Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the
transition period from ________ to ________
COMMISSION
FILE NUMBER: 1-7525
THE
GOLDFIELD CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
88-0031580
|
(State
or other Jurisdiction of Incorporation or
Organization)
|
(I.R.S.
Employer Identification No.)
|
1684
West Hibiscus Blvd., Melbourne, Florida, 32901
(Address
of Principal Executive Offices)(Zip Code)
(321)
724-1700
(Registrant’s
Telephone Number, Including Area Code)
Not
Applicable
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
þ
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
þ
As
of
August 7, 2007, 25,451,354 shares of the Registrant’s Common Stock were
outstanding.
THE
GOLDFIELD CORPORATION AND SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE
QUARTER ENDED JUNE 30, 2007
INDEX
PART
I. FINANCIAL INFORMATION
|
|
|
3
|
|
Item
1. Financial Statements
|
|
|
3
|
|
Consolidated
Balance Sheets
|
|
|
3
|
|
Consolidated
Statements of Operations
|
|
|
4
|
|
Consolidated
Statements of Cash Flows
|
|
|
5
|
|
Notes
to Consolidated Financial Statements
|
|
|
6
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
|
13
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
|
|
|
22
|
|
Item
4T. Controls and Procedures.
|
|
|
23
|
|
PART
II. OTHER INFORMATION
|
|
|
24
|
|
Item
1. Legal Proceedings
|
|
|
24
|
|
Item
1A. Risk Factors
|
|
|
24
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
24
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
|
24
|
|
Item
6. Exhibits
|
|
|
25
|
|
SIGNATURES
|
|
|
26
|
|
PART
I. FINANCIAL INFORMATION
THE
GOLDFIELD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,548,191
|
|
$
|
6,801,600
|
|
Accounts
receivable and accrued billings
|
|
|
4,147,221
|
|
|
4,908,511
|
|
Contracts
receivable
|
|
|
3,279,600
|
|
|
10,623,909
|
|
Remediation
insurance receivable
|
|
|
273,349
|
|
|
329,888
|
|
Current
portion of notes receivable
|
|
|
50,143
|
|
|
41,453
|
|
Construction
inventory
|
|
|
-
|
|
|
216,989
|
|
Real
estate inventories
|
|
|
10,506,278
|
|
|
801,411
|
|
Costs
and estimated earnings in excess of
|
|
|
|
|
|
|
|
billings
on uncompleted contracts
|
|
|
2,473,264
|
|
|
2,358,738
|
|
Deferred
income taxes
|
|
|
20,500
|
|
|
263,400
|
|
Income
taxes recoverable
|
|
|
654,434
|
|
|
309,922
|
|
Residential
properties under construction
|
|
|
-
|
|
|
3,784,165
|
|
Prepaid
expenses
|
|
|
1,017,745
|
|
|
431,441
|
|
Other
current assets
|
|
|
22,345
|
|
|
17,614
|
|
Total
current assets
|
|
|
26,993,070
|
|
|
30,889,041
|
|
Property,
buildings and equipment, at cost, net of depreciation
|
|
|
|
|
|
|
|
of
$14,302,301 as of June 30, 2007 and
|
|
|
|
|
|
|
|
$13,715,313
as of December 31, 2006
|
|
|
10,866,696
|
|
|
9,465,378
|
|
Notes
receivable, less current portion
|
|
|
375,099
|
|
|
407,409
|
|
Deferred
charges and other assets
|
|
|
|
|
|
|
|
Land
and land development costs
|
|
|
710,495
|
|
|
710,495
|
|
Cash
surrender value of life insurance
|
|
|
326,492
|
|
|
321,724
|
|
Other
assets
|
|
|
662,285
|
|
|
110,129
|
|
Total
deferred charges and other assets
|
|
|
1,699,272
|
|
|
1,142,348
|
|
Total
assets
|
|
$
|
39,934,137
|
|
$
|
41,904,176
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
2,899,164
|
|
$
|
5,359,893
|
|
Billings
in excess of costs and estimated
|
|
|
|
|
|
|
|
earnings
on uncompleted contracts
|
|
|
-
|
|
|
24,444
|
|
Notes
payable
|
|
|
9,916,477
|
|
|
8,663,768
|
|
Capital
leases, due within one year
|
|
|
326,754
|
|
|
317,160
|
|
Current
liabilities of discontinued operations
|
|
|
133,759
|
|
|
208,221
|
|
Total
current liabilities
|
|
|
13,276,154
|
|
|
14,573,486
|
|
Deferred
income taxes
|
|
|
465,400
|
|
|
861,400
|
|
Other
accrued liabilities
|
|
|
24,416
|
|
|
20,821
|
|
Notes
payable, less current portion
|
|
|
2,560,976
|
|
|
1,207,745
|
|
Capital
leases, less current portion
|
|
|
729,956
|
|
|
894,976
|
|
Total
liabilities
|
|
|
17,056,902
|
|
|
17,558,428
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, $1 par value per share, 5,000,000
|
|
|
|
|
|
|
|
shares
authorized, none issued
|
|
|
-
|
|
|
-
|
|
Common
stock, $.10 par value per share, 40,000,000 shares authorized;
|
|
|
|
|
|
|
|
27,813,772
shares issued and 25,451,354 shares outstanding
|
|
|
2,781,377
|
|
|
2,781,377
|
|
Capital
surplus
|
|
|
18,481,683
|
|
|
18,481,683
|
|
Retained
earnings
|
|
|
2,922,362
|
|
|
4,390,875
|
|
Treasury
stock, 2,362,418 shares, at cost
|
|
|
(1,308,187
|
)
|
|
(1,308,187
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
22,877,235
|
|
|
24,345,748
|
|
Total
liabilities and stockholders' equity
|
|
$
|
39,934,137
|
|
$
|
41,904,176
|
|
See
accompanying notes to consolidated financial statements
THE
GOLDFIELD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
$
|
6,658,079
|
|
$
|
11,186,323
|
|
$
|
14,012,121
|
|
$
|
21,678,328
|
|
Real
estate development
|
|
|
(5,303,303
|
)
|
|
1,046,540
|
|
|
(2,848,870
|
)
|
|
4,549,487
|
|
Total
revenue
|
|
|
1,354,776
|
|
|
12,232,863
|
|
|
11,163,251
|
|
|
26,227,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
|
4,946,406
|
|
|
8,460,325
|
|
|
11,748,110
|
|
|
16,583,534
|
|
Real
estate development
|
|
|
(3,470,151
|
)
|
|
827,489
|
|
|
(1,776,226
|
)
|
|
3,148,918
|
|
Depreciation
|
|
|
765,770
|
|
|
628,120
|
|
|
1,508,118
|
|
|
1,227,411
|
|
Selling,
general and administrative
|
|
|
606,362
|
|
|
819,774
|
|
|
1,657,333
|
|
|
1,918,129
|
|
Gain
on sale of assets
|
|
|
(1,436
|
)
|
|
(11,013
|
)
|
|
(10,294
|
)
|
|
(29,323
|
)
|
Total
costs and expenses
|
|
|
2,846,951
|
|
|
10,724,695
|
|
|
13,127,041
|
|
|
22,848,669
|
|
Total
operating income (loss)
|
|
|
(1,492,175
|
)
|
|
1,508,168
|
|
|
(1,963,790
|
)
|
|
3,379,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
51,554
|
|
|
26,972
|
|
|
112,886
|
|
|
51,684
|
|
Interest
expense, net of amount capitalized
|
|
|
(99,060
|
)
|
|
(62,965
|
)
|
|
(178,705
|
)
|
|
(99,957
|
)
|
Other
|
|
|
53,364
|
|
|
110,128
|
|
|
62,513
|
|
|
113,622
|
|
Total
other income (expenses), net
|
|
|
5,858
|
|
|
74,135
|
|
|
(3,306
|
)
|
|
65,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
(1,486,317
|
)
|
|
1,582,303
|
|
|
(1,967,096
|
)
|
|
3,444,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(364,815
|
)
|
|
609,831
|
|
|
(498,583
|
)
|
|
1,327,533
|
|
Net
income (loss)
|
|
$
|
(1,121,502
|
)
|
$
|
972,472
|
|
$
|
(1,468,513
|
)
|
$
|
2,116,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share of common stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
$
|
(0.06
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
– basic and diluted
|
|
|
25,451,354
|
|
|
25,572,192
|
|
|
25,451,354
|
|
|
25,572,192
|
|
See
accompanying notes to consolidated financial statements
THE
GOLDFIELD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
(1,468,513
|
)
|
$
|
2,116,962
|
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
cash
provided by (used by) operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,508,118
|
|
|
1,227,411
|
|
Gain
on sale of assets
|
|
|
(10,294
|
)
|
|
(29,323
|
)
|
Deferred
income taxes
|
|
|
(153,100
|
)
|
|
391,000
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivable and accrued billings
|
|
|
761,290
|
|
|
(484,046
|
)
|
Contracts
receivable
|
|
|
7,344,309
|
|
|
4,292,613
|
|
Construction
inventory
|
|
|
216,989
|
|
|
(481,363
|
)
|
Real
estate inventories
|
|
|
(9,704,867
|
)
|
|
-
|
|
Costs
and estimated earnings in excess
|
|
|
|
|
|
|
|
of
billings on uncompleted contracts
|
|
|
(114,526
|
)
|
|
(1,500,264
|
)
|
Land
and land development costs
|
|
|
-
|
|
|
1,074,680
|
|
Residential
properties under construction
|
|
|
3,784,165
|
|
|
(2,081,989
|
)
|
Income
taxes recoverable
|
|
|
(344,512
|
)
|
|
(14,404
|
)
|
Income
taxes payable
|
|
|
-
|
|
|
167,873
|
|
Prepaid
expenses and other assets
|
|
|
(1,143,191
|
)
|
|
(587,823
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(2,490,186
|
)
|
|
652,373
|
|
Billings
in excess of costs and estimated
|
|
|
|
|
|
|
|
earnings
on uncompleted contracts
|
|
|
(24,444
|
)
|
|
(23,881
|
)
|
Net
cash provided by (used by) operating
|
|
|
|
|
|
|
|
activities
of continuing operations
|
|
|
(1,838,762
|
)
|
|
4,719,819
|
|
Net
cash used by operating activities
|
|
|
|
|
|
|
|
of
discontinued operations
|
|
|
(17,923
|
)
|
|
(61,251
|
)
|
Net
cash provided by (used by) operating activities
|
|
|
(1,856,685
|
)
|
|
4,658,568
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Proceeds
from the disposal of property and equipment
|
|
|
91,981
|
|
|
136,735
|
|
Proceeds
from notes receivable
|
|
|
23,620
|
|
|
21,216
|
|
Purchases
of property and equipment
|
|
|
(2,958,071
|
)
|
|
(1,438,503
|
)
|
Cash
surrender value of life insurance
|
|
|
(4,768
|
)
|
|
9,580
|
|
Net
cash used by investing activities of
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(2,847,238
|
)
|
|
(1,270,972
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from term debt
|
|
|
698,093
|
|
|
2,404,676
|
|
Repayments
on term debt
|
|
|
(216,666
|
)
|
|
(520,534
|
)
|
Net
borrowings (repayments) under lines of credit
|
|
|
2,124,513
|
|
|
(3,843,550
|
)
|
Repayments
on capital leases
|
|
|
(155,426
|
)
|
|
-
|
|
Net
cash provided by (used by) financing activities of
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
2,450,514
|
|
|
(1,959,408
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(2,253,409
|
)
|
|
1,428,188
|
|
Cash
and cash equivalents at beginning of period
|
|
|
6,801,600
|
|
|
2,912,494
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,548,191
|
|
$
|
4,340,682
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
166,373
|
|
$
|
88,333
|
|
Cash
paid for income taxes
