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 September 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 October 31, 2001:
Common Stock, $.001 par value
3,559,938 shares
MEADOW VALLEY CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) - Nine Months Ended
September 30, 2001 and September 30, 2000 3
Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended
September 30, 2001 and September 30, 2000 4
Condensed Consolidated Balance Sheets - As of September 30, 2001 (Unaudited) and
December 31, 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended
September 30, 2001 and September 30, 2000 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
2001 2000
-------------- --------------
Revenue $ 133,449,734 $ 128,402,900
Cost of revenue 128,902,986 123,462,464
-------------- --------------
Gross Profit 4,546,748 4,940,436
General and administrative expenses 4,973,476 4,842,142
-------------- --------------
Income (loss) from operations (426,728) 98,294
-------------- --------------
Other income (expense):
Interest income 175,455 462,816
Interest expense (353,676) (174,500)
Other income 358,223 46,788
-------------- --------------
180,002 335,104
-------------- --------------
Income (loss) before income taxes (246,726) 433,398
Income tax benefit (expense) 92,522 (173,353)
-------------- --------------
Net income (loss) $ (154,204) $ 260,045
============== ==============
Basic net income (loss) per common share $ (0.04) $ 0.07
============== ==============
Diluted net income (loss) per common share $ (0.04) $ 0.07
============== ==============
Basic weighted average common shares outstanding 3,559,938 3,546,016
============== ==============
Diluted weighted average common shares outstanding 3,559,938 3,546,016
============== ==============
3
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
----------------------------------------
2001 2000
------------------ ------------------
Revenue $ 52,619,530 $ 44,434,571
Cost of revenue 50,413,756 42,692,537
------------------ ------------------
Gross Profit 2,205,774 1,742,034
General and administrative expenses 1,501,449 1,792,689
------------------ ------------------
Income (loss) from operations 704,325 (50,655)
------------------ ------------------
Other income (expense):
Interest income 48,912 162,886
Interest expense (128,969) (95,172)
Other income (expense) (103,543) 12,119
------------------ ------------------
(183,600) 79,833
------------------ ------------------
Income before income taxes 520,725 29,178
Income tax expense (195,272) (11,663)
------------------ ------------------
Net income $ 325,453 $ 17,515
================== ==================
Basic net income per common share $ 0.09 $ -
================== ==================
Diluted net income per common share $ 0.09 $ -
================== ==================
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
September 30, December 31,
2001 2000 *
------------------ ------------------
Assets: (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,092,002 $ 1,822,598
Restricted cash 2,353,998 1,783,005
Accounts receivable, net 26,765,779 14,297,564
Prepaid expenses and other 485,349 749,708
Inventory 5,857,434 5,242,148
Income tax receivable 268,077 774,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 11,623,682 9,828,009
------------------ ------------------
Total Current Assets 48,446,321 34,497,032
Property and equipment, net 18,177,605 18,111,506
Deferred tax asset 873,441 873,441
Refundable deposits 134,834 176,565
Goodwill, net 1,440,711 1,500,733
Mineral rights 184,438 226,753
------------------ ------------------
Total Assets $ 69,257,350 $ 55,386,030
================== ==================
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable $ 29,068,727 $ 17,606,113
Accrued liabilities 2,187,352 2,289,698
Notes payable 3,082,698 1,604,399
Obligations under capital leases 1,029,997 1,041,921
Billings in excess of costs and estimated earnings on
uncompleted contracts 5,193,360 6,054,814
------------------ ------------------
Total Current Liabilities 40,562,134 28,596,945
Deferred tax liability 2,272,700 2,272,700
Notes payable, less current portion 10,273,065 7,674,608
Obligations under capital leases, less current portion 3,065,418 3,603,540
------------------ ------------------
Total Liabilities 56,173,317 42,147,793
------------------ ------------------
Commitments and contingencies
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 2,936,010 3,090,214
------------------ ------------------
Total Stockholders' Equity 13,084,033 13,238,237
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 69,257,350 $ 55,386,030
================== ==================
*Derived from audited financial statements
5
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------
2001 2000
------------------ ------------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 118,681,534 $ 126,583,669
Cash paid to suppliers and employees (120,856,918) (129,938,998)
Interest received 175,455 507,618
Interest paid (353,676) (174,500)
Income taxes refunded (paid) 598,445 (71,911)
------------------ ------------------
Net cash used in operating activities (1,755,160) (3,094,122)
------------------ ------------------
