in the years ended January 31, 2008 and 2007 were $561,000 and $237,000, respectively. At January 31, 2008, there was $611,000 unrecognized compensation cost related to stock options granted under the Option Plan. The end of the period over which the compensation expense for these awards is expected to be recognized is December 2008. The total intrinsic value of the stock options exercised during the year ended January 31, 2008 was $83,000. The aggregate intrinsic value amount for exercisable stock options at January 31, 2008 was $1,689,000.
A summary of the change in the number of shares of common stock subject to non-vested options to purchase such shares for the years ended January 31, 2008 and 2007 is present below:
| | | Shares | | Weighted- Average Fair Value | |
| Nonvested, February 1, 2006 | | | 16,000 | | | | |
| Granted | | | 176,000 | | | | |
| Vested | | | (176,000 | ) | | | |
| Forfeited | | | — | | | | |
| Nonvested, January 31, 2007 | | | 16,000 | | $ | 3.63 | |
| Granted | | | 212,000 | | | | |
| Vested | | | (33,000 | ) | | | |
| Forfeited | | | (5,000 | ) | | | |
| Nonvested, January 31, 2008 | | | 190,000 | | $ | 5.36 | |
The total fair value amounts for shares vested during the years ended January 31, 2008 and 2007 were $144,000 and $245,000, respectively.
In connection with the Company’s private offering of common stock in April 2003, the Company issuedalso has outstanding warrants to purchase 200,000 shares of the Company’s common stock as of January 31, 2009, exercisable at a per share price of $7.75, per sharethat were issued in connection with ten-year terms. Warrants to purchase 180,000 sharesthe Company’s private placement of common stock were grantedin April 2003 to three individuals who became the executive officers of the Company upon completion of the offering. In addition, MSR Advisors, Inc. (“MSR”) received warrantsoffering and also to purchase 50,000 shares of the Company’s stock.an investment advisory firm. A director of the Company is the chief executive officer of MSR.the investment advisory firm and related part, MSR Advisors, Inc. The aggregate fair value of the issued warrants amounted to $849,000; this amountof $849,000 was recordedrecognized as offering costs. All warrants are exercisable.
At January 31, 2008, there were 858,000 shares of the Company’s common stock reserved for issuance upon the exercise of stock optionsexercisable and warrants.expire in December 2012.
The Company also has a 401(k) Savings Plan covering all of its employees pursuant to which the Company makes discretionary contributions for its eligible and participating employees. The Company’s expense for this defined contribution plan totaled approximately $32,000$33,000 and $39,000$36,000 for the years ended January 31, 2009 and 2008, and 2007, respectively.
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NOTE 15 –— INCOME TAXES
The components of the Company’s income tax expense for the years ended January 31, 2009 and 2008 are presented below:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Current: | | | | | | | | |
| Federal | | $ | 7,226,000 | | | $ | 3,254,000 | |
| State | | | 1,669,000 | | | | 1,044,000 | |
| | | | | | | |
| | | | 8,895,000 | | | | 4,298,000 | |
| Deferred: | | | | | | | | |
| Federal | | | (1,864,000 | ) | | | (2,570,000 | ) |
| State | | | (305,000 | ) | | | (135,000 | ) |
| | | | | | | |
| | | | (2,169,000 | ) | | | (2,705,000 | ) |
| | | | | | | |
| Total tax expense | | $ | 6,726,000 | | | $ | 1,593,000 | |
| | | | | | | |
The actual income tax expense amounts for the years ended January 31, 2009 and 2008 differed from the “expected” tax amounts computed by applying the U.S. Federal corporate income tax rate of 34% to income (loss) from operations before income tax as presented below:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Computed “expected” income tax (benefit) | | $ | 5,693,000 | | | $ | (548,000 | ) |
| Increase (decrease) resulting from: | | | | | | | | |
| State income taxes, net | | | 797,000 | | | | 383,000 | |
| Permanent differences | | | 236,000 | | | | 1,758,000 | |
| | | | | | | |
| Total tax expense | | $ | 6,726,000 | | | $ | 1,593,000 | |
| | | | | | | |
The unfavorable net tax effect of permanent items for the year ended January 31, 2009 reflects primarily the impairment losses of approximately $1.9 million recorded in the current year related to the goodwill of VLI, net of the amount of domestic manufacturing deduction of approximately $1.3 million estimated for the current year. The impairment losses are not deductible for income tax reporting purposes.
Despite reporting a loss from operations before income taxes of $1,612,000$1.6 million for the year ended January 31, 2008, the Company recordedincurred income tax expense of $1,593,000$1.6 million for the year. For the current year, theThe goodwill impairment loss of $5,644,000$5.6 million that is discussed in Note 8 is9 was not deductible for income tax reporting purposes, and representsrepresented a permanent difference between financial and income tax reporting. In addition, the Company was adversely impacted by its inability to utilize certain current operating losses for state income tax reporting purposes.