|
|
|
-
|
|
|
783,064
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Capital
leases for equipment
|
|
|
-
|
|
|
975,665
|
|
Liability
for equipment acquired
|
|
|
33,052
|
|
|
-
|
|
See
accompanying notes to consolidated financial statements
THE
GOLDFIELD CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2007 and 2006
Note
1 - Description of Business and Basis of Financial Statement Presentation
Overview
The
Goldfield Corporation (the “Company”) was incorporated in Wyoming in 1906 and
subsequently reincorporated in Delaware in 1968. The Company's principal lines
of business are electrical construction and real estate development. The
principal market for the Company's electrical construction operation is electric
utilities in the southeastern and mid-Atlantic region of the United States.
The
primary focus of the Company's real estate operations is on the development
of
luxury condominium projects.
Basis
of Presentation
In
the
opinion of management, the accompanying unaudited interim consolidated financial
statements include all adjustments necessary to present fairly the Company’s
financial position, results of operations and changes in cash flows for the
interim periods reported. These adjustments are of a normal recurring nature.
All financial statements presented herein are unaudited. The consolidated
balance sheet as of December 31, 2006, is derived from the audited consolidated
financial statements. The results of operations for the interim periods shown
in
this report are not necessarily indicative of results to be expected for the
fiscal year. These
statements should be read in conjunction with the financial statements included
in the Company’s annual report on Form 10-K for the year ended December 31,
2006.
Use
of Estimates
Generally
accepted accounting principles require management to make estimates and
assumptions during the preparation of the Company’s financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as
more information becomes available, which in turn could impact the amounts
reported and disclosed herein.
Recent
Accounting Pronouncements
In
November 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on
EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing
Investment under SFAS No. 66, “Accounting for Sales of Real Estate,” for Sales
of Condominiums.” EITF No. 06-8 will require condominium sales to meet the
continuing involvement criterion of SFAS No. 66 in order for profit to be
recognized under the percentage of completion method. EITF No. 06-8 will be
effective for annual reporting periods beginning after March 15, 2007. This
consensus could require that additional deposits be collected by developers
of
condominium projects that wish to recognize profit during the construction
period under the percentage-of-completion method. The cumulative effect of
applying EITF No. 06-8, if any, is to be reported as an adjustment to the
opening balance of retained earnings in the year of adoption. The Company is
currently evaluating the potential impact of adopting EITF No. 06-8 on its
consolidated financial position and results of operations. If the Company is
unable to meet the requirements of EITF No. 06-8, it will be required to delay
revenue recognition until the aggregate investment tests described in SFAS
No.
66 and EITF No. 06-8 have been met.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
Measurement.” SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of SFAS No. 157 on its
consolidated financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” which is effective for fiscal years beginning after November
15, 2007. SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the long-term measurement objectives
for
accounting for financial instruments. The Company is currently evaluating the
potential impact of SFAS No. 159 on its consolidated financial position and
results of operations.
Note
2 - Contracts Receivable
Contracts
receivable represents the amount of revenue recognized in the real estate
segment using the percentage-of-completion method for condominium units under
firm contract. As of June 30, 2007, outstanding contracts receivable amounted
to
$3.3 million, all of which is for the Pineapple House condominium project.
As of December 31, 2006, outstanding contracts receivable amounted to $10.6
million, all of which related to the Pineapple House project. For the six months
ended June 30, 2007, a total of thirteen customers defaulted or notified the
Company of their intent to default on their contractual obligation to close
the
purchase of individual condominium units. As of June 30, 2007 and December
31,
2006, $1.0 million and $1.5 million, respectively, of non-refundable earnest
money deposits were held by a third party for the Pineapple House
project.
The
Company’s real estate development operations do not extend financing to buyers
and, therefore, sales proceeds are received in full upon closing.
Note
3 -Inventory
Construction
inventory, which consists of condominium construction materials, is stated
at
the lower of cost or market.
Real
estate inventories, which consist of completed condominium units held for sale,
are carried at the lower of cost or fair value, less cost to sell. The Company
had three completed condominium units held for sale within the Oak Park project
at June 30, 2007 compared to four at December 31, 2006. In addition, as of
June
30, 2007, the Company completed the Pineapple House project and has 24 completed
condominium units held for sale within the Pineapple House project compared
to
none at December 31, 2006.
Note
4 - Discontinued Operations
On
December 4, 2002, effective November 30, 2002, the Company completed the sale
of
the capital stock of its mining subsidiaries.
Commitments
and Contingencies Related to Discontinued Operations
On
September 8, 2003, the United States Environmental Protection Agency (the “EPA”)
issued a special notice letter notifying the Company that it is a potentially
responsible party (“PRP”), along with three other parties, with respect to
investigation and removal activities at the Anderson-Calhoun Mine/Mill Site
(the
“Site”) in Stevens County, Washington.
The
Company sold the Site property in 1964. The Company has investigated the
historic operations that occurred at the Site as well as the nature and scope
of
environmental conditions at the Site that may present concerns to the EPA.
Based
upon its investigation to date, the Company has determined that its operations
at the Site were primarily exploratory and that the Company never engaged in
any
milling or other processing activities at the Site. The Company’s records
reflect that between the years 1950 and 1952 it extracted a limited amount
(111,670 tons) of surface ore from the Site for off-site processing. The Site
has changed owners several times since it was sold by the Company, and the
Company believes that a substantial majority of the mining activities and all
of
the milling and related processing and process waste disposal activities likely
were conducted by subsequent owners.
In
April
of 2007, the EPA approved as final an Engineering Evaluation/Cost Analysis
Report (“EE/CA Report”) for the Site. The EE/CA Report proposes to adopt as the
preferred remedy a removal action primarily focused on addressing ore processing
areas and wastes that were created after the Company sold the Site. The EPA
held
a public comment period for the proposed removal action for the Site, from
June
26, 2007 through July 26, 2007. At the close of the comment period, the EPA
will
address any comments received and expects to adopt a formal Action Memorandum
that will most likely adopt, as the remedy for the Site, the proposed removal
action described in the EE/CA Report.
The
EE/CA
Report, following cost estimation procedures applicable to EE/CA documents,
estimates that the net present value of the proposed removal action is $1.5
million. This figure includes amounts for contingencies and is based on
currently available information, certain assumptions and estimates. In light
of
the Company’s limited role in the creation of the wastes that are the primary
focus of the removal action, the Company believes that the other two PRPs,
particularly Blue Tee Corporation (successor to American Zinc), will be liable
for most of the cleanup costs, as they were directly responsible for all on-site
ore processing activities and wastes. However, there can be no assurance as
to
the scope of the Company’s share of liability for cleanup costs. The EPA has
indicated that it expects response actions at the Site to be completed during
the 2007 construction season.
Under
the
Comprehensive Environmental Response, Compensation and Liability Act, any of
the
PRPs may be jointly and severally liable to the EPA for the full amount of
any
response costs incurred by the EPA, including costs related to investigation
and
remediation, subject to a right of contribution from other PRPs. In practice,
PRPs generally agree to perform such response activities, and negotiate among
themselves to determine their respective contributions to any such multi-party
activities based upon equitable allocation factors that focus primarily on
their
respective contributions to the contamination at issue.
It
is
impossible at this stage to estimate the total costs of the remediation at
the
Site or the Company’s share of liability for those costs due to various factors,
including incomplete information regarding the Site and the other PRPs,
uncertainty regarding the extent of actual remediation costs and the Company’s
equitable share of liability for the contamination.
