form8-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
8-K
CURRENTREPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of Report (Date of earliest event reported): October 31,
2007
STERLING
CONSTRUCTION COMPANY, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation)
|
1-31993
(Commission
File Number)
|
25-1655321
(IRS
Employer Identification Number)
|
|
|
|
|
20810
Fernbush Lane
Houston,
Texas 77073
(Address
of principal executive offices)
|
|
|
|
|
(281)
821-9091
(Registrant’s
telephone number, including area
code)
|
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
□
|
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
□
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
□
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
|
□
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
|
Item
1.01 Entry Into a Material Definitive
Agreement.
Acquisition. On
October 31, 2007, Sterling Construction Company, Inc. (the "Company")
concurrently entered into an agreement to purchase and closed the purchase
of a
91.67% interest in Road and Highway Builders, LLC ("RHB LLC") and of
all the outstanding capital stock of Road and Highway Builders
Inc. The terms of the purchase and a description of the parties are
described in greater detail in Item 2.01, below.
Employment
Agreement. At the closing of the purchase, RHB LLC entered into
a 42-month employment agreement with Richard H. Buenting, its chief
executive. The agreement provides for Mr. Buenting to remain as
chief executive of RHB LLC at an initial annualized salary of $150,000, subject
to annual reviews for possible merit increases. Under the agreement,
Mr. Buenting is also eligible to earn a bonus based on as yet undetermined
goals. He will be eligible to earn a potential maximum annual bonus
equal to 100% of his salary. Mr. Buenting is also eligible to
participate in employee benefit plans to the same extent as other senior
managers of RHB LLC.
In
the
event of Mr. Buenting's death or permanent disability, his employment would
terminate, and RHB LLC would pay him his salary through the date of termination
and any bonus to which he would have been entitled for the year in which his
death or disability occurred, but pro rated based on the number of days during
that year that he was an active employee. Mr. Buenting's
employment may be terminated by RHB LLC for cause, which is defined as a breach
of his obligation of confidentiality to RHB and its affiliates (including the
Company); gross insubordination; willful misconduct; continuing failure to
perform his duties; fraud or dishonesty; the use of illegal drugs; or being
charged with the commission of a felony. If Mr. Buenting's employment
is terminated for cause, or if he exercises his right to resign his employment
on 180 days notice, RHB LLC is only required to pay him his salary through
the
date of termination and is not required to pay him any bonus for the year in
which his employment terminates.
The
foregoing description is not complete and is qualified in its entirety by
reference to the employment agreement, a copy of will be filed as an exhibit
to
an amendment of this Form 8-K, or to the Company’s next Form 10-Q, and which is
incorporated herein by reference.
Credit
Facility. On October 31, 2007, the Company and its subsidiaries,
Texas Sterling Construction Co. and Oakhurst Management Corporation, each as
borrowers entered into a $75,000,000 revolving credit agreement with Comerica
Bank as initial lender and as administrative agent for lenders that from time
to
time may be a party to the credit agreement. In connection with the
revolving credit facility, a credit agreement, security agreement and other
ancillary agreements were entered into, the terms of which are described in
Item
2.03, below.
Item
1.02 Termination of a Material Definitive Agreement.
In
the
new credit agreement described in Item 2.03, below, the Borrowers agreed to
make
no further borrowings pursuant to the existing Fourth Amended and Restated
Credit Agreement with Comerica Bank dated as of May 10, 2006 (the "Existing
Comerica Facility"). The effect of this agreement is to
terminate the Borrowers' ability to make future revolving credit borrowings
under the Existing Comerica Facility, which had provided the Borrowers with
a
$35 million revolving credit facility on terms similar to the new
Credit Facility. No revolving credit loans were outstanding under the
Existing Comerica Facility at October 31, 2007. The new credit
agreement does, however, permit the Borrowers to incur and have outstanding
term
borrowings under the Existing Comerica Facility, but such term borrowings are
limited to two term notes of $37,463 and $635,555.64 that were outstanding
at
October 31, 2007, and to an additional term borrowing of up to
$1,500,000.
Item
2.01 Completion of Acquisition or Disposition of Assets.
On
October 31, 2007, Sterling Construction Company, Inc. (the "Company")
concurrently entered into an agreement to purchase and closed the purchase
of
a 91.67% interest in Road and Highway Builders LLC, a Nevada limited
liability company ("RHB LLC") and all of the outstanding capital stock
of Road and Highway Builders, Inc., a Nevada corporation ("RHB
Inc.") RHB LLC and RHB Inc. were owned equally by Fisher Sand
& Gravel Co., a North Dakota corporation ("FSG") and Richard H.
