**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K**

 

| x | Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |  
 

For the fiscal year ended:  December 31, 2007

 
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: 0-24684

**ADUDDELL INDUSTRIES, INC.**

(Name of issuer in its charter)

 

Oklahoma

(State of incorporation)

73-1587867

(I.R.S. Employer ID no.)

 

 

14220 S. Meridian Avenue

Oklahoma City, Oklahoma 

(Address of Principal Executive Offices) 

73173

(Zip Code)

 

Issuer’s telephone number, including area code:  (405) 692-2300

 

Securities registered pursuant to Section 12(b) of the Act:

**None**

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock (par value $0.001 per share)**

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

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 past 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 at least the past 90 days. Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

On June 30, 2007, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold was $17,528,317.

 

Shares of common stock outstanding as of March 1, 2008:  53,965,854 

 

**ADUDDELL INDUSTRIES, INC.**

**2007 ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**

 

 

Page 

PART I

 

Item 1. Business 

4

Item 1A. Risk Factors

10

Item 1B. Unresolved Staff Comments

13

Item 2. Properties 

13 

Item 3. Legal Proceedings 

13

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

14

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

Item 6. Selected Financial Data   

15

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 

17

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

25

Item 8. Financial Statements and Supplementary Data

25

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

25

Item 9A. Controls and Procedures 

25

Item 9B. Other Information 

26

PART III 

 

Item 10. Directors, Executive Officers and Corporate Governance 

26

Item 11. Executive Compensation

26

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26

Item 13. Certain Relationships and Related Transactions and Director Independence

27

Item 14. Principal Accounting Fees and Services

28

PART IV. 

 

Item 15. Exhibits and Financial Statement Schedules  

29

 

 

2

 

**Cautionary Statement Regarding Forward Looking Information**

 

This annual report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the use of forward-looking terminology such as: “may”, “might”, “could”, “would”, “believe”, “expect”, “intend”, “plan”, “seek”, “anticipate”, “estimate”, “project” or “continue” or the negative thereof or other variations thereon or comparable terminology.  All statements other than statements of historical fact included in this  report on Form 10-K, including without limitation, the statements under “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operation” and located elsewhere herein regarding our financial position and liquidity are forward-looking statements. These forward-looking statements also include, but are not limited to:

 

 

**•**

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

 

 

**•**

actions of our competitors;

 

 

**•**

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

 

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

 

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

 

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

 

 

3

 

**PART I**

 

**Item 1. Business**

 

**Introduction**

 

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

 

Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services. In 2006, we increased our scope of services providing services to the total exterior envelope of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In 2006, we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofingand waterproofing company. This transaction closed in December 2006 adding below grade waterproofing to our service offerings.  Additionally, we established Global Specialty Group (GSG), a new consulting business to capitalize on the national reputation of Brent Anderson.  

 

Our E2MS division had a very successful 2006 in positioning itself in the emergency response market as well as leveraging our relationships to provide growth in the roofing and restoration markets and continued these efforts in 2007.  We have increased the scope of our emergency response to pre-event planning through our strategic relationship with James Lee Witt, and we have negotiated a number of pre-event contracts as first responders in the event of an emergency.  In one of these contracts, E2MS has been named the preferred vendor for emergency planning and response by ASFONA, the Starwood Hotels franchise owners association, and our division president, Randall Oberlag, has been named as an honorary board member of that organization. Starwood Hotels & Resorts is one of the world’s largest hotel and leisure companies.

 

We are licensed in all fifty states as well as Puerto Rico and the Virgin Islands and have a unique capability of offering national account management to our customers. A direct result of this capability was the contract awarded to us by U.S. Communities in July of 2006. This three year contract with renewal opportunities awarded us the sole source opportunity to provide schools, cities, states and other non-profit organizations complete roofing services under the U. S. Communities government purchasing alliance. We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service.  We continued our efforts to market the U.S. Communities purchasing alliance in 2007 and have begun to educate some member entities on this process.  We performed the majority of our 2007 U.S. Communities work inMaryland, Ohio, Texas, Florida, and California.  

 

Revenues from fixed-price construction and renovation contracts are generally accounted for on a percentage-of-completion basis using the cost-to-cost method. The cost-to-cost method measures the percentage completion of a contract based on total costs incurred to date compared to total estimated costs to completion. Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals.   Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials. On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues.Margins are also affected by the competitive bidding process and the technical difficulty of the project. New roof construction work is more likely to be competitively bid than re-roofing, restoration, and repair. Typically, re-roofing, restoration, and repair jobs are more labor intensive and have higher margins than new roof construction.

 

4

 

**The Marketplace**

 

To meet the needs of a changing marketplace, Aduddell Industries is committed to providing additional building envelope protection services through organic and acquisition-based growth initiatives. We believe that we are leading the industry in providing products and services that proactively meet the needs inherent in four fundamental paradigm shifts:

 

 

**•**

Shift from local roofing resources to large national roofing companies 

 

**•**

Expansion of the use of sophisticated metal roofing systems 

 

**•**

Specific needs to provide innovative ways to restore the crumbling national infrastructure 

 

**•**

National change in disaster consequence management from after-the-fact recovery services to pre-disaster planning consultation services 

 

*Shift from local roofing resources to large national roofing companies:*

 

Aduddell Roofing has strategically positioned itself as a proven national commercial roofing resource for corporations and governmental agencies that are taking advantage of an industry change from employing independent local roofers to participating in national roof asset management programs and group purchasing alliances, which provide: 

 

 

**•**

Best value products and services 

 

**•**

Complete roof analysis reports 

 

**•**

Controlled facility maintenance oversight 

 

A prime example of a group taking advantage of this market opportunity is U.S. Communities, a nationwide non-profit strategic sourcing program designed by public purchasing professionals. The alliance is sponsored by the National Association of Counties (NACo), National Institute of Governmental Purchasing (NIGP), the Association of School Business Officials (ASBO), National League of Cities (NLC), and United States Conference of Mayors (USCM). More than 87,000 public entities are eligible to participate in the USC alliance, which currently has revenues of $1 billion. 

 

We, working in a teaming relationship with Professional Services Industries, Inc., an industry-leading roof management consulting, engineering and testing firm, and W.P. Hickman Systems, a leading provider of protection products and services designed to maintain building assets, have won the exclusive national roofing services contract from USC. An additional entity, which is named HCS, was formed to serve the USC participating public agency member accounts nationally. The solicitation process for this contract took more than six months, and HCS was selected for best value over some of the largest companies in the roofing industry. 

 

*Expansion of the use of sophisticated metal roofing systems:*

 

Architects and builders in large numbers nationally are specifying advanced metal roofing systems. Strategically positioned to answer this demand, Aduddell Roofing, with its Metal Roofing Systems division, is supplying leading-edge products and services in this important segment of the industry. The National Roofing Contractors Association 2004-2005 survey indicated the standing seam business category was the fastest growing segment of the roofing industry. 

 

*Specific needs to provide innovative ways to restore the crumbling national infrastructure:*

 

The nation’s aging buildings, bridges, and highways are creating unprecedented government and private industry demand for structural repair, concrete restoration, and waterproofing. Aduddell Restoration and Waterproofing as well as Global Specialty Group’s purpose is to combine the latest technology with the best practices already in use, including repair, restoration, and waterproofing techniques and materials, and to provide the most innovative, cost effective solution to the client's restoration needs. The type of services that these subsidiaries provide are vital to America’s repairing its out-of-date, damaged infrastructure.

 

5

 

*National change in disaster consequence management from after-the-fact recovery services to pre-disaster planning consultation:*

 

Lessons learned from recent man made and natural disasters have created a dynamic need for professional disaster management organizations. The type of service needed is rapidly evolving from primarily being related to post-disaster recovery, to complex, comprehensive pre-disaster planning.  E2MS, our emergency services subsidiary, provides comprehensive pre-event planning, event management and post event recovery services either directly or through one of our strategic alliances.  It is not a question of  if the next disaster will occur but when. We have responded very effectively and profitably over the last fifteen years to disaster, but with our pre-event contracts in place should achieve even greater results.

 

**Services – Roofing**

 

We provide a comprehensive range of commercial roofing services. We employ a knowledgeable and skilled workforce that utilizes standardized techniques and practices to determine a customer’s optimal roofing solution. These solutions are designed to maximize the average life of a new roofing system. Annual maintenance services, which can result in the identification at an early stage of problems within a roofing system, can add as many as 10 years to the useful life of a roof through repair and restoration. The following is a description of our roofing services.

 

*Maintenance:* Maintenance involves the physical inspection of an existing roof system to determine its current condition, detect weaknesses and failures and identify any potential future problems. Through a program of regularly scheduled annual or semi-annual inspections, our technicians assist owners in protecting their roofing investments by identifying damage in its early stages. Early detection of leaks and roofing system failures makes it possible for us to repair and extend the life of a roofing system through repair or restoration, which is significantly less expensive and time consuming than re-roofing. We also will soon offer to our customers a facility management program to coordinate maintenance, repair, restoration and re-roofing as needed. Although direct revenues from these preventive maintenance programs are relatively minor, we believe that theseservices enable us to cultivate strong relationships with our customers and establish a basis for recurring revenues.

 

*Repair:* Repair is a process where an existing roof system has additions and adjustments made to it, such as caulking, re-coating and repairing penetrations to fix leaks in the roofing system.

 

*Restoration:* Restoration involves the major repair of the roofing system, including the repair of all penetrations and re-surfacing of the roof to restore it to serviceable condition. The opportunity to perform restoration work normally exists two or three years before the end of a roof’s life cycle and before significant damage occurs. We are able to inform building owners when a roof is approaching the end of its 15-year average life cycle through our regularly scheduled maintenance and repair program. As many as ten years can be added to the useful life of the roof through restoration, and the cost of restoration is typically one-half the cost of re-roofing.

 

*Re-Roofing*: Re-roofing is the process of installing a new roof when an existing roofing system fails. Roofing system failure can be caused by a number of factors, including age, severe weather, poor workmanship, defective materials, improper specification of a roofing system, abuse and failure to maintain the roof through inspections. We perform re-roofing only when all repair and restoration alternatives are deemed incapable of bringing a roof back to serviceable condition, or at the specific request of a customer.

 

6

 

*New Construction:* New roof construction involves the construction of a variety of roofing systems, including metal roofing systems, built-up roofing membranes and single ply roofing systems. New roof construction coincides with the construction of a new building. New commercial roofing work usually begins with a proposal request from the building owner, property manager, general contractor or roof consultant. Initial meetings with the parties allow the roofing contractor to prepare preliminary and then more detailed design and product specifications, drawings and cost estimates. Once a project is awarded, it is conducted in scheduled phases, and progress billings are rendered to the owner of the building before payment, less a retention (defined as amounts withheld from progress billings until final and satisfactory contract completion) of 5% to 10% of theconstruction cost of the project. Actual field work (ordering of equipment and materials, fabrication or assembly of certain components, delivery of materials and components to the job site, scheduling of work crews and inspection and quality control) is coordinated during these phases. We generally provide the materials to be installed as a part of these contracts.

 

**Services – Restoration and Waterproofing**

 

Concrete is a primary element of practically every kind of construction. We have sought and developed the finest skills and expertise required to provide the numerous specialized concrete services, which have made us known for our workmanship and our continual drive to innovate. We are approved applicators of Carlisle, Kelmar, M Brace, Permaquik, Tremco, Sika, Sonneborn, Stellar Mark, Watson Bowman and many other repair and waterproofing products. Field technicians are completely trained and certified in all the repair and waterproofing services we provide, such as: 

 

Epoxy Coatings

Epoxy Injection 

Expansion Joints 

Fiber Reinforced Polymers (FRP is often referred to as Carbon Fiber Reinforcement) 

High Pressure Washing 

Hot Fluid Applied Waterproofing 

Penetrating Sealers 

Post Tension Cable Repair (Certified by the Post Tensioning Institute: http://www.post-tensioning.org) 

Grout and Sealing

Shot Blasting 

Traffic Coatings 

Urethane Foam Injection 

 

Concrete repair can include basic, minor repair, chip and patch, multi-level structures, structural full depth, and reinforcement or replacement of steel beams. Waterproofing can be either above or below grade as well as vertical and horizontal. Our goal is to incorporate established techniques and technologies in conjunction with the latest advancements. We also understand that projects may require immediate response and completion or long-term monitoring and maintenance work; with this in mind, our scope of what we do is primarily to meet our clients’ needs and goals.  In 2007, we expanded our footprint in the restoration and waterproofing services by starting a business unit in Tampa, Florida.