As of January 31, 2009 and 2008, accrued expenses included income tax amounts currently payable of approximately $2.9 million and $1.1 million, respectively. The componentsCompany’s consolidated balance sheets as of January 31, 2009 and 2008 included deferred tax assets in the amounts of $3.4 million and $1.2 million, respectively, resulting from future deductible temporary differences. The Company’s ability to realize its deferred tax assets depends primarily upon the generation of sufficient future taxable income to allow for the utilization of the Company’s deductible temporary differences and tax planning strategies. If such estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against some or all of the deferred tax assets resulting in additional income tax expense forin the yearsconsolidated statement of operations. During the fiscal year ended January 31, 2008 and 2007 are presented below:
| | | 2008 | | 2007 | |
| Current: | | | | | | | |
| Federal | | $ | 3,254,000 | | $ | 866,000 | |
| State | | | 1,044,000 | | | 226,000 | |
| | | | 4,298,000 | | | 1,092,000 | |
| Deferred: | | | | | | | |
| Federal | | | (2,570,000 | ) | | (846,000 | ) |
| State | | | (135,000 | ) | | (157,000 | ) |
| | | | (2,705,000 | ) | | (1,003,000 | ) |
| Total tax expense | | $ | 1,593,000 | | $ | 89,000 | |
The actual income tax expense amounts2009, the Company established a valuation allowance for the years ended January 31, 2008 and 2007 differ fromstate portion of the “expected”deferred tax amounts computed by applyingassets of VLI in the U.S. Federal corporate incomeamount of $206,000. At this time, based substantially on the strong earnings performance of the Company’s power industry services business segment, management believes that it is more likely than not that the Company will realize benefit for its deferred tax rateassets except for the state portion of 34% to income (loss) from operations before incomethe deferred tax as presented below:assets of VLI.
| | | 2008 | | 2007 | |
| | | | | | |
| Computed “expected” income tax (benefit) | | $ | (548,000 | ) | $ | (8,000 | ) |
| Increase (decrease) resulting from: | | | | | | | |
| State income taxes, net | | | 383,000 | | | 27,000 | |
| Permanent differences | | | 1,758,000 | | | 70,000 | |
| | | $ | 1,593,000 | | $ | 89,000 | |
The Company is subject to income taxes in the U.S. federal jurisdiction and 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 U.S. Federal, state and local income tax examinations by tax authorities for the years before 2003.
As of The Company received notice from Internal Revenue Service on March 16, 2009 that its federal consolidated tax return for the tax year ending January 31, 2008 and 2007 accrued expenses includedhas been selected for audit. The Company does not have reason to expect any material changes to its income tax amounts currently payable of $1,055,000 and $1,089,000, respectively. The Company’s consolidated balance sheets as of January 31, 2008 and 2007 included deferred tax assets in the amounts of $2,423,000 and $512,000, respectively,liability resulting from future deductible temporary differences. The Company’s ability to realize its deferred tax assets depends primarily upon the generationoutcome of sufficient future taxable income to allowthis audit and as a result has not accrued for the utilization of the Company’s deductible temporary differences and tax planning strategies. If such estimates and assumptions change in the future, the Company may be required to record valuation allowances against some or all of the deferred tax assets resulting in additional income tax expense in the consolidated statement of operations. At this time, based substantially on the strong earnings performance of the Company’s power industry services business segment, management believes that it is more likely than not that the Company will realize benefit for its deferred tax assets.any exposure.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at January 31, 20082009 and 20072008 are presented below:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Assets: | | | | | | | | |
| Purchased intangibles | | $ | 1,968,000 | | | $ | 1,528,000 | |
| Inventory and accounts receivable reserves | | | 713,000 | | | | 117,000 | |
| Accrued incentive compensation | | | 656,000 | | | | — | |
| Stock options | | | 614,000 | | | | 238,000 | |
| Property and equipment | | | 291,000 | | | | — | |
| Accrued legal fees | | | 242,000 | | | | 129,000 | |
| Net operating loss | | | 120,000 | | | | 26,000 | |
| Accrued vacation | | | 51,000 | | | | 77,000 | |
| Other | | | 236,000 | | | | 126,000 | |
| | | | | | | |
| | | | 4,891,000 | | | | 2,241,000 | |
| | | | | | | |
| Liabilities: | | | | | | | | |
| Purchased intangibles | | | (1,082,000 | ) | | | (832,000 | ) |
| Property and equipment | | | — | | | | (173,000 | ) |
| Other | | | (200,000 | ) | | | (2,000 | ) |
| | | | | | | |
| | | | (1,282,000 | ) | | | (1,007,000 | ) |
| | | | | | | |
| Valuation allowance | | | (206,000 | ) | | | — | |
| | | | | | | |
| | | | | | | | | |
| Net deferred tax assets | | $ | 3,403,000 | | | $ | 1,234,000 | |
| | | | | | | |
| | | 2008 | | 2007 | |
| Assets: | | | | | | | |
| Purchased intangibles | | $ | 1,655,000 | | $ | -- | |
| Stock options | | | 238,000 | | | 91,000 | |
| Inventory and accounts receivable reserves | | | 207,000 | | | 91,000 | |
| Accrued legal fees | | | 129,000 | | | 221,000 | |
| Accrued vacation | | | 77,000 | | | 87,000 | |
| Net operating loss | | | 26,000 | | | -- | |
| Other | | | 91,000 | | | 22,000 | |
| | | | 2,423,000 | | | 512,000 | |
| Liabilities: | | | | | | | |
| Purchased intangibles | | | (958,000 | ) | | (1,584,000 | ) |
| Property and equipment | | | (229,000 | ) | | (308,000 | ) |
| Other | | | (2,000 | ) | | (91,000 | ) |
| | | | (1,189,000 | ) | | (1,983,000 | ) |
| Net deferred tax assets (liabilities) | | $ | 1,234,000 | | $ | (1,471,000 | ) |
NOTE 16 — TERMINATED CONSTRUCTION CONTRACT
Pursuant to an amended agreement between GPS and a customer covering engineering, procurement and construction services (the “EPC Agreement”), the deadline date for the customer to obtain financing for the completion of the project lapsed during the current year. Financing was not obtained and the EPC Agreement was terminated. Attempts by the customer to sell the partially completed plant have been unsuccessful. Construction activity on this project was suspended in November 2007.
