UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File No 0-25428
MEADOW VALLEY CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0328443
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4411 South 40th Street, Suite D-11
Phoenix, Arizona 85040
(602) 437-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock as of July 31, 2001:
Common Stock, $.001 par value
3,559,938 shares
MEADOW VALLEY CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) - Six Months Ended
June 30, 2001 and June 30, 2000 3
Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended
June 30, 2001 and June 30, 2000 4
Condensed Consolidated Balance Sheets - As of June 30, 2001 (Unaudited) and
December 31, 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended
June 30, 2001 and June 30, 2000 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 17
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------ --------------
Revenue $ 80,830,204 $ 83,968,329
Cost of revenue 78,489,230 80,769,927
------------ --------------
Gross Profit 2,340,974 3,198,402
General and administrative expenses 3,472,027 3,049,453
------------ --------------
Income (loss) from operations (1,131,053) 148,949
------------ --------------
Other income (expense):
Interest income 126,543 299,930
Interest expense (224,707) (79,328)
Other income 461,766 34,669
------------ --------------
363,602 255,271
------------ --------------
Income (loss) before income taxes (767,451) 404,220
Income tax benefit (expense) 287,794 (161,690)
------------ --------------
Net income (loss) $ (479,657) $ 242,530
============ ==============
Basic net income (loss) per common share $ (0.14) $ 0.07
============ ==============
Diluted net income (loss) per common share $ (0.14) $ 0.07
============ ==============
Basic weighted average common shares outstanding 3,559,938 3,538,978
============ ==============
Diluted weighted average common shares outstanding 3,559,938 3,538,978
============ ==============
3
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
----------------------------------------
2001 2000
------------ --------------
Revenue $ 45,476,667 $ 45,378,857
Cost of revenue 43,326,297 43,965,285
------------ --------------
Gross Profit 2,150,370 1,413,572
General and administrative expenses 1,733,346 1,474,909
------------ --------------
Income (loss) from operations 417,024 (61,337)
------------ --------------
Other income (expense):
Interest income 63,972 133,813
Interest expense (144,163) (33,794)
Other income (expense) 523,492 (12,506)
------------ --------------
443,301 87,513
------------ --------------
Income before income taxes 860,325 26,176
Income tax expense (322,623) (10,810)
------------ --------------
Net income $ 537,702 $ 15,366
============ ==============
Basic net income per common share $ 0.15 $ 0.01
============ ==============
Diluted net income per common share $ 0.15 $ 0.01
============ ==============
Basic weighted average common shares outstanding 3,559,938 3,559,938
============ ==============
Diluted weighted average common shares outstanding
3,559,938 3,559,938
============ ==============
4
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000 *
------------------- ------------------
(Unaudited)
Assets:
Current Assets:
Cash and cash equivalents $ 2,572,926 $ 1,822,598
Restricted cash 2,075,974 1,783,005
Accounts receivable, net 22,407,063 14,297,564
Prepaid expenses and other 447,289 749,708
Inventory 5,380,834 5,242,148
Income tax receivable 472,055 774,000
Costs and estimated earnings in excess of billing on
uncompleted contracts 11,261,658 9,828,009
------------------- ------------------
Total Current Assets 44,617,799 34,497,032
Property and equipment, net 17,506,151 18,111,506
Deferred tax asset 873,441 873,441
Refundable deposits 134,834 176,565
Goodwill, net 1,460,718 1,500,733
Mineral rights 198,543 226,753
------------------- ------------------
Total Assets $ 64,791,486 $ 55,386,030
=================== ==================
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable $ 24,887,197 $ 17,606,113
Accrued liabilities 2,391,623 2,289,698
Notes payable 2,368,708 1,604,399
Obligations under capital leases 1,047,021 1,041,921
Billings in excess of costs and estimated earnings on
uncompleted contracts 6,328,184 6,054,814
------------------- ------------------
Total Current Liabilities 37,022,733 28,596,945
Deferred tax liability 2,272,700 2,272,700
Notes payable, less current portion 9,455,899 7,674,608
Obligations under capital leases, less current portion 3,281,574 3,603,540
------------------- ------------------
Total Liabilities 52,032,906 42,147,793
------------------- ------------------
Stockholders' Equity:
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued and outstanding - -
Common stock - $.001 par value; 15,000,000 shares authorized, 3,559,938