 

**Services – Emergency Response**

 

In 2004 and 2005, through the efforts of Oklahoma Development Group (ODG), we secured a subcontractor position to provide temporary roofing services related to damages caused by four different storm events. We partnered with Carothers Construction Inc. in the emergency response effort for the last two storms.

 

In 2006, we brought all services previously provided by ODG in house, and since that time, we have continued to pursue opportunities within the emergency response service categories in a proactive manner rather than a reactive manner.  We have yet to capture any revenues associated with these endeavors, but we continued throughout 2007 with efforts to build relationships and poise ourselves for business opportunities in this category by focusing on trying to advance our strategic planning in this category.

 

7

 

**Seasonal and Cyclical Nature of our Industry**

 

The new construction industry is cyclical and is influenced by seasonal factors as construction activities are usually lower during winter months than other periods. The re-roofing and restoration businesses do not follow the new construction cycles. We attempt to increase winter productivity by concentrating our business in the southern half of the United States. Nevertheless, we expect our revenues and operating results generally to be lower in the first and fourth quarters of each year. Additionally, the industry is affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Since disaster-related work requires an immediate response and is typically covered by insurance, the margins are higher than on discretionary work. 

 

**Competition**

 

The commercial roofing industry and restoration industry is highly fragmented with many contractors competing intensely with us on a local and regional basis. In the future, we may encounter competition from new entrants on a regional or national level. We believe that purchasing decisions in this industry are based on (i) price, (ii) reputation for reliability and quality of services provided, (iii) long-term customer relationships, and (iv) the range of services provided. We believe that our strategy of becoming a leading national provider of services for the full exterior envelope of a building will enhance our competitive position. In addition, we think that our reputation for quality and performance, brought about by our unique project management approach, and most of all safety, provides us with a distinct competitive advantage. We believe that the market for ourservices will expand as we establish experienced sales personnel on a national basis. 

 

**Customers**

 

In 2007, we provided commercial roofing and restoration services to more than 200 customers. No individual customer accounted for more than 10.0% of our 2007 revenues.  We provide roofing and restoration services to customers having a local, regional and national presence in a broad range of businesses, including the industrial, office, retail, hospitality, government and educational industries. 

 

**Suppliers**

 

We purchase our roofing and restoration materials and other supplies from numerous suppliers and are not dependent on any one supplier for materials. Over the last calendar year, our expenses related to materials and supplies have increased, but we have had no significant problems obtaining the supplies and materials we need without extensive delays.

 

**Sales and Marketing**

 

We believe that our reputation for quality and performance has enabled us to obtain recurring business through customer referrals and new business. Like most competitors, we primarily use direct sales to market our services. Although our market presence is felt nationally, we have concentrated our efforts in the past in the southern half of the United States to minimize the seasonal fluctuations typically experienced within the construction industries.  With the expansion efforts that our company has engaged in over the last 18 months, we continue to expect our roofing footprint to expand dramatically. In addition, our restoration and waterproofing businesses also operate nationwide, and we continue to expect our restoration footprint to expand as well.

 

We supplement our sales and marketing activities through participation in industry trade shows and conferences, our Internet website, and the yellow pages in the markets we serve. We have created a new business development group of marketing, financial and business development professionals as well as a corporate accounts program, which is intended to develop and manage our relationship with customers having a regional or national presence. Our logo and identifying marks are featured on service trucks, marketing materials and advertising.

 

8

 

In 2006, we significantly increased marketing efforts by the purchase of EyeOpener Communications in an effort to increase revenues, profits, and shareholder value.  We believe this relationship can be leveraged into additional revenues in our current markets and also create new market opportunities.  EyeOpener continues to provide us with marketing support while simultaneously supporting its diverse clientele base.  In 2007, EyeOpener increased the number of clients that it serves as well as assisted with the marketing of the U.S. Communities contract.  EyeOpener provided HCS with an educational Website tool with which to market its product to the over 87,000 potential customers.

 

**Personnel, Training and Safety**

 

We have a comprehensive job training program, which provides classroom and on-the-job training programs for our personnel based on the model training program developed by the NRCA. The program provides immediate training to roof laborers in our methods, procedures and standards with an emphasis on high quality service. Our training program is also designed to ensure that all of our roofing laborers meet safety standards established by us, our insurance carriers and Federal, state and local laws and regulations. Our training and safety program has been very effective as demonstrated by our EMR rating from our insurance company. This rating monitors the frequency of accidents nationally. The national average construction EMR is 1.0 and our historic EMR is 2007, .54, 2006, .54, 2005, .58. This is almost half the national average and represents one of the best, if not the best rating in the roofing industry.

 

**Government Regulation**

 

Our business and the activities of our roofing and restoration contractors are subject to various federal, state, and local laws, regulations and ordinances relating to, among other things, the licensing and certification of roofing contractors, OSHA standards, advertising, building and zoning regulations and environmental laws and regulations relating to the disposal of demolition debris and other solid wastes. We employ a full-time environmental specialist to assist us with environmental compliance and safety. Our expenses incurred in connection with compliance with environmental laws is not readily determinable as many of the expenses we incur, such as expenses for roof debris clean up, are aggregated with other expenses we incur when performing roofing projects. While we strive to utilize the best industry practices for waste disposal, there can be no assurance that we will not encounterfuture environmental claims, which could have a material adverse effect on our business, financial condition and results of operations.

 

In certain jurisdictions, we are required to be a licensed contractor. We are licensed in all fifty states, Puerto Rico and the Virgin Islands. In addition, certain jurisdictions require us to obtain a building permit for each roofing project. We are also subject to certain federal, state and local laws and regulations, which, among other things, regulate our advertising, warranties and disclosures to customers. Although we believe that we have been and are currently in compliance in all material respects with such laws and regulations, there can be no assurance that in the future our results of operations will not be materially adversely affected by existing or new laws or regulations applicable to our business.

 

**Employees**

 

At February 29, 2008, we had 369 full-time employees, including 262 employees in field operations and 107 managers and administrative employees. Our field operations employees are unionized and covered under a collective bargaining agreement. Our managers and administrative employees are non-unionized. We have not experienced any labor-related work stoppages, and we consider our relations with our employees to be good. 

 

**Item 1A.** **Risk Factors**

 
 
** **

****Not Applicable****.**********
 

**Item 1B.** **Unresolved Staff Comments**

 
 
** **

****None****.**********
 

 

9

 

**Item 2.** **Description of Property**

 

**Facilities and Vehicles**

 

We have a corporate office as well as our roofing office located in a suburban Oklahoma City industrial area. The roofing and corporate office covers 9,380 square feet and the shop and warehouse cover 11,142 square feet. In addition, we have our North Central Roofing Division and our subsidiary Aduddell Restoration and Waterproofing, Inc. offices in St. Paul, Minnesota, in an approximately 20,000 square foot building including warehouse space. We operate our South East Roofing division from a 2,200 square foot facility in Stuart, Florida. Each of the operating facilities also have equipment storage yards and all facilities are leased. We operate a fleet of approximately 140 trucks, vans and other vehicles. We believe that our facility and vehicles are well maintained and adequate for our current operations.

 

**Item 3.** **Legal Proceedings**

 

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

 

Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complained of our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claimed that the individual defendants breached their fiduciary duties tous, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff sought damages, imposition of a constructive trust, restitution and attorneys’ fees. We and the individual defendants denied the substantive allegations of the Complaint. On February 9, 2008, the parties participated in a mediation that resulted in a settlement of the lawsuit, including payment by us of $180,000 ($150,000 of which was paid from proceeds of our director and officer insurance) and certain non-monetary relief.  After publication of the proposed settlement, and after noting no shareholder objection, the Honorable Joe Heaton approved the settlement as fair and reasonable and entered final judgment.  

 

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

 

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

 

No items were submitted to a vote of our security holders during the fourth quarter of 2007. 

 

10

 

**PART II**

 

**Item 5.** **Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

Our common stock is traded on the OTC Bulletin Board and is quoted under the symbol “ADDL.OB”. The following table sets forth, for the periods presented, the high and low bid quotations in the over-the-counter market as quoted on the OTC Bulletin Board. The bid quotations reflect inter-dealer prices without adjustment for retail markups, markdowns, or commissions and may not reflect actual transactions. The reported quotations were obtained from the OTC Bulletin Board website.

 

  

******2007******
******2006******
******Quarter Ended******
******Low******
******High******
******Low******
******High******
March 31

$0.58

$0.64

$0.46

$0.97

June 30

$0.20

$0.51

$0.70

$1.95

September 30

$0.21

$0.21

$0.69

$1.47

December 31

$0.07

$0.08

$0.52

$1.08

 

 

**Holders of our Common Stock**

 

At the date of this report, we had 90 shareholders of record for our common stock. One of the shareholders of record is CEDE & CO and represents over 1,000 independent shareholders holding over 30 million shares.

 

**Dividend Policy**

 

Our dividend policy for holders of common stock is to retain earnings to support the expansion of operations through organic growth or by strategic acquisitions. We have not previously paid any cash dividends, and we do not intend to pay cash dividends in the near future. Any future cash dividends will depend on our future earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. 

 

**Equity Compensation Plan Information**

 

 

******(a)******
** **

******(b)**********
** **

******( c)**********
**Plan Categories**

**Number of securities to be issued upon exercise of options**

 

**Weighted average exercise price**

 

**Number of securities remaining for future issuance**

Equity compensation plans approved by Security holders 

 

 

 

 

 

2005 Stock Incentive Plan

 

3,625,000

 

$ .76

 

1,375,000

Equity compensation plans not approved by security holders

-     

 

-

 

-

Total

3,625,000

 

$  .76

 

1,375,000

 

**Item 6.** **Selected Financial Data**

 

The following table sets forth selected financial and statistical data, computed as a percentage of net sales, for the years ended December 31, 2007, 2006, 2005, 2004, and 2003. The selected financial data are derived from our audited consolidated financial statements and should be read in conjunction with them and the notes thereto. The results of operations for the periods presented are not necessarily indicative of our future operations.

 

11

 

 

** **

******Years Ended December 31,**********
 

** **

******2007******
 

******2006******
** **

******2005**********
** **

******2004******
 

******2003******
 

 

 

 

 

 

 

 

 

 

 

******Revenues******
$

47,233,614 

$

31,660,657 

$

59,227,145 

$

27,828,362 

$

19,309,814 

 

 

 

 

 

 

 

 

 

 

 

******Operating Expenses:******
 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

51,294,473 

 

30,710,356  

 

41,668,047  

 

23,262,586  

 

16,210,622  

General and administrative

 

10,655,868 

 

5,811,508  

 

2,772,785  

 

2,011,624 

 

1,423,122 

Warranty expense

 

221,678 

 

130,711 

 

138,847 

 

110,820  

 

89,001  

 

 

62,172,019 

 

36,652,575  

 

44,579,679  

 

25,385,030 

 

17,722,745 

 

 

 

 

 

 

 

 

 

 

 

******Operating Income (Loss)******
 

(14,938,405) 

 

(4,991,918) 

 

14,647,466  

 

2,443,332 

 

1,587,069 

 

 

 

 

 

 

 

 

 

 

 

******Other Income (Expense):******
 

 

 

 

 

 

 

 

 

 

Interest income

 

91,720  

 

305,998  

 

86,039  

 

75,139  

 

74,157  

Gain (loss) on sale of equipment

 

(167,365)

 

28,751 

 

7,369 

 

3,228 

 

(868)

Gain (loss) on investment

 

- 

 

(590,321)

 

- 

 

- 

 

- 

Other income (loss)

 

233,768 

 

268,852  

 

202,862  

 

34,924  

 

18,252 

 

 

158,123 

 

13,280  

 

296,270  

 

113,291  

 

91,541 

 

 

 

 

 

 

 

 

 

 

 

******Income (Loss) Before Provision For******
 

 

 

 

 

 

 

 

 

 

******Income Taxes******
 

(14,780,282)

 

(4,978,638) 

 

14,943,736  

 

2,556,623  

 

1,678,610 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(4,160,914) 

 

(2,088,000) 

 

5,618,797  

 

1,022,488  

 

438,066  

 

 

 

 

 

 

 

 

 

 

 

******Net Income (Loss)  Before******
 

 

 

 

 

 

 

 

 

 

******Discontinued Operations and******
 

 

 

 

 

 

 

 

 

 

******sale of Discontinued Business******
 

(10,619,368)

 

(2,890,638)

 

9,324,939 

 

1,534,135  

 

1,240,544 

** **

 

 

 

 

