10-Q 1 aiiform10q-063008.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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: 000-24684

 

ADUDDELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Oklahoma

 

73-1587867

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

14220 S. Meridian, Oklahoma City, Oklahoma

 

73173

(Address of principal executive offices)

 

(Zip Code)

 

(405) 692-2300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

Accelerated Filer o

 

 

Non-accelerated Filer o (Do not check if smaller reporting company)

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

 

On August 14, 2008, we had outstanding 53,965,854 shares of our common stock, $.001 par value.

 

 

 


ADUDDELL INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED JUNE 30, 2008

 

Table of Contents

 

 

 

 

Page

 

Part I – Financial Information

 

 

1

 

Item 1. Financial Statements

 

 

1

 

Consolidated Balance Sheets

 

 

1

 

Consolidated Statements of Operations

 

 

3

 

Consolidated Statements of Cash Flows

 

 

4

 

Notes to Consolidated Financial Statements

 

 

6

 

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

 

 

17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

24

 

Item 4. Controls and Procedures

 

 

24

 

Part II – Other Information

 

 

25

 

Item 1. Legal Proceedings

 

 

25

 

Item 1A. Risk Factors

 

 

25

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

25

 

Item 3. Defaults Upon Senior Securities

 

 

25

 

Item 4. Submission of Matters to a Vote of Security Holders

 

 

25

 

Item 5. Other Information

 

 

25

 

Item 6. Exhibits

 

 

25

 

 

 

 


Cautionary Statement Regarding Forward-Looking Information

 

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the use of forward-looking terminology such as “may”, “might”, “could”, “would”, “believe”, “expect”, “intend”, “plan”, “seek”, “anticipate”, “estimate”, “project” or “continue” or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact included in this report on Form 10-Q, including without limitation, the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding our financial position and liquidity are forward-looking statements. These forward-looking statements also include, but are not limited to:

 

 

our ability to expand our markets and maintain or increase profit margins and continue as a going concern;

 

actions of our competitors;

 

 

statements regarding our anticipated revenues, expense levels, liquidity and capital resources and projections of positive operating cash flow.

 

Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to be correct.

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in our internal estimates or expectations or otherwise.

 

 


PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

ADUDDELL INDUSTRIES, INC.

BALANCE SHEET

JUNE 30, 2008

 

 

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

(Unaudited)

 

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

Cash

$

$

1,021,935 

Accounts and contract receivable, net of allowance

 

 

 

 

for doubtful accounts of $665,000

 

16,163,155 

 

14,160,546 

Costs and estimated earnings in excess of

 

 

 

 

billings on uncompleted contracts

 

1,418,161 

 

2,190,585 

Inventory

 

274,880 

 

274,880 

Prepaid expenses

 

176,609 

 

48,952 

Income tax receivable

 

376,469 

 

376,469 

Related party receivable

 

128,796 

 

Deposits

 

3,490 

 

3,490 

Employee and other receivables, net of

 

 

 

 

allowance for doubtful accounts

 

1,821 

 

20,941 

 

 

18,543,381 

 

18,097,798 

Property and Equipment

 

 

 

 

Land

 

130,289 

 

130,289 

Field and shop equipment

 

4,416,842 

 

4,404,164 

Office furniture and equipment

 

1,018,967 

 

994,165 

Transportation equipment

 

2,798,677 

 

2,798,677 

Leasehold improvements

 

268,970 

 

221,136 

 

 

8,633,745 

 

8,548,431 

Less: accumulated depreciation

 

(3,528,828)

 

(2,809,255)

 

 

5,104,917 

 

5,739,176 

Other

 

 

 

 

Investments

 

3,280 

 

3,280 

Intangible asset (customer lists), net

 

4,209,549 

 

4,839,442 

Deferred tax asset

 

5,373,500 

 

4,226,914 

 

 

9,586,329 

 

9,069,636 

 

 

 

 

 

 

$

33,234,627 

$

32,906,610 

 

 

 

 

 

 

 

1

 


ADUDDELL INDUSTRIES, INC.

BALANCE SHEET

JUNE 30, 2008

 

 

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

(Unaudited)

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Current portion of long-term debt

$

284,915 

$

280,936 

Current portion of acquisition payable

 

162,166 

 

162,166 

Advances on line of credit

 

10,443,564 

 

9,151,283 

Overdraft

 

10,189 

 

Accounts and subcontract payables

 

14,962,492 

 

14,249,509 

Accrued liabilities

 

1,870,416 

 

936,447 

Billings in excess of costs and estimated

 

 

 

 

earnings on uncompleted contracts

 

2,717,584 

 

2,945,554 

 

 

30,451,326 

 

27,725,895 

 

 

 

 

 

Long-Term Debt (Net of Current Portion)

 

252,331 

 

382,860 

 

 

 

 

 

Long-Term Stockholder Payable

 

953,521 

 

 

 

 

 

 

Long-Term Acquisition Payable (Net of Current Portion)

 

816,667

 

816,667

 

 

 

 

 

Shareholders' Equity

 

 

 

 

Preferred stock ($0.001 par value, 20,000,000

 

 

 

 

shares authorized, 20,000 issued and outstanding at

 

 

 

 

June 30, 2008 and December 31, 2007)

 

20 

 

20 

Common stock ($0.001 par value, 100,000,000

 

 

 

 

shares authorized, 53,965,854 shares issued and

 

 

 

 

outstanding at June 30, 2008 and December 31, 2007)

 

53,966 

 

53,966 

Paid-in capital

 

7,588,146 

 

7,662,422 

Unrealized loss on available-for-sale securities

 

(20,174)

 

(20,174)

Retained earnings (deficit)

 

(6,861,176)

 

(3,715,046)

 

 

760,782 

 

3,981,188 

 

 

 

 

 

 

$

33,234,627 

$

32,906,610 

 

 

 

 

 

 

 

 

2

 


ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2008

 

2007

 

2006

 

2008

 

2007

 

2006

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

$13,148,323 

 

$14,434,376 

 

$8,637,728 

 

$23,959,480 

 

$24,386,618 

 

$12,372,306 

Other revenue

117,603 

 

 

 

191,970 

 

 

 

13,265,926 

 

14,434,376 

 

8,637,728 

 

24,151,450 

 

24,386,618 

 

12,372,306 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

13,253,944 

 

11,937,500 

 

7,902,525 

 

22,470,736 

 

20,910,887 

 

10,750,521 

Selling, general and administrative

2,507,128 

 

3,343,658 

 

575,898 

 

5,939,788 

 

7,445,057 

 

1,888,463 

Warranty expense

29,029 

 

166,190 

 

36,228 

 

21,234 

 

190,402 

 

86,783 

 

15,790,101 

 

15,447,348 

 

8,514,651 

 

28,431,758 

 

28,546,346 

 

12,725,767 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

(2,524,175)

 

(1,012,972)

 