Cash flows from investing activities:
Increase in restricted cash (570,993) (143,224)
Proceeds from sale of property and equipment 84,887 270,425
Purchase of property and equipment (420,989) (1,476,862)
------------------ ------------------
Net cash used in investing activities (907,095) (1,349,661)
------------------ ------------------
Cash flows from financing activities:
Proceeds received from note payable 4,182,533 4,555,515
Repayment of notes payable (1,426,370) (4,132,814)
Repayment of capital lease obligations (824,504) (898,401)
------------------ ------------------
Net cash provided by (used in) financing activities 1,931,659 (475,700)
------------------ ------------------
Net decrease in cash and cash equivalents (730,596) (4,919,483)
Cash and cash equivalents at beginning of period 1,822,598 6,177,489
------------------ ------------------
Cash and cash equivalents at end of period $ 1,092,002 $ 1,258,006
================== ==================
6
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended
September 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) $ (154,204) $ 260,045
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,968,472 1,851,812
Gain on sale of property and equipment (1,081) (145,956)
Changes in Operating Assets and Liabilities:
Accounts receivable, net (12,468,215) (4,689,858)
Prepaid expenses and other 264,359 (75,863)
Inventory (615,286) (1,248,121)
Income tax receivable 505,923 101,442
Costs and estimated earnings in excess of billings on
uncompleted contracts (1,795,673) 1,007,635
Refundable deposits 41,731 (96,067)
Accounts payable 11,462,614 (1,945,955)
Accrued liabilities (102,346) (120,198)
Billings in excess of costs and estimated earnings on
uncompleted contracts (861,454) 2,006,962
------------------ ------------------
Net cash used in operating activities $ (1,755,160) $ (3,094,122)
================== ==================
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 for the year
ended December 31, 2000 under the Securities Exchange Act of 1934 as filed with
the Securities and Exchange Commission. The results of operations for the nine
months ended September 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 nine months ended September 30,
2001, revenue from anticipated claim proceeds increased by approximately
$1,147,687. At September 30, 2001, claim revenue in the amount of approximately
$6,968,591 has been recorded while the estimated total claims that have been
filed or will be filed were approximately $52,781,913. Of the $52,781,913 in
claims, approximately $24,443,296 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 $28,338,617 as MVCI costs. The
Company must obtain at least $6,968,591 in proceeds from its $28,338,617 portion
of the total claims or there would be a reduction in earnings.
8
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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, 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 September 30, 2001, the net carrying amount of goodwill
is $1,440,711. Amortization expense during the nine-month period ended September
30, 2001 was $60,022. 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.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in
June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS
143 requires that any legal obligation related to the retirement of long-lived
assets be quantified and recorded as a liability with the associated asset
retirement cost capitalized on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be made.
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued in August 2001 and is effective for fiscal years beginning
after December 15, 2001. SFAS 144 provides a single, comprehensive accounting
model for impairment and disposal of long-lived assets and discontinued
operations.
SFAS 143 and SFAS 144 will be adopted on their effective dates, and
adoption is not expected to result in any material effects on the Company's
financial statements.
9
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Notes Payable:
Summary of third quarter additions to notes payable and its balance at
September 30, 2001:
Note payable, interest rate at 8.5%, with monthly
payments of $23,603, due 2/27/06, collateralized
by equipment $ 1,039,953
Note payable, interest rate at 0%, with monthly
payments of $5,012, due 9/28/04, collateralized
by equipment 180,430
-------------
1,220,383
Less: current portion (262,762)
-------------
$ 957,621
=============
Following are maturities of the above long-term debt for each of the
next 5 years:
2002 $ 262,762
2003 280,671
2004 280,164
2005 261,236
Subsequent to 2005 115,550
-----------
$ 1,200,383
===========
6. Line of Credit:
In July 2000, the Company entered into a revolving loan agreement
("line of credit"). In July 2001, the Company amended the line of credit
agreement. 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. At September 30,
2001, the interest rate on the line of credit was at 6.25%. The line of credit
is collateralized by all of MVCI's and RMI'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 September 30, 2001, the
Company was in compliance with all such covenants and had withdrawn $7,000,000
from the line of credit.