and 3,559,938 issued and outstanding 3,601 3,601
Additional paid-in capital 10,943,569 10,943,569
Capital adjustments (799,147) (799,147)
Retained earnings 2,610,557 3,090,214
------------------- ------------------
Total Stockholders' Equity 12,758,580 13,238,237
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 64,791,486 $ 55,386,030
=================== ==================
*Derived from audited financial statements
5
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------------ ------------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 72,008,288 $ 83,176,832
Cash paid to suppliers and employees (73,075,745) (86,026,016)
Interest received 126,543 330,088
Interest paid (224,707) (79,328)
Income taxes refunded (paid) 589,739 (291,314)
------------------ ------------------
Net cash used in operating activities (575,882) (2,889,738)
------------------ ------------------
Cash flows from investing activities:
Increase in restricted cash (292,969) (353,076)
Proceeds from sale of property and equipment 83,587 212,516
Purchase of property and equipment (387,885) (627,311)
------------------ ------------------
Net cash used in investing activities (597,267) (767,871)
------------------ ------------------
Cash flows from financing activities:
Proceeds received from note payable 3,204,127 1,507,500
Repayment of notes payable (726,604) (718,842)
Repayment of capital lease obligations (554,046) (609,561)
------------------ ------------------
Net cash provided by financing activities 1,923,477 179,097
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 750,328 (3,478,512)
Cash and cash equivalents at beginning of period 1,822,598 6,177,489
------------------ ------------------
Cash and cash equivalents at end of period $ 2,572,926 $ 2,698,977
================== ==================
6
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended
June 30,
------------------------------------------
2001 2000
-------------------- ------------------
Increase (Decrease) in Cash and Cash Equivalents (Continued):
Reconciliation of Net Income (Loss) to Net Cash Used in
Operating Activities:
Net Income (Loss) $ (479,657) $ 242,530
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,297,039 1,197,174
Gain on sale of property and equipment (13,904) (102,014)
Changes in Operating Assets and Liabilities:
Accounts receivable, net (8,109,499) (460,745)
Prepaid expenses and other 302,419 262,466
Inventory (138,686) (834,454)
Income tax receivable 301,945 (129,624)
Costs and estimated earnings in excess of billings on
uncompleted contracts (1,433,649) (732,783)
Refundable deposits 41,731 (84,300)
Accounts payable 7,281,084 (2,305,964)
Accrued liabilities 101,925 (441,558)
Billings in excess of costs and estimated earnings on
uncompleted contracts 273,370 499,534
-------------------- ------------------
Net cash used in operating activities $ (575,882) $ (2,889,738)
==================== ==================
7
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Corporation:
Meadow Valley Corporation (the "Company") was organized under the laws
of the State of Nevada on September 15, 1994. The principal business purpose of
the Company is to operate as the holding Company of Meadow Valley Contractors,
Inc. ("MVCI") and Ready Mix, Inc. ("RMI"). MVCI is a general contractor,
primarily engaged in the construction of structural concrete highway bridges and
overpasses, and the paving of highways and airport runways in the states of
Nevada, Arizona, Utah and New Mexico. RMI manufactures and distributes ready mix
concrete in the Las Vegas, NV and Phoenix, AZ metropolitan areas. Formed by the
Company, RMI commenced operations in 1997.
2. Presentation of Interim Information:
The amounts included in this report are unaudited; however, in the
opinion of management, all adjustments necessary for a fair statement of results
for the stated periods have been included. These adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted by SEC rules
and regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 as filed with the Securities and Exchange
Commission. The results of operations for the six months ended June 30, 2001 are
not necessarily indicative of operating results for the entire year.
3. Revenue and Cost Recognition:
Revenues and costs from fixed-price and modified fixed-price
construction contracts are recognized for each contract on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to the estimated total direct costs. Direct costs include, among other
things, direct labor, field labor, equipment rent, subcontracting, direct
materials, and direct overhead. General and administrative expenses are
accounted for as period costs and are, therefore, not included in the
calculation of the estimates to complete construction contracts in progress.