123,077 

 

(4,280,308)

 

(4,159,728)

 

(353,461)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

3,495 

 

83,506 

 

79,925 

 

6,183 

 

84,627 

 

281,956 

Gain on sale of equipment

 

(5,770)

 

22,739 

 

(10,843)

 

(5,555)

 

26,239 

Other income

39,259 

 

36,163 

 

39,211 

 

59,528 

 

64,541 

 

47,300 

 

42,754 

 

113,899 

 

141,875 

 

54,868 

 

143,613 

 

355,495 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) from Operations

 

 

 

 

 

 

 

 

 

 

 

Before Income Taxes

(2,481,421)

 

(899,073)

 

264,952 

 

(4,225,440)

 

(4,016,115)

 

2,034 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (Benefit) for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

(967,833)

 

(351,450)

 

45,800 

 

(1,648,000)

 

(1,567,097)

 

5,800 

 

 

Deferred

373,333 

 

193,614 

 

58,000 

 

501,414 

 

908,111 

 

(22,000)

 

 

 

(594,500)

 

(157,836)

 

103,800 

 

(1,146,586)

 

(658,986)

 

(16,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

(1,886,921)

 

(741,237)

 

161,152 

 

(3,078,854)

 

(3,357,129)

 

18,234 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains

 

(2,082)

 

25,830 

 

 

(2,082)

 

54,235 

 

 

Reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

$(1,886,921)

 

$(743,319)

 

$186,982 

 

$(3,078,854)

 

$(3,359,211)

 

$72,469 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

per Common Share

$(0.03)

 

$(0.01)

 

$    - 

 

$(0.06)

 

$(0.06)

 

$    - 

 

 

Diluted Net Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

per Common Share

N/A

 

N/A

 

$    - 

 

N/A

 

N/A

 

$    - 

 

 

Weighted Average Common

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Basic

53,965,854 

 

53,965,854 

 

50,187,921 

 

53,965,854 

 

53,965,854 

 

50,187,921 

 

 

Weighted Average Common

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Assuming Dilution

 

 

83,666,739 

 

 

 

83,666,739 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 


ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE

 

 

 

Six Months Ended

 

 

June 30,

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ (3,078,854)

 

$ (3,357,129)

 

$       18,234 

 

 

 

 

 

 

 

Reconciliation of net income (loss) to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,355,460 

 

1,471,851 

 

272,154 

Provision for bad debt write-off (recovery)

 

340,000 

 

 

87,000 

Gain (loss) on sale of property and equipment

10,843

 

5,555 

 

(26,238)

(Increase) Decrease from changes in:

 

 

 

 

 

 

Accounts receivable

 

(2,342,609)

 

511,526 

 

(4,317,879)

Costs and estimated earnings in excess of

 

 

 

 

 

billings on uncompleted contracts

 

772,424 

 

(2,795,916)

 

247,316 

Inventory

 

 

(84,136)

 

Income tax receivable

 

 

1,878,000 

 

(159,017)

Related party receivable

 

(128,796)

 

60,088 

 

(40,787)

Deposits

 

 

(478,454)

 

Deferred taxes

 

(1,146,586)

 

(658,985)

 

(22,000)

Prepaid expenses

 

(127,657)

 

135,279 

 

(261,959)

Employee and other receivables

 

19,120 

 

3,237 

 

(10,477)

Intangible asset (customer lists)

 

 

(167,174)

 

(392,537)

Increase (Decrease) from changes in:

 

 

 

 

 

 

Overdraft

 

10,189 

 

(647,265)

 

Accounts payable

 

712,983 

 

4,889,938 

 

(8,630,049)

Insurance payable

 

 

(39,504)

 

70,678 

Accrued liabilities

 

933,969 

 

(54,853)

 

507,864 

Income tax payable

 

 

 

(5,349,105)

Billings in excess of costs and estimated

 

 

 

 

 

 

earnings on uncompleted contracts

 

(227,970)

 

(173,036)

 

155,426 

 

 

 

 

 

 

 

Net adjustments to net loss

 

181,370 

 

3,856,151 

 

(17,869,610)

 

 

 

 

 

 

 

Net cash provided (used) by operating activities

(2,897,484)

 

499,022 

 

(17,851,376)

 

 

4

 


ADUDDELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE

 

 

 

Six Months Ended

 

 

June 30,

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchase of investments

 

$                 - 

 

$           (601)

 

$                 - 

Proceeds from sale of property and equipment

 

7,000 

 

35,363 

Purchase of property and equipment

 

(102,149)

 

(468,954)

 

(2,633,033)

 

 

 

 

 

 

 

Net cash used by investing activities

 

(102,149)

 

(462,555)

 

(2,597,670)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from the issuance of stock

 

 

816,667 

 

120,000 

Preferred dividends paid

 

(141,554)

 

 

Proceeds from long-term debt

 

 

20,981 

 

Proceeds from long-term stockholder debt

 

953,521 

 

 

Net change in line of credit

 

1,292,281 

 

(57,448)

 

Retirement of long-term debt

 

(126,550)

 

(816,667)

 

(298,671)

 

 

 

 

 

 

 

Net cash used by financing activities

 

1,977,698 

 

(36,467)

 

(178,671)

 

 

 

 

 

 

 

Net Increase in Cash (Decrease)

 

(1,021,935)

 

 

(20,627,717)

 

 

 

 

 

 

 

Cash at Beginning of Period

 

1,021,935 

 

 

22,330,751 

 

 

 

 

 

 

 

Cash at End of Period

 

$                 - 

 

$                 - 

 

$  1,703,034 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow

 

 

 

 

 

 

Information

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$     477,924 

 

$     478,968 

 

$       30,902 

Taxes

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Non-Cash

 

 

 

 

 

 

Investing and Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed asset additions

 

$                 - 

 

$     468,954 

 

$     135,220 

Liabilities assumed or incurred

 

$                 - 

 

$     468,954 

 

$     135,220 

 

 

 

 

 

 

 

Common stock issued for services

 

$                 - 

 

$                 - 

 

$     205,000 

 

 

 

 

5

 


ADUDDELL INDUSTRIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(UNAUDITED)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Aduddell Industries, Inc. (the “Company”) is engaged in the commercial and industrial roofing and re-roofing, specialty-roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary, Aduddell Enviro & Emergency Management Services, Inc (“E2MS”). We provide marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

Our revenues are derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, concrete restoration and waterproofing, and emergency pre- and post-event response services. We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service.

Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services. The accompanying consolidated financial statements of Aduddell Industries, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s year-end audited consolidated financial statements and related footnotes included in the previously filed 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 2008, and the consolidated statements of its operations for the three and six months ended June 30, 2008, 2007 and 2006 and consolidated cash flows for the six months ended June 30, 2008, 2007 and 2006, have been included. All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods may not be indicative of the results which may be realized for the full year.

