ARGAN INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For
the Fiscal Year Ended January 31, 2008
or
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
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13-1947195
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(State
or Other Jurisdiction of Incorporation or Organization)
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(IRS.
Employer Identification No.)
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One
Church Street, Suite 401, Rockville, Maryland
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20850
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(Address
of Principal Executive Offices)
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(Zip
Code)
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301-315-0027
(Issuer's
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
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Name
of Each Exchange
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Title
of Each Class
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on
Which Registered
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Common
Stock, $0.15 par value
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American
Stock Exchange
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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.
Yes o
No x.
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. Yes x No o
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'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):
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). Yes o No x
The
aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $31,620,000 on July 31, 2007 (the last business
day
of the Registrant’s second fiscal quarter), based upon the closing price on the
NASDAQ Electronic Bulletin Board System 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: 11,120,026
shares
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders
to be held on June 18, 2008 are incorporated by reference in Part
III.
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ARGAN,
INC.
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2008
FORM 10-K ANNUAL REPORT
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TABLE
OF CONTENTS
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Page
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PART
I
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ITEM
1. DESCRIPTION OF BUSINESS.
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1
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ITEM
1A. RISK FACTORS
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8
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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21 -
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ITEM
2. PROPERTIES
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21 -
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ITEM
3. LEGAL PROCEEDINGS
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21 -
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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22 -
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PART
II
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ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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23 -
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ITEM
6. SELECTED FINANCIAL DATA
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24 -
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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24 -
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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34 -
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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34 -
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
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ITEM
9A(T). CONTROLS AND PROCEDURES
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ITEM
9B. OTHER INFORMATION
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PART
III
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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35 -
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ITEM
11. EXECUTIVE COMPENSATION
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35 -
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND
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36 -
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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36 -
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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36 -
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PART
IV
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ITEM
15. EXHIBITS
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36 -
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PART
I
Argan,
Inc. (“Argan,” the “Company” or “we”) 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 our operations through our wholly owned subsidiaries,
Gemma Power Systems, LLC (“GPS LLC”), Gemma Power, Inc., (“GPI”) and Gemma Power
Systems California, Inc. (“GPS-California”) (collectively referred to as “GPS”),
Southern Maryland Cable, Inc. (“SMC”) and Vitarich Laboratories, Inc. (“VLI”),
respectively. We acquired SMC, VLI and GPS in July 2003, August 2004 and
December 2006, respectively.
The
revenues of GPS, VLI and SMC represented approximately 87%, 8% and 5% of the
Company’s consolidated net sales for the fiscal year ended January 31,
2008.
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 cashflow for the Company and value for our
stockholders.
We
are a
holding company with no operations other than our investments in GPS, SMC and
VLI. At January 31, 2008, there were no restrictions with respect to
intercompany payments from GPS, SMC and VLI to Argan.
We
were
organized as a Delaware corporation in May 1961. On October 23, 2003, our
stockholders approved a plan providing for the internal restructuring of the
Company whereby we became a holding company, and our operating assets and
liabilities relating to our Puroflow Incorporated (“Puroflow”) business were
transferred to a newly-formed, wholly owned subsidiary. The subsidiary then
changed its name to “Puroflow Incorporated” and we changed our name from
Puroflow Incorporated to “Argan, Inc.”
On
October 31, 2003, pursuant to a certain Stock Purchase Agreement (the “Stock
Purchase Agreement”), we completed the sale of Puroflow to Western Filter
Corporation (“WFC”) for approximately $3.5 million in cash, of which $300,000 is
being held in escrow to indemnify WFC from losses if a 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, 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 has appealed this decision (this matter is discussed in Item
3
below).
Merger
of Gemma Power Systems, LLC and its 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’s 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. The purchase price was funded by a new $8.0 million, secured, 4-year
term
loan which carries an interest rate of LIBOR plus 3.25% (as discussed below).
In
addition, the Company raised $10.7 million through the private offering of
2,853,335 shares of Argan common stock at a purchase price of $3.75 per share
(as discussed 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 to January 31,
2008, payment of the remaining $2.0 million was made 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 Stock in 2006
On
December 8, 2006, the Company 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 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. The
Company 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 new financing arrangement reduced the interest rate on
the 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 Company 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
Company 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 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 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.
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, 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, 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 GPS 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.
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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.
Climate
change concerns combined with oil prices at unprecedented levels are driving
an
increase in renewable energy legislation, government incentives and
commercialization. Certain European countries and certain states in the US
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, the annual amount of investment capital flowing
into renewable energy projects has climbed. Very large corporations as well
as
venture capital and other investment firms are directing funds to the renewable
energy sector.
In
the
current year, we substantially completed projects for a large biodiesel facility
near Houston, Texas, 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 recorded in the
current fiscal year. We incurred unexpected costs in connection with the
completion 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 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.
In
December 2007, we announced that GPS has 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 will have a capacity of
640 MW
with a planned completion date of August 1, 2010. GPS brings specific expertise
in the management and construction 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.
Materials
Concurrent
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 we are not dependent
upon any one source for materials that we use to complete the 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. We 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; Emcor Group,
Inc., a provider of mechanical and electrical construction and facilities
services internationally with over 27,000 employees and over $5.0 billion in
annual revenues; Fluor Corporation, an international engineering, procurement,
construction and maintenance company with over 37,000 employees and over $14
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. Other large
competitors in this industry include Washington Group International, Inc.,
Granite Construction Incorporated, Foster Wheeler Ltd. and Perini
Corporation.
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.
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Customers
The
most
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”).
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 26%, 22%, 18% and 13% of
the
Company’s consolidated revenues for the fiscal year ended January 31, 2008,
respectively.
Contract
Backlog
Contract
backlog represents the total accumulated value of new work awarded less the
amount of revenue recognized to date on contracts at a specific point in time.
We believe contract backlog is an indicator of future 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, the Company had entered into power industry service contracts
for the construction of seven facilities, including four that were substantially
completed in fiscal year 2008, representing a total contract backlog of $122
million compared to a total contract backlog of $171 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. 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 amount at January 31, 2008.