 

 

 

 

 

 

******Discontinued Operations:******
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forgiveness of debt 

 

 

 

 

 

 

 

 

 

 

from operations, net of income taxes

 

-         

 

-         

 

-         

 

- 

 

1,312,777  

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of discontinued

 

 

 

 

 

 

 

 

 

 

operations, net of income taxes

 

-   

 

-  

 

-  

 

-

 

(1,190,335)

 

 

 

 

 

 

 

 

 

 

 

******Net Income (Loss)******
 

(10,619,368)

 

(2,890,638)

 

9,324,939 

 

1,534,135 

 

1,362,986 

 

 

 

 

 

 

 

 

 

 

 

******Other Comprehensive Income:******
 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (losses)

 

(20,877) 

 

4,272  

 

14,146  

 

1,230 

 

2,459 

Reclassification adjustment

 

- 

 

- 

 

- 

 

- 

 

-  

 

 

 

 

 

 

 

 

 

 

 

******Comprehensive Income (Loss)******
$

(10,640,245)

$

(2,886,366)

$

9,339,085 

$

1,535,365 

$

1,365,445 

 

 

 

 

 

 

 

 

 

 

 

******Basic Earnings (Loss) per Share******
$

(0.20)

$

(0.06)

$

0.19 

$

0.03 

$

0.03 

******Fully Diluted Earnings(Loss)  per Share******
$

- 

$

- 

$

0.12 

$

0.02 

$

0.02 

 

 

 

 

 

 

 

 

 

 

 

******Earnings (Loss) per Share from******
 

 

 

 

 

 

 

 

 

 

******Discontinued Operations******
$

- 

$

- 

$

- 

$     

- 

$

- 

 

 

 

 

 

 

 

 

 

 

 

******Earnings (Loss) per Share from******
 

 

 

 

 

 

 

 

 

 

******Continuing Operations******
$

(0.20)

$

(0.06)

$

0.19 

$

0.03 

$ 

0.03 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

**Statistical Data As a Percentage of Net Sales**

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

108 %

 

97 %

 

70 %

 

84 %

 

84 %

Operating Income (Loss)

 

(31)%

 

(16)%

 

25 %

 

9 %

 

8 %

General and admin.

 

22 %

 

18 %

 

5 %

 

7 %

 

7 %

Comprehensive net income (loss)

 

(23)%

 

(9)%

 

16 %

 

5 %

 

7 %

 

 

 

 

 

 

 

 

 

 

 

**Cash Flow Data**

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in)

 

 

 

 

 

 

 

 

 

 

Operating activities

$

(676,716)

$

(22,120,388)

$

21,805,758 

$

3,333,887 

$

548,465 

Net cash provided by (used in)

 

 

 

 

 

 

 

 

 

 

Investing activities

$

258,880 

$

(9,996,151)

$

(1,219,507)

$

(123,875)

$

(82,208)

Net cash provided by (used in)

 

 

 

 

 

 

 

 

 

 

Financing activities

$  

1,439,771 

$

9,785,788 

$

(756,061)

$

(1,109,858)

$

(678,694)

 

 

 

 

 

 

 

 

 

 

 

**Balance Sheet Data**

 

 

 

 

 

 

 

 

 

 

Total assets

$

32,906,610 

$

33,340,732 

$

32,703,847 

$

11,048,298 

$

8,239,663 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

$

28,925,422 

$

20,164,870 

$

18,003,086 

$

5,686,622 

$

4,413,352 

 

 

 

 

 

 

 

 

 

 

 

Stockholders Equity

$

3,981,188 

$

11,657,054 

$

14,700,761 

$

5,361,676 

$

3,826,311 

 

 

 

 

 

 

 

 

 

 

 

 

**Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

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

 

**Introduction**

 

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

 

Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services. In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals. In the third quarter of 2006 we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative communications, LLC., and continued to execute our business plan by searching for acquisitions in key markets. On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesotabased restoration, roofing and waterproofing company. This transaction closed in December 2006 adding below grade waterproofing to our service offerings.  In May 2007, we established an additional business unit in Tampa, Florida, that is responsible for selling and finding market opportunities within the concrete restoration and waterproofing market primarily but also find business opportunities within the commercial roofing market.

 

13

 

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

 

**Critical Accounting Policies and Estimates**

 

**General**

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we 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 ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, the useful lives of fixed assets, impairment of long-lived assets and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

 

**Revenue Recognition**

 

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

 

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

 

 

**Cash and Cash Equivalents**

 

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

 

 

**Investments**

 

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

 

14

 

               Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2007 and 2006, all securities covered by SFAS No. 115 were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in our Consolidated Statement of Operations.

 

**Fair Value of Financial Instruments**

 

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

 

**Income Taxes**

 

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). This standard requires the recognition of deferred tax assets and liabilities 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. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry -forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years.

 

**Net Income (Loss) Per Share**

 

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

 

**Property and Equipment**

 

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

 

**Changes from the Prior Period**

 

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

 

**Relationship with Oklahoma Development Group**

In 2004 ODG, an entity owned by Tim Aduddell, Chairman of the Board, and David Aduddell, a Company Director, secured four subcontract positions for hurricane related work and engaged Aduddell Roofing to perform the work. In 2005 ODG prepared and submitted a bid to become a prime contractor on hurricane related work in 2005. As the designated manager of the activities of the JV formed by Aduddell and Carothers in response to Hurricane Katrina, ODG managed the pre-event activities, labor procurement, housing and administrative responsibilities and all close out duties including final inspections and repairs associated with the work. Prior to forming the joint venture and signing the contract with the USACE, ODG implemented the planning and readiness program, procured required hurricane response items and, along with Aduddell Roofing and Carothers, prepared the proposal and all documentationthat was submitted to the USACE. ODG earned approximately $8,900,000 for the year ended December 31, 2005, and $1,300,000 for the year ended December 31, 2004.

 

15

 

**Corporate Governance Matters**

 

We continue to evaluate our corporate governance policies and procedures, and after implementing certain new policies, including the policies required as a result of our settlement of the Eric Beitchman v. Timothy Aduddell, et al. litigation , we believe they are satisfactory for a controlled company of our size.  We are dedicated to further implementing sound corporate governance policies for a company within our demographics.  As a growing company, we anticipate that our corporate governance policies and procedures will soon be enhanced due to our being subject to (i) the requirements of Regulation S-K rather than Regulation S-B, (ii) the corporate governance requirements of a national securities exchange or a Nasdaq market, if we become listed thereon, and (iii) the disclosure obligations under the SEC’s proposed executive compensation and related party disclosure rules (Release No.33-8655).  We are sensitive to our status as a controlled entity, our related-party transactions with ODG and Tim Aduddell, and our stockholders’ desires for enhanced, cost-effective corporate governance policies and procedures.  With the assistance of securities counsel, we will continue to consider enhancements of our corporate governance polices as we grow and our stock is hopefully listed on a national securities exchange or Nasdaq market.

 

**Results of Operations**

 

*Comparison of 2007 and 2006*

 

*Revenues*. Revenues increased from $31,660,657 for the year ended December 31, 2006, to $47,233,614 for the year ended December 31, 2007. Our revenues primarily increased as a result of the acquisition-related revenue associated with Brent Anderson & Associates combined with the efforts of those formerly associated with Merit Construction, Inc.  Revenues derived from the results of our acquisitions exceeded $20,000,000.

 

*Operating Expenses*. Operating expenses for the year ended December 31, 2006, were $36,652,575, or 116% of revenue, compared to $62,172,019, or 132% of revenue, for the year ended December 31, 2007. Operating expenses for the year ended December 31, 2007, as a percentage of revenue were affected by expenditures for national account marketing, acquisition pursuit and execution as well as expanded support structure.  In the third and fourth quarters of 2007, we worked to reduce our overhead expenses by reducing support staff, relocating our corporate headquarters in OKC to the local Aduddell Roofing location, and selling the airplane that we formerly had thereby eliminating higher travel costs, insurance costs, and regular maintenance costs. 

 

*Income(Loss) before Provision for Income Taxes*. Operating loss before taxes for the year ended December 31, 2006, was $4,978,638 compared to a loss of $14,780,282 for the year ended December 31, 2007. The decrease in our 2007 operating income was attributable to higher interests costs on the order of almost a difference of $1,000,000 as a result of advancing on our line of credit to finance our growth and provide working capital for our existing lines of business, higher selling, general, and administrative costs associated with increases in personnel, higher travel costs associated with traveling to multiple locations as well as the increase in fuel costs, and poorer sales results than anticipated. 

 

*Net Income.*The net loss for the year ended December 31, 2006, was $2,886,366, compared to a net loss of $10,640,245 for the year ended December 31, 2007. These results were influenced by the factors identified above under Revenues, Operating Expenses, and Income (Loss) before Provision for Income Taxes.

 

*Comparison of 2006 and 2005*

 

*Revenues*. Revenues increased from $59,227,145 for the year ended December 31, 2005, to $31,660,657 for the year ended December 31, 2006. Our revenues were significantly affected by the absence of natural disaster related work such as tornados, hurricanes and other windstorms. Revenues for 2006 included a 46.9% organic growth in our roofing business as well as $6,303,155 of revenue in our new business line, restoration services. 

 

16

 

*Operating Expenses*. Operating expenses for the year ended December 31, 2005, were $44,579,679, or 75% of revenue, compared to $36,652,575, or 116% of revenue, for the year ended December 31, 2006. Operating expenses for the year ended December 31, 2006, as a percentage of revenue were affected by expenditures for national account marketing, acquisition pursuit and execution as well as expanded support structure. 

 

*Income(Loss) before Provision for Income Taxes*. Operating income before taxes for the year ended December 31, 2005, was $14,943,736 compared to a loss of $4,978,638 for the year ended December 31, 2006. The decrease in our 2006 operating income was attributable to the lack of higher margin disaster work, $2.9 million increase in infra structure as well as $2.7 million expenditure on national account marketing and acquisition pursuit and $590,321 loss on investment. 

 

*Net Income.*The net income for the year ended December 31, 2005, was $9,339,085, compared to a net loss of $2,886,366 for the year ended December 31, 2006. These results were influenced by the factors identified above under Revenues and Operating Expenses.

 

**Off-Balance Sheet Arrangements**

 

We have operating leases and guaranties that are not accrued on the balance sheet. The payments due under these leases are disclosed in a contingent loan guaranty in footnote 16 of our consolidated financial statements. Other than the lease and note guaranty, we have no contractual commitments that do not appear on the balance sheet as of December 31, 2007. 

 

**Seasonality**

 

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

 

The roofing industry is also affected by natural disasters, such as tornadoes, hurricanes and other windstorms. Because of the need for immediate repairs and since the costs of repair are typically covered by insurance, the margins are higher on disaster-related work than on discretionary work. Since

disaster-related work requires an immediate response, we maintain a capacity that is scalable to respond to these needs. The absence of natural disasters will result in lower revenues and higher relative administrative expenses per revenue dollar.

 

**Commitments and Contingencies**

 

In regard to the sale of assets and liquidation of Zenex Communications in 2002, we are a guarantor on notes with an outstanding balance of $ 151,103 at December 31, 2007, with approximately $6,353 in monthly principal and interest payments.  The purchaser is currently in default on the required payment obligations.

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

 

Information regarding our legal proceedings are discussed earlier in this document under, “Item 3.  Legal Proceedings.”

 

17

 

**Liquidity and Capital Resources**

 

**Year Ended December 31, 2007**

 

Total assets decreased from $33,340,732 to $32,906,610, liabilities increased from $21,683,678 to $28,925,422 and shareholders’ equity decreased from $11,657,054 to $3,981,188 from December 31, 2006, to December 31, 2007. The decrease in assets comes from a lower income tax receivable and fixed assets and intangibles with more cash and trade receivables. The increase in liabilities results primarily from an increase in our draw on the line of credit as well as earn out provisions on our acquisition. 

 

For the year ended December 31, 2007, net cash used by operating activities was ($676,716) compared to ($22,120,388) for the year ended December 31, 2006. Net cash provided by investing activities during this period was $258,880 compared to $9,996,151 used by investing activities for the year ended December 31, 2006. Net cash provided by financing activities during this period was $1,439,711 compared to net cash provided of $9,785,788 from financing activities for the year ended December 31, 2006. At December 31, 2007, we had working capital of ($9,628,097) compared to working capital at December 31, 2006, of ($865,202). The decrease in working capital resulted from our growth and the integration of our acquisitions while also operating at a loss.

