SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004
COMMISSION FILE NUMBER 001-31756
ARGAN, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 13-1947195
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(State or other jurisdiction of incorporation (IRS Employer
or organization) identification No.)
ONE CHURCH STREET, SUITE 302, ROCKVILLE MD 20850
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (301) 315-0027
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past twelve months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No [ ]
Securities registered pursuant to Section 12(b) of the Act:
Common Stock Shares outstanding
COMMON STOCK, $.15 PAR VALUE 2,630,000 AS OF DECEMBER 10, 2004
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Transitional Small Business Disclosure Format (Check One): Yes [ ] No |X|
ARGAN, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements..................................................3
Condensed Consolidated Balance Sheets - October 31, 2004 and
January 31, 2004.......................................................3
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended October 31, 2004 and 2003............................4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended October 31, 2004 and 2003........................................5
Notes to Condensed Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis or Plan of Operation............17
Item 3. Controls and Procedures..............................................30
PART II. OTHER INFORMATION..................................................30
Item 1. Legal Proceedings...................................................30
Item 2. Changes in Securities, and Small Business Issuer Purchases of
Equity Securities........................... .........................30
Item 3. Defaults upon Senior Securities.....................................30
Item 4. Submission of matters to a vote of security holders.................30
Item 5. Other Information...................................................30
Item 6. Exhibits and Reports on Form 8-K....................................31
SIGNATURES...................................................................32
==============================================================================
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARGAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCTOBER 31, JANUARY 31,
2004 2004
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 185,000 $ 5,212,000
Investments -- 3,000,000
Accounts receivable 3,078,000 1,523,000
Receivable from affiliated entity 149,000 --
Escrowed cash 601,000 601,000
Estimated earnings in excess of billings 306,000 514,000
Inventories 3,278,000 --
Prepaid expenses and other current assets 745,000 150,000
------------ ------------
TOTAL CURRENT ASSETS 8,342,000 11,000,000
------------ ------------
Property and equipment, net 2,763,000 1,913,000
Contractual customer relationships, net 590,000 1,476,000
Trade name 224,000 680,000
Proprietary formulas, net 2,361,000 --
Non-contractual customer relationships, net 1,933,000 --
Non-compete agreement, net 1,740,000 --
Goodwill 7,563,000 1,680,000
------------ ------------
TOTAL ASSETS $ 25,516,000 $ 16,749,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,850,000 $ 918,000
Billings in excess of estimated earnings 14,000 20,000
Accrued expenses 1,320,000 488,000
Deferred income tax liability 157,000 188,000
Line of Credit 2,569,000 --
Current portion of long-term debt 852,000 1,092,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,762,000 2,706,000
------------ ------------
Deferred income tax liability 2,681,000 1,064,000
Long-term debt 313,000 109,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share -
500,000 shares authorized- issued - none
Common stock, par value $.15 per share - 12,000,000 shares
authorized -2,633,046 shares issued at October 31,
2004 and 1,806,046 shares issued at January 31,
2004 and 2,629,813 shares outstanding at October 31,
2004 and 1,802,813 shares outstanding at January 31, 2004 394,000 270,000
Warrants outstanding 849,000 849,000
Additional paid-in capital 19,140,000 14,121,000
Accumulated deficit (4,590,000) (2,337,000)
Treasury stock at cost:
3,233 shares at October 31, 2004 and January 31, 2004 (33,000) (33,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,760,000 12,870,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,516,000 $ 16,749,000
============ ============
See accompanying notes.
3
ARGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Net sales $ 4,850,000 $ 3,734,000 $ 8,485,000 $ 4,298,000
Cost of goods sold 3,483,000 2,779,000 6,698,000 3,243,000
----------- ----------- ----------- -----------
Gross profit 1,367,000 955,000 1,787,000 1,055,000
Selling, general and administrative expenses 1,513,000 652,000 2,991,000 954,000
Impairment loss -- -- 1,942,000 --
----------- ----------- ----------- -----------
Income (Loss ) from operations (146,000) 303,000 (3,146,000) 101,000
Interest expense 34,000 27,000 64,000 31,000
Other income 8,000 19,000 63,000 46,000
----------- ----------- ----------- -----------
(Loss) Income from continuing operations
before income taxes (172,000) 295,000 (3,147,000) 116,000
Income tax benefit 29,000 25,000 893,000 25,000
----------- ----------- ----------- -----------
(Loss) Income from continuing operations (143,000) 320,000 (2,254,000) 141,000
----------- ----------- ----------- -----------
Loss from discontinued operations, net of
income tax provision of $506,000 and
$751,000 -- (351,000) -- (574,000)
----------- ----------- ----------- -----------
Net loss ($ 143,000) ($ 31,000) ($2,254,000) ($ 433,000)
=========== =========== =========== ===========
Basic and diluted (loss) income per share:
Continuing operations $ (0.06) $ 0.18 $ (1.13) $ 0.10
----------- ----------- ----------- -----------
Discontinued operations -- $ (0.20) -- $ (0.42)
----------- ----------- ----------- -----------
Net loss $ (0.06) $ (0.02) $( 1.13 ) $ (0.32)
=========== =========== =========== ===========
Weighted average number of shares outstanding
- Basic 2,354,000 1,798,000 1,987,000 1,373,000
=========== =========== =========== ===========
- Diluted 2,354,000 1,801,000 1,987,000 1,376,000
=========== =========== =========== ===========
See accompanying notes.
4
ARGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,254,000) $ (433,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 755,000 156,000
Impairment loss on goodwill and intangibles 1,942,000 --
Deferred income taxes (934,000) (25,000)
Changes in operating assets and liabilities:
Accounts receivable and receivable from affiliated entity (234,000) (102,000)
Estimated earnings in excess of billings 208,000 (897,000)
Inventories (31,000) --
Prepaid expenses and other current assets (223,000) (72,000)
Accounts payable and accrued expenses (1,445,000) 595,000
Billings in excess of estimated earnings (6,000) 15,000
Other (14,000) --
Working capital changes of discontinued operations -- 677,000
------------ ------------
Net cash used in operating activities (2,236,000) (86,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (9,000,000) (12,300,000)
Redemptions of investments 12,000,000 9,300,000
Purchase of Vitarich Laboratories, Inc., net (6,650,000) --
Purchase of Southern Maryland Cable, Inc., net -- (3,965,000)
Proceeds from sale of subsidiary, net of escrow funds held -- 3,200,000
Purchases of property and equipment (123,000) (233,000)
Investing activities of discontinued operations -- (88,000)
------------ ------------
Net cash used in investing activities (3,773,000) (4,086,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercised stock options 11,000 --
Proceeds from private placement of common stock,
net of offering costs -- 9,635,000
Proceeds from bank debt facility 2,569,000 1,200,000
Principal payments on credit lines (1,091,000) (965,000)
Payment to former stockholder on loan to Vitarich Laboratories, Inc. (507,000) --
Financing activities of discontinued operations -- (180,000)
------------ ------------
Net cash provided by financing activities 982,000 9,690,000
------------ ------------
NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS (5,027,000) 5,518,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,212,000 --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 185,000 $ 5,518,000
============ ============
See accompanying notes.
5
ARGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
2004
------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of Vitarich Laboratories, Inc.
Fair value of net assets acquired
Accounts receivable $ 1,470,000
Inventories 3,247,000
Other current assets 372,000
Deferred income taxes 42,000
Property and equipment 1,064,000
------------
Total non-cash assets 6,195,000
Accounts payable and accrued expenses 3,209,000
Short-term borrowings and current maturities of debt 1,191,000
Other non-current liabilities 2,564,000
Long-term debt 371,000
------------
7,335,000
Fair value of net assets acquired (1,140,000)
------------
Excess of costs over fair value of net assets acquired 12,922,000
------------
Purchase price $ 11,782,000
============
Cash paid $ 6,650,000
Stock issued 5,132,000
------------
Purchase price $ 11,782,000
============
See accompanying notes.
6
ARGAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
Argan, Inc. (AI or the Company) conducts its operations through its wholly owned
subsidiaries, Vitarich Laboratories, Inc. (VLI) which it acquired in August
2004, and Southern Maryland Cable, Inc. (SMC) which it acquired in July 2003.
Through VLI, the Company develops, manufactures and distributes premium
nutritional supplements, whole-food dietary supplements and personal care
products. Through SMC, the Company provides telecommunications infrastructure
services including project management, construction and maintenance to the
Federal Government, telecommunications and broadband service providers as well
as electric utilities primarily in the Mid-Atlantic Region.
AI was organized as a Delaware corporation in May 1961. On October 23, 2003, our
shareholders approved a plan providing for the internal restructuring of the
Company whereby AI became a holding company and its operating assets and
liabilities relating to its former Puroflow business were transferred to a
newly-formed, wholly owned subsidiary. The subsidiary then changed its name to
"Puroflow Incorporated" (PI) and AI changed its name from Puroflow Incorporated
to "Argan, Inc." At the time of the transfer, SMC was the other wholly owned
operating subsidiary.