 

Revenue Recognition

The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

 

6

 


Contract costs include all direct material and labor costs and an allocation of certain indirect costs related to contract performance, such as indirect labor, interest, depreciation, supplies, selling and general and administrative expenses. General and administrative expenses not allocated to contract costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.

Accounts Receivable and Allowance For Doubtful Accounts

Contracts and other accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. The Company establishes an estimated allowance for doubtful contracts and accounts receivable based on various factors, including revenue, historical credit loss experience, current trends, and any specific customer collection issues that the Company has identified. Uncollectible contracts and accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when the Company has determined that the balance will not be collected.

Inventory

Inventories consist of construction materials and are stated at the lower of cost (first-in, first-out) or market (net realizable value).

Investments

The Company accounts for its investments in marketable securities using Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders’ equity.

Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At June 30, 2008 and December 31, 2007, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.

Intangible Assets

The Company accounts for intangible assets under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) which primarily addresses accounting for goodwill and intangible assets subsequent to acquisition. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives are no longer amortized, but reviewed annually (or more frequently if impairment indicators arise) for impairment. In accordance with SFAS No. 142, intangibles with finite useful lives, which include customer lists, continue to be amortized over their estimated useful life. The Company amortizes customer lists using the straight-line method with an estimated useful life of five years. Impairment, if any, is calculated for all intangibles as the excess of the asset carrying value over its fair value and is charged to expense when discovered. No impairment has been recorded. Accumulated amortization at June 30, 2008 and December 31, 2007 totaled $2,029,198 and $1,399,304, respectively. Amortization expense for six months ended June 30, 2008, 2007 and 2006 was $629,893. $644,894 and $29,877, respectively. The estimated amortization of intangible assets is $1,259,787, $1,229,692, $1,199,815 and $520,255 for the years ended June 30, 2009 through 2012, respectively.

 

7

 


Fair Value of Financial Instruments

The Company’s financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities’ fair values are estimates based on quoted market prices or approximate fair values. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

Share-Based Compensation

The Company recognizes expense for its share-based compensation based on the fair value of awards that are granted in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payments. The fair value of common stock options is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange-traded stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. The measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.

 

Depreciation

Depreciation for financial statement purposes is provided on the straight-line method over the estimated useful lives of the various assets. Depreciation expense for the six months ended June 30, 2008, 2007 and 2006 was $725,567, $826,957 and $242,277 respectively. For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences. Estimated useful lives for financial statement reporting purposes are as follows:

 

Classification

Estimated Useful Life

Field and shop equipment

5 - 7

Years

Office furniture and equipment

5 - 10

Years

Transportation equipment

3 - 7

Years

Leasehold improvements

15 – 39

Years

 

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates. Significant discreet items are separately recognized in the income tax provision in the quarter in which they occur.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items.

 

8

 


Net Income (Loss) Per Common Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings per Share and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

NOTE 2 – GOING CONCERN UNCERTAINTY

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As shown in the financial statements, the Company has incurred significant recurring operating losses. In addition, at June 30, 2008, the Company was in default on its line of credit agreement with its primary lender, and was operating under a temporary forbearance agreement. This forbearance agreement terminates on August 15, 2008. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company continues to actively pursue alternative financing plans to meet the Company’s requirements, and those plans include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital. In addition, the Company continues to explore opportunities to secure additional sources of debt or other financings as a means of more cost effectively conducting its roofing and concrete restoration businesses. To date, the only sources of capital available to the Company has been loans made by Tim Aduddell, the Company’s President and Chief Executive Officer. There is no guarantee that the Company will receive sufficient funding to sustain operations and/or implement any future business plans.

 

NOTE 3 - ACQUISITIONS

On April 1, 2006, Aduddell Roofing acquired certain operating assets of Merit Construction Services, a privately held concrete restoration company. As a result of the acquisition, the Company established its restoration division, eliminated the need to outsource restoration projects, increased Merit’s market opportunity through our bonding capacity, and allowed us to cross sell services to customers.

The aggregate purchase price of $1,085,000 consisted of $880,000 in cash and 250,000 shares of Company common stock valued at $205,000. The value of the common shares issued was determined based on the closing market price of the Company’s common shares on the immediately preceding day of closing. Based on the fair value of the acquired assets, the Company allocated $487,463 of the purchase price to tangible property and equipment and $597,537 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and was considered to have an estimated useful life of five years.

In September 2006, we purchased the assets of EyeOpener Creative Communications, LLC, (“EyeOpener”) an integrated marketing company, to help develop and brand the Company’s operating business units. EyeOpener provides the Company with professional and targeted marketing and sales support through strategic advertising, branding, web-based communications, sales tools, and market research. EyeOpener has in house media, photography and video capabilities that are beneficial to all of our operating units. The aggregate purchase price of $212,550 consisted of $20,000 in cash, $103,800 in repayment of loans and 125,000 shares of Company common stock valued at $88,750. The value of the common shares issued was determined based on the closing market price of the Company’s common shares from the previous day.

 

9

 


On December 1, 2006 the Company purchased Brent Anderson Associates, Inc., a Minnesota-based restoration, roofing and waterproofing company, adding significant resources, including below grade waterproofing, to our service offerings. The aggregate purchase price of $9,072,415 consisted of $1,850,000 in cash, $4,026,915 repayment of loans, and $2,000,000 of Company common stock with a minimum conversion value of $1.00 per share valued at $1,400,000 (Actual value of the common shares issued was determined based on the closing market price of the Company’s common shares from the day previous to closing) and the right to earn an additional $2,565,000 of shares of the Company’s common stock with a minimum conversion price of $1.00 per share (Valued at $1,795,500 based on the share price at the day previous to closing). Based on the fair value of the acquired assets, the Company allocated $3,618,268 of the purchase price to tangible property and equipment and $5,454,147 to intangible assets. The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and is considered to have an estimated useful life of five years.

NOTE 4 - CONTRACTS RECEIVABLE

Contracts receivable consist of the following:

 

 

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

 

 

 

Completed contracts

 

$    3,185,880 

 

$      5,436,675 

Contracts in progress

 

11,097,055 

 

6,963,029 

Retainage

 

2,545,220 

 

2,085,842 

 

 

16,828,155 

 

14,485,546 

Less allowance for doubtful amounts

 

(665,000)

 

(325,000)

 

 

$   16,163,155 

 

$    14,160,546 

 

 

NOTE 5 - UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts, are as follows:

 

 

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$     50,645,500 

 

$    24,775,827 

Estimated earnings (losses)

 

(2,509,106)

 

(278,653)

 

 

48,136,394 

 

24,497,174 

Billings to date

 

49,435,817 

 

25,252,143 

 

 

$     (1,299,423)

 

$       (754,969)

 

 

 

 

 

 

Included in the accompanying balance sheets under the following captions:

 

 

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

 

 

 

Costs and estimated earnings in excess of

 

 

 

 

billings on uncompleted contracts

 

$      1,418,161 

 

$      2,190,585 

Billings in excess of costs and estimated

 

 

 

 

earnings on uncompleted contracts

 

(2,717,584)

 

(2,945,554)

 

 

$    (1,299,423)

 

$       (754,969)

 

 

 

 

 

 

 

10

 


NOTE 6 - LETTER OF CREDIT

At June 30, 2008, the Company had a $293,000 letter of credit issued to its insurance carrier that matures on March 13, 2009.