10
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Commitments:
During the quarter ended September 30, 2001, the Company purchased
equipment under a capital lease agreement expiring in the year 2004. 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 lease
as of September 30, 2001 for each of the next four years and in aggregate are:
2002 $ 11,541
2003 11,541
2004 17,975
----------
Total minimum lease payments 41,057
Less: amount representing interest (6,095)
----------
Present value of net minimum lease payment $ 34,962
==========
8. Contingencies:
Johnson Danley Construction Company ("JD") was the prime contractor on
one of the contracts with the New Mexico State Highway and Transportation
Department ("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. At the
time the contract was bid and awarded, 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 has the obligation to
complete the contract for the surety company. By virtue of JD's default and
MVCI's role as the completing contractor, all rights to claims proceeds formerly
belonging to JD are now the property of MVCI to the extent that MVCI incurs
costs to perform work that would have otherwise belonged to JD. Accordingly, it
is conceivable that cost overruns incurred by MVCI in completing JD's work may
be offset, in whole or in part, by contract proceeds, whether those proceeds
come from regular contractual payments or from payments on claims. At the time
of JD's default, there remained approximately $2.5 million of JD work to be
performed on the contract. Through the period ending September 30, 2001, MVCI
completed approximately 99% of that amount and incurred costs in excess of
revenue of approximately $1.3 million. The Company believes that there exist
claims of sufficient merit and magnitude to recoup these cost overruns from
future claim proceeds and, accordingly, has booked an amount of claim proceeds
to offset those costs to date. The final costs to complete JD's work and resolve
claims filed by JD's unpaid vendors, suppliers and subcontractors against the
payment bond remain, as yet, not entirely determinable due to the insufficient
and vague information being provided to MVCI by the payment bond claimants. As a
result, the Company cannot predict with reasonable accuracy what the final costs
will be and therefore has not yet booked possible losses or additional claim
revenue until such time as they are ascertainable. The Company believes that
this information will be known within the next quarter.
9. 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 nine months ended September 30, 2001, the Company financed
the purchase of equipment in the amount of $1,595,051.
11
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Subsequent Events:
In October 2001, the Company financed the purchase of equipment in the
amount of $180,262. The capital lease obligation has an interest rate of 5.8%,
with monthly payments of $4,217, and is due October 2005.
11. 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.
Nine Months Ended September 30,
--------------------------------------------------------------------
(dollars in thousands) 2001 2000
------------------------------- --------------------------------
Construction Construction
Services Materials Services Materials
------------- ------------- ------------- --------------
Gross revenue $ 111,128 $ 23,793 $ 115,284 $ 14,024
Intercompany revenue - 1,471 - 905
Cost of revenue 107,607 22,767 111,178 13,189
Interest income 160 15 441 22
Interest expense (214) (140) (153) (21)
Depreciation and amortization 1,364 605 1,389 463
Income (loss) before taxes 239 (485) 836 (403)
Income tax benefit (expense) (90) 182 (334) 161
Net income (loss) 149 (303) 502 (242)
Total assets 55,360 13,897 49,221 12,826
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.
12
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 $76.4 million at September 30, 2001,
compared to approximately $72.9 million at September 30, 2000. At September 30,
2001, the Company's backlog included approximately $28.2 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 third quarter ended September 30, 2001, the Company
obtained new projects totaling approximately $19.9 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 September 30, 2001, claim revenue in the amount of
approximately $7.0 million has been recorded while the estimated total claims
that have been filed or will be filed were approximately $52.8 million. Of the
$52.8 million in claims, approximately $24.5 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 $28.3 million as MVCI
costs. The Company must obtain at least $7.0 million in proceeds from its $28.3
million portion of the total claims or there would be a reduction in earnings.
Results of Operations
The following table sets forth, for the nine and the three months ended
September 30, 2001 and 2000, certain items derived from the Company's Condensed
Consolidated Statements of Operations expressed as a percentage of revenue.
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------- ------------- ------------
Revenue 100.0% 100.0% 100.0% 100.0%
Gross Profit 3.4% 3.8% 4.2% 3.9%
General and administrative expenses 3.7% 3.8% 2.9% 4.0%
Interest income 0.1% 0.4% 0.1% 0.4%
Interest expense -0.3% -0.1% -0.2% -0.2%
Other income 0.3% 0.0% -0.2% 0.0%
Income (loss) before income taxes -0.2% 0.3% 1.0% 0.1%
Income tax benefit (expense) 0.1% -0.1% -0.4% 0.0%
Net income (loss) -0.1% 0.2% 0.6% 0.0%
13
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenue and Backlog. Revenue for the nine months ended September 30, 2001
("interim 2001") was $133.4 million compared to $128.4 million for the nine
months ended September 30, 2000 ("interim 2000"). The increase in revenue was
the result of a $9.2 million increase in revenue generated from construction
materials production and manufacturing sold to non-affiliates offset by a $4.2
million decrease in construction services. Backlog increased 5% to approximately
$76.4 million at September 30, 2001 from $72.9 million at September 30, 2000.
Revenue may be impacted in any one period by the backlog at the beginning of the
period.
Gross Profit. Consolidated gross profit decreased from $4.9 million for
interim 2000 to $4.5 million for interim 2001. The decrease in the construction
services gross profit 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 September 30, 2001 and by
recording, in advance of receipt, conservative estimates of revenue from claims.