On October 31, 2003, the Company completed the sale of PI to Western Filter
Corporation (WFC) for approximately $3.5 million in cash of which $300,000 is
being held in escrow for one year to indemnify WFC from any damages resulting
from the breach of representations and warranties under the Stock Purchase
Agreement. (See Note 11.)
The Company operates in two reportable segments. (See Note 10.)
BASIS OF PRESENTATION
The condensed consolidated balance sheet at October 31, 2004, the condensed
consolidated statements of operations for the three and nine months ended
October 31, 2004 and 2003 and the condensed consolidated statements of cash
flows for the nine months ended October 31, 2004 and 2003 are unaudited. In the
opinion of management, the accompanying financial statements contain all
adjustments, which are of a normal and recurring nature, considered necessary to
present fairly the financial position of the Company as of October 31, 2004 and
the results of its operations and its cash flows for the periods presented. The
Company prepares its interim financial information using the same accounting
principles as it does for its annual financial statements.
These financial statements do not include all disclosures associated with annual
financial statements and, accordingly, should be read in conjunction with the
footnotes contained in the Company's consolidated financial statements for the
year ended January 31, 2004, together with the auditors' report, included in the
Company's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission. The results of operations for any interim period are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets," the Company
classified the operating results of PI as discontinued operations in the
accompanying financial statements.
7
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Vitarich Laboratories, Inc. -
Customer sales are recognized at the time title and the risks and rewards of
ownership passes. This typically is when products are shipped per customer's
instructions.
VLI provides for an allowance for doubtful accounts based on historical
experience and a review of its receivables. Receivables are presented net of an
allowance for doubtful accounts of $220,000 at October 31, 2004.
Inventories - Vitarich Laboratories, Inc. -
Inventories are stated at the lower of cost or market (net realizable value).
Cost is determined on the first-in, first-out (FIFO) method. Appropriate
consideration is given to obsolescence, excessive inventory levels, product
deterioration, and other factors in evaluating net realizable value.
Inventories at October 31, 2004 consist of the following:
Raw materials $2,851,000
Work-in-process 119,000
Finished goods 308,000
----------
$3,278,000
==========
Depreciation - Vitarich Laboratories, Inc. -
Property and equipment is stated at historical cost, and depreciation is
computed using the straight-line method over the lives of the assets. Machinery
and equipment and office furniture and fixtures are depreciated over periods
ranging five to seven years. Leasehold improvements are amortized over five
years.
Research and Development Expenditures - Vitarich Laboratories, Inc.
Research and development is a key component of VLI's business development
efforts. VLI develops product formulations for its customers. VLI focuses its
research and development capabilities particularly on new and emerging raw
materials and products. Research and development expenses relate primarily to
VLI's proprietary formulations and are expensed as incurred. The Company
recorded $3,000 of research and development expenses during the three months
ended October 31, 2004.
Income Per Share - (Loss) income per share is computed by dividing (loss) income
from continuing operations, loss from discontinued operations and net (loss)
income by the weighted average number of common shares outstanding for the
period. Outstanding stock options and warrants were anti-dilutive during the
three and nine months ended October 31, 2004 and 2003 due to the Company's loss
from continuing operations.
Seasonality - SMC's telecom infrastructure services operations are expected to
have seasonally weaker results in the first and fourth quarters of the year, and
may produce stronger results in the second and third quarters. This seasonality
is primarily due to the effect of winter weather on outside plant activities as
well as reduced daylight hours and customer budgetary constraints. Certain
customers tend to complete budgeted capital expenditures before the end of the
year, and postpone additional expenditures until the subsequent fiscal period.
Stock Issued to Employees -The Company follows Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, to account for stock
option plans, which generally does not require income statement recognition of
options granted at the market price on the date of issuance.
8
The Pro forma disclosures required by Statement of Financial Accounting
Standards No. 148 "Accounting for Stock Based Compensation" are reflected below:
PRO FORMA DISCLOSURES
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2004 2003
----------- -----------
Net loss, as reported ($2,254,000) ($ 433,000)
Add: Stock based compensation recorded
in the financial statements -- --
Deduct: Total stock-based employee
compensation expense
determined under fair value based methods 41,000 138,000
----------- -----------
Pro forma net loss ($2,295,000) ($ 571,000)
----------- -----------
Basic and diluted (loss) earnings per share:
Basic and diluted - as reported ($1.13) ($.32)
====== =====
Basic and diluted - pro forma ($1.16) ($.42)
====== =====
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2004 2003
----------- -----------
Net loss, as reported: ($ 143,000) $ ( 31,000)
Add: Stock-based compensation recorded in the
financial statements -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based methods 8,000 46,000
----------- -----------
Pro forma net loss ($ 151,000) $ (77,000)
----------- -----------
Basic and diluted (loss) earnings per share:
Basic and diluted - as reported ($ .06) $(.02)
====== =====
Basic and diluted - pro forma ($ .06) $(.04)
====== =====
NOTE 3 - ACQUISITIONS
Vitarich Laboratories, Inc.
On August 31, 2004, the Company acquired, by merger, all of the common stock of
VLI, a developer, manufacturer and distributor of premium nutritional
supplements, whole-food dietary supplements and personal care products. The
Company's purchase of VLI is focused on acquiring VLI's long-standing customer
and exclusive vendor relationships and its well established position in the fast
growing global nutrition industry which supports the premium paid over the fair
value of the tangible assets acquired.
The results of operations of the acquired company are included in the
consolidated results of the Company from August 31, 2004, the date of
acquisition.
The estimated purchase price was approximately $6.1 million in cash and 825,000
shares of the Company's common stock plus the assumption of approximately $1.6
million in debt. The merger agreement contains provisions for payment of
9
additional consideration by the Company to the former VLI shareholder to be
satisfied in the Company's common stock and cash if certain Earnings Before
Interest Taxes Depreciation and Amortization (EBITDA) thresholds for the twelve
months ended February 28, 2005 are met. To meet the EBITDA thresholds, VLI must
have adjusted EBITDA in excess of $2.3 million. Results in excess of the
adjusted EBITDA threshold serve as the basis to determine the amount of
additional payment. Any additional payments earned under the terms of the
purchase agreement will be recorded as an increase in goodwill. The Company also
leases two warehouse buildings at an annual rent of $150,000 from the former
shareholder of VLI.
The Company's preliminary accounting for the acquisition of VLI uses the
purchase method of accounting whereby the excess of cost over the net amounts
assigned to assets acquired and liabilities assumed is allocated to goodwill and
intangible assets based on their estimated fair values. Such intangible assets
identified by the Company include $2,500,000, $2,000,000 and $1,800,000,
respectfully, allocated to Proprietary Formulas (PF), Non-contractual Customer
Relationships (NCR) and a Non-Compete Agreement (NCA). The Company is amortizing
PF over three years and NCR and NCA over five years. Accumulated amortization is
$139,000, $67,000, and $60,000 at October 31, 2004, respectively for PF, NCR and
NCA.
AI also entered into a supply agreement with an entity owned by the seller
whereby the supplier committed to sell to AI and AI committed to purchase on an
as-needed basis, certain organic agriculture products. VLI did not make
purchases under the supply agreement for the period from acquisition (August 31,
2004) through October 31, 2004. At October 31, 2004, AI had an $8,000 note with
the aforementioned seller-owned entity.
The Company also sells its products in the normal course of business to an
entity in which the former owner of VLI has a twenty percent ownership interest.
The pricing on such transactions is consistent with VLI's general customer
pricing for nonaffiliated entities. VLI had approximately $130,000 in sales with
this entity for the period from acquisition (August 31, 2004) to October 31,
2004. At October 31, 2004, the affiliated entity owed $189,000 to VLI.
Southern Maryland Cable, Inc.
On July 17, 2003, the Company acquired all of the common stock of SMC, a
provider of telecommunications and other infrastructure services including
project management, construction and maintenance to the Federal Government,
telecommunications and broadband service providers, as well as electric
utilities.
The results of operations of the acquired company are included in the
consolidated results of the Company from July 17, 2003, the date of the
acquisition. The estimated purchase price was approximately $3.8 million in
cash, plus the assumption of approximately $971,000 in debt. The Company also
leases the SMC headquarters at an annual rent of $75,000 from the former owners
of SMC. The lease term is through January, 2006.
The Company accounted for the acquisition of SMC using the purchase method of
accounting whereby the excess of cost over the net amounts assigned to
identifiable assets acquired and liabilities assumed is allocated to goodwill
and intangible assets based on their estimated fair values. Such intangible
assets included $1,600,000 and $680,000 allocated to Contractual Customer
Relationships ("CCR") and Trade Name, respectively, and $1,680,000 to Goodwill.