Buenting, the chief executive of RHB LLC (together, the
"Sellers.")
RHB
LLC
is a heavy civil construction business located in Reno, Nevada. It
builds roads, highways and bridges for local and state agencies. RHB
Inc.'s sole asset is its rights as co-lessee with RHB LLC under a long-term,
royalty-based lease of a Nevada quarry on which RHB LLC can mine aggregates
for
use in its own construction business and for sale to third parties.
RHB
LLC's
assets consist of construction contracts, road and bridge construction and
aggregate mining machinery and equipment, and two parcels of real estate
aggregating approximately 44.5 acres located in Lovelock, Nevada, one of which
is used for materials storage and the other of which has a 7,200 square-foot
combined office building and maintenance shop.
The
Company acquired all of FSG's member's interest in RHB LLC and 83.34% of Mr.
Buenting's member's interest. As a result, the Company owns 91.67% of
RHB LLC, and Mr. Buenting retains the remaining 8.33%.
The
Company paid an aggregate purchase price of $53 million. Of the
purchase price, $1.0 million was paid to Mr. Buenting in the form of 40,702
shares of the Company's common stock valued at the simple average of the closing
prices of the common stock on the NASDAQ Global Select Market on the ten
consecutive trading days ending on the fifth trading day prior to the closing
of
the purchase ($24.569 per share). The balance of the purchase price
was paid in cash. The sale of the shares to Mr. Buenting was not
registered under the Securities Act of 1933 because the Company has relied
on
the provisions of Section 4(2) of that act in claiming an exemption from
registration for the transaction as one not involving a public
offering.
The
purchase price is subject to a downward adjustment after the closing of the
purchase based on the working capital of RHB LLC at the closing, expected to
be
determined within sixty days after the closing. The Sellers are
obligated to refund the purchase price to the extent that the working capital
of
RHB LLC at the closing of the purchase is determined to have been less than
$2.75 million, minus capital expenditures for equipment made by RHB LLC after
July 1, 2007. The purchase price is also subject to reduction to the
extent that accounts receivable at the closing of the purchase less any reserve
for bad debts are not able to be collected within the one hundred twenty days
following the closing. Unbooked judgments in RHB LLC's favor as well
as unbooked claims against customers (none of which are currently reasonably
assured of collection) that are collected within the three years following
the
closing of the purchase will be divided in three equal parts, among the two
Sellers and the Company.
The
cash
portion of the purchase price was funded by a $22.370 million borrowing under
the Company's new $75 million credit facility with Comerica Bank (see Item
2.03,
below) and the balance was funded from the Company's available
cash. Ten percent of the cash purchase price has been placed in
escrow for eighteen months pursuant to an escrow agreement as security for
any
breaches of representations and warranties made by the Sellers.
Mr.
Buenting has the right to put (or require the Company to buy) his remaining
8.33% interest in RHB LLC, and concurrently the Company has the right to call
(or require Mr. Buenting to sell) that 8.33% interest to the Company, in each
case within sixty days after the Company files its Annual Report on Form 10-K
for the calendar year 2010. The purchase price in each case is 8.33%
of the product of six times the simple average of RHB LLC's income before
interest, taxes, depreciation and amortization (EBITDA) for the calendar years
2008, 2009 and 2010. Mr. Buenting's put right is transferable to his
heirs, and in the event of his death or permanent disability before 2010, he
or
his personal representative has the option to accelerate the exercise of his
put
right, in which event the EBITDA measuring period is commensurately
shortened.
The
parties make representations and warranties in the purchase agreement as to
their own legal status, and the Sellers make representations and warranties
as
to their ownership of RHB LLC and RHB Inc. and as to the assets, business,
operations, liabilities and financial position of RHB LLC and RHB
Inc. The parties' representations and warranties expire eighteen
months after the closing of the purchase except that (a) there is no time limit
on the Sellers' representations and warranties as to matters of title to assets
and the Company's and FSG's representations and warranties concerning the
authorization of the transaction; (b) tax representations and warranties
continue in effect for the applicable tax statute of limitations plus sixty
days; and (c) environmental and employee benefit plan representations and
warranties remain in effect for five years. The parties agree to
indemnify each other for breaches of representations and warranties; however the
total liability for breaches of representations and warranties are capped at
$10.6 million for the Company and $5.3 million for each of the Sellers
individually.
The
purchase agreement restricts Mr.