In order to reflect the termination of the EPC Agreement and the exhaustion of the customer’s efforts to finance or to sell the plant, the Company established a reserve against the balance of accounts receivable from this customer and eliminated the related balance from billings in excess of cost and earnings in the third quarter of the current fiscal year resulting in a net increase to consolidated net revenues of approximately $505,000. No additional loss was incurred by the Company in connection with the termination of the EPC Agreement.
During the fiscal year ended January 31, 2009, GPS recorded favorable adjustments related to the settlement of accrued amounts on a terminated construction contract. The adjustments reduced cost of revenues for the fiscal year ended January 31, 2009 by approximately $7.1 million, net of related expenses.
– NOTE 17 — RELATED PARTY TRANSACTIONS
On December 8, 2006, the Company completed a private offering of 2,853,335 shares of common stock at a negotiated purchase price of $3.75 per share for aggregate proceeds of $10.7 million. The proceeds were used in the Company’s purchase of GPS. The purchase price was set prior to the Closing Date of the GPS acquisition. Two of the investors, MSRI SBIC, L.P. (“MSRI”) and MSR Fund II, L.P., which acquired 92,793 and 440,540 shares in the offering, respectively, are controlled by Daniel Levinson, a director of the Company. Two other investors, Allen & Company LLC and Allen SBH Investments, LLC (“Allen SBH”) which acquired 80,000 and 266,667 shares in the offering, respectively, are affiliates of James Quinn, a director of the Company. In addition, Mr. Quinn acquired 26,667 shares for his own account.
On January 31, 2005, the Company entered into a Debt Subordination Agreement with Kevin Thomas, the former owner of VLI, for the cash portion of additional purchase consideration aggregating $3,292,000 that the Company owed him. The subordinated note had an original maturity of August 1, 2006 with an interest rate of 10%. On May 4, 2006, the Company completed a private offering of 760,000 shares of common stock at a price of $2.50 per share for aggregate proceeds of $1.9 million. Allen SBH and Mr. Quinn acquired 120,000 and 40,000 shares in the offering, respectively. In addition, MSRI acquired 240,000 shares in the offering. On May 8, 2006, the Company used $1.8 million of the proceeds from the private stock offering to pay down the subordinated note payable to Mr. Thomas; the rest of the proceeds of the stock offering were used for general corporate purposes. The remaining principal and interest due on the subordinated note was paid on August 31, 2006 utilizing the proceeds provided by the aforementioned $1.5 million 3-year term note (see Note 10).
The Company leased administrative, manufacturing and warehouse facilities for VLI from Mr. Thomas.an individual who was the former officer and shareholder of VLI. The lease costs through March 2007, the date of his employment termination, were considered related party expenses. SMC’s administrative and maintenance facilities were rented from a former officer through July 2006. The total prior year expense amounts incurredamount under these arrangements werethis arrangement of $45,000 and $195,000 forwas recorded in the yearsfiscal quarter ended January 31, 2008 and 2007, respectively.
TheApril 30, 2007.The Company entered into a supply agreement with an entity owned by Mr. Thomasthe former shareholder of VLI whereby the supplier committed to sell to the Company, and the Company committed to purchase on an as-needed basis, certain organic products. Last year, VLI made $47,000 in purchases under the supply agreement through March 2007, the date that Mr. Thomas’ employmenton which the former officer and shareholder of VLI was terminated. Purchases under the supply agreement in the amount of $91,000 were made during the year ended January 31, 2007.
The Company also sold its products in the normal course of business to an entity in which Mr. Thomasthe former shareholder of VLI had an ownership interest. VLI had approximately $117,000 in currentprior year salesnet revenues related to this entity through the aforementioned termination in March 2007 which were recorded in the fiscal quarter ended April 30, 2007; this amount was collected.