The Company recorded an impairment loss with respect to goodwill and intangible
assets for the nine months ended October 31, 2004 (See Note 5). The Company is
amortizing the CCR over a weighted average life of seven years. Accumulated
10
amortization is $264,000 at October 31, 2004 excluding the impairment loss. The
Trade Name was determined to have an indefinite useful life and is not being
amortized.
The following unaudited pro forma statements of operations for the three and
nine months ended October 31, 2004 and 2003, do not purport to be indicative of
the results that would have actually been obtained if the aforementioned
acquisitions had occurred on February 1, 2003, or that may be obtained in the
future. The pro forma presentation also excludes the discontinued operations of
PI. VLI and SMC previously reported their results of operations using a calendar
year-end. No material events occurred subsequent to this reporting period that
would require adjustment to our unaudited pro forma statements of operations.
The number of shares outstanding used in calculating pro forma earnings per
share assume that the private offering discussed in Note 9 was consummated at
February 1, 2003 and the 825,000 shares issued in connection with the
acquisition of VLI.
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2004 2003
------------ ------------
Pro Forma Statements of Operations
Net sales $ 18,098,000 $ 18,124,000
Cost of goods sold 13,678,000 13,521,000
------------ ------------
Gross profit 4,420,000 4,603,000
Selling, general and administrative expenses 4,938,000 4,068,000
Impairment loss 1,942,000 --
------------ ------------
(Loss) income from operations (2,460,000) 535,000
Other expense 50,000 19,000
------------ ------------
(Loss) income from continuing operations before income
taxes (2,510,000) 516,000
Income tax (benefit) provision (714,000) 206,000
------------ ------------
(Loss) income from continuing operations ($ 1,796,000) $ 310,000
============ ============
(Loss) income per share
- basic $(0.68) $0.12
- diluted $(0.68) $0.12
Weighted average shares outstanding:
- basic 2,624,000 2,624,000
- diluted 2,624,000 2,624,000
11
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2004 2003
------------ ------------
Net sales $ 6,202,000 $ 7,765,000
Cost of goods sold 4,450,000 5,677,000
------------ ------------
Gross profit 1,752,000 2,088,000
Selling, general and administrative expenses 1,716,000 1,451,000
------------ ------------
Income from operations 36,000 637,000
Other expense 48,000 21,000
------------ ------------
(Loss) income from continuing operations before income taxes
(12,000) 616,000
Income tax (benefit) provision (5,000) 246,000
------------ ------------
(Loss) income from continuing operations ($ 7,000) $ 370,000
============ ============
Income per share
- basic -- $0.14
- diluted -- $0.14
Weighted average shares outstanding:
- basic 2,624,000 2,624,000
- diluted 2,624,000 2,624,000
NOTE 4 - LETTER OF INTENT WITH VITAMIN RESEARCH PRODUCTS, INC.
On October 28, 2004, the Company entered into a letter of intent with Vitamin
Research Products, Inc. ("VRP") to acquire all of the common stock of VRP. The
consummation of the transaction is contingent upon the completion of the
Company's due diligence, the signing of a definitive purchase and sale
agreement, approval of both companies' board of directors and other conditions.
NOTE 5 - IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the nine months ended October 31, 2004, the Company determined that both
events and changes in circumstances with respect to SMC's business climate would
have a significant effect on its future estimated cash flows. During the nine
months ended October 31, 2004, SMC terminated a customer contract which had
historically provided positive margins and cash flows. In addition, SMC
experienced revenue levels well below expectations for its largest fixed priced
contract customer. As a consequence, SMC has reduced its future forecasts and
expectations of cash flows. As a result of these events, the Company believed
that there was an indication that its intangible assets not subject to
amortization might be impaired. The Company determined the fair value of its
Goodwill and Trade Name and compared it to the respective carrying amounts. The
carrying amounts exceeded the Goodwill and Trade Name's respective fair values
by $740,000 and $456,000, respectively, which the Company recorded as an
impairment loss for the nine months ended October 31, 2004.
During the nine months ended October 31, 2004, the Company terminated the above
mentioned customer contract. The impact of the termination indicated that the
Company's Contractual Customer Relationships carrying amount was not fully
recoverable. Accordingly, the Company determined the fair value of the CCR's and
compared it to its carrying amount. The Company recorded an impairment loss of
$746,000, as this was the amount by which the CCR's carrying amount exceeded its
fair value.
NOTE 6- DISCONTINUED OPERATIONS
On October 31, 2003, as part of its plan to reallocate its capital to its
acquisition program, AI sold PI to WFC. The sales price of approximately
$3,500,000 was satisfied in cash of which $300,000 is being held in escrow for
one year to indemnify WFC from any damages resulting from a breach of
representations and warranties under the Stock Purchase Agreement. During the
three months ended October 31, 2004, WFC asserted that the Company breached
certain representations and warranties under the Stock Purchase Agreement (See
Note 11). AI recognized a gain on sale of approximately $167,000, net of income
taxes of $506,000. The Company utilized net operating losses to offset the gain
on sale. The $506,000 is the amount of the deferred tax assets related to the PI
which has been sold. In accordance with SFAS No. 144 "Accounting for the
12
Impairment or Disposal of Long-Lived Assets," the Company classified the
operating results of PI as discontinued operations in the accompanying
statements of operations.
The results of the discontinued operations are as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2003 2003
----------- -----------
Net sales $ 1,447,000 $ 5,050,000
Cost of goods sold 1,317,000 3,834,000
----------- -----------
Gross profit 130,000 1,216,000
Selling, general and administrative expenses 645,000 1,701,000
----------- -----------
Operating loss from discontinued operations (515,000) (485,000)
Other expense 3,000 11,000
----------- -----------
Loss from discontinued operations before
income taxes (518,000) (496,000)
Income tax provision -- 245,000
----------- -----------
Loss from discontinued operations $ (518,000) $ (741,000)
=========== ===========
The Company has restated its previously issued financial statements to reflect,
as discontinued operations, the operations of its wholly owned subsidiary, PI.
Because of the reclassification of PI as discontinued operations, the Company
was required to retroactively restate its financial statements for the three and
nine months ended October 31, 2003.
NOTE 7 - DEBT
In August, 2003, the Company entered into a financing arrangement with Bank of
America ("Bank") aggregating $2,950,000 in available financing in two facilities
- a revolving line of credit with $1,750,000 in availability, having an initial
expiration date of July 31, 2004 and bearing interest at LIBOR plus 2.75%, and a
three year term note with an original outstanding balance of $1,200,000,
expiring July 31, 2006 and bearing interest at LIBOR plus 2.95%. The proceeds
from the term note were used to payoff the SMC lines of credit and for working
capital. As of October 31, 2004, the Company had $700,000 outstanding under the
term note.
In August 2004, the Company agreed to amend the existing financing arrangement
with the Bank whereby the revolving line of credit was increased to $3.5 million
in maximum availability, expiring May 31, 2005. Availability on a monthly basis
under the revolving line is determined by reference to accounts receivable and
inventory on hand which meet certain Bank criteria. The aforementioned three
year term note remains in effect. The amended financing arrangement contains
financial and non-financial covenants including requiring the ratio of debt to
pro forma earnings before interest, taxes, depreciation and amortization
("EBITDA") not exceed 2.5 to 1 (with the first test date being January 31,
2005), requiring a pro forma fixed charge coverage ratio not less than 1.25 to 1
(with the first test date being January 31, 2005) and requiring Bank consent for
acquisitions and divestitures. The Company continues to pledge the majority of
its assets to secure the financing arrangement. The amended financing
13
arrangement eliminates certain previously existing covenants which had required
the Company to maintain certain minimum levels of liquidity and had required the
Company to maintain positive net income during the Company's fiscal quarters
ended July 31, 2004 and October 31, 2004. As of October 31, 2004, the Company
had $2,569,000 outstanding under the revolving line of credit.
Under the amended financing arrangement, the three year term note bears interest
at LIBOR plus 3.45% and the revolving line of credit bears interest at LIBOR
plus 3.25%.
Subsequent to the sale of PI, the Company deposited $300,000 as additional
collateral in a restricted cash account with the Bank. The Company drew
approximately $2.1 million on the revolving line of credit in connection with
the acquisition of VLI and for working capital for its newly acquired business
in September 2004. Under the amended financing arrangement, subject to the
successful completion of a standard Bank examination of SMC's and VLI's records,
the Bank has agreed to release the previously restricted cash to the Company.
NOTE 8 - INCOME TAXES
The actual effective rate of the income tax benefit for the three and nine
months ended October 31, 2004 differs from the "expected" tax rate by applying
the U.S. Federal Corporate income tax rate to loss from continuing operations
before income taxes. For the nine months ended October 31, 2004, included in the
loss from continuing operations is the $740,000 impairment loss from goodwill
which is treated as a permanent difference for income tax reporting purposes.
Contributing to the difference in expected taxes for the three and nine months
ended October 31, 2004 is state income taxes accrued for VLI's profitable
performance.