One
of
the Company’s former general liability insurance carriers has accepted the
defense of this matter and has agreed to pay an 80% share of costs of defense
incurred to date, subject to certain reservation of rights as to coverage.
As of
December 31, 2006, the Company recorded a receivable for estimated future
insurance reimbursements in the amount of $330,000 and recorded this as a
reduction to net expense within discontinued operations. During the six months
ended June 30, 2007, the Company was reimbursed $57,000, which reduced the
balance of the estimated receivable for future insurance reimbursements. In
addition to the amount received in the current six months, the Company received
$238,000 during the year ended December 31, 2006, for a total reimbursement
to
date of $295,000, which represents 80% of the Company’s insurable costs incurred
from the inception of this matter through November 30, 2006. Another of the
Company’s former general liability insurance carriers has also accepted the
defense of this matter, subject to certain reservation of rights as to coverage,
and has agreed to pay a 20% share of the costs of defense incurred to date.
However, that insurer has not yet made any payment to the Company. The Company
will record any change to the estimated insurance reimbursements as a change
to
the net expense within discontinued operations. The Company cannot predict
the
extent to which its costs will ultimately be covered by insurance.
Beginning
in September 2003, in accordance with FASB Interpretation (“FIN”) No. 14,
“Reasonable Estimation of the Amount of a Loss - an Interpretation of Statement
of Financial Accounting Standards No. 5 (Accounting for Contingencies),” and
Statement of Position No. 96-1, “Environmental Remediation Liabilities,” the
Company has recognized a net expense (within discontinued operations) for this
matter. The provision did not change during each of the six month periods ended
June 30, 2007 and 2006. As of June 30, 2007 the cumulative net expense was
$32,000. This represents the current estimate of the Company’s share of the
costs associated with both an emergency removal action previously undertaken
by
the EPA and actual remediation costs, the professional fees associated with
the
EE/CA Report, the anticipated professional fees associated through the completed
remediation all reduced by both actual and estimated insurance recoveries.
Total
actual costs to be incurred at the Site in future periods may vary from this
estimate, given inherent uncertainties in evaluating environmental costs. As
of
June 30, 2007, the Company has recorded a reserve balance for future applicable
costs of $134,000 (accrued as a current liability within discontinued
operations). The accrual will be reviewed periodically based upon facts and
circumstances available at the time, which could result in changes to its
amount.
Assets
and liabilities of the discontinued operations have been reflected in the
accompanying consolidated balance sheets as follows:
|
|
June
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Current
assets
|
|
|
|
|
|
Remediation
insurance receivable
|
|
$
|
273,349
|
|
$
|
329,888
|
|
|
|
|
|
|
|
|
|
Total
assets of discontinued operations
|
|
$
|
273,349
|
|
$
|
329,888
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Reserve
for remediation
|
|
$
|
133,759
|
|
$
|
208,221
|
|
|
|
|
|
|
|
|
|
Total
liabilities of discontinued operations
|
|
$
|
133,759
|
|
$
|
208,221
|
|
Note
5 - Notes Payable
As
of
June 30, 2007, the Company, the Company’s wholly owned subsidiaries, Southeast
Power Corporation (“Southeast Power”), Bayswater Development Corporation
(“Bayswater”), Pineapple House of Brevard, Inc. (“Pineapple House”) and Oak Park
of Brevard, Inc. (“Oak Park”) have three loan agreements and a series of related
ancillary agreements with Branch Banking and Trust Company (the “Bank”)
providing for: (1) a revolving line of credit loan for a maximum principal
amount of $3.0 million, to be used as a “Working Capital Loan,” (2) a revolving
line of credit loan for a maximum principal amount of $2.0 million to be used
as
an “Equipment Loan” and (3) a revolving line of credit for a maximum principal
amount of $6.0 million to be used as a “Real Estate Loan.” As of June 30, 2007
and December 31, 2006, there
were no borrowings outstanding under the Working Capital Loan or the Real Estate
Loan.
Borrowings
outstanding under the Equipment Loan were $217,000 and $650,000 as of June
30,
2007 and December 31, 2006, respectively. Principal plus interest are payable
monthly composed of $72,222 principal plus accrued interest. The interest is
payable at an annual rate equal to monthly LIBOR rate plus one and eight-tenths
percent (7.12% and 7.15% as of June 30, 2007 and December 31, 2006,
respectively). The maturity date of the Equipment Loan is February 26, 2008
and
it is secured by the equipment purchased with the proceeds of the loan, and
any
replacements, accessions or substitutions thereof and all cash and non-cash
proceeds received thereof.
As
of
June 30, 2007, the Company’s wholly owned subsidiaries, Southeast Power,
Bayswater, Pineapple House and Oak Park, and the Bank are parties to a loan
agreement for a revolving line of credit loan for a maximum principal amount
of
$14.0 million to be used by Pineapple House to fund the construction of
residential condominium units. Interest is payable monthly at an annual rate
equal to the monthly LIBOR rate plus one and eighty-five one-hundredths percent
(7.17% and 7.20% as of June 30, 2007 and December 31, 2006, respectively).
The
maturity date of the loan is November 18, 2007. At the Bank’s option, the loan
may be extended for two eighteen-month periods upon payment of a fee to the
Bank
in connection with each extension. These extensions do not necessarily provide
for future advances, but solely for extension and preservation of the commitment
related to the construction of a second and third building on the Pineapple
House site. Borrowings outstanding under this agreement were $8.8 million and
$7.8 million as of June 30, 2007 and December 31, 2006, respectively. The loan
is secured by a Mortgage and Security Agreement.
As
of
June 30, 2007 and December 31, 2006, the Company, the Company’s wholly owned
subsidiary, Southeast Power, and the Bank, had a loan agreement for a revolving
line of credit loan for a maximum principal amount of $3.5 million to be used
by
Southeast Power for durable equipment purchases. The Company agreed to guarantee
Southeast Power’s obligations under the loan agreement. Interest is payable
monthly at an annual rate equal to the monthly LIBOR rate plus one and
eight-tenths percent (7.12% as of June 30, 2007 and 7.15% as of December 31,
2006, respectively). The maturity date of the loan is December 13, 2010.
Southeast Power must make monthly payments of interest to the Bank in arrears
on
the principal balance outstanding until July 2007, and thereafter, Southeast
Power must pay monthly installments of principal, in addition to interest on
the
principal balance outstanding, until maturity. Borrowings outstanding under
this
loan agreement were $3.5 million and $1.4 million as of June 30, 2007 and
December 31, 2006, respectively. The loan is secured by the grant of a
continuing security interest in all equipment purchased with the proceeds of
the
loan, and any replacements, accessions, or substitutions thereof and all cash
and non-cash proceeds thereof.
The
Company’s debt arrangements contain various financial and other covenants, all
of which the Company was in compliance with as of June 30, 2007.
Interest
costs related to the construction of condominiums are capitalized. During the
three month periods ended June 30, 2007 and 2006, the Company capitalized
interest costs of $211,000 and $51,000, respectively. During the six month
periods ended June 30, 2007 and 2006, the Company capitalized interest costs
of
$384,000 and $139,000, respectively.
Note
6 - Commitments and Contingencies
In
certain circumstances, the Company is required to provide performance bonds
to
secure its contractual commitments. Management is not aware of any performance
bonds issued for the Company that have ever been called by a customer. As of
June 30, 2007, outstanding performance bonds issued on behalf of the Company’s
electrical construction subsidiary amounted to approximately $16.7 million.
Note
7 - Income Taxes
At
June
30, 2007, the Company had alternative minimum tax (“AMT”) credit carryforwards
of approximately $449,000, which are available to reduce future federal income
taxes over an indefinite period. The net deferred tax asset decreased from
$263,000 at December 31, 2006 to $21,000 at June 30, 2007 due to the utilization
of AMT credit carryforwards on an annualized basis and the reclassification
of
$396,000 AMT credit carryforwards to noncurrent. The net deferred tax liability
decreased from $861,000 at December 31, 2006 to $465,000 at June 30, 2007 due
to
the reclassification of AMT credit carryforwards. The minimum amount of future
taxable income required to be generated to fully realize the deferred tax assets
at the Company’s expected tax rate for the year ending December 31, 2007 is
approximately $2.5 million.
The
following table presents our provision for income tax and effective income
tax
rate from continuing operations for the periods as indicated:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Income
tax expense (benefit)
|
|
$
|
(364,815
|
)
|
$
|
609,831
|
|
$
|
(498,583
|
)
|
$
|
1,327,533
|
|
Effective
income tax rate
|
|
|
(24.5%
|
)
|
|
38.5%
|
|
|
(25.3%
|
)
|
|
38.5%
|
|
The
Company’s expected tax rate for the year ending December 31, 2007, which was
calculated based on the estimated annual operating results for the year, is
(28.3%). The
effective tax rates differ from the federal statutory rate of 34% for the three
months and six months ended June 30, 2007 primarily due to nondeductible
expenses, such as 50% of meals and officers' life insurance.
On
January 1, 2007, the Company adopted FIN No. 48 “Accounting for Uncertainty in
Income Taxes - an Interpretation of SFAS No. 109,” which clarifies the
accounting and reporting for uncertainties in income tax law. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. FIN No. 48 prescribes
a
more-likely-than-not threshold of a tax position taken or expected to be taken
in a tax return being sustained on audit based on the technical merits for
financial statement recognition and measurement.
On
implementation of FIN No. 48, the Company reviewed prior year tax filings and
other corporate records for any uncertain tax positions in accordance with
recognition standards established. As a result of this review, the company
was
not required to accrue additional income taxes.
