Annual Report for the year ended December 31, 2007
To our Shareholders:
In addition to setting new records for both revenues and profits, we had a number of other
major accomplishments in 2007.
•
In October of 2007, we made a major acquisition by acquiring just over 90% of
Road and Highway Builders, a Nevada heavy highway contractor. This gives us a
strong base from which to operate in the Western United States as well as
geographic diversity from our Texas markets. With the acquisition, we were pleased
to add to our existing business over $100 million in backlog and a strong
management team.
• Concurrently with the closing of the Road and Highway Builders acquisition, we put
in place a new 5-year $75 million credit facility with a syndicate led by Comerica
Bank that replaced our former $35 million line of credit.
•
In December 2007, we completed a public offering of 1.84 million shares of common
stock, which was significantly oversubscribed. With the net proceeds of $34.5
million, we put our balance sheet in good shape to capitalize on the opportunities that
we see in the marketplace.
• We added over 200 people to our existing base of construction crews as well as plant
and equipment to support our record revenues in 2007 and for future growth.
• Our backlog going into 2008 increased to $450 million.
For fiscal 2007, revenues increased 23% or $57 million to $306 million. Net income was up
14% to $14.5 million, with gross margins remaining at a solid 11%.
We achieved this performance despite one of the wettest years on record in Texas, which
adversely affected both revenues and profits.
We continue to explore opportunities in our construction markets. We entered 2008 with $82 million of
working capital, which helps boost our bonding capacity to pursue more and larger construction contracts,
and gives us the ability to better utilize both equipment and personnel. With a strong balance sheet, we
are also looking at further expansion of our resources and are continuing to evaluate potential acquisitions
to add to our already diversified base.
In 2007, our tax loss carry-forwards continued to shelter most of our federal tax liability.
Those tax benefits combined with our net income and $9.5 million of depreciation gave us
$29.6 million of cash flow from operating activities in 2007.
By year end 2007, our stockholders’ equity had risen 53% to $139 million as a result of our 2007
earnings and our December 2007 public offering, further enhancing our financial strength and
bonding capacity.
Lastly, we would like to thank all of our employees who helped achieve these record results
despite this very wet year. We would also like to thank all of our stockholders, who have
shown their confidence in our management team.
Respectfully submitted,
/s/ Patrick Manning
Patrick Manning
/s/Joseph Harper
Joseph Harper
Chairman & Chief Executive Officer
President & Chief Operating Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________________________________________
Commission file number 1-31993
STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
incorporation or organization
20810 Fernbush Lane
Houston, Texas
(Address of principal executive offices)
25-1655321
(I.R.S. Employer
Identification No.)
77073
(Zip Code)
Registrant's telephone number, including area code (281) 821-9091
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of each exchange on which registered
The NASDAQ Stock Market
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [√] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [√] No
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
[√] Yes [ ] No
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 amendment to this Form 10-K
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Accelerated filer [√]
Smaller reporting company [ ]
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [√] No
Aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2007: $206,642,670.
At March 3, 2008, the registrant had 13,088,692 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
STERLING CONSTRUCTION COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
_______________________
PART I
................................................................................................................................................1
Cautionary Comment Regarding Forward-Looking Statements ....................................................1
Item 1. Business.................................................................................................................................2
Access to the Company's Filings ......................................................................................................2
Developments of the Business ..........................................................................................................2
Overview of the Company's Business...............................................................................................2
Road and Highway Builders Acquisition .........................................................................................3
Our Business Strategy.......................................................................................................................3
Our Markets and Customers.............................................................................................................4
Competition .......................................................................................................................................5
Contract Backlog...............................................................................................................................6
Contracts............................................................................................................................................6
Employees..........................................................................................................................................9
Item 1A. Risk Factors ........................................................................................................................10
Risks Relating to Our Business ......................................................................................................10
Risks Related to Our Financial Results and Financing Plans .....................................................17
Item 1B. Unresolved Staff Comments..............................................................................................18
Item 2. Properties............................................................................................................................18
Item 3. Legal Proceedings ..............................................................................................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................................................19
PART II 19
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities..........................................................................................................19
Dividend Policy ...............................................................................................................................19
Equity Compensation Plan Information ........................................................................................20
Performance Graph ........................................................................................................................20
Item 6. Selected Financial Data .....................................................................................................21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations ..........................................................................................................................................22
Overview ..........................................................................................................................................22
Critical Accounting Policies ...........................................................................................................22
Discontinued Operations ................................................................................................................25
Results of Operations ......................................................................................................................25
Historical Cash Flows.....................................................................................................................29
Liquidity...........................................................................................................................................31
(i)
Sources of Capital ...........................................................................................................................31
Other Debt .......................................................................................................................................32
Uses of Capital ................................................................................................................................32
Off-Balance Sheet Arrangements...................................................................................................33
New Accounting Pronouncements .................................................................................................33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................34
Item 8. Financial Statements and Supplementary Data..............................................................34
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................................................................................................34
Item 9A. Controls and Procedures ...................................................................................................34
Evaluation of Disclosure Controls and Procedures ......................................................................34
Management’s Report on Internal Control over Financial Reporting.........................................34
Changes in Internal Control over Financial Reporting................................................................35
Inherent Limitations on Effectiveness of Controls........................................................................35
Item 9B. Other Information .............................................................................................................35
PART III ..............................................................................................................................................35
Item 10. Directors, Executive Officers and Corporate Governance ............................................35
Directors ..........................................................................................................................................35
Executive Officers ...........................................................................................................................37
Section 16(a) Beneficial Ownership Reporting Compliance.........................................................37
Code of Ethics .................................................................................................................................38
The Audit Committee ......................................................................................................................38
Item 11. Executive Compensation ...................................................................................................38
Introduction.....................................................................................................................................38
Compensation Discussion and Analysis.........................................................................................39
Employment Agreements of Named Executive Officers................................................................45
Potential Payments Upon Termination or Change-in-Control.....................................................46
Summary Compensation Table for 2007........................................................................................48
Grants of Plan-Based Awards for 2007..........................................................................................50
Option Exercises and Stock Vested for 2006 .................................................................................52
Outstanding Equity Awards at December 31, 2007 .......................................................................53
Director Compensation for 2007 ....................................................................................................54
Compensation Committee Interlocks and Insider Participation...................................................57
Compensation Committee Report ...................................................................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ..........................................................................................................................57
Equity Compensation Plan Information ........................................................................................57
Security Ownership of Certain Beneficial Owners and Management..........................................57
(ii)
Item 13. Certain Relationships and Related Transactions, and Director Independence ...........59
Transactions with Related Persons ................................................................................................59
Policies and Procedures for the Review, Approval or Ratification of Transactions with Related
Persons ............................................................................................................................................60
Director Independence....................................................................................................................60
Item 14. Principal Accounting Fees and Services .........................................................................61
PART IV 63
Item 15. Exhibits, Financial Statement Schedules .........................................................................63
SIGNATURES.........................................................................................................................................67
________________
(iii)
PART I
Cautionary Comment Regarding Forward-Looking Statements.
This Report includes statements that are, or may be considered to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are included throughout this Report,
including in the sections entitled "Business," "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and relate to matters such as our
industry, business strategy, goals and expectations concerning our market position, future operations,
margins, profitability, capital expenditures, liquidity and capital resources and other financial and
operating information. We have used the words "anticipate," "assume," "believe," "budget,"
"continue," "could," "estimate," "expect," "forecast," "future, " "intend," "may," "plan," "potential,"
"predict," "project," "should, " "will," "would" and similar terms and phrases to identify forward-
looking statements in this Report.
Forward-looking statements reflect our current expectations regarding future events, results or
outcomes. These expectations may or may not be realized. Some of these expectations may be
based upon assumptions or judgments that prove to be incorrect. In addition, our business and
operations involve numerous risks and uncertainties, many of which are beyond our control, that
could result in our expectations not being realized or otherwise could materially affect our financial
condition, results of operations and cash flows.
Actual events, results and outcomes may differ materially from our expectations due to a variety of
factors. Although it is not possible to identify all of these factors, they include, among others, the
following:
•
changes in general economic conditions and resulting reductions or delays, or uncertainties
regarding governmental funding for infrastructure services;
adverse economic conditions in our markets in Texas and Nevada;
•
• delays or difficulties related to the commencement or completion of contracts, including
•
additional costs, reductions in revenues or the payment of completion penalties or liquidated
damages;
actions of suppliers, subcontractors, customers, competitors and others which are beyond our
control;
the estimates inherent in our percentage-of-completion accounting policies;
•
• possible cost increases;
• our dependence on a few significant customers;
•
•
adverse weather conditions;
the presence of competitors with greater financial resources than we have and the impact of
competitive services and pricing;
• our ability to successfully identify, complete and integrate acquisitions; and
•
the other factors discussed in more detail in Item 1A. —Risk Factors.
In reading this Report, you should consider these factors carefully in evaluating any forward-looking
statements and you are cautioned not to place undue reliance on any forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in, or suggested by, the
forward-looking statements that we make in this Report are reasonable, we can provide no assurance
that they will be achieved.
The forward-looking statements included in this Report are made only as of the date of this Report,
and we do not undertake to update any information contained in this Report or to publicly release the
results of any revisions to any forward-looking statements to reflect events or circumstances that
- 1 -
occur, or that we become aware of after the date of this Report, except as may be required by
applicable securities laws.
Item 1. Business.
Access to the Company's Filings.
The Company's Website. The Company maintains a website at www.sterlingconstructionco.com on
which our latest Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, recent
Current Reports on Form 8-K, any amendments to those filings, and other filings may be accessed
free of charge through a link to the Securities and Exchange Commission's website where those
reports are filed. Our website also has recent press releases, the Company's Code of Business
Conduct & Ethics and the charters of the Audit Committee, Compensation Committee, and Corporate
Governance & Nominating Committee of the Board of Directors. Information is also provided on
the Company’s “whistle-blower” procedures. Our website content is made available for information
purposes only. It should not be relied upon for investment purposes, and none of the information on
the website is incorporated into this Report by this reference to it.
The Securities and Exchange Commission (SEC). The public may read and copy any materials filed
by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330 (1-800-732-0330). The SEC also maintains an Internet
site at www.sec.gov on which you can obtain reports, proxy and information statements and other
information regarding the Company and other issuers that file electronically with the SEC.
Developments of the Business. In December 2007, the Company completed a public offering of
1.840 million shares of common stock at a price to the public of $20.00 per share that yielded the
Company net proceeds (after underwriters' discounts and commissions) of $ 34.960 million ($19.00
per share.) Other related direct offering costs reduced the net proceeds to $34.489 million.
Overview of the Company's Business. Sterling Construction Company, Inc. was founded in 1991 as
a Delaware corporation. Our principal executive offices are located at 20810 Fernbush Lane,
Houston, Texas 77073, and our telephone number at this address is (281) 821-9091. Our
construction business was founded in 1955 by a predecessor company in Michigan and is now
operated by our subsidiaries, Texas Sterling Construction Co., a Delaware corporation, or TSC and
Road and Highway Builders LLC, a Nevada limited liability company, or "RHB". The terms
"Company", "Sterling", and "we" refer to Sterling Construction Company, Inc. and its subsidiaries
except when it is clear that those terms mean only the parent company.
Sterling is a leading heavy civil construction company that specializes in the building, reconstruction
and repair of transportation and water infrastructure. Transportation infrastructure projects include
highways, roads, bridges and light rail. Water infrastructure projects include water, wastewater and
storm drainage systems. Sterling provides general contracting services primarily to public sector
clients utilizing its own employees and equipment, including excavating, concrete and asphalt
paving, installation of large-diameter water and wastewater distribution systems; construction of
bridges and similar large structures; construction of light rail infrastructure; concrete batch plant
operations, concrete crushing and aggregates and asphalt paving operations. Sterling performs the
majority of the work required by its contracts with its own crews, and generally engages
subcontractors only for ancillary services.
Although we describe our business in this report in terms of the services we provide, our base of
customers and the geographic areas in which we operate, we have concluded that our operations
comprise one reportable segment pursuant to Statement of Financial Accounting Standards No. 131 –
Disclosures about Segments of an Enterprise and Related Information. In making this determination,
we considered that each project has similar characteristics, includes similar services, has similar
types of customers and is subject to the same regulatory environment. We organize, evaluate and
- 2 -
manage our financial information around each project when making operating decisions and
assessing our overall performance.
Sterling has a history of profitable growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services, such as concrete operations, in order to
capture a greater percentage of available work in current and potential markets. It also involves
strategically expanding operations, either by establishing a branch office in a new market, often after
having successfully bid on and completed a project in that market, or by acquiring a company that
gives us an immediate entry into a market. Sterling extended both its service profile and its
geographic market reach with the recent acquisition of RHB, a Nevada construction company.
Sterling operates in Texas and Nevada, two states that management believes benefit from both
positive long-term demographic trends as well as an historical commitment to funding transportation
and water infrastructure projects. From 2000 to 2006, the population of Texas grew 12.7% and the
population of Nevada 24.9%. Budgeted net expenditures for transportation in 2007 totaled more than
$7.6 billion in Texas, an increase of 4% from 2006. In the recent November 2007 election, Texas
voters approved the issuance of $5 billion of bonds for highway improvements. In Nevada, total
highway fund revenue in 2006 reached $1.0 billion, an annual increase of 10.5% from 2001 levels
and up 5% from 2005. Several large jobs are scheduled to be let over the next year. Management
anticipates that continued population growth and increased spending for infrastructure in these
markets will positively affect business opportunities over the coming years.
Road and Highway Builders Acquisition. On October 31, 2007, we completed the acquisition of
privately-owned RHB, which is headquartered in Reno, Nevada. RHB is a heavy civil construction
business focused on the construction of roads and highways throughout the state of Nevada. We paid
$53 million to acquire approximately 91.67% of the equity interest in RHB. The remaining 8.33%
interest is owned by Richard Buenting, the chief executive officer of RHB who continues to run RHB
as part of our senior management team; and his ownership interest can be put to or called by us in
2011.
RHB’s largest customer is the Nevada Department of Transportation, which is responsible for
planning, construction, operation and maintenance of the 5,400 miles of highway and over 1,000
bridges that make up the state highway system. RHB is focused on providing timely and profitable
execution of construction projects along with high-value deployment of construction materials, such
as aggregates and mixes for asphalt paving. RHB has concentrated its business in suburban and rural
highway and road system projects requiring high-volume production and materials handling. RHB
has not historically pursued municipal work, such as water or storm water systems or high density
urban projects. Since its founding in 1999, RHB has experienced profitable growth, capitalizing on
strong market conditions and solid long-term demographics in Nevada.
Our Business Strategy. Key features of our business strategy include:
Continue to Add Construction Capabilities. By adding capabilities that augment our core
construction competencies, we are able to improve gross margin opportunities, more effectively
compete for contracts, and compete for contracts that might not otherwise be available to us.
Increase our Market Leadership in our Core Markets. We have a strong presence in a number of
attractive growing markets in Texas and Nevada in which we intend to continue to expand our
presence.
Apply Core Competencies Across our Markets. We intend to capitalize on opportunities to export our
Texas experience constructing bridges and water and sewer systems into Nevada markets. Similarly,
we believe our experience in aggregates and asphalt paving materials in Nevada may open new
opportunities for us in our Texas markets.
Expand into Attractive New Markets and Selectively Pursue Strategic Acquisitions. We will
continue to seek to identify attractive new markets and opportunities in select western and
- 3 -
southeastern U.S. markets. We will also continue to assess opportunities to extend our service
capabilities and expand our markets through acquisitions.
Position our Business for Future Infrastructure Spending. We believe there is a growing awareness of
the need to build, reconstruct and repair our country’s infrastructure, including water, wastewater and
storm drainage systems, as well as transportation infrastructure such as bridges, highways and mass
transit systems. We will continue to build our expertise to capture this infrastructure spending.
Continue to Develop our Employees. We believe that our employees are key to the successful
implementation of our business strategy, and we will continue allocating significant resources in
order to attract and retain talented managers and supervisory and field personnel.
Our Markets and Customers.
We operate in the heavy civil construction segment for infrastructure projects, specializing in
transportation and water infrastructure. Demand for this infrastructure depends on a variety of
factors, including overall population growth, economic expansion and the vitality of a market area, as
well as unique local topographical, structural and environmental issues. For example, the City of
Houston experiences flooding and subsidence, which has led to various municipal mandates
requiring substantial new construction to reorganize and expand the collection, treatment and
distribution of water throughout the area. In addition to these factors, demand for the replacement of
infrastructure is driven by the general aging of infrastructure and the need for technical
improvements to achieve more efficient or safer use of infrastructure and resources.
Our geographic markets have experienced steady and significant growth over the last 10 years.
According to the 2006 census, ranked by population, Texas is the second largest state in the United
States with 23.5 million people. The population in Texas has grown by 12.7% since 2000, almost
double the 6.4% growth rate for the United States as a whole over the same period. According to the
2006 census, Houston ranks as the fourth largest city in the country, San Antonio as the seventh
largest, Dallas as the ninth largest, Austin as the sixteenth largest and Fort Worth as the nineteenth
largest. Nevada has undergone even more rapid growth, with the state’s population expanding 24.9%
since 2000 to 2.5 million in 2006. These rapidly growing population bases continue to enhance the
need for expanded transportation and water infrastructure.
In addition to our core geographical markets, we operate in large and growing construction sectors
that have experienced solid and sustained national growth over the past several years. According to
data from the U.S. Census Bureau, the annual value of public construction put-in-place in the United
States for transportation, highway, street and water/wastewater infrastructure has grown at a 5.1%
compound annual growth rate since 2002 and was $137 billion in 2006, the last year for which data
are available. This includes 4.4% annual growth in the $99 billion transportation, construction and
highway/street market and 7.2% growth in the $38 billion water/wastewater market. McGraw-Hill,
an industry data source, projects that nationwide construction spending on highways and bridges, and
environmental public works (which include river/harbor improvements, sewers and water supply
systems) is expected to grow by 5% and 3%, respectively, in 2008. Based on dollars spent for
construction of highways and bridges and for sewer systems in 2007, Texas was ranked third in the
nation in both categories by McGraw-Hill.
Our highway and bridge work is generally funded through federal and state authorizations. The
federal government enacted the SAFETEA-LU bill, which authorized $286 billion for transportation
spending through 2009, an average 30% increase from the prior spending bill. Of this total, the Texas
Department of Transportation, or TXDOT, and the Nevada Department of Transportation, or NDOT,
were originally allocated approximately $14.5 billion and $1.3 billion, respectively. Actual
SAFETEA-LU appropriations have been somewhat reduced from the original allocations. We are
reliant upon TXDOT and NDOT contracts for a significant portion of our revenues. Recent public
statements by TXDOT officials indicate potential TXDOT funding shortfalls and reductions in
spending. Transportation leaders have identified $188 billion in needed construction projects to
- 4 -
create an acceptable transportation system in Texas by 2030. NDOT expenditures totaled $740
million in 2006, and have had an annual increase of 9.9% since 2001.
Our water and wastewater, underground utility, light transit and non-highway paving work is
generally funded by municipalities and local authorities. The size and growth rates of these markets
is difficult to compute as a whole given the number of municipalities, the differences in funding
sources and the variations in local budgets. However, management estimates that the municipal
markets in which we could potentially do business are in excess of $1 billion annually.
Our Markets and Customers. For decades, we have concentrated our operations in Texas. We are
headquartered in Houston, and we serve the top markets in Texas, including Houston, San Antonio,
Dallas/Fort Worth and Austin. In 2007, we have expanded our operations into Nevada.
Although we occasionally undertake contracts for private customers, the vast majority of our
contracts are for public sector customers. In Texas, these customers include TXDOT, county and
municipal public works departments, the Metropolitan Transit Authority of Harris County, Texas (or
Metro), the Harris County Toll Road Authority, regional transit authorities, port authorities, school
districts and municipal utility districts. In Nevada, our primary public sector customer has been
NDOT.
Our largest revenue customer is TXDOT. In 2007, contracts with TXDOT represented 66% of our
revenues, and other public sector revenue generated in Texas represented 32% of our revenues. In
2007, contracts with NDOT represented 97% of RHB’s revenues, and other public sector revenue
generated in Nevada represented 3% of RHB’s revenues. In both Texas and Nevada, we provide
services to these customers exclusively pursuant to contracts awarded through competitive bidding
processes.
In Texas, our municipal customers in 2007 included the City of Houston (9% of our 2007 revenues)
and Harris County, Texas (3% of our 2007 revenues). In the past, we have also completed the
construction of certain infrastructure for new light rail systems in Houston, Dallas and Galveston. We
anticipate that revenues obtained from the City of Houston will continue to increase due to the
metropolitan area’s steady gain in population through migration of new residents, the annexation of
surrounding communities and the continuing programs to expand storm water and flood control
systems and deliver water to suburban communities. We provide services to our municipal customers
exclusively pursuant to contracts awarded through competitive bidding processes.
Competition. Our competitors are companies that we bid against for construction contracts. We
estimate that Sterling has approximately 160 competitors in the Texas and Nevada markets that we
primarily serve, and they include large national and regional construction companies as well as many
smaller contractors. Historically, the construction business has not typically required large amounts
of capital, which can result in relative ease of market entry for companies possessing acceptable
qualifications. Factors influencing our competitiveness include price, our reputation for quality, our
equipment fleet, our financial strength, surety bonding capacity and prequalification, our knowledge
of local markets and conditions, and our project management and estimating abilities. Although some
of our competitors are larger than we are and may possess greater resources or provide more
vertically-integrated services, we believe that we are well-positioned to compete effectively and
favorably in the markets in which we operate on the basis of the foregoing factors.
We are unable to determine the size of many competitors because they are privately owned, but we
believe that we are one of the larger participants in our Texas markets and one of the largest
contractors in Houston engaged in municipal civil construction work. In Nevada, we believe that we
are a leading asphalt paving contractor in suburban and rural highway projects. We believe that being
one of the largest firms in the Houston municipal civil construction market provides us with several
advantages, including greater flexibility to manage our backlog in order to schedule and deploy our
workforce and equipment resources more efficiently; more cost-effective purchasing of materials,
insurance and bonds; the ability to provide a broader range of services than otherwise would be
- 5 -
provided through subcontractors; and the availability of substantially more capital and resources to
dedicate to each of our contracts. Because we own and maintain most of the equipment required for
our contracts and have the experienced workforce to handle many types of municipal civil
construction, we are able to bid competitively on many categories of contracts, especially complex,
multi-task projects.
In the state highway markets, most of our competitors are large regional contractors, and individual
contracts tend to be larger and require more specialized skills than those in the municipal markets.
Some of these competitors have the advantage of being more vertically-integrated, or they specialize
in certain types of projects such as construction over water. However those competitors, particularly
in Texas, often have the disadvantage of temporarily using a local workforce to complete each of
their state highway contracts. In contrast, we permanently employ the workers who perform our state
highway contracts in Texas, although we do rely on a temporary, unionized workforce for
performance of a portion of our state highway contracts in Nevada. In 2007, state highway work
accounted for 68% of our consolidated revenues, compared with 67% in 2006 and 39% in 2005.
During the same period, state highway work accounted for 97% of RHB’s revenues, compared with
90% in 2006 and 96% in 2005.
Contract Backlog.
Contract backlog is our estimate of the billings that we expect to make in future periods on our
construction contracts. We add the revenue value of new contracts to our contract backlog, when we
are the low bidder on a public sector contract and have determined that there are no apparent
impediments to award of the contract. As construction on our contracts progresses, we increase or
decrease contract backlog to take account of changes in estimated quantities under fixed unit price
contracts, as well as to reflect changed conditions, change orders and other variations from initially
anticipated contract revenues and costs, including completion penalties and bonuses. We subtract
from contract backlog the amounts we bill on contracts.
At December 31, 2007, our contract backlog of approximately $450 million was 14% higher than the
$395 million of contract backlog at December 31, 2006. Of the contract backlog at December 31,
2007, approximately $279 million is scheduled for completion in 2008. At December 31, 2007, we
included approximately $16 million of contracts in backlog on which we were the apparent low
bidder and expected to be awarded the contracts, but as of that date, those contracts had not been
officially awarded. Historically, subsequent non-awards of such low bids have not materially affected
our backlog or financial condition.
Substantially all of the contracts in our contract backlog may be canceled at the election of the
customer; however, we have not been materially adversely affected by contract cancellations or
modifications in the past. See the section below entitled "Contract Management Process."
Contracts.
Types of Contracts. We provide our services by using traditional general contracting arrangements,
which are predominantly fixed unit price contracts awarded based on the lowest bid. A small amount
of our revenue is produced under change orders or emergency contracts arranged on a cost plus basis.
Fixed unit price contracts are generally used in competitively-bid public civil construction contracts
and, to a lesser degree, building construction contracts. Contractors under fixed unit price contracts
are generally committed to provide all of the resources required to complete a contract for a fixed
price per unit. Fixed unit price contracts generally transfer more risk to the contractor but offer the
opportunity, under favorable circumstances, for greater profits. These contracts are generally subject
to negotiated change orders, frequently due to a differences in site conditions from those anticipated
when the bid is placed. Some contracts provide for penalties if the contract is not completed on time,
or incentives if it is completed ahead of schedule.
- 6 -
Contract Management Process. We identify potential contracts from a variety of sources, including
through subscriber services that notify us of contracts out for bid, through advertisements by federal,
state and local governmental entities, through our business development efforts and through meetings
with other participants in the construction industry. After determining which contracts are available,
we decide which contracts to pursue based on such factors as the relevant skills required, contract
size and duration, the availability of our personnel and equipment, the size and makeup of our current
backlog, our competitive advantages and disadvantages, prior experience, the contracting agency or
customer, the source of contract funding, geographic location, likely competition, construction risks,
gross margin opportunities, penalties or incentives and the type of contract.
As a condition to pursuing certain contracts, we are sometimes required to complete a
prequalification process with the applicable agency or customer. Some customers, such as TXDOT
and NDOT, require yearly prequalification, and other customers have experience requirements
specific to the contract. The prequalification process generally limits bidders to those companies with
operational experience and financial capability to effectively complete the particular contract in
accordance with the plans, specifications and construction schedule.
There are several factors that can create variability in contract performance and financial results
compared to our bid assumptions on a contract. The most significant of these include the
completeness and accuracy of our original bid analysis, recognition of costs associated with added
scope changes, extended overhead due to customer and weather delays, subcontractor performance
issues, changes in productivity expectations, site conditions that differ from those assumed in the
original bid, and changes in the availability and proximity of materials. In addition, each of our
original bids is based on the contract customer’s estimates of the quantities needed to complete a
contract. If the quantities ultimately needed are different, our backlog and financial performance on
the contract will change. All of these factors can lead to inefficiencies in contract performance, which
can increase costs and lower profits. Conversely, if any of these or other factors is more positive than
the assumptions in our bid, contract profitability can improve.
The estimating process for our contracts in Texas typically involves three phases. Initially, we
consider the level of anticipated competition and our available resources for the prospective project.
If we then decide to continue considering a project, we undertake the second phase of the contract
process and spend up to six weeks performing a detailed review of the plans and specifications,
summarize the various types of work involved and related estimated quantities, determine the
contract duration and schedule and highlight the unique and riskier aspects of the contract.
Concurrent with this process, we estimate the cost and availability of labor, material, equipment,
subcontractors and the project team required to complete the contract on time and in accordance with
the plans and specifications. Substantially all of our estimates are made on a per-unit basis for each
line item, with the typical contract containing 50 to 400 line items. The final phase consists of a
detailed review of the estimate by management, including, among other things, assumptions
regarding cost, approach, means and methods, productivity, risk and the estimated profit margin.
This profit amount will vary according to management’s perception of the degree of difficulty of the
contract, the current competitive climate and the size and makeup of our backlog. Our project
managers are intimately involved throughout the estimating and construction process so that contract
issues, and risks, can be understood and addressed on a timely basis.
The contracting process for RHB’s contracts in Nevada is primarily the responsibility of its chief
executive officer. He reviews all of the plans and specifications for a proposed project, estimates the
costs to complete the project and the risks involved, adds an appropriate profit level, and, based on
all of that information, determines whether to submit a bid on the project. Prior to submittal of any
proposals, estimates are reviewed by Sterling management. As part of our process for integrating
RHB into our overall operations, we anticipate that the process used to bid on contracts in Nevada
will substantially conform to the process used in Texas described above.
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To manage risks of changes in material prices and subcontracting costs used in tendering bids for
construction contracts, we obtain firm quotations from our suppliers and subcontractors before
submitting a bid. These quotations do not include any quantity guarantees, and we have no obligation
for materials or subcontract services beyond those required to complete the respective contracts that
we are awarded for which quotations have been provided.
Substantially all of our contracts are entered into with governmental entities and are generally
awarded to the lowest bidder after a solicitation of bids by the project owner. Requests for proposals
or negotiated contracts with public or private customers are generally awarded based on a
combination of technical capability and price, taking into consideration factors such as contract
schedule and prior experience.
During the construction phase of a contract, we monitor our progress by comparing actual costs
incurred and quantities completed to date with budgeted amounts and the contract schedule and
periodically (at a minimum on a monthly basis) prepare an updated estimate of total forecasted
revenue, cost and expected profit for the contract.
During the normal course of most contracts, the customer, and sometimes the contractor, initiates
modifications or changes to the original contract to reflect, among other things, changes in quantities,
specifications or design, method or manner of performance, facilities, materials, site conditions and
the period for completion of the work. In many cases, final contract quantities may differ from those
specified by the customer. Generally, the scope and price of these modifications are documented in a
“change order” to the original contract and reviewed, approved and paid in accordance with the
normal change order provisions of the contract. We are often required to perform extra or change
order work as directed by the customer even if the customer has not agreed in advance on the scope
or price of the work to be performed. This process may result in disputes over whether the work
performed is beyond the scope of the work included in the original contract plans and specifications
or, even if the customer agrees that the work performed qualifies as extra work, the price that the
customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction.
Even when the customer agrees to pay for the extra work, we may be required to fund the cost of the
work for a lengthy period of time until the change order is approved and funded by the customer. In
addition, any delay caused by the extra work may adversely impact the timely scheduling of other
work on the contract (or on other contracts) and our ability to meet contract milestone dates.
The process for resolving contract claims varies from one contract to another but, in general, we
attempt to resolve claims at the project supervisory level through the normal change order process or,
if necessary, with higher levels of management within our organization and the customer’s
organization. Regardless of the process, when a potential claim arises on a contract, we typically
have the contractual obligation to perform the work and must incur the related costs. We do not
recoup the costs unless and until the claim is resolved, which could take a significant amount of time.
Most of our construction contracts provide for termination of the contract for the convenience of the
customer, with provisions to pay us only for work performed through the date of termination. Our
backlog and results of operations have not been materially adversely affected by these provisions in
the past.
We act as the prime contractor on almost all of the construction contracts that we undertake. We
complete the majority of our contracts with our own resources, and we typically subcontract
specialized activities such as traffic control, electrical systems, signage and trucking. As the prime
contractor, we are responsible for the performance of the entire contract, including subcontract work.
Thus, we are subject to increased costs associated with the failure of one or more subcontractors to
perform as anticipated. We manage this risk by reviewing the size of the subcontract, the financial
stability of the subcontractor and other factors. Although we generally do not require that our
subcontractors furnish a bond or other type of security to guarantee their performance, we require
performance and payment bonds on many specialized or large subcontract portions of our contracts.
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Disadvantaged business enterprise regulations require us to use our best efforts to subcontract a
specified portion of contract work performed for governmental entities to certain types of
subcontractors, including minority- and women-owned businesses. We have not experienced
significant costs associated with subcontractor performance issues.
Insurance and Bonding. All of our buildings and equipment are covered by insurance, which our
management believes to be adequate. In addition, we maintain general liability and excess liability
insurance, all in amounts consistent with our risk of loss and industry practice. We self-insure our
workers’ compensation and health plan claims subject to stop-loss insurance coverage.
