Summary of CAVICO CORP - Yahoo! Finance

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Background

Cavico Corp. (the "Company," "Cavico" or "we") was incorporated in Delaware on September 13, 2004 under the name Laminaire Corp. On November 10, 2004, the name of the Company was changed to Agent 155 Media Group, Inc. On May 5, 2006, the Company's name was changed to Cavico Corp.

During 2007 and 2006, as described below, we acquired Cavico Vietnam Joint Stock Company, a corporation organized under the laws of Vietnam ("CVJSC") as our wholly owned subsidiary. As a result of legal restrictions on the foreign ownership of Vietnamese entities imposed by the Vietnamese government, the acquisition of CVJSC occurred in multiple steps, as follows:

· On April 18, 2006, we entered into an asset purchase agreement with CVJSC. Under the terms of the agreement, Cavico purchased all of the assets of CVJSC in consideration for the issuance to CVJSC of 79,000,000 shares of our common stock. CVJSC subsequently transferred 60,062,200 of these shares of our common stock to the former shareholders of CVJSC in return for their shares of CVJSC stock. An additional 18,937,800 shares of our common stock were deposited into a CVJSC bonus plan for that entity's management, of which 4,937,800 shares were distributed to CVJSC's management in 2006.

· Following our purchase of the CVJSC assets, and pending the grant of the requisite approval of the acquisition of CVJSC by a Vietnamese government agency as required under Vietnamese law, CVJSC continued to use the assets subject to our control. Government approval of the acquisition of CVJSC was granted in January 2007. Following the grant of this approval and our subsequent acquisition of CVJSC to become our wholly-owned subsidiary, all assets previously purchased from CVJSC by the Company in April 2006 were transferred back to CVJSC. Also, at that time, CVJSC changed its name to Cavico Vietnam Company Limited.

The transaction was accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of Cavico Vietnam Company Limited obtained control of the consolidated entity. Accordingly, the merger of the two companies is recorded as a recapitalization of Agent 155 Media Group, Inc., with Cavico Vietnam Company Limited being treated as the continuing entity. The historical financial statements to be presented are those of Cavico Vietnam Company Limited, our wholly-owned subsidiary.

Critical Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company, Cavico Corp., and its subsidiaries: Cavico Vietnam Company Limited, Cavico Bridge and Underground Construction JSC (66% owned), Cavico Mining and Construction JSC (26% owned), Cavico Trading JSC(63% owned), Cavico Construction and Infrastructure Investment JSC(69% owned), Cavico Power and Resource JSC(78% owned), Cavico Transport JSC(74% owned), Cavico Hydropower Construction JSC(74% owned), Cavico Energy Construction JSC (38% owned), Cavico Tower JSC (39% owned), Cavico Industry and Technical Service JSC (65% owned), Cavico Manpower JSC (30% owned), Cavico Stone and Mineral JSC (35% owned), Cavico PHI Cement JSC (38% owned), Cavico Luong Son JSC (100% owned) and Cavico Land JSC (11% owned). Cavico Vietnam Company has a majority control in the management of all these subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets and the collectibility of accounts receivable.

Fair Value of Financial Instruments

The carrying amount of cash, cash equivalents, investment securities, notes payable, accounts receivable, accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments. The carrying amount of the notes payable and long-term debt are reasonable estimates of fair value as the loans bear interest based on market rates currently available for debt with similar terms.

Revenue Recognition

Revenue from product and services are recognized at the time goods are shipped or services are provided and accepted by the customer, with an appropriate provision for returns and allowances.

Revenue from construction contracts: For all construction contracts, revenue is recorded when the persuasive evidence of an arrangement exists, work has been completed, price is fixed or determined and collection is reasonably assured.

We recognize revenues from construction contracts, which include engineering, using the percentage-of-completion method, based primarily on work completed to date compared to total work to be completed. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment are included in revenues and cost of revenue when management believes that we are responsible for the acceptability of the project by client. Contracts are not segmented between types of services such as engineering and construction, and accordingly, gross margin is recognized under construction services.

Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts billed are classified as current assets under contract work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under advance billing on contracts.

Other Comprehensive Income

We have adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements.

Foreign Currency Translation

We account for translation of foreign currency in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation." The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." Gains and losses resulting from foreign currency transactions are reflected in the income statement.