NOTE 9 - PRIVATE OFFERING OF COMMON STOCK
On April 29, 2003, the Company completed a private offering of approximately
1,304,000 shares of its common stock at a price of $7.75 per share. The proceeds
of the private offering were approximately $10,107,000 prior to giving effect to
offering costs of $472,000 and the proceeds which may be derived from the future
exercise of 230,000 warrants, issued in connection with the private placement at
an exercise price of $7.75 per share. A portion of the net proceeds of the
private placement was used in the acquisition of SMC and in final payment of the
Company's credit facility with U.S. Bancorp. The remaining net proceeds were
used for acquisitions in growth-oriented industries and for working capital. The
private offering was approved by shareholder vote on April 15, 2003.
NOTE 10 - SEGMENT INFORMATION
Effective with the acquisition of VLI, the Company has two operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and assessing performance.
The Company's two reportable segments are telecom infrastructure services and
nutraceutical products. The Company conducts its operations through its wholly
owned subsidiaries - VLI and SMC. The "Other" column includes the Company's
corporate and unallocated expenses.
The Company's reportable segments are organized in separate business units with
different management, customers, technology and services. The respective
14
segments account for respective businesses using the accounting policies
described as its significant accounting policies in its filings in Note 1 to the
Company's Form 10-KSB and Note 2 to the Company's Form 10-QSB herein. Summarized
financial information concerning the Company's reportable segments is shown in
the following tables:
FOR THE NINE MONTHS
ENDED OCTOBER 31, 2004
Telecom
Infrastructure Nutraceutical(1)
Services Products Other Consolidated
----------- ----------- ----------- -----------
Net sales $ 5,718,000 $ 2,767,000 $ -- $ 8,485,000
Cost of goods sold 4,873,000 1,825,000 -- 6,698,000
----------- ----------- ----------- -----------
Gross profit 845,000 942,000 -- 1,787,000
Selling, general and administrative
expenses 1,279,000 580,000 1,132,000 2,991,000
Impairment loss 1,942,000 -- -- 1,942,000
----------- ----------- ----------- -----------
(Loss) income from operations (2,376,000) 362,000 (1,132,000) (3,146,000)
Interest expense 36,000 25,000 3,000 64,000
Other income 5,000 -- 58,000 63,000
----------- ----------- ----------- -----------
(Loss) income from continuing
operations before income taxes ($2,407,000) $ 337,000 ($1,077,000) (3,147,000)
=========== =========== =========== -----------
Income tax benefit 893,000
-----------
Loss from continuing operations ($2,254,000)
===========
FOR THE THREE MONTHS
ENDED OCTOBER 31, 2004
Telecom
Infrastructure Nutraceutical(1)
Services Products Other Consolidated
----------- ----------- ----------- -----------
Net sales $ 2,083,000 $ 2,767,000 $ -- $ 4,850,000
Cost of goods sold 1,658,000 1,825,000 -- 3,483,000
----------- ----------- ----------- -----------
Gross profit 425,000 942,000 -- 1,367,000
Selling, general and administrative
expenses 452,000 580,000 (481,000) 1,513,000
Impairment loss -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from operations (27,000) 362,000 (481,000) (146,000)
Interest expense 9,000 25,000 -- 34,000
Other income -- -- 8,000 8,000
----------- ----------- ----------- -----------
(Loss) income from continuing
operations before income taxes ($ 36,000) $ 337,000 ($ 473,000) (172,000)
=========== =========== ===========
Income tax benefit 29,000
-----------
Loss from continuing operations $ (143,000)
===========
(1) Operating results of VLI are included since date of acquisition, August 31,
2004.
15
NOTE 11 - CLAIM BY WESTERN FILTER CORPORATION
During the three months ended October 31, 2004, WFC delivered notification to
the Company asserting that the Company breached certain representations and
warranties under the Stock Purchase Agreement. WFC asserts damages in excess of
the $300,000 escrow which is being held by a third party in connection with the
Stock Purchase Agreement.
The Company has reviewed WFC's claim and believes that substantially all of the
claims are without merit. The Company will vigorously contest WFC's claim.
During the three months ended October 31, 2004, the Company recorded an accrual
for a loss related to this matter of $150,000 for losses related to WFC's claim
that it considers to be probable and that can be reasonably estimated. Although
the ultimate amount of liability at October 31, 2004, that may result from this
matter for which the Company has recorded an accrual is not ascertainable, the
Company believes that any amounts exceeding the aforementioned accrual should
not materially affect the Company's financial condition. It is possible,
however, that the ultimate resolution of WFC's claim could result in a material
adverse effect on the Company's results of operations for a particular reporting
period.
NOTE 12 - RESTATEMENT OF QUARTERLY RESULTS
On March 11, 2004, we determined that there was an error in the calculation and
classification of the deferred income tax liability associated with the
identifiable intangible assets recorded in the purchase accounting of our
acquisition of SMC. The error resulted in the overstatement of the customer
contractual relationships, trade name and the deferred income tax liability and
the understatement of goodwill. The consolidated financial statements and
accompanying notes for the three and nine months ended October 31, 2003, have
been restated to correct this error. The following table represents the impact
of the restatement on the consolidated financial statements.
AS REPORTED AS RESTATED
THREE MONTHS THREE MONTHS
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2003
---------------- ----------------
Selling, general and administrative $ 690,000 $ 652,000
Operating (loss) income $ 265,000 $ 303,000
Pretax income (loss) from continuing
operations $ 257,000 $ 295,000
Income tax benefit ($ 40,000) ($ 25,000)
Income (loss) from continuing operations $ 297,000 $ 320,000
Net income (loss) ($ 54,000) ($ 31,000)
Earnings Per Share:
Basic earnings per share from continuing
operations $ 0.17 $ 0.18
Basic net loss per common share ($ 0.03) ($ 0.02)
Diluted earnings per share from continuing
operations $ 0.16 $ 0.18
Diluted net loss per common share ($ 0.03) ($ 0.02)
16
AS REPORTED AS RESTATED
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2003
---------------- ----------------
Selling, general and administrative $ 992,000 $ 954,000
Operating (loss) income $ 63,000 $ 101,000
Pretax income (loss) from continuing
operations $ 78,000 $ 116,000
Income tax benefit ($ 40,000) ($ 25,000)
Income (loss) from continuing operations $ 118,000 $ 141,000
Net income (loss) ($456,000) ($433,000)
Earnings Per Share:
Basic earnings per share from continuing
operations $ 0.09 $ 0.10
Basic net loss per common share ($ 0.33) ($ 0.32)
Diluted earnings per share from continuing
operations $ 0.09 $ 0.10
Diluted net loss per common share ($ 0.33) ($ 0.32)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbor created thereby. These statements
relate to future events or our future financial performance, including
statements relating to our products, customers, suppliers, business prospects,
financings, investments and effects of acquisitions. In some cases, forward
looking statements can be identified by terminology such as "may," "will,"
"should," "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"potential," or "continue," the negative of these terms or other comparable
terminology. These statements involve a number of risks and uncertainties,
including preliminary information; the effects of future acquisitions and/or
investments; competitive factors; business and economic conditions generally;
changes in government regulations and policies, our dependence upon third-party
suppliers; continued acceptance of our products in the marketplace;
technological changes; and other risks and uncertainties that could cause actual
events or results to differ materially from any forward-looking statements.
GENERAL
We conduct our operations through our wholly owned subsidiaries, Vitarich
Laboratories, Inc., (VLI) which we acquired in August 2004 and Southern Maryland
Cable, Inc. (SMC) that we acquired in July 2003. Through VLI, the Company
develops, manufactures and distributes premium nutritional supplements,
whole-food dietary supplements and personal care products. Through SMC, we
provide telecommunications infrastructure services including project management,
construction and maintenance to the Federal Government, telecommunications and
broadband service providers as well as electric utilities.
We were organized as a Delaware corporation in May 1961. On October 23, 2003,
our shareholders approved a plan providing for the internal restructuring of the
Company whereby we became a holding company, and our operating assets and
liabilities relating to our Puroflow business were transferred to a
newly-formed, wholly owned subsidiary. The subsidiary then changed its name to
"Puroflow Incorporated" and we changed our name from Puroflow Incorporated to
17
"Argan, Inc." At the time of the transfer, we also held SMC as our only other
wholly owned operating subsidiary.
On October 28, 2004, the Company entered into a letter of intent with Vitamin
Research Products, Inc. ("VRP") to acquire all of the common stock of VRP. The
consummation of the transaction is contingent upon the completion of the
Company's due diligence, the signing of definitive purchase and sale agreement,
approval of both companies' board of directors and other conditions.
On October 31, 2003, we completed the sale of Puroflow Incorporated (a
wholly-owned subsidiary) to Western Filter Corporation (WFC) for approximately
$3.5 million in cash, of which $300,000 is held in escrow for one year to
indemnify WFC from losses resulting from a breach of the representations and
warranties made by us in connection with that sale. During the three months
ended October 31, 2004, WFC delivered notification to the Company asserting that
the Company breached certain representations and warranties under the Stock
Purchase Agreement. WFC asserts damages in excess of the $300,000 escrow which
is being held by a third party.