NOTE 7 - LINE OF CREDIT

The Company has a $10,000,000 line of credit that matured on December 15, 2007. The Company is in default on the loan and is operating under a temporary forbearance agreement through August 15, 2008. The line bears interest at 3.375% over the published LIBOR Rate and is secured by all accounts, property and equipment. The outstanding balance at June 30, 2008 and December 31, 2007 was $8,988,201 and $9,151,283, respectively.

Under the terms of the temporary forbearance agreement, the unpaid principal balance on the line of credit was capped at $9,151,283, with no additional borrowings allowed, and the Company’s principal officer and stockholder was required to personally guarantee a portion of the loan balance, limited to a maximum of $2,000,000. The agreement also requires that any income tax refunds received be utilized to reduce the outstanding loan principal.

The Company has a $1,005,363 revolving line of credit. The line bears interest at 1% over Wall Street Journal prime (currently 6%) and is secured by real estate owned by Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell, a majority shareholder of the Company. The line matures on September 19, 2008 and the outstanding balance at June 30, 2008 was $1,005,363.

The Company has a $1,000,000 revolving line of credit. The line bears interest at 5.59% and is secured by certificates of deposit owned by Tim Aduddell, a majority shareholder of the Company. The line matures on July 27, 2008 and the outstanding balance at June 30, 2008 was $450,000.

NOTE 8 - LONG-TERM DEBT

The Company has the following long-term debt as of:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

6.63% to 21% notes payable secured by

 

 

 

 

 

equipment, due in varying monthly

 

 

 

 

 

installments through May 2010

 

$        32,040 

 

$        44,696 

 

 

 

 

 

 

 

6% to 8.25% notes payable secured by

 

 

 

 

 

transportation equipment, due in varying

 

 

 

 

 

monthly installments through January 2012

 

505,206 

 

619,100 

 

 

 

537,246 

 

663,796 

 

Less: current portion of long-term debt

 

284,915 

 

280,936 

 

 

 

$       252,331 

 

$       382,860 

 

 

Estimated maturities of long-term debt as of June 30, 2008, are as follows:

 

 

Year

 

 

 

 

 

 

 

2010

 

$       187,992 

 

2011

 

44,209 

 

2012

 

20,130 

 

 

 

$       252,331 

 

 

 

 

 

Interest expense was $440,948, $478,968 and, $30,902 for the six months ended June 30, 2008, 2007 and 2006, respectively.

 

11

 


NOTE 9 - PENSION PLAN

The Company sponsors a defined contribution plan that covers all non-union employees. Employees who are twenty-one years of age and have completed one year of service are eligible to participate. Employees may contribute from one to eighty percent of eligible salary limited to the amount allowed under the Internal Revenue Code. Company profit sharing contributions are discretionary each year. Currently the Company is matching contributions up to 4%. Employees are vested 100% in salary deferral contributions. Company contributions vest immediately. No contributions were made for the six months ended June 30, 2008. Company contributions for the six months ended June 30, 2007 and 2006 totaled $60,380 and $19,010, respectively.

NOTE 10 – STOCK OPTIONS

Common Stock Options and Other Warrants

 

The following table summarizes the Company's stock option activity for the quarters ended June 30, 2008, 2007 and 2006:

 

 

 

 

June 30,

 

Exercise

 

June 30,

 

Exercise

 

June 30,

 

Exercise

 

 

 

2008

 

Price

 

2007

 

Price

 

2006

 

Price

 

Options outstanding,

 

 

 

 

 

 

 

 

 

 

 

 

 

beginning of quarter

 

31,183,818 

 

$    0.12

 

32,353,818 

 

$    0.12

 

34,850,000 

 

$    0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options issued

 

 

 

 

 

 

 

 

 

 

 

 

 

during the quarter

 

 

-

 

 

-

 

525,000 

 

0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

during the quarter

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

during the quarter

 

(5,000)

 

1.02

 

(20,000)

 

1.38

 

(1,971,182)

 

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options expired during

 

 

 

 

 

 

 

 

 

 

 

 

 

the quarter

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding,

 

 

 

 

 

 

 

 

 

 

 

 

 

end of quarter

 

31,178,818 

 

$    0.08

 

32,333,818 

 

$    0.12 

 

33,403,818 

 

$    0.13

 

Options Issued Under 2005 Stock Incentive Plan

The Company’s 2005 Stock Incentive Plan (the “Plan”) was adopted on October 17, 2005. The Plan is administered by the Board of Directors. All officers, employees, directors and individual consultants of the Company are allowed to participate in the Plan. The Plan has a term of ten years. Accordingly, no grants may be made under the Plan after October 17, 2015, but the Plan will continue thereafter while previous grants remain subject to the Plan. The aggregate number of shares of common stock available under the Plan is five million shares. The Plan authorizes the Board of Directors to grant options that are incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non statutory stock options, and restricted stock. All grants under the Plan will be made at the discretion of the Board of Directors.

On October 17, 2005, the Company granted options exercisable for a total of 1,000,000 shares to Ron Carte in his role as President, and options exercisable for a total of 500,000 shares each to David Aduddell, Ron Carte, Tom Parrish and Jerry Whitlock in their roles as Directors at an exercise price of $0.78 per share. On April 1, 2006 the Company granted options exercisable for a total of 500,000 shares to Stan Genega in his role as a director, with an exercise price of $0.80 per share. Of the 1,000,000 options issued to Ron Carte as President, 500,000 options have vested with 500,000 rescinded with his resignation as President. The 500,000 options granted to each of Messrs. Aduddell, Carte, Parrish, Whitlock and Genega vest in five equal annual installments.

 

12

 


In connection with a consulting agreement dated November 21, 2005, the Company granted options to purchase 100,000 shares of common stock for $0.70 per share, vesting in one year.

On January 1, 2006, the Company granted options to purchase 250,000 shares of common stock for $0.49 per share, vesting in 5 equal annual installments, to the Company’s former Chief Financial Officer. All options were vested and extended per the termination agreement with the officer.

 

In connection with a consulting agreement dated January 15, 2006, the Company granted options to purchase 200,000 shares of common stock for $0.66 per share. Options for 100,000 shares have vested with 100,000 options rescinded with the termination of the agreement.

In connection with an employment agreement dated May 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.38 per share, which were rescinded upon termination of employment.