Project losses are provided in the period in which such losses are determined,
without reference to the percentage-of-completion. As contracts can extend over
one or more accounting periods, revisions in costs and earnings estimated during
the course of the work are reflected during the accounting period in which the
facts that required such revision become known.
Claims for additional contract revenue are recognized only to the
extent that contract costs relating to the claim have been incurred and evidence
provides a legal basis for the claim. During the six months ended June 30, 2001,
revenue from anticipated claim proceeds increased by approximately $324,000. The
estimated total claims that have been filed or will be filed were approximately
$32,851,160 at June 30, 2001. The Company's portion of the total claims amount,
excluding claims filed by other prime contractors or on behalf of the Company's
subcontractors, total approximately $17,986,132.
4. Recent Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the required intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
8
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Recent Accounting Pronouncement (Continued):
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$1,460,718. Amortization expense during the six-month period ended June 30, 2001
was $40,015. Currently, the Company is assessing but has not yet determined how
the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.
5. Line of Credit:
In July 2000, the Company entered into a revolving loan agreement
("line of credit"). Under the terms of the agreement, the Company may borrow up
to $7,000,000 at Chase Manhattan Bank's prime, plus .25% through December 31,
2001 at which time the line of credit converts to a term agreement requiring
monthly principal and interest payments through December 31, 2005. The line of
credit is collateralized by all of MVCI's assets and guaranteed by the Company.
Under the terms of the line of credit, the Company is required to maintain
certain levels of tangible net worth. As of June 30, 2001, the Company was in
compliance with all such covenants and had withdrawn $6,241,975 from the line of
credit. As of August 14, 2001, the Company had made a principal payment in the
amount of $220,382 on the line of credit.
6. Commitments:
During the quarter ended June 30, 2001, the Company purchased equipment
under capital lease agreements expiring in the year 2005. The assets and
liabilities under a capital lease are initially recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. Each
asset is depreciated over its expected useful life.
Minimum future lease payments under the above mentioned capital leases
as of June 30, 2001 for each of the next five years and in aggregate are:
2002 $ 69,653
2003 69,653
2004 69,653
2005 58,044
------------
Total minimum lease payments 267,003
Less: amount representing interest (39,585)
------------
Present value of net minimum lease payment $ 227,418
============
9
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
The Company recognized investing and financing activities that affected
assets, liabilities, and equity, but did not result in cash receipts or
payments. These non-cash activities are as follows:
During the six months ended June 30, 2001, the Company financed the
purchase of equipment in the amount of $305,257.
8. Subsequent Events:
In July 2001, the Company had made a principal payment in the amount of
$220,382 on the line of credit.
In July 2001, the Company financed the purchase of equipment in the
amount of $1,072,086. The note payable obligation has an interest rate of 8.5%,
with monthly payments of $23,603, and is due February 2006.
9. Segment Information:
The Company manages and operates two segments, construction services
and construction materials. The construction services segment provides
construction services to a broad range of public and some private customers
primarily in the western states of Arizona, Nevada, Utah and New Mexico. Through
this segment, the Company performs heavy civil construction such as the
construction of bridges and overpasses, channels, roadways, highways and airport
runways. The construction materials segment manufactures and distributes ready
mix concrete and sand and gravel products in the Las Vegas, NV and Phoenix, AZ
markets. Material customers include concrete subcontractors, prime contractors,
homebuilders, commercial and industrial property developers, pool builders and
homeowners. The construction materials segment operates out of two locations in
the Las Vegas, NV vicinity, one location in the Moapa, NV vicinity and two
locations in the Phoenix, AZ vicinity.
Six Months Ended June 30,
--------------------------------------------------------------------
(dollars in thousands) 2001 2000
------------------------------- --------------------------------
Construction Construction
Services Materials Services Materials
------------- ------------- ------------- --------------
Gross revenue $ 66,419 $ 15,348 $ 75,705 $ 9,046
Intercompany revenue - 937 - 783
Cost of revenue 64,662 14,764 73,472 8,080
Interest income 115 11 286 13
Interest expense (137) (88) (79) -
Depreciation and amortization 898 399 901 296
Income (loss) before taxes (319) (449) 212 192
Income tax benefit (expense) 120 168 (85) (77)
Net income (loss) (199) (281) 127 115
Total assets 51,088 13,703 47,186 10,831
There are no differences in accounting principals between the segments.