The Company has reviewed WFC's claim and believes that the claims are
substantially without merit. The Company will vigorously contest WFC's claims.
During the three months ended October 31, 2004, the Company recorded an accrual
for loss related to this matter of $150,000 with respect to this claim. (See
Note 11 to the Company's financial statements for further information.)
During the nine months ended October 31, 2004, we determined that both events
and changes in circumstances with respect to SMC's business climate would have a
significant effect on our future estimated cash flows. During the nine months
ended October 31, 2004, SMC had a customer contract terminated which had
historically provided positive margins and cash flows. In addition, SMC
experienced revenue levels well below expectations for its largest fixed priced
contract customer. As a consequence, SMC has reduced its future expectation of
cash flows. In connection with the foregoing, we recorded an impairment charge
totaling $1,942,000 during the nine months ended October 31, 2004 ($740,000,
$456,000 and $746,000, respectively, to Goodwill, Trade Name and Contractual
Customer Relationships). We believe that the foregoing events will adversely
affect SMC's revenue, gross margin, net income and cash flow for the foreseeable
future.
HOLDING COMPANY STRUCTURE
We intend to make additional acquisitions and/or investments. We intend to have
more than one industrial focus and to identify those companies that are in
industries with significant potential to grow profitably both internally and
through acquisitions. We expect that companies acquired in each of these
industrial groups will be held in separate subsidiaries that will be operated in
a manner that best provides cashflow and value for the Company.
We are a holding company with no operations other than our investments in SMC
and VLI. At October 31, 2004, there were no restrictions with respect to
dividends or other payments from VLI and SMC to AI.
NUTRITIONAL PRODUCTS
We are dedicated to the research, development, manufacture and distribution of
premium nutritional supplements, whole-food dietary supplements and personal
care products. Several have garnered honors including the National Nutritional
Foods Association's prestigious People's Choice Awards for best products of the
year in its respective category.
18
We provide nutrient-dense, super-food concentrates, vitamins and supplements.
Our customers include health food store chains, mass merchandisers, network
marketing companies, pharmacies and major retailers.
We intend to enhance our position in the fast growing global nutrition industry
through our innovative product development and research. We believe that we will
be able to expand our distribution channels by providing continuous quality
assurance and by focusing on timely delivery of superior nutraceutical products.
TELECOM INFRASTRUCTURE SERVICES
We currently provide inside plant, premise wiring services to the Federal
Government and have plans to expand that work to commercial customers who
regularly need upgrades in their premise wiring systems to accommodate
improvements in security, telecommunications and network capabilities.
Despite the recent slowdown by our primary fixed priced contract customer, we
continue to participate in the expansion of the telecommunications industry by
working with various telecommunications providers. We are actively pursuing
contracts with a wide variety of telecommunication providers and others. We
provide maintenance and upgrade services for their outside plant systems that
increase the capacity of existing infrastructure. We also provide outside plant
services to the power industry by providing maintenance and upgrade services to
utilities.
We intend to emphasize our high quality reputation, outstanding customer base
and highly motivated work force in competing for larger and more diverse
contracts. We believe that our high quality and well maintained fleet of
vehicles and construction machinery and equipment is essential to meet
customers' needs for high quality and on-time service. We are committed to
investing in our repair and maintenance capabilities to maintain the quality and
life of our equipment. Additionally, we invest annually in new vehicles and
equipment. We further intend to seek acquisitions to evolve into a
geographically diverse telecom and utility infrastructure services entity with a
reputation for high quality and on-time performance.
CRITICAL ACCOUNTING POLICIES
Management is required to make judgments, assumptions and estimates that affect
the amounts reported when we prepare financial statements and related
disclosures in conformity with generally accepted accounting principles. Note 1
contained in the Company's consolidated financial statements for the year ended
January 31, 2004 included in the Company's Annual Report contained in Form
10-KSB, as filed with the Securities and Exchange Commission describes the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. Estimates are used for, but not limited to
our accounting for revenue recognition, allowance for doubtful accounts,
long-lived assets and deferred income taxes. Actual results could differ from
these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
our consolidated financial statements.
REVENUE RECOGNITION
Vitarich Laboratories, Inc.
We manufacture products for our customers based on their orders. We typically
ship the orders immediately after production keeping relatively little on-hand
as finished goods inventory. We recognize customer sales at the time title and
the risks and rewards of ownership passes to our customer. Cost of goods and
finished goods inventory sold include raw materials and direct labor as well as
other direct costs combined with allocations of indirect operational costs.
19
Southern Maryland Cable, Inc.
We generate revenue under various arrangements, including contracts under which
revenue is determined on a fixed price basis and on a time and materials basis.
Revenues from time and materials contracts are recognized when the related
service is provided to the customer. Revenues from fixed price contracts,
including a portion of estimated profit, is recognized as services are provided,
based on costs incurred and estimated total contract costs in accordance with
Statement of Position 81-1, Accounting for Performance of Construction Type and
Certain Production-Type Contracts, using the percentage of completion method.
The timing of billing to customers varies based on individual contracts and
often differs from the period of revenue recognition. Estimated earnings in
excess of billings and billings in excess of estimated earnings totaled $306,000
and $14,000, respectively, at October 31, 2004.
Contract costs are recorded when incurred and include direct labor and other
direct costs combined with allocations of operational indirect costs. Management
periodically reviews the costs incurred and revenue recognized from contracts
and adjusts recognized revenue to reflect current expectations. Provisions for
estimated losses on incomplete contracts are provided in full in the period in
which such losses become known.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, consisting primarily of property and equipment and
finite-lived intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount should be assessed
pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." We determine impairment by comparing the carrying value of
these long-lived assets to the undiscounted future cash flows expected to result
from the use of these assets. In the event we determine that an impairment
exists, a loss is recognized based on the amount by which the carrying value
exceeds the fair value of the assets, which is generally determined by using
valuation techniques such as the discounted present value of expected future
cash flows, appraisals, or other pricing models as appropriate.
IMPAIRMENT OF GOODWILL AND TRADE NAME
We periodically evaluate the net realizable value of intangible assets relying
on a number of factors including operating results, economic projections, and
anticipated cash flows. In connection with our acquisition of SMC, the excess of
cost over the net amounts assigned to tangible assets acquired and liabilities
assumed was allocated to goodwill and intangible assets recognized separately
such as Trade Name and Contractual Customer Relationships.
In accordance with SFAS No. 142, we will conduct annually during our fiscal
fourth quarter, a review of our goodwill and intangible assets with an
indefinite useful life to determine whether their carrying value exceeds their
fair market value. Should this be the case, a detailed analysis will be
performed to determine if the goodwill and other intangible assets are impaired.
We will review the finite intangible assets when events or changes in
circumstances indicate that the carrying amount may not be recovered.
We will test for impairment of Goodwill and indefinite lived intangible assets
more frequently if events or changes in circumstances indicate that the asset
might be impaired.
During the nine months ended October 31, 2004, we recognized that an impairment
existed with respect to our goodwill, contractual customer relationships and
trade name. (See further discussion of our results of operations for the nine
months ended October 31, 2004.)
20
CONTRACTUAL CUSTOMER RELATIONSHIPS ("CCR'S")
The fair value of the Contractual Customer Relationships (CCR's) was determined
at the time of the acquisition of SMC by discounting the cash flows expected
from SMC's continued relationships with three customers - General Dynamics,
Verizon Communications and Southern Maryland Electric Cooperative. Expected cash
flows were based on historical levels, current and anticipated projects and
general economic conditions. In some cases, the estimates of future cash flows
reflect periods beyond those of the current contracts in place. The expected
cash flows were discounted based on a rate that reflects the perceived risk of
the CCR's, the estimated weighted average cost of capital and SMC's asset mix.
We are amortizing the CCR's over a seven year weighted average life given the
long standing relationship SMC has with SMECO.
During the nine months ended October 31, 2004, we recognized that an impairment
existed with respect to our goodwill, contractual customer relationships and
trade name. (See further discussion of our results of operations for the nine
months ended October 31, 2004.)
TRADE NAME
The fair value of the SMC Trade Name was estimated using a relief-from-royalty
methodology. We determined that the useful life of the Trade Name was indefinite
since it is expected to contribute directly to future cash flows in perpetuity.
The Company has also considered the effects of demand and competition including
its customer base. While SMC is not a nationally recognized Trade Name, it is a
regionally recognized name in Maryland and the mid-Atlantic region.
Using the relief-from-royalty method described above, we test the Trade Name for
impairment annually in our fiscal fourth quarter and on an interim basis if
events or changes in circumstances between annual tests indicate the Trade Name
might be impaired.