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.
Telecommunication
Infrastructure Services
Through
SMC, we provide telecommunication 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.
We
provide a wide range of inside plant and premises wiring services to our
customers including 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 require regular
upgrades to their wiring systems in order to accommodate improvements in
security, telecommunications and network capabilities.
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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. 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 be 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 year, and postpone additional expenditures
until the subsequent fiscal period.
Raw
Materials
Generally,
our telecommunication 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.
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, 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.
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, projects completed
for Verizon, Southern Maryland Electrical Cooperative (“SMECO”) and EDS are
completed under the terms of master agreements that include pre-negotiated
labor
rates. At January, 31, 2008 and 2007, the value of unfulfilled work orders
and
other customer orders that we believe to be firm was approximately $3.6 million
and $6.5 million, respectively.
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Regulation
Our
telecommunication 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 total
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 revenues
for the fiscal 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 58 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. 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
intend
to enhance our position in 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 nutraceutical products.
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 as sufficiently
distinguishable from competitive products. 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.
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6 -
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.
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, 2008 and 2007, the value of unfulfilled purchase
orders that we believe to be firm was approximately $2.0 million and $4.3
million, respectively.
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.
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7 -
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 discussion in Note 5 of the
accompanying consolidated financial statements.
Employees
At
January 31, 2008, we had approximately 424 employees, all of whom were
full-time. 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 Fifth Street,
N.W., 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.
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:
Corporate
Secretary
Argan,
Inc.
Suite
401
One
Church Street
Rockville,
Maryland 20850
(301)
315-0027
ITEM
1A. RISK 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, 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 factors listed from time
to
time in our future filings with the SEC, including, but not limited to, our
Quarterly Reports on Form 10-Q.
General
Risks Relating to our Company
Further
economic downturn may lead to less demand for our products and
services.
If
the
general level of economic activity continues to slow, our customers may delay
or
cancel new projects or products. For example, economic downturns in the past
have led to increased bankruptcies and pricing pressures. These factors
contribute to the delay 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 expenditures in the future, establish
new
supply relationships or pay for past services. In addition, consolidation,
competition or capital constraints in the industries of our customers may result
in reduced spending by such customers. If general economic conditions do not
improve, the demand for our products and services may be adversely
affected.
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8 -
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, 2008 was approximately $18.4 million resulting primarily from
operating losses in prior years. In addition, we incurred a loss of
approximately $3.2 million for the fiscal year ended January 31, 2008. Future
losses may occur in this or other segments of our business. If net losses were
to continue, we could experience cash flow and liquidity shortfalls having
adverse affects on our ability to successfully execute our business
plan.
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, our ability to expand by achieving overall organic growth of
the
Company will be affected by, among other factors, our success in:
|
·
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expanding
the range of services and products we offer to customers to address
their
evolving needs;
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·
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attracting
new customers;
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|
·
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hiring
and retaining employees; and
|
|
·
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reducing
operating and overhead expenses.
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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.
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9 -
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. is a
holding company with no operations other than our investments in SMC, VLI and
GPS. 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 Company and value to the stockholders.
Additional companies that meet these criteria, that provide products and/or
services to growth industries, and that are available for purchase at attractive
prices may be difficult to find. Accordingly, there can be no assurance that
future acquisitions will occur, or if they occur, will be beneficial to us
and
our stockholders.
The
integration of acquired companies may not be successful.
We
may
not be able to successfully integrate 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:
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failure
of acquired companies to achieve the results we
expect;
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·
|
diversion
of management's attention from operational
matters;
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·
|
difficulties
integrating the operations and personnel of acquired
companies;
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·
|
inability
to retain key personnel of acquired
companies;
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·
|
risks
associated with unanticipated events or
liabilities;
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·
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the
potential disruption of our business;
and
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·
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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' ownership interest, the incurrence of debt,
contingent liabilities, deferred stock based compensation or expenses related
to
the valuation of goodwill or other intangible assets and the incurrence of
large, immediate write-offs.
We
may not be able to raise additional capital and, as a result, may not be able
to
successfully execute our business plan.
We
will
need 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 through the issuance
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
currently in the form of multi-year installment term loans relating to VLI
and
GPS that are due on August 31, 2009 and December 31, 2010, respectively, and
that had principal amounts payable at January 31, 2008 in the amounts of
$792,000 and $5,833,000, respectively.
The
debt
arrangements require that 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 condition of the Company or any of its
subsidiaries.
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.
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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 capability of our corporate 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
ability to maintain productivity and profitability will be limited by our
ability to employ, retain and train skilled personnel necessary to meet our
requirements. We cannot be certain that we will be able to maintain 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
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, could
negatively impact our ability to manage our business.
Specific
Risks Relating to Our Power Industry Services
Failure
to successfully operate our power industry services business will adversely
affect our Company.
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, the operations of GPS
represent a significant portion of our Company’s net sales and profits. For the
year ended January 31, 2008, the revenues of GPS represented 87% of consolidated
net sales and provided approximately $10.8 million in income before income
taxes. Our inability to successfully develop, manage and provide our power
industry services will adversely affect our overall business operations and
financial condition.
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, such as Fluor
Corporation, EMCOR Group, Inc., The Shaw Group Inc., Washington Group
International, Inc., and Perini Corporation, and international companies, such
as SNC Lavalin Group, Inc. and Foster Wheeler Ltd. 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, we could lose market share to our competitors
and
experience an overall reduction in our profits.
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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 to 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 would
adversely affect the growth of this business.
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 and cancellations and is,
therefore, an uncertain indicator of our future earnings.
As
of
January 31, 2008, our construction backlog was approximately $122 million.
We
expect that our performance of the work contemplated by this contract backlog
will earn a substantial portion of this revenue in the fiscal year ending
January 31, 2009. However, projects may remain 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
and
could reduce the dollar amount of our backlog and the revenue and profits
that
we actually earn. Project terminations, suspensions or scope adjustments
may
occur from time to time with respect to contracts in our backlog. Finally,
poor
project or contract performance could also impact our backlog and profits.