Buenting and FSG from competing against RHB LLC's business and from
soliciting its employees for a period of four years after the closing of
the purchase. Mr. Buenting's non-compete obligation applies to
the states of Nevada and California. FSG's non-compete obligation
applies to Northern Nevada, but not to certain of its in-progress projects
and
not to contracts in excess of $100 million, and to Southern Nevada, except
not
to Clark County and not to contracts in excess of $75
million.
Prior
to
this acquisition, no relationship of any kind existed between the Sellers and
the Company, any of the Company's affiliates, directors or officers or any
of
their associates.
The
foregoing description in this Item 2.01 is not complete and is qualified in
its
entirety by reference to the purchase agreement and the escrow agreement, copies
of which will be filed as exhibits to an amendment of this Form 8-K, or to
the
Company’s next Form 10-Q, and which are incorporated herein by
reference.
Item
2.03
|
Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance
Sheet Arrangement of a
Registrant
|
On
October 31, 2007, the Company and its subsidiaries, Texas Sterling Construction
Co. and Oakhurst Management Corporation, each as borrowers (the
"Borrowers") closed a $75,000,000 revolving credit facility (the
"Credit Facility") with Comerica Bank as initial lender and as
administrative agent for lenders that from time to time may be a party to the
Credit Facility (the "Lenders"). In connection with the
Credit Facility, a credit agreement, security agreement and several related
ancillary agreements were entered into by the parties. Upon the
Company's purchase of 91.67% of the equity of Road and Highway Builders, LLC
("RHB LLC") and all of the equity of Road and Highway Builders Inc.
("RHB Inc."), which was financed in part with funds borrowed by the
Company under the Credit Facility, RHB LLC and RHB Inc. also became Borrowers
and granted security interests in their assets pursuant to a Joinder
Agreement.
Comerica
intends to syndicate the Credit Facility and is entitled, after consultation
with the Company, to change the terms, structure and pricing (including the
interest rates and fees) of the Credit Facility if Comerica determines in its
reasonable discretion that such changes are necessary to insure that the Credit
Facility can be syndicated to such an extent that Comerica's lending commitment
under the Credit Facility is reduced to $35,000,000.
The
following descriptions are not complete and are qualified in their entirety
by
reference to the agreements governing the Credit Facility, copies of which
will
be filed as exhibits to an amendment of this Form 8-K or to the Company’s next
Form 10-Q, and which are incorporated herein by reference.
Credit
Agreement. Pursuant to the credit agreement dated as of
October 31, 2007 (the "Credit Agreement") among the Borrowers, the
Lenders and the administrative agent, the Lenders agree to make revolving loans
(the "Loans") to the Borrowers and to issue letters of credit on behalf
of the Borrowers. The Borrowers are permitted to use the Loans to
finance working capital, to refinance existing indebtedness and to consummate
the acquisition of RHB LLC and RHB Inc. as described above. At
October 31, 2007, the aggregate amount of Loans outstanding under the Credit
Agreement is $22,370,000 and the aggregate amount of letters of
credit outstanding under the Credit Agreement is
$1,484,000.
At
the
Company’s election, the Loans under the Credit Facility bear interest at either
a LIBOR-based interest rate or a prime-based interest rate. The
unpaid principal balance of each LIBOR-based Loan bears interest at a variable
rate equal to LIBOR plus an amount (the "LIBOR Margin") ranging from
1.25% to 2.25% depending on the Pricing Leverage Ratio achieved by the
Company. The "Pricing Leverage Ratio" is determined by the ratio of
the Company’s average total debt, less cash and cash equivalents, to the EBITDA
achieved by the Company on a rolling four-quarter basis. The Pricing
Leverage Ratio is measured quarterly. If the Company achieves a
Pricing Leverage Ratio of (a) less than 1.00 to 1.00; (b) equal to or greater
than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal
to
1.75 to 1.00, then the applicable LIBOR Margins will be 1.25%, 1.75% and 2.25%,
respectively. Interest on LIBOR-based Loans is payable at the end of
the relevant LIBOR interest period, which must be one, two, three or six
months.
The
unpaid principal balance of each prime-based Loan will bear interest at a
variable rate equal to Comerica’s prime rate plus an amount (the "Prime
Margin") ranging from 0% to 0.50% depending on the Pricing Leverage Ratio
achieved by the Company. If the Company achieves a Pricing Leverage
Ratio of (a) less than 1.00 to 1.00; (b) equal to or greater than 1.00 to
1.00
but less than 1.75 to 1.00; or (c) greater than or equal to 1.75 to 1.00,
then
the applicable Prime Margins will be 0.0%, 0.25% and 0.50%
respectively.