During the nine months ended October 31, 2004, we recognized that an impairment
existed with respect to our goodwill, contractual customer relationships and
trade name. (See further discussion of our results of operations for the nine
months ended October 31, 2004.)
PROPRIETARY FORMULAS
The Fair Value of the Proprietary Formulas (PF's) was determined at the time of
the acquisition of VLI by discounting the cash flows expected from developed,
formulations based on relative technology contribution and estimates regarding
product lifecycle and development costs and time. The expected cash flows were
discounted based on a rate that reflects the perceived risk of the PF's, the
estimated weighted average cost of capital and VLI's asset mix. We are
amortizing the PF's over a three year life based on the estimated contributory
life of the proprietary formulations utilizing estimated historical product
lifecycles and changes in technology.
NON-CONTRACTUAL CUSTOMER RELATIONSHIPS
The fair value of the Non-Contractual Customer Relationships (NCR's) was
determined at the time of acquisition of VLI by discounting the net cash flows
expected from existing customer revenues. Although VLI does not operate using
long-term contracts, historical experience indicates that customers repeat
orders due to the costs associated with changing suppliers. VLI has had a
relationship of five years or more with most of its currently significant
customers. The expected cash flows were discounted based on a rate that reflects
the perceived risk of the NCR's, the estimated weighted average cost of capital
21
and VLI's asset mix. We are amortizing the NCR's over a five year life based on
the length of VLI's significant customer relationships.
NON-COMPETE AGREEMENT
The fair value of the Non-Compete Agreement (NCA) was determined at the time of
acquisition of VLI by discounting the estimated reduction in the cash flows
expected if one key employee, the former sole shareholder of VLI, were to leave.
The key employee signed a non-compete clause prohibiting the employee from
competing directly or indirectly for five years. The estimated reduced cash
flows were discounted based on a rate that reflects the perceived risk of the
NCA, the estimated weighted average cost of capital and VLI's asset mix. We are
amortizing the NCA over five years, the length of the non-compete agreement.
DEFERRED TAX ASSETS AND LIABILITIES
We account for income taxes under the asset and liability method. The approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. Developing our provision for income
taxes requires significant judgment and expertise in Federal and state income
tax laws, regulations and strategies, including the determination of deferred
tax assets and liabilities and, if necessary, any valuation allowances that may
be required for deferred tax assets.
RECENTLY ISSUES ACCOUNTING PRONOUNCEMENTS
In November 2004, Statement of Financial Accounting Standards ("SFAS") No. 151
"Inventory Costs - an amendment of ARB No. 43, Chapter 4" was issued. SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that "under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges." This statement
requires that those items be recognized as current period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
Company will adopt the provisions of SFAS No. 151 in its fiscal year 2006. The
Company does not expect the adoption of SFAS No. 151 to have a material impact
on its financial statements.
SALE OF MANUFACTURING OPERATIONS
On October 31, 2003, as part of our plan to reallocate our capital to our
acquisition program, we sold PI to WFC. The sales price of approximately
$3,500,000 was satisfied in cash of which $300,000 is being held in escrow to
indemnify WFC from any damages resulting from a breach of representations and
warranties under the Stock Purchase Agreement. During the three months ended
October 31, 2004, WFC asserted that the Company breached certain representations
and warranties under the Stock Purchase Agreement. (See Note 11.) We recognized
a gain on sale of approximately $167,000, net of income taxes of $506,000. We
utilized net operating losses to offset the gain on sale and thus, have no
current tax liability in connection with the sale. The $506,000 is the amount of
the deferred tax assets at the date of sale related to Puroflow (which has been
sold). In accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," we classified the operating results of PI as
discontinued operations in the accompanying statements of operations.
22
The results of the discontinued operations are as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2003
----------------------- ----------------------
Net sales $1,447,000 $5,050,000
Cost of goods sold 1,317,000 3,834,000
----------------------- ----------------------
Gross profit 130,000 1,216,000
Selling, general and administrative expenses 645,000 1,701,000
----------------------- ----------------------
Operating loss from discontinued operations (515,000) (485,000)
Other expense (3,000) 11,000
----------------------- ----------------------
Loss from discontinued operations before
income taxes (518,000) (496,000)
Income tax provision -- 245,000
----------------------- ----------------------
Loss from discontinued operations ($ 518,000) ($ 741,000)
======================= ======================
ACQUISITION OF VLI
On August 31, 2004, pursuant to an Agreement and Plan of Merger, the Company
acquired Vitarich Laboratories, Inc. (Vitarich) by way of a merger of Vitarich
with and into a wholly-owned subsidiary of the Company (VLI), with VLI as the
surviving company of the Merger. Vitarich (now VLI) is a developer, manufacturer
and distributor of premium nutritional supplements, wholefood dietary
supplements and personal care products.
Pursuant to the merger agreement, the Company paid Kevin J. Thomas (Thomas), the
former shareholder of Vitarich, initial consideration consisting of (i)
$6,050,000 in cash (the Initial Cash Consideration); and (ii) 825,000 shares of
the Company's common stock which was valued at $5,132,000 (the Initial Stock
Consideration), subject to possible downward adjustment in the event that the
net worth of Vitarich as of the closing date is less than $1,200,000.
The merger agreement further provides that, in addition to the initial
consideration paid at closing, the Company shall pay Thomas additional
consideration equal to (a) 5.5 times the Adjusted EBITDA of Vitarich (as defined
in the merger agreement) for the 12 months ended February 28, 2005, (b) less the
initial consideration paid at closing (provided, however, that in no event shall
the additional consideration be less than zero or require repayment by Thomas of
any portion of the initial consideration paid at closing). Such additional
consideration shall be paid 50% in cash and 50% through issuance of additional
common stock of the Company.
The merger agreement also provides that, if between the closing date and the
additional consideration payment date (which is expected to be on or before June
1, 2005), the Company raises additional capital by issuance of stock pursuant to
a public or private offering for a price less than $7.75 per share (the
Additional Capital Subscription Price), then the number of shares of the
Company's common stock issued to Thomas as initial consideration in the merger
shall be adjusted to the number of shares of the Company's common stock that
would have been issued at the closing of the merger had the value of each share
of the Company's common stock been the Additional Capital Subscription Price.
23
In connection with the merger, the Company assumed approximately $1.6 million of
Vitarich indebtedness (including approximately $1.1 million of equipment leases
and working capital credit lines and approximately $507,000 that was due to
Thomas by Vitarich at the time of the merger) as well as Vitarich accounts
payable and accrued liabilities. The Company also assumed certain real property
leases and other obligations of Vitarich in connection with the merger. The
Company paid off the $507,000 that was due to Thomas at the closing of the
merger and paid off approximately $714,000 of the assumed equipment leases and
working capital credit lines following the closing of the merger.
In connection with the merger, the Company and Thomas entered into a
registration rights agreement, pursuant to which the Company agreed to use its
best efforts to file a registration statement with the Commission under the
Securities Act of 1933 to effect the registration of the shares of the Company's
common stock issued in the merger; VLI and Thomas entered into an employment
agreement, pursuant to which VLI agreed to employ Thomas as its Senior Operating
Executive for an initial term of 3 years, subject to successive automatic
one-year renewal terms after the initial term unless either party provides
notice of its election not to renew; and the Company entered into a supply
agreement with a supply company owned by Thomas, pursuant to which the supply
company committed to sell to the Company, and the Company committed to purchase
on an as-needed basis, certain organic agriculture products produced by the
supply company.
ACQUISITION OF SOUTHERN MARYLAND CABLE, INC.
On July 17, 2003, we acquired all of the common stock of SMC, a provider of
telecommunications and other infrastructure services including project
management, construction and maintenance to the Federal Government,
telecommunications and broadband service providers, as well as electric
utilities.
The results of operations of SMC are included in the consolidated results of the
Company from July 17, 2003, the date of the acquisition. The estimated purchase
price was approximately $3.8 million in cash, plus the assumption of
approximately $971,000 in debt.
We accounted for the acquisition of SMC using the purchase method of accounting
whereby the excess of cost over the net amounts assigned to assets acquired and
liabilities assumed was allocated to goodwill and intangible assets based on
their estimated fair values. Such intangible assets include $1,600,000 and
$680,000 allocated to Contractual Customer Relationships ("CCR") and Trade Name,
respectively, and $1,680,000 to Goodwill. We are amortizing the CCR over a
weighted average life of seven years. The Trade Name was determined to have an
indefinite useful life and is not being amortized.
During the nine months ended October 31, 2004, we recorded impairment losses for
goodwill and intangible assets which were acquired in the acquisition. (See Note
5 and the further discussion of our results of operations for the nine months
ended October 31, 2004).
PRO FORMA RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31,
2004 COMPARED TO PRO FORMA RESULTS FOR THE THREE AND NINE MONTHS ENDED OCTOBER
31, 2003.