All centrally incurred costs are allocated to the construction services segment.
Intercompany revenue is eliminated at cost to arrive at consolidated revenue and
cost of revenue.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following is management's discussion and analysis of certain
significant factors affecting the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. The Company disclaims any
intent or obligation to update these forward-looking statements.
The Company's backlog (anticipated revenue from the uncompleted
portions of awarded projects) was approximately $95.3 million at June 30, 2001,
compared to approximately $88.4 million at June 30, 2000. At June 30, 2001, the
Company's backlog included approximately $58 million of work that is scheduled
for completion during 2001. Accordingly, revenue in the future will be
significantly reduced if the Company is unable to obtain substantial new
projects in 2001. During the second quarter ended June 30, 2001, the Company
obtained new projects totaling approximately $43 million.
Revenue on uncompleted fixed price contracts is recorded under the
percentage-of-completion method of accounting. The Company begins to recognize
revenue on its contracts when it first accrues direct costs. Contracts often
involve work periods in excess of one year and revisions in cost and profit
estimates during construction are reflected in the accounting period in which
the facts that require the revisions become known. Losses on contracts, if any,
are provided in total when determined, regardless of the percent complete.
Claims for additional contract revenue are recognized only to the extent that
contract costs relating to the claim have been incurred and evidence provides a
legal basis for the claim. At June 30, 2001, claim revenue in the amount of
approximately $6.1 million has been recorded while the estimated total claims
that have been filed or will be filed exceed $32.8 million. Of the $32.8 million
in claims, approximately $14.8 million represents costs incurred by other prime
contractors or MVCI subcontractors for which claims are filed by MVCI on their
behalf leaving the balance of approximately $18.0 million as MVCI costs. The
Company must obtain at least $6.1 million in proceeds from its $18.0 million
portion of the total claims or there would be a reduction in earnings.
Results of Operations
The following table sets forth, for the six and the three months ended
June 30, 2001 and 2000, certain items derived from the Company's Condensed
Consolidated Statements of Operations expressed as a percentage of revenue.
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------- ------------- ------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross Profit 2.9% 3.8% 4.7% 3.1%
General and administrative expenses 4.3% 3.6% 3.8% 3.3%
Interest income 0.2% 0.4% 0.1% 0.3%
Interest expense -0.3% -0.1% -0.3% -0.1%
Other income 0.6% 0.0% 1.2% 0.0%
Income (loss) before income taxes -0.9% 0.5% 1.9% 0.1%
Income tax benefit (expense) 0.3% -0.2% -0.7% 0.0%
Net income (loss) -0.6% 0.3% 1.2% 0.1%
11
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenue and Backlog. Revenue for the six months ended June 30, 2001
("interim 2001") was $80.8 million compared to $83.9 million for the six months
ended June 30, 2000 ("interim 2000"). The decrease in revenue was the result of
a $9.3 million decrease in construction services offset by a $6.2 million
increase in revenue generated from construction materials production and
manufacturing sold to non-affiliates. Backlog increased 8% to approximately
$95.3 million at June 30, 2001 from $88.4 million at June 30, 2000. Revenue may
be impacted in any one period by the backlog at the beginning of the period.
Gross Profit. As a percentage of revenue, consolidated gross margin
decreased from 3.8% for interim 2000 to 2.9% for interim 2001. The decrease in
the construction services gross profit margin was the result of costs related to
claims and cost overruns on certain projects offset, in part, by increased
profit recognition related to several projects nearing completion at June 30,
2001 and by recording, in advance of receipt, conservative estimates of revenue
from claims. Gross profit margins are affected by a variety of factors including
construction delays and difficulties due to weather conditions, availability of
materials, and the timing of work performed by other subcontractors and the
physical and geological condition of the construction site. The decrease in the
construction materials gross profit margin was the result of continued costs, in
the current interim period, of the Company's materials expansion strategy
implemented in the second half of 2000. In comparing the gross profit margin
during the interim period for 2000 and 2001, the first six months of 2000
incurred few start up costs associated with last year's expansion of the
construction materials segment, while the first six months of 2001 reflect the
improving, but not yet profitable, results of the expansion.