 

We have a $10,000,000 revolving line of credit. The line bears interest at 3.375% over LIBOR (currently 8.61%) and is secured by all accounts, property and equipment. The line matured on December 15, 2007, and we are presently operating under a temporary forbearance agreement through August 15, 2008. The outstanding advances at December 31, 2007, and the outstanding advance at December 31, 2006, were $9,151,283 and $9,407,272 respectively.

 

At December 31, 2007, we had $1,199,527 of long-term debt as compared to $1,518,808 of long-term debt at December 31, 2006. 

 

**Adequacy of Current Liquidity**

 

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

 

**Contractual Obligations**

 

The following table summarizes our contractual obligations at December 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

 

 

**Total**

**Less than 1 Year**

 

**1 – 3 Years**

 

**3 – 5 Years**

**More than 5 Years**

 

 

 

 

 

 

Operating leases 

$205,370

$42,810

$121,920

$40,640

N/A

 

 

 

 

 

 

Total

$205,370

$42,810

$121,920

$40,640

 

 

 

 

 

 

 

 

 

18

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

At December 31, 2007, we had $9.15 million drawn on our revolving line of credit. Interest on the revolving line of credit is variable and is equal to LIBOR plus 3.375%. Amounts drawn of the revolving line of credit are the only variable rate debt we have outstanding. A one-percentage point change in the interest rate for our revolving line of credit would change our cash interest payments on an annual basis by approximately $91,500. 

 

**Item 8. Financial Statements**

 

Financial Statements and Financial Statement Schedules - See Index to Consolidated Financial Statements and Schedules immediately following the signature page of this report. 

 

**Item 9.** **Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

Sutton Robinson Freeman & Co., P.C. has audited our financial statements for the years covered by this report. There are no disagreements with the independent accountants regarding matters of accounting or financial reporting.  

 

**Item 9A. Controls and Procedures**

 

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

 

As of December 31, 2007, management, including the chief executive officer and chief financial officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded the disclosure controls and procedures currently in place were effective.  On March 21, 2008, however, our Interim chief financial officer resigned, creating a material weakness in our disclosure controls and procedures and resulting in an untimely filing of this report with the SEC.  Management is attempting to correct this material weakness by engaging a new chief financial officer.  Until a new chief financial officer is engaged, Tim Aduddell is acting as interim chief financial officer. 

 

19

 

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our controls are designed to provide reasonable assurance that our assets are protected from unauthorized use and that transactions are executed in accordance with established authorizations and properly recorded.  In 2007, we engaged a consultant to assist us in the review and enhancement of our internal controls.  The engagement was to ensure our internal controls were supported by written policies and complemented by competent and qualified external resources, which would be used to assist intesting the operating effectiveness of our internal control over financial reporting.  Because of our liquidity issues in late 2007, the engagement, and thus the full review and enhancement of our internal controls, was not completed. Through the limited review and enhancement procedures that were undertaken, however, our management concluded that the design and operations of our internal controls over financial reporting at December 31, 2007 were effective and provided reasonable assurance that the books and records accurately reflected the transactions of the Company. 

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

 

With the exception of Tim Aduddell acting as both interim chief financial officer and chief executive officer. there have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed their evaluation.  This report is only signed by Tim Aduddell, as the chief financial officer of the Company in 2007, Josh Brock, has resigned his position with the Company.

 

This report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

 

**Item 9B. Other Information**

 

 

None.

 

 

20

 

**PART III**

 

**Item 10. Directors, Executive Officers and Corporate Governance**

 

Our Board of Directors is currently composed of five (5) persons. The term of each director is one-year ending at the 2008 Annual Meeting or until he resigns or is succeeded by another qualified director who has been elected. The following is a list of the current members of our Board of Directors and our executive officers, including each person’s age, the year he became a director of the Company and his current position with the Company: 

 

 

 

 

 

 

 

 

 

 

 

 

**Name**

 

**Age**

 

**Director Since**

 

**Position**

Timothy Aduddell 

 

 

53

 

 

 

2002

 

 

Chairman of the Board, President, Chief Executive Officer

and Interim Chief Financial Officer

Doug Bruns

 

 

48

 

 

 

N/A

 

 

Chief Operating Officer

David Aduddell 

 

 

44

 

 

 

2005

 

 

Director

Jerry Whitlock 

 

 

56

 

 

 

2005

 

 

Director

Thomas Parrish 

 

 

58

 

 

 

2005

 

 

Director

Ron Carte 

 

 

65

 

 

 

2002

 

 

Director

 

 

 

 

 

 

 

 

 

 

 

 

The following presents a brief biographical description of each current member of the Board of Directors and our executive officers: 

 

**Timothy Aduddell**

Timothy Aduddell has served as our Chairman since November 2006. Mr. Aduddell is the founder and Chairman of Aduddell Roofing & Sheet Metal, Inc. (“Aduddell Roofing”), a nationwide commercial roofing contractor and was the sole owner of Aduddell Roofing until we acquired it in October 2002. On January 3, 2005, Mr. Aduddell became President of Aduddell Roofing. Prior to Mr. Aduddell resuming the role of President of Aduddell Roofing in 2005, he performed various sales and public relations services for Aduddell Roofing and served as its Chairman.  Mr. Aduddell is presently serving as President, Chief Executive Officer, and Interim Chief Financial Officer.

 

 **Doug Bruns**

Mr. Bruns currently serves as our Chief Operating Officer.  Mr. Bruns has served as the president of our restoration division since the purchase of his company, Merit Construction, in April 2006. Mr. Bruns has spent over twenty years in the concrete restoration business and is widely recognized in that field.  He has been primarily responsible for the integration of our largest acquisition, Brent Anderson & Associates, Inc.  

 

**David Aduddell**

David Aduddell has served on the board of directors since 2005.  In 2002, Mr. Aduddell founded and was Managing Partner of Oklahoma Development Group, LLC, where his solid background in corporate planning, marketing and business development built one of Oklahoma’s fastest growing private companies.  Mr. Aduddell has a strong sense of commitment to community and charitable causes and currently serves on the Board of Directors and is actively involved in several Non-Profit Organizations. 

 

**Jerry Whitlock**

Mr. Whitlock is the Chairman and owner of Whitlock Packaging Corp., the United States’ largest non-carbonated beverage packaging and distribution company, and has served in such capacities since 1980. He is also the Chairman and owner of Universal Promotion Services, LLC and serves on the Board of Directors of Strategic Food & Beverages, Inc. 

 

21

 

**Thomas Parrish**

Mr. Parrish has been the President of Parrish Interests, a real estate and investment firm, since 1999. Prior to that, from 1985 to 1999, he was the President and Chief Executive Officer of Southwestern Bank & Trust Company, and from 1979 to 1985, he was the President of Exchange National Bank. Mr. Parrish has more than twenty years experience in commercial/consumer banking and real estate development industries. Mr. Parrish serves on the Board of Directors and the Audit Committee of Aquis Communications Group, Inc. and First National Bank of Oklahoma.

 

**Ron Carte**

Ron Carte, our former President and Chief Executive Officer, became a director in March 2002. In November of 2006, Mr. Carte resigned as our President and Chief Executive Officer but has remained a member of our Board of Directors. He has extensive experience in the banking industry. Mr. Carte was a founder and Chairman of Edmond Bank and Trust, Edmond, Oklahoma, from September 1999 to April 2002. From 1997 to 2002, he was President and CEO of Milestone Construction, a commercial general contractor. From 1993 to 1997, Mr. Carte was a Regional Vice President of Liberty Bank with supervisory responsibility over four branches in the Edmond, Oklahoma area. From 1982 to 1993, he was the President and CEO of First Oklahoma Bank and Trust, Oklahoma City, Oklahoma. He has also been very active in civic and community affairs having served as City Treasurer for the City ofEdmond, and served as President of the Edmond Board of Education.****

 

**Compliance with Section 16(a) of the Securities Exchange Act of 1934**

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.  To the best of our knowledge, there were no late filings in 2007.

 

**Code of Ethics**

 

We have adopted a Code of Ethics that applies to our directors and executive officers, including our Chief Executive Officer, Chief Financial Officer, and Controller. A copy of the Code of Ethics is filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 and is available on our web site at www.aduddell.com.

 

**Audit Committee**

 

The Board of directors maintains an Audit Committee which is composed of two members; Messrs. Parrish (Chairman) and Carte.  Mr. Parrish qualifies as “independent” and “financially literate”, as defined under the Nasdaq Stock Market listing standards and as an “audit committee financial expert”, as defined under SEC regulations.

 

 

22

 

**Item 11. Executive Compensation**

 

The following table sets forth the total compensation for the years ending December 31, 2007 and 2006 paid to our “Named Executive Officers.”  Our Named Executive Officers include (i) our current principal executive officer and principal financial officer, (ii) our chief operating officer, (iii) our former president and chief executive officer, (iv) two former chief financial officers, and (v) our form Director of Corporate Development, who would have been one of our three most highly compensated executive officers as of December 31, 2007 if he remained employed by us.  

 

**SUMMARY COMPENSATION TABLE**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Option**

 

**All Other**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Awards**

 

**Compensation**

 

**Total**

**Name & Principal Position**

 

**Year**

 

**Salary ($)**

 

**Bonus ($)**

 

**($**)(1)

 

**($)**(2)

 

**($)**

Tim Aduddell, President, 

 

 

2007

 

 

 

325,438

 

 

 

—

 

 

 

—

 

 

 

3,250

 

 

 

328,688

 

Chief Executive Officer

 

 

2006

 

 

 

210,523

 

 

 

—

 

 

 

—

 

 

 

8,417

 

 

 

218,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Doug Bruns,

Chief Operating Officer

 

 

2007

 

 

 

175,232

 

 

 

—

 

 

 

—

 

 

 

808

 

 

 

176,040

 

 

 

 

2006

 

 

 

127,940

 

 

 

50,000

(3)

 

 

—

 

 

 

—

 

 

 

177,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Josh Brock,

 

 

2007

 

 

 

87,843

 

 

 

—

 

 

 

1,333

 

 

 

1,473

 

 

 

90,649

 

Former Interim Chief Financial Officer(4)

 

 

2006

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David Aduddell, Former Vice Chairman and Director of Corporate Development (5)

 

 

2007

 

 

 

109,700

 

 

 

—

 

 

 

15,408

 

 

 

3,720

 

 

 

128,828

 

 

 

 

2006

 

 

 

112,530

 

 

 

—

 

 

 

31,141

 

 

 

—

 

 

 

143,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reggie Cook, Former Chief Financial Officer (6)

 

 

2007

 

 

 

113,760

 

 

 

—

 

 

 

85,610

 

 

 

3,850

 

 

 

230,220

 

 

 

 

2006

 

 

 

110,489

 

 

 

—

 

 

 

10,987

 

 

 

—

 

 

 

121,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stan Genega, Former President and Chief Executive Officer (7)

 

 

2007

 

 

 

187,004

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

187.004

 

 

 

 

2006

 

 

 

31,045

 

 

 

—

 

 

 

63,690

 

 

 

127,611

 

 

 

218,346

 

 

(1)

The amounts in the “Option Awards” column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal years ended December 31, 2007 and 2006, respectively, in accordance with FAS 123(R) of awards pursuant to the 2005 Stock Incentive Plan.  These amounts include awards that were made prior to 2006 or 2007 that vested in 2006 or 2007. These amounts reflect our accounting expense recognized in 2006 and 2007 for these awards including the impact of estimated forfeitures, which is excluded from recognition in the financial statements, and do not correspond to the actual value that will be recognized by the named executive officers.  The stock options held by David Aduddell and Stan Genega were cancelled in 2007.  The vesting of the stock options held by Reggie Cook was accelerated upon his resignation pursuant to anagreement between us and Mr. Cook.

 

23

 

(2)

The following table shows the components of “All Other Compensation” in the previous table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**401(k) Plan**

 

 

 

 

 

 

 

 

 

**Employer**

 

**Consulting**

 

**Director**

 

 

 

 

 

**Match**

 

**Fees**

 

**Fees**

 

**Total**

**Name**

**Year**

 

**($)**

 

**($)**

 

**($)**

 

**($)**

Tim Aduddell

2007

 

 

3,250

 

 

 

—

 

 

 

—

 

 

 

3,250

 

 

2006

 

 

8,417

 

 

 

—

 

 

 

—

 

 

 

8,417

 

Doug Bruns

2007

 

 

808

 

 

 

—

 

 

 

—

 

 

 

808

 

 

2006

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Josh Brock

2007

 

 

1,473

 

 

 

—

 

 

 

—

 

 

 

1,473

 

 

2006

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

David Aduddell

2007

 

 

3,720

 

 

 

—

 

 

 

—

 

 

 

3,720

 

 

2006

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Reggie Cook

2007

 

 

3,850

 

 

 

—

 

 

 

—

 

 

 

3,850

 

 

2006

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Stan Genega

2007

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

2006

 

 

—

 

 

 

123,611

 

 

 

4,000

 

 

 

127,611

 

 

(3)

Mr. Bruns was granted a bonus in the discretion of our Chief Executive Officer, which was approved by the Board, in recognition of outstanding performance during the 2006 fiscal year.