As a normal part of the construction business, we are generally required to provide various types of
surety and payment bonds that provide an additional measure of security for our performance under
public sector contracts. Typically, a bidder for a contract must post a bid bond, generally for 5% to
10% of the amount bid, and on winning the bid, must post a performance and payment bond for
100% of the contract amount. Upon completion of a contract, before receiving final payment on the
contract, a contractor must post a maintenance bond for generally 1% of the contract amount for one
to two years. Our ability to obtain surety bonds depends upon our capitalization, working capital,
aggregate contract size, past performance, management expertise and external factors, including the
capacity of the overall surety market. Surety companies consider such factors in light of the amount
of our backlog that we have currently bonded and their current underwriting standards, which may
change from time to time. As is customary, we have agreed to indemnify our bonding company for
all losses incurred by it in connection with bonds that are issued, and we have granted our bonding
company a security interest in certain assets as collateral for such obligation.
Employees. At February 15, 2008, we had more than 1,200 employees, including 15 project
managers and over 50 superintendents who manage over 125 fully-equipped crews in our
construction business. Of such employees, approximately 50 were located in our Houston
headquarters, with most of the others being field personnel. Of our Nevada employees, 72 are union
members represented by three unions.
Our business is dependent upon a readily available supply of management, supervisory and field
personnel. Substantially all of our employees who work on our contracts in Texas are a permanent
part of our workforce, and we generally do not rely on temporary employees to complete these
contracts. In contrast, many of our employees who work on our contracts in Nevada are temporary
employees. In the past, we have been able to attract sufficient numbers of personnel to support the
growth of our operations.
We conduct extensive safety training programs, which have allowed us to maintain a high safety
level at our worksites. All newly-hired employees undergo an initial safety orientation, and for
certain types of projects, we conduct specific hazard training programs. Our project foremen and
superintendents conduct weekly on-site safety meetings, and our full-time safety inspectors make
random site safety inspections and perform assessments and training if infractions are discovered. In
addition, all of our superintendents and project managers are required to complete an OSHA-
approved safety course.
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Item 1A. Risk Factors.
The risks described below are those we believe to be the material risks we face. Any of the risk
factors described below could significantly and adversely affect our business, prospects, financial
condition and results of operations.
Risks Relating to Our Business.
If we are unable to accurately estimate the overall risks or costs when we bid on a contract that is
ultimately awarded to us, we may achieve a lower than anticipated profit or incur a loss on the
contract.
Substantially all of our revenues and backlog are typically derived from fixed unit price contracts.
Fixed unit price contracts require us to perform the contract for a fixed unit price irrespective of our
actual costs. As a result, we realize a profit on these contracts only if we successfully estimate our
costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a
contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost
overruns may cause us to incur losses or cause the contract not to be as profitable as we expected.
This, in turn, could negatively affect our cash flow, earnings and financial position.
The costs incurred and gross profit realized on such contracts can vary, sometimes substantially,
from the original projections due to a variety of factors, including, but not limited to:
• onsite conditions that differ from those assumed in the original bid;
• delays caused by weather conditions;
•
•
contract modifications creating unanticipated costs not covered by change orders;
changes in availability, proximity and costs of materials, including steel, concrete, aggregates
and other construction materials (such as stone, gravel, sand and oil for asphalt paving), as
well as fuel and lubricants for our equipment;
inability to predict the costs of accessing and producing aggregates, and purchasing oil,
required for asphalt paving projects;
availability and skill level of workers in the geographic location of a project;
•
•
• our suppliers’ or subcontractors’ failure to perform;
•
• mechanical problems with our machinery or equipment;
•
fraud or theft committed by our employees;
citations issued by any governmental authority, including the Occupational Safety and Health
Administration;
• difficulties in obtaining required governmental permits or approvals;
•
•
changes in applicable laws and regulations; and
claims or demands from third parties alleging damages arising from our work or from the
project of which our work is part.
Many of our contracts with public sector customers contain provisions that purport to shift some or
all of the above risks from the customer to us, even in cases where the customer is partly at fault. Our
experience has often been that public sector customers have been willing to negotiate equitable
adjustments in the contract compensation or completion time provisions if unexpected circumstances
arise. If public sector customers seek to impose contractual risk-shifting provisions more
aggressively, we could face increased risks, which may adversely affect our cash flow, earnings and
financial position.
Economic downturns or reductions in government funding of infrastructure projects could reduce our
revenues and profits and have a material adverse effect on our results of operations.
Our business is highly dependent on the amount and timing of infrastructure work funded by various
governmental entities, which, in turn, depends on the overall condition of the economy, the need for
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new or replacement infrastructure, the priorities placed on various projects funded by governmental
entities and federal, state or local government spending levels. Spending on infrastructure could
decline for numerous reasons, including decreased revenues received by state and local governments
for spending on such projects, including federal funding. For example, state spending on highway
and other projects can be adversely affected by decreases or delays in, or uncertainties regarding,
federal highway funding, which could adversely affect us. We are reliant upon contracts with the
Texas Department of Transportation, or TXDOT, and the Nevada Department of Transportation, or
NDOT, for a significant portion of our revenues. Recent public statements by TXDOT officials
indicate potential TXDOT funding shortfalls and reductions in spending. In addition, the recent
nationwide declines in home sales and increases in foreclosures could adversely affect expenditures
by state and local governments. Decreases in government funding of infrastructure projects could
decrease the number of civil construction contracts available and limit our ability to obtain new
contracts, which could reduce our revenues and profits.
The cancellation of significant contracts could reduce our revenues and profits and have a material
adverse effect on our results of operations.
Contracts that we enter into with governmental entities can usually be canceled at any time by them
with payment only for the work already completed. In addition, we could be prohibited from bidding
on certain governmental contracts if we fail to maintain qualifications required by those entities. A
sudden cancellation of a contract or our debarment from the bidding process could cause our
equipment and work crews to remain idled for a significant period of time until other comparable
work became available, which could have a material adverse effect on our business and results of
operations.
We operate in Texas and Nevada, and any adverse change to the economy or business environment
in Texas or Nevada could significantly affect our operations, which would lead to lower revenues
and reduced profitability.
We operate in Texas and Nevada, and our Texas operations are particularly concentrated in the
Houston area. Because of this concentration in specific geographic locations, we are susceptible to
fluctuations in our business caused by adverse economic or other conditions in these regions,
including natural or other disasters. A stagnant or depressed economy in Texas or Nevada could
adversely affect our business, results of operations and financial condition.
Our acquisition strategy involves a number of risks.
In addition to organic growth of our construction business, we intend to continue pursuing growth
through the acquisition of companies or assets that may enable us to expand our project skill-sets and
capabilities, enlarge our geographic markets, add experienced management and increase critical mass
to enable us to bid on larger contracts. However, we may be unable to implement this growth strategy
if we cannot reach agreements for potential acquisitions on acceptable terms or for other reasons.
Moreover, our acquisition strategy involves certain risks, including:
• difficulties in the integration of operations and systems;
• difficulties applying our expertise in one market into another market;
•
the key personnel and customers of the acquired company may terminate their relationships
with the acquired company;
• we may experience additional financial and accounting challenges and complexities in areas
such as tax planning and financial reporting;
• we may assume or be held liable for risks and liabilities (including for environmental-related
costs and liabilities) as a result of our acquisitions, some of which we may not discover
during our due diligence;
• our ongoing business may be disrupted or receive insufficient management attention; and
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• we may not be able to realize cost savings or other financial benefits we anticipated.
Future acquisitions may require us to obtain additional equity or debt financing, as well as additional
surety bonding capacity, which may not be available on terms acceptable to us or at all. Moreover, to
the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth,
which might have an adverse effect on our credit and bonding capacity.
Our industry is highly competitive, with a variety of larger companies with greater resources
competing with us, and our failure to compete effectively could reduce the number of new contracts
awarded to us or adversely affect our margins on contracts awarded.
Essentially all of the contracts on which we bid are awarded through a competitive bid process, with
awards generally being made to the lowest bidder, but sometimes recognizing other factors, such as
shorter contract schedules or prior experience with the customer. Within our markets, we compete
with many national, regional and local construction firms. Some of these competitors have achieved
greater market penetration than we have in the markets in which we compete, and some have greater
financial and other resources than we do. In addition, there are a number of national companies in our
industry that are larger than we are and that, if they so desire, could establish a presence in our
markets and compete with us for contracts. In some markets where home building projects have
slowed, construction companies that lack available work in the home building market have begun on
a limited scale bidding on highway and municipal construction contracts. As a result, we may need to
accept lower contract margins in order to compete against competitors that have the ability to accept
awards at lower prices or have a pre-existing relationship with a customer. If we are unable to
compete successfully in our markets, our relative market share and profits could be reduced.
Our dependence on subcontractors and suppliers of materials (including petroleum-based products)
could increase our costs and impair our ability to complete contracts on a timely basis or at all, which
would adversely affect our profits and cash flow.
We rely on third-party subcontractors to perform some of the work on many of our contracts. We
generally do not bid on contracts unless we have the necessary subcontractors committed for the
anticipated scope of the contract and at prices that we have included in our bid, except for trucking
arrangements needed for our Nevada operations. Therefore, to the extent that we cannot engage
subcontractors, our ability to bid for contracts may be impaired. In addition, if a subcontractor is
unable to deliver its services according to the negotiated terms for any reason, including the
deterioration of its financial condition, we may suffer delays and be required to purchase the services
from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on
a contract.
We also rely on third-party suppliers to provide most of the materials (including aggregates,
concrete, steel and pipe) for our contracts, except in Nevada where we source and produce most of
our own aggregates. We do not own or operate any quarries in Texas, and there are no naturally
occurring sources of aggregates in the Houston metropolitan area. We normally do not bid on
contracts unless we have commitments from suppliers for the materials required to complete the
contract and at prices that we have included in our bid, except for some aggregates we use in our
Nevada construction projects. Thus, to the extent that we cannot obtain commitments from our
suppliers for materials, our ability to bid for contracts may be impaired. In addition, if a supplier is
unable to deliver materials according to the negotiated terms of a supply agreement for any reason,
including the deterioration of its financial condition, we may suffer delays and be required to
purchase the materials from another source at a higher price. This may reduce the profit to be
realized, or result in a loss, on a contract.
Diesel fuel and other petroleum-based products are utilized to operate the plants and equipment on
which we rely to perform our construction contracts. In addition, our asphalt plants and suppliers use
oil in combination with aggregates to produce asphalt used in our road and highway construction
projects. Decreased supplies of such products relative to demand, unavailability of petroleum
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supplies due to refinery turnarounds, and other factors can increase the cost of such products. Future
increases in the costs of fuel and other petroleum-based products used in our business, particularly if
a bid has been submitted for a contract and the costs of such products have been estimated at
amounts less than the actual costs thereof, could result in a lower profit, or a loss, on a contract.
We may not accurately assess the quality, and we may not accurately estimate the quantity,
availability and cost, of aggregates we plan to produce, particularly for projects in rural areas of
Nevada, which could have a material adverse effect on our results of operations.
Particularly for projects in rural areas of Nevada, we typically estimate these factors for anticipated
aggregate sources that we have not previously used to produce aggregates, which increases the risk
that our estimates may be inaccurate. Inaccuracies in our estimates regarding aggregates could result
in significantly higher costs to supply aggregates needed for our projects, as well as potential delays
and other inefficiencies. As a result, our failure to accurately assess the quality, quantity, availability
and cost of aggregates could cause us to incur losses, which could materially adversely affect our
results of operations.
We may not be able to fully realize the revenue anticipated by our reported backlog.
Almost all of the contracts included in backlog are awarded by public sector customers through a
competitive bid process, with the award generally being made to the lowest bidder. We add new
contracts to our backlog, typically when we are the low bidder on a public sector contract and
management determines that there are no apparent impediments to award of the contract. As
construction on our contracts progresses, we increase or decrease backlog to take account of changes
in estimated quantities under fixed unit price contracts, as well as to reflect changed conditions,
change orders and other variations from initially anticipated contract revenues and costs, including
completion penalties and bonuses. We subtract from backlog the amounts we bill on contracts.
Most of the contracts with our public sector customers can be terminated at their discretion. If a
customer cancels, suspends, delays or reduces a contract, we may be reimbursed for certain costs but
typically will not be able to bill the total amount that had been reflected in our backlog. Cancellation
of one or more contracts that constitute a large percentage of our backlog, and our inability to find a
substitute contract, would have a material adverse effect on our business, results of operations and
financial condition.
If we are unable to attract and retain key personnel and skilled labor, or if we encounter labor
difficulties, our ability to bid for and successfully complete contracts may be negatively impacted.
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to
successfully bid for and profitably complete our work. This includes members of our management,
project managers, estimators, supervisors, foremen, equipment operators and laborers. The loss of the
services of any of our management could have a material adverse effect on us. Our future success
will also depend on our ability to hire and retain, or to attract when needed, highly-skilled personnel.
Competition for these employees is intense, and we could experience difficulty hiring and retaining
the personnel necessary to support our business. If we do not succeed in retaining our current
employees and attracting, developing and retaining new highly-skilled employees, our reputation
may be harmed and our future earnings may be negatively impacted.
In Texas, we rely heavily on immigrant labor. Any adverse changes to existing laws and regulations,
or changes in enforcement requirements or practices, applicable to employment of immigrants could
negatively impact the availability and cost of the skilled personnel and labor we need, particularly in
Texas. We may not be able to continue to attract and retain sufficient employees at all levels due to
changes in immigration enforcement practices or compliance standards or for other reasons.
In Nevada, a substantial number of our equipment operators and laborers are unionized. Any work
stoppage or other labor dispute involving our unionized workforce would have a material adverse
effect on our operations and operating results in Nevada.
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Our contracts may require us to perform extra or change order work, which can result in disputes and
adversely affect our working capital, profits and cash flows.
Our contracts generally require us to perform extra or change order work as directed by the customer
even if the customer has not agreed in advance on the scope or price of the extra work to be
performed. This process may result in disputes over whether the work performed is beyond the scope
of the work included in the original project plans and specifications or, if the customer agrees that the
work performed qualifies as extra work, the price that the customer is willing to pay for the extra
work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay
for the extra work, we may be required to fund the cost of such work for a lengthy period of time
until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract
disputes or claims are less than the estimates used in our financial statements, the amount of any
shortfall will reduce our future revenues and profits, and this could have a material adverse effect on
our reported working capital and results of operations. In addition, any delay caused by the extra
work may adversely impact the timely scheduling of other project work and our ability to meet
specified contract milestone dates.
Our failure to meet schedule or performance requirements of our contracts could adversely affect us.
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any
such schedule could result in additional costs, penalties or liquidated damages being assessed against
us, and these could exceed projected profit margins on the contract. Performance problems on
existing and future contracts could cause actual results of operations to differ materially from those
anticipated by us and could cause us to suffer damage to our reputation within the industry and
among our customers.
Unanticipated adverse weather conditions may cause delays, which could slow completion of our
contracts and negatively affect our current and future revenues and cash flow.
Because all of our construction projects are built outdoors, work on our contracts is subject to
unpredictable weather conditions, which could become more frequent or severe if general climatic
changes occur. For example, evacuations in Texas due to Hurricane Rita resulted in our inability to
perform work on all Houston-area contracts for several days. Lengthy periods of wet weather will
generally interrupt construction, and this can lead to under-utilization of crews and equipment,
resulting in less efficient rates of overhead recovery. For example, during the first nine months of
2007, we experienced an above-average number of days and amount of rainfall across our Texas
markets, which impeded our ability to work on construction projects and reduced our gross profit.
During the late fall to early spring months of the year, our work on construction projects in Nevada
may also be curtailed because of snow and other work-limiting weather. While revenues can be
recovered following a period of bad weather, it is generally impossible to recover the inefficiencies,
and significant periods of bad weather typically reduce profitability of affected contracts both in the
current period and during the future life of affected contracts. Such reductions in contract
profitability negatively affect our results of operations in current and future periods until the affected
contracts are completed.
Timing of the award and performance of new contracts could have an adverse effect on our operating
results and cash flow.
It is generally very difficult to predict whether and when new contracts will be offered for tender, as
these contracts frequently involve a lengthy and complex design and bidding process, which is
affected by a number of factors, such as market conditions, financing arrangements and
governmental approvals. Because of these factors, our results of operations and cash flows may
fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.
The uncertainty of the timing of contract awards may also present difficulties in matching the size of
our equipment fleet and work crews with contract needs. In some cases, we may maintain and bear
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the cost of more equipment and ready work crews than are currently required, in anticipation of
future needs for existing contracts or expected future contracts. If a contract is delayed or an expected
contract award is not received, we would incur costs that could have a material adverse effect on our
anticipated profit.
In addition, the timing of the revenues, earnings and cash flows from our contracts can be delayed by
a number of factors, including adverse weather conditions such as prolonged or intense periods of
rain, snow, storms or flooding, delays in receiving material and equipment from suppliers and
changes in the scope of work to be performed. Such delays, if they occur, could have adverse effects
on our operating results for current and future periods until the affected contracts are completed.
Our dependence on a limited number of customers could adversely affect our business and results of
operations.
Due to the size and nature of our construction contracts, one or a few customers have in the past and
may in the future represent a substantial portion of our consolidated revenues and gross profits in any
one year or over a period of several consecutive years. For example, in 2007, approximately 78% of
our revenue was generated from three customers, and approximately 97% of RHB’s revenue was
generated from one customer. Similarly, our backlog frequently reflects multiple contracts for
individual customers; therefore, one customer may comprise a significant percentage of backlog at a
certain point in time. An example of this is TXDOT, with which we had 23 contracts representing an
aggregate of approximately 47% of our backlog at December 31, 2007. The loss of business from
any one of such customers could have a material adverse effect on our business or results of
operations. Recent public statements by TXDOT officials indicate potential TXDOT funding
shortfalls and reductions in spending. Because we do not maintain any reserves for payment defaults,
a default or delay in payment on a significant scale could materially adversely affect our business,
results of operations and financial condition.
We may incur higher costs to lease, acquire and maintain equipment necessary for our operations,
and the market value of our owned equipment may decline.
We have traditionally owned most of the construction equipment used to build our projects. To the
extent that we are unable to buy construction equipment necessary for our needs, either due to a lack
of available funding or equipment shortages in the marketplace, we may be forced to rent equipment
on a short-term basis, which could increase the costs of performing our contracts.
The equipment that we own or lease requires continuous maintenance, for which we maintain our
own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be
forced to obtain third-party repair services, which could increase our costs. In addition, the market
value of our equipment may unexpectedly decline at a faster rate than anticipated. Such a decline
would reduce the borrowing base under our credit facility, thereby reducing the amount of credit
available to us and impeding our ability to continue to expand our business.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that we are able to
pursue.
As is customary in the construction business, we are required to provide surety bonds to secure our
performance under construction contracts. Our ability to obtain surety bonds primarily depends upon
our capitalization, working capital, past performance, management expertise and reputation and
certain external factors, including the overall capacity of the surety market. Surety companies
consider such factors in relationship to the amount of our backlog and their underwriting standards,
which may change from time to time. Events that affect the insurance and bonding markets generally
may result in bonding becoming more difficult to obtain in the future, or being available only at a
significantly greater cost. Our inability to obtain adequate bonding, and, as a result, to bid on new
contracts, could have a material adverse effect on our future revenues and business prospects.
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Our operations are subject to hazards that may cause personal injury or property damage, thereby
subjecting us to liabilities and possible losses, which may not be covered by insurance.
Our workers are subject to the usual hazards associated with providing construction and related
services on construction sites, plants and quarries. Operating hazards can cause personal injury and
loss of life, damage to or destruction of property, plant and equipment and environmental damage.
We self-insure our workers’ compensation claims, subject to stop-loss insurance coverage. We also
maintain insurance coverage in amounts and against the risks that we believe are consistent with
industry practice, but this insurance may not be adequate to cover all losses or liabilities that we may
incur in our operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity
of an injury, the determination of our liability in proportion to other parties, the number of incidents
not reported and the effectiveness of our safety program. If we were to experience insurance claims
or costs above our estimates, we might also be required to use working capital to satisfy these claims
rather than to maintain or expand our operations. To the extent that we experience a material increase
in the frequency or severity of accidents or workers’ compensation claims, or unfavorable
developments on existing claims, our operating results and financial condition could be materially
and adversely affected.
Environmental and other regulatory matters could adversely affect our ability to conduct our business
and could require expenditures that could have a material adverse effect on our results of operations
and financial condition.
Our operations are subject to various environmental laws and regulations relating to the management,
disposal and remediation of hazardous substances and the emission and discharge of pollutants into
the air and water. We could be held liable for such contamination created not only from our own
activities but also from the historical activities of others on our project sites or on properties that we
acquire or lease. Our operations are also subject to laws and regulations relating to workplace safety
and worker health, which, among other things, regulate employee exposure to hazardous substances.
Immigration laws require us to take certain steps intended to confirm the legal status of our
immigrant labor force, but we may nonetheless unknowingly employ illegal immigrants. Violations
of such laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-
party property damage or personal injury claims. In addition, these laws and regulations have
become, and enforcement practices and compliance standards are becoming, increasingly stringent.
Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that
could be imposed, or how existing or future laws or regulations will be administered or interpreted,
with respect to products or activities to which they have not been previously applied. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement policies of the
regulatory agencies, could require us to make substantial expenditures for, among other things,
pollution control systems and other equipment that we do not currently possess, or the acquisition or
modification of permits applicable to our activities.
Our aggregate quarry lease in Nevada could subject us to costs and liabilities. A limited
environmental assessment report was inconclusive about potential environmental contamination at
the Nevada quarry resulting from various mining activities and landfill operations that may have
occurred on or near the property. Due to the limited nature of the report, we are unable to assess the
extent of our liability, if any, at the quarry. As lessee and operator of the quarry, we could be held
responsible for any contamination or regulatory violations resulting from activities or operations at
the quarry. Any such costs and liabilities could be significant and could materially and adversely
affect our business, operating results and financial condition.
We may be unable to sustain our historical revenue growth rate.
Our revenue has grown rapidly in recent years. However, we may be unable to sustain these recent
revenue growth rates for a variety of reasons, including limits on additional growth in our current
- 16 -
markets, less success in competitive bidding for contracts, limitations on access to necessary working
capital and investment capital to sustain growth, limitations on access to bonding to support
increased contracts and operations, inability to hire and retain essential personnel and to acquire
equipment to support growth, and inability to identify acquisition candidates and successfully acquire
and integrate them into our business. A decline in our revenue growth could have a material adverse
effect on our financial condition and results of operations if we are unable to reduce the growth of
our operating expenses at the same rate.
Terrorist attacks have impacted, and could continue to negatively impact, the U.S. economy and the
markets in which we operate.
Terrorist attacks, like those that occurred on September 11, 2001, have contributed to economic
instability in the United States, and further acts of terrorism, violence or war could affect the markets
in which we operate, our business and our expectations. Armed hostilities may increase, or terrorist
attacks, or responses from the United States, may lead to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may further contribute to economic instability
in the United States. These attacks or armed conflicts may affect our operations or those of our
customers or suppliers and could impact our revenues, our production capability and our ability to
complete contracts in a timely manner.
Risks Related to Our Financial Results and Financing Plans.
Actual results could differ from the estimates and assumptions that we use to prepare our financial
statements.
To prepare financial statements in conformity with GAAP, management is required to make
estimates and assumptions, as of the date of the financial statements, which affect the reported values
of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.
Areas requiring significant estimates by our management include: contract costs and profits and
application of percentage-of-completion accounting and revenue recognition of contract change order
claims; provisions for uncollectible receivables and customer claims and recoveries of costs from
subcontractors, suppliers and others; valuation of assets acquired and liabilities assumed in
connection with business combinations; and accruals for estimated liabilities, including litigation and
insurance reserves. Our actual results could differ from, and could require adjustments to, those
estimates.
In particular, as is more fully discussed in Item 7 - “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Critical Accounting Policies,” we recognize contract
revenue using the percentage-of-completion method. Under this method, estimated contract revenue
is recognized by applying the percentage of completion of the contract for the period to the total
estimated revenue for the contract. Estimated contract losses are recognized in full when determined.
Contract revenue and total cost estimates are reviewed and revised on a continuous basis as the work
progresses and as change orders are initiated or approved, and adjustments based upon the percentage
of completion are reflected in contract revenue in the accounting period when these estimates are
revised. To the extent that these adjustments result in an increase, a reduction or an elimination of
previously reported contract profit, we recognize a credit or a charge against current earnings, which
could be material.
We may need to raise additional capital in the future for working capital, capital expenditures and/or
acquisitions, and we may not be able to do so on favorable terms or at all, which would impair our
ability to operate our business or achieve our growth objectives.
Our growth has been funded in part by our utilization of net operating loss carry-forwards, or NOLs,
to reduce the amounts that we have paid for income taxes, and we expect our NOLs to be fully
utilized in 2008. Paying taxes will reduce cash flows from operations compared to prior periods, as
we will be required to fund the payment of taxes in 2008 and future periods. To the extent that cash
- 17 -
flow from operations is insufficient to fund future investments, make acquisitions or provide needed
additional working capital, we may require additional financing from other sources of funds.
Our ability to obtain such additional financing in the future will depend in part upon prevailing
capital market conditions, as well as conditions in our business and our operating results; such factors
may adversely affect our efforts to arrange additional financing on terms satisfactory to us. We have
pledged the proceeds and other rights under our construction contracts to our bond surety, and we
have pledged substantially all of our other assets as collateral in connection with our credit facility
and mortgage debt. As a result, we may have difficulty in obtaining additional financing in the future
if such financing requires us to pledge assets as collateral. In addition, under our credit facility, we
must obtain the consent of our lenders to incur any amount of additional debt from other sources
(subject to certain exceptions). If future financing is obtained by the issuance of additional shares of
common stock, our stockholders may suffer dilution. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to make future investments, take advantage of
acquisitions or other opportunities, or respond to competitive challenges.
We are subject to financial and other covenants under our credit facility that could limit our
flexibility in managing our business.
We have a revolving credit facility that restricts us from engaging in certain activities, including
restrictions on the ability (subject to certain exceptions) to —
• Make distributions and dividends;
Incur liens or encumbrances;
•
•
Incur indebtedness;
• Guarantee obligations;
• Dispose of a material portion of assets or otherwise engage in a merger with a third party;
• Make acquisitions; and
•
Incur losses for two consecutive quarters.
Our credit facility contains financial covenants that require us to maintain specified fixed charge
coverage ratios, asset ratios and leverage ratios, and to maintain specified levels of tangible net
worth. Our ability to borrow funds for any purpose will depend on our satisfying these tests. If we are
unable to meet the terms of the financial covenants or fail to comply with any of the other restrictions
contained in our credit facility, an event of default could occur. An event of default, if not waived by
our lenders, could result in the acceleration of any outstanding indebtedness, causing such debt to
become immediately due and payable. If such an acceleration occurs, we may not be able to repay
such indebtedness on a timely basis. Acceleration of our credit facility could result in foreclosure on
and loss of our operating assets. In the event of such foreclosure, we would be unable to conduct our
business and forced to discontinue operations.
Item 1B. Unresolved Staff Comments. None
Item 2. Properties.
We own our 15,000 square-foot headquarters office building in Houston, Texas, which is located on
a seven-acre parcel of land on which our Texas equipment repair center is also located. We also own
land in Dallas and San Antonio on which we plan to construct regional offices and repair facilities.
Pending completion of these regional offices, we lease office facilities in these locations. In order to
complete most contracts in Texas, we lease small parcels of real estate near the site of a contract job
site to store materials, locate equipment, conduct concrete crushing and pugging operations, and
provide offices for the contracting customer, its representatives and our employees.
For our Nevada operations, we lease office space in Reno, Nevada, and we have an office and repair
facilities located on a forty-five acre parcel of land in Lovelock, Nevada. We also lease a quarry in
- 18 -
Carson City, Nevada. Unlike in Texas where we acquire aggregates from third-party suppliers, in
Nevada, we source and produce our own aggregates, whether from the Carson City quarry or from
other sources near job sites where we enter into short-term leases to acquire the aggregates necessary
for the job. In order to complete most contracts in Nevada, we also lease small parcels of real estate
near the site of a contract job site to store materials, locate equipment, and provide offices for the
contracting customer, its representatives and our employees.
Item 3. Legal Proceedings.
We are and may in the future be involved as a party to various legal proceedings that are incidental to
the ordinary course of business. We regularly analyze current information and, as necessary, provide
accruals for probable liabilities on the eventual disposition of these matters.
In the opinion of management, after consultation with legal counsel, there are currently no threatened
or pending legal matters that would reasonably be expected to have a material adverse impact on our
consolidated results of operations, financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders. None
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
The Company's common stock began trading on the Nasdaq National Market on January 20, 2006
under the symbol "STRL" and in June 2006, it was included in the NASDAQ Global Select Market
("NGS"). For approximately two years prior to its Nasdaq listing, the common stock was traded on
the American Stock Exchange, or Amex, under the symbol "STV".
The table below shows the market high and low closing sales prices of the common stock for 2006
and 2007 by quarter and for the period from January 1, through February 29, 2008, on Amex or
Nasdaq, as the case may be.
Year Ended December 31, 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
January 1 through February 29, 2008
High
Low
$23.76
$32.19
$30.13
$25.31
$22.74
$23.86
$23.97
$26.60
$21.84
$15.39
$22.00
$16.67
$19.54
$17.42
$18.90
$18.64
$20.45
$19.65
On February 29, 2008, there were approximately 1,250 holders of record of our common stock.
Dividend Policy. We have never paid any cash dividends on our common stock. For the foreseeable
future, we intend to retain any earnings in our business, and we do not anticipate paying any cash
dividends. Whether or not we declare any dividends will be at the discretion of the Board of
Directors considering then-existing conditions, including the Company's financial condition and
results of operations, capital requirements, bonding prospects, contractual restrictions (including
those under the Company's Credit Facility) business prospects and other factors that our Board of
Directors considers relevant.
- 19 -
Equity Compensation Plan Information. Certain information about the Company's equity
compensation plans is set forth in Item 12. — Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
Performance Graph. The following graph compares the percentage change in the Company's
cumulative total stockholder return on its common stock for the last five years with the Dow Jones
US Total Market Index, a broad market index, and the Dow Jones US Heavy Construction Index, a
group of companies whose marketing strategy is focused on a limited product line, such as civil
construction. Both indices are published in The Wall Street Journal.
The returns are calculated assuming that an investment with a value of $100 was made in the
Company's common stock and in each index at the end of 2002 and that all dividends were
reinvested in additional shares of common stock; however, the Company has paid no dividends
during the periods shown. The graph lines merely connect the measuring dates and do not reflect
fluctuations between those dates. The stock performance shown on the graph is not intended to be
indicative of future stock performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sterling Construction Company, Inc, The Dow Jones US Index
And The Dow Jones US Heavy Construction Index
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
12/02
12/03
12/04
12/05
12/06
12/07
Sterling Construction Company, Inc
Dow Jones US
Dow Jones US Heavy Construction
* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.
Sterling Construction Company, Inc
Dow Jones US
Dow Jones US Heavy Construction
December
2002
100.00
100.00
100.00
December
2003
258.86
130.75
136.41
December
2004
296.57
146.45
165.42
December
2005
961.71
155.72
239.03
December
2006
1,243.43
179.96
298.17
December
2007
1,246.86
190.77
566.39
- 20 -
Item 6. Selected Financial Data.
The following table sets forth selected financial and other data of the Company and its subsidiaries
and should be read in conjunction with both Item 7. —Management’s Discussion and Analysis of
Financial Condition and Results of Operations, which follows, and Item 8. — Financial Statements
and Supplementary Data.