The
Company will classify interest and penalties recognized in accordance with
this
Interpretation as interest expense and other general and administrative
expenses, respectively, and not as a component of income taxes.
Note
8 - Earnings (Loss) Per Share of Common Stock and Stock Repurchase
Plan
Basic
earnings (loss) per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share include dilution from potential common stock
equivalents, such as stock options outstanding. As of June 30, 2007 and December
31, 2006, respectively, there were no common stock equivalents.
Since
September 17, 2002, the Company has had a stock repurchase plan which, as last
amended by the Board of Directors on May 31, 2007, permits the purchase of
up to
3,500,000 shares of Common Stock until September 30, 2008. The Company may
repurchase its shares either in the open market or through private transactions.
The volume of the shares to be repurchased is contingent upon market conditions
and other factors. During each of the years ended December 31, 2006, 2005 and
2004, pursuant to the Repurchase Plan, the Company repurchased 120,838, 379,058
and 489,195 shares of its Common Stock, respectively, at a cost of $132,953
(average cost of $1.10 per share), $209,179 (average cost of $0.55 per share)
and $271,390 (average cost of $0.55 per share), respectively. The Company did
not repurchase shares of its Common Stock during the six month periods ended
June 30, 2007 and 2006. As of June 30, 2007, the total number of shares
repurchased under the Repurchase Plan was 2,345,060 at a cost of $1,289,467
(average cost of $0.55 per share) and the remaining number of shares available
to be repurchased under the Repurchase Plan is 1,154,940. The Company currently
holds the repurchased stock as Treasury Stock, reported at cost. Prior to
September 17, 2002, the Company had 17,358 shares of Treasury Stock which it
had
purchased at a cost of $18,720.
Note
9 - Business Segment Information
The
Company is currently involved in two segments, electrical construction and
real
estate development. There were no material amounts of sales or transfers between
segments and no material amounts of foreign sales. Any intersegment sales have
been eliminated.
The
following table sets forth certain segment information for the periods ended
as
indicated:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
$
|
6,658,079
|
|
$
|
11,186,323
|
|
$
|
14,012,121
|
|
$
|
21,678,328
|
|
Real
estate development
|
|
|
(5,303,303
|
)
|
|
1,046,540
|
|
|
(2,848,870
|
)
|
|
4,549,487
|
|
Total
revenues
|
|
|
1,354,776
|
|
|
12,232,863
|
|
|
11,163,251
|
|
|
26,227,815
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
|
5,783,223
|
|
|
9,118,855
|
|
|
13,328,139
|
|
|
17,817,722
|
|
Real
estate development
|
|
|
(3,611,107
|
)
|
|
953,736
|
|
|
(1,714,804
|
)
|
|
3,562,498
|
|
Corporate
|
|
|
674,835
|
|
|
652,104
|
|
|
1,513,706
|
|
|
1,468,449
|
|
Total
operating expenses
|
|
|
2,846,951
|
|
|
10,724,695
|
|
|
13,127,041
|
|
|
22,848,669
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
|
874,856
|
|
|
2,067,468
|
|
|
683,982
|
|
|
3,860,606
|
|
Real
estate development
|
|
|
(1,692,196
|
)
|
|
92,804
|
|
|
(1,134,066
|
)
|
|
986,989
|
|
Corporate
|
|
|
(674,835
|
)
|
|
(652,104
|
)
|
|
(1,513,706
|
)
|
|
(1,468,449
|
)
|
Total
operating income (loss)
|
|
|
(1,492,175
|
)
|
|
1,508,168
|
|
|
(1,963,790
|
)
|
|
3,379,146
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
|
(83,348
|
)
|
|
(25,948
|
)
|
|
(118,257
|
)
|
|
(43,763
|
)
|
Real
estate development
|
|
|
53,991
|
|
|
105,882
|
|
|
53,991
|
|
|
105,882
|
|
Corporate
|
|
|
35,215
|
|
|
(5,799
|
)
|
|
60,960
|
|
|
3,230
|
|
Total
other income (expense), net
|
|
|
5,858
|
|
|
74,135
|
|
|
(3,306
|
)
|
|
65,349
|
|
Net
income (loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
construction
|
|
|
791,508
|
|
|
2,041,520
|
|
|
565,725
|
|
|
3,816,843
|
|
Real
estate development
|
|
|
(1,638,205
|
)
|
|
198,686
|
|
|
(1,080,075
|
)
|
|
1,092,871
|
|
Corporate
|
|
|
(639,620
|
)
|
|
(657,903
|
)
|
|
(1,452,746
|
)
|
|
(1,465,219
|
)
|
Total
net income (loss) before taxes
|
|
$
|
(1,486,317
|
)
|
$
|
1,582,303
|
|
$
|
(1,967,096
|
)
|
$
|
3,444,495
|
|
Operating
income (loss) is total operating revenue less operating expenses inclusive
of
depreciation and amortization, and selling, general and administrative expenses
for each segment. Operating income (loss) excludes interest expense, interest
income and income taxes. Corporate expenses are comprised of general and
administrative expenses and corporate depreciation and amortization expenses.
The
following table sets forth certain segment information as of the dates
indicated:
|
|
June
30,
|
|
December
31,
|
|
Identifiable
assets
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
$
|
20,821,012
|
|
$
|
21,317,634
|
|
Real
estate development
|
|
|
14,759,098
|
|
|
16,225,823
|
|
Corporate
|
|
|
4,080,678
|
|
|
4,030,831
|
|
Discontinued
operations
|
|
|
273,349
|
|
|
329,888
|
|
Total
|
|
$
|
39,934,137
|
|
$
|
41,904,176
|
|
Electrical
Construction
A
significant portion of the Company’s electrical construction revenue has
historically been derived from two or three utility customers each year. For
the
quarters ended June 30, 2007 and June 30, 2006, the two largest customers
accounted for 47% and 87%, respectively, of the Company’s electrical
construction revenue. For the six months ended June 30, 2007 and June 30, 2006,
the three largest customers accounted for 53% and 89%, respectively, of the
Company’s electrical construction revenue.
Real
Estate Development
During
the three months ended June 30, 2007, twelve customers defaulted or provided
notification of their intent to default on their contractual obligations to
close the purchase of their condominium units. One buyer had provided
notification of default in the first quarter of 2007. As a result of these
defaults and notifications of intent to default, revenues and operating expenses
in the real estate development segment for the three months and six months
ended
June 30, 2007 reflect the reversal of previously recognized revenues of $6.7
million and $7.2 million, respectively, and previously recognized cost of sales
of $4.9 million and $5.2 million, respectively. The cost of these units held
for
sale are reflected in real estate inventory as of June 30, 2007.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
We
make “forward-looking statements” within the “safe harbor” provision of the
Private Securities Litigation Reform Act of 1995 throughout this document.
You
can identify these statements by forward-looking words such as “may,” “will,”
“expect,” “anticipate,” “believe,” “estimate,” “plan,” and “continue” or similar
words. We have based these statements on our current expectations about future
events. Although we believe that our expectations reflected in or suggested
by
our forward-looking statements are reasonable, we cannot assure you that these
expectations will be achieved. Our actual results may differ materially from
what we currently expect. Factors that may affect the results of our electrical
construction operations include, among others: the level of construction
activities by public utilities; the timing and duration of construction projects
for which we are engaged; adverse weather; our ability to estimate accurately
with respect to fixed price construction contracts; heightened competition
in
the electrical construction field, including intensification of price
competition; and the availability of skilled construction labor. Factors that
may affect the results of our real estate development operations include, among
others: interest rates; ability to obtain necessary permits from regulatory
agencies; adverse legislation or regulations; ability to acquire land; our
ability to maintain or increase historical revenues and profit margins; our
ability to collect contracts receivable and close homes in backlog, particularly
related to buyers purchasing homes as investments; availability of labor and
materials and material increases in labor and material costs; ability to obtain
additional construction financing; increases in interest rates and availability
of mortgage financing; increases in construction and homeowner insurance and
the
availability of insurance; the level of consumer confidence; the negative impact
of claims for contract rescission or cancellation by unit purchasers due to
various factors including the increase in the cost of condominium insurance;
adverse weather; natural disasters; changes in generally accepted accounting
principles; the continued weakness in the Florida condominium market and general
economic conditions, both nationally and in our region. Other important factors
which could cause our actual results to differ materially from the
forward-looking statements in this document include, but are not limited to,
those discussed in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” as well as those discussed elsewhere in
this report and as set forth from time to time in our other public filings
and
public statements. In addition to the other information included in this report
and our other public filings and releases, a discussion of factors affecting
our
business is included in our Annual Report on Form 10-K for the year ended
December 31, 2006 under “Item 1A. Risk Factors” and should be considered while
evaluating our business, financial condition, results of operations and
prospects.
You
should read this report completely and with the understanding that our actual
future results may be materially different from what we expect. We may not
update these forward-looking statements, even in the event that our situation
changes in the future. All forward-looking statements attributable to us are
expressly qualified by these cautionary statements.
Overview
We
are a
leading provider of electrical construction services in the southeastern United
States and a developer of condominiums on the east coast of Florida. Through
our
subsidiary, Southeast Power Corporation, we are engaged in the construction
and
maintenance of electric utility facilities for electric utilities and industrial
customers, and the installation of fiber optic cable for fiber optic cable
manufacturers, telecommunication companies and electric utilities. Southeast
Power is based in Titusville, Florida, and performs electrical contracting
services in the southeastern and mid-Atlantic regions of the United
States.