 

(4)

Mr. Brock was hired by us in 2007 and was appointed as our Interim Chief Financial Officer effective September 5, 2007.  Mr. Brock resigned as Interim Chief Financial Officer effective March 21, 2008.

 

(5)

Mr. David Aduddell resigned from his position of Director of Corporate Development effective June 1, 2007.

 

(6)

Mr. Cook resigned from his position as our Chief Financial Officer effective September 5, 2007.

 

(7)

Mr. Genega was appointed our President and Chief Executive Officer in November, 2006 and resigned from that position effective September 5, 2007.

 

**Employment Agreement**

 

Aduddell Roofing is a party to an employment agreement with Doug Bruns dated April 1, 2006. None of our other Named Executive Officers have employment agreements. Mr. Bruns’ employment agreement has a term of three years and provides that Mr. Bruns will serve as the President of the Waterproofing and Concrete Restoration Division of Aduddell Roofing. The employment agreement provides that Mr. Bruns’ base salary will be $175,000 per year subject to increase (but not decrease) at the discretion of Aduddell Roofing. Additionally, the employment agreement provides that Mr. Bruns’ will be paid an annual bonus equal to 10% of the EBIT (earnings before interest and taxes) of the Waterproofing and Concrete Restoration Division of Aduddell Roofing up to a maximum of $500,000, based on continued annual revenue growth within the division. 

 

24

 

**OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Option Awards**

 

 

 

**Number of**

 

 

**Number of**

 

 

 

 

 

 

 

 

 

**Securities**

 

 

**Securities**

 

 

 

 

 

 

 

 

 

**Underlying**

 

 

**Underlying**

 

 

 

 

 

 

 

 

 

**Unexercised**

 

 

**Unexercised**

 

 

**Option**

 

 

 

 

 

 

**Options**

 

 

**Options**

 

 

**Exercise**

 

 

**Option**

 

 

 

**(#)**

 

 

**(#)**

 

 

**Price**

 

 

**Expiration**

 

**Name**

 

**Exercisable**

 

 

**Unexercisable**

 

 

**($)**

 

 

**Date (1)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reggie Cook

 

 

0

 

 

 

250,000

 

 

$

.49

 

 

 

1/1/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Mr. Cook’s options became fully vested upon his resignation on September 5, 2007 pursuant to an agreement between us and Mr. Cook.

 

**Potential Payments Upon Termination or Changes in Control**

 

We do not have employment or severance agreements with our Named Executive Officers other than Mr. Bruns. Upon a change in control, our Named Executive Officer will become 100% vested in their outstanding unvested awards under our 2005 Stock Incentive Plan. At December 31, 2007, none of the options were in-the-money and, as a result, no value would have been realized by the Named Executive Officers assuming a change in control occurred on that date.

 

**Director Compensation**

 

We did not pay any compensation to our non-management directors for the year ended December 31, 2007.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

**Certain Beneficial Owners**

 

To the best of our knowledge, no person beneficially owned more than 5% of our common stock at the close of business on March 31, 2008, except for Timothy and David Aduddell (see Director and Executive Officer Ownership Table below) and except as set forth below: 

 

**Name and Address of Beneficial Owner**

 

**Number of Shares Beneficially Owned**

 

**Percent of Class**

 
 

 

 

 

 

 

 

 

 

Oklahoma Development Group, LLC

 

5,728,509

 

6.9%

 

 

 

 

2575 Kelley Pointe Parkway

Edmond, OK 73013

 

 

 

 

 

 

 

 

 

**Directors and Executive Officers**

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 31, 2008, by (i) each of our directors, (ii) each of our Named Executive Officers, and (iii) all directors and executive officers as a group. Unless indicated otherwise, each person has sole voting and dispositive power with respect to such shares. The number of shares of common stock outstanding for each listed person includes any shares the individual has the right to acquire within 60 days after March 31, 2008. For purposes of calculating each person’s or group’s percentage ownership, stock options exercisable within 60 days are included for that person or group, but not for the stock ownership of any other person or group.  We have not included beneficial ownership information regarding Josh Brock, Reggie Cook or Stan Genega, threeformer employees who are deemed to be our Named Executive Officers under SEC rules and regulations for purposes of this report.  Because these former officers no longer have reporting requirements with respect to their ownership of our common stock,  we do not have current information regarding their ownership. 

 

25

 

 

 

**Number of Shares**

 

 

**Name**

 

**Beneficially Owned**

 

**Percent of Class**

 

 

 

 

 

 

 

 

 

Timothy Aduddell (1) (2)

 

 

51,958,884

 

 

 

62.9 

%

 

 

 

 

 

 

 

 

 

David Aduddell (3)

 

 

5,625,255

 

 

 

10.4 

%

 

 

 

 

 

 

 

 

 

Doug Bruns (4)

 

 

250,000

 

 

 

*

 

 

 

 

 

 

 

 

 

 

Ron Carte

 

 

84,000

 

 

 

*

 

 

 

 

 

 

 

 

 

 

Thomas Parrish 

 

 

1,000

 

 

 

*

 

 

 

 

 

 

 

 

 

 

Jerry Whitlock 

 

 

2,630,779

 

 

 

4.8 

%

 

 

 

 

 

 

 

 

 

All directors and executive officers as a group (6 persons)

 

 

60,549,918

 

 

 

67.9 

%

 

 

 

 

 

*

 

Less than one percent.

 

 

 

(1)

 

Mr. Timothy Aduddell’s share totals include presently exercisable options covering 28,528,818 shares, exercisable at $.04 per share, which he acquired in our acquisition of Aduddell Roofing. See “Certain Relationships and Related Party Transactions”.

 

 

 

(2)

 

Mr. Timothy Aduddell owns 50% of Oklahoma Development Group, LLC and, as such, is deemed to have beneficial ownership of designated shares in his partnership account. 2,364,254 of the shares owned by ODG, LLC are included in Timothy Aduddell’s total beneficial ownership in the table above.

 

 

 

(3)

 

Mr. David Aduddell owns 50% of Oklahoma Development Group, LLC and, as such, is deemed to have beneficial ownership of designated shares in his partnership account. 3,364,255 of the shares owned by ODG, LLC are included in David Aduddell’s total beneficial ownership in the table above. 

 

 

 

(4)

 

Includes 250,000 shares Mr. Bruns acquired through the asset purchase of his company Merit Construction.

 

 

 

 

**Item 13. Certain Relationships and Related Transactions and Director Independence**

 

We lease Aduddell Roofing’s office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly owned by Tim Aduddell. The lease agreement is for one year and expires on September 30, 2008, with monthly rentals of $16,250. We are responsible for all taxes, insurance, maintenance and utilities on the leased premises. Rental expense under this lease amounted to $195,000 for each of the years ended December 31, 2007, 2006 and 2005, respectively. 

 

We leased Aduddell Restoration and Waterproofing’s office, warehouse, and yard facilities in Minnesota from BDA Development, LLP, an entity owned by Brent Anderson who is our employee.  The lease is on a month-to-month basis with monthly rentals of $29,442.  Rental expense under this lease amounted to $353,310 for the year ended December 31, 2007.  We have since relocated Aduddell Restoration and Waterproofing’s office, warehouse, and yard facilities.

 

We have an unwritten policy that all future related party transactions must be approved by a majority of disinterested directors. Our policy concerning related party transactions applies to all transactions between us or our subsidiaries and our employees, directors or 5% shareholders, when reviewing related party transactions, we look at 

 

 (i) whether the proposed transaction is on the same terms and conditions that we could obtain in an arms-length transaction; and 

 

(ii) whether the transaction is fair to us.

 

 

26

 

**Item 14. Principal Accounting Fees and Services**

 

**FEES PAID TO INDEPENDENT AUDITORS**

 

During 2007 and 2006, the Audit Committee pre-approved all audit and non-audit services to be rendered to us by Sutton Robinson as well as the fees associated with such services.

 

The following table sets forth the aggregate fees and costs paid to Sutton Robinson during the last two fiscal years for professional services rendered to us: 

 

 

 

**Years Ended December 31,**

 

 

**2007**

 

**2006**

Audit Fees (1)

 

$

79,248

 

 

$

60,489

 

Audit-Related Fees

 

 

—

 

 

 

—

 

Tax Fees

 

 

—

 

 

 

—

 

All Other Fees

 

 

—

 

 

 

—

 

 

 

(1)

 

Includes fees billed by Sutton Robinson for the 2007 and 2007 annual audits, the review of our quarterly financial statements for fiscal years 2007 and 2006 and accounting consultations and services that are normally provided in connection with statutory and regulatory filings or engagements.

 

 

27

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

(a)(1) Financial Statements. See index to Consolidated Financial Statements immediately following the signature page of this report.

 

(a)(2) Financial Statement Schedules. See index to Consolidated Financial Statements immediately following the signature page of this report.

 

(a)(3) Exhibits

 

 

**Exhibit No.**

 

**Description of Exhibit**

 

 

2.1

Agreement and Plan of Split-off and Merger, dated as of September 27, 2002, by and among Zenex International, its subsidiary and Aduddell Roofing (filed as exhibit to our Form 8-K/A filed on November 15, 2002 and incorporated by reference herein)

 

 

3.1

Amended and Restated Articles of Incorporation of Zenex (filed as exhibit to our Form S-3 Registration Statement filed on August 2, 2000 and incorporated by reference herein)

 

 

3.2

Amended and Restated Bylaws of Zenex (filed as exhibit to our Form S-3 Registration Statement filed on August 2, 2000 and incorporated by reference herein).

 

 

3.3

Amendment to the Articles of Incorporation of Lone Wolf Energy, Inc. changing the name to Zenex Telecom, Inc. effective November 29, 2001 (filed as exhibit to our Form 8-K filed on November 28, 2001 and incorporated by reference herein)

 

 

3.4

Amendment to the Articles of Incorporation changing Zenex Telecom, Inc. to Zenex International, Inc. effective August 6, 2002 (filed as exhibit to our Form 8-K filed on August 15, 2002 and incorporated by reference herein)

 

 

10.1

Service Agreement dated February 9, 2005 between Zenex International, Inc. and Oklahoma Development Group, LLC (filedaas an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated by reference herein)

 

 

14

Code of Ethics for Principal Executive and Senior Financial Officers (filed as exhibit to our Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference herein) 

 

 

21.1

Subsidiaries of Registrant 

 

 

23.1

Consent of Independent Auditors

 

 

31.1

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

 

 

32.1

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

 

 

 

 

28

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

Aduddell Industries, Inc.