As a
result, we cannot guarantee that the revenue projected in our backlog 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.
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12 -
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;
|
|
·
|
work
stoppages;
|
|
·
|
weather
interference;
|
|
·
|
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.
-
13 -
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 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'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.
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 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 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 in a lump sum or a fixed-price type
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 impair contract profitability.
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14 -
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 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.
When
it is determined that we have liability, we may not be covered by insurance
or,
if covered, the dollar amount of these liabilities may exceed our policy limits.
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 profits and cash available for operations.
We
could be subject to claims and liabilities under 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.
The
failure of our insurance policies to cover all 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 insurance
could have a material adverse effect on our financial condition and results
of
operations.
Specific
Risks Relating to Our Telecommunications Infrastructure
Business
Deterioration
of regional economic conditions in our industry could have a material adverse
effect on our future operating results.
We
are
involved in the telecommunications infrastructure services 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, our activities may be hampered by weather conditions and an inability
to plan and forecast activity levels. Adverse economic conditions in the
telecommunications infrastructure and construction industries may have a
material adverse effect on our future operating results.
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.
-
15 -
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 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 revenue 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.
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16 -
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 States government under government
contracts. United States government contracts and related customer orders
subject us to various laws and regulations governing United States government
contractors and subcontractors, 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 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 of our customers.
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.
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17 -
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 in the
current year.
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;
|
|
·
|
competitors;
|
|
·
|
the
safety and quality of our products and ingredients;
and
|
|
·
|
regulatory
investigations of our products or competitors’
products.
|
Our
inability to respond to changing consumers’ 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 our growth 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 to
us.
-
18 -
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.
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 strategic acquisition of other businesses. In
connection with our acquisition of GPS and VLI, among other consideration,
we
issued approximately 3,666,667 and 1,785,000, respectively, shares of our common
stock. In addition, we issued 2,853,335 shares of our common stock in our
December 2006 private placement. We used the proceeds from the December 2006
private placement to fund the cash portion of the acquisition cost of GPS.
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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19 -
Our
officers, directors and certain key employees have substantial control over
Argan.
As
of
January 31, 2008, our executive officers and directors as a group owned
approximately 17.5% of our voting shares (giving effect to an aggregate of
360,000 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) and therefore, may have the power
to
influence 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 influence the election of directors
and
other actions requiring stockholder approval.
In
addition, as of January 31, 2008, William F. Griffin, Jr. and Joel M. Canino,
executive officers of GPS, own approximately 13.5% and 11.6% of our outstanding
voting shares, respectively. Therefore, Messrs. Canino and Griffin,
individually, may have the power to influence corporate actions.
As
our common stock is thinly traded, the stock price may be volatile and you
may
have difficulty disposing of your investment at prevailing market prices.
In
August
2007, our common stock was approved for listing on the American Stock Exchange
(“AMEX”) 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, 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. On
February 16, 2007, we filed a Form S-3 registration statement for resale
of
3,666,667 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. 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
Certificate of 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 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 dividends on our common
stock
in the foreseeable future. Payment of dividends, if any, will depend on our
future earnings, capital requirements and financial position, plans for
expansion, general economic conditions and other pertinent factors.
-
20 -
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
occupy
our corporate headquarters in Rockville, Maryland, under a lease that expires
on
June 30, 2009 covering 1,495 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 others pursuant to leases with terms that will
expire on February 28, 2011. One facility is leased from the former owner of
VLI. 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 two storage
and
staging lots in the nearby St. Mary’s and Calvert Counties of Maryland that
expire in December 2008 and September 2009, respectively.
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.
ITEM
3. LEGAL 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'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.
|
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 filed a lawsuit against the Company,
VLI and
our 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 our 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 our 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
intend
to vigorously defend this lawsuit and prosecute its counterclaims
(the
“VLI Merger Litigation”).
|
|
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 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. The defendants
vigorously deny that VLI breached any contract or that VLI’s president
defamed VLI. We intend to vigorously defend this
lawsuit.
|
-
21 -
|
4)
|
Mr.
Thomas has also filed a lawsuit against VLI’s president for defamation in
the Circuit Court of Florida for Collier County. 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.
|
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
None.
-
22 -
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In
August
2007, our common stock was approved for listing on the American Stock Exchange
(“AMEX”) and commenced trading under the symbol AGX. The following table sets
forth the high and low closing prices for our common stock for the fiscal
quarters ended October 31, 2007, January 31, 2008 and April 30, 2008.
|
High
Close
|
Low
Close
|
||||||
|
Fiscal
Year Ended January 31, 2008
|
|||||||
|
3rd
Quarter (commencing August 22, 2007)
|
$
|
10.25
|
$
|
7.55
|
|||
|
4th
Quarter
|
13.39
|
9.94
|
|||||
|
Fiscal
Year Ending
January 31, 2009
|
|||||||
|
1st
Quarter (through March 12, 2008)
|
$
|
12.25
|
$
|
11.51
|
|||
Prior
to
the listing on 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.
As
of
April 4, 2008, we had approximately 234 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.
-
23 -
Equity
Compensation Plan Information
The
following table sets forth certain information, as of January 31, 2008,
concerning securities authorized for issuance under warrants and options to
purchase our common stock.
|
|
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, a total of 650,000 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
2007
in order to authorize the grant of options for up to 650,000 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 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. As of January 31, 2008, warrants to purchase
226,000 shares of common stock were outstanding.
Recent
Sales of Unregistered Securities
None.
ITEM
6. SELECTED FINANCIAL DATA
Not
required for smaller reporting company.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FININCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion summarizes the financial position of Argan, Inc. and its
subsidiaries as of January 31, 2008, and the results of operations for the
years
ended January 31, 2008 and 2007, 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.
-
24 -
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 our 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 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 energy market for a wide range of customers
including public utilities, independent power project owners, municipalities,
public institutions and private industry. 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. Through VLI, we
develop, manufacture and distribute premium nutritional products.
Critical
Accounting Policies
We
consider the accounting policies related to revenue recognition on long-term
construction contracts, the valuation of goodwill and other purchased intangible
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.81-1
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.” The types of contracts may vary and include 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. 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.