The
electrical construction business is highly competitive and fragmented. We
compete with other independent contractors, including larger regional and
national firms that may have financial, operational, technical and marketing
resources that exceed our own. We also face competition from existing and
prospective customers establishing or augmenting in-house service organizations
that employ personnel who perform some of the same types of service as those
provided by us. In addition, a significant portion of our electrical
construction revenue is derived from a small group of customers, with one or
two
different customers accounting for a substantial portion of our revenue in
any
given year. For example, in the year ended December 31, 2006, one of our
customers accounted for greater than 50% of our consolidated revenue. The loss
of, or decrease in current demand from, one or more of these customers would,
if
not replaced by other business, result in a decrease in revenues, margins and
profits which could be material. During the first six months of 2007, we were
less successful in the bidding and awards process, partly due to the number
of
jobs awarded to competitors at lower than normal profit margins.
We
are
also involved, through our subsidiary Bayswater Development Corporation and
its
wholly-owned real estate development subsidiaries, in the development of
residential condominium projects, on the east coast of Central Florida. Our
current project, Pineapple House, is a multi-phase project. The first phase
of
Pineapple House is comprised of an eight-story building containing thirty-three
luxury river-view condominium units. As of December 31, 2006, twenty-two units
were under contract for sale, backed by $1.5 million of non-refundable earnest
money deposits. Due to the current weakness in the Florida condominium market,
as further described below, there was a virtual cessation of sales of our
condominiums during 2006, which has continued through the six months ended
June
30, 2007, during which we have made no additional sales for Pineapple House,
however we sold one unit in the Oak Park project. In May 2007, we received
the
Certificate of Occupancy for Pineapple House and notified our contracted buyers
to begin consummating the sales of the units. Of the twenty-two units under
contract for sale we have closed on seven of these units and expect to close
on
two more by mid-August. The remaining thirteen buyers have either defaulted
or
provided notification of their intention to default on their contract. As a
result of the actual or anticipated defaults on these contracts, we have
reversed the previously recognized revenues and cost of sales on these units,
resulting in negative revenues and negative cost of goods sold for the real
estate segment for both the three month and six month periods ended June 30,
2007.
We
believe the defaults on the existing contracts and the continued slowdown in
new
unit sales are attributable to the continued deterioration in the national
housing market, including a softening in demand for new homes and an oversupply
of homes available for sale in the Florida market. We believe the decline in
demand for our new condominiums is related to concerns of prospective home
buyers regarding the direction of home prices, interest rates, property taxes,
insurance and their inability to sell their current homes. In addition to the
traditional homebuyer, it appears that speculators and investors have
significantly reduced their participation in the new home market. Additionally,
our market has been impacted by an overall increase in the supply of homes
available for sale, as speculators and investors attempt to sell the homes
they
previously purchased or cancel contracts for homes under construction. In
addition, high cancellation rates reported by other builders have added to
the
supply of homes in the marketplace.
As
we
look to our third quarter and the remainder of 2007, we continue to see weak,
and perhaps deteriorating, market conditions, which will likely have an adverse
impact on the sales and pricing of our condominium units, the settlement of
existing contracts, the commencement and development of new projects (including
a delay in the commencement of the second phase of the Pineapple House project)
and on the results of our real estate development operations. We cannot predict
whether the Florida condominium market will improve, or when any such
improvement may take place. However, we have completed the first phase of the
Pineapple House project on budget and in a timely manner, and we believe the
project is attractive and of high quality. We will no longer be incurring
construction costs with respect to this phase and our share of the maintenance
costs on the unsold units is expected to be no more than $107,000 annually.
Based on current discussions with the Bank, we expect to be able to renew our
construction loan on substantially similar terms to those currently in
effect.
Critical
Accounting Estimates
This
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to fixed price electrical
construction contracts, real estate development projects, deferred income tax
assets and environmental remediation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our management has
discussed the selection and development of its critical accounting policies,
estimates and related disclosure with the Audit Committee of the Board of
Directors.
Percentage
of Completion - Electrical Construction Segment
We
recognize revenue from fixed price contracts on a percentage-of-completion
basis, using primarily the cost-to-cost method based on the percentage of total
costs incurred to date in proportion to total estimated costs to complete the
contract. Total estimated costs, and thus contract income, are impacted by
several factors including, but not limited to, changes in productivity and
scheduling, and the cost of labor, subcontracts, materials and equipment.
Additionally, external factors such as weather, site conditions and scheduling
that differ from those assumed in the original bid (to the extent contract
remedies are unavailable), client needs, client delays in providing approvals,
the availability and skill level of workers in the geographic location of the
project, a change in the availability and proximity of materials and
governmental regulation, may also affect the progress and estimated cost of
a
project's completion and thus the timing of income and revenue
recognition.
The
accuracy of our revenue and profit recognition in a given period is almost
solely dependent on the accuracy of our estimates of the cost to complete each
project. Due to our experience and our detailed approach in determining our
cost
estimates for all of our significant projects, we believe our estimates to
be
highly reliable. However, our projects can be complex and in almost every case
the profit margin estimates for a project will either increase or decrease
to
some extent from the amount that was originally estimated at the time of bid.
Because we have a number of projects of varying levels of complexity and size
in
process at any given time these changes in estimates can offset each other
without materially impacting our overall profitability. If a current estimate
of
total costs indicates a loss on a contract, the projected loss is recognized
in
full when determined. Contract loss accruals recorded for the three and the
six
month periods ended June 30, 2007 were $6,000 and $17,000, respectively compared
to no contract loss accruals for both the three and six month periods ended
June
30, 2006. Revenue from change
orders, extra work, variations in the scope of work and claims is recognized
when realization is probable.
Percentage
of Completion - Real Estate Development Segment
All
revenue associated with real estate development projects that meet the criteria
specified by SFAS 66, “Accounting for Sales of Real Estate,” is recognized using
the percentage-of-completion method. Under this method, revenue is recognized
when (1) construction is beyond a preliminary stage, (2) a substantial
percentage (at least one-third) of the condominiums are under firm,
non-refundable contracts, except in the case of non-delivery of the unit or
interest, (3) sufficient units have already been sold to assure that the entire
property will not revert to rental property, consideration is given to the
requirements of state laws, the condominium contract and the terms of the
financing agreements, (4) collection of the sales price is reasonably assured,
(5) deposits equal or exceed 10% of the contract price and (6) sales proceeds
and costs can be reasonably estimated. The Company determines that construction
is beyond a preliminary stage when engineering and design work, execution of
construction contracts, site clearance and preparation, excavation and the
building foundation is complete. In November 2006, the FASB ratified EITF Issue
No. 06-8, “Applicability of a Buyer’s Continuing Investment under FASB Statement
No. 66 for Sales of Condominiums.” EITF Issue 06-8 provides guidance in
assessing the collectibility of the sales price, which is required in order
to
recognize profit under the percentage-of-completion method pursuant to SFAS
No.
66. See note 1 to the consolidated financial statements for additional
information.
We
believe that a material difference in total actual project costs versus total
estimated project costs is unlikely due to the nature of the fixed price
contracts we enter into with the general contractors on our real estate
projects.
If
a
current estimate of total project costs indicates a loss on a project, the
projected loss is recognized in full when determined. There were no contract
loss accruals recorded during both the three and six month periods ended June
30, 2007 and June 30, 2006. The timing of revenue and expense recognition is
contingent on construction productivity. Factors possibly impeding construction
productivity include, but are not limited to, supply of labor, materials and
equipment, scheduling, weather, permitting and unforeseen events.
When
a
buyer defaults on the contract for sale, revenues and expenses recognized in
prior periods are adjusted in the period of default. In the three and six month
periods ended June 30, 2007, we recorded a reversal in revenues previously
recognized of $6.7 million and $7.2 million, respectively, and in costs of
sales
previously recorded of $4.9 million and $5.2 million, respectively.
Deferred
Tax Assets
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
We
consider future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance for deferred tax
assets. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the deferred
tax
assets are expected to be recovered or settled. If we determine that we will
not
be able to realize all or part of our deferred tax assets, a valuation allowance
would be recorded to reduce our deferred tax assets to the amount that is more
likely than not to be realized. In the event we were to subsequently determine
that we would be able to realize our deferred tax assets in the future in excess
of our net recorded amount, an adjustment to the previously recorded valuation
allowance would increase income in the period such determination was
made.
As
of
June 30, 2007, our deferred tax assets were largely comprised of an AMT credit
carryforward. Based on historical experience and assumptions with respect to
forecasts of future taxable income and tax planning, among others, we anticipate
being able to generate sufficient taxable income to utilize the AMT credit
carryforward which has no expiration date. Therefore, we have not recorded
a
valuation allowance against the deferred tax assets. The minimum amount of
future taxable income required to be generated to fully realize the deferred
tax
assets at our expected tax rate for the year ending December 31, 2007 is
approximately $2.5 million.
Provision
for Remediation
In
September 2003, we were notified by the EPA that we are a PRP with respect
to
possible investigation and removal activities at the Site, a mine that we
formerly owned. Refer to note 4 of the notes to the consolidated financial
statements for a discussion of this matter.
It
is
impossible at this stage to estimate the total costs of the remediation at
the
Site or our share of liability for those costs due to various factors, including
incomplete information regarding the Site and the other PRPs, uncertainty
regarding the extent of actual remediation costs and our equitable share of
liability for the contamination.
Beginning
in September 2003, in accordance with FIN No. 14, we had recognized a net
expense (within discontinued operations) for this matter. The provision did
not
change during each of the six months ended June 30, 2007 and the six months
ended June 30, 2006. As of June 30, 2007, the cumulative net expense was
$32,000. This represents the current estimate of our share of the costs
associated with both an emergency removal action previously undertaken by the
EPA and actual remediation costs, the professional fees associated with the
EE/CA Report, the anticipated professional fees associated through the completed
remediation all reduced by both actual and estimated insurance recoveries.
