Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-25428
----------------
MEADOW VALLEY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0328443
- --------------------------------------------------------------------------------
(State or other (I.R.S. Employer Identification Number)
jurisdiction of incorporation
or organization)
4411 South 40th Street, Suite D-11, Phoenix, AZ 85040
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(602) 437-5400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of exchange on which registered:
Common stock, $.001 par value Nasdaq National Market
Common stock purchase warrants Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
------ -----
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K x
---
On February 28, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $10,335,594.
On February 28, 1997, there were 3,601,250 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference into Part III of this Report,
information contained in its definitive proxy statement disseminated in
connection with its Annual Meeting of Shareholders for the year ended
December 31, 1996.
1
PART I
Item 1. Business
General
Meadow Valley Corporation (the "Company") was incorporated in Nevada
on September 15, 1994. On October 1, 1994, the Company purchased all of the
outstanding Common Stock of Meadow Valley Contractors, Inc. ("MVC"), for $11.5
million comprised of a $10 million promissory note and $1.5 million paid by the
issuance of 500,000 restricted shares of the Company's Common Stock valued at
$3.00 per share. MVC was founded in 1980 as a heavy construction contractor and
has been engaged in that activity since inception. References to the Company's
history include the history of MVC.
Operating through MVC, the Company is a heavy construction contractor
specializing in structural concrete construction of highway bridges and
overpasses and the paving of highways and airport runways. The Company
generally serves as the prime contractor for public sector customers (such as
federal, state and local governmental authorities) in the states of Nevada,
Arizona, Utah and New Mexico. The Company believes that specializing in
structural concrete construction has contributed significantly to its revenue
growth and provides it with an advantage in the competitive bidding process.
However, such specialization limits the types and sizes of projects upon which
the Company bids and may be a competitive disadvantage for projects in which the
amount of work proposed to be completed by the prime contractor (as compared to
the amount of work which will be subcontracted by the prime contractor) is a
consideration in the bidding process. The Company primarily seeks public sector
customers because public sector projects are less cyclical than private sector
projects, payment is more reliable, work required by the project is generally
standardized and little marketing expense is incurred in obtaining projects.
The Company generated average project revenue of approximately $6 to
$7 million in each of the three years ended December 31, 1994, 1995 and 1996.
The Company had a project backlog of approximately $130 million at December 31,
1996, which included portions of a $19 million reconstruction of sections of
Interstate 10 in Phoenix, AZ, portions of a $14 million airport runway extension
at McCarran International Airport in Las Vegas, NV, portions of a $41 million
sitework for a new terminal at McCarran International Airport in Las Vegas, NV,
portions of the $28 million beltway continuation in Las Vegas, NV, the $36
million Squaw Peak Pkwy Shea-Thunderbird Freeway Continuation in Phoenix, AZ,
and the $16 million reconstruction of sections of Interstate 15 in North Salt
Lake, Utah. The Company has acted as the prime contractor on projects funded by
a number of governmental authorities, including the Federal Highway
Administration, the Arizona Department of Transportation, the Nevada Department
of Transportation, the Utah Department of Transportation, the Clark County
(Nevada) Department of Public Works, Salt Lake City (Utah) Airport Authority and
the New Mexico Department of Transportation.
On October 16, 1995, the Company sold 1,675,000 Units of its
securities to the public at $6.00 per Unit (the "Public Offering"). Each Unit
consisted of one share of $.001 par value common stock and one common stock
purchase warrant. In November 1995, the Company sold an additional 251,250 Units
pursuant to its underwriters' overallotment option.
On January 2, 1996, the Company acquired certain assets of AKR
Contracting ("AKR"), an unaffiliated company in Phoenix, Arizona, specializing
in earthwork, grading and paving of residential subdivisions, commercial centers
and small publicly funded projects. Through AKR, the Company expects to increase
revenue from the private construction market in which the Company was not
previously engaged.
Business Strategy
The Company seeks to generate revenue growth and profitability by
pursuing the following business strategy:
(i) Expand Construction-related Niche Markets. The Company continues
to assess the viability of entering the concrete or "white" paving market. By
performing white paving work itself, the Company may be able to increase its
project
2
revenue and earnings, reduce reliance on white paving subcontractors and improve
the likelihood of being awarded projects in which the amount of work proposed to
be completed on a project by the prime contractor is a consideration in the
competitive bidding process. The Company will continue to explore other niche
markets which may increase the Company's competitiveness, diversify its revenue
base, increase project revenue and improve profitability. Consistent with this
strategy, the Company has taken action in five areas:
(1) The Company has entered into an operating lease for a portable
hot mix asphalt plant and related paving equipment. The asphalt
paving capabilities provide the Company the opportunity to expand
its existing geographic market. The Company believes increased
competitiveness and revenue will be generated on projects that
call for large quantities of asphaltic concrete.
(2) On January 2, 1996, the Company acquired certain assets of AKR,
an unaffiliated company in Phoenix, Arizona. AKR specializes in
earthwork, grading and paving of residential subdivisions,
commercial centers and in small publicly funded projects. Through
AKR, the Company expects to increase revenue from the private
construction market in which the Company was not previously
engaged.
(3) During 1996, the Company formed Ready Mix, Inc. ("RMI"), a
wholly-manufactures and distributes ready mix concrete and
expects to target markets such as concrete subcontractors, prime
contractors, home builders, commercial and industrial property
developers, pool builders and homeowners. RMI is expected to
begin operations from its first in March 1997. Financed with
internal funds, a $2 million line of credit and operating leases,
the Company intends RMI to operate from two sites using
approximately 40 mixer trucks.
(4) During 1996, the Company formed Prestressed Products,
Incorporated ("PPI"), a wholly-owned precast concrete company
based in Moapa, NV, which is northeast of Las Vegas, NV. PPI will
design, manufacture and erect precast prestressed concrete
building components for use on commercial, institutional and
public construction projects throughout the Southwest. Product
lines include architectural and structural building components
and prestressed bridge girders for highway construction. PPI will
begin operations during 1997 with a precast yard and concrete
batch plant located on leased property adjacent to the Company's
office in Moapa, Nevada.
(5) The Company has established a sand and gravel crushing and
screening operation in Moapa, Nevada. The Company's primary
product is a crushed and washed sand that is intended to be sold
to the RMI, PPI and the Company.
(ii) Solidify Market Position. The Company intends to continue to
expand its operations in Nevada, Arizona, Utah and New Mexico and consider
expansion into other western states.
(iii) Seek to Acquire Other Businesses. The Company will seek to
acquire other businesses that provide subcontracting services used by the
Company in its projects, complement the Company's existing construction
expertise or offer construction services similar to the Company in other
geographic markets. In certain circumstances, the Company may join with one or
more companies combining expertise, financial strength, and/or bonding capacity.
Through a joint venture, the Company may be able to pursue projects which might
otherwise exceed its staffing or bonding resources.
(iv) Increase Bonding Capacity. The Company retained a portion of the
proceeds of its Public Offering to increase its bonding capacity in order to bid
upon more and larger projects. The Company intends to retain a portion of future
earnings to further increase its bonding capacity. See "--Insurance and
Bonding."
Market Overview
The Company believes that infrastructure construction (primarily
highways, bridges, overpasses, tunnels and other transportation projects) in the
western United States is substantial and will generate continued federal, state
and local government expenditures. In 1991, Congress passed the Intermodal
Surface Transportation Efficiency Act of 1991 ("ISTEA") which included an
appropriation of over $150 billion through September 1997. In 1995, as a result
of the ISTEA
3
legislation, Congress designated a National Highway System ("NHS") consisting of
158,674 miles of key transportation corridors and continued funding as
originally intended through ISTEA. In addition to federal funding, which has
increased year-to-year in the states in which the Company has historically
operated, other funding mechanisms are used at various governmental levels to
improve and maintain transportation facilities. Maricopa County (Phoenix,
Arizona metropolitan area) and Clark County (Las Vegas, Nevada metropolitan
area) have passed sales tax measures to fund major transportation improvements.
Maricopa County's program has approximately $800 million of work remaining to be
bid that is scheduled for completion by 2006. Clark County's program, including
airport improvements funded by PFC's (Passenger Facility Charges),budgets
expenditures of approximately $300 million through 1997. The transportation
departments of the states of Arizona, Nevada and Utah expect to let contracts
during 1997 in amounts approximating $410 million, $278 million and $256
million, respectively. Utah's State Legislature is currently debating funding
alternatives for the planned reconstruction of I-15 through Salt Lake City.
This work will be accomplished under a design/build contract expected to be in
excess of $1 billion. Both Las Vegas, Nevada and Phoenix, Arizona have
experienced considerable growth in residential construction. Site work, grading,
drainage and paving of residential subdivisions, commercial shopping centers,
and industrial office complexes will be pursued by the Company through AKR.
Private infrastructure spending is highly cyclical, and is very sensitive to
general economic conditions and interest rates and, therefore, is subject to
volatility. There can be no assurance that the recent trends in residential and
commercial development will be sustained.
Operations
In addition to the construction of highways, bridges, overpasses and
airport runways, the Company constructs other projects which require the use of
structural concrete. From its Phoenix, Arizona corporate office and area offices
in Moapa, Nevada, Salt Lake City, Utah and New Mexico, the Company markets
(primarily by responding to solicitations for competitive bids) and manages all
of its projects. Staff is also located at job sites to meet on-site project
management requirements. See "--Marketing."
In addition to profitability, the Company considers a number of
factors when determining whether to bid on a project, including the location of
the project, likely competitors and the Company's current and projected
workloads. The Company uses a computer-based project estimating system which
reflects its bidding and construction experience and which the Company believes
best identifies the project's risks and opportunities. The Company develops
comprehensive estimates with each project divided into phases and line items for
which separate labor, equipment, material, subcontractor and overhead cost
estimates are compiled. Once a project begins, the estimate provides the Company
with a budget against which ongoing project costs are measured. Until 1996, the
Company had seldom experienced material deviations in actual project costs from
its estimated project budgets. Several material deviations occurred in 1996;
however, management has determined they were primarily the result of operational
difficulties and not of a nature that would require modifications to the
estimating or bidding procedures.
The Company owns some of the construction equipment used in its
projects, including cranes, backhoes, scrapers, graders, loaders, trucks,
trailers, pavers and rollers. The net book value of the Company's equipment at
December 31, 1996 was approximately $4.7 million. Although the Company leases a
significant portion of its equipment, it believes that ownership of equipment is
generally preferable to leasing because ownership ensures equipment availability
and normally results in lower equipment costs. The Company attempts to keep its
equipment as fully utilized as possible and may rent equipment on a short-term
basis to other contractors.
The Company's corporate management coordinates engineering and
administrative support services with operating management at the project site.
The latter are responsible for planning, scheduling and budgeting operations,
equipment maintenance and customer satisfaction. Project and area managers
monitor project costs on a daily and weekly basis while corporate management
monitors such costs monthly.
Raw materials (primarily concrete, aggregate and steel) used in the
Company's operations are available from a number of sources. There are a
sufficient number of materials suppliers within the Company's market areas to
assure the Company of adequate competitive bids for supplying such raw
materials. Generally, the Company will obtain four bids from competing concrete,
asphalt or aggregate suppliers whose reserves of such materials will normally
extend beyond the expected
4
completion date of the project. Costs for raw materials vary depending upon
project duration, construction season, or other factors; but, generally, prices
quoted to the Company for raw materials are fixed for the project's duration.
The Company continues to revise its field reporting systems and to
reassign senior management personnel in order to control costs and improve its
reporting systems. Arvin L. Black resigned as Area Manager for Arizona
operations and was replaced by Robert H. Bottcher. Gary W. Burnell will begin
his duties as Chief Financial Officer effective April 1, 1997. Kenneth D.
Nelson has been named Vice President - Corporate Administration with direct
responsibilities for field cost accounting systems, training and enforcement of
compliance with Company policies and procedures relative to tracking and
managing field cost. To assist Mr. Nelson in this effort, the Company has added
James M. Vandegrift, who has extensive construction cost accounting experience,
as Cost Accounting Supervisor. Management at the area and corporate levels has
increased both the depth and frequency of direct scrutiny of project costs.