Results of Operations

Results of operations for the three-months ended September 30, 2008 compared to the three-months ended September 30, 2007.

Net sales

We generated $14,714,981 in net sales during the three-months ended September 30, 2008 compared to $7,713,921 during the three-months ended September 30, 2007, mostly from construction and mining projects. Company's net sales from mining construction increased by $32,689 or 4% to $851,672 for the three-months ended September 30, 2008 from $818,982 for the three-months ended September 30, 2007. During the third quarter of 2008, mining activity in the Nui beo mine increased per the agreement with the owner of the mine. The Company's net sales from civil construction increased by $6,802,115 or 106% to $13,219,147 for the three-months ended September 30, 2008 from $6,417,032 for the three-months ended September 30, 2007. This is mainly due to an increase in net sales generated from new hydropower construction projects such as ALuoi Hydropower Project of $1,852,938; Song Tranh Hydropower Project of $504,421; Dong Nai 4 Hydropower Project of $597,510; Dasiat Hydropower Project of $514,240; Dong Nai 3 Hydropower Project of $156,551; ZaHung Hydropower Project of $421,679; Dakmi 4 Hydropower Project of $224,668; Nam Chien 1 Hydropower Project of $190,458 and Angieri Project of $533,148. The Company's net sales from other operations (leasing machinery and equipment, selling materials) decreased by $33,878 or 7% to $444,029 for the three-months ended September 30, 2008 from $477,907 for the three-months ended September 30, 2007. The Company's net sales from production was $200,134 for the three-months ended September 30, 2008 from a new subsidiary
- Cavico Industry and Technical Service which generates net sales from steel fabrication production.

Cost of production

Costs of goods sold were $13,160,823 and $6,748,985 for the three-months ended September 30, 2008, and 2007, respectively. Cost of goods sold includes capitalization of interest expenses of $700,886 and $592,732 for the three-months ended September 30, 2008 and 2007, respectively. The increase in capitalization of interest was due to new loans added in third quarter of the year 2008.

Cost of goods sold (without capitalization of interest expenses) increased by $6,303,684 or 102% to $12,459,937 for the three-months ended September 30, 2008 from $6,156,253 for the three-months ended September 30, 2007. Cost of goods sold excluding capitalization of interest expenses as a percentage of sales increased by 5% to 85% for the three-months ended September 30, 2008 from 80% of sales for the three-months ended September 30, 2007.

Company's cost of production from mining construction for the three-months ended September 30, 2008 was $682,653. The cost of production percentage to sales increased by 5% to 80% for the three-months ended September 30, 2008 from 75% of sales for the three-months ended September 30, 2007. Company's cost of production from civil construction for the three-months ended September 30, 2008 was $11,895,308 which as a percentage of sales increased by 1% to 90% for the three-months ended September 30, 2008 from 89% of sales for the three-months ended September 30, 2007. The increase of cost of production from mining construction and civil construction as a percentage of sales was due to a high inflation in Vietnam in the third quarter of 2008. Company's cost of production from other operations (i.e. leasing machinery and equipment, selling materials) for the three-months ended September 30, 2008 was $403,043, which as a percentage of sales increased by 7% to 91% for the three-months ended September 30, 2008 from 84% for the three-months ended September 30, 2007. Company's cost for steel fabrication production in the three-months ended September 30, 2008 was $179,819, which as a percentage of sales of 90%.

Gross Profit

The gross profit for the three-months ended September 30, 2008 was $1,554,158 or 11% of sales compared to $964,936 or 13% of sales for the three-months ended September 30, 2007. The increase in gross profit was primarily due to an increase in gross profit from civil construction. The decrease in gross profit is as a percentage of sales is mainly due to cost increase from inflation in Vietnam during the third quarter of 2008.

Operating expenses

The company's general and administrative costs for the three-months ended September 30, 2008 were $1,731,260 compared to $1,065,646 for the same period in 2007, with an increase of $665,614. The increase was mainly due to the following:

· Payroll expenses increased by $378,756 to $693,233 for the three-months ended September 30, 2008 from $314,477 for the same period in 2007. The increase in payroll expenses resulted from a 31% salary increase for all employees effective January 2008.