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During the start-up period and $543,000under an agreement with GRP, GPS is incurring certain costs on behalf of GRP. In addition, GPS provides administrative and accounting services for GRP. The total amount of such reimbursable costs incurred by GPS in sales to this entity during the fiscal year ended January 31, 2007. At January 31, 2007, the previously affiliated entity owed $155,000 to VLI; payment of this amount2009 was subsequently received by the Company.
approximately $1.5 million. NOTE 17 –18 — SEGMENT REPORTING
Effective with the acquisition of GPS, theThe Company’s three reportable segments are power industry services, telecommunications infrastructure services and nutraceuticalnutritional products. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assessing performance. The Company’s reportable segments are organized in separate business units with different management teams, customers, technologies and services. The business operations of each segment are conducted primarily by the Company’s wholly-owned subsidiaries -– GPS, VLI and SMC, respectively. The “Other” column includes the Company’s corporate and unallocated expenses. Presented below are the summarized operating results of the business segments for the years ended January 31, 20082009 and 2007,2008, and certain financial position data as of January 31, 20082009 and 2007:2008:
Fiscal Year Ended January 31, 2009 | | | | | | | | | | | | | | | | | | | | | |
| | | Power | | | | | | | Telecom | | | | | | | |
| | | Industry | | | Nutritional | | | Infrastructure | | | | | | | |
| | | Services | | | Products | | | Services | | | Other | | | Consolidated | |
| Net revenues | | $ | 202,298,000 | | | $ | 10,075,000 | | | $ | 8,553,000 | | | $ | — | | | $ | 220,926,000 | |
| Cost of revenues | | | 169,046,000 | | | | 11,868,000 | | | | 7,127,000 | | | | — | | | | 188,041,000 | |
| | | | | | | | | | | | | | | | |
| Gross profit | | | 33,252,000 | | | | (1,793,000 | ) | | | 1,426,000 | | | | — | | | | 32,885,000 | |
| Selling, general and administrative expenses | | | 5,543,000 | | | | 3,025,000 | | | | 1,538,000 | | | | 4,752,000 | | | | 14,858,000 | |
| Impairment losses | | | — | | | | 2,043,000 | | | | 1,091,000 | | | | — | | | | 3,134,000 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 27,709,000 | | | | (6,861,000 | ) | | | (1,203,000 | ) | | | (4,752,000 | ) | | | 14,893,000 | |
| Interest expense | | | (348,000 | ) | | | (56,000 | ) | | | — | | | | (6,000 | ) | | | (410,000 | ) |
| Investment income | | | 1,519,000 | | | | — | | | | — | | | | 236,000 | | | | 1,755,000 | |
| Equity in the net income of GRP | | | 507,000 | | | | — | | | | — | | | | — | | | | 507,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | 29,387,000 | | | $ | (6,917,000 | ) | | $ | (1,203,000 | ) | | $ | (4,522,000 | ) | | | 16,745,000 | |
| | | | | | | | | | | | | | | | | |
| Income tax expense | | | | | | | | | | | | | | | | | | | (6,726,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | | | | | | | | | | | | $ | 10,019,000 | |
| | | | | | | | | | | | | | | | | | | | |
| Amortization of purchased intangible assets | | $ | 1,254,000 | | | $ | 47,000 | | | $ | 103,000 | | | $ | — | | | $ | 1,404,000 | |
| | | | | | | | | | | | | | | | |
| Depreciation and other amortization | | $ | 199,000 | | | $ | 297,000 | | | $ | 488,000 | | | $ | 8,000 | | | $ | 992,000 | |
| | | | | | | | | | | | | | | | |
| Goodwill | | $ | 18,476,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 18,476,000 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 96,091,000 | | | $ | 4,171,000 | | | $ | 2,896,000 | | | $ | 32,006,000 | | | $ | 135,164,000 | |
| | | | | | | | | | | | | | | | |
| Fixed asset additions | | $ | 153,000 | | | $ | 131,000 | | | $ | 86,000 | | | $ | — | | | $ | 370,000 | |
| | | | | | | | | | | | | | | | |
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Fiscal Year Ended January 31, 2008
| | | Power Industry Services | | Nutritional Products | | Telecom Infrastructure Services | | Other | | Consolidated | |
| Net sales | | $ | 180,414,000 | | $ | 16,669,000 | | $ | 9,693,000 | | $ | — | | $ | 206,776,000 | |
| Cost of sales | | | 162,418,000 | | | 14,714,000 | | | 8,059,000 | | | — | | | 185,191,000 | |
| Gross profit | | | 17,996,000 | | | 1,955,000 | | | 1,634,000 | | | — | | | 21,585,000 | |
Selling, general and administrative expenses | | | 9,880,000 | | | 3,947,000 | | | 1,340,000 | | | 3,816,000 | | | 18,983,000 | |
| Impairment losses | | | — | | | 6,826,000 | | | — | | | — | | | 6,826,000 | |
Income (loss) from operations | | | 8,116,000 | | | (8,818,000 | ) | | 294,000 | | | (3,816,000 | ) | | (4,224,000 | ) |
| Interest expense | | | (588,000 | ) | | (110,000 | ) | | (1,000 | ) | | — | | | (699,000 | ) |