General and Administrative Expenses. General and administrative
expenses increased to $3.5 million for interim 2001 from $3.0 million for
interim 2000. The increase resulted primarily from a $.2 million in general and
administrative expenses attributed to expanding construction material
operations, an increase of $.2 million in legal expenses, an increase of $.1
million in employee benefits offset, in part, by a $.09 million reduction of
general and administrative expenses related to various employee incentive plans.
Interest Income and Expense. Interest income for interim 2001 decreased
to $.1 million from $.3 million for interim 2000 resulting primarily from a
decrease in invested cash reserves. Interest expense increased for interim 2001
to $.2 million from $.1 million for interim 2000, due primarily to the Company
borrowing on the line of credit.
Net Income (Loss) After Income Taxes. Net income (loss) after income
taxes was $(.5) million in interim 2001 as compared to $.2 million for interim
2000.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Revenue and Backlog. Revenue for the three months ended June 30, 2001
("interim 2001") was $45.5 million compared to $45.4 million for the three
months ended June 30, 2000 ("interim 2000"). The increase in revenue was the
result of a $3.8 million increase in revenue generated from construction
materials production and manufacturing sold to non-affiliates offset by a $3.7
million decrease in construction services. Backlog increased 8% to approximately
$95.3 million at June 30, 2001 from $88.4 million at June 30, 2000. Revenue may
be impacted in any one period by the backlog at the beginning of the period.
Gross Profit. As a percentage of revenue, consolidated gross margin
increased from 3.1% for interim 2000 to 4.7% for interim 2001. The increase in
the construction services gross profit margin was the result of improved
profitability on a number of projects and the reduction of losses on previously
problematic projects. Gross profit margins are affected by a variety of factors
including construction delays and difficulties due to weather conditions,
availability of materials, and the timing of work performed by other
subcontractors and the physical and geological condition of the construction
site. The increase in the construction services gross profit was offset by a
decrease in the construction materials gross profit. The decrease in the
construction materials gross profit margin resulted from increased costs for
interim 2001 associated with the expansion of operations for construction
materials.
12
General and Administrative Expenses. General and administrative
expenses increased to $1.7 million for interim 2001 from $1.5 million for
interim 2000. The increase resulted primarily from a $.1 million in general and
administrative expenses attributed to expanding construction material
operations, an increase of $.1 million in legal expenses offset, in part, by a
$.04 million reduction of general and administrative expenses related to various
employee incentive plans.
Interest Income and Expense. Interest income for interim 2001 decreased
to $.06 million from $.1 million for interim 2000 resulting primarily from a
decrease in invested cash reserves. Interest expense increased for interim 2001
to $.1 million from $.03 million for interim 2000, due primarily to the Company
borrowing on the line of credit.
Net Income After Income Taxes. Net income after income taxes was $.5
million in interim 2001 as compared to $.01 million for interim 2000.
Liquidity and Capital Resources
The Company's primary need for capital has been to finance growth in
its core business as a heavy construction contractor and its expansion into the
other construction and construction related businesses previously discussed.
Historically, the Company's primary source of cash has been from operations. The
Company's expansion into construction materials has required capital to finance
expanded receivables, increased inventories and capital expenditures as well as
to address fluctuations in the work-in-progress billing cycle.
The following table sets forth for the six months ended June 30, 2001
and 2000, certain items from the condensed consolidated statements of cash
flows.
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------------- ------------------
Cash Flows Used in Operating Activities $ (575,882) $ (2,889,738)
Cash Flows Used in Investing Activities (597,267) (767,871)
Cash Flows Provided by Financing Activities 1,923,477 179,097
Although the Company may experience increased profitability as the
Company expands its operations, particularly its aggregate, ready mix concrete
and asphalt production, cash may be used to finance receivables, build
inventories and for customer cash retention required under contracts subject to
completion. It is not unusual for cash flows from construction projects nearing
the final stages of completion to have negative cash flows. Claim-related costs
expended on projects and the start-up costs of the business expansion have
resulted in a significant decline in the Company's cash reserves. Accordingly,
during the year ended December 31, 2000, the Company entered into a revolving
loan agreement ("line of credit"). Under the terms of the agreement, the Company
may borrow $7,000,000 at Chase Manhattan Bank's prime, plus .25% through
December 31, 2001. The line of credit is collateralized by all of MVCI's assets.