Additional training is being scheduled and the Company's upgraded Windows-based
field cost system (F-Cost) is undergoing its beta testing on selected projects.
Additionally, the Company recently employed the services of Fails Management
Institute (FMI), one of the nation's leading construction management
consultants, to perform a complete performance evaluation of the Company's
systems, personnel and practices. Management intends to utilize the findings of
the FMI study to further enhance its Field reporting systems, management
practices and operational matters.
Projects and Customers
The Company specializes in public sector construction projects and its
principal customers are the state departments of transportation in Nevada,
Arizona, Utah and New Mexico and bureaus and departments of municipal and county
governments in those states. The Company generated average project revenue of
approximately $6 to $7 million in each of the three years ended December 31,
1994, 1995 and 1996. For the year ended December 31, 1996, revenue generated
from six projects in Nevada, Arizona and Utah represented 63% of the Company's
revenue. The discontinuance of any projects, a general economic downturn or a
reduction in the number of projects let out for bid in any of the states in
which the Company operates, could have an adverse effect on the Company's
results of operations. In each of the two years ended December 31, 1995 and
1996, Clark County General Services and the Arizona Department of
Transportation each accounted for over 10% of the Company's consolidated
revenue.
The following table describes all projects substantially completed by
the Company in each of the three years ended December 31, 1994, 1995 and 1996.
Contract amounts include agreed upon change orders, if any, and represent the
total dollar value of the contract to the Company.
Contract
Customer Project Designation Location Amount Completion Date
- -------------------------------------------------------------------------------------------------------------
City of Phoenix, Arizona Northern Avenue Phoenix, AZ $ 311,132 April 1994
Clark County, Nevada
General Services Airport Beltway Channel Las Vegas, NV 2,895,903 April 1994
Clark County, Nevada
General Services Airport Connector Las Vegas, NV 13,870,339 November 1994
Cheyenne Joint Venture Cheyenne Channel
Reconstruction Las Vegas, NV 1,446,002 November 1994
City of Phoenix, Arizona Grand Canal Phoenix, AZ 43,845 January 1995
Arizona Department of
Transportation Squaw Peak Parkway Phoenix, AZ 25,733,328 May 1995
Arizona Department of
Transportation Casa Grande Highway Phoenix, AZ 27,052,138 May 1995
Clark County, Nevada
General Services Flamingo Winnick Las Vegas, NV 2,687,309 May 1995
Clark County, Nevada
General Services Airport North Portal Las Vegas, NV 15,068,853 May 1995
5
Contract
Customer Project Designation Location Amount Completion Date
- -----------------------------------------------------------------------------------------------------------------
Arizona Department of
Transportation Red Mountain Freeway Phoenix, AZ $12,684,836 May 1995
Salt Lake City, Utah Airport
Authority 40th Street Relocation Salt Lake City, UT 2,293,088 May 1995
Clark County, Nevada
General Services Van Buskirk Las Vegas, NV 3,175,206 May 1995
Continental Insurance Gila River Phoenix, AZ 3,594,017 May 1995
City of Mesquite, Nevada Mesquite Mesquite, NV 316,244 October 1995
Lincoln County, Nevada Panaca, NV Panaca, NV 243,903 October 1995
Colorado River Commission River Mountain Las Vegas, NV 1,300,901 November 1995
City of Mesquite, Nevada Summer Ridge Mesquite, NV 129,237 December 1995
City of Mesquite, Nevada Hillside Storm Drain Mesquite, NV 162,103 December 1995
City of Henderson, Nevada C-1 Channel Henderson, NV 1,086,497 October 1995
Arizona Department of Payson-Show Low
Transportation Highway at Heber Heber, AZ 5,535,662 April 1996
Arizona Department of
Transportation I-17 Widening Phoenix, AZ 8,633,650 October 1996
DG Fenn Baptist Retirement Phoenix, AZ 78,468 October 1996
Salt Lake City Airport
Authority South Cargo Salt Lake City, UT 1,517,428 October 1996
Intermountain
Roadbuilders Davis Monthan - Streets Tucson, AZ 344,418 April 1996
Town of Youngtown Youngtown Streets Youngtown, AZ 77,423 February 1996
Arizona Department of
Transportation Pima Freeway Phoenix, AZ 7,546,838 May 1996
Salt Lake City, Utah Airport
Authority Salt Lake City Airport Salt Lake City, UT 27,364,636 January 1996
Clark County, Nevada
General Services South Beltway Las Vegas, NV 16,175,964 January 1996
Arizona Department of
Transportation Dunlap Phoenix, AZ 8,198,181 January 1996
VFL Technology Chevron Cell
Corporation Construction Salt Lake City, UT 1,315,072 June 1996
Arizona Department of Chandler
Transportation Boulevard Phoenix, AZ 2,209,435 May 1996
Utah Department of
Transportation Snow Canyon Southern, Utah 4,138,290 January 1996
Arizona Department of
Transportation Navajo Papermill Rd Phoenix, AZ 641,061 January 1996
Intermountain Roadbuilders Intermtn.Roadbuilders Phoenix, AZ 265,345 January 1996
Arizona Department of
Transportation Goodyear Urban Goodyear, AZ 463,665 August 1996
Crescent Run LLP Crescent Run Mesa, AZ 262,261 April 1996
6
Contract
Customer Project Designation Location Amount Completion Date
- ------------------------------------------------------------------------------------------------------------------------
Wespac Lost Canyon II Scottsdale, AZ $ 152,778 October 1996
City of Winslow City of Winslow Winslow, AZ 1,402,868 September 1996
Clark County Department of
Aviation Searchlight Searchlight, NV 707,977 January 1996
Arizona Department of
Transportation Nogales Connection Nogales, AZ 11,308,000 October 1996
The following table describes all projects of the Company in progress
as of December 31, 1996. Current contract amounts include agreed upon change
orders, if any, and represent the dollar value of the contract to the Company.
Current Award
Contract Date/Estimated
Customer Project Designation Location Amount Completion Date
- ------------------------------------------------------------------------------------------------------------------------
February 1996
City of Henderson Equestrian Detention Henderson, NV $ 5,317,707 March 1997
Clark County Department of June 1995
Aviation Jean Airport Jean, NV 3,576,993 March 1997
Clark County, Nevada McCarran Airport January 1995/
General Services Parking Garage Las Vegas, NV 60,494,179 March 1997
Clark County Department of August 1995/
Public Works LV Beltway Las Vegas, NV 28,684,010 March 1997
Clark County Department of McCarran Garage August 1995/
Aviation Infrastructure Las Vegas, NV 5,950,409 March 1997
Arizona Department of Phoenix - Casa November 1995/
Transportation Grande (Joint Venture) Phoenix, AZ 19,600,390 June 1997
Intermountain December 1995/
Roadbuilders Davis Monthan - Taxiway Tucson, AZ 164,608 March 1997
January 1996/
Homes by Dave Brown Country Estates Gilbert, AZ 260,643 July 1997
Clark County Department of March 1996/
Aviation Runway Extension Las Vegas, NV 14,165,629 August 1997
Clark County Department of June 1996/
Aviation Ticketing Facility Las Vegas, NV 7,223,006 July 1997
December 1995/
Kay Roger/ADA Const. Legacy II Phoenix, AZ 195,483 February 1997
Clark County Department of Union Pacific R.R. June 1996/
Aviation Relocation Las Vegas, NV 1,989,519 January 1997
April 1996/
Chanen Midwestern University II Glendale, AZ 230,579 January 1997
June 1996/
Moapa Water District Moapa Water District Moapa, NV 858,485 January 1997
7
Current Award
Contract Date/Estimated
Customer Project Designation Location Amount Completion Date
- ----------------------------------------------------------------------------------------------------------------------
June 1996/
Frehner Construction Precast Las Vegas, NV $ 97,885 January 1997
May 1996/
Robert Ewing Lone Butte Industrial Maricopa County 225,000 February 1997
July 1996/
City of Phoenix Collector Street Overlay Phoenix, AZ 2,082,183 January 1997
Clark County Department of August 1996/
Aviation Terminal D Sitework Las Vegas, NV 41,026,706 April 1998
May 1996/
City of Phoenix Skunk Creek Landfill Phoenix, AZ 2,708,736 January 1997
June 1996/
Dept. of United States Army White Sands Missile Range New Mexico 12,207,945 June 1997
June 1996
Triton Builders AT&T Expansion Mesa, AZ 246,080 January 1997
November 1996/
City of Las Vegas Detention Facility Las Vegas, NV 386,046 May 1997
Dept. of Transportation July 1996/
Hwy. Admin. Wiggins Crossing Arizona 812,890 August 1997
Nevada Department of September 1996/
Transportation Eastern State Highway Sys Las Vegas, NV 2,196,806 February 1997
August 1996/
Robert Ewing Lone Butte 3&4 Maricopa County 201,979 February 1997
Clark County Department of McCarran Air Cargo October 1996/
Aviation Expansion Las Vegas, NV 2,387,106 April 1997
New Mexico Department of August 1996/
Transportation I-25/Socorro New Mexico 2,495,015 June 1997
Arizona Department of Squaw Peak Shea-TBird October 1996/
Transportation Continuation Phoenix, AZ 36,240,016 February 1999
Municipal Parking September 1996/
City of Gilbert Expansion Gilbert, AZ 154,492 January 1997
School House Roosevelt Lake, October 1996/
United States Forest Service Campground AZ 4,578,350 August 1997
October 1996/
Jackson Properties Country Meadows Maricopa County 748,289 April 1997
Utah Department of October 1996/
Transportation I-15/Woods Crossing Salt Lake, UT 15,985,425 November 1997
November 1996/
City of Bisbee Bisbee Municipal Airport Bisbee, AZ 295,712 January 1997
United States Dept. Of October 1996/
Agriculture Tonto Forest Arizona 290,000 March 1997
8
Current Award
Contract Date/Estimated
Customer Project Designation Location Award Completion Date
- ---------------------------------------------------------------------------------------------------------------
October 1996/
United States Marine Corp. Yuma Taxiway Repair Yuma, AZ $ 668,000 March 1997
Arizona Department of November 1996/
Transportation Douglas Rodeo Hwy Douglas, AZ 1,455,635 May 1997
December 1996/
City of Mesa City of Mesa Sealcoat Mesa, AZ 103,898 May 1997
December 1996/
Mayo Clinic/Ryan Cos. Mayo Arrowhead Glendale, AZ 133,320 May 1997
Backlog
The Company's backlog (anticipated revenue from the uncompleted
portions of awarded projects) was approximately $130 million at December 31,
1996, compared to approximately $90 million at December 31, 1995. The Company
includes a construction project in its backlog at such time as a contract is
awarded or a firm letter of commitment is obtained. The Company believes that
its backlog figures are firm, subject to provisions contained in its contracts
which allow customers to modify or cancel the contracts at any time upon payment
of a relatively small cancellation fee. The Company has not been materially
adversely affected by contract cancellations or modifications in the past. A
portion of the Company's anticipated revenue in any year is not reflected in its
backlog at the start of the year because some projects are initiated and
completed in the same year.
Competition
The Company believes that the primary competitive factors in the
structural concrete segment of the construction industry are price, reputation
for quality work, financial strength, knowledge of local market conditions and
estimating abilities. The Company believes that it competes favorably with
respect to each of the foregoing factors. However, most of the Company's
projects involve public sector work for which contractors are first pre-
qualified to bid and then are chosen by a competitive bidding process, primarily
on the basis of price. Because the Company's bids are often determined by the
cost to it of subcontractor services and materials, the Company believes it is
often able to lower its overall construction bids due to its prompt payments to,
consistent workloads for, and good relationships with, its subcontractors and
suppliers. The Company competes with a large number of small owner/operator
contractors that tend to dominate smaller (under $4 million) highway projects.
When bidding on larger infrastructure projects, the Company also competes with
larger, well capitalized regional and national contractors (including Granite
Construction Incorporated, Peter Kiewit Sons', Inc. and SundtCorp., Inc.), many
of whom have larger net worths, bonding capacities and construction personnel
than the Company. Due to currently favorable market conditions in Nevada,
Arizona and Utah, which have resulted in an increase in heavy construction
projects in these states, additional competition for projects may be expected.
Such additional competition could reduce the Company's profit margins on certain
projects.