Year Ended December 31
Operating Results:
Revenues
Income from continuing
operations before income taxes and
minority interest
Minority interest
Income tax (expense)/benefit
Income from continuing operations
Income (loss) from discontinued operations,
including gain on sale in 2006
Net income
Basic and diluted per share amounts:
Basic earnings per share from
continuing operations
Basic earnings per share from
discontinued operations
Basic earnings per share
Diluted earnings per share from
continuing operations
Diluted earnings per share from
discontinued operations
Diluted earnings per share
2007
2006
2005
(Amounts in thousands except per-share data)
2004
2003
$306,220
$249,348
$219,439 $132,478
$149,006
22,421
(62)
(7,890)
14,469
19,204
--
(6,566)
12,638
13,329
--
(2,788)
10,541
4,109
(962)
2,134
5,281
(25)
$14,444
682
$13,320
559
$11,100
372
$5,653
8,583
(1,627)
(1,752)
5,204
215
$5,419
$1.31
$1.19
$1.36
$0.99
$1.02
--
$1.31
$0.06
$1.25
$0.07
$1.43
7,775
$0.07
$1.06
5,343
$0.04
$1.06
5,090
$1.22
$1.08
$1.11
$0.75
$0.80
--
$1.22
$0.06
$1.14
$0.05
$1.16
9,538
$0.05
$0.80
7,028
$0.03
$0.83
6,489
Basic weighted average shares outstanding
11,044
10,583
Diluted weighted average shares outstanding
11,836
11,714
Cash dividends declared
—
—
—
—
—
Balance Sheet:
Total assets
Long-term debt
Book value per share of outstanding
common stock
$274,515
65,556
$167,772
30,659
$118,455
14,570
$89,544
21,979
$75,578
19,992
$10.66
$8.37
$5.95
$4.77
$3.24
Equity
Shares outstanding
138,612
13,007
90,991
10,875
48,612
8,165
35,208
7,379
16,636
5,140
In January 2006 the Company completed a public offering of approximately 2.0 million shares of its
common stock at $15.00 per share. The Company received proceeds, net of underwriting
commissions, of approximately $28.0 million ($13.95 per share) and paid approximately $907,000 in
related offering expenses. In addition, the Company received approximately $484,000 from the
- 21 -
exercise of warrants and options to purchase 321,758 shares. These shares were sold by the option
and warrant holders in the offering. From the proceeds of the offering, the Company repaid all its
outstanding related party promissory notes in January 2006. Executive management, directors and
former directors received proceeds as follows:
Name
Patrick T. Manning
Principal
318,592
$
Interest Total Payment
2,867
321,459
$
James D. Manning
$ 1,855,349
16,698
$ 1,872,047
Joseph P. Harper, Sr.
$ 2,637,422
23,737
$ 2,661,159
Maarten D. Hemsley
Robert M. Davies
$
$
181,205
1,631
452,909
4,076
$
$
182,836
456,985
During 2006, the Company utilized part of the offering proceeds to purchase additional capital
equipment for the construction business, to replenish funds that had been used for the 2006
acquisition of a drill shaft business.
In December 2007, the Company completed an additional public offering of 1.84 million shares of its
common stock at $20.00 per share. The Company received proceeds, net of underwriting
commissions, of approximately $35.0 million ($19.00 per share) and paid approximately $0.5 million
in related offering expenses. A reconciliation of the use of proceeds through December 31, 2007 is
as follows (in thousands, except share data) (unaudited):
Shares issued upon completion of equity offering
Proceeds received from sale of shares
Less:
Underwriters’ commission
Expenses (legal, printing, etc.)
Net proceeds from sale of shares
Use of proceeds:
Repayment of credit line at a bank
Purchase of short term securities (1)
Total spent through December 31, 2007
Balance retained in working capital
1,840,000
$36,800
($1,840)
($471)
$34,489
$4,951
$24,708
$29,659
$4,830
(1) Between the purchase date of RHB and the 2007 public offering of stock, the Company used the
proceeds from the sale of its investments in short-term securities to pay off the Credit Facility
borrowings of $22.4 million used to purchase RHB. The proceeds of the public stock offering were used
to replenish the investment in short-term securities.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Overview.
For an overview of the Company's business and its associated risks, see Item 1. Business and Item
1A. Risk Factors.
Critical Accounting Policies.
Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial
Statements for the year ended December 31, 2007.
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
- 22 -
revenues and expenses during the reporting period. Our business involves making significant
estimates and assumptions in the normal course of business relating to our contracts due to, among
other things, the one-of-a-kind nature of most of our contracts, the long-term duration of our contract
cycle and the type of contract utilized. Therefore, management believes that “Revenue Recognition”
is the most important and critical accounting policy. The most significant estimates with regard to
these financial statements relate to the estimating of total forecasted construction contract revenues,
costs and profits in accordance with accounting for long-term contracts. Actual results could differ
from these estimates and such differences could be material.
Our estimates of contract revenue and cost are highly detailed. We believe, based on our experience,
that our current systems of management and accounting controls allow management to produce
reliable estimates of total contract revenue and cost during any accounting period. However, many
factors can and do change during a contract performance period, which can result in a change to
contract profitability from one financial reporting period to another. Some of the factors that can
change the estimate of total contract revenue, cost and profit include differing site conditions (to the
extent that contract remedies are unavailable), the failure of major material suppliers to deliver on
time, the performance of subcontractors, unusual weather conditions, our productivity and efficient
use of labor and equipment and the accuracy of the original bid estimate. Because we have a large
number of contracts in process at any given time, these changes in estimates can sometimes offset
each other without affecting overall profitability. However, significant changes in cost estimates on
larger, more complex projects can have a material impact on our financial statements and are
reflected in our results of operations when they become known.
When recording revenue from change orders on contracts that have been approved as to scope but
not price, we include in revenue an amount equal to the amount that we currently expect to recover
from customers in relation to costs incurred by us for changes in contract specifications or designs, or
other unanticipated additional costs. Revenue relating to change order claims is recognized only if it
is probable that the revenue will be realized. When determining the likelihood of eventual recovery,
we consider such factors as evaluation of entitlement, settlements reached to date and our experience
with the customer. When new facts become known, an adjustment to the estimated recovery is made
and reflected in the current period results.
Revenue Recognition.
The majority of our contracts with our customers are “fixed unit price.” Under such contracts, we are
committed to providing materials or services required by a contract at fixed unit prices (for example,
dollars per cubic yard of concrete poured or per cubic yard of earth excavated). To minimize
increases in the material prices and subcontracting costs used in submitting bids, we obtain firm
quotations from our suppliers and subcontractors. After we are advised that our bid is the winning
bid, we enter into firm contracts with our materials suppliers and sub-contractors, thereby mitigating
the risk of future price variations affecting those contract costs. Such quotations do not include any
quantity guarantees, and we therefore have no obligation for materials or subcontract services beyond
those required to complete the respective contracts that we are awarded for which quotations have
been provided. The principal remaining risks under fixed price contracts relate to labor and
equipment costs and productivity levels. As a result, we have rarely been exposed to material price
or availability risk on contracts in our contract backlog. Most of our state and municipal contracts
provide for termination of the contract for the convenience of the owner, with provisions to pay us
only for work performed through the date of termination.
We use the percentage of completion accounting method for construction contracts in accordance
with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue and
earnings on construction contracts are recognized on the percentage of completion method in the
ratio of costs incurred to estimated final costs. Revenue is recognized as costs are incurred in an
amount equal to cost plus the related expected profit. Contract cost consists of direct costs on
- 23 -
contracts, including labor and materials, amounts payable to subcontractors and equipment expense
(primarily depreciation, fuel, maintenance and repairs). Depreciation is computed using the straight-
line method for construction equipment. Contract cost is recorded as incurred, and revisions in
contract revenue and cost estimates are reflected in the accounting period when known.
The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of
our estimates of the cost to finish uncompleted contracts. Our cost estimates for all of our significant
contracts use a highly detailed “bottom up” approach, and we believe our experience allows us to
produce reliable estimates. However, our contracts can be highly complex, and in almost every case,
the profit margin estimates for a contract will either increase or decrease to some extent from the
amount that was originally estimated at the time of bid. Because we have a large number of contracts
of varying levels of size and complexity in process at any given time, these changes in estimates can
sometimes offset each other without materially impacting our overall profitability. However, large
changes in revenue or cost estimates can have a more significant effect on profitability.
There are a number of factors that can contribute to changes in estimates of contract cost and
profitability. The most significant of these include the completeness and accuracy of the original bid,
recognition of costs associated with scope changes, extended overhead due to customer-related and
weather-related delays, subcontractor performance issues, site conditions that differ from those
assumed in the original bid (to the extent contract remedies are unavailable), the availability and skill
level of workers in the geographic location of the contract and changes in the availability and
proximity of materials. The foregoing factors, as well as the stage of completion of contracts in
process and the mix of contracts at different margins, may cause fluctuations in gross profit between
periods, and these fluctuations may be significant.
Valuation of Long-Term Assets.
Long-lived assets, which include property, equipment and acquired identifiable intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment evaluations involve management estimates
of useful asset lives and future cash flows. Actual useful lives and cash flows could be different from
those estimated by management, and this could have a material effect on operating results and
financial position. In addition, we had goodwill with a value of approximately $57 million at
December 31, 2007, which must be reviewed for impairment at least annually in accordance with
Statement of Financial Accounting Standards No. 142, or SFAS 142. The impairment testing
required by SFAS 142 requires considerable judgment, and an impairment charge may be required in
the future. We completed our annual impairment review for goodwill during the 4th quarter of 2007,
and it did not result in an impairment.
Income Taxes.
Deferred tax assets and liabilities are recognized based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and, where necessary, establish a valuation allowance.
Reflecting management’s assessment of expected future operating profitability and expectation that
the Company would utilize all remaining net operating loss carry forwards ("NOLs"), we eliminated
our valuation allowance in 2005. We are subject to the alternative minimum tax (AMT). Because we
are still utilizing our NOLs to offset taxable income, payment of AMT results in a reduction of our
deferred tax liability.
An ownership change, which may occur if there is a transfer of ownership exceeding 50% of our
outstanding shares of common stock in any three-year period, may lead to a limitation in the usability
of, or a potential loss of some or all of, the NOLs. In order to reduce the likelihood of an ownership
change occurring, our restated and amended certificate of incorporation, as amended, prohibits
transfers of our common stock resulting in, or increasing, individual holdings in excess of 4.5% of
our common stock, unless such transfer is made by us or with the consent of our board of directors.
- 24 -
Because the regulations governing NOLs are highly complex and may be changed from time to time,
and because our attempts to prevent an ownership change from occurring may not be successful, the
NOLs could be limited or lost. We believe that the NOLs are currently available in full, however, and
intend to take all reasonable and appropriate steps to ensure that they will remain available. To the
extent the NOLs become unavailable to us, our future taxable income and that of any consolidated
affiliate will be subject to federal taxation, thus reducing funds otherwise available for corporate
purposes.
Although our NOLs do not expire until 2020, if unused, we estimate that our deferred tax assets
related to our NOLs will be fully utilized during 2007. After the expiration or utilization of our
NOLs, we have available to us the excess tax benefit resulting from exercise of a significant number
of non-qualified in-the-money options amounting to $1.3 million as of December 31, 2007.
Accordingly, because we will no longer have the significant offsets provided by the NOLs, a
comparison of our future cash flows to our historic cash flows may not be meaningful.
On January 1, 2007, we adopted the provisions of Financial Interpretation No. 48, (FIN 48) which
establishes the criteria that an individual tax position must meet for some or all of the benefits of that
position to be recorded. Adoption of FIN 48 did not have a material impact on our consolidated
financial statements.
Discontinued Operations.
In August 2005, our board of directors authorized management to sell our distribution business. In
accordance with the provisions of SFAS 144, we determined in the third quarter of 2005 that the
distribution business became a long-lived asset held for sale and a discontinued operation. In
October 2006, we sold the distribution business to an industry-related buyer for gross proceeds of
approximately $5.4 million. We recognized a pre-tax gain on the sale in 2006 of approximately
$249,000, equal to $121,000 after taxes.
Results of Operations.
Fiscal Year Ended December 31, 2007 (2007) Compared with Fiscal Year Ended December 31,
2006 (2006).
2007
2006
% Change
Revenues
Gross profit
Gross margin
General and administrative expenses, net
Other income
Operating income
Operating margin
Interest income
Interest expense
Minority Interest
Income from continuing operations before taxes
Income taxes
Net income from continuing operations
Net income (loss) from discontinued operations,
including
gain on sale
Net income
Contract backlog, end of year
(Dollar amounts in thousands)
$ 306,220
33,686
11.0%
(13,206)
549
21,029
$ 249,348
28,547
11.4%
(10,825)
276
17,998
6.9%
7.2%
1,669
(278)
(62)
22,359
7,890
14,469
1,426
(220)
--
19,204
6,566
12,638
22.8%
18.0%
(3.5)%
22.0%
98.9%
16.8%
(4.2)%
17.0%
26.5%
100.0%
16.4%
20.2%
14.5%
(25)
682
(103.7)%
$ 14,444
$ 450,000
$ 13,320
$ 395,000
8.4%
13.9%
- 25 -
Revenues. Revenues increased $57 million, or 23%, from 2006 to 2007 reflecting the effect of
continued expansion of our construction fleet, addition of a concrete plant and addition of crews.
Our workforce grew by 18% year-over-year, and we purchased over $36 million in property, plant
and equipment, including that acquired in the purchase of RHB, within the twelve month period
ending December 31, 2007. The increased revenue came strictly from the state market resulting from
the Company being the successful low bidder in the state market which was assisted by an improved
bidding climate in 2006 due to a large state highway program and increased total funding in the
Dallas and Houston areas. The improvement in the weather in the fourth quarter 2007 offset much of
the lower than expected revenue of the first three quarters of 2007 due to heavy rainfall during those
months. Due to seasonality of the Nevada market, the contracts of RHB had only a modest effect on
revenues for the two months they were included in 2007 revenues. Contract receivables are directly
related to revenues and include both amount currently due and retainage. The increase of $11.6
million in contracts receivable to $54.4 million at December 31, 2007 versus 2006 is due to the
increase in revenue for the year 2007. The days revenue in contract receivables is approximately 64
days and 62 days at December 31, 2007 and 2006, respectively.
Gross Profit. The improvement in gross profits in 2007 was due principally to the increase in
revenues. The slight margin reduction was attributable to a decrease of margin in backlog, due to
poor weather for the first three quarters of the year, and an increase in sales from the state contracts
which have historically had lower gross margin than municipal contracts. State highway contracts
generally allow us to achieve greater revenue and gross profit production from our equipment and
work crews, although on average the gross margins on this work tend to be slightly lower than on our
water infrastructure contracts in the municipal markets. The lower margins reflect proportionally
larger material inputs in the state contracts as we typically receive lower margins on materials than
on labor. Partially offsetting the margin reduction was our ability to continue to redesign some jobs,
achieve incentive awards and maintain good execution levels during dry weather. Due to the large
number of contracts in different stages of completion and in different locations, it is not practical to
quantify the impact of each of these matters on revenues and gross profit.
Contract Backlog. The increase in contract backlog is related to the Nevada acquisition where
backlog was $116 million at December 31, 2007. There was $16 million included in our 2007 year-
end backlog on which we were the apparent low bidder and have subsequently been officially
awarded these contracts. Historically, subsequent non-awards of such low bids have not materially
affected our backlog or financial condition.
General and Administrative Expenses, Net of Other Income and Expense. The increase in general
and administrative expenses, or G&A, in 2007 was principally due to higher employee expenses,
including an increase in staff, and higher professional fees. Despite these increases in G&A expenses
in support of our growing business, our ratio of G&A expenses to revenue remained essentially
unchanged from 2006 to 2007, at 4%.
Operating Income. The 2007 increase in operating income resulted principally from the higher
revenues and gross profits as discussed above.
Interest Income Net of Interest Expense. The interest income net of interest expense remained
virtually unchanged from 2006 to 2007 given the high cash and short term investments maintained
throughout the year and the offering completed in December 2007. A total of $53,000 of interest
expense was capitalized as part of our office and shop expansion.
Minority Interest. As discussed in Part I, Item 1. Business, on October 31, 2007, the Company
acquired a 91.67% interest in RHB. The minority interest's share of RHB's income before income
taxes was $62,000 for the two months ended December 31, 2007 that was included in the
consolidated results of operations.
Income Taxes. Income taxes increased due to increased income, the Texas margin tax and increases
in the statutory tax rate.
- 26 -
Net Income from Continuing Operations. The 2007 increase in net income from continuing
operations was the result of the various factors discussed above.
Discontinued Operations, Net of Tax. Discontinued operations for 2007 and 2006 represent the
results of operations of our distribution business, which was operated by Steel City Products, LLC.
The distribution business was sold on October 27, 2006. The Company recorded proceeds from the
sale of approximately $5.4 million and recorded a pre-tax gain on the sale of approximately $249,000
and recorded $128,000 in income tax expense related to that gain in 2006.
Fiscal Year Ended December 31, 2006 (2006) Compared with Fiscal Year Ended December 31,
2005 (2005).
Revenues
Gross profit
Gross margin
2006
2005
% Change
(Dollar amounts in thousands)
$ 249,348 $ 219,439
13.6 %
28,547 23,756
20.2 %
11.4 %
10.8 %
5.6 %
General and administrative expenses and other
10,549
9,091
15.0 %
Operating income
Operating margin
Interest income
Interest expense
17,998 14,665
22.7 %
7.2 %
6.7 %
7.5 %
1,426
150 850.6 %
220
1,486
(85.2 )%
Income from continuing operations before taxes
19,204 13,329
44.1 %
Income taxes
6,566
2,788 135.5 %
Net income from continuing operations
12,638 10,541
19.9 %
Net income from discontinued operations, including gain on sale
682
559
22.0 %
Net income
Backlog, end of year
$ 13,320 $ 11,100
20.0 %
$ 395,000 $ 307,000
28.7 %
Revenues. Our revenue increase of $29.9 million, or 14%, from 2005 to 2006 included a substantial
increase in revenues from state highway work of $89.0 million, or 114%, to $166.3 million as we
took advantage of the very strong bidding climate in this sector and the resultant increase in the
proportion of state highway contracts in our backlog. In particular, we saw a near-tripling of revenues
in the Dallas market, where we won several major contracts in early 2006, and also good growth in
the San Antonio market. State highway contracts generally allow us to achieve greater revenue and
gross profit production from our equipment and work crews, although on average the gross margins
on this work are slightly lower than on our water infrastructure contracts in the municipal markets
because of the cost of larger material inputs into the state contracts.
At the same time there was a decrease in our municipal revenues of $59.0 million, or 41.5%, to
$83 million due to a decrease in the market for large diameter water line infrastructure construction.
The overall revenue expansion was facilitated by an increase of over two hundred employees in
2006, and a significant increase in our equipment fleet. The increase was achieved despite a generally
wetter year in 2006 in most of our markets than in 2005, which adversely affected production rates,
and the impact of some significant delays in starting certain contracts in the first three quarters of
2006, which were due to factors outside our control.
- 27 -
Gross Profit. The improvement in gross profits in 2006 was due principally to the increase in
revenues, combined with the higher gross margins. This margin improvement was attributable
principally to a better margin mix in backlog resulting from the improved bidding climate since
2004, and to efficiencies resulting from the higher revenue levels achieved in 2006. These factors
overcame the negative impact on gross margins of the wetter weather in 2006 and the delay in
starting certain contracts, as described above. They also helped offset the downward pressure on
gross margins arising from the increased percentage of state highway work, from 39% in 2005 to
67% in 2006. In both years, we achieved a number of incentive awards upon the successful
completion of contract milestones.
Backlog. The $88 million increase in backlog in 2006 reflected the on-going broadening of our
service platform and the generally good bidding environment in our markets, especially in the
Dallas/Fort Worth area where our backlog expanded significantly during the year.
General and Administrative Expenses, Net of Other Income and Expense. The increase in general and
administrative expenses, or G&A, in 2006 was principally due to higher employee expenses,
including an increase in staff, increased stock-based compensation expense resulting from our higher
share price in 2006, and higher legal and accounting fees. Despite these increases in G&A expenses
in support of the growing business, our ratio of G&A expenses to revenue remained essentially
unchanged from 2005 to 2006, at 4%.
Operating Income. The 2006 increase in operating income resulted principally from the higher
revenues and gross profits, which led to an increase in operating margin from 6.7% to 7.2%.
Interest Expense Net of Interest Income. In 2006, we invested cash raised in our public stock offering
on which we earned over $1.4 million of interest. In 2005, we paid $1.5 million of interest expense
primarily on related party debt which was repaid in January 2006 from the proceeds of our public
offering.
Income Taxes. In 2005, we recorded a reduction in the valuation allowance related to the deferred tax
asset following management’s review of the likelihood that tax loss carryforwards would be
substantially utilized in the future. This resulted in an effective tax rate of 21% in 2005. In 2006, we
recorded a more normal tax charge at 34.2% of income.
Net Income From Continuing Operations. The 2006 increase in net income from continuing
operations was the result of the various factors discussed above.
Effect of Income Tax Benefits. Although we have had the benefit of significant NOLs, which offset
most of our income from federal income taxes, we are required to reflect a full tax charge in our
financial statements through an adjustment to the deferred tax asset. In addition, certain adjustments
resulting from our recovery of the deferred tax asset are recorded in the income statement. Those
adjustments resulted in a benefit of $1.4 million in 2005. Assuming an income tax rate of 34%, and
disregarding adjustments to our deferred tax asset and other timing differences, net income would
have been $8.797 million for 2005 so that, on a comparative basis, the income from continuing
operations level of $12.675 million for 2006 represents an increase of approximately 44%. Similarly,
basic and fully diluted earnings from continuing operations per common share for 2005, reflecting an
effective tax rate of 34%, would have been $1.13 and $0.92, respectively, for 2005. A reconciliation
of reported income from continuing operations for 2006 and 2005 to net income as if a 34% tax rate
had been applied is set forth in the table below.
- 28 -
2006
2005
(Amounts in thousands,
except per share data)
Income from continuing operations before income taxes, as reported
Provision for income taxes (assuming a 34% effective rate)
$ 19,204 $ 13,329
6,529
4,532
Net income from continuing operations as if a 34% rate had been applied
$ 12,675 $ 8,797
Basic income from continuing operations per common share as if a 34% effective tax rate
had been applied
$
1.20 $
1.13
Diluted income from continuing operations per common share as if a 34% effective tax rate
had been applied
$
1.08 $
0.92
Discontinued Operations, Net of Tax. Discontinued operations for 2006 and 2005 represent the
results of operations of our distribution business, which was operated by Steel City Products, LLC.
The increase in the net income from discontinued operations was primarily due to increases in gross
margins from 16% in 2005 to 16.5% in 2006 through the date of sale.
The distribution business was sold on October 27, 2006. We recorded proceeds from the sale of
approximately $5.4 million and paid $3.8 million to retire the Steel City Products, LLC revolving
line of credit. We recorded a pre-tax gain on the sale of $249,000 and recorded $128,000 in income
tax expense related to that gain.
Historical Cash Flows.
The following table sets forth information about our cash flows for the years ended December 31,
2007, 2006 and 2005.
Year Ended December 31,
2007
2006
2005
(Amounts in thousands)
$ 28,466
$ 22,267
$ 80,649
29,567
23,089
(47,935)
(52,358)
70,576
35,468
31,266
(10,972)
(1,476)
(25)
--
--
495
4,739
(5,357)
(294)
--
349
26,319
24,849
82,063
62,874
11,392
18,354
Cash and cash equivalents (at end of period)
Net cash provided by (used in)
Continuing operations:
Operating activities
Investing activities
Financing activities
Discontinued operations
Operating activities
Investing activities
Financing activities
Supplementary information:
Capital expenditures
Working capital (at end of period)
- 29 -
Operating Activities.
Significant non-cash items included in operating activities were:
• depreciation and amortization, which totaled $9.5 million, an increase of $2.5 million from
2006, which was $7.0 million, an increase of $2.0 million over 2005, as a result of the
continued increase in the size of our construction fleet;
• deferred tax expense was $6.6 million in 2007, an increase of $0.3 million over 2006. We
accelerate the depreciation of our fixed assets for tax purposes. The significant additions to
fixed assets in 2007 and 2006 increased our deferred tax liability and certain other timing
differences are recorded in the income statement. Such tax expense in 2006 increased $3.7
million over 2005 due to the increased depreciation and a reduction in the valuation allowance
related to the deferred tax asset.
Significant components of the changes in working capital are as follows:
• contracts receivable increased by $6.6 million in 2007 and $7.9 million in 2006, principally
reflecting the revenue increase and related level of customer retentions;
• billings in excess of costs and estimated earnings on uncompleted contracts increased by $0.6
million in 2007, while in 2006 there was an increase of $7.9 million. These changes
principally reflect fluctuations in the timing and amount of mobilization payments to assist in
the start-up on certain contracts;
•
•
trade payables increased by $6.1 million in 2007 compared with a decrease of $3.0 million in
2006, reflecting an increase in our volume of business; and
there was a decrease of $0.6 million in costs and estimated earnings in excess of billings on
uncompleted contracts in 2007 compared with an increase of $1.0 million in 2006. These
changes reflect timing differences as contracts progress.
Investing Activities.
Expenditures to expand our construction fleet were $26.3 million in 2007 compared with $24.8
million in 2006. The much enlarged contract backlog required a significant expansion and upgrade
of our fleet in 2007 and 2006. Additionally, in October 2007, we purchased a 91.67% interest in
RHB which we acquired for $53.0 million in order to expand our construction operations into
Nevada. In connection with the acquisition, we incurred $1.1 million of direct costs of the
acquisition. In January 2006, we purchased certain assets of Rathole Drilling, Inc. for $2.2 million
also in order to expand our construction capabilities. In 2007 and 2006, we invested a portion of the
funds raised in our public sale of common stock in cash and cash equivalents and short-term auction-
rate securities, respectively.
Financing Activities.
The increase in cash provided by financing activities in 2007 and 2006 was principally due to the sale
of common stock to the public in December 2007 and January 2006, in which our net proceeds were
approximately $34.5 million and $27.0 million, respectively. In addition, we received proceeds of
approximately $513,000 and $913,000 in 2007 and 2006, respectively, from the exercise of stock
options and warrants. Funds received from the exercise of warrants by North Atlantic Smaller
Companies Investment Trust plc, or NASCIT, and the exercise of options by employees and directors
totaled $0.8 million during 2005. In 2006 and 2005 we used approximately $8.6 million and $2.8
million, respectively, to pay long-term debt, which included payments on notes to related parties in
2006 and 2005. During 2007, 2006 and 2005, there were net increases in borrowings under the lines
of credit of $35.0 million, $16.2 million and $0.5 million, respectively, because capital expenditures,
long-term debt repayments and working capital requirements exceeded cash provided by operations.
- 30 -
Liquidity.
The level of working capital for our construction business varies due to fluctuations in the levels of
costs and estimated earnings in excess of billings, billings in excess of cost and estimated earnings,
the size and status of contract mobilization payments, levels of customer receivables and contract
retentions, and the level of amounts owed to suppliers and subcontractors. Some of these
fluctuations can be significant. The significant increase in our working capital level in 2007 and
2006 has been an important element in enabling us to expand our bonding facilities and therefore to
continue to bid on larger and longer-lived projects. The Company believes that it has sufficient
financial resources to fund its requirements for the next twelve months of operations.
Sources of Capital.
In addition to cash provided from operations, we use our revolving lines of credit to finance working
capital needs and capital expenditures.
Lines of Credit.
We have a Credit Facility with Comerica Bank entered into on October 31, 2007 which replaced a
similar $35.0 million revolver that had been renewed in April 2006. The Credit Facility has a
maturity date of October 31, 2012, borrowing capacity of $75.0 million and is secured by all assets of
the Company, other than proceeds and other rights under our construction contracts which are
pledged to our bond surety. Borrowings under the Credit Facility were used to finance the RHB
acquisition, repay indebtedness outstanding under the Revolver, and finance working capital. At
December 31, 2007, the aggregate borrowings outstanding under the Credit Facility were
$65.0 million, and the aggregate amount of letters of credit outstanding under the new Credit Facility
was $1.5 million, which reduces availability under the Credit Facility.
At our election, the loans under the new Credit Facility bear interest at either a LIBOR-based interest
rate or a prime-based interest rate. The unpaid principal balance of each LIBOR-based loan bears
interest at a variable rate equal to LIBOR plus an amount ranging from 1.25% to 2.25% depending
on the pricing leverage ratio that we achieve. The “pricing leverage ratio” is determined by the ratio
of our average total debt, less cash and cash equivalents, to earnings before interest, taxes,
depreciation and amortization ("EBITDA") that we achieve on a rolling four-quarter basis. The
pricing leverage ratio is measured quarterly. If we achieve a pricing leverage ratio of (a) less than
1.00 to 1.00; (b) equal to or greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or
equal to 1.75 to 1.00, then the applicable LIBOR margins will be 1.25%, 1.75% and 2.25%,
respectively. Interest on LIBOR-based loans is payable at the end of the relevant LIBOR interest
period, which must be one, two, three or six months. The new Credit Facility is subject to our
compliance with certain covenants, including financial covenants relating to fixed charges, leverage,
tangible net worth, asset coverage and consolidated net losses.
The unpaid principal balance of each prime-based loan will bear interest at a variable rate equal to
Comerica’s prime rate plus an amount ranging from 0% to 0.50% depending on the pricing leverage
ratio that we achieve. If we achieve a pricing leverage ratio of (a) less than 1.00 to 1.00; (b) equal to
or greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal to 1.75 to 1.00, then
the applicable prime margins will be 0.0%, 0.25% and 0.50%. The interest rate on funds borrowed
under this revolver during the year ended December 31, 2007 ranged from 7.50% to 7.75%.
In December 2007, Comerica syndicated the Credit Facility with three other financial institutions
under the same terms discussed above.
Management believes that the new Credit Facility will provide adequate funding for the Company’s
working capital, debt service and capital expenditure requirements, including seasonal fluctuations at
least through December 31, 2008.
- 31 -
As discussed above, the Credit Facility contains restrictions on the ability to:
• Make distributions and dividends;
Incur liens and encumbrances;
•
•
Incur further indebtedness;
• Guarantee obligations;
• Dispose of a material portion of assets or merge with a third party;
•
Incur negative income for two consecutive quarters.
The Company was in compliance with all covenants under the Credit Facility as of December 31,
2007.
Other Debt.
Mortgages.
In 2001 we completed the construction of a new headquarters building on land owned by us adjacent
to our equipment repair facility in Houston. The building was financed principally through an
additional mortgage of $1.1 million on the land and facilities at a floating interest rate which at
December 31, 2007 was 7.5% per annum, repayable over 15 years. This mortgage is cross-
collateralized with a prior mortgage on the land and equipment repair facilities, which were
purchased in 1998, in the original amount of $500,000, repayable over 15 years with an interest rate
of 9.3% per annum. In addition, we have available to us a long-term facility of up to $1.5 million
repayable over 15 years to finance the expansion of our office building and maintenance facilities.
Uses of Capital.
Contractual Obligations.
The following table sets forth our fixed, non-cancelable obligations at December 31, 2007.
Payments due by Period
Total
Less Than
One Year
4—5
Years
More Than
5 Years
1—3 Years
(Amounts in thousands)
Credit Facility
Operating leases
Mortgages
$ 65,000 $ —
$
— $ 65,000
$ —
2,999
654
920
98
2,009
220
70
146
—
190
$ 68,653
$ 1,018
$ 2,229 $ 65,216
$ 190
Our obligations for interest are not included in the table above as these amounts vary according to the
levels of debt outstanding at any time. Interest on our Credit Facility is paid monthly and fluctuates
with the balances outstanding during the year, as well as with fluctuations in interest rates. In 2007
interest on the Credit Facility and Revolver was approximately $239,000. The mortgages are
expected to have future annual interest expense payments of approximately $47,200 in less than one
year, $106,700 in one to three years, $43,600 in four to five years and $23,800 for all years
thereafter.