In connection with an employment agreement dated September 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.02 per share which were rescinded upon termination of employment.

In connection with an employment agreement dated October 16, 2006, the Company granted options to purchase 25,000 shares of common stock for $.74 per share which were been rescinded upon termination of employment.

 

Options Issued Prior to the 2005 Stock Incentive Plan

 

In connection with the terms of the Agreement and Plan of Split Off and Merger, signed September 27, 2002, Tim Aduddell was granted an option to purchase 30 million shares of common stock for $0.04 per share. On June 7, 2006, 1,471,182 of these options were exercised, and the underlying shares were redeemed in payment of his note receivable, leaving 28,528,818 options outstanding.

In connection with a July 3, 2002, financing agreement for certain equipment, 200,000 options at $0.08 per share were granted.

 

Following is a summary of stock options outstanding and exercisable at June 30, 2008:

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

Weighted-

 

 

 

Weighted

 

Range of

 

Number

 

Remaining

 

Average

 

Number

 

Average

 

Exercise

 

Outstanding

 

Contractual

 

Exercise

 

Exercisable

 

Exercise

 

Prices

 

at 6/30/08

 

Life

 

price

 

at 6/30/08

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

0.04

 

28,528,818

 

No term

 

0.04

 

28,528,818

 

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

0.08

 

200,000

 

No term

 

0.08

 

200,000

 

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

.49-.78

 

2,450,000

 

10 year

 

0.6

 

1,250,000

 

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

1.38

 

31,178,818

 

 

 

0.08

 

29,978,818

 

0.12

 

 

13

 


NOTE 11 - INCOME TAXES

The income tax provision consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2008

 

2007

 

2006

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Current tax provision

 

$    (967,833)

 

$        (351,450)

 

$   45,800 

 

$(1,648,000)

 

$(1,567,097)

 

$         5,800 

Deferred tax provision

 

373,333 

 

193,614 

 

58,000 

 

501,414 

 

908,111 

 

(22,000)

Total provision for income taxes

$    (594,500)

 

$        (157,836)

 

$ 103,800 

 

$(1,146,586)

 

$   (658,986)

 

$     (16,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A reconciliation of the Company’s effective income tax rate to that determined by applying the statutory U.S. federal (34%) and state (5%) income tax rates to income before income taxes is as follows for the six months ended:

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

2008

 

2007

 

2006

 

Statutory federal income tax rate

 

34.0%

 

34.0%

 

34.0%

 

State tax effective rate

 

 

5.0%

 

5.0%

 

5.0%

 

Prior year assessments finalized

 

-   

 

-   

 

-   

 

Difference in estimated and actual rate

 

-5.0%

 

-   

 

-   

 

Change in valuation allowance

 

-   

 

-   

 

-   

 

Temporary differences

 

 

-10.0%

 

-21.5%

 

-   

 

Other

 

 

-   

 

-   

 

-   

 

 

 

 

24.0%

 

17.5%

 

39.0%

 

At June 30, 2008, the Company had net operating loss carry forwards of approximately $19.3 million available to reduce future federal and state taxable income. Unless utilized, the carry forward amounts will begin to expire in 2012. For federal and state tax purposes, approximately $800,000 of the Company’s net operating loss carry forward amounts are subject to an annual limitation due to a greater than 50% change in stock ownership which occurred in 2002, as defined by federal and state tax law.

Taxable temporary differences result principally from the excess of depreciation for tax purposes over the amount deducted for financial reporting purposes. Deductible temporary differences from the operating loss carry forward, give rise to a deferred tax asset, which are reduced by a valuation allowance. The Company has established a valuation allowance for a portion of its net deferred tax assets due to the ownership change limitation on the use of the loss carry forward.

The net deferred tax asset consisted of the following components:

 

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Deferred tax liability on depreciation

 

$    (1,016,000)

 

$      (988,000)

 

Deferred tax asset for loss carry forward

 

6,592,500 

 

5,417,914 

 

 

 

5,576,500 

 

4,429,914 

 

Less: valuation allowance

 

(203,000)

 

(203,000)

 

Net deferred tax asset

 

$     5,373,500 

 

$    4,226,914 

 

 

 

 

 

 

 

 

14

 


NOTE 12 - RELATED PARTY TRANSACTIONS

The Company engaged in certain transactions with Tim Aduddell, a director and President and Chief Executive Officer, as well as a majority shareholder, of the Company, and entities owned by Tim Aduddell.

In May 2008, the Company borrowed $953,321 from Tim Aduddell under a $1,000,000 unsecured long-term promissory note bearing interest at 7.5% per annum. The note is payable interest only on a quarterly basis through maturity on May 10, 2018.

The Company advanced money to Hickman Community Services which is owned 50% by Aduddell Roofing, Inc. At June 30, 2008 the advances totaled $128,796.

The Company leases its Oklahoma office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell. The lease is on a month-to-month basis with monthly rentals of $16,250. The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rental expense under this lease amounted to $97,500 for the six months June 30, 2008. 2007 and 2006.

The Company leased its office, warehouse and yard facilities in Minnesota, through February 2008, from BDA Development, LLP an entity owned by Brent Anderson who is a Company employee. The lease is on a month-to-month basis with monthly rentals of $29,442. Rental expense under this lease amounted to $59,830 and $104,348 for the six months ended June 30, 2008 and 2007.

NOTE 13 - BACKLOG

The amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements on which work had not yet begun at June 30, 2008, 2007 and 2006 was approximately $19,684,000, $22,956,000 and $18,237,000, respectively.

NOTE 14 - SHARE BASED COMPENSATION  

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2006: risk-free interest rates of 3%, no dividend yield or assumed forfeitures; expected lives of 10.0 years; and volatility of 104%. The amounts above are not likely to be representative of future years because there is no assurance that additional awards will be made each year.

 

NOTE 15 - EARNINGS PER SHARE

 

 

 

 

 

 

2008

 

2007

 

2006

 

Basic and dilutedearnings(loss)

 

 

 

 

 

 

 

Common shares outstanding

 

53,965,854 

 

53,965,854 

 

50,187,921 

 

Weighted average shares outstanding

 

53,965,854 

 

53,965,854 

 

80,187,921 

 

Earnings (loss) per share

 

 

$      (0.06)

 

$      (0.06)

 

$               - 

 

Fully dilluted earnings per share:

 

 

 

 

 

 

 

Common shares outstanding

 

N/A 

 

N/A 

 

83,666,739 

 

Weighted average shares outstanding

 

N/A 

 

N/A 

 

83,666,739 

 

Earnings(loss) per share

 

 

$              - 

 

$               - 

 

$               - 

 

For the six months ended June 30, 2008 and 2007, all options to purchase shares of common stock were omitted from the computation of loss per common share-assuming dilution because such options were anti-dilutive.