Although smaller contractors have smaller overhead expenses, generally
overhead expenses are proportionate when computed as a percentage of total
revenue generated and are therefore not a competitive factor. Except for the
Company's approximately $65 million limit on individual project bonds and
approximately $160 million limit on aggregate project bonds, the Company does
not believe it is at a competitive disadvantage in relation to its larger
competitors. The Company does not believe it has other competitive advantages
or disadvantages with respect to its smaller competitors other than advantages
which may result from its higher bonding capacity, longer relationships with
subcontractors and suppliers and the perceived stability of having been in
business since 1980.
9
The Company does not believe that the competitive environment is
materially different in other western states in which the Company may expand;
however, growth rates have been stagnant in some western states in recent years,
thereby intensifying competition among construction companies in those states.
Initially, the Company will be at a competitive disadvantage in new markets
until it obtains information on those markets and develops relationships with
local subcontractors.
The Contract Process
The Company's projects are obtained primarily through competitive
bidding and negotiations in response to advertisements by federal, state and
local government agencies and solicitations by private parties. The Company
submits bids after a detailed review of the project specifications, an internal
review of the Company's capabilities and equipment availability and an
assessment of whether the project is likely to attain targeted profit margins.
The Company owns, leases, or is readily able to rent, any equipment necessary to
complete the projects upon which it bids. After computing estimated costs of the
project to be bid, the Company adds its desired profit margin before submitting
its bid. The Company believes that success in the competitive bidding process
involves (i) being selective on projects bid upon in order to conserve
resources, (ii) identifying projects which require the Company's specific
expertise, (iii) becoming familiar with all aspects of the project to avoid
costly bidding errors and (iv) analyzing the local market to determine the
availability and cost of labor and the degree of competition. Since 1987, the
Company has been awarded contracts for approximately 18% of the projects upon
which it has bid. A substantial portion of the Company's revenue is derived
from projects that involve ''fixed unit price'' contracts under which the
Company is committed to provide materials or services at fixed unit prices (such
as dollars per cubic yard of earth or concrete, or linear feet of pipe). The
unit price is determined by a number of factors including haul distance between
the construction site and the warehouses or supply facilities of local material
suppliers and to or from disposal sites, site characteristics and the type of
equipment to be used. While the fixed unit price contract generally shifts the
risk of estimating the quantity of units for a particular project to the
customer, any increase in the Company's unit cost over its unit bid price,
whether due to inefficiency, faulty estimates, weather, inflation or other
factors, must be borne by the Company.
Most government contracts provide for termination of the contract at
the election of the customer. In such event the Company is generally entitled
to receive a small cancellation fee in addition to reimbursement for all costs
it incurred on the project. Many of the Company's contracts are subject to
completion requirements with liquidated damages assessed against the Company if
schedules are not met. The Company has not been materially adversely affected
by these provisions in the past.
Contracts often involve work periods in excess of one year. 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. Pursuant to construction industry practice,
a portion of billings, generally not exceeding 10%, may be retained by the
customer until the project is completed and all obligations of the contractor
are paid. The Company has not been subject to a material loss in connection
with any such retention.
The Company acts as prime contractor on most of its construction
projects and subcontracts certain jobs such as electrical, mechanical and white
paving work to others. As prime contractor, the Company bills the customer for
work performed and pays the subcontractors from funds received from the
customer. Occasionally the Company provides its services as a subcontractor to
another prime contractor. As a subcontractor, the Company will generally
receive the same or similar profit margin as it would as a prime contractor,
although revenue to the Company will be smaller because the Company only
contracts a part of the project. As prime contractor, the Company is
responsible for the performance of the entire contract, including work assigned
to subcontractors. Accordingly, the Company is subject to liability associated
with the failure of subcontractors to perform as required under the contract.
The Company occasionally requires its subcontractors to furnish bonds
guaranteeing their performance, although affirmative action regulations require
the Company to use its best efforts to hire minority subcontractors for a
portion of the project and some of these subcontractors may not be able to
obtain surety bonds. On average, the Company has required performance bonds for
less than 10% of the dollar amount of its subcontracted work. However, the
Company is generally aware of the skill levels and financial condition of its
subcontractors through its direct inquiry of the subcontractors and contract
partners of the subcontractors, as well as its review of financial information
provided by the subcontractors and third party reporting services including
credit reporting
10
agencies and bonding companies. The Company has experienced losses of less than
.5 of 1% of total revenue over the last five fiscal years including a loss of .8
of 1% of total revenue for the year ended December 31, 1993. As the Company
expands into new geographic areas, it expects to obtain references and examine
the financial condition of prospective subcontractors before entering into
contracts with them, requiring bonding as deemed appropriate.
In connection with public sector contracts, the Company is required to
provide various types of surety bonds guaranteeing its own performance. The
Company's ability to obtain surety bonds depends upon its net worth, working
capital, past performance, management expertise and other factors. Surety
companies consider such factors in light of the amount of the Company's surety
bonds then outstanding and the surety companies' current underwriting standards,
which may change from time to time. See ''--Insurance and Bonding.''
Insurance and Bonding
The Company maintains general liability and excess liability
insurance, insurance covering its owned and leased construction equipment and
workers' compensation insurance in amounts it believes are consistent with its
risks of loss and in compliance with specific insurance coverages required by
its customers as a part of the bidding process. The Company carries liability
insurance of $11 million per occurrence, which management believes is adequate
for its current operations and consistent with the requirements of projects
currently under construction by the Company.
The Company is required to provide a surety bond on most of its
projects. The Company's ability to obtain bonding, and the amount of bonding
required, is primarily determined by the Company's net worth, liquid working
capital (consisting of cash and accounts receivable in excess of accounts
payable and accrued liabilities) and the number and size of projects under
construction. The larger the project and/or the more projects in which the
Company is engaged, the greater the Company's bonding, net worth and liquid
working capital requirements. Bonding requirements vary depending upon the
nature of the project to be performed. The Company generally pays a fee to
bonding companies of 1/2% to 1% of the amount of the contract to be performed.
Because these fees are generally payable at the beginning of a project, the
Company must maintain sufficient working capital to satisfy the fee prior to
receiving revenue from the project. The Company has approximately a $65
million limit on individual project bonds and approximately a $160 million limit
on aggregate project bonds.
Marketing
The Company obtains its projects primarily through the process of
competitive bidding. Accordingly, the Company's marketing efforts are limited
to subscribing to bid reporting services and monitoring trade journals and other
industry sources for bid solicitations by various government authorities. In
response to a bid request, the Company submits a proposal detailing its
qualifications, the services to be provided and the cost of the services to the
soliciting entity which then, based on its evaluation of the proposals
submitted, awards the contract to the successful bidder. Generally, the
contract for a project is awarded to the lowest bidder, although other factors
may be taken into consideration such as the bidder's track record for compliance
with bid specifications and procedures and its construction experience. In the
private infrastructure market which the Company pursues through AKR, a more
focused effort is required. AKR is listed on preferred " bid lists" of certain
real estate developers. The timely completion of quality work at competitive
prices and constant maintenance of personal relationships is necessary to
preserve the Company's place on these bid lists. Occasionally, private work
can be negotiated depending upon the business practices of the owner/developer.
Membership and participation in selected industry associations helps to increase
the Company's exposure to potential clients and is one means by which the
Company stays informed as to industry developments and future prospects within
the marketplace.
Government Regulation
The Company's operations are subject to compliance with regulatory
requirements of federal, state and municipal authorities, including regulations
covering labor relations, safety standards, affirmative action and the
protection of the environment including requirements in connection with water
discharge, air emissions and hazardous and toxic substance
11
discharge. Under the Federal Clean Air Act and Clean Water Act, the Company
must apply water or chemicals to reduce dust on road construction projects and
to contain water contaminants in run off water at construction sites. The
Company may also be required to hire subcontractors to dispose of hazardous
wastes encountered on a project. The Company believes that it is in substantial
compliance with all applicable laws and regulations. However, amendments to
current laws or regulations imposing more stringent requirements could have a
material adverse effect on the Company.
Employees
On December 31, 1996, the Company employed approximately 50 salaried
employees (including its management personnel and executive officers) and
approximately 178 hourly employees. The number of hourly employees varies
depending upon the amount of construction in progress. For the year ended
December 31, 1996, the number of hourly employees ranged from approximately 178
to approximately 397 and averaged approximately 309. At December 31, 1996,
the Company's employees did not belong to a labor union and the Company
believes its relations with its employees are satisfactory.
Item 2. Properties
The Company leases approximately 6,200 square feet of executive
office space at 4411 South 40th Street, Suites D-10 and D-11, Phoenix, Arizona,
85040, under one lease which expires in July 1997, at a rental rate of $4,022
per month. The Company leases approximately 1,800 square feet of office space at
1598 North 400 West, Suite C, Layton, Utah 84041, which expires in February
1998, at a monthly rental rate of $1,000 per month. The Company also leases
from an affiliate approximately 2,000 square feet of office space at 1501
Highway 168, Moapa, Nevada 89025, on a month-to-month basis, at a rental rate
of $800 per month. The Company believes that its rental rates are fair,
reasonable and consistent with rates charged by unaffiliated third parties in
the same market area.
Item 3. Legal Proceedings
The Company is a party to legal proceedings in the ordinary course of
its business. 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 that none of these proceedings are material to its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended December 31, 1996.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been listed on the Nasdaq National
Market since October 1995 and is traded under the symbol "MVCO". The following
table represents the high and low closing prices for the Company's common stock
on the Nasdaq National Market.
1995 1996
------------------------------
High Low High Low
------------------------------
First quarter....................... 6 3/8 5
Second quarter...................... 6 1/8 5
Third quarter....................... 7 3/8 4 7/8
Fourth quarter...................... 6 1/8 5 1/8 4 3/4 3 5/8
Holders of Record
As of February 28, 1997 there were more than 350 record and beneficial
owners of the Company's Common Stock.
Item 6. Selected Financial Data
Proforma
Years Ended December 31, Combined (1)
- ------------------------------- 1992 1993 1994 1995 1996
------------- ------------ ------------ ------------- -------------
Income Statement Data:
Revenue......................................... $34,756,329 $60,474,750 $80,220,521 $90,048,523 $133,723,645
Gross Profit.................................... 2,994,885 3,461,503 5,472,878 4,354,455 2,810,585
Income (loss) from Operations................... (376,554) (230,934) 4,704,425 2,364,676 (331,525)
Interest Expense................................ 4,542 3,727 500,000 1,116,464 611,828
Income (loss) before income taxes(2)............ 25,331 60,501 4,565,398 1,608,997 (106,863)
Net income (loss)............................... 15,706 37,511 2,824,776 1,059,347 (85,228)
Average shares outstanding(3)................... 1,675,000 1,675,000 3,350,000 1,641,663 3,601,250
Net income (loss) per share(3).................. $0.01 $0.02 $0.84 $.65 $(.02)
Financial Position Data: 1992 1993 1994 1995 1996
------------- ------------ ------------ ------------- -------------
Working capital (deficiency).................... $ 4,169,935 $ 5,617,286 $(3,348,451) $11,319,107 $ 8,738,820
Total assets.................................... 11,391,879 19,664,666 22,375,168 28,909,786 42,121,334
Long-term debt.................................. - - - 3,689,055 4,631,377
Stockholders' equity (deficit).................. 5,631,661 6,809,481 (232,770) 11,761,997 11,676,769
(1) Effective October 1, 1994, the Company acquired all the outstanding shares
of Meadow Valley Contractors, Inc. ("MVC") in a transaction accounted for by
the purchase method of accounting whereby the basis of certain assets was
revalued for accounting purposes. To arrive at this proforma presentation, the
MVC financial statements for the 1994 period prior to October 1, 1994 have
been combined with the Company's financial statements for the period ending
December 31, 1994. See Note 2 to the Company's Consolidated Financial
Statements.
13
(2) Includes the effect of proforma income tax adjustments reflecting
additional income taxes that would have been reported had MVC been subject
to federal and state income taxes for the periods presented through
September 30, 1994. Prior to October 1, 1994, MVC was a S Corporation
and, therefore, did not pay income taxes.