To manage risks of changes in the material prices and subcontracting costs used in submitting bids
for construction contracts, we generally obtain firm quotations from our suppliers and subcontractors
before submitting a bid. These quotations do not include any quantity guarantees, and we have no
obligation for materials or subcontract services beyond those required to complete the contracts that
we are awarded for which quotations have been provided.
Capital Expenditures.
Our capital expenditures during 2007 were $36.0 million, including property, plant and equipment
acquired with the purchase of RHB, and during 2006 were $27.1 million including the purchase of
the RDI equipment, and consisted almost exclusively of expenditures to purchase heavy construction
equipment. In 2008 we expect that our capital expenditure spending will be less than the 2006 level.
- 32 -
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements.
New Accounting Pronouncements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements” (SFAS 157) which establishes a framework for measuring fair value and
requires expanded disclosure about the information used to measure fair value. The statement
applies whenever other statements require or permit assets or liabilities to be measured at fair value,
and does not expand the use of fair value accounting in any new circumstances. In February 2008,
the FASB delayed the effective date by which companies must adopt the provisions of SFAS 157.
The new effective date of SFAS 157 defers implementation to fiscal years beginning after November
15, 2008, and interim periods within those fiscal years. The adoption of this standard is not
anticipated to have a material impact on our financial position, results of operations, or cash flows.
In December 2007, the FASB revised Statement of Accounting Standards No. 141, “Business
Combinations” (SFAS 141(R)). This Statement establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. Also, under SFAS 141(R), all direct costs of the
business combination must be charged to expense on the financial statements of the acquirer at the
time of acquisition. SFAS 141(R), revises previous guidance as to the recording of post-combination
restricting plan costs by requiring the acquirer to record such costs separately from the business
combination. This statement is effective for acquisitions occurring on or after January 1, 2009, with
early adoption not permitted. The effect of SFAS 141 (R) on future financial statements cannot be
determined at this time; however, had this statement been in effect for 2007, the charge of $5.4
million to additional paid-in capital related to the acquisition of RHB would have instead been in the
costs allocated to nets assets acquired, including goodwill, and $1.14 million of direct costs related to
such acquisition would have been charged to expense instead of being included in the costs of the
acquisition.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115” (“SFAS No. 159”). This statement allows a company to irrevocably elect fair
value as a measurement attribute for certain financial assets and financial liabilities with changes in
fair value recognized in the results of operations. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the impact of
adoption on its results of operations and financial position.
In December 2007, the FASB issued Statement of Accounting Standards No. 160, “Non-controlling
Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 clarifies previous guidance
on how consolidated entities should account for and report non-controlling (minority) interests in
consolidated subsidiaries. The statement standardizes the presentation of non-controlling interests
for both the consolidated balance sheet and income statement. The statement also standardizes the
accounting for changes in a parent company’s interest in a subsidiary for situations where the change
results in a deconsolidation and for situations where it does not result in a deconsolidation. This
Statement is effective for our fiscal year ending December 31, 2009, and all interim periods within
that fiscal year, with early adoption not permitted. When this Statement is adopted by the Company,
the Minority Interest in RHB and any similar subsequent acquisitions will be a separate component
of stockholders equity instead of a liability and earnings per common share will be segregated
between EPS per common share and EPS of Minority Interest.
- 33 -
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Changes in interest rates are our primary sources of market risk. At December 31, 2007, $65 million
of our outstanding indebtedness was at floating interest rates. Based on our average debt outstanding
during 2007, we estimate that an increase of 1.0% in the interest rate would have resulted in an
increase in our interest expense of approximately $11,000 in 2007.
Item 8. Financial Statements and Supplementary Data.
Financial statements start on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
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 Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s
management, including the principal executive and principal financial officers, or persons performing
similar functions, as appropriate to all timely decisions regarding required disclosure.
The Company’s principal executive officer and principal financial officer reviewed and evaluated the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure controls and
procedures were effective at December 31, 2007 to ensure that the information required to be
disclosed by the Company in this Annual Report on Form 10-K is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms and is accumulated and communicated to the Company's management including the
principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Management’s Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f)) under the Securities Exchange Act of
1934). Under the supervision and with the participation of the Company’s management, including
the principal executive officer and principal financial officer, the Company conducted an evaluation
of the effectiveness of internal control over financial reporting at December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework. The Company’s
management has concluded that, at December 31, 2007, the Company’s internal control over
financial reporting is effective based on these criteria.
As permitted by guidance provided by the staff of the Securities and Exchange Commission, the
scope of management’s assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007, did not include the internal controls of RHB which are
included in the 2007 consolidated financial statements of Sterling Construction Company, Inc. and
Subsidiaries. We acquired RHB on October 31, 2007 and its business represents approximately 5.6%
and 6.9% of the Company’s total assets and liabilities, respectively, as of December 31, 2007, and
approximately 2.3% and 3.1% of the Company’s total revenues and net income from continuing
operations, respectively, for the year then ended. The Company will include the RHB business in the
scope of management’s assessment of internal control over financial reporting beginning in 2008.
- 34 -
Our internal control over financial reporting has been audited by Grant Thornton LLP, an
independent registered public accounting firm, as stated in their report included herein.
Changes in Internal Control over Financial Reporting.
We maintain a system of internal control over financial reporting that is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States. Based on the most recent evaluation, we have concluded that no significant changes in
our internal control over financial reporting occurred during the last fiscal quarter that have
materially affected or are reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Controls.
Internal control over financial reporting may not prevent or detect all errors and all fraud. Also,
projections of any evaluation of effectiveness of internal control to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Item 9B. Other Information. None
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors. The following table sets forth the name and age of each of the Company's current
directors and the positions each held on February 15, 2008.
Name
Patrick T. Manning
Joseph P. Harper, Sr.
Position
Chairman of the Board of Directors
& Chief Executive Officer
President, Treasurer & Chief
Operating Officer, Director
John D. Abernathy
Robert W. Frickel
Donald P. Fusilli, Jr.
Maarten D. Hemsley
Director
Director
Director
Director
Christopher H. B. Mills
Director
Milton L. Scott
Director
David R. A. Steadman
Director
Age
62
Director
Since
2001
Year
Term of
Office
Expires
2008
62
2001
2008
70
64
56
58
55
51
70
1994
2001
2007
1998
2001
2005
2005
2009
2009
2010
2010
2010
2009
2008
Patrick T. Manning. Mr. Manning joined the predecessor of Texas Sterling Construction Co., the
Company's Texas construction subsidiary, which along with its predecessors is referred to as TSC, in
1971 and led its move from Detroit, Michigan into the Houston market in 1978. He has been TSC’s
President and Chief Executive Officer since 1998 and Chairman of the Board of Directors and Chief
Executive Officer of the Company since July 2001. Mr. Manning has served on a variety of
construction industry committees, including the Gulf Coast Trenchless Association and the Houston
Contractors’ Association, where he served as a member of the board of directors and as President
from 1987 to 1993. He attended Michigan State University from 1969 to 1972.
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Joseph P. Harper, Sr. Mr. Harper has been employed by TSC since 1972. He was Chief Financial
Officer of TSC for approximately 25 years until August 2004, when he became Treasurer of TSC. In
addition to his financial responsibilities, Mr. Harper has performed both estimating and project
management functions. Mr. Harper has been a director and the Company's President and Chief
Operating Officer since July 2001, and in May 2006 was elected Treasurer. Mr. Harper is a certified
public accountant.
John D. Abernathy. Mr. Abernathy was Chief Operating Officer of Patton Boggs LLP, a Washington
D.C. law firm, from January 1995 through May 2004 when he retired. He is also a director of
Par Pharmaceutical Companies, Inc., a New York Stock Exchange-listed company that manufactures
generic and specialty drugs, and Neuro-Hitech, Inc., a development-stage drug company.
Mr. Abernathy is a certified public accountant. In December 2005, Mr. Abernathy was elected Lead
Director by the independent members of the Board of Directors.
Robert W. Frickel. Mr. Frickel is the founder and President of R.W. Frickel Company, P.C., a public
accounting firm that provides audit, tax and consulting services primarily to companies in the
construction industry. Prior to the founding of R.W. Frickel Company in 1974, Mr. Frickel was
employed by Ernst & Ernst. Mr. Frickel is a certified public accountant.
Donald P. Fusilli, Jr. Mr. Fusilli is the Chief Executive Officer of a marine services subsidiary of
David Evans and Associates, Inc., a company that provides underwater mapping and analysis
services. From May 1973 until September 2006, Mr. Fusilli served in a variety of capacities at
Michael Baker Corporation, a public company listed on the American Stock Exchange that provides
a variety of professional engineering services spanning the complete life cycle of infrastructure and
managed asset projects. Mr. Fusilli joined Michael Baker Corporation as an engineer and over the
course of his career rose to president and chief executive officer in April 2001. From September
2006 to January 2008, Mr. Fusilli was an independent consultant providing strategic planning,
marketing development and operations management services. Mr. Fusilli is a director of RTI
International Metals, Inc., a New York Stock Exchange-listed company that is a leading
U.S. producer of titanium mill products and fabricated metal components. He holds a Civil
Engineering degree from Villanova University, a Juris Doctor degree from Duquesne University
School of Law and attended the Advanced Management Program at the Harvard Business School.
Maarten D. Hemsley. Mr. Hemsley served as the Company's President and Chief Operating Officer
from 1988 until 2001, and as Chief Financial Officer from 1998 until August 2007. From January
2001 to May 2002, Mr. Hemsley was also a consultant to, and thereafter has been an employee of, JO
Hambro Capital Management Limited, which is part of JO Hambro Capital Management Group
Limited, or JOHCMG, an investment management company based in the United Kingdom.
Mr. Hemsley has served since 2001 as Fund Manager of JOHCMG’s Leisure & Media Venture
Capital Trust, plc, and since February 2005, as Senior Fund Manager of its Trident Private Equity II
LLP investment fund. Mr. Hemsley is a director of Tech/Ops Sevcon, Inc., a U.S. public company
that manufactures electronic controls for electric vehicles and other equipment, and of a number of
privately-held companies in the United Kingdom. Mr. Hemsley is a Fellow of the Institute of
Chartered Accountants in England and Wales.
Christopher H. B. Mills. Mr. Mills is a director of JOHCMG. Prior to founding JOHCMG in 1993,
Mr. Mills was employed by Montagu Investment Management and its successor company, Invesco
MIM, as an investment manager and director, from 1975 to 1993. He is the Chief Executive of North
Atlantic Smaller Companies Investment Trust plc, which is a part of JOHCMG and a 3.82% holder
of the Company's common stock. Mr. Mills is a director of two U.S. public companies, W-H Energy
Services, Inc., a New York Stock Exchange-listed company that is in the oilfield services industry,
and SunLink Healthcare Systems, Inc., a non-urban community healthcare provider for seven
hospitals and related businesses in four states in the Southwest and Midwest. Mr. Mills also serves
as a director of a number of public and private companies outside of the U.S. in which JOHCMG
funds have investments.
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Milton L. Scott. Mr. Scott is Chairman and Chief Executive Officer of the Tagos Group, a strategic
advisory and services company in supply chain management, transportation and logistics, and
integrated supply. He was previously associated with Complete Energy Holdings, LLC, a company
of which he was Managing Director until January 2006 and which he co-founded in January 2004 to
acquire, own and operate power generation assets in the United States. From March 2003 to January
2004, Mr. Scott was a Managing Director of The StoneCap Group, an entity formed to acquire, own
and operate power generation assets. From October 1999 to November 2002, Mr. Scott served as
Executive Vice President and Chief Administrative Officer at Dynegy Inc., a public company that
was a market leader in power distribution, marketing and trading of gas, power and other
commodities, midstream services and electric distribution. From July 1977 to October 1999,
Mr. Scott was with the Houston office of Arthur Andersen LLP, a public accounting firm, where he
served as partner in charge of the Southwest Region Technology and Communications practice.
Mr. Scott is currently the lead director and chairman of the audit committee of W-H Energy Services.
David R. A. Steadman. Mr. Steadman is President of Atlantic Management Associates, Inc., a
management services and investment group. An engineer by profession, Mr. Steadman served as
Vice President of the Raytheon Company from 1980 until 1987 where he was responsible for
commercial telecommunications and data systems businesses in addition to setting up a corporate
venture capital portfolio. Subsequent to that and until 1989, Mr. Steadman was Chairman and Chief
Executive Officer of GCA Corporation, a manufacturer of semiconductor production equipment.
Mr. Steadman serves as a director of Aavid Thermal Technologies, Inc., a provider of thermal
management solutions for the electronics industry, a privately-held company. Mr. Steadman also
serves as Chairman of Tech/Ops Sevcon, Inc., a public company that manufactures electronic
controls for electric vehicles and other equipment. Mr. Steadman is a Visiting Lecturer in Business
Administration at the Darden School of the University of Virginia.
Executive Officers. In addition to Messrs. Manning and Harper, whose backgrounds are described
above, the following are the Company's other executive officers:
James H. Allen, Jr. Mr. Allen became the Company's Senior Vice President & Chief Financial
Officer in August 2007. He spent approximately 30 years with Arthur Andersen & Co., including
19 years as an audit and business advisory partner and as head of the firm’s Houston office
construction industry practice. After being retired for several years, he became chief financial officer
of a process chemical manufacturer and served in that position for over three years prior to joining
the Company. Mr. Allen is a certified public accountant.
Roger M. Barzun. Mr. Barzun has been the Company's Vice President, Secretary and General
Counsel since August 1991. He was elected a Senior Vice President from May 1994 until July 2001
and again in March 2006. Mr. Barzun has been a lawyer since 1968 and is a member of the bar of
New York and Massachusetts. Mr. Barzun also serves as general counsel to other corporations from
time to time on a part-time basis.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Exchange Act
requires the Company’s officers and directors, and persons who own more than 10% of the
Company’s equity securities, or insiders, to file with the Securities and Exchange Commission (SEC)
reports of beneficial ownership of those securities and certain changes in beneficial ownership on
Forms 3, 4 and 5, and to give the Company a copy of those reports.
Based solely upon a review of Forms 3 and 4 and amendments to them furnished to the Company
during 2007, any Forms 5 and amendments to them furnished to the Company relating to 2007, and
any written representations that no Form 5 is required, all Section 16(a) filing requirements
applicable to the Company’s insiders were satisfied except as follows:
Mr. Fusilli failed to timely file a Form 3, which was required by his election as a director of the
Company on March 14, 2007. His Form 3 was filed with the SEC on April 10, 2007.
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In September 2007, Mr. Hemsley failed to timely file a Form 4 covering sales on September 10
and September 18, 2007 totaling 14,000 shares of the Company's common stock. A Form 4
reporting those sales was filed with the SEC on October 1, 2007.
In August 2007, Mr. Mills shared voting and investment power over 600,000 shares of the
Company's common stock with North Atlantic Smaller Companies Investment Trust plc, or
NASCIT, of which he is chief executive officer. Mr. Mills failed to timely file a Form 4 covering
sales by NASCIT on August 14, 2007 of 200 shares. A Form 4 reporting that sale was filed with
the SEC on August 21, 2007.
Code of Ethics. The Company has adopted a Code of Business Conduct & Ethics that complies with
SEC rules. The Code applies to all the officers and in-house counsel of the Company and its
subsidiaries, and is posted on the Company’s website at www.sterlingconstructionco.com.
The Audit Committee. The Company has a standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee
are John D. Abernathy, Chairman, Donald P. Fusilli, Jr., Milton L. Scott and David R. A. Steadman.
Each of the members of the Audit Committee is an independent director under the independence
standards of both Nasdaq and the SEC. The Board of Directors has determined that each of Messrs.
Abernathy and Scott is an audit committee financial expert. The independent members of the Board
have appointed Mr. Abernathy Lead Director.
Item 11. Executive Compensation.
Introduction.
This Item 11 has two main parts, the first contains information about the compensation of certain
executive officers of the Company and the second contains information about the compensation of
directors who are not also executive officers.
The Company is required under applicable rules and regulations to furnish information about the
compensation of five of its executive officers. Because these executive officers are named in the
Summary Compensation Table for 2007 in this Item 11, they are sometimes referred to as the named
executive officers. The named executive officers are as follows:
Patrick T. Manning, Chairman & Chief Executive Officer
Joseph P. Harper, Sr., President, Treasurer & Chief Operating Officer
Maarten D. Hemsley, Chief Financial Officer (until August 10, 2007)
James H. Allen, Jr., Chief Financial Officer (since August 10, 2007)
Roger M. Barzun, Senior Vice President, Secretary & General Counsel
The compensation of these executives is described and discussed in the subsections listed below:
• The Compensation Discussion and Analysis, which covers how and why executive
compensation was determined.
• The Employment Agreements of Named Executive Officers, which describes the important
terms of the executives' employment agreements.
• The Potential Payments upon Termination and Change-in-Control, which as its name
indicates, describes particular provisions of the executives' employment agreements relating
to the termination of their employment and a change in control of the Company.
• The Summary Compensation Table for 2007, which shows the cash and equity compensation
the Company paid to the named executive officers for 2007.
• The table of Grants of Plan-Based Awards for 2007, which shows details of both equity and
non-equity awards made to the named executive officers for 2007 and describes the plans
under which the Company made those awards.
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• The table of Option Exercises and Stock Vested for 2007, which shows the number of shares
named executive officers purchased under their stock options in 2007 and the dollar value of
the difference between the option exercise price and the market value of the shares on the
date of exercise.
The table of Outstanding Equity Awards at December 31, 2007, which as its name indicates, shows
the stock options held by the named executive officers at year's end and gives other details of their
option awards.
Compensation Discussion and Analysis.
Introduction. This discussion and analysis of executive compensation is designed to show how and
why the compensation of the named executive officers was determined. Their compensation is
determined by the Compensation Committee of the Board of Directors, or the Committee, whose
members are three independent directors of the Company.
During the first half of 2007, the Company compensated Messrs. Manning and Harper under three-
year employment agreements that expired on July 18, 2007, referred to as the prior agreements.
During the second half of 2007, the Company compensated Messrs. Manning and Harper under
employment agreements entered into as of July 19, 2007, referred to as the new agreements. The
Company hired Mr. Allen in July 2007 and has compensated him since then under the terms of his
employment agreement, which contains essentially the same basic terms as those of Messrs. Manning
and Harper except for compensation levels.
Mr. Hemsley's employment agreement was to expire on July 18, 2007 as well, but the Committee
extended its term through October 31, 2007 in order to provide a transition period for Mr. Allen, who
became Chief Financial Officer on August 10, 2007. Following the expiration of Mr. Hemsley's
employment agreement, he ceased to be an employee, but remains a director of the Company.
Compensation Objectives. The Committee's compensation objectives for each of the named
executive officers as well as for other management employees is to provide the employee with a rate
of pay for the work he does that is appropriate in comparison to similar companies in the industry
and that is considered fair by the executive; to give the executive a significant incentive to make the
Company financially successful; and to give him an incentive to remain with the Company.
Employment Agreements. The Company believes that compensating an executive under an
employment agreement has the benefit of assuring the executive of continuity, both as to his
employment and the amounts and elements of his compensation. At the same time, an employment
agreement gives the Company some assurance that the executive will remain with the Company for
the duration of the agreement and enables the Company to budget salary costs over the term of the
agreement. All elements of the compensation of the named executive officers are paid according to
the terms of their employment agreements.
The Prior Agreements. Under the prior agreements, executive compensation has three main
elements: a salary paid in cash, an annual cash incentive bonus, in which payment is contingent on
the Company's financial performance, and a long-term equity element that the Company provides
through the award of options to purchase the Company's common stock.
Elements of Compensation. Salary is intended to reward the executive for his current, day-to-day
work. The cash incentive bonus is intended to be a reward for the executive's contribution to the
financial success of the Company in a given year. Awards of equity are intended to create a longer-
term incentive for the executive to remain with the Company because the benefit is realized, if at all,
over a multi-year period.
Compensation Levels. The Committee based the salary levels under the prior agreements primarily
on the executive's prior salary and his level of responsibility in the Company. Before entering into
the prior agreements, the Committee made a relatively informal review of publicly-available industry
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trade publications to ensure that the executives' compensation fell within the range of comparable
companies, both as to salary and as to incentive compensation.
The amount of the cash incentive bonus for Messrs. Manning, Harper and Hemsley under the prior
agreements is based on the annual budgeted earnings before payment of interest charges, taxes, and
charges for depreciation and amortization, referred to as EBITDA, and the extent to which the budget
is achieved or exceeded.
EBITDA is defined as annual net income determined in accordance with generally accepted
accounting principles —
Interest expense for the period;
Plus
Plus Depreciation and amortization expense for the period;
Plus Federal and state income tax expense incurred for the period;
Plus Extraordinary items (to the extent negative) if any, for the period;
Plus Any and all fees paid to Menai Capital, LLC, and any fees paid to non-employee
directors;
Plus Any and all parent-company charges for corporate overhead or similar non-operating
charges;
Minus Extraordinary items (to the extent positive) if any; and
Minus Interest income for the period.
In the case of Messrs. Manning and Harper, the EBITDA of the Company's operating subsidiary
Texas Sterling Construction Co., or TSC, is used, and in the case of Mr. Hemsley, the EBITDA of
the Company on a consolidated basis is used. The budgeted EBITDA for each year must have been
approved by the Board of Directors, which has a majority of directors who are not employees of the
Company. The cash incentive bonus plan does not have any portion based on the executive's
achievement of personal goals or objectives.
For Messrs. Manning and Harper, the cash incentive bonus plan has a discretionary element that
comes into effect if EBITDA exceeds a predetermined percentage of budgeted EBITDA. In
exercising this discretion, members of the Committee use their personal judgment of appropriate
amounts after taking into account information about the executive's work during the year, his past
compensation, his perceived contribution to the Company generally, his level of responsibility, and
any notable individual achievements or failings in the year in question.
For Mr. Hemsley, any additional cash incentive bonus above that earned upon the achievement of the
budgeted EBITDA target is in the discretion of the Committee. In exercising its discretion, the
Committee takes into account the Company's consolidated financial results, the number of non-
routine business transactions to which Mr. Hemsley devoted substantial time during the year and any
other matters the Committee deems relevant.
The Committee believes that the award of an option to buy the Company's common stock is a long-
term element of compensation because on the date of the award, the exercise price, or purchase price,
of the shares subject to the option is the same as the price of those shares on the open market. Since
the recipient of a stock option will only realize its value if the market price of the shares increases
over the life of the option, the award gives the executive an incentive to remain with the Company.
When the prior employment agreements of Messrs. Manning and Harper were negotiated in July
2004, they each agreed to accept stock option awards over the life of the agreement in place of a
portion of their salary to save the Company cash. To accomplish this, the prior agreements provide
for annual stock option awards that are larger than would otherwise have been made.
Under the prior agreements, the Company paid Messrs. Manning and Harper car allowances to
reflect the fact that they use their own automobiles for business purposes, such as visiting
construction sites, attending meetings with customers and providing transportation to out-of-town
- 40 -
business colleagues. The Company paid their country club dues because the clubs are often used for
business purposes and as accommodation for out-of-town business colleagues. The payment of
Mr. Hemsley's term life insurance and long-term disability insurance premiums is a benefit that the
Company has provided to him for many years and was continued because of that fact.
The New Agreements. In anticipation of the expiration of the prior agreements, in May 2007, the
Committee began a discussion of new employment agreements for Messrs. Manning and Harper.
The Committee's starting point was a written salary and cash incentive bonus proposal from Messrs.
Manning and Harper for themselves and for the five senior managers of TSC. In connection with the
proposal, Messrs. Manning and Harper stressed the importance of a team approach to compensation,
which is designed to avoid the disruptive influence of variations in compensation levels between
managers of equal importance and responsibility. The Committee discussed management's proposal
in the course of several meetings. No member of senior management, including Messrs Manning or
Harper, was present at any of the Committee's deliberations and discussions.
Compensation Principles and Policies. In the course of their discussions, members of the Committee
came to a consensus on the following general compensation principles as a guide for their further
discussion of the compensation of Messrs. Manning, Harper and Allen as well as of the five senior
managers of TSC:
• Compensation should consist of two main elements, base salary and cash incentive bonus for
the reasons discussed above.
• Equity compensation should not be an element of compensation for executives who already
hold a substantial number of shares of the Company's common stock or options to purchase a
substantial number of shares of common stock, or both.
• The cash incentive bonus element of compensation should be divided into two parts: one
part, 60%, of the incentive bonus based on the achievement by the Company, on a
consolidated basis, of financial goals, and the other part, 40%, based on the achievement by
the executive of personal goals and objectives to be established annually by the Committee in
consultation with the executive.
• Perquisites such as car allowances, reimbursement of club dues and the like should not be an
element of compensation because salaries are designed to be sufficient for the executive to
pay these items personally.
• The Committee should determine at the end of each year the extent to which each of Messrs.
Manning, Harper and Allen have achieved his personal goals as provided in the committee’s
charter.
In determining individual compensation levels, the Committee should take into account, among other
things, the following:
• The elimination of stock options as an element of compensation (except for Mr. Allen, who is
a new employee.)
• The executives' existing salaries.
• Salaries of comparable executives in the industry.
• Wage inflation from 2004 through 2007, to the extent applicable.
• The Company's growth since July 2004 when the prior agreements became effective and the
resulting increase in senior management responsibilities.
• The total amount that is appropriate for the Company to allocate to the compensation of all
seven members of the Company's senior management given the Company's size and industry.
• The elimination of perquisites.
- 41 -
Compensation Consultant. To assist them in evaluating management's proposed salary and bonus
structure, in May 2007, the Committee authorized its Chairman to retain the services of Hay Group, a
large firm that performs a number of consulting services, including the benchmarking of executive
compensation. The Committee's Chairman instructed Hay Group to prepare an analysis of the levels
of compensation payable under the prior agreements to Messrs. Manning, Harper and the five senior
managers of TSC, and to compare them to a representative group of similar companies. Mr. Allen
joined the Company in July 2007 just before Hay Group's report was finished and as a result, its
analysis did not cover his compensation.
The peer group was selected by Hay Group in consultation with the Chairman of the Committee and
Messrs. Manning and Harper. The peer group consisted of eight engineering and construction
companies with 2006 revenues of between $85 million and $651 million. The following is a list of
companies in the peer group:
Devcon International Corp.
Furmanite Corporation
Modtech Holdings Inc.
Meadow Valley Corporation
SPARTA, Inc. (Delaware)
Great Lakes Dredge & Dock Company
Insituform Technologies Inc.
Michael Baker Corporation
The Committee determined that although these companies are in different areas of the construction
and engineering industry, they present an appropriate range in size and types of construction-related
businesses to which to compare the Company.
After distributing its report to members of the Committee, two representatives of Hay Group
reviewed its findings in detail at a meeting of the Committee held at the end of July 2007. Hay
Group performed no other services for the Committee. Because of the work it did for the Committee,
the Corporate Governance & Nominating Committee retained Hay Group to do a similar analysis and
report on non-employee director compensation.
The following is a summary of the Hay Group's Executive Compensation Report:
• Except for net income, the Company is at or about the median of the peer group in sales,
assets, market capitalization and number of employees. In total shareholder return, growth in
income before interest and taxes, and return on investment, the Company is ahead of the peer
group.
• The Company's 2006 net income was above the peer group and its stockholders' equity was
135% of the peer-group median.
• Using the peer group, the base salaries of Messrs. Manning and Harper under the prior
agreements were 64% and 81%, of the median, respectively; the sum of their base salaries
and annual incentive awards were 130% and 150% of the median, respectively; and their
total direct compensation (which includes equity compensation) was 86% and 93% of the
median, respectively.
• Using Hay Group's so called national general industry database updated to July 2007, the
prior agreements' base salaries of Messrs. Manning and Harper were below the median, 91%
and 81% respectively, but their total cash compensation was above the median, 144% and
132%, respectively.
- 42 -
These numbers demonstrated to the Committee that it is the financial success of the Company that
causes the total compensation of Messrs. Manning and Harper to be above the median.
Compensation Levels. It was the consensus of the Committee that both the salary and cash incentive
bonus levels of Messrs. Manning and Harper should be significantly above the peer-group median to
reflect the following:
• The Company's excellent, above-median performance in net income and stockholders' equity;
• The growth of the Company since 2004 and the resulting increase in the complexity of the
business; and
• The elimination of equity as an element of compensation.
To account for the elimination of long-standing perquisites, the Committee added $25,000 to the
proposed base salaries of both executives. In addition, the Committee took into account the fact that
under the accounting rules of FAS 123R, the elimination of equity compensation causes the proposed
$3.41 million of total compensation for the seven-person management group consisting of Messrs.
Manning, Harper and the five TSC senior managers, to be below the total of prior years.
Because of management's expressed desire for a team concept of compensation, the Committee
agreed with Messrs. Manning's and Harper's proposal that their salaries and cash incentive bonuses
be the same, reflecting their belief that each has different but equal levels of responsibility and
expertise.
The Committee determined that performance-based compensation should be approximately equal to
base salary after disregarding the $25,000 that represents the elimination of perquisites. In the case
of Mr. Allen, his performance-based compensation when combined with his equity compensation is
approximately 60% of his base salary.
As noted above, Mr. Allen's compensation was not a subject of Hay Group's report because he joined
the Company just before the report was presented. The Committee established his salary based on a
number of factors, including Mr. Allen's thirty years of experience in Houston with a major public
accounting firm, including nineteen years of concentration in the construction industry; his financial
and business experience; the compensation package requested by Mr. Allen; and Committee
members' own judgment of what are reasonable levels of compensation. The Committee granted him
the stock option described above so that like other members of senior management, he would have a
long-term equity interest in the Company. The Committee determined that Mr. Allen would be
compensated under the same form of employment agreement as the one eventually agreed upon with
Messrs. Manning and Harper.
Cash Incentive Bonus Performance Goals. The Committee's first inclination was to have cash
incentive bonuses tied solely to a financial measurement found in the Company's annual financial
statements. Mr. Harper advised the Committee that EBITDA was used in the past as a measure of
financial performance because it was the number on which management believes that its performance
has the most direct effect. Mr. Harper also noted that the threshold for bonus achievement was 75%
instead of 100% of budgeted EBITDA because base salaries were set at a relatively low level, a fact
supported by the Hay Group report. The relatively easily achieved cash incentive bonus together
with base salary was intended to yield fair base compensation, but was also intended to conserve cash
by keeping salaries low in years in which the Company had especially poor financial performance
and did not even achieve 75% of budgeted EBITDA.
The Committee agreed to maintain this concept, but determined that it would be better structured by
revising the base salary arrangements. The Committee divided base salary into two parts; the larger
part to be paid in periodic installments through the payroll system, or base payroll salary, and the
balance to be deferred (base deferred salary) to be paid in a lump sum after year end only if 75% of
budgeted EBITDA is achieved. EBITDA is defined in the new agreements in the same way as in the
prior agreements, described above.
- 43 -
In keeping with its principle of basing 60% of the cash incentive bonus on the achievement of a
financial measurement that can be determined by direct reference to the Company's financial
statements, the Committee decided to use budgeted earnings-per-share in the belief that it is a
measure that most directly affects a stockholder's investment in the Company.
2007 Transition Terms. The new agreements provide that the cash incentive bonuses for 2007 under
the prior agreements and the base deferred salaries under the new agreements are to be prorated
based on the number of days during 2007 that each agreement was in effect. In 2007, the Company
achieved the 75% of budgeted EBITDA goal, so that each of Messrs. Manning and Harper earned a
portion of the cash incentive bonus provided for in the prior agreements and a portion of the base
deferred salary provided for under the new agreements. No such transition terms are applicable to
Mr. Hemsley's bonus. Mr. Allen's base deferred salary is prorated based on the number of days
during 2007 that he was an employee.