· Administrative cost of corporate office (mainly audit fees, legal fees and consulting fees) increased by $136,276 to $149,008 for the three-months ended September 30, 2008 from $12,732 for the same period in 2007.

· Other administration cost of subsidiaries increased by $151,982 to $793,738 for the three-months ended September 30, 2008 from $641,756 for the same period in 2007. The increase in other administration cost mainly due to a high inflation in Vietnam in the third quarter of 2008.

Other Income (expenses)

The total other income (expenses) decreased by $6,558,508 to $1,310,728 as expense for the three-months ended September 30, 2008 from $5,247,780 as income for the three-months ended September 30, 2007. This decrease is mainly due to gain on sale of marketable securities of $5,600,318 for the three-months ended September 30, 2007 compared to a loss of $380,818 on sale of marketable securities for the three-months ended September 30, 2008. Other income also includes gain from disposal of fixed assets of $3,198 for the three-months ended September 30, 2008 compared to $20,592 in 2007. The interest income during the three-months ended September 30, 2008 was $232,430 compared to $466,962 for the same period in 2007.

Interest expenses excluding capitalized interest increased by $391,466 to $1,162,799 for the three-months ended September 30, 2008 from $771,333 for the same period in 2007. This increase is mainly due to the average loan's interest rate increase from 12% per annum in 2007 to 21% per annum during the third quarter of 2008.

Net Income

The Company had net income of $148,984 for the three-months ended September 30, 2008, compared to net income of $3,710,095 for the same period in 2007. The decrease of $3,561,111 was mainly due to the decrease of $5,981,136 in gain on sale of marketable securities, the increase of $665,614 in general and administrative expenses, the decrease of $234,532 in interest income and the increase of $391,466 in interest expenses, offset by an increase in gross profit of $589,222 and a net tax decrease of $3,096,215.

Per discussions with the Vietnamese tax authorities, the Company accrued $2,941,959 of taxes related to the year ended December 31, 2007. During the period ended September 30, 2008, the Company determined that its actual tax obligation was much less than this original estimate and reduced the original accrual to the actual amount owed of $1,070,497. The net of the prior year's tax difference of $1,871,462 and current quarter's income tax expense of $112,871 was presented as income tax benefit.

The net income per share was $0.00 for the three-months ended September 30, 2008 and $0.03 for the three-months ended September 30, 2007.

Results of operations for the nine-months ended September 30, 2008 compared to the nine-months ended September 30, 2007.

Net sales

We generated $42,464,110 in net sales during the nine-months ended September 30, 2008 compared to $20,123,277 during the nine-months ended September 30, 2007, mostly from construction and mining projects. Company's net sales from mining construction decreased by $51,946 or 2% to $2,983,315 for the nine-months ended September 30, 2008 from $3,035,261 for the nine-months ended September 30, 2007. This was due principally to a significant reduction in mining activity in the Nui beo mine in the first quarter of 2008 amounting $178,434 and the redeployment of some of our equipment from that mine to other civil engineering projects (primarily new hydro power construction projects resulting in higher net saless) based on the Company's expectation that the size of that project would decrease at the annual rate of 10% to 20% as stipulated in the agreement with the owner of the mine. The Company's net sales from civil construction increased by $21,539,417 or 134% to $37,641,074 for the nine-months ended September 30, 2008 from $16,101,657 for the nine-months ended September 30, 2007. This is due to an increase in net sales generated from new hydropower construction projects such as ALuoi Hydropower Project of $6,291,145; Song Tranh Hydropower Project of $1,552,252; Dong Nai 4 Hydropower Project of $1,530,443; Dasiat Hydropower Project of $1,489,360; Dong Nai 3 Hydropower Project of $1,037,719; Nho Que Hydropower Project of $869,050; ZaHung Hydropower Project of $1,053,137; Dakmi 4 Hydropower Project of $607,780; Nam Chien 1 Hydropower Project of $501,941 and Angieri Project of $1,307,529. The Company's net sales from other operations (leasing machinery and equipment, selling materials) increased by $483,774 or 49% to $1,470,133 for the nine-months ended September 30, 2008 from $986,359 for the nine-months ended September 30, 2007. The Company's net sales from production was $369,588 for the nine-months ended September 30, 2008 from a new subsidiary, Cavico Industry and Technical Service with steel fabrication production.