(3) The average shares outstanding and net income (loss) per share are computed
upon the number of shares of the Company's Common Stock outstanding as of
December 31, 1994 including the assumed issuance of 500,000 shares of
restricted Common Stock in the MVC acquisition, which were issued during
October 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company was incorporated in Nevada on September 15, 1994. On
October 1, 1994, the Company purchased all of the outstanding Common Stock of
Meadow Valley Contractors, Inc. ("MVC"), for $11.5 million comprised of a $10
million promissory note and $1.5 million paid by the issuance of 500,000
restricted shares of the Company's Common Stock valued at $3.00 per share. MVC
was founded in 1980 as a heavy construction contractor and has been engaged in
that activity since inception. References to the Company's history include the
history of MVC.
The Company is a heavy construction contractor specializing since 1980
in structural concrete construction of highway bridges and overpasses and the
paving of highways and airport runways. The Company generally serves as the
prime contractor for public sector customers (such as federal, state and local
governmental authorities) in the states of Nevada, Arizona, Utah and New Mexico.
The Company believes that specializing in structural concrete construction has
contributed significantly to its revenue growth and provides it with an
advantage in the competitive bidding process. However, such specialization
limits the types and sizes of projects upon which the Company bids and may be a
competitive disadvantage for projects in which the amount of work proposed to be
completed by the prime contractor (as compared to the amount of work which will
be subcontracted by the prime contractor) is a consideration in the bidding
process. The Company primarily seeks public sector customers because public
sector projects are less cyclical than private sector projects, payment is more
reliable, work required by the project is generally standardized and little
marketing expense is incurred in obtaining projects.
On January 2, 1996, the Company acquired certain assets of AKR
Contracting ("AKR"), an unaffiliated company in Phoenix, Arizona. AKR
specializes in earthwork, grading and paving of residential subdivisions,
commercial centers and in small publicly funded projects. Through AKR, the
Company expects to increase revenue from the private construction market in
which the Company was not previously engaged.
During 1996, the Company formed Ready Mix, Inc. ("RMI"), a wholly-
owned ready mix concrete company based in Las Vegas, NV. RMI manufactures and
distributes ready mix concrete and expects to target markets such as concrete
subcontractors, prime contractors, home builders, commercial and industrial
property developers, pool builders and homeowners. RMI is expected to begin
operations from its first site near the end of the first quarter 1997. Financed
with internal funds, a $2 million line of credit and operating leases, the
Company intends to operate from two sites using approximately 40 mixer trucks.
During 1996, the Company formed Prestressed Products Incorporated
("PPI"), a wholly-owned precast concrete company based in Moapa, NV, which is
northeast of Las Vegas, NV. PPI will design, manufacture and erect precast
prestressed concrete building components for use on commercial, institutional
and public construction projects throughout the Southwest. Product lines
include architectural and structural building components and prestressed bridge
girders for highway construction. PPI will begin operations during 1997 with a
precast yard and concrete batch plant located on leased property adjacent to the
Company's office in Moapa, Nevada.
The Company has historically relied upon a small number of projects to
generate a significant portion of its revenue. For instance, revenue generated
from six projects represented 63% of the Company's revenue for the year ended
December 31, 1996. Results for any one calender quarter may fluctuate widely
depending upon the stage of completion of the Company's active projects.
14
Results of Operations
The results of operations for the year ended December 31, 1994,
represents the combined activities of MVC and the Company on a continuous basis
for the 12 month period. The Company had no other operations since inception
other than MVC's operations. Accordingly, a discussion of the combined
operations for the 12 months ended December 31, 1994, is considered more
meaningful than a discussion of separate operations.
The following table sets forth statement of operations data expressed
as a percentage of revenues for the periods indicated:
Years Ended December 31,
--------------------------
1994 1995 1996
------- -------- -------
Revenue............................... 100.00% 100.00% 100.00%
Cost of contract revenue.............. 93.18 95.16 97.90
Gross profit.......................... 6.82 4.84 2.10
General and administrative expenses... .89 2.21 2.35
Income (loss) from operations......... 5.93 2.63 (.25)
Interest income....................... .43 .52 .56
Interest expense...................... (.28) (1.24) (.46)
Other income.......................... .03 .07 .07
Prior Offering costs.................. - (.19) -
Income (loss) before income taxes..... 6.11 1.79 (.08)
Net income (loss) after income taxes.. 3.72 1.18 (.06)
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Revenue and Backlog. Revenue increased 48.5% to $133.7 million for
the year ended December 31, 1996, from $90.0 million for the year December 31,
1995. The increase results primarily from a $30.0 million increase in backlog
at December 31, 1995 over the prior year and the award of approximately $100
million of projects during the first nine months of 1996, compared to
approximately $58 million during the same period in 1995. In addition, the
Company's expansion into earthwork, grading and paving of residential
subdivisions, commercial centers and in small public works, through the
acquisition of certain assets of AKR, contributed approximated $11.2 million to
the Company's overall revenue growth. Revenue is impacted in any one period by
the backlog at that beginning of that period.
Gross Profit. As a percentage of revenue, gross profit decreased from
4.84% in 1995 to 2.10% in 1996. The decrease results primarily from cost
overruns attributable to (i) omission of costs from bid estimates (ii)
difficulty in assembling an adequate skilled labor force due to physical
location of a construction site (iii) erroneous assumptions at bid time
regarding the Company's construction productivity (iv) cost related plan or
specification errors and (v) inadequate field and corporate supervision, offset
by a 2.2% increase in gross profit margins due to the settlement of a claim
which is related to a project completed during 1995. Gross profit margins can
be affected by construction delays and difficulties due to weather conditions,
availability of materials, the timing of work performed by other subcontractors
and the physical and geological condition of the construction site.
General and Administrative Expenses. General and administrative
expenses increased from $1,989,779 for 1995 to $3,142,110 for 1996. The
increase results, in part, from the start-up costs associated with the Company's
development stage subsidiaries, the Company's expansion in the Utah market and,
through AKR, expansion into earthwork, grading and paving of residential
subdivisions, commercial centers and in small publicly funded projects. The
additional costs associated with the development stage companies, expansion in
the Utah market and AKR amounted to $719,572, consisting primarily of salaries
and office set up costs. In addition to the start-up costs, the Company
sustained increased general and administrative expenses due to the 48.5% growth
in revenue.
15
Interest Income and Expense. Interest income increased in 1996 to
$741,270 from $470,150 due to invested proceeds from the Public Offering and
increased funds held in retention. Interest expense decreased in 1996 to
$611,828 due to the November 1995 repayment of $6.5 million of loans issued in
connection with the acquisition of Meadow Valley Contractors, Inc.
Net Income (Loss) After Income Taxes. Net loss after income taxes for
1996 was $(85,228) compared to net income of $1,059,347 for 1995. The
decrease primarily resulted from the lower gross profit and higher general and
administrative expense as discussed above.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Revenue and Backlog. Revenue increased 12.3% to $90.0 million for the
year ended December 31, 1995, from $80.2 million for the twelve months ended
December 31, 1994. The increase resulted from the awarding of several
significant projects in the first quarter of 1995, totaling approximately $76.0
million. Revenue is impacted in any one period by the backlog at the beginning
of the period. Backlog was approximately $96.0 million at December 31, 1995,
an increase of approximately $66.0 million from December 31, 1994.
Gross Profit. As a percentage of revenue, gross profit decreased from
6.8% in 1994 to 4.8% in 1995. The decrease was a result of (i) the
substantial completion during 1994 of several projects with higher gross profit
margins; (ii) decreased gross profits during the first six months of 1995
related to additional costs incurred in the final stages of three ''large
volume'' projects. (A ''large volume'' project is defined by the Company as a
project in excess of $20 million). The Company is requesting additional
compensation for each of the large volume projects based upon the Company's
contractual right to request additional compensation if plan or specification
errors result in additional work or extend the duration of the project. Large
volume projects offer lower gross profit margins but greater total dollar
profits than smaller volume projects. Gross profit margins are affected by
construction delays and difficulties due to weather conditions, availability of
materials, the timing of work performed by other subcontractors and the physical
and geological condition of the construction site.
General and Administrative Expenses. General and administrative
expenses increased from $712,331 for 1994 to $1,989,779 for 1995. The increase
results primarily from additional administrative and estimating personnel hired
during 1995 who contributed to the significant increase in backlog at December
31, 1995. The additional estimating personnel are expected to enable the Company
to submit bids on a greater number of projects in the future. The additional
administrative personnel are expected to be instrumental in the exploration and
development of new business markets and acquisition targets. Other factors
contributing to the increase in general and administrative expenses were as
follows (i) amortization of goodwill of $81,390 relating to the acquisition of
MVC (ii) the 1994 recovery of a bad debt of $257,575 and (iii) costs associated
with the relocation of the executive office from Nevada to Arizona.
Interest Income and Expense. Interest income increased in 1995 to
$470,150 from $346,450 due to increased retentions held in interest bearing
accounts, invested proceeds from the initial public offering and higher average
interest rates earned in 1995. Interest expense increased in 1995 to $1,116,464
from 222,889 in 1994 due to interest expense on the promissory notes issued to
acquire MVC.
Provision for Income Taxes. MVC was an S Corporation under the
Internal Revenue Code through September 30, 1994. As such, the MVC was not
subject to federal and state income taxes. MVC's sole stockholder was required
to report the MVC's taxable income on his personal income tax return. The
financial statements of the Company include a pro forma income tax adjustment
that represents the estimated federal and state income taxes that would have
been paid if MVC had been subject to taxation. Effective with the acquisition
of MVC by the Company as of October 1, 1994, the S Corporation election was
revoked and all future income will be subject to federal and state income taxes.
Net Income. Net income after income taxes for 1995 was $1,059,347
compared to $2,824,776 for 1994. The decrease resulted primarily from the
lower gross profit and higher general and administrative expense as discussed
above, together with interest expense, and goodwill amortization relating to the
acquisition of MVC.
16
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 heretofore discussed.
Annual revenue has grown from approximately $60.5 million in 1993 to $133.7
million in 1996. Growth has resulted in the need for additional capital to
finance increased receivables, retentions and capital expenditures, and to
address fluctuations in the work-in-process billing cycle, wherein costs and
estimated earnings on contracts in progress have exceeded billings.
The following table sets forth, for the periods presented, certain
items from the Statements of Cash Flows of the Company and MVC.
Years Ended December 31,
-----------------------------------------
(Combined)
1994 1995 1996
------------ ------------- ------------
Cash Flows Provided By (Used in) Operating Activities: $ 2,114,540 $(1,789,928) $(3,085,632)
Cash Flows Provided By (Used in) Investing Activities: 2,072,896 (527,120) (584,470)
Cash Flows Provided By (Used in) Financing Activities: (2,043,046) 2,935,528 (247,283)
Although the Company may experience increased profitability as
operations increase, cash may be reduced to finance receivables and for customer
cash retention required under contracts subject to completion. Management
continually monitors the Company's cash requirements to maintain adequate cash
reserves, and the Company believes that its cash balances were and, together
with the operating lines of credit described below, are sufficient.
Cash used in operating activities increased $5.2 million during the
years 1994 to 1996. The increased is primarily the result of an increase in
accounts receivable and net costs in excess of billings ("billings") of $14.4
million, offset by increases in accounts payable and accrued liabilities of $9.4
million along with interest payments related to the MVC acquisition of $.6
million and income tax payments in the amount of $1.1 million. The outstanding
accounts receivable and billings have increased primarily due to growth in
revenue and increased retentions related to large volume projects. The Company
contracts primarily with public sector customers, which it believes
significantly reduces exposure to conventional bad debts. Accordingly, based on
the Company's history of no material delays in the collection of accounts
receivable, no allowance was established for potentially uncollectible accounts
at December 31, 1996.
For the year ended December 31, 1994, cash provided by investing
activities amounted to $2.1 million, primarily as a result of cash acquired
through purchase of a subsidiary of $2.3 million, offset by loans to related
parties of $.3 million. Cash used in investing activities during 1995 included
the purchase of property and equipment of $1.4 million. Cash used during 1995
was offset by a decrease in restricted cash of $.3 million and repayment of $.6
million of loans to related parties.