 

15

 


NOTE 16 - LEASES

As disclosed in Note 12, the Company leases its Corporate offices, warehouse and yard facilities under a month to month operating lease with monthly rentals of $16,250. The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises.

The Company leases its former corporate office facilities under a four year operating lease with monthly rentals of $10,153 through April 30, 2010. Under the terms of this lease, the Company is responsible for its share of common area maintenance and operating expenses. The facility has been subleased through December 31, 2008 at monthly sublease rentals of $10,153.

In December 2007 the Company leased its Minnesota office, warehouse and yard facilities under an operating lease which expires on November 30, 2010. Under the terms of the lease the Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rent expense under the lease totaled $59,830 for the six months ended. June 30, 2008.

The Company also leases office facilities for its Florida roofing division and its Eyeopener division under operating leases which expire during 2008.

The Company also routinely leases specialized construction equipment and storage facilities under short-term operating leases which are included in contract costs and not considered operating leases.

Rental expense under all operating leases, net of sublease rentals, amounted to approximately $400,654, $519,070 and $138,357 for the six months ended June 30, 2008, 2007 and 2006, respectively.

As of June 30, 2008, the future minimum lease commitments under all noncancelable operating leases, net of aggregate future minimum noncancelable sublease rentals, are as follows:

 

 

For the Year Ended June 30,

 

 

 

 

 

 

 

2009

 

$      213,718 

 

2010

 

294,030 

 

2011

 

105,000 

 

 

 

$      612,748 

 

 

 

 

 

NOTE 17 - COMMITMENTS AND CONTINGENCIES

The Company warrants its work in the normal course of business. In management's opinion, there were no outstanding claims which would have a material effect on the Company's operations or financial position at June 30, 2008.

The Company maintains cash balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000, and any amounts in excess of this would not be insured if the institution should fail. At times, cash in the deposit accounts may exceed the federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk.

In regard to the sale of assets and liquidation of Zenex Communications in 2002, the Company was guarantor to the purchaser on notes with a remaining balance of $128,278 at June 30, 2008, with approximately $6,353 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations.

 

16

 


Lawsuit

 

We have been sued by First Bank centre (the "Bank") in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. A scheduling order has been entered in the case. Written discovery has been exchanged between the parties. On April 8, 2008, the parties engaged in mediation in Tulsa, Oklahoma. Following the mediation, the parties reached a settlement of the case whereby we agreed to pay the Bank $5,000 and issue the Bank 500,000 shares of our common stock. We anticipate the settlement will close by August 31, 2008.

 

In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve employment claims or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, and are likely to have a material adverse effect on our financial condition or results of operations.

 

NOTE 18 - CONCENTRATIONS

In connection with providing service to customers, Aduddell Industries does not have contractual agreements with suppliers. The material and supplies used in the business are readily available from several vendors.

Aduddell Industries had a significant number of customers, and for the six months ended June 30, 2008, two customers account for 17% and 15% of the revenue. For the six months ended June 30, 2007 and 2006 one customer accounted for 10% and 27% of the revenue.

The Company’s contract receivables are from a small number of companies in various industries which could be subject to business cycle variations. As of June 30, 2008, one customer accounted for 19% of contract receivables. At December 31, 2007 no customer accounted for 10% or more of contract receivables.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with our financial statements and notes thereto.

 

Introduction

 

Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc. In addition we provide pre-event planning, event management and post-event recovery services for disaster-related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (“E2MS”), as well as marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado. On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

Our revenues have been historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services. In 2008, we have continued to focus on the integration of our acquisitions, cost control, and operations. We have also embarked on efforts to raise our sales volume through the cross-selling of services at our regional and divisional offices as well as the continual pursuit of sales through the award of contracts through US Communities. We were recently awarded a contract through US Communities that amounted to approximately $5 million, which is our largest award to date through that program. In addition, we expect improvement in our divisional gross margins.

 

17

 


In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In the third quarter of 2006, we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company. This transaction closed in December 2006 adding significant resources, including below grade waterproofing to our service offerings.

 

Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals. Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair. Typically, re-roofing, restoration and repair jobs are more labor intensive and have higher margins than new roof construction.

 

The following table sets forth information used by management to assess our results of operations of the current quarter over the same quarter in the prior year in aggregate amounts:

 

 

Six months ended

 

Six months ended

 

 

June 30, 2008

 

June 30, 2007

 

 

 

 

 

 

Total Revenue

$  24,151,450 

 

$  24,386,618 

 

 

 

 

 

 

Total Gross Margin

$    1,680,714 

 

$    3,475,731 

 

 

 

 

 

 

Cash Flow from Operations

$  (2,897,484)

 

$       499,022 

 

 

 

 

 

 

EBITDA

$  (2,387,396)

 

$ (2,146,450)

 

 

 

 

 

 

Net Income (Loss)

$  (3,078,854)

 

$ (3,359,211)

 

 

 

 

 

 

Free Cash Flow

$  (2,999,633)

 

$         30,068 

 

 

The following table sets forth the reconciliation of our free cash flow to our cash flow from operations:

 

Cash Flow from Operations

$  (2,897,484)

 

$ 499,022 

 

 

 

 

 

 

Capital Expenditures

102,149 

 

468,954 

 

 

 

 

 

 

Free Cash Flow

(2,999,633)

 

30,068 

 

 

The following table reconciles our EBITDA to our net income:

 

Net Income

$  (3,078,854)

 

$  (3,359,211)

 

 

 

 

 

 

Interest (Income)

471,741 

 

394,341 

 

 

 

 

 

 

(Gain) Loss on Sale of Equipment

10,843 

 

5,555 

 

 

 

 

 

 

Provision (Benefit) for Income Taxes

(1,146,586)

 

(658,986)

 

 

 

 

 

 

Depreciation

1,355,460 

 

1,471,851 

 

 

 

 

 

 

EBITDA

(2,387,396)

 

(2,146,450)

 

 

 

18

 


We present EBITDA and free cash flow because we believe that each provides useful information regarding our continuing operating results. We rely on EBITDA and free cash flow as primary measures to review and assess our operating performance and our management team’s performance in connection with our executive compensation and bonus plans. We also review EBITDA and free cash flow to compare our current operating results with corresponding periods, and as an assessment of our overall liquidity and our ability to meet our debt service obligations.

 

We believe that EBITDA and free cash flow are useful to investors to provide disclosures of our operating results on the same basis as that used by our management. We also believe that these measures can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items, which do not directly affect our ongoing operating performance or cash flows. EBITDA and free cash flow, which are non-GAAP financial measures, have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with accounting principles generally accepted in the United States. Because of these limitations, EBITDA and free cash flow should neither be considered as measures of discretionary cash available to us to invest in the growth of our business, nor as replacements for net income. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and free cash flow as supplemental information.