Until
the
Company issues its financial statements for the quarter ended December 31,
2007,
the LIBOR Margin and the Prime Margin will be determined as if the Company
had
achieved a Pricing Leverage Ratio equal to, or greater than, 1.00 to 1.00,
but
less than 1.75 to 1.00.
The
principal balance of all Loans under the Credit Facility will mature on October
31, 2012. The principal balance of the Loans may be prepaid at any
time, in whole or in part, without premium or penalty, except for losses
incurred by the Lenders as a consequence of the prepayment of any Loans bearing
interest based on LIBOR. Amounts repaid under the Credit Facility may
be re-borrowed.
The
Borrowers will pay a syndication arrangement fee to Comerica, a facility
fee to
the Lenders, and fees on the amount of each letter of credit. The
Borrowers will also pay customary fees to the administrative agent, the
collateral trustee and the Lender issuing the letters of credit.
The
Credit Agreement contains financial covenants, including covenants in which
the
Borrowers have agreed —
|
·
|
beginning
with the quarter ended December 31, 2007, to maintain a fixed charge
coverage ratio of not less than 1.25 to
1.00;
|
|
·
|
to
maintain a leverage ratio not less than 1.25 to 1.00 for the quarters
ended December 31, 2007 and March 31, 2008 and to maintain a leverage
ratio of not less than 2.00 to 1.00 for each quarter
thereafter;
|
|
·
|
commencing
with the date of the Credit Agreement (October 31, 2007), to maintain
a
tangible net worth greater than or equal to the sum of (a) the
tangible
net worth of the Company immediately following the acquisition
of RHB LLC
and RHB Inc. less $3,000,000; plus (b) 50% of each subsequent quarter’s
positive net income, without reduction for
losses;
|
|
·
|
commencing
with the date of the Credit Agreement, to maintain an asset coverage
ratio
of at least 1.25 to 1.00; and
|
|
·
|
at
no time to have consolidated net losses, in the aggregate, for
any two
consecutive quarters that total more than
$500,000.
|
The
Credit
Agreement contains negative covenants in which the Borrowers have agreed
(subject to certain exceptions) —
|
·
|
not
to incur liens on their assets;
|
|
·
|
not
to engage in acquisitions exceeding a certain
cost;
|
|
·
|
not
to merge or consolidate or sell, transfer, lease or otherwise dispose
of
their assets;
|
|
·
|
not
to engage in any business that is substantially different from
the
business engaged in on the date of the Credit
Agreement;
|
|
·
|
not
to incur additional indebtedness;
|
|
·
|
not
to amend their existing surety arrangements or enter into new surety
arrangements unless on terms substantially similar as the Company’s
existing arrangements, and not unless the new surety delivers to
the
Lenders a comfort letter substantially similar to that previously
delivered to the Lenders by the Company’s existing principal surety;
and
|
|
·
|
not
to declare or make dividend distributions to their shareholders
other than
stock dividends.
|
The
Credit Agreement also contains other covenants that include, among other things
(subject to exceptions), limitations on investments, limitations on transactions
with affiliates, limitations on amendments to surety documents, maintenance
of
properties and insurance, compliance with laws, delivery of certain information
and keeping of books and records.
The
Credit Agreement contains the following events of default, which are subject
to
customary grace periods and materiality standards:
|
·
|
nonpayment
of any amounts payable under the Credit Facility when
due;
|
|
·
|
any
representation or warranty made in connection with the Credit Facility
being incorrect in any material respect when made or deemed
made;
|
|
·
|
failure
of the Borrowers to comply with the Credit Agreement or any related
document;
|
|
·
|
failure
by the Borrower to make payments on other indebtedness involving
amounts
of $1,000,000 or more, or the occurrence of any event that permits
the
acceleration of such indebtedness;
|
|
·
|
entry
of judgments or orders against the Borrowers for payment of an aggregate
amount of $1,000,000 or more;
|
|
·
|
the
insolvency of the Borrowers, or the voluntary or involuntary bankruptcy
or
reorganization of the Borrowers;
|
|
·
|
certain
events under ERISA that could reasonably be expected to have a material
adverse effect;
|
|
·
|
any
Person either alone or with its subsidiaries shall acquire more than
50%
of the outstanding stock of the Company or the Company shall fail
to
maintain its existing ownership interests in its
subsidiaries;
|
|
·
|
an
event of default occurs under any of the Borrower’s surety agreements, or
any surety makes a public filing of its liens or takes action or
threatens
to take action to enforce its liens;
and
|
|
·
|
the
Credit Agreement or any document securing the obligations under the
Credit
Agreement ceases to be in effect or any lien created in connection
with
the Credit Facility ceases to be
enforceable.