For the year ended December 31, 1996, cash used in investing
activities amounted to $.6 million, primarily the result of the purchase of
property and equipment of $1.9 million offset by a decrease in restricted cash
of $1.2 million. The decrease in restricted cash during 1995 and 1996 is a
result of the partial release of funds held in escrow accounts pending the
completion of three large volume projects.
Cash flows used in financing activities increased by $1.7 million to
$2.0 million during the year ended December 31, 1994. The increase was caused
by a $1.7 million distribution to a stockholder. Cash provided by financing
activities during 1995 include proceeds from the initial public offering of the
Company's securities in the amount of $9.5 million, net of offering costs. Cash
provided by financing activities during 1995 was offset by repayment of $6.5
million of loans from a related party issued in connection with the MVC
acquisition. Cash used in financing activities during 1996 include lease
payments of $.1 million and equipment loan payments of $.1 million.
The Company currently has available from a commercial bank a
$2,000,000 operating line of credit ("line of credit") at an interest rate of
the commercial bank's prime plus .50%, and a $2,000,000 operating line of credit
at an interest rate of the commercial bank's prime plus .25%. At December 31,
1996, nothing had been drawn on either of the lines of credit.
17
Under the lines of credit, the Company is required to maintain certain levels of
working capital, to promptly pay all its obligations and is precluded from
conveying, selling or leasing all or substantially all of its assets. At
December 31, 1996, the Company was in full compliance with all such covenants
and there are no material covenants or restrictions in the lines of credit which
the Company believes would impair its operations. The lines of credit expire
August 15, 1997.
The Company anticipates incurring total costs related to the ready mix
operations of approximately $7.2 million which include the acquisition of land,
equipment and batch plant. The batch plant and its related equipment in the
amount of approximately $6.0 million will be financed primarily through
operating leases. The land totaling approximately $1.2 million will be financed
through bank notes and/or other financial instruments, which include
approximately $100,000 of capital expenditures and a $420,000 million land note
financed during 1996. In addition, the Company is currently leasing
approximately 40 ready-mix trucks with estimated annual lease payments of
$800,000.
The Company anticipates incurring total costs of approximately $.6
million, which includes $.2 million of capital expenditures incurred during
1996, for the acquisition of equipment and construction of a precast
manufacturing facility. The facility and its related equipment will be financed
with the proceeds of the IPO.
Management believes that the Company's cash reserves, together with
its lines of credit, are sufficient to fund its cash requirements for the next
12 months and that the Company's working capital will be adequate to fund its
short term and long term requirements.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. The Company adopted this accounting standard January 1, 1996. SFAS
123 also encourages, but does not require companies to record compensation cost
for stock-based employee compensation. The Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
Impact of Inflation
The Company believes that inflation has not had a material impact on
its operations. However, substantial increases in labor costs, worker
compensation rates and employee benefits, equipment costs, material or
subcontractor costs could adversely affect the operations of the Company for
future periods.
Known and Anticipated Future Trends and Contingencies
With the completion of the Public Offering in October 1995 and the
corresponding influx of capital, the Company's bonding limits were raised to
approximately $65 million per single project and $160 million aggregate.
Subject to the Company's profitability and increases in retained earnings, it
is anticipated that the bonding limits will increase proportionately, thereby
allowing the Company to bid on and perform more and larger projects.
18
The Company believes that the trend toward government funding of the
transportation system will continue. The passage of the ISTEA bill in 1991 was
intended to establish a strategic direction for future transportation
development in the United States. The creation of the National Highway System
in 1995 with corresponding funding is an indication of this trend. The current
ISTEA bill is due for reauthorization in 1997, and it is believed that the
current legislation, with necessary modifications, will likely be passed by
Congress. A number of state legislatures are addressing transportation funding
by allowing the construction of toll roads, and design-build contracts. These
contracts tend to be larger ($300 million - $1 billion) and therefore attract
larger contractors, joint ventures, or consortiums of firms.
Funding for infrastructure development in the United States is coming
from a growing variety of innovative sources. An increase of funding measures is
being undertaken by all levels of government to help solve traffic congestion
and related air quality problems. Sales taxes, fuel taxes, user fees in a
variety of forms, vehicle license taxes, private toll roads, quasi-public toll
roads, and others are all examples of how transportation funding is evolving.
Transportation norms are being challenged by federally mandated air quality
standards. Improving traffic movement, eliminating congestion, increasing
public transit, adding or designating high occupancy vehicle (HOV) lanes to
encourage car pooling and other solutions are being considered in order to help
meet EPA - imposed air quality standards.
Seasonality
The construction industry is seasonal, generally due to inclement
weather occurring in the winter months. Accordingly, the Company may experience
a seasonal pattern in its operating results with lower revenue in the first
quarter of each calendar year than other quarters. Quarterly results may also be
affected by the timing of bid solicitations by governmental authorities, the
stage of completion of major projects and revenue recognition policies. Results
for any one quarter, therefore, may not be indicative of results for other
quarters or for the year.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements are indexed on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
Information on directors and executive officers of the Company will be
included under the caption "Directors and Executive Officers" of the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders for
the year ended December 31, 1996, which is hereby incorporated by reference.
Item 11. Executive Compensation
Information on executive compensation will be included under the
caption "Compensation of Executive Officers" of the Company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders for the year ended
December 31, 1996, which is hereby incorporated by reference.
19
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on beneficial ownership of the Company's voting securities
by each director and all officers and directors as a group, and by any person
known to beneficially own more than 5% of any class of voting security of the
Company will be included under the caption "Beneficial Ownership of the
Company's Securities" of the Company's definitive Proxy Statement relating to
the Annual Meeting of the Shareholders for the year ended December 31, 1996,
which is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information on certain relationships and related transactions
including information with respect to management indebtedness will be included
under the caption "Information Regarding Indebtedness of Management to the
Company" of the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders for the year ended December 31, 1996, which is hereby
incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See Item 8 of Part II hereof.
(a)(2) Financial Statement Schedules
The schedules specified under Regulation S-X are either not
applicable or immaterial to the Company's consolidated financial
statements for the period from the date of inception, September 15,
1994 through December 31, 1994 and the years ended December 31,
1995 and 1996.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter
ended December 31, 1996.
(c) Exhibits
Exhibit
No. Title
------- ------------------------------------------------------------
1.01 Form of Underwriting Agreement with Spelman & Co., Inc. (1)
1.02 Form of Selected Dealer Agreement (1)
1.03 Form of Representatives' Warrant (1)
1.04 Consulting Agreement with the Representative (1)
1.05 Form of Amended Underwriting Agreement (Spelman & Co.,
Inc.) (1)
1.06 Form of Amended Representatives' Warrant (Spelman & Co.,
Inc.)(1)
1.07 Form of Underwriting Agreement (H D Brous & Co.,
Inc.)(1)
1.08 Form of Selected Dealer Agreement (H D Brous & Co.,
Inc.)(1)
1.09 Form of Representatives' Unit Warrant (H D Brous & Co.,
Inc.)(1)
20
Exhibit
No. Title
- -------- ---------------------------------------------------------------
1.10 Warrant Agreement (1)
1.11 Agreement Among Underwriters (1)
1.12 Form of Underwriting Agreement (H D Brous & Co., Inc. and
Neidiger/Tucker/Bruner, Inc.)(1)
1.13 Form of Agreement Among Underwriters (H D Brous & Co., Inc. and
Neidiger/Tucker/Bruner, Inc.)(1)
1.14 Form of Selected Dealer Agreement (H D Brous & Co., Inc. and
Neidiger/Tucker/Bruner, Inc.)(1)
1.15 Form of Representatives' Warrant Agreement, including Form of
Representatives' Warrant (H D Brous & Co., Inc. and
Neidiger/Tucker/Bruner, Inc.)(1)
3.01 Articles of Incorporation and Amendments thereto of the
Registrant (1)
3.02 Bylaws of the Registrant (1)
3.03 Bylaws of the Registrant Effective October 20, 1995
5.01 Opinion of Gary A. Agron, regarding legality of the Common
Stock (includes Consent)(1)
5.02 Opinion of Gary A. Agron, regarding legality of the Units,
Common Stock and Warrants (1)
10.01 Incentive Stock Option Plan (1)
10.02 Office lease of the Registrant (1)
10.03 Office lease of the Registrant (1)
10.04 Contract between the State of Arizona and the Registrant dated
October 22, 1993 (1)
10.05 Surety Bond between the Registrant and St. Paul Fire & Marine
Insurance Company (1)
10.06 Surety Bond between the Registrant and United States Fidelity
and Guaranty Company (1)
10.07 Contract between Clark County, Nevada and the Registrant dated
October 6, 1992 (1)
10.08 Surety Bond between the Registrant and St. Paul Fire and
Marine Insurance Company (1)
10.09 Agreement between Salt Lake City Corporation and the
Registrant dated May 5, 1993 (1)
10.10 Contract between Clark County, Nevada and the Registrant dated
July 21, 1993 (1)
10.11 Contract between Clark County, Nevada and the Registrant dated
August 17, 1993 (1)
10.12 Promissory Note executed by Robert C. Lewis and Richard C.
Lewis (1)
10.13 Promissory Note executed by Moapa Developers, Inc. (1)
10.14 Promissory Note executed by Paul R. Lewis (1)
10.15 Contract between Clark County, Nevada and the Registrant dated
September 7, 1993 (1)
10.16 Agreement between Salt Lake City Corporation and the
Registrant dated February 11, 1994 (1)
10.17 Contract between Northwest/Cheyenne Joint Venture and the
Registrant dated March 16, 1994 (1)
10.18 Contract between Clark County, Nevada and the Registrant dated
April 5, 1994 (1)
10.19 Statutory Payment Bond dated September 8, 1994 (1)
21
Exhibit
No. Title
- -------- ---------------------------------------------------------------
10.20 Employment Agreement with Mr. Lewis (1)
10.21 Employment Agreement with Mr. Black (1)
10.22 Employment Agreement with Mr. Terril (1)
10.23 Employment Agreement with Mr. Nelson (1)
10.24 Employment Agreement with Ms. Danely (1)
10.25 Employment Agreement with Mr. Jessop (1)
10.26 Employment Agreement with Mr. Larson (1)
10.27 Stock Purchase Agreement (1)
10.28 Form of Lockup Letter (1)
10.29 Revolving Credit Loan Agreement (1)
10.30 Contract Award Notification - Arizona Department of
Transportation (1)
10.31 Contract Award Notification - McCarran International Airport (1)
10.32 Contract Award Notification - City of Henderson (1)
10.33 Contract between Registrant and Arizona Department of
Transportation (1)
10.34 Contract between Registrant and Arizona Department of
Transportation (1)
10.35 Office Lease of the Registrant (1)
10.36 Contract between Registrant and Arizona Department of
Transportation
10.37 Contract Award Notification - Clark County
10.38 Joint Venture Agreement
10.39 Employment Agreement with Mr. Grasmick
10.40 Contract between Registrant and Clark County, Nevada
10.41 Contract between Registrant and Clark County, Nevada
10.42 Contract between Registrant and Utah Department of
Transportation
10.43 Contract between Registrant and Arizona Department of
Transportation
10.44 Promissory Note executed by Nevada State Bank
10.45 Escrow Settlement Documents and related Promissory Note
10.46 Conveyor Sales Contract and Security Agreement
10.47 CAT Financial Installment Sale Contract
10.48 Second and Third Amendments to Office Lease of the Registrant
10.49 Lease Agreement with US Bancorp
10.50 Lease Agreement with CIT Group
16.01 Letter re: Change in Certifying Accountant (1)
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.02 Consent of Semple & Cooper (Meadow Valley Corporation)(1)
22
Exhibit
No. Title
- -------- ---------------------------------------------------------------
23.03 Consent of Gary A. Agron, Esq. (See 5.01, above.)(1)
23.04 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.05 Consent of BDO Seidman LLP (Meadow Valley Corporation)(1)
23.06 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.07 Consent of BDO Seidman LLP (Meadow Valley Corporation) (1)
23.08 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.09 Consent of BDO Seidman LLP (Meadow Valley Corporation and
Meadow Valley Contractors, Inc.)(1)
23.10 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.11 Consent of BDO Seidman LLP (Meadow Valley Corporation and
Meadow Valley Contractors, Inc.)(1)
23.12 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.13 Consent of BDO Seidman LLP (Meadow Valley Corporation and
Meadow Valley Contractors, Inc.)(1)
23.14 Consent of Semple & Cooper (Meadow Valley Contractors, Inc.)(1)
23.15 Consent of BDO Seidman LLP (Meadow Valley Corporation and
Meadow Valley Contractors, Inc.)(1)
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, File Number 33-87750 declared effective October 16, 1995.