 

Critical Accounting Policies and Estimates

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services. The accompanying financial statements of the Company have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's year end audited financial statements and related footnotes included in the annual 10-K filing. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2008, and the statements of its operations and accumulated deficit and cash flows for the six month periods ended June 30, 2008 and 2007 have been included. All significant inter-company accounts and transactions have been eliminated in the consolidation. The results of operations for interim periods may not be indicative of the results which may be realized for the full year.

Revenue Recognition

The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract. Management uses this method because total cost is considered to be the best available measure of progress on the contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, interest, depreciation and supplies. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.

 

19

 


Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.

Investments

The Company accounts for its investments in marketable securities using Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders’ equity.

Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At June 30, 2008, and December 31, 2007, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable. The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature. Marketable equity securities’ fair values are estimates based on quoted market prices or approximate fair values. The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

Share-Based Compensation

The Company recognizes expense for its share-based compensation based on the fair value of awards that are granted in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payments. The fair value of common stock options is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange-traded stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return. Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility. The measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry-forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

 

20

 


In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates. Significant discreet items are separately recognized in the income tax provision in the quarter in which they occur.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items.

Net Income (Loss) Per Common Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings per Share and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated using straight-line and accelerated methods over the estimated useful lives of the assets, which range from five to thirty nine years.

 

Changes from the Prior Period

We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions.

Results of Operations

 

Comparison of 2nd Quarter 2008 and 2007

 

Revenues. Revenues decreased from $14,434,376 for the three months ended June 30, 2007, to $13,265,926 for the three months ended June 30, 2008, which represents a decrease of 8.1%. We had no revenues for emergency services in either of the second quarters of 2008 or 2007. Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms.

 

Operating Expenses. Operating expenses for the three months ended June 30, 2008, were $15,790,101, or 119% of revenue, compared to $15,447,348, or 107% of revenue, for the three months ended June 30, 2007. Cost of sales for the three months ended June 30, 2008 as a percentage of revenue increased from 83% of revenues to 100% of revenues due to increases in the cost of fuel, materials, and subcontractor expenses. Selling, general and administrative expenses decreased to $2,507,128 in the second quarter of 2008 compared to $3,343,658 in the second quarter of 2007 primarily as a result of cost control initiatives and a reduction in manpower, corporate overhead, and travel expenses associated with the corporate aircraft.

 

Income (Loss) before Provision for Income Taxes. Operating income (loss) before taxes for the quarter ended June 30, 2008, was $(2,481,421) compared to $(899,073) for the quarter ended June 30, 2007. The decrease in our 2008 operating income was attributable to higher operating expenses of $15,790,101 and lower sales volume.

 

Net Income (Loss). The net loss for the quarter ended June 30, 2008, was $(1,886,921), compared to a net loss of $(743,319) for the quarter ended June 30, 2007. These results were influenced by the factors identified above under Revenues and Operating Expenses.

 

21

 


Comparison of six months ended June 30, 2008 and 2007

 

Revenues. Revenues decreased from $24,386,618 for the six months ended June 30, 2007 to $24,151,450 for the six months ended June 30, 2008, which represents a decrease of 0.1%. We had no revenues for emergency services in either the first half of 2008 or 2007. Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms.

 

Operating Expenses. Operating expenses for the six months ended June 30, 2008, were $28,431,758, or 118% of revenue, compared to $28,546,346, or 117% of revenue, for the six months ended June 30, 2007. Cost of sales for the six months ended June 30, 2008 as a percentage of revenue increased from 86% of revenues to 93% of revenues due to increases in the cost of fuel, materials, and subcontractors. Selling, general and administrative expenses decreased to $5,939,788 in the first six months of 2008 compared to $7,445,057 in the first six months of 2007 primarily as a result of a decrease in corporate overhead, manpower, and operating and travel expense associated with the corporate aircraft.

 

Income (Loss) before Provision for Income Taxes. Operating income (loss) before taxes for the six months ended June 30, 2008, was $(4,225,440) compared to $(4,016,115) for the six months ended June 30, 2007. The decrease in our 2008 operating income was attributable to higher cost of sales and lower sales volume partially offset by lower selling, general, and administrative expenses of $5,939,788.

 

Net Income (Loss). The net loss for the six months ended June 30, 2008, was $(3,078,854), compared to a net loss of $(3,359,211) for the six months ended June 30, 2007. These results were influenced by the factors identified above under Revenues and Operating Expenses.

Off-Balance Sheet Arrangements

 

We have operating leases and guaranties that are not accrued on the balance sheet. The payments due under the leases are disclosed in footnote 16 of our consolidated financial statements, and the contingent loan guaranty is disclosed below and in footnote 17 of our consolidated financial statements. Other than the lease and note guaranty, we have no contractual commitments that do not appear on the balance sheet as of June 30, 2008.

Seasonality

 

The construction industry, including the roofing industry, is influenced by seasonal factors, as construction activities are usually lower during winter months than other periods. We attempt to increase winter productivity by concentrating our business in the southern half of the United States and by expanding our sales and marketing efforts to control project scheduling. Nevertheless, our revenues and operating results potentially will be lower in the first and fourth quarters.

 

The roofing industry is also affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Because of the need for immediate repairs and since the costs of repair are typically covered by insurance, the margins are higher on disaster-related work than on discretionary work. Since disaster-related work requires an immediate response, we maintain a capacity that is scalable to respond to these needs. The absence of natural disasters will result in lower revenues and higher relative administrative expenses per revenue dollar.

Commitments and Contingencies

 

In regard to the sale of assets and liquidation of Zenex Communications in 2002, we are a guarantor on notes with an outstanding balance of $128,278 at June 30, 2008, with approximately $6,353 in monthly principal and interest payments. The purchaser is currently in default on the required payment obligations.

 

We warrant our work in the normal course of business. In management’s opinion, there were no outstanding claims which would have a material effect on our operations or financial position.

 

Information regarding our legal proceedings are discussed later in this document under, “Part II, Item 1. Legal Proceedings”.

 

22

 


Liquidity and Capital Resources

 

Total assets increased from $32,906,610 to $33,234,627, total liabilities increased from $28,925,422 to $32,473,845, and shareholders’ equity decreased from $3,981,188 to $760,782 from December 31, 2007, to June 30, 2008. The increase in assets comes from higher receivables and a deferred tax asset along with higher prepaid expenses. The increase in liabilities results primarily from an increase in our accounts and subcontract payables, advances on line of credit, accrued liabilities, and a long-term payable to Tim Aduddell.

 

Our net cash at June 30, 2008, is $(10,189). We are primarily using funds provided by operations and working capital to finance our operations along with some additional capital that was generated through advances on new lines of credit. For the six months ended June 30, 2008, net cash used by operating activities was $2,897,484 compared to $499,022 provided by operations for the six months ended June 30, 2007. Net cash used by investing activities during this period was $102,149 compared to $462,555 used by investing activities for the six months ended June 30, 2007. Net cash provided by financing activities during this period was $1,977,698 compared to $36,467 used by financing activities for the six months ended June 30, 2007. At June 30, 2008, we had negative working capital of $11,907,945 compared to a negative working capital at December 31, 2007 of $9,628,097.