-
25 -
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, the beginning
of our most recent fiscal year, goodwill and other purchased intangible assets
together represented approximately 30% of consolidated total assets. In
accordance with FAS No. 142 “Goodwill and Other Intangible Assets,” 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 business experienced by VLI during
the current year suggested that the carrying value of VLI’s goodwill and other
long-lived 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 the current fair values. Accordingly,
we recorded asset impairment losses in the total amount of $6.8 million for
the
year ended January 31, 2008.
As
of
January 31, 2008 and 2007, our consolidated balance sheets included deferred
tax
assets in the total amounts of $2,423,000 and $512,000, respectively, resulting
from our future deductible temporary differences. In assessing the realizability
of deferred tax assets, 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 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 benefit for our deferred tax assets.
As
discussed in Note 12 to the consolidated financial statements, we are involved
in several legal maters where litigation has been initiated against us. As
discussed in Note 12, we deny the alleged wrongdoings and intend to vigorously
defend ourselves in each case. We have concluded that the likelihood of an
unfavorable outcome in each case is neither probable nor remote as those terms
are defined in FAS No. 5, “Accounting for Contingencies.” 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 cases change, 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
discussed in the Note 15 to the accompanying consolidated financial statements,
we have adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”. Other than this change, there have been no significant changes to
our critical accounting policies during the year ended January 31,
2008.
On
February 1, 2006, we adopted Statement of Financial Accounting Standard No.
123R, “Share-based Payments,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors using a fair value based option pricing model, and eliminated the
alternative intrinsic value method of accounting for share-based payments.
We
applied the modified prospective transition method; accordingly, the Company
recorded compensation expense related to stock options and warrants in the
financial statements beginning February 1, 2006 (amounting to $561,000 and
$237,000 for the years 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.
In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 141(R), “Business Combinations”. FAS No. 141(R) replaces FAS No.
141 and provides greater consistency in the accounting and financial reporting
of business combinations. FAS No. 141(R) 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 required 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
in a business combination are recognized in income from continuing operations
in
the period of the combination. For us, FAS 141R will be effective for
business combinations occurring subsequent to January 31, 2009. We will assess
the impact that SFAS 141R may have on its financial position and results of
operations. In December 2007, the FASB also issued FAS 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 would
not affect our current consolidated financial statements.
-
26 -
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” FAS No. 159 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 be effective for us beginning
February 1, 2008. We do not expect FAS No. 159 to have a significant impact
on
the consolidated financial statements.
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.
-
27 -
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.
-
28 -
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.
-
29 -
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.
-
30 -
|
|
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.
-
31 -
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.
-
32 -
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.
-
33 -
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required for smaller reporting company.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
the
Index to the Consolidated Financial Statements on page 41.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Attached
as exhibits to this 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.
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 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 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 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,
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.
-
34 -
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’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.
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, 2008 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.
ITEM
9B. OTHER INFORMATION
Not
Applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this item will be incorporated by reference to our
2008
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
The
information required by this item will be incorporated by reference to our
2008
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.
-
35 -
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED
STOCKHOLDER MATTERS
The
information required by this item will be incorporated by reference to our
2008
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
The
information required by this item will be incorporated by reference to our
2008
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
The
information required by this item will be incorporated by reference to our
2008
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
15. EXHIBITS
The
following exhibits are filed as part of this annual report:
|
Exhibit No.
|
|
Description
|
|
3.1
|
Certificate
of Incorporation, as amended. Incorporated by reference to 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).
|
|
|
4.1
|
Stock
Purchase Agreement dated as of May 4, 2006 between Argan, Inc. and
the
purchasers identified on Schedule A attached thereto.
(b)
|
|
|
4.2.1
|
Escrow
Agreement dated as of May 4, 2006 between Argan, Inc. and the purchasers
identified on Schedule A attached thereto.
(b)
|
|
|
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)
|
|
|
4.4
|
Stock
Purchase Agreement dated as of December 8, 2006 by and between Argan,
Inc.
and Argan Investments LLC.
(e)
|
|
|
4.5
|
Registration
Rights Agreement dated December 8, 2006 by and between Argan, Inc.
and
Argan Investments LLC. (e)
|
|
|
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)
|
|
|
|
||
|
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)
|
|
|
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)
|
|
|
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.
|
-
36 -
|
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
|
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)
|
|
|
10.17
|
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)
|
|
|
10.18
|
Employment
Agreement dated as of December 8, 2006 by and between Gemma Power
Systems,
LLC and Joel M. Canino.
(e)
|
|
|
10.19
|
Employment
Agreement dated as of December 8, 2006 by and between Gemma Power
Systems,
LLC and William M. Griffin, Jr.
(e)
|
-
37 -
|
10.20
|
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)
|
|
|
10.21
|
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)
|
|
|
10.22
|
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)
|
|
|
10.23
|
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)
|
|
|
|
||
|
10.24
|
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)
|
|
|
10.25
|
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)
|
|
|
10.26
|
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)
|
|
|
|
||
|
10.27
|
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)
|
|
|
10.28
|
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)
|
|
|
10.29
|
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)
|
|
|
10.30
|
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)
|
|
|
10.31
|
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)
|
|
|
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
|
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.
|
|
|
23.1
|
Consent
of Grant Thornton LLP, Independent Registered Public Accounting Firm.
