Form 10-K
Table of Contents

 

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 EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                  to                                     

 

Commission file number 000-26025

 

U. S. CONCRETE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   76-0586680

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

2925 Briarpark, Suite 500, Houston, Texas 77042

(Address of principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code: (713) 499-6200

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 

 

Common Stock, par value $.001    Nasdaq National Market
(Title of class)    (Name of exchange on which registered)

 

Rights to Purchase Series A Junior

Participating Preferred Stock

(Title of class)

 

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 þ No ¨

 

Indicate 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. ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨

 

As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, there were 28,274,426 shares of common stock, par value $.001 per share, of the registrant issued and outstanding, 21,645,497 of which, having an aggregate market value of $83,118,709 based on the closing market price of $3.84 per share of the common stock of the registrant reported on the Nasdaq National Market on that date, were held by non-affiliates of the registrant. As of March 10, 2004, there were 28,661,954 shares of common stock, par value $.001 per share, of the registrant issued and outstanding. For purposes of the above statements only, all directors and executive officers of the registrant are assumed to be affiliates.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement related to the registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

 



Table of Contents

TABLE OF CONTENTS

 

          Page

PART I     

Item 1.

   Business    1

Item 2.

   Properties    13

Item 3.

   Legal Proceedings    13

Item 4.

   Submission of Matters to a Vote of Security Holders    14
PART II     

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters    15

Item 6.

   Selected Financial Data    16

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    29

Item 8.

   Financial Statements and Supplementary Data    30

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    58

Item 9A.

   Controls and Procedures    59
PART III     

Item 10.

   Directors and Executive Officers of the Registrant    60

Item 11.

   Executive Compensation    60

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    60

Item 13.

   Certain Relationships and Related Transactions    60

Item 14.

   Principal Accountant Fees and Services    60
PART IV     

Item 15.

   Exhibits, Financial Statement Schedules and Reports on Form 8-K    61


Table of Contents

Statements we make in this Annual Report on Form 10-K which express a belief, expectation or intention, as well as those that are not historical facts, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the heading “Cautionary Statement Concerning Forward-Looking Statements” following Item 1 in this report.

 

PART I

 

Item 1.    Business

 

General

 

U.S. Concrete is a major producer of ready-mixed concrete and related concrete products in select markets in the United States. We believe we are among the leading producers of ready-mixed concrete in substantially all the markets in which we have ready-mixed operations. Ready-mixed concrete is an important building material that is used in the vast majority of commercial, residential and public works construction projects.

 

The principal states in which we operate are California (44% of 2003 net sales), New Jersey (17% of 2003 net sales), Michigan (12% of 2003 net sales) and Texas (9% of 2003 net sales).

 

As of March 10, 2004, we had 89 fixed and eight portable ready-mixed concrete plants, eight precast concrete plants, three concrete block plants and one aggregates quarry. During 2003, these facilities produced approximately 5.0 million cubic yards of ready-mixed concrete, 7.5 million eight-inch equivalent block units and 1.0 million tons of aggregates. We derived approximately 78% of our 2003 revenues from the sale of ready-mixed concrete and the remaining 22% of those revenues from the sale of other concrete and concrete-related products and aggregates.

 

Our operations consist principally of formulating, preparing and delivering ready-mixed concrete to the job sites of our customers. We also provide services intended to reduce our customers’ overall construction costs by lowering the installed, or “in-place,” cost of concrete. These services include the formulation of mixtures for specific design uses, on-site and lab-based product quality control and customized delivery programs to meet our customers’ needs. Our marketing efforts primarily target general contractors, developers and home builders whose focus extends beyond the price of ready-mixed concrete to product quality and consistency and reduction of in-place concrete costs. In addition, we manufacture and deliver various precast and concrete masonry products to the construction industry. Our customer base for all our concrete products often overlaps in markets in which we produce ready-mixed concrete and other concrete products.

 

Industry Overview

 

General

 

Ready-mixed concrete is a highly versatile construction material that results from combining coarse and fine aggregates, such as gravel, crushed stone and sand, with water, various admixtures and cement. Ready-mixed concrete can be manufactured in thousands of variations, which in each instance may reflect a specific design use. Manufacturers of ready-mixed concrete generally maintain only a few days’ inventory of raw materials and must coordinate their daily material purchases with the time-sensitive delivery requirements of their customers.

 

The quality of ready-mixed concrete is time-sensitive, as it becomes difficult to place within 90 minutes after mixing. Many ready-mixed concrete specifications do not allow for its placement beyond that time. Consequently, the market for a permanently installed ready-mixed concrete plant generally is limited to an area within a 25-mile radius of its location. Concrete manufacturers produce ready-mixed concrete in batches at their plants and use mixer and other trucks to distribute and place it at the job sites of their customers. These manufacturers generally do not provide paving or other finishing services construction contractors or subcontractors typically perform.

 

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Concrete manufacturers generally obtain contracts through local sales and marketing efforts they direct at general contractors, developers and home builders. As a result, local relationships are very important.

 

On the basis of information the National Ready-Mixed Concrete Association has provided to us, we estimate that, in addition to vertically integrated manufacturers of cement and ready-mixed concrete, approximately 3,000 independent concrete producers currently operate a total of approximately 6,000 plants in the United States. Larger markets generally have numerous producers competing for business on the basis of price, timing of delivery and reputation for quality and service. We believe, on the basis of available market information, that the typical ready-mixed concrete company is family-owned and has limited access to capital, financial and technical expertise and exit strategies for its owners. Given these operating constraints, we believe many ready-mixed concrete companies are finding it difficult to both grow their businesses and compete effectively against larger, more cost-efficient and technically capable competitors. We believe these characteristics in our highly fragmented industry present growth opportunities for a company with a national strategy, focused acquisition program and access to capital.