Gross profit is 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 services
gross profit was offset by an increase in the construction materials gross
profit. Gross profit from construction materials increased from $.8 million for
interim 2000 to $1.0 million for interim 2001. While gross profit from
construction materials increased, the gross margin, as a percent of gross
revenue declined in interim 2001 to 4.3% from 6.0% in interim 2000. In comparing
the gross profit margin during the interim period for 2000 and 2001, the first
half of 2000 incurred few start up costs associated with last year's expansion
of the construction materials segment, while the first half of 2001 reflect the
improving, but not yet profitable, results of the expansion.
General and Administrative Expenses. General and administrative expenses
increased to $5.0 million for interim 2001 from $4.8 million for interim 2000.
The increase resulted primarily from a $.3 million in general and administrative
expenses attributed to expanding construction material operations, an increase
of $.1 million in bad debt expense, an increase of $.1 million in employee
benefits offset, in part, by a $.3 million reduction of general and
administrative expenses related to various employee incentive plans.
Interest Income and Expense. Interest income for interim 2001 decreased to
$.2 million from $.5 million for interim 2000 resulting primarily from a
decrease in invested cash reserves. Interest expense increased for interim 2001
to $.4 million from $.2 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 $(.2) million in interim 2001 as compared to $.3 million for interim 2000.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenue and Backlog. Revenue for the three months ended September 30, 2001
("interim 2001") was $52.6 million compared to $44.4 million for the three
months ended September 30, 2000 ("interim 2000"). The increase in revenue was
the result of a $3.1 million increase in revenue generated from construction
materials production and manufacturing sold to non-affiliates and a $5.1 million
increase in construction services. Backlog increased 5% to approximately $76.4
million at September 30, 2001 from $72.9 million at September 30, 2000. Revenue
may be impacted in any one period by the backlog at the beginning of the period.
Gross Profit. Consolidated gross profit increased to $2.2 million for
interim 2001 from $1.7 million for interim 2000 and consolidated gross margin,
as a percent of revenue, increased to 4.2% in interim 2001 from 3.9% in interim
2000. Gross profit from construction services dropped slightly to $1.8 million
in interim 2001 from $1.9 million in interim 2000 and the gross profit margin
dropped to 4.0% from 4.7% in the respective periods. The decrease in the
construction services gross profit 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 September 30, 2001
and by recording, in advance of receipt, conservative estimates of revenue from
claims. The increase in consolidated gross profit, then, was the result of
improved profitability from the construction materials segment where gross
profit improved to $.5 million in interim 2001 from a $.1 million loss in
interim 2000. The gross margin, as a percent of gross revenue, on construction
materials improved to 5.6% for interim 2001 from
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(2.7%) in interim 2000. The improved performance for the construction materials
segment during interim 2001 is the result of a 63% increase in revenue from
interim 2000 that results from the expansion of construction materials
operations implemented last year.
General and Administrative Expenses. General and administrative expenses
decreased to $1.5 million for interim 2001 from $1.8 million for interim 2000.
The decrease resulted primarily from a $.1 million reduction of general and
administrative expenses related to various employee incentive plans and an
decrease in of $.1 million in legal expenses. The reduction of legal expenses
was a result of the Company allocating legal expenses to direct job cost in the
income statement.
Interest Income and Expense. Interest income for interim 2001 decreased to
$.05 million from $.2 million for interim 2000 resulting primarily from a
decrease in invested cash reserves. Interest expense increased for interim 2001
to $.13 million from $.1 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 $.3
million in interim 2001 as compared to $.02 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 nine months ended September 30, 2001
and 2000, certain items from the condensed consolidated statements of cash
flows.
Nine Months Ended
September 30,
------------------------
2001 2000
----------- -----------
Cash Flows Used in Operating Activities $(1,755,160) $(3,094,122)
Cash Flows Used in Investing Activities (907,095) (1,349,661)
Cash Flows Provided by (Used in) Financing Activities 1,931,659 (475,700)
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"). In July 2001, the Company amended the line of credit
agreement. 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. At
September 30, 2001, the interest rate on the line of credit was at 6.25%. The
line of credit is collateralized by all of MVCI's and RMI's assets. Under the
line of credit, the Company is required to maintain a certain level of tangible
net worth. At September 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 September 30, 2001, the
Company had withdrawn $7,000,000 from the line of credit.