The new agreements also provide that cash incentive bonuses for 2007 will be based solely on the
terms of the new agreements. Although the new employment agreements became effective as of July
19, 2007, they were not completed and signed until early January 2008. As a result, no 2007
personal goals and objectives were established for Messrs. Manning, Harper or Allen. In light of
this, the Committee agreed that the award of any or all of the portion of the cash incentive bonus
(40%) that would have been based on the achievement of 2007 personal goals and objectives would
be solely in the discretion of the Committee.
Termination Events. The obligations of the Company under the new employment agreements in the
event of the termination of the employment of the named executive officers or a change in control of
the Company are described in detail in the section entitled Potential Payments Upon Termination
and Change-in-Control, below.
The Committee's principle in setting termination provisions was based on the belief that absent a
termination for cause, an employee should at least receive the base deferred salary and cash incentive
bonus that he would have earned had his employment not terminated, prorated for the portion of the
year that he was an employee. The Committee made an exception to this in the event the executive
voluntarily resigns, in which case the Committee determined that payment of any cash incentive
bonus is not warranted because incentive bonuses in part are designed to encourage the employee to
remain in the Company's employ.
In the event that termination is by the Company without cause or because of an uncured breach by
the Company of the employment agreement, the executive should also receive the benefit of his base
salary for the balance of the term of the agreement, but at least for twelve months.
The Committee did not believe that any special payments should be made to executives in the event
of a change in control of the Company because the protections afforded by their employment
agreements against termination without cause are unaffected by a change in control. The executives'
stock options by their terms vest in full in the event of a change in control. The acceleration of
vesting is based on the assumption that a change in control often results in a change in senior
management. Absent accelerated vesting, a termination without cause after a change in control could
unfairly reduce or eliminate the benefit of a stock option depending on when the change occurs. If
the executive is terminated for cause, all of the executives' stock options immediately terminate.
2007 Cash Bonus and Incentive Awards. In 2007, the Company achieved both its budgeted
EBITDA and its earnings-per-share goals. As a result, each of Messrs. Manning and Harper became
entitled to the prorated portion of his bonus under the prior agreements and his base deferred salary
under the new agreements as well as 60% of the cash incentive bonus under the new agreements. In
the exercise of its discretion, the Committee in February, 2007 awarded each of Messrs. Manning
and Harper the entire 40% balance of their cash incentive bonuses. Although Mr. Allen's
employment agreement provides that for 2007 his maximum base deferred salary and cash incentive
bonus are to be prorated based on the 46% of the year in which he was an employee, the Committee
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nevertheless awarded Mr. Allen two-thirds of his annual base deferred salary and maximum cash
incentive bonus.
In exercising its discretion, the Committee took into account the following 2007 accomplishments by
the Company, in each of which Messrs. Manning, Harper and Allen played a significant role:
•
In spite of adverse weather conditions in 2007, the achievement of budgeted EBITDA and
earnings per share goals;
• The completion of a major acquisition (RHB);
• The completion of a refinancing of the Company's revolving line of credit; and
• The completion of a public offering of 1.8 million shares of the Company's common stock.
The Committee awarded Mr. Barzun a discretionary cash incentive bonus of $75,000 based on the
significant role he also played in the acquisition, the refinancing and the public offering, all of those
transactions being outside his normal duties as General Counsel, and increased his annual salary to
$75,000.
Because the Company in 2007 achieved 75% of EBITDA, the Committee awarded Mr. Hemsley a
cash incentive bonus of $50,000 as provided in his employment agreement.
All cash incentive bonuses, including base deferred salary payments for 2007, are more fully
described in the following sections:
Employment Agreements of Named Executive Officers
Summary Compensation Table for 2007
Grants of Plan-Based Awards for 2007
Employment Agreements of Named Executive Officers.
During 2007, Messrs. Manning, Harper and Hemsley were compensated under similar employment
agreements that expired on July 18, 2007 (the prior agreements) except that in the case of
Mr. Hemsley, the Compensation Committee, or the Committee, extended the expiration date of his
agreement through October 31, 2007, when he ceased to be an employee of the Company. Mr. Allen
became an employee of the Company on July 16, 2007 and was elected Senior Vice President &
Chief Financial Officer effective August 10, 2007.
Effective July 2007, Messrs. Manning, Harper and Allen entered into new employment agreements
with the Company (the new employment agreements). In the case of Messrs. Manning and Harper,
the new agreements became effective with the expiration of their prior agreements.
The Prior Agreements. The following table describes the material financial features of each of the
prior employment agreements.
Base Salary
Threshold Cash Incentive Bonus (1)
Maximum Additional Cash Incentive Bonus (1)
Annual Option Grant (Shares) (2)
Vacation Time
Benefits Paid by the Company (4)
Car Allowance
Country Club Dues
Payment of Commuting Expenses
Mr. Manning Mr. Harper
$215,000
$240,000
Mr. Hemsley
$135,000
$125,000
$125,000
$240,000
$215,000
10,000
10,000
$50,000
$75,000
2,800
(3)
(3)
Not specified
$700/month
$700/month
Yes
Yes
Yes
Yes
- 45 -
No
No
No
Company-Paid Long-Term Disability Insurance
Company-Paid Term Life Insurance
Mr. Manning Mr. Harper
No
No
No
No
Mr. Hemsley
$7,500/month benefit
$100,000 death benefit
(1) This cash incentive bonus was based on the financial performance of TSC for Messrs. Manning and Harper, and
of the Company for Mr. Hemsley. The calculation of the cash incentive bonus and the additional cash incentive
bonus is described below in this Item 11 in footnote (1) to the table of Grants of Plan-Based Awards for 2007.
(2) The terms of these stock options are described below in this Item 11 in footnote (2) to the table of Grants of
Plan-Based Awards for 2007.
(3) Mr. Manning was entitled to eight weeks of vacation per year and Mr. Harper was entitled to 18 weeks of
vacation each year. Mr. Harper could take additional vacation by forfeiting salary at the rate of $4,000 per
week and he could forfeit his vacation time and be paid for it at the rate of $4,000 per week.
(4) For the Company's cost of these benefits in 2007, see footnote (3) of the Summary Compensation Table for
2007, below.
The New Agreements. The new employment agreements of Messrs. Manning, Harper and Allen
became effective in July 2007 and expire on December 31, 2010. The following table describes the
material financial features of each of the new employment agreements.
Mr. Manning
Mr. Harper
Base Salary
Base Deferred Salary
Maximum Incentive Bonus
Equity Compensation
$365,000
$162,500
$162,500
None
$365,000
$162,500
$162,500
None
Vacation
Discretionary (2)
Discretionary (2)
Benefits Paid by the Company
None
None
Mr. Allen
$250,000
$75,000
$75,000
13,707-share stock
option award (1)
5 weeks
None (3)
(1) The terms of this August 7, 2007 stock option are described below in the section entitled Grants of Plan-Based
Awards for 2007.
(2) The executive is entitled to take so many days vacation per year as he believes is appropriate in light of the
needs of the business.
(3) When he joined the Company, the Company, at Mr. Allen's request, agreed that he would continue his then
current health plan rather than participate in the Company's health plan and would be reimbursed for up to
$1,000 of the monthly premiums. This arrangement is less expensive for the Company than if Mr. Allen had
joined the Company's health plan.
Mr. Barzun's Employment Agreement. Mr. Barzun's employment agreement became effective in
March 2006 and continues until terminated by the Company or by Mr. Barzun. His base salary in
2007 under the terms of the employment agreement was $62,500, subject to merit increases, and an
annual cash incentive bonus in the discretion of the Committee. Because he is a part-time employee,
there is no provision in his agreement for paid vacation time.
All of the foregoing agreements provide for the election of the executive to his current positions with
the Company. The new employment agreements of Messrs. Manning, Harper and Allen provide that
they may not compete with the Company after termination of employment for a period of twelve
months or for the period, if any, during which the Company is obligated to continue to pay him his
base payroll salary, whichever period is longer.
Potential Payments upon Termination or Change-in-Control.
The following table describes the payment and other obligations of the Company and the named
executive officers under the new agreements in the event of a termination of employment or a change
- 46 -
in control of the Company. The table also shows the estimated cost to the Company had the
executive's employment been terminated on December 31, 2007.
Patrick T. Manning, Joseph P. Harper, Sr.& James H. Allen, Jr.
Event
Payment and/or Other Obligations *
1. Termination by the Company without
cause (1)
Estimated termination payments:
Messrs. Manning & Harper (each)
The Company must —
• Continue to pay the executive his base salary for the
balance of the term of his employment agreement or for
one year, whichever period is longer;
• Continue to cover him under its medical and dental plans
provided the executive reimburses the Company the
COBRA cost thereof, in which event the Company must
reimburse the amount of the COBRA payments to the
executive; and
• Pay him a portion of any base deferred salary and cash
incentive bonus that he would have earned had he
remained an employee of the Company through the end of
the calendar year in which his employment is terminated,
based on the number of days during the year that he was
an employee of the Company.
$1,095,000 in monthly installments plus COBRA payment
reimbursement, which currently would be approximately
$48,400 for Mr. Manning and $29,200 for Mr. Harper for
the three year period.
Mr. Allen
$786,000 in monthly installments
2. Termination by reason of the
executive's death
The Company is obligated to pay the executive a portion of
any base deferred salary and of any cash incentive bonus
that he would have earned had he remained an employee of
the Company through the end of the calendar year in which
his employment terminated, based on the number of days
during the year that he was an employee of the Company.
Estimated termination payments:
None
3. Termination by the Company for
cause (1)
The Company is required to pay the executive any accrued
but unpaid base payroll salary through the date of
termination and any other legally-required payments
through that date.
All of the executive's stock options terminate.
Estimated termination payments:
None
4. Involuntary resignation of the
executive (2)
An involuntary resignation, also known as a constructive
termination, is treated under the agreement as a termination
by the Company without cause.
Estimated termination payments:
See Event 1, above.
5. Voluntary resignation by the executive The Company is obligated to pay the executive a portion of
any base deferred salary that he would have earned had he
remained an employee of the Company through the end of
the calendar year in which he resigned, based on the number
of days during the year that he was an employee of the
Company.
- 47 -
Event
Payment and/or Other Obligations *
Estimated termination payments:
None
6. A change in control of the Company.
All the executives' unexercisable in-the-money stock
options become exercisable in full and at December 31,
2007, had the following value based upon their market
value at that date less their exercise price:
Mr. Manning
$43,883
Mr. Harper
Mr. Allen
Mr. Barzun
$4,536
$38,791
$3,024
* The base payroll salaries, base deferred salaries and cash incentive bonus eligibility of the executives are set
forth above under the heading Employment Agreements of Named Executive Officers.
(1) The term cause is defined in the employment agreements and means what is commonly referred to as cause in
employment matters, such as gross negligence, dishonesty, insubordination, inadequate performance of
responsibilities after notice and the like. A termination without cause is a termination for any reason other than
for cause, death or voluntary resignation.
(2) The executive is entitled to resign in the event that the Company commits a material breach of a material
provision of his employment agreement and fails to cure the breach within thirty days, or, if the nature of the
breach is one that cannot practicably be cured in thirty days, if the Company fails to diligently and in good faith
commence a cure of the breach within the thirty-day period.
Roger M. Barzun. In the event that Mr. Barzun's employment is terminated for cause, the Company
is only obligated to pay him his salary through the date of termination and his outstanding options
terminate on that date. In the event that his employment is terminated without cause, or by reason of
his death or permanent disability, the Company is obligated to pay him his salary then in effect for a
period of six months, which at December 31, 2007 would be $31,250, and to pay him within thirty
days of his termination a portion of any cash incentive bonus to which he would otherwise have been
entitled had his employment not been terminated, based on the number of days during the year that
he was an employee of the Company. For purposes of determining the amount of the cash incentive
bonus to which he would have been entitled, the Company is required to make such reasonable
assumptions as it determines in good faith. In the event of a change in control of the Company, all of
Mr. Barzun’s options become exercisable in full.
Maarten D. Hemsley. As noted elsewhere in this Item 11, Mr. Hemsley's employment terminated on
October 31, 2007 by reason of his voluntary resignation with the result that no termination payments
were made to him.
Summary Compensation Table for 2007.
The following table sets forth for calendar years 2006 and 2007 all compensation awarded to, earned
by, or paid to, Patrick T. Manning, the Company's principal executive officer; James H. Allen, Jr., its
principal financial officer, who joined the Company on July 16, 2007; and Maarten D. Hemsley, its
former principal financial officer.
The table also shows the same compensation information of Joseph P. Harper, Sr., the Company's
President, Treasurer & Chief Operating Officer, and Roger M. Barzun, its Senior Vice President,
Secretary & General Counsel, who are the only other executive officers whose compensation for
2007 exceeded $100,000.
The Company does not pay Messrs. Manning or Harper additional compensation for service on the
Board of Directors. The Company pays compensation to these executive officers according to the
terms of their employment agreements. The amounts include any compensation that was deferred by
- 48 -
the executive through contributions to his defined contribution plan account under Section 401(k) of
the Internal Revenue Code. All amounts are rounded to the nearest dollar.
Year
2006
2007
Salary
($)
240,000
296,500
Option
Awards (1)
($)
82,883
—
Non-Equity
Incentive Plan
Compensation (2)
($)
All Other
Compensation
($) (3)
341,000
325,000
38,950
31,258
Total
($)
702,833
652,758
2006
2007
235,800*
282,500
82,883
—
318,500
325,000
21,150
14,396
658,333
621,896
2007
115,500
14,553
100,000
865
230,918
2006
2007
129,808
106,500
22,862
27,640
117,500
50,000
12,350
6,823
282,520
190,963
2007
62,500
—
75,000
137,500
Name
and
Principal Position
Patrick T. Manning
Chairman of the Board
& Chief Executive
Officer (principal
executive officer)
Joseph P. Harper, Sr.
President, Treasurer
& Chief Operating
Officer
James H. Allen, Jr.
Senior Vice President
& Chief Financial
Officer (principal
financial officer)
Maarten D. Hemsley
Chief Financial
Officer (former
principal financial
officer)
Roger M. Barzun
Senior Vice President
& General Counsel,
Secretary
* This includes $20,800 paid to Mr. Harper for foregoing approximately five weeks of the vacation he was
entitled to under his prior employment agreement, which expired in July 2007.
(1) The value of these stock option awards is the total dollar cost of the award recognized by the Company in the
year of grant for financial reporting purposes in accordance with FAS 123R. No amounts earned by the
executive officers have been capitalized on the balance sheet for 2007. The cost does not reflect any estimates
made for financial statement reporting purposes of forfeitures by the executive officers related to service-based
vesting conditions.
The valuation of these options was made on the equity valuation assumptions described in Note 8 of Notes to
Consolidated Financial Statements. None of the awards has been forfeited. The following section, entitled
Grants of Plan-Based Awards for 2007, contains a description of the basis on which these stock options were
awarded and their full grant date fair market value.
(2) Cash incentive bonuses were calculated and approved by the Committee in March 2007 and February and
March 2008. The bonuses for 2006 were determined in part by the application of a formula found in the prior
employment agreement of each executive officer and in part by the Committee exercising its discretion as to the
amount of additional cash incentive bonus within the range provided for in his employment agreements.
Footnotes (1) and (2) to the table in the following section, entitled Grants of Plan-Based Awards for 2007,
contain a description of the formula and its application.
(3) The following table shows a breakdown of the amounts shown above in the All Other Compensation column.
The dollar amounts are the costs of the items to the Company.
- 49 -
Type of Other Compensation
Year Mr. Manning Mr. Harper Mr. Hemsley Mr. Allen
Car allowance
Expenses of commuting to work
Country club dues
Company contribution to 401(k) Plan
account
Long-term disability insurance premium
Term life insurance premium
2006
2007
2006
2007
2006
2007
2006
2007
2006
2007
2006
2007
$8,400
$5,000
$2,500
$2,400
$25,000
$15,000
$3,050
$8,858
—
—
—
—
$8,400
$5,000
$1,800
$1,750
$4,500
$3,420
$6,450
$4,226
—
—
—
—
—
—
—
—
—
—
$7,500
$6,407
$4,502
$152
$348
$264
—
—
—
—
—
—
—
$865
—
—
—
—
Grants of Plan-Based Awards for 2007.
The following table shows each grant of an award for 2007 to a named executive officer under a
Company plan. The Company did not award any SAR's, stock, restricted stock, restricted stock
units, or similar instruments to any of the named executive officers in 2007.
Name
Grant
Date
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (1)
($)
Threshold
Patrick T. Manning
7/19/2007
142,156
Joseph P. Harper, Sr.
7/19/2007
142,156
James H. Allen, Jr.
8/7/2007
50,000
Maarten D. Hemsley
7/18/2007
50,000
Roger M. Barzun
75,000
Target
239,656
239,656
50,000
75,000
75,000
Maximum
304,656
304,656
100,000
125,000
75,000
(1) Non-Equity Incentive Plan Awards.
All Other
Option
Awards:
Number of
Securities
Underlying
Options (2)
(#)
Exercise
or Base
Price of
Option
Awards (3)
($/share)
-0-
-0-
13,707
2,800
-0-
N/A
N/A
18.99
21.60
N/A
Grant
Date
Fair
Value of
Option
Awards (4)
($)
N/A
N/A
$172,692
$27,640
N/A
Messrs. Manning and Harper. Under their prior employment agreements, which expired in July
2007, each of Messrs. Manning and Harper is entitled to an annual bonus of $125,000 for any
year in which TSC achieves 75% or more of its budgeted EBITDA, which is a term defined in
their agreements. Under their new employment agreements, which took effect upon the
expiration of their prior employment agreements, each of them is entitled to what is referred to as
a base deferred salary of $162,500 for any year in which the Company, on a consolidated basis,
achieves 75% or more of its budgeted EBITDA. In 2007, both TSC and the Company reached
the 75% EBITDA goal.
The transition terms of the new employment agreements provide for the pro-ration of the prior
agreement's bonus and the new agreement's base deferred salary based on the number of days
during 2007 that each agreement was in effect. As a result of the pro-ration, the Company paid
each executive 54.25% of his bonus under the prior agreement and 45.75% of the base deferred
salary under his new agreement. The sum of these two amounts is the Threshold amount in the
table above.
- 50 -
Under the new agreements, the Company agrees to pay each of Messrs. Manning and Harper a
cash incentive bonus of up to $162,500. Sixty percent of the cash incentive bonus is payable for
a year in which the Company reaches its budgeted earnings-per-share goal, which it did in 2007.
The sum of the Threshold amount and the 60% portion of the cash incentive bonus is the Target
amount in the table above.
Under the same transition terms of the new agreements, the Compensation Committee may pay
the 40% balance of the cash incentive bonus for 2007 is in its sole discretion, which it did. The
sum of the Target amount and the 40% portion of the cash incentive bonus is the Maximum
amount in the table above.
In subsequent years, the 40% portion of the cash incentive bonus will be payable based on the
extent to which the executive achieves his personal goals for the year.
Mr. Allen. Mr. Allen's employment agreement has the same goal for earning a base deferred
salary ($75,000) and a cash incentive bonus ($75,000) as do the new employment agreements of
Messrs. Manning and Harper, except that since Mr. Allen was an employee for slightly less than
half of 2007, his employment agreement provides for the pro-ration of his base deferred salary
and cash incentive bonus based on the 169 days or 46% of 2007 that he was an employee.
As described above in the Compensation Discussion & Analysis, the Compensation Committee
decided to award Mr. Allen two-thirds of his base deferred salary and two-thirds of both the 60%
earnings-per-share portion and the 40% discretionary portion of his cash incentive bonus.
Accordingly, in the table above, the Threshold amount is two-thirds of Mr. Allen's base deferred
salary, the Target amount is the sum of the Threshold amount and two-thirds of the 60% portion
of his cash incentive bonus, and the Maximum amount is the sum of the Target amount and two-
thirds of the 40% portion of his cash incentive bonus.
Mr. Hemsley. Under his employment agreement, which expired by extension on October 31,
2007, Mr. Hemsley is entitled to a cash incentive bonus of $50,000 for any year during the term
of his agreement in which the Company on a consolidated basis achieves 75% or more of its
budgeted EBITDA. He is also eligible for an additional cash incentive bonus not to exceed
$75,000 in the discretion of the Compensation Committee. In exercising their discretion,
members of the Committee are to consider the Company's consolidated financial results for the
year in question, the number of non-routine business transactions to which Mr. Hemsley devoted
substantial time during the year and such other matters as they considered relevant. Accordingly,
the Maximum amount is the sum of the Threshold and the Target amounts.
Mr. Barzun. Mr. Barzun's cash incentive bonus for a given year is entirely in the discretion of the
Committee and is based on the Company's consolidated financial results for the year, the number
of non-routine legal transactions to which he devoted substantial time during the year, and such
other matters as the Committee deems relevant. Accordingly, for Mr. Barzun, his Threshold,
Target and Maximum in the table above is the bonus amount awarded to him for 2007.
(2) Stock Option Awards. The stock option awards in this column were all granted under the
Company's 2001 Stock Incentive Plan. In addition to the vesting dates of these options,
described below, they vest in full if there is a change in control of the Company.
The July 18, 2007 Stock Option Award.
• This stock option was granted to Mr. Hemsley pursuant to the terms of his employment
agreement.
• The option has a five-year term and vests, or becomes exercisable, in full on the date of grant.
• The exercise or purchase price of the shares subject to this option is the closing price of the
common stock on the NASDAQ Global Select Market on the date of grant.
- 51 -
• Had Mr. Hemsley's employment been terminated by the Company for cause, which is defined
in the stock option agreement, or for good cause, which is defined in his employment
agreement, all of his options would have immediately terminated.
• Because his employment terminated upon the expiration of his employment agreement, he
may exercise this stock option from the date it became exercisable through its expiration
date. Mr. Hemsley's employment agreement is described above in the section entitled
Employment Agreements of Named Executive Officers.
The August 7, 2007 Stock Option Award.
• This stock option was awarded by the Committee in the exercise of its discretion in
connection with Mr. Allen's election as Senior Vice President & Chief Financial Officer of
the Company.
• The option has a ten-year term and vests, or becomes exercisable, in three substantially equal
installments on each of the first three anniversaries of the date of the grant.
•
• The exercise price, or purchase price, of the shares subject to this stock option is the closing
price of the Company's common stock on August 7, 2007, which was the date of the meeting
of the Committee at which the stock option was approved.
If Mr. Allen's employment terminates by reason of his permanent disability or death, or if he
dies within three months after he ceases to be an employee, then he, his legal representative,
his estate, or his beneficiaries (depending on the circumstances of the termination) may
exercise the option for a period of one year or until the option's expiration date, whichever
comes first, but only for the number of shares that had become exercisable on the date his
employment terminated.
If Mr. Allen's employment is terminated for cause, which is defined in the option agreement,
the option immediately terminates.
If Mr. Allen's employment terminates for any other reason, he may exercise the option for a
period of ninety days after his employment terminates or until the expiration date of the
option, whichever comes first, but only for the number of shares that had become exercisable
on the date his employment terminated.
•
•
(3) Establishing the Option Exercise Price. It is the Company's policy to use the closing price of
the common stock on the date of the meeting at which a stock option award is approved as the
option's per-share exercise price. In the case of a stock option awarded on a date specified in an
employment agreement, the exercise price is the closing price of the common stock on that date.
(4) The grant date fair value is the value computed for financial reporting purposes in accordance
with FAS 123R. The valuation was made on the equity valuation assumptions described in Note
8 of Notes to Consolidated Financial Statements.
Option Exercises and Stock Vested for 2007.
The following table contains information on an aggregated basis about each exercise of a stock
option during 2007 by each of the named executive officers.
Name
Patrick T. Manning
Joseph P. Harper, Sr.
Option Awards
Number of Shares
Acquired
on Exercise
(#)
Value Realized
Upon
Exercise (1)
($)
—
—
- 52 -
—
—
Option Awards
Number of Shares
Acquired
on Exercise
(#)
—
128,424
9,990
Value Realized
Upon
Exercise (1)
($)
—
$2,714,821
$207,503
Name
James H. Allen, Jr.
Maarten D. Hemsley
Roger M. Barzun
(1) SEC regulations define the "Value Realized Upon Exercise" as the difference between the market price of the
shares on the date of the purchase, and the option exercise price of the shares, whether or not the shares are sold,
or if they are sold, whether or not the sale occurred on the date of the exercise.
Outstanding Equity Awards at December 31, 2007.
The following table shows certain information concerning unexercised stock options and stock
options that have not vested outstanding on December 31, 2007 for each named executive officer.
No other equity awards have been made to the named executive officers.
Option Awards
Name
Patrick T. Manning
Joseph P. Harper, Sr.
James H. Allen, Jr.
Maarten D. Hemsley
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
200
10,000
600
10,000
2,100
10,000
2,800
3,500
3,700
200
10,000
600
10,000
3,500
10,000
3,500
3,500
3,700
—
2,800
2,800
2,800
5,000
75,000
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
800
—
900
—
1,400
—
700
—
—
800
—
900
—
—
—
—
—
—
Option
Exercise
Price/Share
($)
$25.21
$24.96
$16.78
$9.69
$3.10
$3.10
$3.05
$1.725
$1.50
$25.21
$24.96
$16.78
$9.69
$3.10
$3.10
$3.05
$1.725
$1.50
Option
Grant
Date
8/08/2006
7/18/2006
8/12/2005
7/18/2005
8/12/2004
8/12/2004
8/20/2003
7/24/2002
7/23/2001
8/08/2006
7/18/2006
8/12/2005
7/18/2005
8/12/2004
8/12/2004
8/20/2003
7/24/2002
7/23/2001
Option
Expiration
Date
9/08/2011
7/18/2011
9/12/2010
7/18/2010
8/12/2014
8/12/2009
8/20/2013
7/24/2012
7/23/2011
9/08/2011
7/18/2011
9/12/2010
7/18/2010
8/12/2014
8/12/2009
8/20/2013
7/24/2012
7/23/2011
13,707
$18.99
8/7/2007
8/7/2012
—
—
—
—
—
$21.60
$24.96
$9.69
$3.10
$0.875
7/18/2007
7/18/2006
7/18/2005
8/12/2004
1/13/1998
7/18/2012
7/18/2011
7/18/2010
1/29/2008
10/27/2013
- 53 -
Vesting
Date
Footnotes
(1)
(2)
(1)
(2)
(1)
(2)
(1)
(1)
(1)
(1)
(2)
(1)
(2)
(3)
(2)
(3)
(3)
(1)
(3)
(4)
(2)
(2)
(5)
(6)
Option Awards
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
120
400
2,000
1,190
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
480
600
—
—
Option
Exercise
Price/Share
($)
$25.21
$16.78
$3.10
$0.875
Option
Grant
Date
8/8/2006
8/12/2005
8/12/2004
2/4/1998
Option
Expiration
Date
9/8/2011
9/12/2010
8/12/2014
2/4/2008
Vesting
Date
Footnotes
(1)
(1)
(4)
(4)
Name
Roger M. Barzun
Vesting of Stock Options. If there is a change-in-control of the Company, all the stock options then held by a
named executive officer become exercisable in full. Absent a change in control of the Company, the options listed
above vest as described in the following footnotes:
(1) This option vests in equal installments on the first five anniversaries of its grant date.
(2) This option vested in a single installment on July 18, 2007.
(3) This option vests in equal installments on the first three anniversaries of its grant date.
(4) This option vested in a single installment on its grant date.
(5) This option vests in equal installments on the grant date and the first three anniversaries of its grant date.
(6) This option vested in a single installment on December 18, 1998.
Director Compensation for 2007.
The Company does not pay additional compensation for serving on the Board of Directors to
directors who are employees of the Company, namely Messrs. Manning, Harper and through October
2007, Mr. Hemsley. The following table contains information concerning the compensation paid for
2007 to non-employee directors. All dollar numbers are rounded to the nearest dollar.
Name
John D. Abernathy (Lead director)
Chairman of the Audit Committee
Member of the Compensation Committee
Robert W. Frickel
Chairman of the Compensation Committee
Member of the Corporate Governance & Nominating
Committee
Donald P. Fusilli, Jr.
Member of the Audit Committee
Member of the Compensation Committee
Fees Earned
or Paid in
Cash
($)
Stock
Awards
(1)(3)
($)
Total (2)
($)
$33,300
$35,000
$68,300
$21,700
$35,000
$56,700
$17,350
$35,000
$52,350
Maarten D. Hemsley (for November and December 2007)
$5,550
—
$5,550
Christopher H. B. Mills
Milton L. Scott
Member of the Audit Committee
Member of the Corporate Governance & Nominating
Committee
$12,600
$35,000
$47,600
$23,400
$35,000
$58,400
- 54 -
Name
David R. A. Steadman
Chairman of the Corporate Governance & Nominating
Committee
Member of the Audit Committee
Fees Earned
or Paid in
Cash
($)
Stock
Awards
(1)(3)
($)
Total (2)
($)
$24,600
$35,000
$59,600
(1) The aggregate value of these restricted stock awards was $210,000, including $140,000 recognized in 2007 for
financial reporting purposes in accordance with FAS 123R. No amounts earned by a director have been
capitalized on the balance sheet for 2007. The cost does not reflect any estimates made for financial statement
reporting purposes of future forfeitures related to service-based vesting conditions. The valuation of the awards
was made on the equity valuation assumptions described in Note 8 of Notes to Consolidated Financial
Statements. None of the awards has been forfeited to date.
(2) During 2007, none of the non-employee directors received any other compensation for any service provided to
the Company. All directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending
meetings of the Board and Board committees. Directors living outside of North America, currently only
Mr. Mills, have the option of attending regularly-scheduled in-person meetings by telephone, and if they choose
to do so, they are paid an attendance fee as if they had attended in person.
(3) The following table shows for each non-employee director the grant date fair value of each stock award that has
been expensed, the aggregate number of shares of stock awarded, and the number of shares underlying stock
options that were outstanding on December 31, 2007.
Name
John D. Abernathy
Robert W. Frickel
Total
Total
Grant
Date
5/1/1998
5/1/1999
5/1/2000
5/1/2001
7/23/2001
5/19/2005
5/7/2007
7/23/2001
5/19/2005
5/7/2007
Donald P. Fusilli, Jr.
5/7/2007
Maarten D. Hemsley
7/18/2007
7/18/2006
7/18/2005
8/12/2004
1/13/1998
Total
Securities Underlying
Option Awards
Outstanding
at December 31, 2007
(#)
3,000
3,000
3,000
1,166
12,000
5,000
27,166
12,000
5,000
17,000
—
2,800
2,800
2,800
5,000
75,000
88,400
- 55 -
Aggregate Stock
Awards Outstanding
at December 31,
2007
(#)
Grant Date Fair
Value of Stock
and
Option Awards
($)
1,598
1,598
1,598
1,598
1,598
†
†
†
†
57,600
27,950
35,000
N/A
57,600
27,950
35,000
120,550
35,000
27,640
45,917
17,534
12,762
†
N/A
Name
Grant
Date
Securities Underlying
Option Awards
Outstanding
at December 31, 2007
(#)
Aggregate Stock
Awards Outstanding
at December 31,
2007
(#)
Grant Date Fair
Value of Stock
and
Option Awards
($)
Christopher H. B. Mills 5/19/2005
5,000
5/7/2007
Total
5,000
Milton L. Scott
5/7/2007
David R. A. Steadman
5/19/2005
5/7/2007
Total
5,000
5,000
† These options were not expensed.
1,598
1,598
1,598
1,598
1,598
27,950
35,000
62,950
35,000
27,950
35,000
62,950
Standard Director Compensation Arrangements. The following table shows the standard
compensation arrangements for non-employee directors that were adopted by the Corporate
Governance & Nominating Committee of the Board on May 10, 2006.