Total
actual costs to be incurred at the Site in future periods may vary from this
estimate, given inherent uncertainties in evaluating environmental costs. As
of
June 30, 2007, we have recorded a reserve balance for future applicable costs
of
$134,000 (accrued as a current liability within discontinued operations). The
accrual will be reviewed periodically based upon facts and circumstances
available at the time, which could result in changes to the
balance.
Results
of Operations
Six
Months Ended June 30, 2007 Compared to Six Months Ended June 30,
2006
Segment
Information
The
table
below is a reconciliation of our operating income attributable to each of our
segments for the six months ended June 30 as indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
|
|
|
|
Revenue
|
|
$
|
14,012,121
|
|
$
|
21,678,328
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
11,748,110
|
|
|
16,583,534
|
|
Depreciation
|
|
|
1,421,500
|
|
|
1,143,959
|
|
SG&A
|
|
|
161,528
|
|
|
114,649
|
|
Other
general income
|
|
|
(2,999
|
)
|
|
(24,420
|
)
|
Total
operating expenses
|
|
|
13,328,139
|
|
|
17,817,722
|
|
Operating
income
|
|
$
|
683,982
|
|
$
|
3,860,606
|
|
|
|
|
|
|
|
|
|
Real
estate development
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
(2,848,870
|
)
|
$
|
4,549,487
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(1,776,226
|
)
|
|
3,148,918
|
|
Depreciation
|
|
|
12,890
|
|
|
13,358
|
|
SG&A
|
|
|
48,532
|
|
|
400,222
|
|
Total
operating expenses
|
|
|
(1,714,804
|
)
|
|
3,562,498
|
|
Operating
income (loss)
|
|
$
|
(1,134,066
|
)
|
$
|
986,989
|
|
Continuing
Operations
Revenues
Total
revenues in the six months ended June 30, 2007 decreased by 57.4% to $11.2
million, compared to $26.2 million in the six months ended June 30, 2006
reflecting lower revenue in our electrical construction segment and the reversal
of previously recognized revenue in our real estate development segment due
to
the default, or expected default, on thirteen condominium units.
Electrical
construction revenues decreased $7.7 million, or 35.4%, to $14.0 million for
the
six months ended June 30, 2007 from $21.7 million for the six months ended
June
30, 2006. The decrease in revenue for the six months period ending June 30,
2007
when compared to the same period in 2006 was primarily due to a slowdown in
demand for our electrical construction services and a reduction in the number
of
projects in process, resulting from the availability of fewer profitable
projects. In the current six months we had fewer projects under construction
because we have recently been less successful in the bidding and awards process,
partly due to the number of jobs awarded to competitors at prices that would
not
meet our target profit margins.
The
varying magnitude and duration of electrical construction projects may result
in
substantial fluctuation in the Company’s backlog from time to time. Backlog
represents the uncompleted portion of services to be performed under
project-specific contracts and the estimated value of future services that
we
expect to provide under our existing service agreements, including new
contractual agreements on which work has not begun. In many instances, our
customers are not contractually committed to specific volumes of services and
many of our contracts may be terminated with notice, therefore we do not
consider any portion of our backlog to be firm. However, our customers become
obligated once we provide the services they have requested. Our service
agreements are typically multi-year agreements, and we include in our backlog
the amount of services projected to be performed over the terms of the contracts
based on our historical relationships with these customers. Our estimates of
a
customer’s requirements during a particular future period may not be accurate at
any point in time. As of June 30, 2007, the electrical construction operation’s
backlog was approximately $11.9 million, which included approximately $9.7
million from fixed price contracts for which revenue is recognized using
percentage-of-completion and approximately $2.2 million from service agreement
contracts for which revenue is recognized as work is performed. Of our total
backlog, we expect approximately 82% to be completed within the current fiscal
year. This compares to a backlog of $14.0 million at June 30, 2006, of which
approximately $8.5 million represented backlog from fixed price contracts and
approximately $5.5 million represented backlog from service agreement
contracts.
Real
estate construction revenues decreased by 162.6% to $(2.8 million) for the
six
months ended June 30, 2007 from $4.6 million for the like period in 2006. The
decrease in revenues for the six months ended June 30, 2007, compared to the
like period in 2006, was mainly due to the reversal of previously recognized
revenues on the Pineapple House project upon the notification from buyers of
their intent to default on their contracts. In the six months ended June 30,
2006, we recognized revenue on both the Oak Park project, which was completed
in
the third quarter of 2006 and the Pineapple House project, which we had begun
in
the first quarter of 2006. During the six months ended June 30, 2007, the only
project under construction was Pineapple House.
As
of
June 30, 2007 due to the completion of the Pineapple House project there was
no
backlog for the real estate development operation’s segment. There can be no
assurance that settlements of condominiums subject to contracts for sale will
occur.
Our
Pineapple House project began recognizing revenue during the first quarter
2006
and was complete as of June 30, 2007.
Operating
Results
Total
operating income (loss) decreased to $(2.0 million) for the six months ended
June 30, 2007, compared to $3.4 million for the like period in 2006. Electrical
construction operations had an operating income of $684,000 during the six
months ended June 30, 2007, compared to an operating income of $3.9 million
during the six months ended June 30, 2006.
Operating
margins on electrical construction operations decreased to 4.9% for the six
months ended June 30, 2007 from 17.8% for the six months ended June 30, 2006.
The decrease in operating margins for the six month period ended June 30, 2007
was largely the result of reduced productivity on several jobs due to clients’
transmission line clearance problems, delays in procurements of client furnished
materials, delays in our clients processing permits on a timely basis and
related transition costs and lost productivity as work crews were moved from
one
job to another due to these customer delays.
Real
estate development operations had an operating loss of $1.1 million in the
six
months ended June 30, 2007, compared to operating income of $987,000 in the
six
months ended June 30, 2006, a decrease of $2.1 million. The operating loss
for
the six months ended June 30, 2007, reflects the reversal of revenues and cost
of sales due to the default on purchase contracts discussed above.
Costs
and Expenses
Total
costs and expenses, and the components thereof, decreased 42.5% to $13.1 million
in the six months ended June 30, 2007 from $22.9 million in the six months
ended
June 30, 2006.
Electrical
construction cost of goods sold decreased to $11.8 million in the six months
ended June 30, 2007 from $16.6 million in the six months ended June 30, 2006,
a
decrease of 29.2%. The decrease in costs reflects the lower level of
construction activities.
Real
estate development cost of goods sold decreased to $(1.8 million) in the six
months ended June 30, 2007 from $3.2 million in the six months ended June 30,
2006, a decrease of 156.4%. The decreased costs primarily reflect the reversal
of previously recognized costs associated with the reversal of revenues due
to
the defaults on the Pineapple House development, discussed above, as well as
the
decrease due to only one project currently under construction compared to two
in
the prior year quarter.
The
following table sets forth the depreciation and amortization expense for each
respective segment for the six months ended June 30 as indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
$
|
1,421,500
|
|
$
|
1,143,959
|
|
Real
estate development
|
|
|
12,890
|
|
|
13,358
|
|
Corporate
|
|
|
73,728
|
|
|
70,094
|
|
Total
|
|
$
|
1,508,118
|
|
$
|
1,227,411
|
|
The
depreciation and amortization expense was $1.5 million in the six months ended
June 30, 2007, compared to $1.2 million in the six months ended June 30, 2006,
an increase of 22.9%. The increase in depreciation expense is mainly due to
an
increase in capital expenditures in 2006 and the first six months of 2007,
primarily within the electrical construction segment. We had $2.8 million in
capital expenditures within this segment during the six months ended June 30,
2007, the majority of which was for equipment upgrades and fleet expansion.
The
following table sets forth selling, general and administrative (“SG&A”)
expenses for each respective segment for the six months ended June 30 as
indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
$
|
161,528
|
|
$
|
114,649
|
|
Real
estate development
|
|
|
48,532
|
|
|
400,222
|
|
Corporate
|
|
|
1,447,273
|
|
|
1,403,258
|
|
Total
|
|
$
|
1,657,333
|
|
$
|
1,918,129
|
|
In
the
six months ended June 30, 2007, total SG&A expenses decreased 13.6% to $1.7
million for the six months ended June 30, 2007 compared to $1.9 million for
the
six months ended June 30, 2006. The decrease in the SG&A expense for the six
months ended June 30, 2007 is mainly due to a $202,000 decrease in salaries
within the combined corporate and real estate segments, as well as a $190,000
decrease in selling expenses within the real estate segment, due to the reversal
of previously recognized sales. These decreases were partially offset by a
$148,000 increase in professional services within the corporate
segment.
Income
Taxes
The
following table presents our provision for income tax and effective income
tax
rate from continuing operations for the six months ended June 30 as
indicated:
|
|
2007
|
|
2006
|
|
Income
tax expense (benefit)
|
|
$
|
(498,583
|
)
|
$
|
1,327,533
|
|
Effective
income tax rate
|
|
|
(25.3%
|
)
|
|
38.5%
|
|
Our
expected tax rate for the year ending December 31, 2007, which was calculated
based on the estimated annual operating results for the year, is (28.3%). The
effective tax rate differs from the federal statutory rate of 34% for the six
months ended June 30, 2007 primarily due to nondeductible expenses such as
50%
of meals and officers' life insurance.