| Interest income | | | 3,301,000 | | | — | | | 10,000 | | | — | | | 3,311,000 | |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 10,829,000 | | $ | (8,928,000 | ) | $ | 303,000 | | $ | (3,816,000 | ) | | (1,612,000 | ) |
| Income tax expense | | | | | | | | | | | | | | | (1,593,000 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | $ | (3,205,000 | ) |
| Amortization of intangible assets | | $ | 5,168,000 | | $ | 913,000 | | $ | 103,000 | | $ | — | | $ | 6,184,000 | |
| Depreciation and other amortization | | $ | 181,000 | | $ | 558,000 | | $ | 522,000 | | $ | 16,000 | | $ | 1,277,000 | |
| Goodwill | | $ | 18,476,000 | | $ | 921,000 | | $ | 940,000 | | $ | — | | $ | 20,337,000 | |
| Total assets | | $ | 119,026,000 | | $ | 7,632,000 | | $ | 4,731,000 | | $ | 14,474,000 | | $ | 145,863,000 | |
Fixed asset additions | | $ | 58,000 | | $ | 324,000 | | $ | 491,000 | | $ | — | | $ | 873,000 | |
January 31, 2007 | | Power Industry Services | | Nutritional Products | | Telecom Infrastructure Services | | Other | | Consolidated | |
| Net sales | | $ | 33,698,000 | | $ | 20,842,000 | | $ | 14,327,000 | | $ | -- | | $ | 68,867,000 | |
| Cost of sales | | | 30,589,000 | | | 16,549,000 | | | 11,479,000 | | | -- | | | 58,617,000 | |
| Gross profit | | | 3,109,000 | | | 4,293,000 | | | 2,848,000 | | | -- | | | 10,250,000 | |
Selling, general and administrative expenses | | | 1,288,000 | | | 4,542,000 | | | 1,636,000 | | | 2,397,000 | | | 9,863,000 | |
Income (loss) from operations | | | 1,821,000 | | | (249,000 | ) | | 1,212,000 | | | (2,397,000 | ) | | 387,000 | |
| Interest expense | | | (101,000 | ) | | (360,000 | ) | | (42,000 | ) | | (205,000 | ) | | (708,000 | ) |
| Interest income | | | 287,000 | | | -- | | | 10,000 | | | -- | | | 297,000 | |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 2,007,000 | | $ | (609,000 | ) | $ | 1,180,000 | | $ | (2,602,000 | ) | | (24,000 | ) |
| Income tax expense | | | | | | | | | | | | | | | (89,000 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | $ | (113,000 | ) |
Amortization of intangible assets | | $ | 1,007,000 | | $ | 1,218,000 | | $ | 103,000 | | $ | -- | | $ | 2,328,000 | |
| Depreciation and other amortization | | $ | 31,000 | | $ | 566,000 | | $ | 474,000 | | $ | 294,000 | | $ | 1,365,000 | |
| Goodwill | | $ | 16,476,000 | | $ | 6,565,000 | | $ | 940,000 | | $ | -- | | $ | 23,981,000 | |
| Total assets | | $ | 97,454,000 | | $ | 15,851,000 | | $ | 5,347,000 | | $ | 2,887,000 | | $ | 121,539,000 | |
Fixed asset additions | | $ | -- | | $ | 387,000 | | $ | 540,000 | | $ | 8,000 | | $ | 935,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Power | | | | | | | Telecom | | | | | | | |
| | | Industry | | | Nutritional | | | Infrastructure | | | | | | | |
| | | Services | | | Products | | | Services | | | Other | | | Consolidated | |
| Net revenues | | $ | 180,414,000 | | | $ | 16,669,000 | | | $ | 9,693,000 | | | $ | — | | | $ | 206,776,000 | |
| Cost of revenues | | | 162,418,000 | | | | 14,714,000 | | | | 8,059,000 | | | | — | | | | 185,191,000 | |
| | | | | | | | | | | | | | | | |
| Gross profit | | | 17,996,000 | | | | 1,955,000 | | | | 1,634,000 | | | | — | | | | 21,585,000 | |
| Selling, general and administrative expenses | | | 9,880,000 | | | | 3,947,000 | | | | 1,340,000 | | | | 3,816,000 | | | | 18,983,000 | |
| Impairment losses of VLI | | | — | | | | 6,826,000 | | | | — | | | | — | | | | 6,826,000 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 8,116,000 | | | | (8,818,000 | ) | | | 294,000 | | | | (3,816,000 | ) | | | (4,224,000 | ) |
| Interest expense | | | (588,000 | ) | | | (110,000 | ) | | | (1,000 | ) | | | — | | | | (699,000 | ) |
| Investment income | | | 3,301,000 | | | | — | | | | 10,000 | | | | — | | | | 3,311,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | 10,829,000 | | | $ | (8,928,000 | ) | | $ | 303,000 | | | $ | (3,816,000 | ) | | | (1,612,000 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax expense | | | | | | | | | | | | | | | | | | | (1,593,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | $ | (3,205,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Amortization of purchased intangible assets | | $ | 5,168,000 | | | $ | 913,000 | | | $ | 103,000 | | | $ | — | | | $ | 6,184,000 | |
| | | | | | | | | | | | | | | | |
| Depreciation and other amortization | | $ | 181,000 | | | $ | 558,000 | | | $ | 522,000 | | | $ | 16,000 | | | $ | 1,277,000 | |
| | | | | | | | | | | | | | | | |
| Goodwill | | $ | 18,476,000 | | | $ | 921,000 | | | $ | 940,000 | | | $ | — | | | $ | 20,337,000 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 119,026,000 | | | $ | 7,632,000 | | | $ | 4,731,000 | | | $ | 14,474,000 | | | $ | 145,863,000 | |
| | | | | | | | | | | | | | | | |