Annual Fees
Annual Fees
Each Non-Employee Director
$7,500
An award (on the date of each
Annual Meeting of Stockholders) of restricted stock that
has an accounting income charge under FAS 123R of
$35,000 per grant.*
Additional Annual Fees for Committee Chairmen
Chairman of the Audit Committee
Chairman of the Compensation Committee
Chairman of the Corporate Governance & Nominating Committee
$7,500
$2,500
$2,500
Meeting Fees
In-Person Meetings
Board Meetings
Committee Meetings
Audit Committee Meetings
on the same day as a Board meeting
on a day other than a Board meeting day
Other Committee Meetings
on the same day as a Board meeting
on a day other than a Board meeting day
Telephonic Meetings (Board & committee meetings)
One hour or longer
Less than one hour
Per Director Per Meeting
$1,500
$1,000
$1,500
$500
$750
$1,000
$300
* The shares awarded are restricted because they may not be sold, assigned, transferred, pledged or otherwise
disposed of until the restrictions expire. The restrictions for the award made on May 7, 2007 expire on the
day before the 2008 Annual Meeting of Stockholders, but earlier if the director dies or becomes disabled or
- 56 -
if there is a change in control of the Company. The shares are forfeited if before the restrictions expire, the
director ceases to be a director other than because of his death or disability.
Compensation Committee Interlocks and Insider Participation.
During 2007, Robert W. Frickel (Chairman), John D. Abernathy, Donald P. Fusilli, Jr. (since May
2007) and Milton L. Scott (until May 2007) served on the Compensation Committee. None of these
Compensation Committee members is or has been an officer or employee of the Company.
Mr. Frickel is President of R.W. Frickel Company, P.C., an accounting firm that performs certain
accounting and tax services for the Company. In 2007, the Company paid or accrued for payment to
R.W. Frickel Company approximately $63,580 in fees. The Company estimates that during 2008,
the fees of R.W. Frickel Company will be approximately the same as in 2007.
None of the Company's executive officers served as a director or member of the compensation
committee, or any other committee serving an equivalent function, of any other entity that has an
executive officer who is serving or during 2007 served as a director or member of the Compensation
Committee of the Company.
Compensation Committee Report.
The Compensation Committee of the Board of Directors has reviewed and discussed with
management the Compensation Discussion and Analysis set forth above in this Item 11. Based on
that review and those discussions, the Compensation Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form
10-K.
Submitted by the members of the Compensation Committee on March 17, 2008
Robert W. Frickel, Chairman
John D. Abernathy
Donald P. Fusilli, Jr.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Equity Compensation Plan Information. The following table contains information at December 31,
2007 about compensation plans (including individual compensation arrangements) under which the
Company has authorized the issuance of equity securities.
Number of Securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans, excluding
securities reflected in
column (a)
(c)
543,496
$5.30
83,736
Plan Category (1)
Equity compensation
plans approved by
security holders
(1) There is no outstanding compensation plan (including individual compensation arrangements) under which the
Company has authorized the issuance of equity securities that has not been approved by stockholders.
Security Ownership of Certain Beneficial Owners and Management. The following table sets forth
certain information at February 15, 2008 about the beneficial ownership of shares of the Company's
common stock by each person or entity known to the Company to own beneficially more than 5% of
the outstanding shares of common stock; by each director; by each executive officer named above in
Item 11. — Executive Compensation, under the heading Summary Compensation Table for 2007; and
- 57 -
by all directors and executive officers as a group. The Company has no other class of equity
securities outstanding.
Based on information furnished by the beneficial owners, the Company believes that those owners
have sole investment and voting power over the shares of common stock shown as beneficially
owned by them, except as stated otherwise in the footnotes to the table.
Rule 13d-3(d)(1) of the Securities Exchange Act of 1934 requires that the percentages listed in the
following table assume for each person or group the acquisition of all shares that the person or group
can acquire within sixty days of February 15, 2008, for instance by the exercise of a stock option, but
not the acquisition of the shares that can be acquired in that period by any other person or group
listed.
Except for Mr. Mills and the entities listed below, the address of each person is the address of the
Company.
Name and Address of Beneficial
Owner
North Atlantic Smaller Companies
Investment Trust plc (or NASCIT)
℅ North Atlantic Value LLP, Ryder
Court, 14 Ryder Street,
London SW1Y 6QB, England
North Atlantic Value LLP (or NAV)
Ryder Court, 14 Ryder Street,
London SW1Y 6QB, England
John D. Abernathy
Robert W. Frickel
Donald P. Fusilli, Jr.
Joseph P. Harper, Sr.
Maarten D. Hemsley
Patrick T. Manning
Christopher H. B. Mills
℅ North Atlantic Value LLP, Ryder
Court, 14 Ryder Street,
London SW1Y 6QB, England
Milton L. Scott
David R. A. Steadman
All directors and executive officers as
a group (10 persons)
Number of
Outstanding
Shares of
Common Stock
Owned
Shares Subject
to
Purchase *
Total
Beneficial
Ownership
Percent
of Class
500,000 (1)
500,000 (1)
29,801(2)
64,805 (2)
1,598 (2)
550,141(3)
246,924 (4)
132,500 (5)
—
—
500,000
3.82%
500,000
3.82%
27,166
56,967
17,000
81,805
—
1,598
†
†
†
172,574
722,715
4.20%
88,400
335,324
2.08%
65,120
197,620
1.01%
514,805 (2)(6)
5,000
519,805
3.93%
2,805 (2)
16,805 (2)
—
2,805
5,000
21,805
†
†
1,573,047 (7)
382,780 (7)
1,955827 (7)
14.57%
* These are the shares that the entity or person can acquire within sixty days of February 15, 2008.
† Less than one percent.
- 58 -
(1) According to a Form 13G/A (Amendment No. 4) filed with the Securities and Exchange Commission on
February 7, 2008, each of NASCIT, NAV and Mr. Mills have shared voting and investment power over these
shares.
(2) This number includes, or in the case of Mr. Fusilli, consists entirely of, 1,598 restricted shares awarded to non-
employee directors described above in Item 11. — Executive Compensation in footnote (1) to the Director
Compensation Table for 2007. The restrictions expire on the day preceding the 2008 Annual Meeting of
Stockholders, but earlier if the director dies or becomes disabled or if there is a change in control of the
Company. The shares are forfeited before the expiration of the restrictions if the director ceases to be a director
other than because of his death or disability.
(3) This number includes 8,000 shares held by Mr. Harper as custodian for his grandchildren.
(4) This number includes 10,000 shares owned by the Maarten and Mavis Hemsley Family Foundation as to which
Mr. Hemsley has shared voting and investment power with his wife and two daughters.
(5) Of these shares 100,000 have been pledged to Mr. Manning's broker to secure a line of credit with the broker of
up to $1.5 million.
(6) This number consists of the 500,000 shares owned by NASCIT; 13,207 shares owned by Mr. Mills personally
over which he claims sole voting and investment power; and the 1,598 restricted shares the Company awarded
to each non-employee director described above in footnote (2).
(7) See the footnotes above for a description of certain of the shares included in this total.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons.
Maarten D. Hemsley. At December 31, 2007, NASCIT held 3.82% of the Company's outstanding
common stock. NASCIT is a part of JO Hambro Capital Management Group Limited, or JOHCMG,
an investment company and fund manager located in the United Kingdom. From January 2001 until
May 2002, Mr. Hemsley was a consultant to JO Hambro Capital Management Limited, or JOHCM,
which is part of JOHCMG, and since May 2002 has been an employee of JOHCM. Mr. Hemsley has
served since 2001 as Fund Manager of JOHCMG's Leisure & Media Venture Capital Trust, plc, and
since February 2005, as Senior Fund Manager of its Trident Private Equity II LLP investment fund.
Neither of those funds was or is an investor in the Company or any of the Company's affiliates.
Robert W. Frickel. Mr. Frickel is President of R.W. Frickel Company, P.C., an accounting firm
based in Michigan that performs certain accounting and tax services for the Company. In 2007, the
Company paid or accrued for payment to R.W. Frickel Company approximately $63,580 in fees.
The Company estimates that during 2008, the fees of R.W. Frickel Company will be approximately
the same as in 2007.
Joseph P. Harper, Jr. Joseph P. Harper, Jr. is Chief Financial Officer of the Company's wholly-
owned subsidiary, Texas Sterling Construction Co., or TSC, and the son of Joseph P. Harper, Sr.,
who is President, Treasurer & Chief Operating Officer of the Company. For 2007 Mr. Harper Jr.
received salary and a cash bonus aggregating approximately $274,125.
The Paradigm Companies. Since July 2005, Patrick T. Manning has been the husband of Amy
Peterson, the sole beneficial owner of Paradigm Outdoor Supply, LLC and Paradigm Outsourcing,
Inc. The Paradigm companies have provided materials and services to the Company and to other
contractors for many years. In 2007, the Company paid a total of approximately $1.72 million to the
Paradigm companies. The Audit Committee reviews and approves these payments in the manner
described below.
Richard H. Buenting. Prior to the Company's acquisition of a majority interest in Road and Highway
Builders, LLC, or RHB, Mr. Buenting, the Chief Executive Officer of RHB, made use of RHB
equipment, materials and labor for the construction of a new home for himself and his family and
then would reimbursed RHB. This practice, which Mr. Buenting had fully disclosed to the Company
prior to the purchase, inadvertently continued for a short period after the acquisition during which
Mr. Buenting used a total of $18,730 of RHB's materials and labor. The practice has ceased and Mr.
Buenting has reimbursed RHB in full.
- 59 -
Policies and Procedures for the Review, Approval or Ratification of Transactions with Related
Persons.
General. The Board of Directors' policy on transactions between the Company and related parties is
set forth in the written charter of the Audit Committee. The policy requires that the Audit Committee
must review in advance the terms of any transaction by the Company with a director; executive
officer; nominee for election as director; stockholder; or any affiliate or any of their immediate
family members that involves more than $50,000. If the Audit Committee approves the transaction,
it must do so in compliance with Delaware law and report it to the full Board of Directors.
Mr. Hemsley. Mr. Hemsley's relationship with JOHCM has not been the subject of any approval
process by the Board or the Audit Committee because, as noted above, neither of the funds he
manages were or are an investor in the Company or any of its affiliates.
Mr. Frickel. The Company's Audit Committee reviews and approves the retention of Mr. Frickel's
firm and the payment of its fees. A description of this written procedure is found in Item 14. —
Principal Accounting Fees and Services, below, under the heading Audit and Non-Audit Service
Approval Policy.
Joseph P. Harper, Jr. The Compensation Committee reviews Mr. Harper, Jr.'s salary and bonus as
well as the salary and bonus of other senior managers of TSC. Neither Mr. Harper, Sr. nor
Mr. Harper, Jr. is a member of the Compensation Committee, which is made up entirely of
independent directors.
The Paradigm Companies. TSC engages the Paradigm companies primarily for City of Houston
projects to comply with requirements that a portion of project contracts be subcontracted to minority
and/or women-owned businesses. Both Paradigm companies are woman-owned businesses.
Paradigm Outdoor Supply arranges for the purchase of construction materials. Paradigm delivers the
materials directly to the project site and bills the Company for them. Paradigm Outdoor Supply and
similar companies charge a percentage commission ranging from 2% to 3% of the cost of the
materials. Paradigm Outsourcing provides flagmen and other temporary construction personnel to
contractors and charges competitive rates for those services.
During 2007, the Company paid Paradigm Outdoor Supply a total of approximately $1.5 million for
the materials it purchased for the Company. During 2007 the Company paid Paradigm Outsourcing
$221,000 for temporary personnel supplied to the Company.
The Audit Committee has determined that it is not practical for the Company to get more than oral
bids from Paradigm Outdoor Supply and its main competitor or to get any competitive bids on the
type of services performed by Paradigm Outsourcing. As a result, the Audit Committee requires
management on a quarterly basis to obtain rates from Paradigm Outdoor Supply and its main
competitor and prepare a memorandum for the Audit Committee on the results of those calls. On a
quarterly basis, the Audit Committee approves the continuation of business with the Paradigm
companies and reviews the payments the Company has made to the Paradigm companies in the prior
quarter.
Director Independence. The following table shows the Company's independent directors in 2007
and the committees of the Board of Directors on which they served. Each of the directors listed has
in the past and continues to satisfy Nasdaq's definition of an independent director. Each member of
the Audit Committee, Compensation Committee, and Corporate Governance & Nominating
Committees of the Board also satisfies Nasdaq's independence standards for service on those
committees. In addition, the members of the Audit Committee satisfy the independence requirements
of the SEC's Regulation §240.10A-3.
- 60 -
Name
John D. Abernathy
Robert W. Frickel
Milton L. Scott
Committee Assignment
Audit Committee (Chairman)
Compensation Committee
Compensation Committee (Chairman)
Corporate Governance & Nominating Committee
Audit Committee
Corporate Governance & Nominating Committee
David R. A. Steadman
Corporate Governance & Nominating Committee (Chairman)
Audit Committee
Donald P. Fusilli, Jr.
Audit Committee
Compensation Committee
Christopher H. B. Mills
None
The relationship between Mr. Frickel's accounting firm and the Company is described above in this
Item 12 under the heading Transactions with Related Persons.
In determining that Mr. Mills is independent under Nasdaq rules, the Board of Directors considered
the fact that Mr. Mills is the Chief Executive Officer of NASCIT, which is a stockholder holding less
than 10% of the Company's common stock and therefore under applicable rules and regulations is not
an affiliate of the Company. The Board also considered the payments of interest that the Company
made on a promissory note it issued to NASCIT in 2001 in connection with the Company's
acquisition of TSC and the fact that the note was paid in full on June 30, 2005. The Board has
concluded that under Nasdaq's standards for independence, neither of Mr. Frickel's nor Mr. Mills'
relationship to the Company adversely affects his independence. In reaching this conclusion, the
Board also relied on the fact that both Messrs. Frickel and Mills were directors at the time that the
Company applied for the listing of its common stock on Nasdaq and that they qualified as
independent at that time.
In 2005, the Company retained Eugene Abernathy, brother of Audit Committee Chairman John
Abernathy, to assist the Company on GAAP compliance issues. Eugene Abernathy is a certified
public accountant and a consultant who has in the past worked at a predecessor of
PricewaterhouseCoopers, a public accounting firm, and was a member of the Construction
Contractor Guide Committee that issued the Audit and Accounting Guide for Construction
Contractors under the sponsorship of the American Institute of Certified Public Accountants. In
2007 the Company paid fees of $10,625 to Eugene Abernathy. In view of the small amount of the
fees the Company has paid to Eugene Abernathy, the Board does not consider that this relationship
has any effect on John Abernathy's independence.
Item 14. Principal Accounting Fees and Services.
The following table sets forth the aggregate fees that the Company's independent registered public
accounting firm, Grant Thornton LLP, billed to the Company for the years ended December 31, 2007
and 2006.
Fee Category
Audit Fees:
2007
$602,900
Audit-Related Fees:
$25,500
Tax Fees:
All Other Fees:
$3,300
—
Percentage
Approved by the
Audit Committee
100%
100%
100%
NA
- 61 -
Percentage
Approved by the
Audit Committee
100%
100%
NA
NA
2006
$529,300
$110,300
—
—
Audit Fees. In 2006 and 2007 audit fees include the fees for Grant Thornton's audit of the
consolidated financial statements included in the Company's Annual Report on Form 10-K; reviews
of the consolidated financial statements included in the Company's quarterly reports on Form 10-Q;
the resolution of issues that arose during the audit process; and other audit services that are normally
provided in connection with statutory and regulatory filings. For 2006 and 2007, Grant Thornton's
fees also included attestation work required by Section 404 of the Sarbanes-Oxley Act of 2002 to
enable Grant Thornton to issue an opinion on management's assessment of the effectiveness of
internal controls over financial reporting. For 2007, Grant Thornton's fees also included attestation
work to enable Grant Thornton to issue a report on Internal Controls over Financial Reporting.
Audit-Related Fees. In 2007 audit-related fees included fees in connection with the Company's
October 2007 acquisition of RHB.
Tax Fees. Our independent registered public accounting firm provides tax consulting services to the
Company.
Audit and Non-Audit Service Approval Policy. In accordance with the requirements of the
Sarbanes-Oxley Act of 2002 and related rules and regulations, the Audit Committee has adopted a
policy that it believes will result in an effective and efficient procedure to approve the services of the
Company's independent registered public accounting firm.
Audit Services. The Audit Committee annually approves specified audit services engagement terms
and fees and other specified audit fees. All other audit services must be specifically pre-approved by
the Audit Committee. The Audit Committee monitors the audit services engagement and must
approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit
scope or other items.
Audit-Related Services. Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Company's financial statements, which
historically have been provided by our independent registered public accounting firm, and are
consistent with the SEC’s rules on auditor independence. The Audit Committee annually approves
specified audit-related services within established fee levels. All other audit-related services must be
pre-approved by the Audit Committee.
Tax Fees. As the fees related to these services are de minimis in amount, they are approved by the
Chairman of the Audit committee prior to being incurred.
All Other Services. Other services, if any, are services provided by our independent registered public
accounting firm that do not fall within the established audit, audit-related and tax services categories.
The Audit Committee must pre-approve specified other services that do not fall within any of the
specified prohibited categories of services.
Procedures. All requests for services that are to be provided by our independent registered public
accounting firm, which must include a detailed description of the services to be rendered and the
amount of corresponding estimated fees, are submitted to both the Company's President and the
Chairman of the Audit Committee. The Chief Financial Officer authorizes services that have been
approved by the Audit Committee within the pre-set limits. If there is any question as to whether a
proposed service fits within an approved service, the Chairman of the Audit Committee is consulted
for a determination. The Chief Financial Officer submits to the Audit Committee any requests for
services that have not already been approved by the Audit Committee. The request must include an
affirmation by the Chief Financial Officer and the independent registered public accounting firm that
the request is consistent with the SEC’s rules on auditor independence.
- 62 -
Item 15. Exhibits, Financial Statement Schedules.
PART IV
The following Financial Statements and Financial Statement Schedules are filed with this Report:
Financial Statements.
Reports of the Company's Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2007 and December 31, 2006
Consolidated Statements of Operations for the fiscal periods ended December 31, 2007,
December 31, 2006 and December 31, 2005
Consolidated Statements of Stockholders' Equity for the fiscal periods ended December 31, 2007,
December 31, 2006 and December 31, 2005
Consolidated Statements of Cash Flows for the fiscal periods ended December 31, 2007,
December 31, 2006 and December 31, 2005
Notes to the Consolidated Financial Statements
Financial Statement Schedules. None
Exhibits.
The following exhibits are filed with this Report:
Explanatory Note
Prior to changing its name to Sterling Construction Company, Inc. in November 2001, the Company
was known as Hallwood Holdings Incorporated from May 1991 to July 1993; Oakhurst Capital, Inc.
from July 1993 to April 1995; and Oakhurst Company, Inc. from April 1995 to November 2001.
References in the following exhibit list use the name of the Company in effect at the date of the
exhibit.
Number Exhibit Title
1.1
2.1
2.2
3.1
Underwriting Agreement dated December 18, 2007 between Sterling Construction
Company, Inc., and D. A. Davidson & Co. (incorporated by reference to Exhibit 1.1
to Sterling Construction Company, Inc.'s Current Report on Form 8-K, filed on
December 20, 2007 (SEC File No. 1-31993)).
Purchase Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
Thomas Fisher and Sterling Construction Company, Inc. dated as of October 31,
2007 (incorporated by reference to Exhibit number 2.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on November
21, 2007 (SEC File No. 1-31993)).
Escrow Agreement by and among Sterling Construction Company, Inc., Fisher Sand
& Gravel Co., Richard H. Buenting and Comerica Bank as Escrow Agent, dated as
of October 31, 2007 (incorporated by reference to Exhibit number 2.2 to Sterling
Construction Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed
on November 21, 2007 (SEC File No. 1-31993)).
Restated and Amended Certificate of Incorporation of Oakhurst Company, Inc.,
dated as of September 25, 1995 (incorporated by reference to Exhibit 3.1 to Sterling
Construction Company, Inc.'s Registration Statement on Form S-1, filed on
November 17, 2005 (SEC File No. 333-129780)).
- 63 -
Number Exhibit Title
3.2
3.3*
4.1
4.3
4.4
10.1#
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
Certificate of Amendment of the Certificate of Incorporation of Oakhurst Company,
Inc., dated as of November 12, 2001 (incorporated by reference to Exhibit 3.2 to
Sterling Construction Company, Inc.'s Registration Statement on Form S-1, filed on
November 17, 2005 (SEC File No. 333-129780)).
Bylaws of Sterling Construction Company, Inc. as amended through November 7,
2007.
Certificate of Designations of Oakhurst Company, Inc.'s Series A Junior
Participating Preferred Stock, dated as of February 10, 1998 (incorporated by
reference to Exhibit 4.2 to its Annual Report on Form 10-K, filed on May 29, 1998
(SEC File No. 000-19450)).
Rights Agreement, dated as of December 29, 1998, by and between Oakhurst
Company, Inc. and American Stock Transfer & Trust Company, including the form
of Series A Certificate of Designation, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B and C, respectively
(incorporated by reference to Exhibit 99.1 to Oakhurst Company, Inc.'s Registration
Statement on Form 8-A, filed on January 5, 1999 (SEC File No. 000-19450)).
Form of Common Stock Certificate of Sterling Construction Company, Inc.
(incorporated by reference to Exhibit 4.5 to its Form 8-A, filed on January 11, 2006
(SEC File No. 011-31993)).
Oakhurst Capital, Inc. 1994 Omnibus Stock Plan, with form of option agreement
(incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s
Registration Statement on Form S-1, filed on November 17, 2005 (SEC File No.
333-129780)).
Oakhurst Capital, Inc. 1994 Omnibus Stock Plan, as amended through December 18,
1998, (incorporated by reference to Exhibit 10.21 to Oakhurst Company, Inc.'s
Annual Report on Form 10-K, filed on June 1, 1999 (SEC File No. 000-19450)).
Oakhurst Capital, Inc. 1994 Non-Employee Director Stock Option Plan, with form of
option agreement (incorporated by reference to Exhibit 10.3 to Sterling Construction
Company, Inc.'s Registration Statement on Form S-1, filed on November 17, 2005
(SEC File No. 333-129780)).
Oakhurst Company, Inc. 1998 Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 to Sterling Construction Company, Inc.'s Registration Statement on
Form S-1, filed on November 17, 2005 (SEC File No. 333-129780)).
Form of Stock Incentive Agreements under Oakhurst Company, Inc.'s 1998 Stock
Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling Construction
Company, Inc.'s Annual Report on Form 10-K for the year ended December 31,
2004, filed on March 29, 2005 (SEC File No. 001-31993)).
Oakhurst Company, Inc. 2001 Stock Incentive Plan (incorporated by reference to
Exhibit 10.6 to Sterling Construction Company, Inc.'s Registration Statement on
Form S-1, filed on November 17, 2005 (SEC File No. 333-129780)).
Forms of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling Construction
Company, Inc.'s Annual Report on Form 10-K for the year ended December 31,
2004, filed on March 29, 2005 (SEC File No. 001-31993)).
10.8#*
Summary of Compensation for Non Employee Directors of Sterling Construction
Company, Inc.
- 64 -
Number Exhibit Title
10.9
10.10
10.11
10.12
10.13
Oakhurst Group Tax Sharing Agreement, dated as of July 18, 2001, by and among
Oakhurst Company, Inc., Sterling Construction Company, Steel City Products, Inc.
and such other companies as are set forth on Schedule A thereto (incorporated by
reference to Exhibit 10.28 to Sterling Construction Company, Inc.'s Transition
Report on Form 10-K for the ten months ended December 31, 2001, filed on April 8,
2002 (SEC File No. 000-19450)).
Fourth Amended and Restated Revolving Credit Loan Agreement, dated as of May
10, 2006, by and between Comerica Bank, Sterling Construction Company, Inc.,
Sterling General, Inc., Sterling Houston Holdings, Inc. Texas Sterling Construction,
L.P. (incorporated by reference to Exhibit 10.1 (and referred to as "Amended
Revolving Line of Credit Agreement with Comerica Bank") to Sterling Construction
Company, Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2006, filed on November 13, 2006 (SEC File No. 001-31993)).
Credit Agreement by and among Sterling Construction Company, Inc., Texas
Sterling Construction Co., Oakhurst Management Corporation and Comerica Bank
and the other lenders from time to time party thereto, and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007 (incorporated by
reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s Current Report on
Form 8-K, Amendment No. 1 filed on November 21, 2007 (SEC File No. 1-31993)).
Security Agreement by and among Sterling Construction Company, Inc., Texas
Sterling Construction Co., Oakhurst Management Corporation and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007 (incorporated by
reference to Exhibit 10.2 to Sterling Construction Company, Inc.'s Current Report on
Form 8-K, Amendment No. 1 filed on November 21, 2007 (SEC File No. 1-31993)).
Joinder Agreement by Road and Highway Builders, LLC and Road and Highway
Builders Inc, dated as of October 31, 2007 (incorporated by reference to Exhibit 10.3
to Sterling Construction Company, Inc.'s Current Report on Form 8-K, Amendment
No. 1 filed on November 21, 2007 (SEC File No. 1-31993)).
10.14# Employment Agreement between Richard H. Buenting and Road and Highway
Builders, LLC, effective October 31, 2007 (incorporated by reference to Exhibit 10.4
to Sterling Construction Company, Inc.'s Current Report on Form 8-K, Amendment
No. 1 filed on November 21, 2007 (SEC File No. 1-31993)).
10.15# Employment Agreement dated as of July 19, 2007 between Sterling Construction
Company, Inc. and Patrick T. Manning (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on January
17, 2008 (SEC File No. 1-31993))
10.16# Employment Agreement dated as of July 19, 2007 between Sterling Construction
Company, Inc. and Joseph P. Harper, Sr. (incorporated by reference to Exhibit 10.2
to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
10.17# Employment Agreement dated as of July 16, 2007 between Sterling Construction
Company, Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.3 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on January
17, 2008 (SEC File No. 1-31993))
10.18# Option Agreement dated August 7, 2007 between Sterling Construction Company,
Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.4 to Sterling
Construction Company, Inc.'s Current Report on Form 8-K filed on January 17, 2008
(SEC File No. 1-31993))
- 65 -
Number Exhibit Title
14
Code of Business Conduct and Ethics as amended on November 7, 2006
(incorporated by reference to Exhibit 14 to Sterling Construction Company, Inc.'s
Current Report on Form 8-K filed on November 13, 2006 (SEC File No. 1-31993)).
21
Subsidiaries of Sterling Construction Company, Inc.:
Texas Sterling Construction Co.
Oakhurst Management Corporation
Road and Highway Builders, LLC
Road and Highway Builders Inc.
23.1*
Consent of Grant Thornton LLP.
31.1*
31.2*
32.0*
Certification of Patrick T. Manning, Chief Executive Officer of Sterling Construction
Company, Inc.
Certification of James H. Allen, Jr., Chief Financial Officer of Sterling Construction
Company, Inc.
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code (18 U.S.C. 1350) of Patrick T. Manning, Chief Executive Officer, and James
H. Allen, Jr., Chief Financial Officer.
# Management contract or compensatory plan or arrangement.
* Filed herewith.
- 66 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 17, 2008
By: /s/ Patrick T. Manning
STERLING CONSTRUCTION COMPANY, INC.
Patrick T. Manning, Chief Executive Officer
(duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
/s/ Patrick T. Manning
Patrick T. Manning
/s/ Joseph P. Harper, Sr.
Joseph P. Harper, Sr.
/s/James H. Allen, Jr.
James H. Allen, Jr.
/s/ John D. Abernathy
John D. Abernathy
/s/ Robert W. Frickel
Robert W. Frickel
/s/ Donald P. Fusilli, Jr.
Donald P. Fusilli, Jr.
/s/Maarten D. Hemsley
Maarten D. Hemsley
/s/ Christopher H. B. Mills
Christopher H. B. Mills
/s/ Milton L. Scott
Milton L. Scott
/s/ David R. A. Steadman
David R. A. Steadman
Title
Date
Chairman of the Board of
Directors; Chief Executive Officer
(principal executive officer)
March 17, 2008
President, Treasurer & Chief
Operating Officer; Director
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
March 17, 2008
Senior Vice President & Chief
Financial Officer (principal
financial officer and principal
accounting officer)
Director
Director
Director
Director
Director
Director
Director
- 67 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Sterling Construction Company, Inc.
We have audited Sterling Construction Company, Inc. (a Delaware Corporation) and subsidiaries’
internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Sterling Construction Company, Inc. and subsidiaries’
management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting, appearing under
item9A. Our responsibility is to express an opinion on Sterling Construction Company, Inc. and
subsidiaries’ internal control over financial reporting based on our audit.
As indicated in the accompanying Management’s Report on Internal Control Over Financial
Reporting, management’s assessment of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of Road and Highway Builders, LLC or Road
and Highway Builders, Inc., which are included in the 2007 consolidated financial statements of
Sterling Construction Company, Inc. and subsidiaries and constituted 5.6% and 6.9% of total assets
and liabilities, respectively, as of December 31, 2007 and 2.3% and 3.1% of revenues and net income
from continuing operations, respectively, for the year then ended. Our audit of internal control over
financial reporting of Sterling Construction Company, Inc. and subsidiaries also did not include an
evaluation of the internal control over financial reporting of Road and Highway Builders, LLC or
Road and Highway Builders, Inc.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Sterling Construction Company Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by COSO.
F1
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sterling Construction Company
Inc. and subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated March 17, 2008 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
March 17, 2008
F2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sterling Construction Company, Inc.