Cost of production

Costs of goods sold were $35,258,645 and $17,359,704 for the nine-months ended September 30, 2008, and 2007, respectively. Cost of goods sold includes capitalization of interest expenses of $2,543,844 and $1,644,061 for the nine-months ended September 30, 2008 and 2007, respectively. The increase in capitalization of interest was due to new loans received during 2008.

Cost of goods sold (without capitalization of interest expenses) increased by $16,999,157 or 108% to $32,714,800 for the nine-months ended September 30, 2008 from $15,715,643 for the nine-months ended September 30, 2007. Cost of goods sold excluding capitalization of interest expenses as a percentage of sales decreases by 1% to 77% for the nine-months ended September 30, 2008 from 78% of sales for the nine-months ended September 30, 2007.

Company's cost of production from mining construction for the nine-months ended September 30, 2008 was $2,382,433, which as a percentage of sales increased by 4% to 80% for the nine-months ended September 30, 2008 from 76% of sales for the nine-months ended September 30, 2007. Company's cost of production from civil construction for the nine-months ended September 30, 2008 was $31,500,800, which as a percentage of sales decreased by 5% to 84% for the nine-months ended September 30, 2008 from 89% of sales for the nine-months ended September 30, 2007. The decrease of cost of production from mining construction and civil construction as a percentage of sales was due to the improvement in efficiency of machinery and equipment. Company's cost of production from other operations (i.e. leasing machinery and equipment, selling materials) for the nine-months ended September 30, 2008 was $1,060,212, of which as a percentage of sales decreased by 7% to 72% for the nine-months ended September 30, 2008 from 79% for the nine-months ended September 30, 2007. Company's cost for steel fabrication production in the nine-months ended September 30, 2008 was $315,200, which as a percentage of sales of 85%.

Gross Profit

The gross profit for the nine-months ended September 30, 2008 was $7,205,466 or 17% of sales compared to $2,763,573 or 14% of sales for the nine-months ended September 30, 2007. The increase in gross profit was primarily due to an increase in gross profit from civil construction. . The decrease in gross profit is as a percentage of sales is mainly due to cost increase from inflation in Vietnam during the third quarter of 2008.

Operating expenses

The company's general and administrative costs for the nine-months ended September 30, 2008 was $4,820,348 compared to $3,308,045 for the same period in 2007, an increase of $1,512,303. The increase was mainly due to the following:

· Payroll expenses increased by $1,049,207 to $1,926,528 for the nine-months ended September 30, 2008 from $877,321 for the same period in 2007. The increase in payroll expenses resulted from a 31% salary increase for all employees effective January 2008.

· Administrative cost of corporate office (mainly audit fees, legal fees and consulting fees) increased by $265,204 to $665,997 for the nine-months ended September 30, 2008 from $400,793 for the same period in 2007.

· Other administration cost of other subsidiaries increased by $174,465 to $1,937,844 for the nine-months ended September 30, 2008 from $1,763,379 for the same period in 2007.

Rent expenses increased by $23,427 to $289,979 for the nine-months ended September 30, 2008 from $266,552 for the same period in 2007.

Other Income (expenses)

The total other income (expenses) decreased by $8,736,843 to $1,808,579 of expenses for the nine-months ended September 30, 2008 from $6,928,264 of income for the nine-months ended September 30, 2007. This decrease is mainly due to a gain on sale of marketable securities of $8,277,167 for the nine-months ended September 30, 2007 compared to a loss of $380,818 on sale of marketable securities for the nine-months ended September 30, 2008. This is offset by a gain on disposal of fixed assets of $53,528 for the nine-months ended September 30, 2008 compared to $20,592 in 2007. The interest income during the nine-months ended September 30, 2008 was $661,183 compared to $1,039,855 for the same period in 2007.

Interest expenses, excluding capitalized interest decreased by $271,086 to $2,133,179 for the nine-months ended September 30, 2008 from $2,404,265 for the same period in 2007. This decrease is mainly due to the Company's reduced ownership of six subsidiaries in June 2007 and use of the proceeds of approximately $10 million to pay the short-term loans from the Banks.