(f)
|
|
|
31.1
|
Certification
of CEO required by Section 302 of the Sarbanes-Oxley Act of
2002.(f)
|
|
|
31.2
|
Certification
of CFO required by Section 302 of the Sarbanes-Oxley Act of
2002.(f)
|
-
38 -
|
32.1
|
Certification
of CEO required by Section 906 of the Sarbanes-Oxley Act of
2002.(f)
|
|
|
32.2
|
Certification
of CFO required by Section 906 of the Sarbanes-Oxley Act of
2002.(f)
|
|
(a)
|
Not
used.
|
|
(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)
|
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.
|
|
(f)
|
Filed
herewith.
|
-
39 -
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:
|
/s/
Rainer H. Bosselmann
|
|
|
Rainer
H. Bosselmann
|
||
|
Chairman
of the Board and Chief Executive Officer
|
||
|
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/
Rainer H. Bosselmann
|
Chairman
of the Board and Chief Executive Officer
|
April
23, 2008
|
||
|
Rainer
H. Bosselmann
|
(Principal
Executive Officer)
|
|||
|
/s/
Arthur F. Trudel
|
Senior
Vice President, Chief Financial Officer and
|
April
23, 2008
|
||
|
Arthur
F. Trudel
|
Secretary
|
|||
|
(Principal
Accounting and Financial Officer)
|
||||
|
/s/
Henry A. Crumpton
|
Director
|
April
23, 2008
|
||
|
Henry
A. Crumpton
|
||||
|
/s/
DeSoto S. Jordan
|
Director
|
April
23, 2008
|
||
|
DeSoto
S. Jordan
|
||||
|
/s/
William F. Leimkuhler
|
Director
|
April
23, 2008
|
||
|
William
F. Leimkuhler
|
||||
|
/s/
Daniel A. Levinson
|
Director
|
April
23, 2008
|
||
|
Daniel
A. Levinson
|
||||
|
/s/
W. G. Champion Mitchell
|
Director
|
April
23, 2008
|
||
|
W.
G. Champion Mitchell
|
||||
|
/s/
James W. Quinn
|
Director
|
April
23, 2008
|
||
|
James
W. Quinn
|
-
40 -
ARGAN,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
JANUARY
31, 2008
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 on Form 10-K.
|
|
Page No.
|
|
|
Report
of Grant Thornton LLP, Independent Registered Public Accounting
Firm
|
42
|
|
|
Consolidated
Balance Sheets at January 31, 2008 and 2007
|
43
|
|
|
Consolidated
Statements of Operations for the
years ended January 31, 2008 and 2007
|
44
|
|
|
Consolidated
Statements of Stockholders' Equity for the years ended January 31,
2008
and 2007
|
45
|
|
|
Consolidated
Statements of Cash Flows for the
years ended January 31, 2008 and 2007
|
46
|
|
|
Notes
to Consolidated Financial Statements
|
47
|
|
|
Schedule
II – Valuation and Qualifying Accounts
|
67
|
-
41 -
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. and
subsidiaries (the “Company”) as of January 31, 2008 and 2007, 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, assessing the accounting principles used and
significant estimates made by management, and 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
discussed in Note 2 to the consolidated financial statements, effective February
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes.
/s/
GRANT
THORNTON LLP
Baltimore,
Maryland
April
23,
2008
-
42 -
ARGAN,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JANUARY
31,
|
2008
|
2007
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
66,827,000
|
$
|
25,393,000
|
|||
|
Accounts
receivable, net of allowance for doubtful accounts
|
30,239,000
|
23,185,000
|
|||||
|
Investments
available for sale
|
—
|
2,283,000
|
|||||
|
Escrowed
cash
|
14,398,000
|
15,031,000
|
|||||
|
Estimated
earnings in excess of billings
|
242,000
|
12,003,000
|
|||||
|
Inventories,
net of obsolescence reserve
|
2,808,000
|
2,387,000
|
|||||
|
Prepaid
expenses and other current assets
|
1,330,000
|
643,000
|
|||||
|
Deferred
income tax assets
|
406,000
|
409,000
|
|||||
|
TOTAL
CURRENT ASSETS
|
116,250,000
|
81,334,000
|
|||||
|
Property
and equipment, net of accumulated depreciation
|
2,892,000
|
3,250,000
|
|||||
|
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
|
|||||
|
Deferred
income tax assets
|
828,000
|
—
|
|||||
|
Other
assets
|
260,000
|
313,000
|
|||||
|
TOTAL
ASSETS
|
$
|
145,863,000
|
$
|
121,539,000
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
35,483,000
|
$
|
44,255,000
|
|||
|
Accrued
expenses
|
9,370,000
|
5,873,000
|
|||||
|
Billings
in excess of cost and earnings
|
52,313,000
|
15,705,000
|
|||||
|
Current
portion of long-term debt
|
2,581,000
|
2,586,000
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
99,747,000
|
68,419,000
|
|||||
|
Long-term
debt
|
4,134,000
|
6,715,000
|
|||||
|
Deferred
income tax liabilities
|
—
|
1,880,000
|
|||||
|
Other
liabilities
|
116,000
|
14,000
|
|||||
|
TOTAL
LIABILITIES
|
103,997,000
|
77,028,000
|
|||||
|
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
|
|||||
|
Warrants
outstanding
|
834,000
|
849,000
|
|||||
|
Additional
paid-in capital
|
57,861,000
|
57,190,000
|
|||||
|
Accumulated
other comprehensive loss
|
(107,000
|
)
|
(8,000
|
)
|
|||
|
Accumulated
deficit
|
(18,356,000
|
)
|
(15,151,000
|
)
|
|||
|
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
|
|||
The
accompanying notes are an integral part of these financial
statements.
-
43 -
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
|
|||||
The
accompanying notes are an integral part of these financial
statements.