| Fixed asset additions | | $ | 58,000 | | | $ | 324,000 | | | $ | 491,000 | | | $ | — | | | $ | 873,000 | |
| | | | | | | | | | | | | | | | |
During the year ended January 31, 2008,2009, the majority of the Company’s net revenues related to a broad range of engineering, procurement and construction services that were provided by GPS to the power industry. TotalNet revenues from power industry services accounted for approximately 87%91.6% of consolidated net salesrevenues for the year ended January 31, 2008.year. The Company’s most significant current year customer relationships included fourtwo power industry service customers Altra Biofuels Nebraska, LLC (“Altra”); Renewable Bio-Fuels Port Neches LLC (“RBF”); Green Earth Fuels of Houston LLC (“GEF”); and the Connecticut Municipal Electrical Energy Cooperative (“CMEEC”), which accounted for approximately 26%, 22%, 18%49.7% and 13%40.2%, respectively, of consolidated net salesrevenues for the year ended January 31, 2008.year. VLI, which provides nutritional and whole-food supplements as well as personal care products to customers in the global nutrition industry, accounted for approximately 8%4.5% of consolidated net salesrevenues for the year ended January 31, 2008.year. SMC, which provides infrastructure services to telecommunications and utility customers as well as to the federal government, accounted for approximately 5%3.9% of consolidated net salesrevenues for the year.
Net revenues from power industry services accounted for approximately 87.3% of consolidated net revenues for the year ended January 31, 2008.
The consolidated operating results for theCompany’s most significant prior year ended January 31, 2007customer relationships included the results of thefour power industry services segmentservice customers, which accounted for the period December 8, 2006 (the date of the Company’s acquisition of GPS) through January 31, 2007. Nonetheless, revenues related to the power services project with Altra represented approximately 29%26.2%, 22.1%, 17.5% and 13.3%, respectively, of consolidated net salesrevenues for the year. No other customerThe operations of the Company provided revenues or net sales in excess of 10%VLI represented approximately 8.1% of consolidated net salesrevenues for the year ended January 31, 2007.year. SMC accounted for approximately 4.7% of consolidated net revenues for the year.
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NOTE 18 –19 — QUARTERLY FINANCIAL INFORMATION (unaudited):
Certain unaudited quarterly financial information for the fiscal quarters ended April 30, July 31, October 31 and January 31 included in the fiscal years ended January 31, 20082009 and 20072008 is presented below:
| | | | | | | | | | | | | | | | | | | | | |
| 2009 | | April | | | July | | | October | | | January | | | Full Year | |
| Net revenues | | $ | 48,406,000 | | | $ | 75,098,000 | | | $ | 41,387,000 | | | $ | 56,035,000 | | | $ | 220,926,000 | |
| Gross profit | | | 5,733,000 | | | | 7,720,000 | | | | 6,838,000 | | | | 12,594,000 | | | | 32,885,000 | |
| Income from operations | | | 1,722,000 | | | | 1,758,000 | | | | 3,748,000 | | | | 7,665,000 | | | | 14,893,000 | |
| Net income | | | 1,555,000 | | | | 806,000 | | | | 2,624,000 | | | | 5,034,000 | | | | 10,019,000 | |
| Income per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.14 | | | $ | 0.07 | | | $ | 0.20 | | | $ | 0.37 | | | $ | 0.80 | |
| Diluted | | $ | 0.14 | | | $ | 0.07 | | | $ | 0.19 | | | $ | 0.37 | | | $ | 0.78 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2008 | | April | | | July | | | October | | | January | | | Full Year | |
| Net revenues | | $ | 50,432,000 | | | $ | 53,136,000 | | | $ | 49,263,000 | | | $ | 53,945,000 | | | $ | 206,776,000 | |
| Gross profit | | | 1,178,000 | | | | 6,568,000 | | | | 7,446,000 | | | | 6,393,000 | | | | 21,585,000 | |
| Income (loss) from operations | | | (3,383,000 | ) | | | 1,795,000 | | | | (1,601,000 | ) | | | (1,035,000 | ) | | | (4,224,000 | ) |
| Net income (loss) | | | (2,016,000 | ) | | | 1,333,000 | | | | (1,957,000 | ) | | | (565,000 | ) | | | (3,205,000 | ) |
| Income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.18 | ) | | $ | 0.12 | | | $ | (0.18 | ) | | $ | (0.05 | ) | | $ | (0.29 | ) |
| Diluted | | $ | (0.18 | ) | | $ | 0.12 | | | $ | (0.18 | ) | | $ | (0.05 | ) | | $ | (0.29 | ) |
| | | April | | July | | October | | January | | Full Year | |
2008 Net sales | | $ | 50,432,000 | | $ | 53,136,000 | | $ | 49,263,000 | | $ | 53,945,000 | | $ | 206,776,000 | |
| Operating income (loss) | | | (3,383,000 | ) | | 1,795,000 | | | (1,601,000 | ) | | (1,035,000 | ) | | (4,224,000 | ) |
| Net income (loss) | | | (2,016,000 | ) | | 1,333,000 | | | (1,957,000 | ) | | (565,000 | ) | | (3,205,000 | ) |