Net Income

The Company had net income of $745,098 for the nine-months ended September 30, 2008, compared to $4,118,814 for the same period in 2007. The decrease of $3,373,716 was mainly due to the decrease of $8,657,985 in gain on sale of marketable securities, an increase in general and administrative expenses of $1,512,303 and the increase of $683,507 in minority interest which was offset by an increase in gross profit of 4,441,893, a net tax decrease of $3,153,278 and a decrease of $271,086 in interest expenses.

As explained earlier, the Company over-accrued $1,871,462 of taxes related to the year ended December 31, 2007. During the period ended September 30, 2008, the Company determined that its actual tax obligation was much less than original estimate and reduced the original accrual to the actual amount The net of the prior year's tax difference of $1,871,462 and nine- month period's income tax expense of $755,973 was presented as income tax benefit.

. The net income per share was $0.01 for nine-months ended September 30, 2008 and was $0.03 for nine-months ended September 30, 2007.

Liquidity and Capital Resources

The Company's working capital as of September 30, 2008 decreased to $(13,764,754) compared to $(12,146,400) as of September 30, 2007 as current assets increased less than the increase in current liabilities. As of September 30, 2008, the Company had $1,824,481 in cash, accounts receivable of $21,648,365, an inventory of $3,943,403, construction work in progress of $27,372,361, investment available for sale of $2,239,505 and other current assets of $2,699,087. Our current accounts receivable was increased by $6,789,193 from the prior year end. Our accounts receivable increase was due to an increase in sales from completed projects. Our inventory for the nine-months ended September 30, 2008 was increased by $798,953 and construction work in progress increased by $2,216,078 from the prior year end. These increases were due to an increase in work in progress from new projects.

The Company's total current liabilities as of September 30, 2008 were $74,098,610 which was increased by $6,844,778 from the prior year end. The current liabilities included accounts payable of $10,769,711, accrued expenses of $5,336,581, advances from customers of $8,249,038, payable to employees of $3,473,129, and total current loans of $46,208,700. Advances from customers increased mainly due to Damb'ri HP project for which we received approximately $3.04 million and Nam Chien HP project for which we received approximately $0.5 million during the period ended September 30, 2008. Current Notes payable increased by $4,069,257 from the prior year end. This increase is mainly due to an increase in financial needs for new projects such as A Luoi HP, Nam Chien HP, Song Tranh HP, Dong Nai 4 HP, Dasiat HP, Dong Nai 3 HP, Nho Que HP, ZaHung HP. At September 30, 2008, the Company's current liabilities exceeded current assets by $13,764,754

Cash flows

The Company used cash of $1,824,903 in operating activities for the nine-months ended September 30, 2008 while it used cash of $12,529,841 from operating activities for the same period in 2007. The major reasons are an increase in construction work in progress in the amount of $1,764,566 and $10,346,496 during the period September 30, 2008 and 2007, respectively.

In investing activities, the Company used net cash of $8,735,674 for the nine-months ended September 30, 2008 to purchase property, equipment and investments in other entities. The Company spent $9,262,159 for the purchase of fixed assets, which primarily included vehicles, equipment, machinery and intangible assets. The Company also received $798,931 in proceeds from disposal of fixed assets. Additionally, the Company purchased investments in other entities during the nine-months ended September 30, 2008 in the amount of $452,757 and received $180,311 from sale of investments. During the nine-months ended September 30, 2007, the Company used cash of $4,255,826 in investing activities, such as procurement of property and equipment totaling $10,874,144 and investments in other entities totaling $4,338,354 and received $1,381,930 from disposal of fixed assets and $9,574,742 from sale of investments.

During the nine-months ended September 30, 2008, the Company generated cash flows of $11,020,527 from financing activities, which included $53,367,570 from loan proceeds and repayments of loans in the amount of $45,000,365. The Company also received $2,692,055 proceeds from additional investments by minority interests during the nine-months ended September 30, 2008. During the nine-months ended September 30, 2007, the Company generated cash flows of $19,157,882 from financing activities including $41,619,738 in repayments of loans to others and $46,749,235 from loan proceeds , $4,838,093 proceeds from additional investments by minority interests and $9,263,408 from issuance of shares.

The Company generated net income of $745,098 and $4,118,814 for the nine-months ended September 30, 2008 and 2007, respectively.

As of September 30, 2008, the Company has approximately $324.5 million for contract backlog. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of . . .