 

 

 

Date: April 30, 2008

By:  

/s/ Tim Aduddell

 

Tim Aduddell

 

President, Chief Executive Officer and 

 

Interim Chief Financial Officer

 

 

 

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

**Name**

 

**Title**

 

**Date**

 

 

 

/s/ Tim Aduddell

Director

April 30, 2008

 

 

 

/s/ David Aduddell

Director

April 30, 2008

 

 

 

/s/ Ron Carte

Director

April 30, 2008

 

 

 

/s/ Thomas Parrish

Director

April 30, 2008

 

 

 

/s/ Jerry Whitlock

Director

April 30, 2008

 

 

 

29

 

**INDEX TO EXHIBITS**

 

 

**Exhibit No.**

 

**Description**

 

**Method of Filing**

 

 

 

2.1

Agreement and Plan of Split-off and Merger, dated as of September 27, 2002, by and among Zenex International, its subsidiary and Aduddell Roofing 

Incorporated by reference

 

 

 

3.1

Amended and Restated Articles of Incorporation of Zenex 

Incorporated by reference

 

 

 

3.2

Amended and Restated Bylaws of Zenex 

Incorporated by reference

 

 

 

3.3

Amendment to the Articles of Incorporation of Lone Wolf Energy, Inc. changing the name to Zenex Telecom, Inc. effective November 29, 2001 

Incorporated by reference

 

 

 

3.4

Amendment to the Articles of Incorporation changing Zenex Telecom, Inc. to Zenex International, Inc. effective August 6, 2002 

Incorporated by reference

 

 

 

10.1

Service Agreement dated February 9, 2005 between Zenex International, Inc. and Oklahoma Development Group, LLC 

Incorporated by reference

 

 

 

14

Code of Ethics for Principal Executive and Senior Financial Officers 

Incorporated by reference

 

 

 

21.1

Subsidiaries of Registrant 

Filed herewith electronically

 

 

 

23.1

Consent of Independent Auditors

Filed herewith electronically

 

 

 

31.1

Rule 13a-14 Certification of Chief Executive Officer and

Interim Chief Financial Officer

Filed herewith electronically

 

 

 

32.1

Section 1350 Certification of Chief Executive Officer and

Interim Chief Financial Officer

Filed herewith electronically

 

 

 

 

 

30

 

**Aduddell Industries, Inc.**

 

**Consolidated Financial Statements**

 

**And**

 

**Report of Independent Registered Public Accounting Firm**

 

 

 

**Years Ended December 31, 2007, 2006 and 2005**

 

 

 

 

 

**Aduddell Industries, Inc.**

 

**Table of Contents**

 

 

 

******Page******
 

 

**Report of Independent Registered Public Accounting Firm**

F-2

 

 

**Financial Statements**

 

Consolidated Balance Sheets

 

as of December 31, 2007 and 2006

F-3

 

 

Consolidated Statements of Operations and Comprehensive Income

 

for the years ended December 31, 2007, 2006 and 2005

F-5

 

 

Consolidated Statements of Stockholders’ Equity

 

for the years ended December 31, 2007, 2006, and 2005

F-6

 

 

Consolidated Statements of Cash Flows

 

for the years ended December 31, 2007, 2006 and 2005

F-7

 

 

Notes to Consolidated Financial Statements

F-9

 

 

F-1

 

 

 

 

**[Logo]**

**SUTTON**

**ROBINSON**

**FREEMAN**

 

 

**REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM**

 

Board of Directors and Stockholders

Aduddell Industries, Inc.

Oklahoma City, Oklahoma

 

We have audited the accompanying consolidated balance sheets of Aduddell Industries, Inc. (an Oklahoma corporation) as of December 31, 2007 and 2006, and the related statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit  includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aduddell Industries, Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations, changes in stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2007 in conformity with United States generally accepted accounting principles.  

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has incurred recurring losses from operations, and the Company is in default under its bank line of credit and is operating under a temporary forbearance agreement. These circumstances create substantial doubt about the Company’s ability to continue as a going concern and are discussed in Note 2.  Management’s plans in regard to these matters are also described in Note 2.  The financial statements do not contain any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

We were not engaged to examine management’s assertion about the effectiveness of Aduddell Industries, Inc. internal controls over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

 

Sutton Robinson Freeman & Co., P.C.

Certified Public Accountants

 

Tulsa, Oklahoma 

April 10, 2008

 

F-2

 

 

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31,**

 

 

 

 

 

 

 

**2007**

 

**2006**

 

 

 

 

 

 

 

 

 

**Assets**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Current Assets**

 

 

 

 

 

 

 

Cash

 

 

 

 

$

1,021,935 

$

- 

Accounts  and contracts receivable, net of allowance 

 

 

 

 

for doubtful accounts 

 

 

 

14,160,546 

 

13,662,030 

Costs and estimated earnings in excess of

 

 

 

 

 

billings on uncompleted contracts

 

 

 

2,190,585 

 

2,298,191 

Inventory

 

 

 

 

 

274,880 

 

472,588 

Prepaid expenses

 

 

 

 

48,952 

 

268,108 

Income tax receivable

 

 

 

 

376,469 

 

2,254,469 

Related party receivable

 

 

 

- 

 

60,088 

Deposits

 

 

 

 

 

3,490 

 

252,710 

Employee and other receivables, net of

 

 

 

 

 

allowance for doubtful accounts

 

 

 

20,941 

 

31,484 

 

 

 

 

 

 

18,097,798 

 

19,299,668 

 

 

 

 

 

 

 

 

 

**Non-Current** **Related** **Party** **Receivable**

 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

**Property** **and** **Equipment**

 

 

 

 

 

 

 

Land

 

 

 

 

 

130,289 

 

- 

Field and shop equipment

 

 

 

4,404,164 

 

4,023,879 

Office furniture and equipment

 

 

 

994,165 

 

1,263,131 

Transportation equipment

 

 

 

2,798,677 

 

3,931,118 

Leasehold improvements

 

 

 

221,136 

 

203,896 

 

 

 

 

 

 

8,548,431 

 

9,422,024 

Less:  accumulated depreciation

 

 

 

(2,809,255)

 

(1,584,170)

 

 

 

 

 

 

5,739,176 

 

7,837,854 

 

 

 

 

 

 

 

 

 

**Other**

 

 

 

 

 

 

 

 

Investments

 

 

 

 

3,280 

 

25,156 

Intangible asset (customer lists), net

 

 

4,839,442 

 

6,112,054 

Deferred tax asset

 

 

 

 

4,226,914 

 

66,000 

 

 

 

 

 

 

9,069,636 

 

6,203,210 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,906,610 

$

33,340,732 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-3

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31,**

 

 

 

**2007**

 

**2006**

 

 

 

 

 

**Liabilities** **and** **Shareholders'** **Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Current** **Liabilities**

 

 

 

 

 

 

 

Current portion of long-term debt

 

 

$

280,936 

$

214,343 

Current portion of acquisition payable

 

 

162,166 

 

816,667 

Advances on line of credit

 

 

 

9,151,283 

 

9,407,272 

Overdraft

 

 

 

 

 

- 

 

732,778 

Accounts and subcontract payables

 

 

14,249,509 

 

7,122,863 

Other accrued liabilities

 

 

 

936,447 

 

812,779 

Billings in excess of costs and estimated

 

 

 

 

 

earnings on uncompleted contracts

 

 

2,945,554 

 

1,058,168 

 

 

 

 

 

 

27,725,895 

 

20,164,870 

 

 

 

 

 

 

 

 

 

**Long-Term** **Debt** **(Net** **of** **Current** **Portion)**

 

 

382,860 

 

539,975 

 

 

 

 

 

 

 

 

 

**Long-Term** **Acquisition** **Payable** **(Net** **of** **Current** **Portion)**

 

816,667 

 

978,833 

 

 

 

 

 

 

 

 

 

**Shareholders'** **Equity**

 

 

 

 

 

 

 

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

 

 

 

 

 

shares authorized, 20,000 shares issued and

 

 

 

 

 

outstanding at December 31, 2007)

 

 

 

20 

 

- 

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

 

 

 

 

 

shares authorized, 53,965,854 and 52,799,191

 

 

 

 

 

shares issued and outstanding at December 31,

 

 

 

 

 

2007 and 2006)

 

 

 

 

53,966 

 

52,799 

Paid-in capital

 

 

 

 

7,662,422 

 

4,699,230 

Unrealized gain (loss) on available-for-sale securities

 

(20,174)

 

703 

Retained earnings (deficit)

 

 

 

(3,715,046)

 

6,904,322 

 

 

 

 

 

 

3,981,188 

 

11,657,054 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,906,610 

$

33,340,732 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-4

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31,**

 

 

 

 

 

 

**2007**

 

**2006**

 

**2005**

 

 

 

 

 

 

 

 

 

 

**Revenues**

 

 

 

 

 

 

 

 

 

Contract revenue

 

 

$

46,496,420 

$

31,356,079 

$

59,227,145 

Material sales

 

 

 

737,194 

 

304,578 

 

- 

 

 

 

 

 

47,233,614 

 

31,660,657 

 

59,227,145 

 

 

 

 

 

 

 

 

 

 

**Operating** **Expenses**

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

51,294,473 

 

30,710,356 

 

41,668,047 

Selling, general and administrative

 

 

10,655,868 

 

5,811,508 

 

2,772,785 

Warranty expense

 

 

 

221,678 

 

130,711 

 

138,847 

 

 

 

 

 

62,172,019 

 

36,652,575 

 

44,579,679 

 

 

 

 

 

 

 

 

 

 

**Operating** **Income** **(Loss)**

 

 

(14,938,405)

 

(4,991,918)

 

14,647,466 

 

 

 

 

 

 

 

 

 

 

**Other** **Income** **(Expense)**

 

 

 

 

 

 

 

Interest and dividend income

 

 

91,720 

 

305,998 

 

86,039 

Gain on sale of equipment

 

 

(167,365)

 

28,751 

 

12,369 

Gain(loss) on investments

 

 

- 

 

(590,321)

 

- 

Other income

 

 

 

233,768 

 

268,852 

 

197,862 

 

 

 

 

 

158,123 

 

13,280 

 

296,270 

 

 

 

 

 

 

 

 

 

 

**Net** **Income** **(Loss)**  **from** **Operations**

 

 

 

 

 

 

 

**Before** **Income** **Taxes**

 

 

 

(14,780,282)

 

(4,978,638)

 

14,943,736 

 

 

 

 

 

 

 

 

 

 

**Provision** **(Benefit)** **for** **income** **taxes:**

 

 

 

 

 

 

 

Current

 

 

 

 

(5,765,000)

 

(1,878,000)

 

5,439,797 

Deferred

 

 

 

 

1,604,086 

 

(210,000)

 

179,000 

 

 

 

 

 

(4,160,914)

 

(2,088,000)

 

5,618,797 

 

 

 

 

 

 

 

 

 

 

**Net** **Income** **(Loss)**

 

 

 

(10,619,368)

 

(2,890,638)

 

9,324,939 

 

 

 

 

 

 

 

 

 

 

**Other** **Comprehensive** **Income**

 

 

 

 

 

 

 

Unrealized holding gains 

 

 

(20,877)

 

4,272 

 

14,146 

Reclassification adjustment

 

 

- 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

**Comprehensive** **Income** 

 

 

$

(10,640,245)

$

(2,886,366)

$

9,339,085 

 

 

 

 

 

 

 

 

 

 

**Basic** **Net** **Income** **(Loss)** **per**

 

 

 

 

 

 

 

**Common** **Share**

 

 

$

- 

$

- 

$

0.19 

**Diluted** **Net** **Income** **(Loss)** **per**

 

 

 

 

 

 

 

**Common** **Share**

 

 

$

- 

$

- 

$

0.12 

**Weighted** **Average** **Common**

 

 

 

 

 

 

 

**Shares** **Basic**

 

 

 

53,965,854 

 

50,258,549 

 

48,737,921 

**Weighted** **Average** **Common**

 

 

 

 

 

 

 

**Shares** **Assuming** **Dilution**

 

 

82,494,672 

 

79,437,367 

 

80,737,921 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-5

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**For the Years Ended December 31, 2007, 2006 and 2005**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Unrealized**

 

 

 

**Shares of**

 

**Par Value**

 

**Shares of**

 

**Par Value**

 

**Additional**

 

 

 

**Holding**

 

**Total**

 

**Common**

 

**Common**

 

**Preferred**

 

**Preferred**

 

**Paid in**

 

**Retained**

 

**Gains**

 

**Stockholders'**

 

**Stock**

 

**Stock**

 

**Stock**

 

**Stock**

 

**Capital**

 

**Earnings**

 

**(Losses)**

 

**Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

48,737,921 

$

48,738 

 

- 

$

- 

$

4,860,632 

$

470,021 

$

(17,715)

$

5,361,676 

Unrealized holding gain 

- 

 

- 

 

- 

 

- 

 

- 

 

- 

 

14,146 

 

14,146 

Net income

- 

 

- 

 

- 

 

- 

 

- 

 

9,324,939 

 

- 

 

9,324,939 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

48,737,921 

 

48,738 

 

- 

 

- 

 

4,860,632 

 

9,794,960 

 

(3,569)

 

14,700,761 

Exercise of stock options

1,686,270 

 

1,686 

 

- 

 

- 

 

166,940 

 

- 

 

- 

 

168,626 

Common stock issued for acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merritt Construction

250,000 

 

250 

 

- 

 

- 

 

204,750 

 

- 

 

- 

 

205,000 

Brent Anderson

2,000,000 

 

2,000 

 

- 

 

- 

 

1,398,000 

 

- 

 

- 

 

1,400,000 

EyeOpener

125,000 

 

125 

 

- 

 

- 

 

83,625 

 

- 

 

- 

 

83,750 

Cancellation of options for repayment of debt

- 

 

- 

 

- 

 

- 

 

(1,841,920)

 

- 

 

- 

 

(1,841,920)

Cancellation of options for repayment of debt

- 

 