23
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEADOW VALLEY CORPORATION
By: /s/ Bradley E. Larson Date: March 19, 1997
------------------------------------------------
Bradley E. Larson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Bradley E. Larson /s/ Kenneth D. Nelson
- --------------------------------- ----------------------------------------
Bradley E. Larson, Kenneth D. Nelson,
Director, President and Director, Chief Financial Officer,
Chief Executive Officer Treasurer and Vice President - Finance
Date: March 19, 1997 Date: March 19, 1997
---------------------------- -----------------------------------
/s/ Paul R. Lewis /s/ Donald W. Townsend
- --------------------------------- ----------------------------------------
Paul R. Lewis, Donald W. Townsend,
Director and Chief Director
Operating Officer Date: March 19, 1997
Date: March 19, 1997 -----------------------------------
----------------------------
/s/ Alan A. Terril /s/ Gary A. Agron
- --------------------------------- ----------------------------------------
Alan A. Terril, Gary A. Agron,
Director and Vice Director
President - Nevada Date: March 19, 1997
Operations -----------------------------------
Date: March 19, 1997
----------------------------
/s/ Charles E. Cowan /s/ Julie L. Bergo
- --------------------------------- ----------------------------------------
Charles E. Cowan, Julie L. Bergo,
Director Secretary and Principal Accounting
Date: March 19, 1997 Officer
---------------------------- Date: March 19, 1997
-----------------------------------
/s/ Scott E. Miller
- ---------------------------------
Scott E. Miller
Director
Date: March 19, 1997
----------------------------
24
INDEX TO FINANCIAL STATEMENTS
Meadow Valley Corporation and Subsidiaries
Independent Certified Public Accountants' Report.................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1996......... F-3
Consolidated Statements of Operations for the period from
the date of inception, September 15, 1994 through
December 31, 1994 and for the years ended December 31,
1995 and 1996................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity for the period from the date of inception,
September 15, 1994 through December 31, 1994 and for the
years ended December 31, 1995 and 1996.......................... F-5
Consolidated Statements of Cash Flows for the period from
the date of inception, September 15, 1994 through December
31, 1994 and for the years ended December 31, 1995 and
1996............................................................ F-6
Notes to Consolidated Financial Statements........................ F-8
F-1
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To The Stockholders and Board of Directors of
Meadow Valley Corporation
We have audited the accompanying consolidated balance sheets of Meadow Valley
Corporation and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the period from the date of inception, September 15, 1994, through
December 31, 1994 and the years ended December 31, 1995 and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted audit standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe our audits of the consolidated
financial statements provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Meadow
Valley Corporation and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations, and cash flows for the period from the
date of inception, September 15, 1994, through December 31, 1994 and for the
years ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Los Angeles, California
February 28, 1997
F-2
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
Assets: 1995 1996
------------- -------------
Current Assets:
Cash and cash equivalents (Notes 1 and 3).............................................. $ 5,357,904 $ 1,440,519
Restricted cash (Notes 1 and 3)........................................................ 2,629,549 1,415,577
Accounts receivable (Notes 1 and 4).................................................... 13,710,390 26,861,458
Prepaid expenses and other............................................................. 67,000 836,086
Note receivable - related parties (Note 12)............................................ 257,575 257,575
Note receivable - other (Note 11)...................................................... - 1,855
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5)....................................................... 2,721,178 3,726,328
------------- -------------
Total Current Assets............................................................. 24,743,596 34,539,398
Property and equipment, net (Notes 1, 6, 9 and 12)....................................... 1,997,438 5,278,390
Refundable deposits...................................................................... 48,989 247,740
Note receivable - other (Note 11)........................................................ - 210,602
Goodwill, net (Note 1)................................................................... 1,900,880 1,820,850
Tradename, net (Note 1).................................................................. - 24,354
Real Estate.............................................................................. 218,883 -
------------- -------------
Total Assets..................................................................... $28,909,786 $42,121,334
============= =============
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes payable - related party (Note 12)................................................ $ - $ 500,000
Notes payable - other (Note 9)......................................................... - 266,220
Obligation under capital lease (Note 14)............................................... 70,504 254,364
Accounts payable (Notes 7 and 12)...................................................... 10,985,454 19,629,807
Accrued liabilities (Notes 8, 12 and 16)............................................... 1,040,422 1,777,334
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5)....................................................... 718,794 3,372,853
Income tax payable (Note 13)........................................................... 609,315 -
------------- -------------
Total Current Liabilities........................................................ 13,424,489 25,800,578
Deferred income taxes (Note 13).......................................................... 34,245 12,610
Obligation under capital lease (Note 14)................................................. 189,055 643,910
Note payable - related party (Note 12)................................................... 3,500,000 3,000,000
Notes payable - other (Note 9)........................................................... - 987,467
------------- -------------
Total Liabilities................................................................ 17,147,789 30,444,565
------------- -------------
Commitments and contingencies (Notes 12, 14 and 16)
Stockholders' Equity:
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued and outstanding (Note 15)................................................ - -
Common stock - $.001 par value; 15,000,000 shares authorized,
3,601,250 issued and outstanding (Notes 15 and 19)................................... 3,601 3,601
Additional paid-in capital............................................................. 10,943,569 10,943,569
Capital adjustment (Note 2)............................................................ (799,147) (799,147)
Retained earnings...................................................................... 1,613,974 1,528,746
------------- -------------
Total Stockholders' Equity ...................................................... 11,761,997 11,676,769
------------- -------------
Total Liabilities and Stockholders' Equity....................................... $28,909,786 $42,121,334
============= =============
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F-3
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Period
From The Date
of Inception,
September 15,
1994 Through For the Years Ended
December 31, December 31,
-------------- -------------------------------
1994 1995 1996
-------------- -------------- --------------
Contract Revenues (Note 18)............. $ 18,340,303 $ 90,048,523 $ 133,723,645
Cost of Contract Revenues (Note 12)..... 17,064,719 85,694,068 130,913,060
-------------- -------------- --------------
Gross Profit............................ 1,275,584 4,354,455 2,810,585
General and Administrative Expenses..... 188,619 1,989,779 3,142,110
-------------- -------------- --------------
Income(loss) from Operations............ 1,086,965 2,364,676 (331,525)
-------------- -------------- --------------
Other Income (Expense):
Interest income......................... 114,292 470,150 741,270
Interest expense - related party
(Note 12).......................... (222,889) (1,116,464) (611,828)
Other income............................ 10,468 63,635 95,220
Offering costs written off.............. - (173,000) -
-------------- -------------- --------------
(98,129) (755,679) 224,662
-------------- -------------- --------------
Income (loss) before income taxes....... 988,836 1,608,997 (106,863)
Income tax (expense) benefit (Note 13).. (434,209) (549,650) 21,635
-------------- -------------- --------------
Net Income (loss)....................... $ 554,627 $ 1,059,347 $ (85,228)
============== ============== ==============
Net Income (loss )per share............. $ .47 $ .65 $ (.02)
============== ============== ==============
Weighted Average Common Shares
Outstanding............................ 1,175,000 1,641,663 3,601,250
============== ============== ==============
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F-4
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period From The Date of Inception,
September 15, 1994 Through December 31, 1994
and For The Years Ended December 31, 1995 and 1996
Common Stock
---------------------
Number of
Shares Paid-in Capital Retained
Outstanding Value Capital Adjustment Earnings
------------ -------- ----------- ---------- -----------
Sale of common stock........................ 1,175,000 $ 1,175 $ 10,575 $ $
Net income for the period................... 554,627
Excess of purchase price over investors
predecessor cost of net assets acquired
(Note 2)................................. (799,147)
------------ -------- ----------- ---------- -----------
Balance at December 31, 1994................ 1,175,000 1,175 10,575 (799,147) 554,627
Sale of Units to the public (Note 15)....... 1,926,250 1,926 9,433,494
Issuance of common stock (Note 12).......... 500,000 500 1,499,500
Net income for the year..................... 1,059,347
------------ -------- ----------- ---------- -----------
Balance at December 31, 1995................ 3,601,250 3,601 10,943,569 (799,147) 1,613,974
Net loss for the year....................... (85,228)
------------ -------- ----------- ---------- -----------
Balance at December 31, 1996................ 3,601,250 $ 3,601 $10,943,569 $ (799,147) $ 1,528,746
============ ======== =========== ========== ===========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F-5
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period
From The Date of
Inception,
September 15,
1994 Through For the Years Ended
December 31, December 31,
---------------- ----------------------------
1994 1995 1996
---------------- ------------- -------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers................................ $ 20,334,596 $ 84,602,809 $ 122,322,752
Cash paid to suppliers and employees........................ (17,497,113) (85,317,317) (124,394,729)
Interest received........................................... 149,543 459,997 685,738
Interest paid............................................... - (1,195,119) (642,344)
Income taxes paid........................................... - (340,298) (1,057,049)
------------ ------------ -------------
Net cash provided by (used in) operating activities.... 2,987,026 (1,789,928) (3,085,632)
------------ ------------ -------------
Cash flows from investing activities:
Cash acquired through purchase of subsidiary................ 2,330,037 - -
Purchase of AKR Contracting tradename....................... - - (36,531)
Decreases in restricted cash................................ 585,553 316,996 1,213,972
Collection of notes receivable - related party.............. 804,000 600,000 -
Collection of note receivable - other....................... - - 876
Additional cost of acquisition.............................. - (136,058) -
Proceeds from sale of property and equipment................ 144,970 86,202 126,431
Proceeds from sale of rental real estate.................... - - 16,866
Purchase of property and equipment.......................... (217,774) (1,175,377) (1,906,084)
Purchase of real estate..................................... - (218,883) -
------------ ------------ -------------
Net cash provided by (used in)investing activities..... 3,646,786 (527,120) (584,470)
------------ ------------ -------------
Cash flows from financing activities:
Deferred offering costs..................................... (206,138) (1,166,498) -
Common stock issuance....................................... 11,750 - -
Proceeds from sale of unit to public........................ - 10,633,000 -
Distribution to stockholder................................. (1,700,000) - -
Repayment of capital lease obligation....................... - (30,974) (124,333)
Repayment of notes payable - other.......................... - - (122,950)
Repayment of note payable - related party................... - (6,500,000) -
------------ ------------ -------------
Net cash provided by (used in) financing activities.... (1,894,388) 2,935,528 (247,283)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents............. 4,739,424 618,480 (3,917,385)
Cash and cash equivalents at beginning of period................. - 4,739,424 5,357,904
------------ ------------ -------------
Cash and cash equivalents at end of period....................... $ 4,739,424 $ 5,357,904 $ 1,440,519
============ ============ =============
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F-6
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The Period
From The Date of
Inception,
September 15,
1994 Through For the Years Ended
December 31, December 31,
---------------- --------------------------------
1994 1995 1996
---------------- -------------- -------------
Increase (Decrease) in Cash and Cash Equivalents:
Reconciliation of Net Income (Loss ) to Net Cash
Provided by (used in) Operating Activities:
Net income(loss).......................................... $ 554,627 $ 1,059,347 $ (85,228)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 83,864 367,015 769,173
(Gain)/Loss on sale of property and equipment........... 40,321 (17,913) (38,170)
Gain on sale of rental real estate...................... - - (11,316)
Offering costs written off.............................. - 173,000 -
Changes in Assets and Liabilities, net of acquisition of
subsidiary:
Accounts receivable.................................... 1,845,193 (4,026,929) (13,095,536)
Prepaid expenses and other............................. (10,448) 17,037 (968,247)
Costs and estimated earnings in excess of billings
on uncompleted contracts.............................. 287,147 (1,647,081) (1,005,150)
Interest payable....................................... 222,889 (78,655) (30,516)
Accounts payable....................................... (230,259) 2,155,191 8,644,352
Accrued liabilities.................................... (86,931) (188,168) 767,429
Billings in excess of costs and estimated earnings
on uncompleted contracts.............................. (188,836) 182,574 2,654,059
Interest receivable.................................... 35,250 5,302 (55,532)
Income tax payable..................................... 340,298 269,017 (609,315)
Deferred income tax payable............................ 93,911 (59,665) (21,635)
---------------- --------------------------------
Net cash provided by (used in) operating activities....... $ 2,987,026 $ (1,789,928) $ (3,085,632)
---------------- --------------------------------
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F-7
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of the 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. (MVC), Ready Mix, Inc. (RMI) and Prestressed Products, Inc. (PPI). MVC is a
general contractor, primarily engaged in the construction of structural concrete
highway bridges in the states of Nevada, Arizona, Utah and New Mexico. MVC was
acquired by the Company as of October 1, 1994. See Note 2. RMI is a producer and
retailer of ready-mix concrete operating in the Las Vegas metropolitan area. PPI
manufactures and/or erects prestressed products primarily in the Southern Nevada
area.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries MVC, RMI and PPI.