Three
Months Ended June 30, 2007 Compared to Three Months Ended June 30,
2006
Segment
Information
The
table
below is a reconciliation of our operating income attributable to each of our
segments for the three months ended June 30 as indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
|
|
|
|
Revenue
|
|
$
|
6,658,079
|
|
$
|
11,186,323
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
4,946,406
|
|
|
8,460,325
|
|
Depreciation
|
|
|
724,902
|
|
|
586,508
|
|
SG&A
|
|
|
113,351
|
|
|
80,684
|
|
Other
general income
|
|
|
(1,436
|
)
|
|
(8,662
|
)
|
Total
operating expenses
|
|
|
5,783,223
|
|
|
9,118,855
|
|
Operating
income
|
|
$
|
874,856
|
|
$
|
2,067,468
|
|
|
|
|
|
|
|
|
|
Real
estate development
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
(5,303,303
|
)
|
$
|
1,046,540
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(3,470,151
|
)
|
|
827,489
|
|
Depreciation
|
|
|
6,445
|
|
|
6,547
|
|
SG&A
|
|
|
(147,401
|
)
|
|
119,700
|
|
Total
operating expenses
|
|
|
(3,611,107
|
)
|
|
953,736
|
|
Operating
income (loss)
|
|
$
|
(1,692,196
|
)
|
$
|
92,804
|
|
Continuing
Operations
Revenues
Total
revenues in the three months ended June 30, 2007 decreased by 88.9% to $1.4
million, compared to $12.2 million in the three months ended June 30, 2006
reflecting lower revenue in our electrical construction segment and the reversal
of previously recognized revenue in our real estate development segment due
to
the default or expected default on twelve condominium units.
Electrical
construction revenues decreased 40.5%, to $6.7 million for the three months
ended June 30, 2007 from $11.2 million for the three months ended June 30,
2006.
The decrease in revenue for the three month period ending June 30, 2007, when
compared to the same period in 2006, was primarily due to a slowdown in demand
for our electrical construction services and a reduction in the number of
projects in process, resulting from the availability of fewer profitable
projects. In the current quarter we had fewer projects under construction
because we have recently been less successful in the bidding and awards process,
partly due to the number of jobs awarded to competitors at prices that would
not
meet our target profit margins.
Real
estate construction revenues decreased by 606.7% to $(5.3 million) for the
three
months ended June 30, 2007 from $1.1 million for the like period in 2006. The
decrease in revenues for the three months ended June 30, 2007, compared to
the
like period in 2006, was mainly due to the reversal of previously recognized
revenues on the Pineapple House project upon the notification from buyers of
their intent to default on their contracts. In the three months ended June
30,
2006, we recognized revenue on both the Oak Park project, which was completed
in
the third quarter of 2006, and the Pineapple House project, which we had begun
in the first quarter of 2006. During the quarter ended June 30, 2007, the only
project under construction was Pineapple House.
Our
Pineapple House project began recognizing revenue during the first quarter
2006
and was complete as of June 30, 2007.
Operating
Results
Total
operating income (loss) decreased 198.9% to $(1.5 million) for the three months
ended June 30, 2007, compared to $1.5 million for the like period in 2006.
Electrical construction operations had an operating income of $875,000 during
the three months ended June 30, 2007, compared to an operating income of $2.1
million during the three months ended June 30, 2006, a decrease of
57.7%.
Operating
margins on electrical construction operations decreased to 13.1% for the three
months ended June 30, 2007 from 18.5% for the three months ended June 30, 2006.
The decrease in operating margins for the three month period ended June 30,
2007
was largely the result of reduced productivity on several jobs due to clients’
transmission line clearance problems, delays in procurements of client furnished
materials, delays in our clients processing permits on a timely basis and
related transition costs and lost productivity as work crews were moved from
one
job to another due to these customer delays.
Real
estate development operations had an operating income (loss) of $(1.7 million)
in the three months ended June 30, 2007, compared to $93,000 in the three months
ended June 30, 2006, a decrease of $1.8 million. The operating loss for the
three months ended June 30, 2007 reflects the reversal of revenues and cost
of
sales due to the default on Pineapple House purchase contracts discussed
above.
Costs
and Expenses
Total
costs and expenses, and the components thereof, decreased 73.5% to $2.9 million
in the three months ended June 30, 2007 from $10.7 million in the three months
ended June 30, 2006.
Electrical
construction cost of goods sold decreased to $4.9 million in the three months
ended June 30, 2007 from $8.5 million in the three months ended June 30, 2006.
The decrease in costs reflects the lower level of construction
activities.
Real
estate development cost of goods sold decreased 519.4% to $(3.5 million) in
the
three months ended June 30, 2007 from $827,000 in the three months ended June
30, 2006. The decreased costs primarily reflect the reversal of previously
recognized costs associated with the reversal of revenues due to the defaults
on
the Pineapple House development, discussed above, as well as the decrease due
to
only one project currently under construction compared to two in the prior
year.
The
following table sets forth the depreciation and amortization expense for each
respective segment for the three months ended June 30 as indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
$
|
724,902
|
|
$
|
586,508
|
|
Real
estate development
|
|
|
6,445
|
|
|
6,547
|
|
Corporate
|
|
|
34,423
|
|
|
35,065
|
|
Total
|
|
$
|
765,770
|
|
$
|
628,120
|
|
The
depreciation and amortization expense was $766,000 in the three months ended
June 30, 2007, compared to $628,000 in the three months ended June 30, 2006,
an
increase of 21.9%. The increase in depreciation expense is mainly due to an
increase in capital expenditures in 2006 and the first quarter of 2007,
primarily within the electrical construction segment. We had $2.8 million in
capital expenditures within this segment during the six months ended June 30,
2007, the majority of which was for equipment upgrades and fleet expansion.
The
following table sets forth SG&A expenses for each respective segment for the
three months ended June 30 as indicated:
|
|
2007
|
|
2006
|
|
Electrical
construction
|
|
$
|
113,351
|
|
$
|
80,684
|
|
Real
estate development
|
|
|
(147,401
|
)
|
|
119,700
|
|
Corporate
|
|
|
640,412
|
|
|
619,390
|
|
Total
|
|
$
|
606,362
|
|
$
|
819,774
|
|
In
the
three months ended June 30, 2007, total SG&A expenses decreased 26.0% to
$606,000 compared to $820,000 for the three months ended June 30, 2006. The
decrease in the SG&A expense for the three months ended June 30, 2007 is
mainly due to a $107,000 decrease in salaries within the combined corporate
and
real estate segments, as well as a $174,000 decrease in selling expenses within
the real estate segment, due to the reversal of previously recognized sales.
These decreases were partially offset by a $64,000 increase in professional
services within the corporate segment.
Income
Taxes
The
following table presents our provision for income tax and effective income
tax
rate from continuing operations for the three months ended June 30 as
indicated:
|
|
2007
|
|
2006
|
|
Income
tax expense (benefit)
|
|
$
|
(364,815
|
)
|
$
|
609,831
|
|
Effective
income tax rate
|
|
|
(24.5%
|
)
|
|
38.5%
|
|
Our
expected tax rate for the year ending December 31, 2007, which was calculated
based on the estimated annual operating results for the year, is (28.3%). The
effective tax rate differs from the federal statutory rate of 34% for the three
months ended June 30, 2007 primarily due to nondeductible expenses such as
50%
of meals and officers' life insurance.
Liquidity
and Capital Resources
Working
Capital Analysis
Our
primary cash needs have been for working capital and capital expenditures.
Our
primary sources of cash have been cash flow from operations and borrowings
under
our lines of credit. As of June 30, 2007, we had cash and cash equivalents
of
$4.5 million and working capital of $13.7 million as compared to cash and cash
equivalents of $6.8 million and working capital of $16.3 million as of December
31, 2006. In addition, we have $9.0 million in unused revolving lines of credit
as of June 30, 2007, as discussed in note 5 to the consolidated financial
statements in this Form 10-Q. We anticipate that this cash on hand, our credit
facilities and our future cash flows from operating activities will provide
sufficient cash to enable us to meet our future operating needs and debt
requirements, as well as to ensure our ability to grow.
Cash
Flow Summary
Net
cash
flows for each of the six month periods ended June 30 were as
follows:
|
|
2007
|
|
2006
|
|
Net
cash provided by (used by) operating activities
|
|
$
|
(1,856,685
|
)
|
$
|
4,658,568
|
|
Net
cash used by investing activities
|
|
|
(2,847,238
|
)
|
|
(1,270,972
|
)
|
Net
cash provided by (used by) financing activities
|
|
|
2,450,514
|
|
|
(1,959,408
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(2,253,409
|
)
|
$
|
1,428,188
|
|
Operating
Activities
Cash
flows from operating activities are comprised of income (loss) from continuing
operations adjusted to reflect the timing of cash receipts and disbursements
therefrom.
Cash
used
in our operating activities totaled $1.9 million in the six months ended June
30, 2007, compared to cash provided by our operating activities of $4.7 million
for the same period in 2006. Our cash flows are influenced by the level of
operations, operating margins, the types of services we provide, as well as
the
stages of our projects in both the electrical construction and real estate
segments.
The
increase of $6.5 million in cash used was mainly attributable to (i) the cash
used by the change to the current period net loss versus net income in the
prior
year period and (ii) cash used within the real estate segment as we progressed
toward completion of Pineapple House.
Days
of Sales Outstanding Analysis
We
evaluate fluctuations in our accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts for the electrical
construction segment by comparing days of sales outstanding (“DSO”). We
calculate DSO as of the end of any period by utilizing the preceding three
months of revenues to determine sales per day. We then divide accounts
receivable and accrued billings, net of allowance for doubtful accounts at
the
end of the period by sales per day to calculate DSO for accounts receivable.