Net income (loss) per share - Basic - Diluted | | $ $ | (0.18 (0.18 | ) ) | $ $ | 0.12 0.12 | | $ $ | (0.18 (0.18 | ) ) | $ $ | (0.05 (0.05 | ) ) | $ $ | (0.29 (0.29 | ) ) |
2007 Net sales | | $ | 8,962,000 | | $ | 8,560,000 | | $ | 9,609,000 | | $ | 41,736,000 | | $ | 68,867,000 | |
| Operating income (loss) | | | 277,000 | | | (2,000 | ) | | (346,000 | ) | | 458,000 | | | 387,000 | |
| Net income (loss) | | | (18,000 | ) | | (155,000 | ) | | (255,000 | ) | | 315,000 | | | (113,000 | ) |
Net income (loss) per share - Basic - Diluted | | $ $ | -- -- | | $ $ | (0.03 (0.03 | ) ) | $ $ | (0.06 (0.06 | ) ) | $ $ | 0.04 0.04 | | $ $ | (0.02 (0.02 | ) ) |
Quarterly amounts reported above include the operating results of GPS following its date of acquisition by Argan in December 2006. The sum of the net income (loss) per share amounts for each quarter of 2007 doesmay not agree with the calculated net lossincome (loss) per share amount of $(0.02) for the full year as the per share amounts for each quarter and the full year are required to be computed independently.
Income from operations for the fourth quarter ended January 31, 2009 was impacted by the favorable adjustments to cost of revenues recorded by GPS in the approximate net amount of $7.1 million (see Note 16) offset partially by impairment losses totaling $1.2 million and the provision for inventory obsolescence in the amount of $825,000 recorded by VLI.
The operating results for the quarter ended July 31, 2008 (the second quarter of the current year) were adversely impacted by impairment losses totaling $1.9 million that related to goodwill, other purchased intangible assets and fixed assets of VLI.
The operating results for the quarters ended April 30, 2007, July 31, 2007 and October 31, 2007 (the first three quarters of the fiscal year ended January 31, 2008) were adversely impacted by losses reportedincurred by GPS related to one power plant project in the amounts of approximately $5.3 million, $4.1 million and $2.3 million, respectively.
The operating results for the quarters ended October 31, 2007 and January 31, 2008 (the third and fourth quarters of the fiscal year ended January 31, 2008) were adversely impacted by impairment losses of $4,666,000$4.7 million and $2,160,000,$2.2 million, respectively, that related to goodwill and other purchased intangible assets of VLI.
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NOTE 20 — SUPPLEMENTAL FINANCIAL INFORMATION
NOTE 19 – SUPPLEMENTAL CASH FLOW INFORMATION
CashThe amounts of cash paid for interest and income taxes is presented below for the years ended January 31, 20082009 and 2007:
| | | 2008 | | 2007 | |
| Interest | | $ | 699,000 | | $ | 526,000 | |
| Income taxes | | $ | 4,358,000 | | $ | 147,000 | |
Non-cash investing and financing transactions2008 are presented belowbelow:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Interest | | $ | 408,000 | | | $ | 693,000 | |
| | | | | | | |
| Income taxes | | $ | 6,779,000 | | | $ | 4,358,000 | |
| | | | | | | |
The amounts attributable to significant non-cash transactions for the years ended January 31, 2009 and 2008 and 2007:are presented below:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Reductions in accounts receivable and billings in excess of costs and estimated earnings | | $ | 22,219,000 | | | $ | — | |
| | | | | | | |
| Net (increase) decrease in the fair value of interest rate swaps | | $ | (44,000 | ) | | $ | 99,000 | |
| | | | | | | |
| | | 2008 | | 2007 | |
| Fair value of common stock issued in connection with the GPS combination | | $ | — | | $ | 20,167,000 | |
| Net decrease in unrealized investment loss | | $ | — | | $ | (6,000 | ) |
| Net decrease in fair value of interest rate swaps | | $ | (99,000 | ) | $ | (2,000 | ) |
NOTE 20 – SUBSEQUENT EVENTS
On March 4, 2008, Vitarich Farms, Inc. (“VFI”) filed a lawsuit against VLI and its current presidentThe amounts of accrued incentive cash compensation included in the Circuit Courtaccrued expenses as of Florida for Collier County. VFI, which is owned by Kevin Thomas, the former owner of VLI, has supplied VLI with certain organic raw materials for manufacturing VLI's products. VFI has asserted a breach of contract claim against VLI and alleges that VLI breached a supply agreement with VFI by acquiring the organic products from a different supplier. VFI also asserted a claim for defamation against VLI’s president alleging that he made false statements regarding VFI’s organic certification to one of VLI's customers. The deadline for filing a responsive pleading to this complaint is April 18, 2008. VLI and its president vigorously deny that VLI breached any contract or that its president defamed VFI. The defendants intend to vigorously defend this lawsuit.