 

We have a $10,000,000 revolving line of credit that matured on December 15, 2007. The Company is in default on this primary line of credit loan and is operating under a temporary forbearance agreement through August 15, 2008. The line bears interest at 3.375% over the published LIBOR Rate and is secured by all accounts, property and equipment. At June 30, 2008, the advance on the line of credit was $8,988,201 compared to an advance of $9,151,283 at December 31, 2007.

 

We have a $1,005,363 revolving line of credit. The line bears interest at 1% over Wall Street Journal prime (currently 6%) and is secured by real estate owned by Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell, a majority shareholder. The line matures on September 19, 2008, and the outstanding balance at June 30, 2008 was $1,005,363 compared to a balance of $0 at December 31, 2007.

 

We also have an additional $1,000,000 revolving line of credit. The line bears interest at 5.59% and is secured by certificates of deposit owned by Tim Aduddell. The line matures on July 27, 2008, and the outstanding balance at June 30, 2008 was $450,000 compared to no balance at December 31, 2007.

 

The promissory note and two revolving lines of credit issued to us by Tim Aduddell are attached as exhibits to this report, and their terms are incorporated herein by reference.

 

At June 30, 2008, we had $2,022,519 of long-term debt as compared to $1,199,527 of long-term debt at December 31, 2007. The increase in the amount of long-term debt outstanding was due to an increase of a long-term payable due to Tim Aduddell.

 

Adequacy of Current Liquidity

 

We presently meet all of our funding needs for ongoing operations with internally generated cash flows from operations, existing cash and short-term investment balances, lines of credit, and additional privately-placed term debt or equity. We are unable to draw on our primary existing line of credit at the present time and are presently operating under a temporary forbearance agreement through August 15, 2008. We continue to actively pursue alternative financing plans to meet our requirements that include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital. To date, the only sources of capital available to us have been loans made by Tim Aduddell, the Company’s President and Chief Executive Officer. There is no guarantee that we will receive sufficient funding in the near future to either (i) sustain operations and implement any future business plans, or (ii) have sufficient funds to pay off our primary line of credit when our forbearance agreement terminates on August 15, 2008 or any other line of credit at maturity. If we cannot timely find alternative sources of financing, we may be forced to seek protection under Federal bankruptcy laws.

 

23

 


Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk relates to changes in interest rates. Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

 

At June 30, 2008, we had $9.99 million drawn on our variable rate revolving lines of credit. Interest on the revolving lines of credit is variable and is equal to LIBOR plus 3.375% and Wall Street prime plus 1%. Amounts drawn on the revolving lines of credit are the only variable rate debt we have outstanding. A one-percentage point change in the interest rate for our revolving lines of credit would change our cash interest payments on an annual basis by approximately $100,000.

 

 

Item 4.

Controls and Procedures

 

It is the responsibility of our chief executive officer and our chief financial officer to ensure that we maintain controls and other procedures designed to ensure that the information required to be disclosed by us in reports that we file with the Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified by in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 

 

As of June 30, 2008, management, including the chief executive officer and interim chief financial officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and interim chief financial officer concluded the disclosure controls and procedures currently in place were effective.

 

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our controls are designed to provide reasonable assurance that our assets are protected from unauthorized use and that transactions are executed in accordance with established authorizations and properly recorded. In 2007, we engaged a consultant to assist us in the review and enhancement of our internal controls. The engagement was to ensure our internal controls were supported by written policies and complemented by competent and qualified external resources, which would be used to assist in testing the operating effectiveness of our internal control over financial reporting. Because of our liquidity issues in late 2007, the engagement, and thus the full review and enhancement of our internal controls, was not completed. Through the limited review and enhancement procedures that were undertaken, however, our management concluded that the design and operations of our internal controls over financial reporting at June 30, 2008, were effective and provided reasonable assurance that the books and records accurately reflected the transactions of the Company.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and interim chief financial officer completed their evaluation.

 

 

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PART II OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

We have been sued by First Bankcentre (the "Bank") in the Oklahoma District Court of Tulsa County, Oklahoma Case No. CJ-2006-03621. The Petition was filed on June 7, 2006. Plaintiff claims that we must issue 500,000 shares of our common stock at a purchase price of $.01 per share pursuant to a warrant held by the Bank. We believe the warrant is unenforceable. We have filed an Answer setting forth our defenses. Among them are that the warrant was issued without corporate authority, that the warrant violated the anti-tying restrictions of the Bank Holding Company Act and that the warrant represents a clog on our equity of redemption from the Bank under a prior loan that was repaid in full. A scheduling order has been entered in the case. Although a trial date has not been set, we anticipate trial in the spring of 2008. Written discovery has been exchanged between the parties. On April 8, 2008, the parties engaged in a mediation in Tulsa, Oklahoma. Following the mediation, the parties reached a settlement of the case whereby we agreed to pay the Bank $5,000 and issue the Bank 500,000 shares of our common stock. We anticipate the settlement will close by August 31, 2008.

 

In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve employment claims or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, is likely to have a material adverse effect on our financial condition or results of operations.

 

Item 1A.

Risk Factors

 

Not Applicable.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

 

Exhibit No.

 

DESCRIPTION

 

 

 

10.1

 

10-Year Promissory Note to Tim Aduddell dated May 10, 2008

 

 

 

10.2

 

Revolving Line of Credit by and among the Company and Tim and Ruth Aduddell dated May 20, 2008

 

 

 

10.3

 

Revolving Line of Credit by and among the Company and Tim and Ruth Aduddell dated June 10, 2008

 

 

 

31.1

 

Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer

 

 

 

32.1

 

Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer

 

 

 

25

 


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.

 

 

 

ADUDDELL INDUSTRIES, INC.

 

 

 

 

 

 

August 14, 2008

By:

/s/ Tim Aduddell

 

 

Tim Aduddell, President, Chief Executive Officer

 

 

And Interim Chief Financial Officer

 

 

 

26

 


EXHIBIT INDEX

 

 

EXHIBIT

NO.

 

DESCRIPTION

 

METHOD OF FILING

 

 

 

 

 

10.1

 

10-Year Promissory Note to Tim Aduddell dated May 10, 2008

 

Filed herewith electronically

 

 

 

 

 

10.2

 

Revolving Line of Credit by and among the Company and Tim and Ruth Aduddell dated May 20, 2008

 

Filed herewith electronically

 

 

 

 

 

10.3

 

Revolving Line of Credit by and among the Company and Tim and Ruth Aduddell dated June 10, 2008

 

Filed herewith electronically

 

 

 

 

 

31.1

 

Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer

 

Filed herewith electronically

 

 

 

 

 

32.1

 

Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer

 

Filed herewith electronically

 

 

 

27