To
calculate DSO for costs and estimated earnings in excess of billings, we divide
costs and estimated earnings in excess of billings on uncompleted contracts
by
sales per day.
For
the
quarters ended June 30, 2007 and 2006, our DSO for accounts receivable were
57
and 56, respectively, and our DSO for costs and estimated earnings in excess
of
billings on uncompleted contracts were 34 and 22, respectively. The increase
in
the DSO for costs and estimated earnings in excess of billings is primarily
attributable to several projects requiring special billing conditions. The
special billing conditions require; 1) the completion of discrete components
of
work prior to billing, rather than the more typical monthly progress billings,
and 2) the construction of a series of distinct tasks performed by separate
labor groups in sequential order, resulting in varying stages of construction
for each distinct component. Several jobs with these special billing conditions
have experienced delays in completion due to customer clearance issues, which
results in increased delays in billings.
As
of
July 31, 2007, we have received approximately 72% of our June 30, 2007
outstanding trade accounts receivable balance. In addition as of July 31, 2007,
we have invoiced our customers for approximately 36% of the balance in costs
and
estimated earnings in excess of billings as of June 30, 2007.
Investing
Activities
Net
cash
used in investing activities during the six months ended June 30, 2007 was
$2.9
million compared to $1.3 million for the same period in 2006. These purchases
are mainly attributable to our electrical construction segment for the upgrading
and replacement of equipment.
Our
capital budget for 2007 is expected to total approximately $5.0 million, the
majority of which is for investment in equipment upgrades and fleet expansion
in
the electrical construction segment. These purchases will be funded through
our
working capital, leases and lines of credit.
Financing
Activities
Cash
provided by financing activities during the six months ended June 30, 2007
was
$2.5 million compared to cash used by financing activities of $2.0 million
during the same period in 2006. The increase in cash provided by financing
activities is mainly due to the borrowings made under our equipment line of
credit of $2.1 million used for capital expenditures by the electrical
construction segment and within the real estate segment of $900,000 used for
the
development of Pineapple House. These borrowings were partially offset by loan
repayments of $433,000 on the Equipment Loan. See note 5 of the notes to
consolidated financial statements for more information regarding these
borrowings. In addition, we repaid capital lease obligations of $155,000 during
the six month period ended June 30, 2007. There were no capital lease obligation
repayments during the six month period ended June 30, 2006.
We
have
paid no cash dividends on our Common Stock since 1933, and it is not expected
that we will pay any cash dividends on our Common Stock in the immediate
future.
Forecast
We
anticipate our cash on hand, cash flows from operations and credit facilities
will provide sufficient cash to enable us to meet our working capital needs,
debt service requirements and planned capital expenditures for at least the
next
twelve months. However, our revenues, results of operations and cash flows
as
well as our ability to seek additional financing may be negatively impacted
by
factors including, but not limited to, a decline in demand for electrical
construction services and/or condominiums in the markets served and general
economic conditions, heightened competition, availability of construction
materials, increased interest rates and adverse weather conditions.
Impact
of Inflation
The
impact of inflation on our operations has not been significant to date. However,
there can be no assurance that a high rate of inflation in the future would
not
have an adverse impact on our operating results.
Item
3. Quantitative and Qualitative Disclosures about Market Risk.
Our
Company and our subsidiaries are exposed to certain market risks from
transactions that are entered into during the normal course of business. Our
primary market risk exposure is related to interest rate risk. At June 30,
2007,
we performed sensitivity analyses to assess the potential effect of this risk
and concluded that a hypothetical change in the interest rates of 100 basis
points (i.e., 1%) would not materially affect our financial position, results
of
operations or cash flows.
Item
4T. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit
under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms
of the SEC, and that such information is accumulated and communicated to our
management timely. An evaluation was performed under the supervision and with
the participation of our management, including John H. Sottile, our Chief
Executive Officer and Stephen R. Wherry, our Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June
30, 2007. Based upon that evaluation, our management, including our Chief
Executive Officer and our Chief Financial Officer, concluded that as of June
30,
2007, our disclosure controls and procedures were effective to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the
time
periods specified in rules and forms of the SEC, and is accumulated and
communicated to our management as appropriate to allow timely decisions
regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
No
changes in our internal controls over financial reporting occurred during the
second quarter of 2007 that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting.
Based
on
current regulations, Section 404 of the Sarbanes-Oxley Act will require our
management to provide an assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2007, and our independent registered
public accounting firm will be required to audit the effectiveness of internal
control over financial reporting as of December 31, 2008. We are in the process
of performing the necessary system and process documentation in preparation
for
the evaluation and testing required for management to make this assessment
and
for our independent registered public accounting firm to provide their
attestation report. We have not completed this process or our assessment, and
this process will require significant amounts of management time and resources.
In the course of evaluation and testing, we may identify deficiencies that
will
need to be addressed and remedied.
Limitations
of the Effectiveness of Controls
A
control
system, no matter how well conceived and operated, can provide only reasonable
assurance, not absolute assurance, that the objectives of the control system
are
met. Because of inherent limitations in all control systems, no evaluation
of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people
or by
management override of the controls. The design of any system of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that the design will succeed in achieving
its stated goals under all potential future conditions; over time, controls
may
become inadequate because of changes in conditions, or the degree of compliance
with policies and procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or
fraud may occur and not be detected. Accordingly, our disclosure controls and
procedures are designed to provide reasonable, not absolute, assurance that
the
objectives of our disclosure control system are met and, as set forth above,
our
CEO and CFO have concluded, based on their evaluation, that our disclosure
controls and procedures were effective as of June 30, 2007 to provide reasonable
assurance that the objectives of the disclosure control system were
met.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Environmental
For
information in response to this Item, see the discussion regarding the special
notice letter we received from the EPA regarding the Anderson-Calhoun mine/mill
site in note 4 of notes to the consolidated financial statements in this Form
10-Q.
Item
1A. Risk Factors
There
have been no material changes from the risk factors previously disclosed in
our
Annual Report on Form 10-K for the year ended December 31, 2006.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table sets forth information on a monthly basis regarding our
purchases of our Common Stock during the second quarter of 2007:
Issuer
Purchases of Equity Securities
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs(1)
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
04/1/07-04/30/07
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
1,154,940
|
|
05/1/07-05/31/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,154,940
|
|
06/1/07-06/30/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,154,940
|
|
Total
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
1,154,940
|
|
|
(1)
|
Since
September 17, 2002, we have had a stock repurchase plan which, as
last
amended by the Board of Directors on May 31, 2007, permits the purchase
of
up to 3,500,000 shares until September 30, 2008. We may repurchase
our
shares either in the open market or through private transactions.
The
volume of the shares to be repurchased is contingent upon market
conditions and other factors. As of June 30, 2007, the total number
of
shares repurchased under the Repurchase Plan was 2,345,060 at a cost
of
$1,289,467 (average cost of $0.55 per share) and the remaining number
of
shares available to be repurchased under the Repurchase Plan is 1,154,940.
|
Item
4. Submission of Matters to a Vote of Security Holders
We
held
our Annual Meeting of Stockholders on May 31, 2007. At the Annual Meeting,
the
stockholders approved the following proposals listed in our Proxy Statement
dated April 26, 2007:
I. |
Election
of Seven Directors
|
The
number of votes cast or withheld with respect to the election of each of the
directors is set forth below:
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
John
H. Sottile
|
|
|
20,779,057
|
|
|
540,718
|
|
Thomas
E. Dewey, Jr.
|
|
|
20,680,057
|
|
|
639,718
|
|
Harvey
C. Eads, Jr.
|
|
|
20,685,214
|
|
|
634,561
|
|
John
P. Fazzini
|
|
|
20,679,640
|
|
|
640,135
|
|
Danforth
E. Leitner
|
|
|
20,777,477
|
|
|
542,298
|
|
Al
M. Marino
|
|
|
20,807,425
|
|
|
512,350
|
|
Dwight
W. Severs
|
|
|
20,694,782
|
|
|
624,993
|
|
There
were no broker non-votes with respect to the election of directors. There were
no votes against any of the directors.
II.
|
Ratify
the Appointment of KPMG LLP as the Company’s Independent Registered Public
Accounting Firm for the Fiscal Year Ending December 31,
2007
|
The
shareholders also voted to ratify the appointment of KPMG LLP as the Company’s
independent registered public accounting firm for the year ending December
31,
2007 with 21,000,309 votes cast for, 272,945 votes cast against, 46,519 votes
abstained and 0 broker non-votes.
These
items were the only matters voted upon at the Annual Meeting.
Item
6. Exhibits
*31-1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 15 U.S.C.
Section 7241
|
|
|
*31-2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 15 U.S.C.
Section 7241
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*32-1
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**Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
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*32-2
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**Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
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*
Filed
herewith.
**
These
exhibits are intended to be furnished in accordance with Regulation S-K Item
601(b)(32)(ii) and shall not be deemed to be filed for purposes of Section
18 of
the Securities Act of 1934 or incorporated by reference into any filing under
the Securities Act of 1933, except as shall be expressly set forth by specific
reference.
SIGNATURES
Pursuant
to the requirements 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.
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Dated:
August 14, 2007 |
THE
GOLDFIELD
CORPORATION
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By: |
/s/
JOHN
H. SOTTILE
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John
H. Sottile |
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Chairman of the Board, President and Chief Executive
Officer (Principal Executive Officer) |
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/s/ STEPHEN
R. WHERRY
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Stephen
R. Wherry |
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Senior
Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary
(Principal Financial and Accounting
Officer)
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