On March 4, 2008, Mr. Thomas filed a lawsuit against VLI's president in the Circuit Court of Florida for Collier County. As described in Note 12, Mr. Thomas, the former owner of VLI, previously filed a lawsuit against the Company, VLI and the Company’s CEO for a variety of contract and tort-based claims arising from his compensation and employment agreements from the acquisition of VLI ("VLI Merger Litigation"). The Company and VLI asserted four counterclaims against Mr. Thomas for violating his restrictive covenants upon leaving VLI. The VLI Merger Litigation is pending in the Circuit Court of Florida for Collier County. Mr. Thomas has filed this new lawsuit against VLI’s president for defamation. Mr. Thomas alleges that VLI’s president made false statements to third-parties regarding Mr. Thomas' conduct that is the subject of counterclaims by the Company and VLI in the VLI Merger Litigation and that these statements have caused him damage to his business reputation. The deadline for filing a responsive pleading to this complaint is April 18, 2008. VLI’s president vigorously denies that he defamed Mr. Thomas and intends to vigorously defend this lawsuit.
At January 31, 2009 and 2008 GPS had a construction project which was in suspension pending the efforts of the customer to obtain financing to complete the construction of an ethanol facility. Under the terms of the amended engineering, procurementwere $4.3 million and construction agreement with the customer (the “EPC Agreement”), March 19, 2008 was the deadline for the customer to obtain financing for the project. If such financing was not obtained, GPS would be allowed to terminate the EPC Agreement at that time. GPS has served termination notice but the customer has not acknowledged the termination or released the construction bond. GPS continues to cooperate with the customer in its efforts to obtain financing. The amount owed to GPS by the project owner is included in accounts receivable in the consolidated balance sheet at January 31, 2008 and is approximately equal to the amount of billings in excess of cost and earnings for the project. GPS is uncertain as to the ultimate resolution of this matter, but does not anticipate any losses to arise from the resolution of this EPC Agreement.$1.6 million, respectively.
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SCHEDULE II
ARGAN, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | |
| | | Balance, | | | Charged | | | | | | | | | | | Balance, | |
| | | Beginning of | | | To Costs | | | | | | | | | | | End of | |
| Description | | Year | | | and Expenses | | | Write-offs | | | Other (1) | | | Year | |
Allowance for uncollectible
accounts receivable | | | | | | | | | | | | | | | | | | | | |
| Year ended January 31, 2009 | | $ | 75,000 | | | $ | 129,000 | | | $ | 44,000 | | | $ | 22,219,000 | | | $ | 22,379,000 | |
| Year ended January 31, 2008 | | | 137,000 | | | | 45,000 | | | | 107,000 | | | | — | | | | 75,000 | |
| | | | | | | | | | | | | | | | | | | | | |
Allowance for overstocked
and obsolete inventory | | | | | | | | | | | | | | | | | | | | |
| Year ended January 31, 2009 | | $ | 225,000 | | | $ | 1,637,000 | | | $ | 172,000 | | | $ | — | | | $ | 1,690,000 | |
| Year ended January 31, 2008 | | | 104,000 | | | | 434,000 | | | | 313,000 | | | | — | | | | 225,000 | |
| | |
| (1) | | During the fiscal year ended January 31, 2009, the allowance for uncollectible accounts receivable was increased by $22.2 million which was offset by the elimination of a corresponding amount of billings in excess of cost and estimated earnings. |
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Description | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Write-offs | | Balance at End of Year | |
Allowance for doubtful accounts | | | | | | | | | | | | | |
| Year ended January 31, 2008 | | $ | 137,000 | | $ | 45,000 | | $ | 107,000 | | $ | 75,000 | |
| Year ended January 31, 2007 | | | 50,000 | | | 133,000 | | | 46,000 | | | 137,000 | |
| | | | | | | | | | | | | | |
Valuation allowance for inventory obsolescence | | | | | | | | | | | | | |
| Year ended January 31, 2008 | | $ | 104,000 | | $ | 555,000 | | $ | 434,000 | | $ | 225,000 | |
| Year ended January 31, 2007 | | | 95,000 | | | 96,000 | | | 87,000 | | | 104,000 | |
EXHIBIT INDEX
| | | | |
| Exhibit No. | | Description |
| | | | | |
10.31 | 3.2 | | First Amendment to Second Amended and Restated Financing and Security Agreement | Bylaws of Argan, Inc. |
| | | | | |
| 10.26 | | | Second Amendment to Financing and Security Agreement. |
| | | | |
| 21.0 | | | Subsidiaries of the Company. |
| | | | |
| 23.1 | | | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. |
| | | | | |
| 31.1 | | | Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| 31.2 | | | Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| 32.1 | | | Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| 32.2 | | | Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002. |