Under the line of credit, the Company is required to maintain a certain level of
tangible net worth. At June 30, 2001, the Company is in compliance with all
covenants under the line of credit. The line of credit expires December 31, 2001
at which time the line of credit converts to a term agreement requiring monthly
principal and interest payments through December 31, 2005. The Company believes,
but cannot assure, that the line of credit, together with the Company's
historical ability to acquire new work may be sufficient to meet the Company's
cash requirements for the next twelve months. As of June 30, 2001, the Company
had withdrawn $6,241,975 from the line of credit. As of August 14, 2001, the
Company had made a principal payment in the amount of $220,382 on the line of
credit.
Cash used in operating activities during interim 2001 amounted to $.6
million, primarily the result of an increase in accounts receivable, net of $8.1
million, an increase in net costs in excess of billings of $1.2 million, a net
loss of $.5 million, offset, in part, by an increase in accounts payable of $7.3
million, a decrease in prepaid expenses and other of $.3 million, a decrease in
income tax receivable of $.3 million and depreciation and amortization of $1.3
million.
13
Cash used in operating activities during interim 2000 amounted to $2.9
million, primarily the result of a decrease in accounts payable of $2.3 million,
a decrease in accrued liabilities of $.4 million, an increase in inventory of
$.8 million, an increase in accounts receivable, net of $.5 million, and an
increase in net costs in excess of billings of $.2 million offset, in part, by
net income of $.2 million, depreciation and amortization of $1.2 million and a
decrease in prepaid expenses and other of $.2 million.
Cash used in investing activities during interim 2001 amounted to $.6
million related primarily to the purchase of property and equipment of $.4
million and an increase in restricted cash of $.3 million, offset by proceeds
from the sale of property and equipment in the amount of $.1 million.
Cash used in investing activities during interim 2000 amounted to $.8
million related primarily to the purchase of property and equipment of $.6
million and an increase in restricted cash of $.4 million, offset by proceeds
from the sale of property and equipment in the amount of $.2 million.
Cash provided by financing activities during interim 2001 amounted to
$1.9 million related primarily to the proceeds received from a note payable of
$3.2 million, offset by the repayment of notes payable and capital lease
obligations of $1.3 million.
Cash provided by financing activities during interim 2000 amounted to
$.2 million related primarily to the proceeds received from a note payable of
$1.5 million, offset by the repayment of notes payable and capital lease
obligations of $1.3 million.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$1,460,718. Amortization expense during the six-month period ended June 30, 2001
was $40,015. Currently, the Company is assessing but has not yet determined how
the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.
14
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company does not have
foreign currency exchange rate and commodity price market risk.
Interest Rate Risk - From time to time the Company temporarily invests
its cash and restricted cash in interest-bearing securities issued by
high-quality issuers. The Company's management monitors risk exposure to monies
invested in securities of any one financial institution. Due to the short time
the investments are outstanding and their general liquidity, these instruments
are classified as cash equivalent in the consolidated balance sheet and do not
represent a material interest rate risk to the Company. The Company's primary
market risk to exposure for changes in interest rates relates to the Company's
long-term debt obligations. The Company manages its exposure to changing
interest rates principally through the use of a combination of fixed and
floating rate debt.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to legal proceedings in the ordinary course of
its business. With the exception of those matters detailed below, the Company
believes that the nature of these proceedings (which generally relate to
disputes between the Company and its subcontractors, material suppliers or
customers regarding payment for work performed or materials supplied) are
typical for a construction firm of its size and scope, and no other pending
proceedings are material to its financial condition.
The following proceedings represent matters that may become material
and have already been or may soon be referred to legal counsel for further
action:
Requests for Equitable Adjustment to Construction Contracts. The Company has or
- -----------------------------------------------------------
will make claims as described below on the following contracts:
1. Five contracts with the New Mexico State Highway and Transportation
Department ("NMSHTD") - The approximate value of claims on these
projects is $19,050,000 of which approximately $14,150,000 is on behalf
of MVCI and the balance of $4,900,000 is on behalf of the prime
contractors or subcontractors. The primary issues are changed
conditions, plan errors and omissions, contract modifications and
associated delay costs. In addition, the projects were not completed
within the adjusted contract time because of the events given rise to
the claims. The prosecution of the claims will include the appropriate
extensions of contract time to offset any potential liquidated damages
that may be assessed on the contracts.