-
44 -
ARGAN,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED JANUARY 31, 2008 AND 2007
|
|
|
Accumulated
|
|
|
|
|
|||||||||||||||||||
|
|
Common
Stock
|
|
Other
|
Additional
|
|
|
|
||||||||||||||||||
|
|
Outstanding
Shares
|
Par
Value
|
Warrants
|
Comprehensive
Losses
|
Paid-In
Capital
|
Accumulated
Deficit
|
Treasury
Stock
|
Totals
|
|||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Balance,
February 1, 2006
|
3,814,010
|
$
|
572,000
|
$
|
849,000
|
$
|
—
|
$
|
25,336,000
|
$
|
(15,038,000
|
)
|
$
|
(33,000
|
)
|
$
|
11,686,000
|
||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(113,000
|
)
|
—
|
(113,000
|
)
|
|||||||||||||||
|
Other
comprehensive loss
|
—
|
—
|
—
|
(8,000
|
)
|
—
|
—
|
—
|
(8,000
|
)
|
|||||||||||||||
|
Total
comprehensive loss
|
(121,000
|
)
|
|||||||||||||||||||||||
|
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
|
|||||||||||||||||
|
Exercise
of stock warrants
|
4,000
|
1,000
|
(15,000
|
)
|
—
|
45,000
|
—
|
—
|
31,000
|
||||||||||||||||
|
Stock
option vesting
|
—
|
—
|
—
|
—
|
561,000
|
—
|
—
|
561,000
|
|||||||||||||||||
|
Other
|
(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
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
-
45 -
ARGAN,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JANUARY 31,
|
2008
|
2007
|
||||||
|
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:
|
|||||||
|
Impairment
losses on goodwill and other purchased intangible assets
|
6,826,000
|
—
|
|||||
|
Amortization
of purchased intangible assets
|
6,184,000
|
2,328,000
|
|||||
|
Depreciation
and other amortization
|
1,277,000
|
1,365,000
|
|||||
|
Deferred
income taxes
|
(2,705,000
|
)
|
(1,003,000
|
)
|
|||
|
Non-cash
stock option compensation expense
|
561,000
|
237,000
|
|||||
|
Provision
for inventory obsolescence
|
555,000
|
133,000
|
|||||
|
Loss
on sale of assets
|
74,000
|
13,000
|
|||||
|
Provision
for losses on accounts receivable
|
45,000
|
96,000
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(7,099,000
|
)
|
(10,820,000
|
)
|
|||
|
Escrowed
cash
|
633,000
|
(10,039,000
|
)
|
||||
|
Estimated
earnings in excess of billings
|
11,761,000
|
(10,210,000
|
)
|
||||
|
Inventories
|
(976,000
|
)
|
890,000
|
||||
|
Prepaid
expenses and other assets
|
(791,000
|
)
|
(375,000
|
)
|
|||
|
Accounts
payable and accrued expenses
|
(7,278,000
|
)
|
13,890,000
|
||||
|
Billings
in excess of estimated earnings
|
36,608,000
|
446,000
|
|||||
|
Other
|
30,000
|
(136,000
|
)
|
||||
|
Net
cash provided by (used in) operating activities
|
42,500,000
|
(13,298,000
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchase
of investments
|
(19,997,000
|
)
|
—
|
||||
|
Proceeds
from the sale of investments
|
22,268,000
|
—
|
|||||
|
Purchases
of property and equipment
|
(873,000
|
)
|
(935,000
|
)
|
|||
|
Proceeds
from the sale of property and equipment
|
45,000
|
15,000
|
|||||
|
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
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Principal
payments on long-term debt
|
(2,586,000
|
)
|
(796,000
|
)
|
|||
|
Proceeds
from the exercise of stock options and warrants
|
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
INCREASE IN CASH AND CASH EQUIVALENTS
|
41,434,000
|
25,388,000
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
25,393,000
|
5,000
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
66,827,000
|
$
|
25,393,000
|
|||
The
accompanying notes are an integral part of these
financial statements.
-
46 -
ARGAN,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2008 AND 2007
NOTE
1 – ORGANIZATION
Nature
of Operations
Argan,
Inc. (“AI” or the “Company”) conducts its operations through its wholly owned
subsidiaries, Gemma Power Systems, LLC and subsidiaries (“GPS”) which was
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. Through GPS, the Company 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. 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 and maintenance to the Federal Government,
telecommunications and broadband service providers, as well as 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
of the Company whereby AI became 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.
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, 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 of 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 engineering
and
construction of biodiesel and ethanol production facilities and traditional
power energy systems (see Note 4).
On
December 11, 2006, the Company amended its financing arrangements with the
Bank
of America (the “Bank”). The amended financing arrangements reduced the interest
rate on the 3-year term loan for VLI to LIBOR plus 3.25% per annum (from LIBOR
plus 3.45% per annum). The principal balance 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 annum 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.
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.
-
47 -
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation –
The consolidated financial statements include the accounts of AI 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. In accordance with the requirements of Statement of Financial
Accounting Standard (“FAS”) No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” 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.
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 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, management does not
believe that the risk associated with keeping deposits in excess of federal
deposit limits represents a material risk currently.
Investments
Available for Sale –
The Company accounts for its investments in debt and equity securities in
accordance with 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 basis
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 the year ended January 31, 2008.
Fair
Value of Financial Instruments –
The carrying amount of certain of the Company’s financial instruments, including
accounts receivable and accounts payable, approximates fair value due 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.
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.
-
48 -
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.
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,” the 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
estimates 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 after taking into consideration industry and Company trends, 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.
Long-Lived
Assets, including Definite-Lived Intangible Assets –
Long-lived assets, consisting primarily of purchased intangible assets and
property and equipment are reviewed for impairment whenever events or changes
in
circumstances indicate that the carrying amount should be assessed pursuant
to
FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
The Company determines whether any impairment exists by comparing the carrying
value of these long-lived assets to the undiscounted future cash flows expected
to result from the use of these 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, 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.
-
49 -
Revenue
Recognition – Gemma Power Systems –
GPS recognizes revenue pursuant to Statement of Position (SOP) No.81-1
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.” Revenue is 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 cost
or
losses, if any, are recognized in the period in which they are determined.
Unapproved change orders, if any exist are accounted for in revenue and cost
when it is probable that the cost will be recovered through a change in the
contract price. In circumstances where recovery is considered probable but
the
revenue cannot be reliably estimated, cost attributable to change orders is
deferred pending determination of contract price.
Revenue
Recognition – Vitarich Laboratories, Inc. –
Customer sales are recognized at the time products are shipped and title passes
pursuant to the terms of the agreement with the customers, the amount due from
the customer is fixed and collectibility 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 generates revenue under various arrangements, including contracts
under which revenue is 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 is provided to the customer. Revenue from fixed price contracts,
including a portion of estimated profit, is recognized as services are provided,
based on costs incurred and estimated total contract costs using the percentage
of completion method. Many of SMC’s contracts consist of multi-deliverables.