Intercompany transactions and balances have been eliminated in consolidation.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 of 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 revisions become known.
Restricted Cash:
At December 31, 1995 and December 31, 1996 funds in the amount of
$2,629,549 and $1,415,577 were held in trust, lieu of retention, on some of the
Company's construction contracts and will be released to the Company when the
contracts are completed.
Accounts Receivable:
Included in accounts receivable are trade receivables that represent
amounts billed but uncollected on completed construction contracts and
construction contracts in progress.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense based on
a review of the individual accounts outstanding, and the Company's prior history
of uncollectible accounts receivable. As of December 31, 1995 and December 31,
1996, no allowance has been established for potentially uncollectible accounts
receivable because, in the opinion of management, all accounts were considered
fully collectible.
F-8
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued):
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method, over the following estimated useful lives.
Computer equipment 5-7 years
Construction equipment 3-8 years
Construction vehicles 5 years
Office furniture and equipment 7 years
Leasehold Improvements 5 years
Goodwill:
Goodwill represents the excess of the costs of acquiring Meadow Valley
Contractors, Inc. over the fair value of its net assets and is being amortized
on the straight-line method over twenty-five (25) years. Amortization expense
charged to operations for the period from the date of acquisition to December
31, 1994 and for the years ended December 31, 1995, and 1996 amounted to
$18,465, $81,390 and $80,029. The carrying value of goodwill will be
periodically reviewed by the Company and impairments, if any, will be recognized
when expected future operating cash flows derived from goodwill is less than its
carrying value.
Tradename:
On January 2, 1996, the Company acquired the tradename of AKR
Contracting in the amount of $36,531. The tradename amortization is provided
for on a straight line basis over three years. Amortization expense charged to
operations in 1996 was $12,177.
Income Taxes:
The Company accounts for income taxes in accordance with the Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 requires the company to recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in a
company's financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. The Company files consolidated tax returns with MVC, RMI
and PPI for federal and state tax reporting purposes.
Cash Flow Recognition:
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an initial maturity of three (3) months
or less to be cash equivalents.
Earnings Per Share:
Earnings per common share is computed by dividing the net income for
each period by the weighted average number of common shares outstanding during
the period. Common equivalent shares representing the common shares that would
be issued on exercise of outstanding stock options and warrants reduced by the
number of shares which could be purchased from the related exercise proceeds are
not included because their effect would be anti-dilutive.
Fair Value of Financial Instruments:
The Financial Accounting Standards Board issued SFAS No. 107,
Disclosures about Fair Value of Financial Statements, which is effective
December 31, 1995. This statement requires the disclosure of estimated fair
values for all financial instruments for which it is practicable to estimate
fair value.
The carrying amounts of financial instruments including cash,
restricted cash, accounts receivable, costs and estimated earnings in excess of
billings on uncompleted contracts, prepaid expenses and other, current portion
of notes receivable, current maturities of long-term debt, accounts payable and
accrued liabilities approximate fair value because of their short maturity.
F-9
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued):
Fair Value of Financial Instruments (Continued):
The carrying amount of long-term debt approximates fair value because
the interest rates on these instruments approximate the rate the Company could
borrow at December 31, 1996.
New Accounting Pronouncements:
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. The Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
2. Acquisition:
On October 24, 1994, the Company signed a Stock Purchase Agreement to
purchase all of the outstanding common stock of MVC, the acquisition was
effective as of October 1, 1994. The purchase price included a $10,000,000
promissory note, bearing interest at ten percent (10%) per annum, and due ten
days after the closing of the Initial Public Offering. Also included in the
aforementioned Stock Purchase Agreement is a $1,500,000 stock note payable,
bearing interest at six percent (6%) per annum, and due ten days after the
closing of the Initial Public Offering. Payment of the stock note payable was
made by the issuance of 500,000 shares of restricted common stock. The
promissory notes were secured by all of the outstanding common stock of MVC.
See Note 12.
The acquisition of MVC was accounted for using the purchase method of
accounting under APB Opinion 16 "Business Combinations." Accordingly, the
assets and liabilities were valued at their fair values for the portion of the
acquisition relating to new stockholders of the Company's interest which
resulted in increasing the basis of the historical book value of the net assets
acquired (all goodwill) in the amount of $1,864,676. In addition, as of October
1, 1994, $799,147 was charged to stockholders' equity and represents the
proportionate amount of the net purchase price in excess of the cost of the
interest of certain stockholders of the Company who were also stockholders of
MVC prior to the acquisition. During the year ended December 31, 1995 the
Company incurred additional costs relating to the acquisition in the amount of
$136,058.
The unaudited proforma results of operations presented below reflect
the Company's operations as though the acquisition had taken place at the
beginning of the period presented. The proforma results have been prepared for
comparative purposes only, and are not necessarily indicative of what the actual
results of operations would have been had such acquisition occurred at the
beginning of the periods presented, or what the results of operations will be in
the future.
F-10
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisition (Continued):
For the
Year Ended
December 31,
1994
------------
Revenues.............................. $80,220,521
Gross profit.......................... 5,472,878
Operating income...................... 4,704,425
Net income............................ 2,408,947
Net income per share.................. 1.44
Weighted average shares outstanding... 1,675,000
Pro forma adjustments included in the table above include additional
interest on indebtedness and provision for income taxes. The weighted average
shares outstanding include the 500,000 shares of restricted common stock issued
as part of the acquisition.
3. Concentration of Credit Risk:
The Company maintains cash balances at various financial institutions.
Deposits not to exceed $100,000 for each institution are insured by the Federal
Deposit Insurance Corporation. At December 31, 1995 and December 31, 1996, the
Company had uninsured cash, cash equivalents, and restricted cash in the amount
of $10,132,967 and $5,434,509.
4. Accounts Receivable:
Based on the anticipated completion dates of current projects and the
Company's and MVC's history of collections, accounts receivable are expected to
be collected within one year.
Accounts receivable consist of the following:
December 31, December 31,
1995 1996
------------ ------------
Contracts in progress.............. $ 7,347,835 $17,079,502
Contracts in progress - retention.. 5,501,653 7,590,488
Completed contracts................ 144,161 927,230
Completed contracts - retention.... 342,744 436,832
Other receivables.................. 373,997 827,406
----------- -----------
$13,710,390 $26,861,458
=========== ===========
5. Contracts in Progress:
Costs and estimated earnings in excess of billings and billings in
excess of costs and estimated earnings on uncompleted contracts consist of the
following:
December 31, December 31,
1995 1996
------------ ------------
Costs incurred on uncompleted contracts.. $ 169,957,398 164,191,228
Estimated earnings to date............... 8,000,973 7,179,053
------------- -------------
177,958,371 171,370,281
Less: billings to date................... (175,955,987) (171,016,806)
------------- -------------
$ 2,002,384 $ 353,475
============= =============
F-11
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Contracts in Progress (Continued):
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts.. $ 2,721,178 $ 3,726,328
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (718,794) (3,372,853)
----------- -----------
$ 2,002,384 $ 353,475
=========== ===========
6. Property and Equipment:
Property and equipment consists of the following:
December 31, December 31,
1995 1996
------------ -------------
Land................................... $ - $ 562,901
Computer equipment..................... 81,056 173,905
Construction equipment................. 1,528,496 3,542,594
Construction vehicles (Note 14)........ 703,282 1,824,078
Office furniture and equipment......... 18,836 42,897
Leasehold Improvements................. - 42,028
----------- -----------
2,331,670 6,188,403
Accumulated depreciation............... (334,232) (972,413)
----------- -----------
1,997,438 5,215,990
Construction in progress - 62,400
----------- -----------
$ 1,997,438 $ 5,278,390
=========== ===========
7. Accounts Payable:
Accounts payable consist of the following:
December 31, December 31,
1995 1996
------------ ------------
Trade.................................. $ 6,111,551 $13,456,213
Retentions............................. 4,873,903 6,173,594
----------- -----------
$10,985,454 $19,629,807
=========== ===========
8. Accrued Liabilities:
Accrued liabilities consist of the following:
December 31, December 31,
1995 1996
------------ ------------
Salaries and wages..................... $ 563,620 $ 772,265
Interest............................... 144,234 113,717
Taxes.................................. 248,026 225,149
Insurance.............................. 16,042 276,525
Legal fees............................. 13,500 180,000
Other.................................. 55,000 209,678
----------- -----------
$ 1,040,422 $ 1,777,334
=========== ===========
F-12
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes payable - other
Notes payable - other consist of the following:
December 31, December 31,
1995 1996
------------ ------------
10% note payable with monthly
payments of $13,777, plus
interest, due May 3, 2000,
collateralized by equipment....... $ - $ 564,846
9% note payable with monthly
payments of $5,669, due February
15, 2001, collateralized by
equipment......................... - 235,661
10% note payable with monthly
payments of $922, due December
18, 1999, collateralized by
equipment......................... - 33,180
9.33% note payable, first six
consecutive payments interest
only commencing September 15,
1996, remaining 78 months
principal and interest payments
of $7,227, due in full August 15,
2003, collateralized by the land.. - 420,000
---------- ----------
- 1,253,687
Less: current portion.............. - (266,220)
---------- ----------
$ - $ 987,467
========== ==========
Following are maturities of long-term debt for each of the next 5 years:
1997............................... $ 266,220
1998............................... 283,390
1999............................... 293,621
2000............................... 197,332
2001............................... 82,083
Subsequent to 2001................. 131,041
----------
$1,253,687
==========
10. Lines of Credit:
At December 31, 1996, the Company had available from a commercial bank
a $2,000,000 operating line of credit ("line of credit") at an interest rate of
the commercial bank's prime plus .50%, and a $2,000,000 operating line of at an
interest rate of the commercial bank's prime plus .25%. At December 31, 1996,
nothing had been drawn on either of the lines of credit. Under the lines of
credit, the Company is required to maintain certain levels of working capital,
to promptly pay all its obligations and is precluded from conveying, selling or
leasing all or substantially all of its assets. At December 31, 1996, the
Company was in full compliance with all such covenants. The lines of credit
expires August 15, 1997.
11. Note receivable - other
Note receivable - other consist of the following:
December 31, December 31,
1995 1996
------------ ------------
8% note receivable, 84 monthly
payments in the amount of $1,565
commencing July 19, 1996, balloon
payment in the amount of $197,282
due June 19, 2003, collateralized
by deed of trust.................. $ - $212,457
Less: current portion.............. - (1,855)
-------- --------
$ - $210,602
======== ========
F-13
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Related Party Transactions:
Notes Receivable - Related Parties:
Notes receivable - related parties consist of the following:
December 31, December 31,
1995 1996
------------ ------------
6% note receivable from a corporate
officer, dated December 15, 1994,
due June 15, 1997, including a six
month extension, collateralized by
100,000 shares of the Company's
common stock................... $ 257,575 $ 257,575
============ ============
Equipment:
During the year ended December 31, 1996 the company purchased
equipment used in the construction business from a related party in the amount
of $299,800.
Professional Services:
During the year ended December 31, 1996, a related party rendered
professional services to the Company in the amount of $26,654.