- 

 

- 

 

- 

 

(172,797)

 

- 

 

- 

 

(172,797)

Unrealized holding gain 

- 

 

- 

 

- 

 

- 

 

- 

 

- 

 

4,272 

 

4,272 

Net income (loss)

- 

 

- 

 

- 

 

- 

 

- 

 

(2,890,638)

 

- 

 

(2,890,638)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2006

52,799,191 

 

52,799 

 

- 

 

- 

 

4,699,230 

 

6,904,322 

 

703 

 

11,657,054 

Preferred stock issued

- 

 

- 

 

20,000 

 

20 

 

1,999,980 

 

- 

 

- 

 

2,000,000 

Preferred stock dividends

- 

 

- 

 

- 

 

- 

 

(67,278)

 

- 

 

- 

 

(67,278)

Common stock issued for Brent Anderson acquisition

1,166,663 

 

1,167 

 

- 

 

- 

 

815,500 

 

- 

 

- 

 

816,667 

Fair value of share-based compensaton

- 

 

- 

 

- 

 

- 

 

214,990 

 

- 

 

- 

 

214,990 

Unrealized holding gain (loss)

- 

 

- 

 

- 

 

- 

 

- 

 

- 

 

(20,877)

 

(20,877)

Net income (loss)

- 

 

- 

 

- 

 

- 

 

- 

 

(10,619,368)

 

- 

 

(10,619,368)

Balance at December 31, 2007

53,965,854 

$

53,966 

 

20,000 

$

20 

$

7,662,422 

$

(3,715,046)

$

(20,174)

$

3,981,188 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-6

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Years Ended December 31,**

 

 

 

 

 

 

**2007**

 

**2006**

 

**2005**

 

 

 

 

 

 

 

 

 

 

**Cash Flows from Operating Activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

(10,619,368)

$

(2,890,638)

$

9,324,939 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,941,484 

 

931,261 

 

220,691 

Issuance of debt for interest expense

 

- 

 

- 

 

6,000 

Provision for bad debt write-off (recovery)

 

325,000 

 

(48,186)

 

(270,710)

Gain (loss) on sale of property and equipment

 

167,365 

 

(28,751)

 

(12,369)

Loss on sale investments

 

 

- 

 

590,321 

 

- 

(Increase) Decrease from changes in:

 

 

 

 

 

 

Accounts receivable

 

 

(823,516)

 

(9,171,746)

 

451,957 

Costs and estimated earnings in excess of

 

 

 

 

 

 

billings on uncompleted contracts

 

107,606 

 

(139,220)

 

(795,466)

Inventory

 

 

 

197,708 

 

(472,588)

 

- 

Income tax receivable

 

 

1,878,000 

 

(2,254,469)

 

- 

Related party receivable

 

 

60,088 

 

(100,875)

 

(70,793)

Deposits

 

 

 

399,220 

 

(252,710)

 

- 

Deferred tax asset

 

 

 

(4,160,914)

 

(66,000)

 

- 

Prepaid expenses

 

 

 

219,156 

 

(99,269)

 

(58,845)

Employee and other receivables

 

 

11,542 

 

(15,285)

 

38,828 

Intangible asset (customer list)

 

 

- 

 

(392,537)

 

- 

Increase (Decrease) from changes in:

 

 

 

 

 

 

Overdraft

 

 

 

(732,778)

 

732,778 

 

- 

Accounts payable

 

 

 

7,126,646 

 

(4,431,191)

 

7,889,814 

Other accrued Liabilities

 

 

338,659 

 

521,438 

 

(207,087)

Income tax payable

 

 

 

- 

 

(5,349,105)

 

5,237,103 

Billings in excess of costs and estimated

 

 

 

 

 

 

earnings on uncompleted contracts

 

1,887,386 

 

960,384 

 

(127,304)

Deferred income taxes

 

 

- 

 

(144,000)

 

179,000 

 

 

 

 

 

 

 

 

 

 

Net adjustments to net income (loss)

 

9,942,652 

 

(19,229,750)

 

12,480,819 

  

 

 

 

 

 

 

 

 

 

Net cash provided (used) operating activities

 

(676,716)

 

(22,120,388)

 

21,805,758 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-7

 

**ADUDDELL INDUSTRIES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Years Ended December 31,**

 

 

 

 

 

 

**2007**

 

**2006**

 

**2005**

 

 

 

 

 

 

 

 

 

 

**Cash** **Flows** **from** **Investing** **Activities**

 

 

 

 

 

 

 

Purchase of investments

 

 

- 

 

(188,096)

 

(403,225)

Purchase of Brent Anderson & Associates

 

- 

 

(6,026,915)

 

- 

Proceeds from sale of property and equipment

 

833,057 

 

37,851 

 

88,295 

Purchase of property and equipment

 

(574,177)

 

(3,818,991)

 

(904,577)

 

 

 

 

 

 

 

 

 

 

Net cash provided(used) by investing activities

 

258,880 

 

(9,996,151)

 

(1,219,507)

 

 

 

 

 

 

 

 

 

 

**Cash** **Flows** **from** **Financing** **Activities**

 

 

 

 

 

 

Proceeds from the issuance of stock

 

2,000,000 

 

168,626 

 

- 

Preferred dividends paid

 

 

(67,278)

 

- 

 

- 

Net change in line of credit

 

 

(255,989)

 

9,407,272 

 

- 

Proceeds from long-term debt

 

 

- 

 

538,640 

 

- 

Retirement of long-term debt

 

 

(236,962)

 

(328,750)

 

(756,061)

 

 

 

 

 

 

 

 

 

 

Net cash provide(used) by financing activities

 

1,439,771 

 

9,785,788 

 

(756,061)

 

 

 

 

 

 

 

 

 

 

**Net** **Increase** **in** **Cash** **(Decrease)**

 

 

1,021,935 

 

(22,330,751)

 

19,830,190 

 

 

 

 

 

 

 

 

 

 

**Cash** **at** **Beginning** **of** **Period**

 

 

- 

 

22,330,751 

 

2,500,561 

 

 

 

 

 

 

 

 

 

 

**Cash** **at** **End** **of** **Period**

 

 

$

1,021,935 

$

- 

$

22,330,751 

 

 

 

 

 

 

 

 

 

 

**Supplemental** **Disclosure** **of** **Cash** **Flow**

 

 

 

 

 

 

**Information**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

 

 

$

1,006,959 

$

134,511 

$

142,950 

Income taxes

 

 

 

- 

 

5,309,034 

 

84,692 

 

 

 

 

 

 

 

 

 

 

**Supplemental** **Schedule** **of** **Non-Cash**

 

 

 

 

 

 

 

**Investing** **and** **Financing** **Activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed asset additions

 

 

$

146,440 

$

249,039 

$

130,000 

Liabilities assumed or incurred

 

$

146,440 

$

249,039 

$

130,000 

 

 

 

 

 

 

 

 

 

 

Acquisition of Brent Anderson & Associates

$

- 

$

1,795,500 

$

130,000 

Liabilities assumed or incurred

 

$

- 

$

1,795,500 

$

130,000 

 

 

 

 

 

 

 

 

 

 

Common stock issued for Acquisitions

$

816,667 

$

1,688,750 

$

- 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-8

 

 

 

**ADUDDELL INDUSTRIES, INC.**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007 AND 2006**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Organization and Nature of Business**

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

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

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

 

**Basis of Presentation**

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services. The financial statements include all adjustments that in the opinion of management, are necessary in order to make the financial statements not misleading.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

**Revenue Recognition**

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

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

 

F-9

 

**Cash and Cash Equivalents**

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

**Accounts Receivable and Allowance For Doubtful Accounts**

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

**Inventory**

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

**Investments**

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

Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date.  At December 31, 2007 and 2006, all securities covered by *SFAS No. 115* were designated as available-for-sale.  Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity.  Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations. 

**Intangible Assets**

The Company accounts for intangible assets under *Statement of Financial Accounting Standards No. 142, “Goodwill and Other**Intangible Assets*,” (“SFAS No. 142”) which primarily addresses accounting for goodwill and intangible assets subsequent to acquisition.  Under *SFAS No. 142*, goodwill and separately identified intangible assets with indefinite lives are no longer amortized, but reviewed annually (or more frequently if impairment indicators arise) for impairment.   In accordance with *SFAS No. 142*, intangibles with finite useful lives, which include customer lists, continue to be amortized over their estimated useful life. The Company amortizes customer lists using the straight-linemethod with an estimated useful life of five years. Impairment, if any, is calculated for all intangibles as the excess of the asset carrying value over its fair value and is charged to expense when discovered.    No impairment was recorded for the years ended December 31, 2007 and 2006.  Accumulated amortization at December 31, 2007  and 2006 totaled $1,399,304 and $104,678, respectively.  Amortization expense for the years ended  December 31, 2007 and 2006 was $1,294,626 and $104,678, respectively.  The estimated amortization of intangible assets for 2008 is $1,289,784 with amortization of $1,274,740, $1,259,632, and $1,165,222 in years 2009, 2010, and 2011 respectively.  

 

F-10

 

**Fair Value of Financial Instruments**

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

**Share-Based Compensation**

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

**Depreciation**

Depreciation for financial statement purposes is provided on the straight-line method over the estimated useful lives of the various assets.  Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $1,646,858, $841,631 and $220,691 respectively.   For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences.   Estimated useful lives for financial statement reporting purposes are as follows:

 

**Classification**

**Estimated Useful Life**

Field and shop equipment

5  - 7 

Years

Office furniture and equipment

5  - 10

Years

Transportation equipment

3  - 7 

Years

Leasehold improvements

15 – 39

Years

**Income Taxes**

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

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

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

 

F-11

 

**Net Income (Loss) Per Common Share**

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

**Use of Estimates**

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

 

**NOTE 2 – GOING CONCERN UNCERTAINTY**

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.   As shown in the financial statements, the Company has incurred significant recurring operating losses in 2007 and 2006.  In addition, at December 31, 2007, the Company was in default on its line of credit agreement with its primary lender, and was operating under a temporary forbearance agreement.  These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.  The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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

 

**NOTE 3 - ACQUISITIONS**

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

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

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

 

F-12

 

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

At 2006 year end, we signed a definitive purchase agreement to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York.  We terminated our plans for these acquisitions in August 2007.

**NOTE 4 - CONTRACTS RECEIVABLE**

Contracts receivable consist of the following:

 

 

**December 31,********2007**

**December 31,****2006**

Completed contracts

$           5,436,675 

$          2,465,564

Contracts in progress

6,963,029 

9,139,408

Retainage

2,085,842 

2,057,058

 

14,485,546 

13,662,030

Less allowance for doubtful amounts

(325.000)

-

 

$          14,160,546 

$          13,662,030

 

**NOTE 5 - UNCOMPLETED CONTRACTS**

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

 

**December 31,****2007**

**December 31,****2006**

Costs incurred on uncompleted contracts

$          24,775,827 

$          29,126,527 

Estimated earnings 

(278,653)

145,508 

 

24,497,174 

29,272,035 

Billings to date

25,252,143 

28,032,012 

 

$             (754,969)

$           1,240,023 

Included in the accompanying balance sheets under the following captions:

 

**December 31,**

**2007**

**December 31,**

**2006**

Costs and estimated earnings in excess of billings on uncompleted contracts

$         2,190,585 

$          2,298,191 

Billings in excess of costs and estimated earnings on uncompleted contracts

(2,945,554)

(1,058,168)

 

$          (754,969)

$         1,240,023 

 

 

F-13

 

**NOTE 6 - LETTER OF CREDIT**

At December 31, 2007, the Company had a $175,000 letter of credit issued to its insurance carrier that matures on February 24, 2008.

**NOTE 7 - LINE OF CREDIT**

The Company has a $10,000,000 line of credit that matured on December 15, 2007.  The Company is in default on the loan and is operating under a temporary forbearance agreement through August 15, 2008.  The line bears interest at 3.375% over the published LIBOR Rate (currently 8.61%) and is secured by all accounts, property and equipment.      The outstanding balance at December 31, 2007 and 2006 was $9,151,283 and $9,407,272 respectively.