Because the projects are fully integrated undertakings, SMC cannot separate
each
component of the services provided. Losses on contracts, if any, are recognized
in the period in which they become known.
Income
Taxes –
The Company accounts 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 effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
FAS No. 109 also requires that deferred tax assets 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 there was no material effect as a 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 Statement of FAS No. 123R (revised
2004), “Share-based Payments,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors using a fair value based option pricing model. Adoption of 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 for the portion of awards previously granted that
were not vested as of February 1, 2006.
NOTE
3 – RECENTLY ISSUED ACCOUNTING
STANDARDS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued FAS
No. 141(R), “Business Combinations”. FAS No. 141(R) replaces FAS No.
141 and provides greater consistency in the accounting and financial reporting
of business combinations. FAS No. 141(R) 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 required 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
in a business combination are recognized in income from continuing operations
in
the period of the combination. FAS 141R is effective for business
combinations for which 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 impact that SFAS 141R may have on its financial position
and results of operations.
-
50 -
In
December 2007, the FASB also issued FAS 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 FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” FAS No. 159 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 be effective for the Company
beginning February 1, 2008. The Company does not expect FAS No. 159 to have
a
significant impact on the consolidated financial statements.
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
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.
-
51 -
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 that
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
|
||
-
52 -
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 described in Note 4.
For
certain construction projects, cash is held in escrow as a substitute for
retainage. As of January 31, 2008, cash 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 WFC in
the
amount of $300,000 are being held in escrow to indemnify WFC from any damage
which may result from the breach of representations and warranties under the
related stock purchase agreement (see Note 12).
NOTE
6 – ACCOUNTS RECEIVABLE AND ESTIMATED EARNINGS IN EXCESS OF
BILLINGS
Accounts
receivable and estimated earnings in excess of billings represent amounts due
from customers for services rendered or products delivered. The timing of
billing to customers under construction-type contracts varies based on
individual contracts and often differs from the period in which revenue is
recognized. The amounts of estimated earnings in excess of billings at January
31, 2008 and 2007 were $242,000 and $12.0 million, respectively, and were
expected to be billed and collected in the normal course of business. 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 amounts included in accounts receivable
were
$5.6 million and $2.3 million at January 31, 2008 and 2007, respectively. 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 Company’s allowances for doubtful accounts at January 31, 2008
and 2007 were $70,000 and $137,000, respectively.
NOTE
7 - PROPERTY AND EQUIPMENT
Property
and equipment at January 31, 2008 and 2007 consisted of the
following:
|
2008
|
2007
|
||||||
|
Leasehold
improvements
|
$
|
1,051,000
|
$
|
964,000
|
|||
|
Machinery
and equipment
|
3,778,000
|
3,424,000
|
|||||
|
Trucks
and other vehicles
|
1,263,000
|
1,241,000
|
|||||
|
6,092,000
|
5,629,000
|
||||||
|
Less
accumulated depreciation
|
(3,200,000
|
)
|
(2,379,000
|
)
|
|||
|
Property
and equipment, net
|
$
|
2,892,000
|
$
|
3,250,000
|
|||
Depreciation
expense for property and equipment, including assets under capital leases,
for
the fiscal years ended January 31, 2008 and 2007 was approximately $1,120,000
and $1,051,000, respectively.
NOTE
8 – GOODWILL
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 for the quarter ended
October 31, 2007, the Company conducted an analysis of the operations of VLI
in
order to identify any impairment in the carrying value of the goodwill related
to this business. The analysis was updated as of year-end. In general, this
business has reported operating results that are below expected results.
Analyzing this business using both an income approach and a market approach
suggested that the current fair value of this business was approximately $4.4
million. Based on the analyses, the Company recorded goodwill impairment losses
of $5,644,000 during the year ended January 31, 2008, thereby reducing the
goodwill related VLI to an adjusted balance of approximately $921,000. The
goodwill impairment loss amounts are included in the consolidated statement
of
operations for the year ended January 31, 2008.
-
53 -
Additional
purchase price of $2.0 million in cash became payable to the former owners
of
GPS during the fourth quarter of the current 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,
2008
and 2007 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
|
|||||
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.
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 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 is
amortizing the fair value of the CCR’s over a seven-year weighted average life
given the long standing relationships that SMC has with two of the three
customers.
Contractual
Customer Relationships of VLI –
The fair value of the Contractual Customer Relationships at VLI (“VCCR’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 and
sales orders. The Company 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. The Company
is amortizing the VCCR’s over a five-year life based on expectations of
continued cash flows from these relationships and VLI’s history of maintaining
relationships.
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
amortizing the GCCR’s over the estimated duration of the respective contracts
which at the time of acquisition ranged from eight to eighteen months.
-
54 -
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.
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.
Impairment
of Asset Carrying Values
The
loss
of business experienced by VLI during the current year also suggested that
the
carrying value of VLI’s other long-lived 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 year ended January 31, 2008.
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:
|
$
|
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.
-
55 -
|
|
|
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
|
||||||||
-
56 -
NOTE
10 – DEBT
At
January 31, 2008 and 2007, debt consisted of the following:
|
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.
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, including
capital leases, were as follows:
|
2009
|
$
|
2,581,000
|
||
|
2010
|
2,301,000
|
|||
|
2011
|
1,833,000
|
|||
|
2012
|
—
|
|||
|
Total
|
$
|
6,715,000
|
On
December 11, 2006, the Company amended its financing arrangements with the
Bank.
The amended financing arrangements reduced the interest rate on the 3-year
term
loan for VLI to LIBOR plus 3.25%. The principal balance of this loan was
approximately $1.4 million at the amendment date. The original amount of this
loan was $1.5 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 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 in escrow with the Bank as
discussed in Note 4). The outstanding principal balance of this Bank term loan
at January 31, 2008 was $5,833,000.
Finally,
the amended financing arrangements provided 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 to
January 31, 2008, 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 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 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, the Company was in compliance with the
covenants of its amended financing arrangements.