Johnson Danley Construction Company ("JD") was the prime contractor on
one of the aforementioned contracts with NMSHTD. In May, 2001, JD filed
for protection under the bankruptcy laws and as a direct result was
found in default on the NMSHTD contract. MVCI had assisted JD in
obtaining surety credit to provide the payment and performance bonds
required under the contract. In doing so, MVCI indemnified the surety
company in the event JD failed to satisfactorily perform on the
contract. Therefore MVCI is now performing the remainder of the work on
the contract for the surety company, but due to the indemnification,
MVCI is at risk for any cost overruns that may be incurred in
completing the work. The remaining proceeds of the contract are
approximately $2,460,000 and MVCI has yet to complete a thorough
evaluation of the costs to complete. Appropriate adjustments will be
made to costs and estimated costs as they become more certain. In
addition, all rights to claim proceeds formerly belonging to JD are now
the property of MVCI to the extent that MVCI incurs costs performing
work that would have otherwise belonged to JD. Management believes that
if the analysis of costs to complete exceeds the remaining contract
proceeds, there will be sufficient valid contract claims to offset the
costs and therefore, this issue may have no material affect on the
Company.
15
2. Clark County, Nevada - The approximate total value of claims on this
project is $13,801,160 of which approximately $3,836,132 is on behalf
of MVCI. The primary issues are changed conditions, plan errors and
omissions, contract modifications and associated delay costs.
The above claims combined total approximately $32,851,160. Of that
total, MVCI's portion of the claims total approximately $17,986,132 and the
balance of approximately $14,865,028 pertains to prime contractor or
subcontractors' claims. Relative to the aforementioned claims, the Company has
recorded approximately $6,144,904 in claim revenue to offset portions of the
costs incurred to-date on the claims. Although the Company believes this
presents a reasonably conservative posture, any claims proceeds ultimately
awarded to the Company less than $6,144,904 will result in a reduction of
income. Conversely, any amount of claims proceeds in excess of $6,144,904 will
be an increase in income.
Lawsuits Filed Against Meadow Valley Contractors, Inc.
- ------------------------------------------------------
1. Innovative Construction Services, Inc. ("ICS"), District Court, Clark
County, NV - ICS was a subcontractor to MVCI on several projects. ICS
failed to make payments of payroll, pension fund contributions and
other taxes for which the Internal Revenue Service garnished any future
payments due ICS on MVCI projects. As a result, ICS failed to supply
labor to perform its work and defaulted on its subcontracts. MVCI
terminated the ICS subcontracts and performed the work with MVCI
personnel. ICS alleges it was wrongfully terminated and is asserting
numerous claims for damages. ICS claims against MVCI total
approximately $15,000,000. The Company does not believe ICS' claims
have merit and intends to vigorously defend against these claims and
will eventually seek to recover the damages ICS has caused the Company
through its failure to perform.
2. AnA Enterprises, LLC ("AnA"), District Court, Clark County, NV - AnA
supplied equipment to MVCI on a project under terms of a variety of
agreements. AnA is suing MVCI for non-payment. MVCI has counter-sued
for costs overruns deemed to be the responsibility of AnA. AnA's suit
against MVCI is approximately $3,000,000. MVCI's countersuit against
AnA is for approximately $2,000,000. The Company does not believe AnA's
claims have merit and intends to vigorously defend against these
claims.
3. The Company is defending a claimed preference in connections with a
payment made to it by an insurance company in the approximate amount of
$100,000. The Company believes that the payment is not a preference,
and is vigorously defending the action.
16
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.149 Lease Agreement with Associates Leasing, Inc.
10.150 Lease Agreement with M&I First National Leasing Corp.
10.151 Lease Agreement with Trinity Capital Corporation
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2001.
17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act as of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEADOW VALLEY CORPORATION
(Registrant)
By /s/ Bradley E. Larson
------------------------------------------
Bradley E. Larson
President and Chief Executive Officer
By /s/ Nicole R. Smith
------------------------------------------
Nicole R. Smith
Principal Accounting Officer
18