The following summarizes the pro forma results of our operations for the three
and nine months ended October 31, 2004 compared to the pro forma results for the
three and nine months ended October 31, 2003, as if the acquisitions of VLI and
SMC were completed on February 1, 2003. The unaudited pro forma statements of
operations do not include the operating results of PI which have been
reclassified as discontinued operations in the condensed consolidated statements
of operations (see Note 6). The unaudited statements of operations do not
purport to be indicative of the results that would have actually been obtained
24
if the aforementioned acquisitions and disposition had occurred on February 1,
2003, or that may be obtained in the future. VLI and SMC previously reported
their results of operations using a calendar year-end. No material events
occurred subsequent to these reporting periods that would require adjustment to
our unaudited pro forma results in the pro forma statements of operations.
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
Pro forma Statements of Operations 2004 2003 2004 2003
---- ---- ---- ----
(Pro Forma) (Pro Forma) (Pro Forma) (Pro Forma)
Net sales $ 6,202,000 $ 7,765,000 $ 18,098,000 $ 18,124,000
Cost of goods sold 4,450,000 5,677,000 13,678,000 13,521,000
------------ ------------ ------------ ------------
Gross profit 1,752,000 2,088,000 4,420,000 4,603,000
------------ ------------ ------------ ------------
Selling, general and
administrative expenses 1,716,000 1,451,000 4,938,000 4,068,000
Impairment loss -- -- 1,942,000 --
------------ ------------ ------------ ------------
(Loss) income from
operations 36,000 637,000 (2,460,000) 535,000
Other expense 48,000 21,000 50,000 19,000
------------ ------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (12,000) 616,000 (2,510,000) 516,000
Income tax (benefit)
provision (5,000) 246,000 (714,000) 206,000
------------ ------------ ------------ ------------
(Loss) income from
continuing operations ($ 7,000) $ 370,000 ($ 1,796,000) $ 310,000
============ ============ ============ ============
Due to the aforementioned acquisitions of VLI and SMC and disposition of PI, the
Company has compared the pro forma results of operations of AI for the three and
nine months ended October 31, 2004 to AI's pro forma statement of operations for
the three and nine months ended October 31, 2003, as if the acquisitions of VLI
and SMC occurred on February 1, 2003. The unaudited pro forma statements of
operations do not include the operating results of PI which have been
reclassified as discontinued operations in the condensed consolidated statements
of operations (see Note 6). The unaudited statements of operations do not
purport to be indicative of the results that would have actually been obtained
if the aforementioned acquisitions and disposition had occurred on February 1,
2003, or that may be obtained in the future. VLI and SMC previously reported
their results of operations using a calendar year-end. No material events
occurred subsequent to these reporting periods that would require adjustment to
our unaudited pro forma results in the pro forma statement of operations.
PRO FORMA RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2004
COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 2003
PRO FORMA NET SALES
AI, through its wholly owned subsidiaries VLI and SMC, had pro forma net sales
of $6,202,000 for the three months ended October 31, 2004 compared to pro forma
net sales of $7,765,000 for the three months ended October 31, 2003. The
decrease of $1,563,000 or 20% is due primarily to the decrease in volume of
infrastructure services provided to an SMC customer under fixed-priced contracts
which was offset, in part, by increased volumes of services rendered under
unit-priced contracts.
25
PRO FORMA COST OF GOODS SOLD
For the three months ended October 31, 2004, pro forma cost of goods sold was
$4,450,000 or 72% of pro forma net sales compared to $5,677,000 or 73% of pro
forma net sales for the three months ended October 31, 2003. Decreased costs as
a percent of net sales is due to improved operating margins at VLI from
favorable customer pricing which offset inefficiencies experienced as the
Company's volume under and number of fixed-priced contracts at SMC decreased
during the three months ended October 31, 2004.
PRO FORMA SELLING GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma selling, general and administrative expenses were $1,716,000 or 28% of
pro forma net sales for the three months ended October 31, 2004 compared to
$1,451,000 or 19% of pro forma net sales for the three months ended October 31,
2003. The increase of $265,000 was due primarily to the WFC claim accrued at
$150,000 and to general and administrative expenses incurred for the corporate
management team and efforts on expansion into the nutraceutical industry.
PRO FORMA OTHER EXPENSE, NET
We had pro forma other expense, net of $48,000 for the three months ended
October 31, 2004 compared to pro forma other expense, net of $21,000 for the
three months ended October 31, 2003.
PRO FORMA INCOME TAXES
AI's pro forma tax benefit was $5,000 for the three months ended October 31,
2004 compared to pro forma tax provision of $246,000 at October 31, 2003. AI
used a 40% pro forma tax rate.
PRO FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2004
COMPARED TO NINE MONTHS ENDED OCTOBER 31, 2003
We compare the pro forma results of our operations for the nine months ended
October 31, 2004 to pro forma results for the nine months ended October 31,
2003, as if the acquisitions of VLI and SMC were completed on February 1, 2003.
(See the table on page 25.)
PRO FORMA NET SALES
AI, through its wholly owned subsidiaries, VLI and SMC, had pro forma net sales
of $18,098,000 for the nine months ended October 31, 2004 compared to pro forma
net sales of $18,124,000 for the nine months ended October 31, 2003. SMC
experienced a decrease of $2.8 million in net sales which was offset by a $2.8
million increase in VLI's net sales.
PRO FORMA COST OF GOODS SOLD
For the nine months ended October 31, 2004, pro forma cost of goods sold was
$13,678,000 or 76% of net sales compared to $13,521,000 or 75% of pro forma net
sales for the nine months ended October 31, 2003. VLI experienced a decrease in
cost of goods sold percentage from 73% to 71% due to favorable pricing to
customers which offset, in part, SMC's negative performance.
PRO FORMA SELLING GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma selling, general and administrative expenses were $4,938,000 or 27% of
pro forma net sales for the nine months ended October 31, 2004 compared to
$4,068,000 or 22% of pro forma net sales for the nine months ended October 31,
2003, an increase of $870,000. General and administrative expenses incurred for
general corporate expenses and for the corporate management team's efforts
focused on expansion into the nutraceutical industry contributed to the increase
as well as the $150,000 which AI accrued for the WFC claim. The management team
was in place for nine months in 2004 compared to six months in 2003.
26
IMPAIRMENT OF GOODWILL AND INTANGIBLES
During the nine months ended October 31, 2004, the Company determined that both
events and changes in circumstances with respect to its business climate would
have significant effect on its future estimated cash flows. During the nine
months ended October 31, 2004, SMC had a customer contract terminated which had
historically provided positive margins and cash flows. In addition, SMC
experienced revenue levels well below expectations for its largest fixed priced
contract customer. As a consequence, SMC has reduced its future expectations of
cash flows. As a result of these events, the Company believed that there was an
indication that its intangible assets not subject to amortization might be
impaired. The Company determined the fair value of its Goodwill and Trade Name
and compared it to its respective carrying amounts. The carrying amounts
exceeded the Goodwill and Trade Name's respective fair values by $740,000 and
$456,000, respectively, which the Company recorded as an impairment loss for the
nine months ended October 31, 2004.
During the nine months ended October 31, 2004, the Company terminated a customer
contract. The impact of the termination indicated that its Contractual Customer
Relationships carrying amount was not fully recoverable. Accordingly, the
Company determined the fair value of the CCR's and compared it to its carrying
amount. The Company recorded an impairment loss of $746,000 as this is the
amount by which the CCR's carrying amount exceeded its fair value.
PRO FORMA OTHER EXPENSE, NET
We had pro forma other expense, net of $50,000 for the nine months ended October
31, 2004 compared to pro forma other expense, net of $19,000 for the nine months
ended October 31, 2003.
PRO FORMA INCOME TAX BENEFIT
AI's effective pro forma income tax benefit rate was 28% for the nine months
ended October 31, 2004. AI recorded $740,000 on an actual impairment of goodwill
for the nine months ended October 31, 2004 which is treated as a permanent
difference for income tax reporting purposes. We considered the aforementioned
permanent difference in AI's pro forma effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2004 and January 31, 2004, the Company had $185,000 and
$8,212,000 respectively available in cash and cash equivalents and short-term
investments. On April 29, 2003, the Company completed a private offering of
approximately 1,304,000 shares of common stock at a price of $7.75 per share.
The net proceeds from the private placement aggregated approximately $9,635,000.
A portion of the proceeds were used in the acquisition of SMC and VLI.
On October 31, 2003, AI sold its subsidiary, PI, to Western Filter Corporation
(WFC). The sales price of approximately $3,500,000 was satisfied in cash of
which $300,000 is being held in escrow. (See Note 11.)
Net cash used in operations for the nine months ended October 31, 2004 was
$2,236,000 compared with $86,000 cash used in operations for the nine months
ended October 31, 2003. The decrease in cash provided by operations is primarily
due to the reduced performance of SMC's revenue resulting in a loss from
continuing operations.