We have audited the accompanying consolidated balance sheets of Sterling Construction Company,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Sterling Construction Company, Inc. and subsidiaries as of December 31, 2007
and 2006, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2007 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 123(R), “Share-Based Payment”, on a modified prospective
basis as of January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sterling Construction Company, Inc. and subsidiaries’ internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 17, 2008 expressed an unqualified
opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
March 17, 2008
F3
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(Amounts in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Contracts receivable, including retainage
Costs and estimated earnings in excess of billings on uncompleted
contracts
Inventories
Deferred tax asset, net
Note receivable, current
Other
Total current assets
Property and equipment, net
Goodwill
Note receivable, long term
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Billings in excess of cost and estimated earnings on uncompleted
contracts
Current maturities of long term debt
Other accrued expenses
Total current liabilities
Long-term liabilities:
Long-term debt, net of current maturities
Deferred tax liability, net
Minority interest in RHB
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized
1,000,000 shares, none issued
Common stock, par value $0.01 per share; authorized
14,000,000 shares, 13,006,502 and 10,875,438 shares issued
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
2007
2006
$80,649
54
54,394
3,747
1,239
1,088
205
1,574
142,950
72,389
57,232
--
1,944
$274,515
$28,466
26,169
42,805
3,157
965
4,297
300
1,249
107,408
46,617
12,735
325
687
$167,772
$27,190
$17,373
25,349
98
8,250
60,887
65,556
3,098
6,362
75,016
21,536
123
5,502
44,534
30,659
1,588
--
32,247
--
--
130
147,786
(9,304)
138,612
$274,515
109
114,630
(23,748)
90,991
$167,772
The accompanying notes are an integral part of these consolidated financial statements
F4
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2007, 2006 and 2005
(Amounts in thousands, except share and per share data)
Revenues
Cost of revenues
Gross profit
General and administrative expenses
Other income
Operating income
Interest income
Interest expense
Income from continuing operations before
minority interest and income taxes
Minority interest in earnings of RHB
Income from continuing operations before
income taxes
Income tax expense:
Current
Deferred
Total income tax expense
Net income from continuing operations
2007
$306,220
272,534
33,686
13,206
549
21,029
1,669
277
22,421
62
22,359
1,290
6,600
7,890
14,469
2006
$249,348
220,801
28,547
10,825
276
17,998
1,426
220
19,204
--
19,204
310
6,256
6,566
12,638
2005
$219,439
195,683
23,756
9,375
284
14,665
150
1,486
13,329
--
13,329
257
2,531
2,788
10,541
Income (loss) from discontinued operations,
including gain on disposal of $121 in 2006, net
of income taxes of $(0), $308 and $313
Net income
Basic net income per share:
Net income from continuing g operations
Net income from discontinued operations
Net income
Weighted average number of shares outstanding
used in computing basic per share amounts
Diluted net income per share:
Net income from continuing operations
Net income from discontinued operations
Net income
Weighted average number of shares outstanding
used in computing diluted per share amounts
(25)
682
559
$14,444
$13,320
$11,100
$1.31
--
$1.31
$1.19
$0.06
$1.25
$1.36
$0.07
$1.43
11,043,948
10,582,730
7,775,476
$1.22
--
$1.22
$1.08
$0.06
$1.14
$1.11
$0.05
$1.16
11,836,176
11,714,310
9,537,923
The accompanying notes are an integral part of these consolidated financial statements
F5
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2007, 2006 and 2005
(Amounts in thousands)
Balance at December 31, 2004
Stock issued upon option/warrant
exercise
Stock based compensation expense
Tax benefit of stock option exercise
Cancellation of treasury stock of
SCPL
Net income
Balance at December 31, 2005
Stock issued upon option/warrant
exercise
Stock based compensation expense
Stock issued in equity offering, net
of expenses
and
Issuance
amortization of
restricted stock
Available excess tax benefits from
exercise of stock options
Net income
Balance at December 31, 2006
Stock issued upon option/warrant
exercise
Stock based compensation expense
amortization of
Issuance
and
restricted stock
Available excess tax benefits from
exercise of stock options
Stock issued in equity offering, net
of expenses
Issuance of stock
interest
Excess fair value over book value
of minority interest in RHB
Net income
to minority
Common stock
Shares
7,379
Amount
$74
786
8
8,165
701
2,003
6
82
7
20
--
Additional
paid in
capital
$80,527
819
463
1,013
82,822
906
991
27,019
117
2,775
10,875
109
114,630
241
10
1,840
41
2
--
18
1
511
912
198
1,480
34,471
999
(5,415)
Balance at December 31, 2007
13,007
$130
$147,786
Accumulated
deficit
$(45,392)
Treasury
stock
$(1)
(1)
11,100
(34,293)
(2,775)
13,320
(23,748)
1
--
--
Total
$35,208
827
463
1,013
11,100
48,611
913
991
27,039
117
--
13,320
90,991
513
912
198
1,480
34,489
1,000
14,444
$(9,304)
$--
(5,415)
14,444
$138,612
The accompanying notes are an integral part of this consolidated financial statement
F6
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2007, 2006 and 2005
(Amounts in thousands, except share data)
Net income
Net income (loss) from discontinued operations
Net income from continuing operations
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Depreciation and amortization
Gain on sale of property and equipment
Deferred tax expense
Stock based compensation expense
Excess tax benefits from exercise of stock options
Minority interest in net earnings of subsidiary
Other changes in operating assets and liabilities:
(Increase) in contracts receivable
(Increase) decrease in costs and estimated earnings in
excess of billings on uncompleted contracts
(Increase) in inventories
(Increase) decrease in prepaid expenses and other assets
(Decrease) increase in trade payables
Increase in billings in excess of costs and estimated
earnings on uncompleted contracts
Increase (decrease) in accrued compensation and other
liabilities
Net cash provided by continuing operating activities
Cash flows from continuing operations investing activities:
Cash paid for business combinations, net of cash acquired
Additions to property and equipment
Proceeds from sale of property and equipment
Purchases of short-term securities, available for sale
Sales of short-term securities, available for sale
Net cash used in continuing operations investing activities
Cash flows from continuing operations financing activities:
Cumulative daily drawdowns – revolver
Cumulative daily reductions – revolver
Repayments under related party long term debt
Repayments under long-term obligations
Increase in deferred loan costs
Issuance of common stock pursuant to warrants and
options exercised
Utilization of excess tax benefits from exercise of stock
options
Payments on note receivable
Net proceeds from sale of common stock
Net cash provided by (used in) continuing operations
financing activities
Net increase in cash and cash equivalents from continuing
operations
F7
2007
$14,444
(25)
14,469
2006
$13,320
682
12,638
2005
$11,100
559
10,541
9,544
(501)
6,600
1,110
(1,480)
62
7,011
(276)
6,256
1,108
--
--
5,064
(279)
2,531
463
--
--
(6,588)
(7,893)
(8,662)
648
(125)
(504)
6,064
646
(378)
29,567
(49,334)
(26,319)
1,603
(123,797)
149,912
(47,935)
190,199
(155,199)
--
(129)
(1,197)
513
1,480
420
34,489
70,576
52,208
(958)
(965)
(46)
(3,043)
7,901
1,356
23,089
(2,206)
(24,849)
866
(144,192)
118,023
(52,358)
106,025
(89,813)
(8,449)
(123)
(123)
3,685
--
730
6,034
9,158
2,001
31,266
--
(11,392)
420
--
--
(10,972)
139,593
(139,134)
(2,649)
(113)
--
913
827
--
27,039
--
--
35,468
(1,476)
6,199
18,818
Cash provided by (used in) discontinued operating activities
Cash used in discontinued operations investing activities
Cash (used in) provided by discontinued operations financing
activities
Net cash (used in) provided by discontinued operations
(25)
--
--
(25)
495
4,739
(5,357)
(123)
(294)
--
349
55
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
28,466
$80,649
22,267
$28,466
3,449
$22,267
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net of $53 and
$14 of capitalized interest expense in 2007 and 2006
Cash paid during the period for taxes
Supplemental disclosure of non-cash financing activities:
Capital lease obligations for new equipment
$216
$1,300
$199
$300
$1,609
$355
--
--
$83
The accompanying notes are an integral part of these consolidated financial statements
F8
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business and Significant Accounting Policies
Basis of Presentation:
Sterling Construction Company, Inc. (“Sterling” or “the Company”) a Delaware Corporation, is
a leading heavy civil construction company that specializes in the building, reconstruction and repair
of transportation and water infrastructure in large and growing markets in Texas and Nevada. Our
transportation infrastructure projects include highways, roads, bridges and light rail, and our water
infrastructure projects include water, wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients utilizing our own employees and equipment for
activities including excavating, paving, pipe installation and concrete placement. We purchase the
necessary materials for our contracts, perform approximately three-quarters of the work required by
our contracts with our own crews, and generally engage subcontractors only for ancillary services.
Sterling owns four subsidiaries; Texas Sterling Construction Co. (“TSC”), a Delaware
corporation, and Road and Highway Builders, LLC (“RHB”), a Nevada limited liability company,
both of which perform construction contracts, Oakhurst Management Corporation (“OMC”), a Texas
corporation and a management services company for Sterling and certain of its subsidiaries, and
Road and Highway Builders, Inc., an inactive Nevada corporation. The accompanying consolidated
financial statements include the accounts of subsidiaries in which the Company has a greater than
50% ownership interest and all significant intercompany accounts and transactions have been
eliminated in consolidation. For all years presented, the Company had no subsidiaries with ownership
interests of less than 50%.
Organization and Business:
The Company's business consists of the operations of a heavy civil construction company through its
subsidiaries and its headquarters is in Houston, Texas. Until October 27, 2006, the Company also
operated a smaller business, which consisted of a wholesale distributor of automotive accessories, pet
supplies and lawn and garden products. See Note 2 for a discussion on the sale of this discontinued
operation.
Although we describe our business in this report in terms of the services we provide, our base of
customers and the geographic areas in which we operate, we have concluded that our operations
comprise one reportable segment pursuant to Statement of Financial Accounting Standards No. 131 –
Disclosures about Segments of an Enterprise and Related Information. In making this determination,
we considered that each project has similar characteristics, includes similar services, has similar
types of customers and is subject to the same regulatory environment. We organize, evaluate and
manage our financial information around each project when making operating decisions and
assessing our overall performance.
Use of Estimates:
The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain of the Company's accounting policies require higher degrees of judgment than others in
their application. These include the recognition of revenue and earnings from construction contracts
F9
under the percentage of completion method, the valuation of long-term assets, estimates for the use
of the Company's net operating loss carry forwards and the allowance for doubtful accounts.
Management evaluates all of its estimates and judgments on an on-going basis.
Revenue Recognition:
Construction
The Company's primary business since July 2001 has been as a general contractor in the State of
Texas, and, with the acquisition of RHB, Nevada where it engages in various types of heavy civil
construction projects principally for public owners. Credit risk is minimal with public (government)
owners since the Company ascertains that funds have been appropriated by the governmental project
owner prior to commencing work on such projects. While most public contracts are subject to
termination at the election of the government entity, in the event of termination the Company is
entitled to receive the contract price for completed work and reimbursement of termination-related
costs. Credit risk with private owners is minimized because of statutory mechanics liens, which give
the Company high priority in the event of lien foreclosures following financial difficulties of private
owners.
Revenues are recognized on the percentage-of-completion method, measured by the ratio of costs
incurred up to a given date to estimated total costs for each contract.
Contract costs include all direct material, labor, subcontract and other costs and those indirect
costs related to contract performance, such as indirect salaries and wages, equipment repairs and
depreciation, insurance and payroll taxes. Administrative and general expenses are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions and estimated
profitability, including those changes arising from contract penalty provisions and final contract
settlements may result in revisions to costs and income and are recognized in the period in which the
revisions are determined. An amount attributable to contract claims is included in revenues when
realization is probable and the amount can be reliably estimated. Cost and estimated earnings in
excess of billings included $0.5 million and $0.25 million at December 31, 2007 and 2006,
respectively, for contract claims not approved by the customer (which includes out-of-scope work,
potential or actual disputes, and claims). The Company generally provides a one-year warranty for
workmanship under its contracts. Warranty claims historically have been inconsequential.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”
represents revenues recognized in excess of amounts billed on these contracts. The liability “Billings
in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of
revenues recognized on these contracts.
Cash and Cash Equivalents and Short-term Investments:
The Company considers all highly liquid investments with original or remaining maturities of
three months or less at the time of purchase to be cash equivalents. Included in cash and cash
equivalents at December 31, 2007 and 2006 are uninsured temporary cash investments of $21.9
million and $40.1 million, respectively, in money market funds stated at fair value. Additionally, the
Company maintains cash in bank deposit accounts that at times may exceed federally insured limits.
The Company has from time-to-time invested in short-term auction-rate securities to provide
liquidity for its operating cash needs. These auction-rate securities were for the most part municipal
bonds and municipal bond funds with long-term scheduled maturities and periodic interest rate reset
dates, usually 28 days or less. Due to the liquidity provided by the interest rate reset mechanism and
the short-term nature of the investment in these securities, there was no unrealized gain or loss on
these securities at December 31, 2007 and December 31, 2006, as the market value of these securities
approximated their cost. No gain or loss was realized on these securities during the years ended 2007
and 2006.
F10
The Company classifies its short-term investments (including auction-rate securities) as
securities available for sale in accordance with SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities”. At December 31, 2007 and 2006, the Company had short-term
securities available for sale of $54,000 and $26.2 million, respectively. Subsequent to December 31,
2007, the Company has invested in other types of short-term securities in order to minimize its
exposure to the uncertainty in the municipal bond markets.
For the years ended December 31, 2007, 2006 and 2005, the Company recorded interest income
of $1.7 million, $1.4 million and $150,000, respectively.
Contracts Receivable:
Contracts receivable are generally based on amounts billed to the customer. At December 31,
2007, contracts receivable included retainage of $21.1 million discussed below which is being
withheld by customers until completion of the contracts and $2.0 million of cost and estimated
earnings not yet billed on contracts completed at that date. All other contracts receivable include only
balances approved for payment by the customer. Based upon a review of outstanding contracts
receivable, historical collection information and existing economic conditions, management has
determined that all contracts receivable at December 31, 2007 and 2006 are fully collectible, and
accordingly, no allowance for doubtful accounts against contracts receivable is required. Contracts
receivable are written off based on individual credit evaluation and specific circumstances of the
customer, when such treatment is warranted.
Retainage:
Many of the contracts under which the Company performs work contain retainage provisions.
Retainage refers to that portion of billings made by the Company but held for payment by the
customer pending satisfactory completion of the project. Unless reserved, the Company assumes that
all amounts retained by customers under such provisions are fully collectible. Retainage on active
contracts is classified as a current asset regardless of the term of the contract and is generally
collected within one year of the completion of a contract. Retainage was approximately $21.1 million
and $16.4 million at December 31, 2007 and December 31, 2006, respectively, of which $3.0 million
at December 31, 2007 is expected to be collected beyond 2008.
Inventories:
The Company's inventories are stated at the lower of cost or market as determined by the average
cost method. Inventories at December 31, 2007 and 2006 consist primarily of raw materials, such as
concrete and millings which are expected to be utilized on construction projects in the future. The
cost of inventory includes labor, trucking and other equipment costs.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization are computed using the
straight-line method. The estimated useful lives used for computing depreciation and amortization
are as follows:
39 years
Building
5-15 years
Construction equipment
Land improvements
5-15 years
Office furniture and fixtures 3-10 years
Transportation equipment
5 years
Depreciation expense was approximately $9.5 million, $6.9 million, and $5.1 million in 2007,
2006 and 2005, respectively, primarily in costs of revenues from continuing operations, and
approximately $0.1 million for discontinued operations in each of 2006 and 2005.
F11
Deferred Loan Costs:
Deferred loan costs represent loan origination fees paid to the lender and related professional fees
such as legal fees related to drafting of loan agreements. These fees are amortized over the term of
the loan. In 2007, the Company entered into a new syndicated term Credit Facility (see Note 4) and
incurred $1.3 million of loan costs, which are being amortized over the five-year term of the loan. In
2006, TSC renewed its line of credit and incurred loan costs in the amount of $123,000, which were
being amortized over the three year term of the Credit Facility; however, the unamortized loan costs
were charged to expense in 2007 with the execution of a new line of credit. Loan cost amortization
expense for fiscal years 2007, 2006 and 2005 was $76,000, $99,000 and $56,000, respectively.
Goodwill and Intangibles:
Goodwill represents the excess of the cost of companies acquired over the fair value of their net
assets at the dates of acquisition.
The Company accounts for goodwill in accordance with Statement of Financial Accounting
Standards No. 142 “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142 requires that:
(1) goodwill and indefinite lived intangible assets not be amortized, (2) goodwill is to be tested for
impairment at least annually at the reporting unit level, (3) the amortization period of intangible
assets with finite lives is to be no longer limited to forty years, and (4) intangible assets deemed to
have an indefinite life are to be tested for impairment at least annually by comparing the fair value of
these assets with their recorded amounts.
Goodwill impairment is tested during the last quarter of each calendar year. The first step
compares the book value of the Company’s stock to the fair market value of those shares as reported
by Nasdaq. If the fair market value of the stock is greater than the calculated book value of the stock,
goodwill is deemed not to be impaired and no further testing is required. If the fair market value is
less than the calculated book value, additional steps of determining fair value of additional assets
must be taken to determine impairment. Testing step one in 2007 indicated the fair market value of
the Company’s stock was in excess of its book value and no further testing was required; based on
the results of such test for impairment, the Company concluded that no impairment of goodwill
existed as of December 31, 2007. See Note 13 related to the acquisition of RHB and the amount of
goodwill related to such acquisition.
Intangible assets that have finite lives continue to be subject to amortization. In addition, the
Company must evaluate the remaining useful life in each reporting period to determine whether
events and circumstances warrant a revision of the remaining period of amortization. If the estimate
of an intangible asset’s remaining life is changed, the remaining carrying amount of such asset is
amortized prospectively over that revised remaining useful life.
Equipment under Capital Leases:
The Company’s policy is to account for capital leases, which transfer substantially all the benefits
and risks incident to the ownership of the leased property to the Company, as the acquisition of an
asset and the incurrence of an obligation. Under this method of accounting, the recorded value of the
leased asset is amortized principally using the straight-line method over its estimated useful life and
the obligation, including interest thereon, is reduced through payments over the life of the lease.
Depreciation expense on leased equipment and the related accumulated depreciation is included with
that of owned equipment.
Evaluating Impairment of Long-Lived Assets:
When events or changes in circumstances indicate that long-lived assets other than goodwill may
be impaired, an evaluation is performed. The estimated undiscounted cash flow associated with the
asset is compared to the asset's carrying amount to determine if a write-down to fair value is required.
Federal and State Income Taxes:
F12
Sterling accounts for income taxes using an asset and liability approach, with certain recognition
and measurement criteria. Deferred tax liabilities and assets are recognized for the future tax
consequences of events that have already been recognized in the financial statements or tax returns.
Net deferred tax assets are recognized to the extent that management believes that realization of such
benefits is considered more likely than not. Changes in enacted tax rates or laws may result in
adjustments to the recorded deferred tax assets or liabilities in the period that the tax law is enacted
(see Note 6).
Stock-Based Compensation:
The Company has five stock-based incentive plans which are administered by the
Compensation Committee of the Board of Directors. Prior to August 2006, the Company used the
closing price of its common stock on the trading day immediately preceding the date the option was
approved as the grant date market value. Since July 2006, the Company’s policy has been to use the
closing price of the common stock on the date of the meeting at which a stock option award is
approved for both the option’s per-share exercise price and the Black-Scholes valuation model. The
term of the grants under the plans do not exceed 10 years. Stock options generally vest over a three to
five year period. Refer to Note 8 for further information regarding the stock-based incentive plans.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), using the
modified prospective transition method and, therefore, has not restated financial results for prior
periods. Since January 1, 2003, the Company has accounted for its stock-based compensation under
the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and
Disclosure” which amended SFAS Statement No. 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based employee
compensation. Because the Company had utilized the fair value method for expensing stock options
in the past several years, the impact on financial results of the transition to SFAS 123(R) at
January 1, 2006 for unvested options was not material. The Company utilizes the Black-Scholes
valuation model to estimate the fair value of its stock option grants. The fair value is recognized on a
straight-line basis over the vesting period of the option.
If the Company had applied the fair value recognition provisions of SFAS Statement No. 123,
“Accounting for Stock-Based Compensation”, to stock-based employee compensation as of
January 1, 2005 instead of 2006, the effect on net income and earnings per share would not have
been material to the financial statements. Because the Company has net operating loss carry
forwards to offset taxable income, it has been unable to recognize excess tax benefits generated
from the exercise of non-qualified stock options until the net operating loss carry forwards were
exhausted in 2007. Therefore, there was no impact on cash flows from operating activities and
financing activities upon adoption of SFAS 123(R).
F13
Net Income Per Share:
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per common share is
the same as basic net income per share but assumes the exercise of any convertible subordinated debt
securities and includes dilutive stock options and warrants using the treasury stock method. The
following table reconciles the numerators and denominators of the basic and diluted per common
share computations for net income for 2007, 2006 and 2005 (in thousands, except per share data):
Numerator:
Net income from continuing operations, as reported
Income (loss)from discontinued operations, net of taxes
Net income before interest on convertible debt
Denominator:
Weighted average common shares
outstanding — basic
Shares for dilutive stock options and warrants
Weighted average common shares outstanding and
assumed conversions — diluted
Basic earnings per common share:
Net income from continuing operations
Net income from discontinued operations
Net income
Diluted earnings per common share:
Net income from continuing operations
Net income from discontinued operations
Net income
2007
2006
2005
$ 14,469
(25)
$ 14,444
$ 12,638
682
$ 13,320
$ 10,541
559
$ 11,100
11,044
792
10,583
1,131
7,775
1,763
11,836
11,714
9,538
$ 1.31
--
$ 1.31
$ 1.22
--
$ 1.22
$
$
$
$
$
$
1.19
0.06
1.25
1.08
0.06
1.14
$ 1.36
$ 0.07
$ 1.43
$ 1.11
$ 0.05
$ 1.16
For the years ended December 31, 2007 and 2006, 79,700 and 81,500 options, respectively, were
considered antidilutive as the option exercise price exceeded the average share price. No options or
warrants were considered antidilutive for the year ended December 31, 2005.
Derivatives
Financial derivatives, consisting of interest rate swap agreements, are sometimes used as part of
the Company’s overall strategy to manage the risk related to changes in interest rates. Interest rate
swap agreements are used to modify variable rate obligations to fixed rate obligations, thereby
reducing the exposure to higher interest rates. Amounts paid or received under interest rate swap
agreements are accrued as interest rates change with the offset recorded in interest expense.
The Company applies SFAS No. 133,”Accounting for Derivative Instruments and Hedging
Activities.” Under SFAS No. 133, the Company's interest rate swaps have not been designated as
hedging instruments; therefore changes in fair value are recognized in current earnings. At December
31, 2007, all of the Company's interest rate swaps had been settled and the change in fair value for
the year was nominal.
Interest Costs
During 2006, TSC began expansion of its maintenance facilities and office building.
Construction was still in progress at December 31, 2007. Accordingly, approximately $53,000 and
$14,000 of interest related to the construction of qualifying assets were capitalized as part of
construction costs during 2007 and 2006, respectively, in accordance with SFAS No.34
“Capitalization of Interest Cost”.
F14
Self-Insurance
The Company is primarily self-insured for workers’ compensation liability, up to $250,000 per
occurrence, with a maximum of $2.7 million per year and has purchased stop-loss insurance
coverage for what it considers reasonable limits above those self-insured amounts. Operations are
charged with the cost of claims reported and an estimate of claims incurred but not reported. A
liability for unpaid claims and associated expenses, including incurred but not reported claims, is
reflected in the balance sheet as an accrued liability. At December 31, 2007 and 2006, the
Company’s accrued liability for such claims was $1,067,000 and $575,000, respectively.
The Company also has a self-insured health plan for its employees and has purchased stop-loss
insurance to limit its exposure. See Note 14 for details of the health insurance plan.
Recent Accounting Pronouncements:
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements” (SFAS 157) which establishes a framework for measuring fair value and
requires expanded disclosure about the information used to measure fair value. The statement
applies whenever other statements require or permit assets or liabilities to be measured at fair value,
and does not expand the use of fair value accounting in any new circumstances. In February 2008,
the FASB delayed the effective date by which companies must adopt the provisions of SFAS 157.
The new effective date of SFAS 157 defers implementation to fiscal years beginning after November
15, 2008, and interim periods within those fiscal years. The adoption of this standard is not
anticipated to have a material impact on our financial position, results of operations, or cash flows.
In December 2007, the FASB revised Statement of Accounting Standards No. 141, “Business
Combinations” (SFAS 141(R)). This Statement establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. Also, under SFAS 141(R), all direct costs of the
business combination must be charged to expense on the financial statements of the acquirer at the
time of acquisition. SFAS 141(R) revises previous guidance as to the recording of post-combination
restricting plan costs by requiring the acquirer to record such costs separately from the business
combination. This statement is effective for acquisitions occurring on or after January 1, 2009, with
early adoption not permitted. The effect on future financial statements of SFAS 141(R) when adopted
cannot be determined at this time.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115” (“SFAS No. 159”). This statement allows a company to irrevocably elect fair
value as a measurement attribute for certain financial assets and financial liabilities with changes in
fair value recognized in the results of operations. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the impact of
adoption on its results of operations and financial position.
In December 2007, the FASB issued Statement of Accounting Standards No. 160, “Non-
controlling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 clarifies
previous guidance on how consolidated entities should account for and report non-controlling
interests in consolidated subsidiaries. The statement standardizes the presentation of non-controlling
minority interests for both the consolidated balance sheet and income statement. The statement also
standardizes the accounting for changes in a parent company’s interest in a subsidiary for situations
F15
where the change results in a deconsolidation and for situations where it does not result in a
deconsolidation. This Statement is effective for fiscal years beginning on or after January 1,
2009, and all interim periods within that fiscal year, with early adoption not permitted. When
this Statement is adopted by the Company, the Minority Interest in RHB and any similar subsequent
acquisitions will be a separate component of stockholders equity instead of a liability and earnings
per common share (“EPS”) will be segregated between EPS per common share and EPS of Minority
Interest.
Reclassifications
Certain prior years' balances included in the prior year balance sheet have been reclassified to
conform to current year presentation.
2. Discontinued operations
In 2005 management identified one of the Company’s subsidiaries, Steel City Products, LLC,
(“SCPL”) as held for sale and accordingly, reclassified its consolidated financial statements for all
periods to separately present SCPL as discontinued operations.
On October 27, 2006, the Company sold the operations of SCPL to an industry related buyer. The
Company received proceeds from the sale of $5.4 million, which included a two-year promissory
note in the amount of $650,000. From the proceeds, the Company repaid SCPL’s revolving line of
credit in full and retained and settled certain liabilities primarily related to severance and bonus
payments. The Company reported a pre-tax gain of $249,000 on the sale, equal to $121,000 after
taxes. The Company retained an accounts receivable, which it believes is fully collectible and
recorded liabilities related to the right of the purchaser to request payment for certain inventory not
sold within a year and for legal claims which remained unresolved at the sale date.
Summarized financial information for discontinued operations is presented below (in thousands):
2007
--
(25)
--
--
2006*
$ 17,661
741
180
121
682
(25) $
2005
$ 22,029
872
313
--
559
$
Net sales
Income (loss) before income taxes
Income taxes
Gain on disposal, net of tax of $128
Net income (loss) from discontinued operations
$
$
* through the date of sale, October 27, 2006
F16
3. Property and Equipment
Property and equipment are summarized as follows (in thousands):
Construction equipment
Transportation equipment
Buildings
Office equipment
Construction in progress
Land
Water rights
Less accumulated depreciation
December 31,
2007
December 31,
2006
$83,739
9,279
1,573
602
856
2,718
200
98,967
(26,578)
$72,389
$56,406
7,685
1,488
435
259
1,204
--
67,477
(20,860)
$46,617
4. Line of Credit and Long-Term Debt
Long-term debt consists of the following (in thousands):
TSC Revolver, due May 2009
Sterling Credit Facility, due October 2012
TSC mortgages due monthly through June 2016
Less current maturities of long-term debt
Line of Credit Facilities
December 31,
2007
$--
65,000
654
65,654
(98)
$65,556
December 31,
2006
$30,000
--
782
30,782
(123)
$30,659
In April 2006, the terms of TSC’s Revolver were modified to renew the line with Comerica Bank
for a term of three years, maturing on May 31, 2009 and to provide for an increase in the line from
$17.0 million to $35.0 million. The facility was also modified to add the Company as a co-borrower.
The interest rate varied quarterly, based on the Company’s ratio of debt to tangible net worth. The
credit facility continued to be subject to restrictive covenants including the maintenance of certain
financial ratios and a prescribed level of tangible net worth. In addition, the bank made available a
long-term facility of up to $1.5 million repayable over 15 years to finance the expansion of the
Company’s office building and maintenance facilities in Houston, Texas. The TSC Revolver
required the payment of a quarterly commitment fee of 0.25% per annum of the unused portion of the
line of credit. Borrowing interest rates were based on the bank's prime rate or on a Eurodollar rate at
the option of the Company. The interest rate on funds borrowed under this revolver during the year
ended December 31, 2006 ranged from 7.25% to 8.25% and during 2007 ranged from 7.75% to
8.25%.
On October 31, 2007, the Company and its subsidiaries entered into a new credit facility (“Credit
Facility”) with Comerica Bank, which replaced the prior Revolver and will mature on October 31,
2012. The Credit Facility allows for borrowing of up to $75.0 million and is secured by all assets of
F17
the Company, other than proceeds and other rights under our construction contracts, which are
pledged to our bond surety. The Credit Facility requires the payment of a quarterly commitment fee
of 0.25% per annum of the unused portion of the Credit Facility. Borrowings under the Credit
Facility were used to finance the RHB acquisition, repay indebtedness outstanding under the
Revolver, and finance working capital. At December 31, 2007, the aggregate borrowings outstanding
under the Credit Facility were $65.0 million, and the aggregate amount of letters of credit
outstanding under the Credit Facility was $1.5 million, which reduces availability under the Credit
Facility.
At our election, the loans under the new Credit Facility bear interest at either a LIBOR-based
interest rate or a prime-based interest rate. The unpaid principal balance of each LIBOR-based loan
bears interest at a variable rate equal to LIBOR plus an amount ranging from 1.25% to 2.25%
depending on the pricing leverage ratio that we achieve. The “pricing leverage ratio” is determined
by the ratio of our average total debt, less cash and cash equivalents, to the EBITDA that we achieve
on a rolling four-quarter basis. The pricing leverage ratio is measured quarterly. If we achieve a
pricing leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or greater than 1.00 to 1.00 but less
than 1.75 to 1.00; or (c) greater than or equal to 1.75 to 1.00, then the applicable LIBOR margins will
be 1.25%, 1.75% and 2.25%, respectively. Interest on LIBOR-based loans is payable at the end of the
relevant LIBOR interest period, which must be one, two, three or six months. The new credit facility
is subject to our compliance with certain covenants, including financial covenants relating to fixed
charges, leverage, tangible net worth, asset coverage and consolidated net losses.
The unpaid principal balance of each prime-based loan will bear interest at a variable rate equal
to Comerica’s prime rate plus an amount ranging from 0% to 0.50% depending on the pricing
leverage ratio that we achieve. If we achieve a pricing leverage ratio of (a) less than 1.00 to 1.00;
(b) equal to or greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal to 1.75
to 1.00, then the applicable prime margins will be 0.0%, 0.25% and 0.50%. The interest rate on
funds borrowed under this revolver during the year ended December 31, 2007 ranged from 7.50% to
7.75%.
In December 2007, Comerica syndicated the Credit Facility with three other financial institutions
under the same terms discussed above.
Management believes that the new Credit Facility will provide adequate funding for the
Company’s working capital, debt service and capital expenditure requirements, including seasonal
fluctuations at least through December 31, 2008.
As discussed above, the Credit Facility contains restrictions on the Company’s ability to:
• Make distributions and dividends;
•
Incur liens and encumbrances;
•
Incur further indebtedness;
• Guarantee obligations;
• Dispose of a material portion of assets or merge with a third party;
• Make acquisitions;
•
Incur negative income for two consecutive quarters.
The Company was in compliance with all covenants under the Credit Facility as of December 31,
2007.
TSC Mortgages
In 2001 TSC completed the construction of a headquarters building and financed it principally
through a mortgage of $1.1 million on the land and facilities, at a floating interest rate, which at
December 31, 2007 was 7.5% per annum, repayable over 15 years. This mortgage is cross-
F18
collateralized with another mortgage on the land and facilities which was obtained in 1998 in the
amount of $500,000, repayable over 15 years with an interest rate of 9.3% per annum. The
outstanding balance on these two mortgages aggregated $654,000 at December 31, 2007.
Maturity of Debt
The Company's long-term obligations mature in future years as follows (in thousands):
Fiscal Year
2008
2009
2010
2011
2012
Thereafter
$98
73
73
73
65,073
264
$ 65,654
F19
5. Financial Instruments
SFAS No. 107, “Disclosure about Fair Value of Financial Instruments” defines the fair value of
financial instruments as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
The Company’s financial instruments are cash and cash equivalents, short-term investments,
contracts receivable, accounts payable, mortgages payable and long-term debt. The recorded values
of cash and cash equivalents, short-term investments, contracts receivable and accounts payable
approximate their fair values based on their short-term nature. The recorded value of long-term debt
approximates its fair value, as interest approximates market rates.TSC has two mortgages, at 7.50%
and 9.30%, which contain pre-payment penalties. To determine the fair value of the mortgages, the
amount of future cash flows was discounted using the Company’s borrowing rate on its Credit
Facility. At December 31, 2007 and December 31, 2006, the carrying value of the mortgages was
$654,000 and $782,000, respectively, and the fair value of the mortgages was approximately
$641,000 and $741,000, respectively.
The Company does not have any off-balance sheet financial instruments.