-
57 -
During
the year ended January 31, 2007, the Company entered into interest rate swap
agreements with a total initial notional amount of $5,125,000 and terms of
three
years. Under the swap agreements, the Company receives a floating rate based
on
the LIBOR interest rate and pays fixed rates; the Company’s weighted-average
fixed rate related to its interest rate swap agreements is 5.22%. At January
31,
2008 and 2007, the Company recorded liability amounts of $107,000 and $2,000,
respectively, in order to recognize the fair value of the interest rate swaps;
these amounts were included in other long-term liabilities in the consolidated
balance sheets.
Interest
expense was $699,000 and $708,000 for the years ended January 31, 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 facility 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. 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 for all operating leases and other rental agreements
was approximately $5,009,000 and $657,000 for the years ended January 31, 2008
and 2007, 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:
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'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.
-
58 -
Although
the Company has reviewed WFC’s claims and believes that they are without merit,
the Company’s consolidated balance sheet at January 31, 2008 included
approximately $20,000 in accrued expenses reflecting the Company’s estimate of
the remaining amount of legal fees that it expects to be billed in connection
with this matter. It is possible however, that the ultimate resolution of the
WFC litigation could result in a material adverse effect on the results of
operations of the Company for a particular future reporting period.
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.
Although
the Company has reviewed the claims of Mr. Thomas and believes that they are
without merit, the Company’s consolidated balance sheet at January 31, 2008
includes approximately $301,000 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. It is possible however, that 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.
NOTE
13 – PRIVATE OFFERINGS OF COMMON STOCK
On
December 8, 2006, the Company 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.
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. The Company used $1.8 million of the proceeds to pay down a
subordinated note payable to the former owner of VLI.
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 2007 in order to authorize the grant of options
for up to 650,000 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 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.
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.
The
fair
values per share of options to purchase shares of the Company’s common stock,
including options issued or assumed from acquisitions, 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
|
—
|
%
|
-
59 -
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
|
|||||||
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 issued warrants to purchase shares of the Company’s common stock at
a price of $7.75 per share with ten-year terms. Warrants to purchase 180,000
shares of common stock were granted to three individuals who became the
executive officers of the Company upon completion of the offering. In addition,
MSR Advisors, Inc. (“MSR”) received warrants to purchase 50,000 shares of the
Company’s stock. A director of the Company is the chief executive officer of
MSR. The aggregate fair value of the warrants amounted to $849,000; this amount
was recorded 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 options and
warrants.
-
60 -
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 and $39,000 for the years ended January
31,
2008 and 2007, respectively.
NOTE
15 – INCOME TAXES
Despite
reporting a loss from operations before income taxes of $1,612,000 for the
year
ended January 31, 2008, the Company recorded income tax expense of $1,593,000
for the year. For the current year, the goodwill impairment loss of $5,644,000
that is discussed in Note 8 is not deductible for income tax reporting purposes,
and represents 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.
The
components of the Company’s income tax expense for the years 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 amounts for the years ended January 31, 2008 and
2007
differ 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:
|
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
January 31, 2008 and 2007, accrued expenses included 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, 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
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.
-
61 -
The
tax
effects of temporary differences that give rise to deferred tax assets and
liabilities at January 31, 2008 and 2007 are presented below:
|
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–
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. 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 expense amounts incurred under these arrangements were $45,000 and
$195,000 for the years ended January 31, 2008 and 2007,
respectively.
The
Company entered into a supply agreement with an entity owned by Mr. Thomas
whereby the supplier committed to sell to the Company and the Company committed
to purchase on an as-needed basis, certain organic products. VLI made $47,000
in
purchases under the supply agreement through March 2007, the date that Mr.
Thomas’ employment 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. Thomas had an ownership interest. VLI had approximately $117,000
in
current year sales to this entity through the aforementioned termination in
March 2007, and $543,000 in sales to this entity during the year ended January
31, 2007. At January 31, 2007, the previously affiliated entity owed $155,000
to
VLI; payment of this amount was subsequently received by the
Company.
-
62 -
NOTE
17 – SEGMENT REPORTING
Effective
with the acquisition of GPS, the Company’s three reportable segments are power
industry services, telecommunications infrastructure services and nutraceutical
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, 2008 and 2007, and certain
financial position data as of January 31, 2008 and 2007:
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
|
||||||
-
63 -
|
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
|
||||||
During
the year ended January 31, 2008, the majority of the Company’s revenues related
to a broad range of engineering, procurement and construction services provided
by GPS to the power industry. Total revenues from power industry services
accounted for approximately 87% of consolidated net sales for the year ended
January 31, 2008. The Company’s most significant current year customer
relationships included four 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%
and 13%, respectively, of consolidated net sales for the year ended January
31,
2008. 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% of consolidated net sales for the year ended January 31,
2008. SMC, which provides infrastructure services to telecommunications and
utility customers as well as to the federal government, accounted for
approximately 5% of consolidated net sales for the year ended January 31,
2008.
The
consolidated operating results for the year ended January 31, 2007 included
the
results of the power industry services segment 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% of consolidated net sales for the year. No other
customer of the Company provided revenues or net sales in excess of 10% of
consolidated net sales for the year ended January 31, 2007.
-
64 -
NOTE
18 – 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, 2008 and 2007 is presented below:
|
|
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 does not agree with the calculated net
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.
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 reported 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 and $2,160,000,
respectively, that related to goodwill and other purchased intangible assets
of
VLI.
NOTE
19 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash
paid
for interest and income taxes is presented below for the years ended January
31,
2008 and 2007:
|
2008
|
2007
|
||||||
|
Interest
|
$
|
699,000
|
$
|
526,000
|
|||
|
Income
taxes
|
$
|
4,358,000
|
$
|
147,000
|
|||
Non-cash
investing and financing transactions are presented below for the years ended
January 31, 2008 and 2007:
|
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 president in the Circuit Court 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.
-
65 -
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, 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. 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.
-66-
SCHEDULE
II
ARGAN,
INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
|
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
|
|||||||||
-67-
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
10.31
|
First
Amendment to Second Amended and Restated Financing and Security
Agreement
|
|
|
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.
|
-68-