Cash used in investing activities was $3,773,000 for the nine months ended
October 31, 2004 due primarily to the acquisition of VLI for which the Company
redeemed short-term investments compared to cash used in investing activities of
$4,086,000 for the nine months ended October 31, 2003 due primarily to the
acquisition of SMC and the purchase of short-term investments.
27
Net cash provided by financing activities was $982,000 for the nine months ended
October 31, 2004 compared to net cash provided by financing activities of
$9,690,000 for the same period one year ago. Proceeds from the expanded credit
facility with Bank of America (Bank) were used to pay approximately $714,000 of
the $1,091,000 paid in principal on credit lines as well as amounts owed to the
former shareholder of VLI. The aforementioned private placement accounted for
$9,635,000 of the net cash provided from financing activities during the nine
months ended October 31, 2003.
In August, 2003, the Company entered into a financing arrangement with Bank
aggregating $2,950,000 in available financing in two facilities - a revolving
line of credit with $1,750,000 in availability, expiring July 31, 2004 and
bearing interest at LIBOR plus 2.75%, and a three year term note with an
original outstanding balance of $1,200,000, expiring July 31, 2006 and bearing
interest at LIBOR plus 2.95%. The proceeds from the term note were used to
payoff the SMC lines of credit and for working capital. As of October 31, 2004
the Company had $700,000 outstanding under the term note.
In August 2004, in connection with its acquisition of VLI, the Company agreed to
amend the existing financing arrangement with the Bank whereby the revolving
line of credit was increased to $3.5 million in maximum availability, expiring
May 31, 2005. Availability on a monthly basis under the revolving line is
determined by reference to accounts receivable and inventory on hand which meet
certain Bank criteria. The aforementioned three year term note remains in
effect. The amended financing arrangement contains financial and non-financial
covenants including requiring the ratio of debt to pro forma earnings before
interest, taxes, depreciation and amortization ("EBITDA") not exceed 2.5 to 1
(with the first measurement date being January 31, 2005) requiring a pro forma
fixed charge coverage ratio not less than 1.25 to 1 (with the first measurement
date being January 31, 2005), and requiring Bank consent for acquisitions and
divestitures. The Company continues to pledge the majority of its assets to
secure the financing arrangement. The amended financing arrangement eliminates
certain previously existing covenants which had required the Company to maintain
certain minimum levels of liquidity and had required the Company to maintain
positive net income during the Company's fiscal quarters ended July 31, 2004 and
October 31, 2004. As of October 31, 2004, the Company had $2,569,000 outstanding
under the revolving line of credit.
Under the amended financing arrangement, the three year term note bears interest
at LIBOR plus 3.45% and the revolving line of credit bears interest at LIBOR
plus 3.25%.
Subsequent to the sale of PI, the Company deposited $300,000 as additional
collateral in a restricted cash account with the Bank. Under the amended
financing arrangement, subject to the successful completion of a bank
examination of SMC's and VLI's records, the Bank has agreed to release the
previously restricted cash to the Company. The company drew approximately $2.1
million in connection with the acquisition of VLI and for working capital for
its newly acquired business. The Company paid cash consideration of
approximately $6.1 million in connection with acquisition of VLI. The Company
also used approximately $507,000 in cash following the merger to pay off amounts
due to the former stockholder of VLI that were assumed in the merger and
approximately $700,000 in cash to pay down certain equipment leases and working
capital lines of credit that were assumed in the merger, and approximately
28
$500,000 in cash to satisfy certain transaction costs that were incurred in
connection with the merger.
In connection with the Merger, VLI assumed (in addition to the above items that
were paid down following the merger) certain obligations of Vitarich, including
equipment leases totaling approximately $267,000 which have a weighted average
term to maturity of approximately fifty-three months and require aggregate
monthly payments of approximately $6,000; real estate leases which have a
weighted average term of approximately twenty-six months and require aggregate
monthly payments of approximately $27,000. VLI also assumed accounts payable and
accrued liabilities of Vitarich in connection with the merger.
At December 8, 2004, the Company had $184,000 available in cash, cash
equivalents and short-term investments. The Company also had approximately
$600,000 available under its line of credit.
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a "going concern," which assumes that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
The Company anticipates that it will be obligated to pay Thomas a portion of the
additional consideration in cash in connection with the acquisition of VLI. The
additional consideration will be determined based on the Adjusted EBITDA of VLI
(as defined in the merger agreement) for the twelve months ended February 28,
2005. It is doubtful, at this time, that the Company has the financial resources
to pay the cash portion of the additional consideration when due in May 2005. In
addition, the Company's revolving line of credit with Bank of America expires on
May 31, 2005. AI will be working with Bank of America to renew its existing line
of credit and is actively pursuing alternative financing and has had discussions
with various third parties although no firm commitments have been obtained.
These financial statements do not reflect adjustments that would be necessary if
the Company were unable to continue as a "going concern." While management
believes that the actions already taken or planned will provide the resources
necessary to meet its obligations under the merger agreement to eliminate the
doubt about the validity of the "going concern" assumptions used in preparing
these financial statements, there can be no assurance that these actions will be
successful.
CUSTOMERS
During the nine months ended October 31, 2004, we provided nutritional and
whole-food supplements as well as personal care products to customers in the
global nutrition industry and services to telecommunications and utilities
customers as well as to the Federal Government, through a contract with General
Dynamics Corp. ("GD"). Certain of our more significant customer relationships
are with Southern Maryland Electrical Cooperative (SMECO), GD, TriVita
Corporation (TVC), Rob Ries Companies (RCC) and Verizon Communications, Inc.
(Verizon). SMECO accounted for approximately 31% of consolidated net sales
during the nine months ended October 31, 2004. GD accounted for approximately
15% of consolidated net sales during the nine months ended October 31, 2004. GD
has substantially reduced its level on certain contracts under which it used SMC
as a subcontractor. The Federal Government, through our contract with GD, has
been a major customer for two years. TVC and RCC have been customers of VLI for
many years and accounted for 11% and 6% of consolidated net sales for the nine
29
months ended October 31, 2004. Verizon accounted for approximately 5% of
consolidated net sales during the nine months ended October 31, 2004. Verizon
has been a major customer of SMC for many years, but has indicated its intention
to decrease its volume of business with us. In June 2004, Verizon advised SMC
that a subcontract that SMC had with Verizon Federal Systems (VFS) was being
terminated because VFS was being terminated by its customer. An increase in
SMECO's level of business for the twelve months ended January 31, 2005 is
expected to partially offset the Verizon decrease. Combined SMECO, GD, TVC, RCC
and Verizon accounted for approximately 68% of consolidated net sales during the
nine months ended October 31, 2004.
SEASONALITY
The Company's telecom infrastructure services operations are expected to have
seasonally weaker results in the first and fourth quarters of the year, and may
produce stronger results in the second and third quarters. This seasonality is
primarily due to the effect of winter weather on outside plant activities as
well as reduced daylight hours and customer budgetary constraints. Certain
customers tend to complete budgeted capital expenditures before the end of the
year, and postpone additional expenditures until the subsequent fiscal period.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as of the end of the period covered by this
report. Based upon this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. There have been
no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
30
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT NO. TITLE
----------- -----
Exhibit: 31.1 Certification of Chief Executive Officer,
pursuant to Rule 13a-14(c) under the
Securities Exchange Act of 1934
Exhibit: 31.2 Certification of Chief Financial Officer,
pursuant to Rule 13a-14(c) under the
Securities Exchange Act of 1934
Exhibit: 32.1 Certification of Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350
Exhibit: 32.2 Certification of Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350
b) Reports on Form 8-K:
In a report on Form 8-K dated August 31, 2004, filed on September 7,
2004, the Company reported under Item 2.01 "Completion Of Acquisition
Or Disposition of Assets," Item 2.03 "Creation Of A Direct Financial
Obligation Or An Obligation Under An Off-Balance Sheet Arrangement Of
The Registrant," Item 3.02 "Unregistered Sales Of Equity Securities,"
Item 5.01 "Change In Control Of Registrant" and Item 9.01 "Financial
Statements And Exhibits," the acquisition by the Company, through a
wholly owned subsidiary of Vitarich Laboratories, Inc. for cash, stock
and assumption of debt.
The Company also reported under Item 2.03 "Creation Of A Direct
Financial Obligation Or An Obligation Under An Off-Balance Sheet
Arrangement Of The Registrant" the amendment of its existing financing
arrangement with Bank of America, N.A.
In a report on Form 8-K/A dated August 31, 2004, filed on September 17,
2004, the Company provided a more legible copy of the Merger Agreement
when viewed on EDGAR in "html" format.
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto, duly
authorized.
ARGAN, INC.
December 13, 2004 By: /s/ Rainer Bosselmann
-------------------------------------------------
Rainer Bosselmann
Chairman of the Board and Chief Executive Officer
December 13, 2004 By: /s/ Arthur F. Trudel
-------------------------------------------------
Arthur F. Trudel
Chief Financial Officer
32