|
Security
Agreement. Pursuant to a Security Agreement dated as of
October 31, 2007, each Borrower granted to Comerica Bank, as administrative
agent for the Lenders, a security interest in all of such Borrower’s personal
property to secure the obligations of the Borrowers under the Credit
Facility. In addition, the Credit Agreement requires that the
Borrowers execute mortgages granting the administrative agent a lien on certain
of their real properties within 30 days after the date of the Credit
Agreement.
If
an
event of default under the Credit Agreement occurs, then the administrative
agent may exercise the Borrower’s rights in the collateral. In that
event, the collateral trustee will have all of the rights of a secured party
with respect to the collateral under the Uniform Commercial Code, including,
among other things, the right to sell the collateral at public or private
sale.
On
October 31, 2007, the Company issued a press release together with informational
slides announcing the acquisition of Road and Highway Builders, LLC and Road
and
Highway Builders Inc. A copy of the press release and slides are
filed as Exhibit 99.1 and Exhibit 99.2 to this Form 8-K and are incorporated
herein by reference.
Item
9.01
|
Financial
Statements and Exhibits.
|
(a)
|
Financial
statements of businesses
acquired.
|
The
financial statements required by Item 9.01 will be filed by an amendment to
this
Form 8-K on or before January 16, 2007.
(b)
|
Pro
forma Financial Information.
|
The
pro
forma financial information required by Item 9.01 will be filed by an amendment
to this Form 8-K on or before January 16, 2007.
|
|
|
|
|
|
2.1
|
|
Purchase
Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
Thomas Fisher and Sterling Construction Company, Inc. dated as of
October 31, 2007, a copy of which will be filed as an exhibit to
an amendment of this Form 8-K or to the Company’s next report on Form
10-Q.
|
|
|
|
2.2
|
|
Escrow
Agreement by and among Sterling Construction Company, Inc., Fisher
Sand
& Gravel Co., Richard H. Buenting and Comerica Bank as Escrow Agent,
dated as of October 31, 2007, a copy of which will be filed as an
exhibit to an amendment of this Form 8-K or to the Company’s next
report on Form 10-Q.
|
|
|
|
10.1
|
|
Credit
Agreement by and among Sterling Construction Company, Inc., Texas
Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank
and
the other lenders from time to time party thereto, and Comerica Bank
as
administrative agent for the lenders, dated as of October 31, 2007,
a
copy of which will be filed as an exhibit to an amendment of this
Form 8-K
or to the Company’s next report on Form 10-Q.
|
|
|
|
10.2
|
|
Security
Agreement by and among Sterling Construction Company, Inc., Texas
Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank
as
administrative agent, dated as of October 31, 2007, a copy of
which will be filed as an exhibit to an amendment of this Form 8-K
or to
the Company’s next report on Form 10-Q.
|
|
|
|
10.3
|
|
Joinder
by Road and Highway Builders, LLC and Road and Highway Builders Inc,
dated
as of October 31, 2007, a copy of which will be filed as an exhibit to
an amendment of this Form 8-K or to the Company’s next report on Form
10-Q.
|
|
|
|
10.4
|
|
Employment
Agreement between Richard H. Buenting and Road and Highway Builders,
LLC,
dated as of October 31, 2007, a copy of which will be filed as an
exhibit to an amendment of this Form 8-K or to the Company’s next report
on Form 10-Q.
|
|
|
|
|
|
Sterling
Construction Company, Inc. press release dated November 1, 2007 announcing
the acquisition of Road and Highway Builders, LLC and Road and Highway
Builders Inc., and the entry into a $75 million line of credit agreement
with Comerica Bank, as administrative agent and as initial
lender.
|
|
|
|
|
|
Informational
slides regarding the acquisition on October 31, 2007 by Sterling
Construction Company, Inc. of Road and Highway Builders, LLC and
Road and
Highway Builders Inc.
|
______________
* Filed
herewith
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 hereunto
duly authorized.
|
Sterling
Construction Company, Inc.
|
|
|
|
|
|
By:
|
/s/
James H. Allen, Jr. |
|
|
|
James
H. Allen, Jr.
|
|
|
Senior
Vice President & Chief Financial
Officer
|
Dated:
November 1, 2007
Page
7 of
7