Cash used in operating activities during interim 2001 amounted to $1.8
million, primarily the result of an increase in accounts receivable, net of
$12.5 million, an increase in net costs in excess of billings of $2.6 million,
an
15
increase in inventory of $.6 million, a net loss of $.1 million, offset, in
part, by an increase in accounts payable of $11.5 million, a decrease in income
tax receivable of $.5 million and depreciation and amortization of $2.0 million.
Cash used in operating activities during interim 2000 amounted to $3.1
million, primarily the result of a decrease in accounts payable of $1.9 million,
a decrease in accrued liabilities of $.1 million, an increase in inventory of
$1.2 million, an increase in accounts receivable, net of $4.7 million offset, in
part, by net income of $.3 million, depreciation and amortization of $1.8
million and an increase in net billings in excess of costs of $3 million.
Cash used in investing activities during interim 2001 amounted to $.9
million related primarily to the purchase of property and equipment of $.4
million and an increase in restricted cash of $.6 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 $1.3
million related primarily to the purchase of property and equipment of $1.5
million and an increase in restricted cash of $.1 million, offset by proceeds
from the sale of property and equipment in the amount of $.3 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 $4.2
million, offset by the repayment of notes payable and capital lease obligations
of $2.3 million.
Cash used in financing activities during interim 2000 amounted to $.5
million related primarily to the repayment of notes payable and capital lease
obligations of $5.0 million, offset by the proceeds received from a note payable
of $4.5 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, 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 September 30, 2001, the net carrying amount of goodwill
is $1,440,711. Amortization expense during the nine-month period ended September
30, 2001 was $60,022. 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.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in June
2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143
requires that any legal obligation related to the retirement of long-lived
assets be quantified and recorded as a liability with the associated asset
retirement cost capitalized on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be made.
16
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued in August 2001 and is effective for fiscal years beginning
after December 15, 2001. SFAS 144 provides a single, comprehensive accounting
model for impairment and disposal of long-lived assets and discontinued
operations.
SFAS 143 and SFAS 144 will be adopted on their effective dates, and
adoption is not expected to result in any material effects on the Company's
financial statements.
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 $33,646,516 of which approximately $22,088,485 is on
behalf of MVCI and the balance of $11,558,031 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 largely because of the events giving
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. At the time the contract was
bid and awarded, 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 has
the obligation to complete the contract for the surety company. By
virtue of JD's default and MVCI's role as the completing contractor,
all rights to claims proceeds formerly belonging to JD are now the
property of MVCI to the extent that MVCI incurs
17
costs to perform work that would have otherwise belonged to JD.
Accordingly, it is conceivable that cost overruns incurred by MVCI in
completing JD's work may be offset, in whole or in part, by contract
proceeds, whether those proceeds come from regular contractual
payments or from payments on claims. At the time of JD's default,
there remained approximately $2.5 million of JD work to be performed
on the contract. Through the period ending September 30, 2001, MVCI
completed approximately 99% of that amount and incurred costs in
excess of revenue of approximately $1.3 million. The Company believes
that there exist claims of sufficient merit and magnitude to recoup
these cost overruns from future claim proceeds and, accordingly, has
booked an amount of claim proceeds to offset those costs to date. The
final costs to complete JD's work and resolve claims filed by JD's
unpaid vendors, suppliers and subcontractors against the payment bond
remain, as yet, not entirely determinable due to the insufficient and
vague information being provided to MVCI by the payment bond
claimants. As a result, the Company cannot predict with reasonable
accuracy what the final costs will be and therefore has not yet booked
possible losses or additional claim revenue until such time as they
are ascertainable. The Company believes that this information will be
known within the next quarter.
2. Clark County, Nevada - The approximate total value of claims on this
project is $19,135,397 of which approximately $6,250,132 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 $52,781,913. Of that
total, MVCI's portion of the claims total approximately $28,338,617 and the
balance of approximately $24,443,296 pertains to prime contractor or
subcontractors' claims. Relative to the aforementioned claims, the Company has
recorded approximately $6,968,591 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 $6,968,591 will result in a reduction of
income. Conversely, any amount of claims proceeds in excess of $6,968,591 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 $4,000,000. MVCI's countersuit against
AnA is for approximately $2,600,000. 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.
18
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.152 Security Agreement with FCC Equipment Financing, Inc.
10.153 Lease Agreement with CitiCapital
10.154 Amended and Restated Revolving Loan Agreement with The CIT
Group/Equipment Financing, Inc.
10.155 Revolving Loan Agreement with The CIT Group/Equipment
Financing, Inc.
10.156 Lease Agreement with Thomas Mining, LLC
10.157 Employment Agreement with Mr. Kiesel
10.158 Security Agreement with Volvo Commercial Finance LLC The
Americas
b. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended September 30, 2001.
19
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
20