6. Income Taxes and Deferred Tax Asset/Liability
During the year ended December 31, 2007, Sterling utilized the benefit of its book net operating
tax loss carry forwards ("NOL") of approximately $9.8 million, which offset a portion of the taxable
income of the Company and its subsidiaries from federal income taxes.
The Company has available to it carry forwards resulting from the exercise of non-qualified stock
options. Under the provisions of SFAS 123(R), the Company could not recognize the tax benefit of
these carry-forwards as deferred tax assets until its existing NOL's were fully utilized, and therefore,
the deferred tax asset related to NOL carry forwards differed from the amount available on its federal
tax returns. The Company utilized approximated $2.8 million of these excess tax benefits from the
exercise of stock options to offset taxable income in 2007 and has approximately $1.3 million of such
excess tax benefits available to reduce future tax liabilities. As these excess tax benefits are utilized
for tax purposes, they reduce taxes payable and increase additional paid-in capital.
The availability of the tax NOL carry forwards, including those from excess compensation
expense from the exercise of stock options, may be adversely affected by future ownership changes
of Sterling. At this time, such changes cannot be predicted. Under IRC Section 382, if a corporation
undergoes an ownership change, generally defined as a change of control of greater than 50% in any
three year period, the amount of net operating losses available to offset taxable income in a taxable
period may be subject to limitation under these provisions. In order to reduce the likelihood of such
a change of control occurring, Sterling's Certificate of Incorporation includes restrictions on the
registration of transfers of stock resulting in, or increasing, individual holdings exceeding 4.5% of the
Company's common stock.
F20
Deferred tax assets and liabilities of continuing operations consist of the following (in
thousands):
Assets related to:
Net operating loss carry forwards
Accrued compensation
AMT carry forward
Other
Liabilities related to:
Contract accounting
Depreciation
equipment
Net asset/liability
of
property
and
December 31, 2007
December 31, 2006
Current
Long Term
Current
Long Term
$
-- $
1,054
--
37
1,091
-- $ 3,346
974
--
64
4,384
487
2,446
--
2,933
$
--
162
1,289
--
1,451
(3)
--
(87)
--
--
--
(6,031)
$ 1,088 $ (3,098) $ 4,297
(3,039)
$ (1,588)
Current income tax expense represents federal alternative minimum tax and Texas margins tax.
Until such time as all NOL’s are fully utilized, the Company will recognize alternative minimum tax
payments as a debit to its deferred tax liability.
The income tax provision differs from the amount using the statutory federal income tax rate of
35% in 2007 and 34% in 2006 and 2005 applied to income from continuing operations, for the
following reasons (in thousands):
Tax expense at the U.S. federal statutory rate
State income tax expense, net of refunds and federal
..benefits
Decrease in deferred tax asset valuation allowance
Adjustment to value of net operating loss carry forward
Non-deductible costs
Non-taxable interest income
Other
Income tax expense
Income tax on discontinued operations including taxes
on the gain on sale in 2006
Income tax on continuing operations
December 31,
2007
$ 7,826
Fiscal Year Ended
December 31,
2006
$ 6,787
December 31,
2005
$ 4,829
106
--
--
74
(295)
179
$ 7,890
--
--
--
87
--
--
$ 6,874
--
(1,390)
(364)
98
--
(70)
$ 3,104
--
$ 7,890
308
$ 6,566
315
$ 2,788
The increase in the effective income tax rate to 35.3% in 2007 from 34.2% in 2006 is primarily
due to state income taxes due for 2007 and the increase in the graduated statutory tax rates. The
increase in the effective income tax rate to 34.2% in 2006 from 20.9% in 2005 is the result of the
decrease in the valuation allowance and adjustment in the value of the net operating loss carry
forward shown above. During fiscal 2005, the valuation allowance was reduced to zero.
In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). The interpretation prescribes a recognition threshold and measurement
attribute criteria for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on classification,
interest and penalties, accounting in interim periods, disclosure and transition.
The Company and its subsidiaries file income tax returns in the United States federal jurisdiction
and in various states. With few exceptions, the Company is no longer subject to federal tax
examinations for years prior to 2001 and state income tax examinations for years prior to 2004. The
Company’s policy is to recognize interest related to any underpayment of taxes as interest expense,
and penalties as administrative expenses. No interest or penalties have been accrued at December 31,
2007.
F21
The Company adopted FIN 48 on January 1, 2007; however the adoption did not result in an
adjustment to retained earnings. In its 2005 tax return, the Company used NOL’s that would have
expired during that year instead of deducting compensation expense that originated in 2005 as the
result of stock option exercises. Therefore, that compensation deduction was lost. Whether the
Company can choose not to take deductions for compensation expense in the tax return and to
instead use otherwise expiring NOLs is considered by management to be an uncertain tax position. In
the event that the IRS examines the 2005 tax return and determines that the compensation expense is
a required deduction in the tax return, then the Company would deduct the compensation expense
instead of the NOL used in the period; however there would be no cash impact on tax paid due to the
increased compensation deduction. In addition, there would be no interest or penalties due as a result
of the change. As a result of the Company’s detailed FIN 48 analysis, management has determined
that it is more likely than not this position will be sustained upon examination, and this uncertain tax
position was determined to have a measurement of $0.
The Company does not believe that its uncertain tax position will significantly change due to the
settlement and expiration of statutes of limitations prior to December 31, 2008.
7. Costs and Estimated Earnings and Billings on Uncompleted Contracts
Costs and estimated earnings and billings on uncompleted contracts at December 31, 2007 and
2006 are as follows (in thousands):
incurred and estimated earnings on
Costs
uncompleted contracts
Billings on uncompleted contracts
Fiscal Year Ended
Fiscal Year Ended
December 31,
December 31,
2007
2006
$ 329,559
(351,161)
$ (21,602)
$ 222,170
(240,549)
$ (18,379)
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts
Billings in excess of costs and estimated earnings
on uncompleted contracts
Fiscal Year Ended
December 31,
Fiscal Year Ended
December 31,
2007
2006
$ 3,747
$ 3,157
(25,349)
$(21,602)
(21,536)
$(18,379)
The cost and earned profit and billings in 2007 shown above include the amount related to the
Nevada contracts acquired on October 31, 2007 and still in progress at December 31, 2007.
F22
8. Stock Options and Warrants
Stock Options and Grants
The Company has five stock incentive plans which are administered by the Compensation
Committee of the Board of Directors. In general, the plans provide for all grants to be issued with a
per-share exercise price equal to the fair market value of a share of common stock on the date of
grant. The original terms of the grants typically do not exceed 10 years. Stock options generally vest
over a three to five year period.
In July 2001, the Board of Directors adopted and in October 2001 shareholders approved the
2001 Stock Incentive Plan (the “2001 Plan”). The 2001 Plan initially provided for the issuance of
stock awards for up to 500,000 shares of the Company's common stock. In March 2006, the number
of shares available for issuance under the 2001 Plan was increased to one million shares and
subsequently in November 2007 was reduced to 662,626 shares. Under the 2001 Plan, stock options
may be granted at an exercise price not less than the fair market value of the common stock on the
date of grant. The Company's and its subsidiaries' directors, officers, employees, consultants and
advisors are eligible to be granted awards under the plan. Stock options granted under the 2001 Plan
generally vest over three to five years and can be exercised no more than 10 years after the date of
the grant.
The plan also provides for stock grants and in May 2007 and May 2006, the independent directors
of the Company were awarded restricted stock with one-year vesting as follows:
2007 Awards
2006 Awards
Shares awarded to each independent director
Total shares awarded
1,598
9,588
Grant-date market price per share of awarded shares $
21.90 $
1,207
6,035
28.99
Total compensation cost
Compensation cost recognized in 2007
$
$
210,000 $
175,000
140,000 $
59,000
In the third quarter of 2007, two officers were issued options to purchase an aggregate of
16,507 shares of common stock at the closing market price on the date of grant. This same market
price was used in the Black Scholes valuation model to calculate compensation expense.
At December 31, 2007 there were 83,736 shares of common stock available under the 2001 Plan
for issuance pursuant to future stock option and share grants. No shares are or will be available for
grant under the Company’s other option plans, all of which have been terminated except with respect
to stock options outstanding under those plans.
The following tables summarize the stock option activity under the five plans:
Outstanding at December 31,
2004:
Exercised
Expired/forfeited
Outstanding at December 31,
2005:
Exercised
Outstanding at December 31,
2006:
Exercised
Outstanding at December 31,
2007:
1991 Plan
Director Plan
1994 Omnibus Plan
Shares
84,420
—
—
Weighted
Average
Exercise Price
Shares
Weighted
Average
Exercise Price
$ 2.75
$ 2.75
47,332
(3,000)
(13,166)
$ 1.67
$ 1.83
$ 2.75
Weighted
Average
Exercise Price
$ 1.29
$ 0.99
Shares
578,196
(154,000)
—
84,420
(55,996)
$ 2.75
$ 2.75
31,166
(18,000)
$ 1.58
$ 2.05
424,196
(166,016)
$ 1.40
$ 1.08
28,424
(28,424)
$ 2.75
$ 2.75
13,166
(3,000)
$ 0.94
$ 1.00
258,180
(181,990)
$ 1.60
$ 1.91
—
—
10,166
$ 0.93
76,190
$ 0.88
F23
Outstanding at December 31, 2004:
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2005:
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2006:
Granted
Exercised
Expired/forfeited
Outstanding at December 31, 2007:
1998 Plan
2001 Plan
Weighted
Average
Exercise
Price
$ 0.54
$ 0.50
$ 0.58
$ 0.57
$ 1.00
$ 1.00
—
Shares
518,625
—
(289,500)
—
229,125
—
(225,875)
—
3,250
—
(3,250)
—
—
Weighted
Average
Exercise
Price
$ 2.48
$ 10.88
$ 2.06
$ 2.43
$ 4.66
$ 16.36
$ 2.46
$ 7.83
$ 8.35
$ 19.43
$ 3.39
$13.48
$ 9.06
Shares
364,300
117,600
(17,540)
(7,200)
457,160
81,500
(64,057)
(4,400)
470,203
16,507
(24,110)
(5,460)
457,140
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2007:
Range of Exercise Price Per
Share
$0.50 - $0.88
$0.94 - $1.50
$1.73 - $2.00
$2.75 - $3.38
$6.87
$9.69
$16.78
$18.99
$21.60
$24.96
$25.21
Number of
Shares
80,356
54,400
36,300
167,873
20,000
62,800
25,560
13,707
2,800
62,800
16,900
543,496
Options Outstanding
Options Exercisable
Weighted Average
Remaining Contractual Life
(years)
Weighted Average
Exercise Price Per
Share
5.74
3.37
4.57
4.63
7.39
2.55
2.58
9.61
4.55
3.55
3.50
$ 0.88
$ 1.44
$ 1.73
$ 3.09
$ 6.87
$ 9.69
$16.78
$18.99
$21.60
$24.96
$ 25.21
$ 7.79
Number of
Shares
80,356
54,400
36,300
132,853
20,000
62,800
9,960
—
2,800
62,800
3,660
465,929
Weighted Average
Exercise Price Per
Share
$ 0.88
$ 1.44
$ 1.73
$ 3.09
$ 6.87
$ 9.69
$16.78
—
$21.60
$ 24.96
$ 25.21
$ 6.99
Total outstanding in-the-money options at 12/31/07
Total vested in-the-money options at 12/31/07
Total options exercised during 2007
463,796
339,469
240,774
Aggregate intrinsic value
$7,894,277
$7,120,803
$4,874,306
For unexercised options, aggregate intrinsic value represents the total pretax intrinsic value (the
difference between the Company’s closing stock price on December 31, 2007 ($21.82) and the
exercise price, multiplied by the number of in-the-money option shares) that would have been
received by the option holders had all option holders exercised their options on December 31, 2007.
For options exercised during 2007, aggregate intrinsic value represents the total pretax intrinsic value
based on the Company’s closing stock price on the day of exercise.
Compensation expense for options granted during 2007, 2006 and 2005 were calculated using the
Black-Scholes option pricing model using the following assumptions in each year:
F24
Fiscal 2007
Fiscal 2006
Fiscal 2005
Average Risk free interest rate
Average Expected volatility
4.7%
70.7%
4.9%
76.3%
4.2%
77.8%
Average Expected life of option
3.0 years
5.0 years
6.0 years
Expected dividends
None
None
None
The risk-free interest rate is based upon interest rates that match the contractual terms of the
stock option grants. The expected volatility is based on historical observation and recent price
fluctuations. The expected life is based on evaluations of historical and expected future employee
exercise behavior, which is not less than the vesting period of the options. The Company does not
currently pay dividends. The weighted average fair value of stock options granted in 2007, 2006 and
2005 was $12.20, $16.36 and $7.32, respectively.
Pre-tax deferred compensation expense for share based compensation was $1,110,000 ($722,000
after tax effects of 35.0%), $1,108,000 ($729,000 after tax effects of 34.2%), and $463,000
($306,000 after tax effects of 34.2%), in 2007, 2006 and 2005, respectively. Proceeds received by
the Company from the exercise of options in 2007, 2006 and 2005 were $513,000, $657,000 and
$343,000, respectively. At December 31, 2007, total unrecognized stock-based compensation
expense related to unvested stock options was approximately $501,000, which is expected to be
recognized over a weighted average period of approximately 1.8 years.
Prior to the adoption of SFAS123 (R), all tax benefits resulting from the exercise of non-qualified
stock options (or disqualifying dispositions of incentive stock options) were presented as operating
cash flows in the Consolidated Statements of Cash Flows. SFAS 123 (R) requires that cash flows
from the exercise of such stock options resulting from tax benefits in excess of recognized
cumulative compensation cost (excess tax benefits) be classified as financing cash flows. Because
the Company had not fully utilized its net operating loss carry forwards, the tax benefit could not be
recorded until it could be realized. Upon adoption of SFAS 123 (R), the Company recorded $2.8
million of these benefits as a component of stockholders’ equity. During 2007 an additional $4.3
million ($1.5 million net tax benefit) of excess compensation expense was utilized by the Company
as it fully utilized its net operating loss carry forwards.
Warrants
Warrants attached to zero coupon notes were issued to certain members of TSC management and
to certain stockholders in 2001. These ten-year warrants to purchase shares of the Company's
common stock at $1.50 per share became exercisable 54 months from the July 2001 issue date,
except that one warrant covering 322,661 shares by amendment became exercisable forty-two
months from the issue date. The following table shows the warrant shares outstanding and the
proceeds that have been received by the Company from exercises.
Warrants outstanding on vest date
Warrants exercised in 2005
Warrants exercised in 2006
Warrants exercised in 2007
Company’s
Proceeds of
Exercise
Year-End
Warrant Share
Balance
--
$483,991
$257,000
--
850,000
527,339
356,266
356,266
Shares
850,000
322,661
171,073
--
F25
9. Employee Benefit Plan
The Company and its subsidiaries maintain defined contribution profit-sharing plans covering
substantially all non-union persons employed by the Company and its subsidiaries, whereby
employees may contribute a percentage of compensation, limited to maximum allowed amounts
under the Internal Revenue Code. The Plans provides for discretionary employer contributions, the
level of which, if any, may vary by subsidiary and is determined annually by each company's board
of directors. The Company made aggregate matching contributions of $353,000, $325,000 and
$276,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
10. Operating Leases
The Houston headquarters and operations are conducted from an owned building in Houston,
Texas. The Company also leases office space in the Dallas area, and San Antonio, Texas and Reno,
Nevada.
In 2006 and 2007, the Company entered into several long-term operating leases for equipment
with lease terms of approximately three to five years. Certain of these leases allow the Company to
purchase the equipment on or before the end of the lease term. If the Company does not purchase the
equipment, it is returned to the lessor. Two leases obligate the Company to pay a guaranteed residual
not to exceed 20% of the original equipment cost. The Company is accruing the liability for both
leases, which is not expected to exceed $330,000 in aggregate.
Minimum annual rentals for all operating leases having initial non-cancelable lease terms in
excess of one year are as follows (in thousands):
Fiscal Year
2008
2009
2010
2011
2012
Thereafter
$
920
721
721
567
70
--
Total future minimum rental
payments
$ 2,999
Total rent expense for all operating leases amounted to approximately $1,068,000, $995,000 and
$1,013,000 in fiscal years 2007, 2006 and 2005, respectively.
F26
11. Customers
The following table shows contract revenues generated from the Company’s customers that
accounted for more than 10% of revenues (dollars in thousands):
Texas State Department of
Transportation ("TXDOT")
City of Houston ("COH")
Harris County
December 31,
2007
December 31,
December 31,
2006
2005
Contract
Revenues
% of
Revenues
Contract
Revenues
% of
Revenues
Contract
Revenues
% of
Revenues
$201,073
*
*
65.7%
*
*
$ 166,333
$ 29,848
*
67.1%
12.1%
*
$ 84,827
$ 49,437
$ 29,796
38.8%
22.6%
13.6%
* represents less than 10% of revenues
At December 31, 2007, TXDOT ($26.4 million) and COH ($8.2 million) had balances greater than
10% of contracts receivable.
12. Equity Offerings
In December 2007, the Company completed a public offering of 1.84 million shares of its
common stock at $20.00 per share. The Company received proceeds, net of underwriting discounts
and commissions, of approximately $35.0 million ($19.00 per share) and paid approximately $0.5
million in related offering expenses. From the proceeds of the offering, the Company repaid the
portion of its Credit Facility that was used in its acquisition of its interest in RHB. The remainder of
the offering proceeds was used for working capital purposes.
In January 2006, the Company completed a public offering of approximately 2.0 million shares of
its common stock at $15.00 per share. The Company received proceeds, net of underwriting
commissions, of approximately $28.0 million ($13.95 per share) and paid approximately $907,000 in
related offering expenses. In addition, the Company received approximately $484,000 from the
exercise of warrants and options to purchase 321,758 shares, of Common Stock, which were
subsequently sold by the option and warrant holders. From the proceeds of the offering, the
Company repaid all its outstanding related party promissory notes to officers, directors and former
directors as follows:
Name
Patrick T. Manning
James D. Manning
Joseph P. Harper, Sr.
Maarten D. Hemsley
Robert M. Davies
Principal
$
318,592
$ 1,855,349
$ 2,637,422
181,205
$
452,909
$
Interest
2,867
16,698
23,737
1,631
4,076
Total
Payment
$
321,459
$ 1,872,047
$ 2,661,159
182,836
$
456,985
$
During 2006, the Company utilized a portion of the offering proceeds to purchase additional
construction equipment and to repay borrowed funds used for the acquisition of RDI (see note 13
below).
F27
13. Acquisitions:
On October 31, 2007, the Company purchased a 91.67% interest in Road and Highway
Builders, LLC (“RHB”), a Nevada limited liability company, and all of the outstanding capital stock
of Road and Highway Builders, Inc (“RHB Inc”), an inactive Nevada corporation. These entities
were affiliated through common ownership.
RHB is a heavy civil construction business located in Reno, Nevada that builds roads, highways
and bridges for local and state agencies. Its assets consist of construction contracts, road and bridge
construction and aggregate mining machinery and equipment, and approximately 44.5 acres of land
with improvements. RHB Inc’s sole asset is its right as a co-lessee with RHB under a long-term,
royalty-based lease of a Nevada quarry on which RHB can mine aggregates for use in its own
construction business and for sale to third parties.
The Company paid an aggregate purchase price for its interest in RHB of $53.0 million,
consisting $48.9 million in cash, 40,702 unregistered shares of the Company’s common stock, which
was valued at $1.0 million based on the quoted market value of the Company’s stock on the purchase
date, and $3.1 million in assumption of accounts payable to RHB by one of the sellers. Additionally,
the Company incurred $1.1 million of direct costs related to the acquisition. We acquired RHB for a
number of reasons, including those listed below:
• Expansion into growing western U.S. infrastructure construction markets;
• Strong management team with a shared corporate cultural;
• Expansion of our service lines into aggregates and asphalt paving materials;
• Opportunities to extend our municipal and structural capabilities into Nevada; and
• RHB’s strong financial results and expected immediate accretion to our earnings and
earnings per share.
Ten percent of the cash purchase price was placed in escrow for eighteen months as security for
any breach of representations and warranties made by the sellers. The cash portion of the purchase
price was funded by a $22.4 million drawdown under a new $75 million five-year Credit Facility
with Comerica Bank and the balance from the Company’s available cash.
The minority interest owner of RHB (who remains with RHB as Chief Executive Officer) has
the right to require the Company to buy his remaining 8.33% minority interest in RHB and,
concurrently, the Company has the right to require that owner to sell his 8.33% interest to the
Company, beginning in 2011. The purchase price in each case is 8.33% of the product of six times
the simple average of RHB’s income before interest, taxes, depreciation and amortization for the
calendar years 2008, 2009 and 2010. The minority interest was recorded at its estimated fair value at
the date of acquisition and the difference between the minority owner’s interest in the historical basis
of RHB and the estimated fair value of that interest was recorded as a liability to minority interest
and a reduction in addition paid-in capital.
Any changes to the estimated fair value of the minority interest will be recorded as a
corresponding change in additional paid-in-capital. Additionally, interest will be accredited to the
minority interest liability based on the discount rate used to calculate the fair value of the acquisition.
The purchase agreement restricts the sellers from competing against the business of RHB and
from soliciting its employees for a period of four years after the closing of the purchase.
The following table summarizes the initial allocation of the purchase price, including related
direct acquisition costs for RHB (in thousands):
F28
Tangible assets acquired at estimated fair value, including
approximately $10,000 of property, plant and equipment
Current liabilities assumed
Goodwill
Total
$19,334
(9,686)
44,496
$54,144
The goodwill is deductible for tax purposes over 15 years. The purchase price allocation has not
been finalized due to the short time period between the acquisition date and the date of the financial
statements. A preliminary analysis of the assets acquired indicates that there are no separately
identifiable intangible assets. The nature and amount of any material adjustments ultimately made to
the initial allocation of the purchase price will be disclosed when determined.
The operations of RHB are included in the accompanying consolidated statements of operations
and cash flows for the two months ended December 31, 2007. Supplemental information on an
unaudited pro forma combined basis, as if the RHB acquisition had been consummated at the
beginning of 2006, is as follow (in thousands, except per share amounts):
Revenues
Net income from continuing operations
(Unaudited)
2007
2006
$377,740
$286,511
$26,881
$14,959
Diluted net income per share from continuing operations
$2.26
$1.27
For the ten months ended October 31, 2007, RHB had unaudited revenues of approximately
$72 million and unaudited income before taxes of approximately $21.0 million. The profitability of
RHB for the ten month period was higher than what is expected to continue due to some unusually
high margin contracts and may not be indicative of future results of operations. We purchased RHB
based on an assumed sustainable trailing twelve month EBITDA (earnings before interest, tax,
depreciation and amortization) of approximately $12 million with the expectation of further future
growth. At October 31, 2007, RHB had a backlog of approximately $123 million.
In January, 2006, TSC acquired certain assets of the crane division of Rathole Drilling, Inc.
“RDI.” The acquisition included the purchase of construction equipment at its appraised value of
approximately $2.0 million, the trade name RDI and the assumption by TSC of certain of the seller’s
contracts. TSC paid cash of $2.2 million for the acquired assets. The size of the acquisition and the
amount of assets acquired were not material in relation to the Company’s historical business.
F29
14. Commitments and Contingencies
Employment Agreements
Patrick T. Manning, Joseph P. Harper, Sr., James H. Allen, Jr. and certain other officers of the
Company and TSC have employment agreements which provide for payments of annual salary,
deferred salary bonuses and certain benefits if their employment is terminated without cause.
Self-Insurance
The Company is self-insured for employee health claims. Its policy is to accrue the estimated
liability for known claims and for estimated claims that have been incurred but not reported as of
each reporting date. The Company has obtained reinsurance coverage for the policy period from June
1, 2007 through May 31, 2008 as follows:
• Specific excess reinsurance coverage for medical and prescription drug claims in excess of
$60,000 for each insured person with a maximum lifetime reimbursable of $2,000,000.
• Aggregate reinsurance coverage for medical and prescription drug claims with a plan year with a
maximum of approximately $1.1 million which is the estimated maximum claims and fixed
cost based on the number of employees.
For the twelve months ended December 31, 2007, 2006 and 2005, the Company incurred $1.6
million, $1.2 million and $1.0 million, respectively, in expenses related to this plan.
The Company is also self-insured for workers’ compensation claims up to $250,000 per
occurrence, with a maximum aggregate liability of $2.7 million per year. Its policy is to accrue the
estimated liability for known claims and for estimated claims that have been incurred but not
reported as of each reporting date. At December 31, 2007 and 2006, TSC had recorded an estimated
liability of $1,067,000 and $575,000, respectively, which it believes is adequate based on its claims
history. The Company has a safety and training program in place to help prevent accidents and
injuries and works closely with its employees and the insurance company to monitor all claims.
The Company obtains bonding on construction contracts through Travelers Casualty and Surety
Company of America. As is customary in the construction industry, the Company indemnifies
Travelers for all losses incurred by it in connection with bonds that are issued. The Company has
granted Travelers a security interest in accounts receivable and contract rights for that obligation.
Guarantees
The Company typically indemnifies contract owners for claims arising during the construction
process and carries insurance coverage for such claims, which in the past have not been material.
The Company’s Certificate of Incorporation provides for indemnification of its officers and
directors. The Company has a Director and Officer insurance policy that limits its exposure. At
December 31, 2007 the Company had not accrued a liability for this guarantee, as the likelihood of
incurring a payment obligation in connection with this guarantee is believed to be remote.
Litigation
The Company is the subject of certain claims and lawsuits occurring in the normal course of
business. Management, after consultation with outside legal counsel, does not believe that the
outcome of these actions will have a material impact on the financial statements of the Company.
F30
Purchase Commitments
To manage the risk of changes in material prices and subcontracting costs used in tendering bids
for construction contracts, we obtain firm quotations from our suppliers and subcontractors before
submitting a bid. These quotations do not include any quantity guarantees. As soon as we are
advised that our bid is the lowest, we enter into firm contracts with our materials suppliers and most
sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.
15. Minority Interest in RHB
As discussed in Note 13 above, on October 31, 2007, the Company acquired a 91.67% interest in
RHB. The remaining 8.33% interest is reported as minority interest in long-term liabilities in the
accompanying financial statements, at its estimated fair value at December 31, 2007. The minority
interest owner has the right to require the Company to buy his remaining 8.33% minority interest in
RHB and, concurrently, the Company has the right to require that owner to sell his 8.33% interest to
the Company, both in 2011. The purchase price in each case is 8.33% of the product of six times the
simple average of RHB LLC’s income before interest, taxes, depreciation and amortization for the
calendar years 2008, 2009 and 2010. The minority interest was recorded at its estimated fair value at
the date of acquisition and the difference ($5.4 million) between the minority owner’s interest in the
historical basis of RHB and the estimated fair value of that interest was recorded as a liability to
minority interest and a reduction in additional paid-in capital.
16. Related Party Transactions
In July 2001, Robert Frickel was elected to the Board of Directors. He is President of R.W.
Frickel Company, P.C., an accounting firm based in Michigan that performs certain tax services for
the Company. Fees paid or accrued to R.W. Frickel Company for 2007, 2006 and 2005 and were
approximately $63,580, $57,500 and $113,000, respectively.
In July 2005, Patrick T. Manning married Amy Peterson, the sole beneficial owner of Paradigm
Outdoor Supply, LLC and Paradigm Outsourcing, Inc., both of which are women-owned business
enterprises. The Paradigm companies provide materials and services to the Company and to other
contractors. From July 2005, when Ms. Peterson and Mr. Manning were married, through December
31, 2005, the Company paid approximately $6.0 million to the Paradigm companies for materials and
services. In 2007 and 2006, the Company paid approximately $1.7 million and $3.3 million,
respectively, to the Paradigm companies for materials and services.
17.
Capital Structure
Holders of common stock are entitled to one vote for each share on all matters voted upon by the
stockholders, including the election of directors, and do not have cumulative voting rights. Subject
to the rights of holders of any then outstanding shares of preferred stock, common stockholders are
entitled to receive ratably any dividends that may be declared by the Board of Directors out of funds
legally available for that purpose. Holders of common stock are entitled to share ratably in net assets
upon any dissolution or liquidation after payment of provision for all liabilities and any preferential
liquidation rights of our preferred stock then outstanding. Common stock shares are not subject to
any redemption provisions and are not convertible into any other shares of capital stock. The rights,
preferences and privileges of holders of common stock are subject to those of the holders of any
shares of preferred stock that may be issued in the future.
The Board of Directors may authorize the issuance of one or more classes or series of preferred
stock without stockholder approval and may establish the voting powers, designations, preferences
and rights and restrictions of such shares. No preferred shares have been issued.
In December 1998, the Company entered into a rights agreement with American Stock Transfer
& Trust Company, as rights agent, providing for a dividend of one purchase right for each
outstanding share of common stock for stockholders of record on December 29, 1998. Holders of
shares of common stock issued since that date are issued rights with their shares. The rights trade
F31
automatically with the shares of common stock and become exercisable only if a takeover attempt of
the Company occurs. The rights will expire on December 29, 2008, unless redeemed or exchanged
before that time.
F32
20. Quarterly Financial Information
(Unaudited)
Fiscal 2007 Quarter Ended
March 31
June 30
September 30
December 31
Total
(Dollar amounts in thousands, except per share data)
5,632
5,711
3,797
2,536
3,831
Revenues..................................... $ 68,888 $ 71,275
Gross profit .................................
8,046
Pre-tax income from continuing
operations..................................
Net income from continuing
operations..................................
Net loss from discontinued
--
operations..................................
Net income.................................. $ 2,511 $ 3,797
Basic income per share:
From continuing operations: ....... $
From discontinued
operations:.................................
$
Net income per share, basic: ....... $
Diluted income per share:
From continuing operations ........ $
From discontinued operations..... $
Net income per share,
diluted: ......................................
0.21 $
--
$
$
--
0.23 $
--
0.35
0.32
--
0.23 $
0.21
0.32
0.35
(25)
$
$
$ 77,714
7,915
$ 88,343
12,093
$ 306,220
33,686
5,125
3,443
7,692
4,693
22,359
14,469
--
$ 3,443
--
$ 4,693
(25)
$ 14,444
$
0.31
$
0.42
$
$
$
$
--
0.31
0.29
--
$
$
$
$
--
0.42
0.39
--
$
0.29
$
0.39
$
$
$
$
$
$
1.31
--
1.31
1.22
--
1.22
Fiscal 2006 Quarter Ended
March 31
June 30
September 30
December 31
Total
(Dollar amounts in thousands, except per share data)
6,686
Revenues..................................... $ 56,480 $ 60,010
Gross profit .................................
7,310
Pre-tax income from continuing
operations.................................
Net income from continuing
operations..................................
Net income from discontinued
operations..................................
4,563
3,022
3,156
4,832
171
208
Net income.................................. $ 3,193 $ 3,364
Basic income per share:
From continuing operations: ....... $
From discontinued
$
operations:.................................
Net income per share, basic: ....... $
Diluted income per share:
From continuing operations ........ $
From discontinued operations..... $
Net income per share,
diluted: ......................................
0.27 $
0.01 $
0.02
$
0.32 $
0.27
0.02
0.02
0.32
0.30 $
0.28
0.29
0.30
$
$
$ 68,743
7,878
$ 64,115
6,673
$ 249,348
28,547
5,354
3,545
4,455
2,915
19,204
12,638
65
$ 3,610
238
$ 3,153
682
$ 13,320
$
0.33
$
0.26
$
$
$
$
0.01
0.34
0.30
0.01
$
$
$
$
0.01
0.27
0.24
0.01
$
0.31
$
0.25
$
$
$
$
$
$
1.19
0.06
1.25
1.08
0.06
1.14
F33
20810 Fernbush Lane
Houston, Texas 77073
281-821-9091
www.sterlingconstructionco.com