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

**NOTE 8 - LONG-TERM DEBT**

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

 

 

**December 31,****2007**

**December 31,**

**2006**

 

 

 

6.63%  to 21% notes payable secured by equipment, due in varying monthly installments through May 2010

$                  44,696

$                   68,124

 

 

 

6% to 8.25% notes payable secured by transportation equipment, due in varying monthly installments through January  2012

619,100

686,194

 

663,796

754,318

Less: current portion of long-term debt

280,936

214,343

 

$                382,860

$                 539,975

 

Estimated maturities of long-term debt as of December 31, 2007, are as follows:

 

**Year**

**Amount**

 

2009

$          255,270

 

2010

85,868

 

2011

39,227

 

2012

2,495

 

 

$          382,860

 

 

Interest expense was $1,043,936, $134,510 and $148,950 for the years ended December 31, 2007, 2006 and 2005, respectively.**** 

 

F-14

 

**NOTE 9 - PENSION PLAN**

The Company sponsors a defined contribution plan that covers all non-union employees.  Employees who are twenty-one years of age and have completed one year of service are eligible to participate.  Employees may contribute from one to eighty percent of eligible salary limited to the amount allowed under the *Internal Revenue Code*. Company profit sharing contributions are discretionary each year.  Currently the Company is matching contributions up to 4%. Employees are vested 100% in salary deferral contributions.  Company contributions vest immediately.  Company contributions for the years ended December 31, 2007, 2006, and 2005 totaled $94,401, $44,517 and $42,955, respectively. 

**NOTE 10 – STOCK OPTIONS**

**Common Stock Options and Other Warrants**

 

 The following table summarizes the Company's stock option activity for the years ended December 31, 2007, 2006 and 2005:

 

 

 

**December 31****2007**

**Weighted**

**Average**

**Exercise**

**Price**

**December 31,****2006**

**Weighted**

**Average**

**Exercise**

**Price**

 

 

 

 

 

**December 31,****2005**

**Weighted**

**Average**

**Exercise**

**Price**

Options outstanding beginning of year

 

 

32,353,818

 

$   .12

 

35,600,000

 

 

 

$   .12

 

 

32,000,000

 

 

 

$  .04

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Options issued during the year

 

 

-

 

 

 

1,025,000

 

 

 

.72

 

 

3,600,000

 

 

 

.78

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Options exercised during the year

 

 

-

 

 

 

1,686,266

 

 

 

.10

 

 

-

 

 

 

-

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Options cancelled during the year

 

 

1,170,000

 

.79

 

2,584,916

 

 

 

.76

 

 

-

 

 

 

-

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Options expired during the year

 

 

-

 

 

 

-

 

 

 

-

 

 

-

 

 

 

-

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Options outstanding end of year

 

 

31,183,818

 

$   .12

 

32,353,818

 

 

 

$   .12

 

 

35,600,000

 

 

 

$  .12

 
**Options Issued Under 2005 Stock Incentive Plan**

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

 

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

 

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

 

F-15

 

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

 

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

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

In connection with an employment agreement dated September 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.02 per share, 5,000 have vested with the remaining 20,000 rescinded with resignation.

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

 

**Options Issued Prior to the 2005 Stock Incentive Plan**

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

 

Following is a summary of stock options outstanding and exercisable at December 31, 2007:

 

 

**Options Outstanding**

**Options Exercisable**

 

 

**Range of**

**Exercise Prices**

**Number Outstanding**

**at 12/31/07**

**Weighted-Average**

**Remaining Contractual**

**Life**

**Weighted-Average**

**Exercise Price**

**Number Exercisable**

**at 12/31/06**

**Weighted-Average**

**Exercise Price**

**Number Exercisable**

**at 12/31/05**

**Weighted-Average**

**Exercise Price**

.04

28,528,818

No term

.04

28,528,818

.04

30,000,000

.04

.08

200,000

No term

.10

200,000

.10

2,000,000

.10

.70 – 1.38

2,455,000

10 year

.79

3,625,000

.78

3,605,000

.78

 

31,183,818

 

.12

32,353,818

.12

35,600,000

.12

**NOTE 11 - INCOME TAXES**

The income tax provision consists of the following:

 

 

**December 31,****2007**

**December 31,****2006**

**December 31,****2005**

Current tax provision

$   (5,765,000)

$   (1,878,000)

$    5,439,797

Deferred tax provision

1,604,086 

(210,000)

179,000

Total provision for income taxes

$  (4,160,914)

$   (2,088,000)

$   5,618,797

 

 

F-16

 

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

 

**December 31,****2007**

**December 31,****2006**

**December 31,****2005**

Statutory federal income tax rate

34.0%

34.0%

34.0%

State tax effective rate

5.0   

5.0   

5.0   

Prior year assessments finalized

-   

-   

1.5   

Difference in estimated and actual tax rates utilized

(5.0) 

-   

-   

Change in valuation allowance

-   

-   

-   

Temporary differences arising from business combinations

(5.2) 

2.9   

-   

Other

(0.6) 

-   

(2.9) 

 

28.2%

41.9%

37.6%

At December 31, 2007, the Company had net operating loss carry forwards of approximately $11 million available to reduce future federal and state taxable income.  Unless utilized, the carry forward amounts will begin to expire in 2012.  For federal and state tax purposes, approximately $800,000 of the Company’s net operating loss carry forward amounts are subject to an annual limitation due to a greater than 50% change in stock ownership which occurred in 2002, as defined by federal and state tax law. 

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

The net deferred tax asset consisted of the following components:

 

 

**December 31,****2007**

**December 31,****2006**

Deferred tax liability on depreciation 

$              (988,000)

$          (150,000)

Deferred tax asset for loss carry forward andshare-based compensation

5,417,914 

419,000 

Deferred tax asset

4,429,914 

269,000 

Less: valuation allowance

203,000 

203,000 

Net deferred tax asset

$            4,226,914 

$            66,000 

**NOTE 12 - RELATED PARTY TRANSACTIONS**

The Company engaged in certain transactions with Tim Aduddell, a majority shareholder of the Company, and entities owned by Tim Aduddell.

 

F-17

 

At June 6, 2006 the Company had a note receivable of $1,841,920 from an entity owned by Tim Aduddell.  The loan was secured by marketable securities and a personal guaranty.  Interest was accrued quarterly based on the federal mid-term rate and added to the note principal.  Accrued interest income amounted to $40,787 and $ 70,793 for the years ended December 31, 2006 and 2005, respectively.   On June 6, 2006, the Board of Directors voted to collect the receivable by redemption of a certain portion of Tim Aduddell’s stock options in an amount sufficient to satisfy the outstanding note receivable. For purposes of determining the redemption value of Mr. Aduddell’s options, the options were valued at the prior twenty day trading average ($1.52) discounted by 15% ($1.292), less the exercise price of the options ($.04) for a total value of $1.252 per option.  Based upon this valuation,the Company accepted Tim Aduddell’s surrender of 1,471,182 options in satisfaction of the debt.

The Company leases its office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell.  The lease is on a month to month basis with monthly rentals of $16,250.   The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises.  Rental expense under this lease amounted to $195,000 for  each of the years ended December 31,  2007, 2006 and 2005, respectively.

The Company leases its office, warehouse and yard facilities in Minnesota from BDA Development, LLP  a entity owned by Brent Anderson who is a Company employee. The lease is on a month to month basis with monthly rentals of $29,442.  Rental expense under this lease amounted to $353,310 for the year ended December 31, 2007.

**NOTE 13 - BACKLOG**

The amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements on which work had not yet begun at December 31, 2007 and 2006, was approximately $17,600,000 and $26,860,000 respectively.

**NOTE 14 - SHARE BASED COMPENSATION** 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2006, risk-free interest rates of 4.5%, no dividend yield or assumed forfeitures; expected lives of 10.0 years; and volatility of 94%. The amounts above are not likely to be representative of future years because there is no assurance that additional awards will be made each year.

 

**NOTE 15 - EARNINGS PER SHARE**

 

 

**December 31,****2007**

**December 31, 2006**

**December 31, 2005**

Basic earnings per share:(in thousands)

 

 

 

Common shares outstanding

53,965,854

52,799,191

48,737,921

Weighted average shares outstanding

53,965,854

50,258,549

48,737,921

Earnings  per share

$          -

$          -

$        .19

Fully diluted earnings per share:

 

 

 

Common shares outstanding

82,514,672

81,978,005

80,737,921

Weighted average shares outstanding

82,514,672

79,437,367

80,737,921

Earnings  per share

$          -

$ - (.04)

$        .12

For the years ended December 31, 2007 and 2006, all options to purchase shares of common stock were omitted from the computation of loss per common share-assuming dilution because all options were anti-dilutive.

 

F-18

 

**NOTE 16 - LEASES**

The Company leases its corporate offices, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly owned by the Company’s president and principal stockholder, under an operating lease with monthly rentals of $16,250 through September 30, 2008.  The Company is responsible for all taxes, maintenance and utilities on the leased premises.

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

The Company also leases office facilities for its Restoration and Minnesota roofing division, Florida roofing division and its Eyeopener division under operating leases which expire during 2008.  The Company also routinely leases specialized construction equipment and  storage facilities under short-term operating leases. 

Rental expense under all operating leases, net of sublease rentals, amounted to approximately $1,019,700, $472,100 and $231,400 for the years ended December 31, 2007, 2006 and 2005, respectively.

As of   December 31, 2007, the future minimum lease commitments under all noncancellable operating leases, net of aggregate future minimum noncancellable sublease rentals were as follows:

 

**Year**

**Gross Rents**

 

 

 

 

2008

$              42,810

 

2009

121,920

 

2010

40,640

 

 

$            205,370

 

**NOTE 17 - COMMITMENTS AND CONTINGENCIES**

The Company warrants its work in the normal course of business.  In management's opinion, there were no outstanding claims which would have a material effect on the Company's operations or financial position at December 31, 2007.

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

In regard to the sale of assets and liquidation of Zenex Communications in 2002, the Company was guarantor to the purchaser on notes with a remaining balance of $151,103 at December 31, 2007, with approximately $6,353 in monthly principal and interest payments.  The purchaser is currently in default on the required payment obligations. 

**Lawsuit**

 

Eric Beitchman v. Timothy Aduddell, et al., Case No. 5:05-cv-01465-HE, United States District Court for the Western District of Oklahoma. On December 19, 2005, a shareholder’s derivative action was filed, claiming that we entered into certain non-arms length transactions with certain of our officers and/or directors. Among the transactions complained of is one in which we allegedly entered into a Telecommunications Equipment and Software Upgrade Agreement with a company partially owned and controlled by one of our officers/directors. In addition, the plaintiff complained of our contracting with and making payments to Oklahoma Development Group, LLC (“ODG”) in connection with our outsourcing of emergency response services to ODG in 2005. Based on these and other allegations in the Complaint, the plaintiff claimed that the individual defendants breached their fiduciary duties tous, that they abused control of us, that they engaged in gross mismanagement, and, with respect to certain officers/director defendants, that they engaged in unjust enrichment. Plaintiff sought damages, imposition of a constructive trust, restitution and attorneys’ fees. We and the individual defendants denied the substantive allegations of the Complaint. On February 9, 2007, the parties participated in a mediation that resulted in a settlement of the lawsuit, including payment by us of $200,000 ($150,000 of which was paid from proceeds of our director and officer 

 

F-19

 

insurance) and certain non-monetary relief.  After publication of the proposed settlement, and after noting no shareholder objection, the Honorable Joe Heaton approved the settlement as fair and reasonable and entered final judgment.   

 

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

 

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

 

**NOTE 18 - CONCENTRATIONS**

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

Aduddell Industries had a significant number of customers and for the year ended December 31, 2007 no customer accounted for 10% or more of total revenue.  For the year ended December 31, 2006, one customer accounted for 40% of revenue. For the year ended December 31, 2005 the USACE accounted for 72% of revenue. 

The Company’s contract receivables at are from a small number of companies in various industries which could be subject to business cycle variations. As of December 31, 2007 no customer accounted for 10% or more of contract receivables.  As of December 31, 2006, the Company had one customer that accounted for 40% of contract receivables.  

 

**NOTE 19 – PREFERRED STOCK**

In October 2007, Aduddell Industries closed a private placement of 20,000 shares of its Series A Preferred Stock, par value $.001 per share, for $100 per share, or total gross proceeds of $2,000,000.  The Series A Preferred Stock carries a cash dividend of 14% per annum payable monthly.  Each share of Series A Preferred Stock is convertible into the Company’s common stock at any time after the tenth anniversary of the date of issuance.  The conversion price per share for the Series A Preferred Stock is the weighted (based on daily trading volume) average closing price per share of the Company’s common stock as reported in the public trading markets for the twenty trading days immediately preceding the date of conversion.  The Company may redeem the Series A Preferred Stock at any time at a price equal to the per share liquidation value of $100 plus any accrued and unpaid dividends.

 

F-20

 

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