Subcontractor/Supplier:
Various related parties performed construction work for the Company as
a subcontractor or provided materials and equipment used in the construction
business during the period September 15, 1994 through December 31, 1994 and the
years ended December 31, 1995 and 1996, in the amounts of $237,883, $119,614 and
$81,581. Included in accounts payable at December 31, 1996 are amounts due to
related parties, in the amount of $5,808.
Accrued Interest:
During the period from the date of inception September 15, 1994
through December 31, 1994 and the years ended December 31, 1995 and 1996, the
Company incurred interest expense in the amount of $222,889, $1,063,716 and
$438,699 related to notes payable to a principal stockholder. Included in
accrued liabilities at December 31, 1995 and December 31, 1996 are amounts due
to related parties, in the amount of $103,253 and $86,301. Included in accounts
receivable at December 31, 1995 and 1996 are amounts due from a related party,
in the amount of $15,455 and $15,455.
Note payable - related party:
At December 31, 1994, notes payable to a related party consisting of a
10% note payable in the amount of $10,000,000 plus a stock note payable, valued
at fair market value of $1,500,000 for accounting purposes because the note was
to be repaid through the issuance of 500,000 shares of restricted stock of the
Company. See Note 2. Interest on the stock note, in the amount of 6% per annum,
was payable in cash. The two notes were due ten days after the completion of an
initial public offering by the Company which was completed on October 16, 1995.
The notes were collateralized by the stock of MVC. On August 15, 1995 the notes
were revised requiring $5,000,000 to be repaid ten days after completion of an
initial public offering. The remaining $5,000,000 is due in five equal
installments of $1,000,000 plus interest at 12.5% per annum commencing October
31, 1995. On November 22, 1995 the Company prepaid $1,500,000 on the $5,000,000
note.
F-14
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Related Party Transactions (Continued):
Note payable - related party(Continued):
At December 31, 1995 and 1996, note payable - related party was as
follows:
December 31, December 31,
1995 1996
----------------- ------------------
12.5% note payable to a related
party, due October 16, 2000,
due in equal installments of
$1,000,000 plus accrued interest.... $ $3,500,000 $ 3,500,000
Less: current portion............ - (500,000)
----------------- ------------------
$3,500,000 $3,000,000
================= ==================
Commitment:
The Company leased office space in Moapa, Nevada from a company
controlled by a principal stockholder under a non-cancelable operating lease
agreement which expired December 31, 1995. Rent expense paid under the
aforementioned operating lease agreement was $1,800 for the period from the date
of inception, September 15, 1994 through December 31, 1994. Effective January 1,
1995 the Company entered into a new lease with the same party, expiring December
31, 1995 with monthly payments of $1,200. The lease was renewed January 1, 1996
on a month to month basis with monthly payments of $800. The lease terms also
require the Company to pay common area maintenance, taxes, insurance and other
costs. Rent expense under the lease for the year ended December 31, 1995 and
1996 amounted to $14,400 and $9,600, respectively.
13. Income Taxes:
The provisions for income taxes consist of the following:
September 15,
1994 (Inception)
Through For the Years Ended
December 31, December 31,
--------------- ---------------------------------
1994 1995 1996
--------------- -------------- ---------------
Current:
Federal........... $ 322,680 $ 541,272 $ -
State............. 17,618 68,043 -
340,298 609,315 -
Deferred............. 93,911 (59,665) (21,635)
--------------- ------------- --------------
$ 434,209 $ 549,650 $ (21,635)
=============== ============= ==============
Prior to October 1, 1994, MVC was a S Corporation for federal income
tax purposes. With the acquisition by the Company, MVC's S Corporation election
was revoked. Accordingly, as of October 1, 1994, income taxes amounting to
$96,700 were charged to operations due to temporary differences between the
carrying amounts of assets for financial reporting purposes and the
corresponding amounts used for income tax purposes.
F-15
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued):
The Company's deferred tax liability consists of the following, all
of which is long-term in nature:
December 31,
----------------------------------------------------------
1995 1996
-------------------------- ----------------------------
Deferred tax asset:
Net operating loss carryforward............................... $ - $ 153,167
Deferred tax liability:
Depreciation.................................................. (34,245) (165,777)
--------------------------- ---------------------------
Net deferred tax liability..................................... $ (34,245) $ (12,610)
=========================== ===========================
For the period ended December 31, 1994, the effective tax rate differs from
the federal statutory rate primarily due to state income taxes (1.8%) and the
one time charge relating to the termination of the S Corporation election
described above (9.8%). For the years ended December 31, 1995 and 1996, the
difference relates primarily to state income tax.
14. Commitments:
The Company is currently leasing office space in Phoenix, Arizona under
a separate non-cancelable operating lease agreement expiring in July 1997. On
May 1, 1996 the Company expanded its office facilities and amended the original
lease. The amended lease agreement provides for monthly payments of $4,022. The
lease terms also require the Company to pay common area maintenance, taxes,
insurance and other costs. Rent expense paid under the aforementioned operating
lease was $3,291 for the period from the date of inception, September 15, 1994
through December 31, 1994 and $14,622 and $44,481 for the years ended December
31, 1995 and 1996.
During December, 1994, the Company executed a five year employment
agreement with its chief executive officer, and executed three year employment
agreements with six of its executive officers that provide for an annual salary,
issuance of the Company's common stock and various other benefits and
incentives. At December 31, 1995 and 1996 the total commitments, excluding
benefits and incentives amount to $1,419,625 and $735,416.
The Company is the lessee of construction vehicles under capital leases
expiring in various years through 2001. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over their
related lease terms. Depreciation on assets under capital leases charged to
expense in 1995 and 1996 was $31,481 and $114,175. At December 31, 1995 and
1996, property and equipment included $259,052 and $897,749, net of accumulated
depreciation, of construction vehicles under capital leases.
Minimum future lease payments under capital leases as of December 31,
1996 for each of the next five years and in aggregate are:
Year Ended December 31, Amount
------------------------------------------------------------------------------------------- -------------------
1997....................................................................................... $ 338,994
1998....................................................................................... 307,877
1999....................................................................................... 263,250
2000....................................................................................... 178,426
2001....................................................................................... 4,575
-------------------
Total minimum lease payments............................................................... 1,093,122
Less: Executory costs...................................................................... (34,415)
-------------------
Net minimum lease payments................................................................. 1,058,707
Less: Amount representing interest......................................................... (160,433)
-------------------
Present value of net minimum lease payment................................................. $ 898,274
===================
F-16
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Stockholders' Equity:
Preferred Stock:
The Company authorized 1,000,000 shares of $.001 par value preferred
stock to be issued, with such rights, preferences, privileges, and restrictions
as determined by the Board of Directors.
Initial Public Offering:
During October 1995, the Company completed an initial public offering
("Offering") of Units of the Company's securities. Each unit consisted of one
share of $.001 par value common stock and one redeemable common stock purchase
warrant ("Warrant"). Each Warrant is exercisable to purchase one share of
common stock at $7.20 per share for a period of 5 years from the date of the
Offering. The Offering included the sale of 1,926,250 Units at $6.00 per Unit.
Net proceeds of the Offering, after deducting underwriting commissions and
offering expenses of $2,122,080, amounted to $9,435,420. In connection with the
Offering, the Company granted the underwriters warrants to purchase 167,500
shares of common stock at $7.20 per share for a period of 4 years from the date
of the Offering.
16. Litigation Matters:
The Company is defending a claimed preference in connection 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. In addition, the Company's prior legal counsel
filed an arbitration action for disputed professional fees arising from its
representation of the Company. The Company had accrued a liability in the amount
of $125,000 as of December 31, 1994, representing the Company's estimated
portion of the liability. During 1995, the aforementioned dispute was resolved
resulting in additional legal fees of $36,000.
17. 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 three month period ended December 31, 1994, the Company
financed the sale of equipment in the amount of $19,559.
During the year ended December 31, 1995, the Company issued 500,000
share of restricted common stock in satisfaction of a $1,500,000 discounted
stock note payable. The Company acquired the stock of MVC for a $10 million
note payable and a 500,000 share stock note payable valued at $1,500,000
effective October 1, 1994. See Note 2.
During the year ended December 31, 1995, the Company exchanged certain
machinery and equipment with a book value of $20,000, plus cash of $74,160, for
similar equipment with a cost of $94,160, which represents the book value of
equipment given up plus the cash price.
During the years ended December 31, 1995 and 1996, the Company
financed the purchase of construction vehicles and equipment in the amount of
$290,533 and $1,719,685.
During the year ended December 31, 1996, the Company financed the
purchase of land in the amount of $420,000.
During the year ended December 31, 1996, the Company financed the sale
of real estate in the amount of $213,333.
F-17
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Significant Customers:
For the period from the date of inception, September 15, 1994 through
December 31, 1994 and for the years ended December 31, 1995 and 1996, the
Company recognized a significant portion of its revenue from two Customers
(shown as an approximate percentage of total revenue):
For The Period From The Date of For the Years Ended
Inception September 15, 1994 --------------------------------------
Through December 31, 1994 December 31, 1995 December 31, 1996
-------------------------------- ------------------- -----------------
A................... 37.0% 33.2% 23.7%
B................... 43.0% 39.1% 41.3%
At December 31, 1995 and December 31, 1996, amounts due from the
aforementioned Customers included in restricted cash and accounts receivable,
are as follows:
December 31, December 31,
1995 1996
-------------- ----------------
A .................................................. $ 4,348,831 $ 3,835,166
B .................................................. 5,405,339 14,280,369
19. Stock Option Plan:
In November, 1994, the Company adopted a Stock Option Plan providing
for the granting of both qualified incentive stock options and non-qualified
stock options. The Company has reserved 700,000 shares of its common stock for
issuance under the Plan. Granting of the options is at the discretion of the
Board of Directors and may be awarded to employees and consultants. Consultants
may receive only non-qualified stock options. The maximum term of the stock
options are 10 years and may be exercised as follows: 33.3% after one year of
continuous service, 66.6% after two years of continuous service and 100.0% after
three years of continuous service. The exercise price of each option is equal to
the market price of the Company's common stock on the date of grant. The
following summarizes the stock option transactions:
Weighted Average
Shares Price Per Share
----------------- -----------------------
Outstanding at December 31, 1994 - -
Granted 311,000 $6.25
Forfeited (71,300) 6.25
-----------------
Outstanding at December 31, 1995 239,700 6.25
Granted 241,025 5.36
Forfeited (1,800) 5.36
-----------------
Outstanding at December 31, 1996 478,925 5.87
=================
Information relating to stock options at December 31, 1996 summarized
by exercise price are as follows:
Outstanding Exercisable
--------------------------------------- ----------------------------
Weighted Average Weighted Average
------------------------ -----------------
Exercise
Exercise Price Per Share Shares Life (Year) Price Shares Exercise Price
- ------------------------------------------------------ ------------- ------------- ---------- ---------- -----------------
$6.25 239,700 10 $6.25 76,950 $6.25
$4.375 to $5.41 239,225 10 5.36 - -
------------- ----------
478,925 10 5.87 76,950 6.25
============= ==========
F-18
MEADOW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Stock Option Plan (Continued):
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements for the year ended December 31, 1995 and 1996. Had
compensation cost for stock-based compensation been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
the Company's net income and earnings per share for the years ended December 31,
1996, would have been reduced to the proforma amounts presented below:
1995 1996
---------- -----------
Net income(loss)
As reported $1,059,347 $( 85,228)
Proforma - $(186,033)
Net income (loss) per share
As reported $ .65 $ (.02)
Proforma - $ (.05)
The fair value of option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1995 and 1996: expected life of options of 5
years, expected volatility of 30.19%, risk-free interest rates of 8.0%, and a 0%
dividend yield. The weighted average fair value at date of grant for options
granted during 1995 and 1996 approximated $1.31 and $1.23, respectively.
20. Subsequent Events:
During January 1997, the Company financed the purchase of machinery in
the amount of $157,048. The note payable has a 7.55% interest rate with monthly
payments of $4,889, due January 1, 1999.
During January 1997, the Company executed a five year employment
agreement with a third party to commence employment on April 1, 1997 as its
Chief Financial Officer. The agreement provides for an annual salary, issuance
of Company stock options and various other benefits and incentives.
F-19