 

Annual usage of ready-mixed concrete in the United States remains near record levels. According to information available from the National Ready-Mixed Concrete Association and F.W. Dodge, total sales from the production and delivery of ready-mixed concrete in the United States over the past three years were as follows (in millions):

 

2003

   $ 26,938

2002

   $ 26,971

2001

   $ 27,137

 

According to F.W. Dodge data, the four major segments of the construction industry accounted for the following approximate percentages of the total volume of ready-mixed concrete produced in the United States in 2003:

 

Residential construction

   30 %

Commercial and industrial construction

   19 %

Street and highway construction and paving

   31 %

Other public works and infrastructure construction

   20 %

 

Historically, barriers to the start-up of a new ready-mixed concrete manufacturing operation have been low. In recent years, however, public concerns about dust, process water runoff, noise and heavy mixer and other truck traffic associated with the operation of ready-mixed concrete plants and their general appearance have made obtaining the permits and licenses required for new plants more difficult. Delays in the regulatory process, coupled with the substantial capital investment start-up operations entail, have raised the barriers to entry for those operations.

 

For a discussion of the seasonality of the ready-mixed concrete industry generally, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Affect Our Future Operating Results” in Item 7 of this report.

 

Significant Factors Impacting the Market for Ready-Mixed Concrete

 

Industry-wide Promotional and Marketing Activities. We believe industry participants have only in recent years focused on and benefited from promotional activities to increase the industry’s share of street and highway and residential construction expenditures. Many of these promotional efforts resulted from an industry-wide initiative called RMC 2000, a program established in 1993 under the leadership of our chief executive officer, Eugene P. Martineau. The National Ready-Mixed Concrete Association, the industry’s largest trade organization, has adopted this program. Its principal goals have been to (1) promote ready-mixed concrete as a

 

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building and paving material, (2) improve the overall image of the ready-mixed concrete industry and (3) improve financial returns for producers of ready-mixed concrete. We believe RMC 2000 has been a catalyst for increased investment in the promotion of concrete.

 

Development of New and Innovative Ready-mixed Concrete Products. Ready-mixed concrete has many attributes that make it a highly versatile construction material. In recent years, industry participants have developed various product innovations, including:

 

    concrete housing;

 

    pre-cast modular paving stones;

 

    pre-stressed concrete railroad ties to replace wood ties;

 

    flowable fill for backfill applications;

 

    continuous-slab rail-support systems for rapid transit and heavy-traffic rail lines; and

 

    concrete bridges, tunnels and other structures for rapid transit systems.

 

Other examples of successful innovations that have opened new markets for concrete include:

 

    highway median barriers;

 

    highway sound barriers;

 

    paved shoulders to replace less permanent and increasingly costly asphalt shoulders;

 

    pervious concrete parking lots providing a long-lasting, environmentally sensitive and aesthetically pleasing urban environment; and

 

    colored pavements to mark entrance and exit ramps and lanes of expressways.

 

Our Business Strategy

 

Our objective is to become the leading value-added provider of ready-mixed concrete and related concrete products in each of our markets and to diversify the geographic scope of our operations. We plan to achieve this objective by continuing to implement our national operating strategy and continuing to make acquisitions on a selective basis.

 

Implementation of National Operating Strategy. We have designed our national operating strategy to (1) increase revenues and market share through improved marketing and sales initiatives and enhanced operations and (2) achieve cost efficiencies.

 

    Improving Marketing and Sales Initiatives and Enhancing Operations. Our basic operating strategy emphasizes the sale of value-added products to customers who are more focused on reducing their in-place concrete costs than on the price per cubic yard of the ready-mixed concrete they purchase. Key elements of our service-oriented approach include:

 

    providing corporate-level marketing and sales expertise;

 

    establishing and implementing company-wide quality control improvements;

 

    providing technical services expertise to optimize mix designs and develop innovative new products;

 

    continuing to develop and implement training programs that emphasize successful marketing, sales and training techniques and the sale of high-margin concrete mix designs; and

 

    investing in computer and communications technology at each of our locations to improve communications, purchasing, accounting, dispatch, truck tracking, delivery efficiency, reliability of equipment and customer service.

 

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We have formed strategic alliances with several national specialty admixture and engineering software companies to provide alternative concrete solutions for designers and contractors using value-added products. Through these alliances, we can offer color-conditioned, fiber-reinforced and high-performance concretes, as well as advanced software technology that can be used to design buildings constructed of reinforced concrete. We believe the design software provides opportunities to expand uses of structural concrete in office and institutional buildings to better compete with structural steel. With each of these initiatives, we are seeking to enhance our product offering, capabilities and services, penetrate new market segments, increase market demand for our products and provide economical solutions to our customers. We train our sales professionals in the application of these advanced technologies and intend to expand our promotion of these technologies as we seek to advance concrete as the preferred building material of choice.

 

    Achieving Cost Efficiencies. We strive over time to reduce operating expenses of our businesses. We believe that if we continue to increase in size on both a local market and national level, we should continue to experience cost savings in such areas as:

 

    materials, through procurement and optimized mix designs;

 

    purchases of mixer trucks and other equipment, spare parts and tools;

 

    vehicle and equipment maintenance; and

 

    insurance and other risk management programs.

 

Disciplined Growth Through Acquisitions. The ready-mixed concrete industry is a fragmented, consolidating industry with over 3,000 independent producers. We believe these characteristics present growth opportunities for a company with a national strategy, focused acquisition program and access to capital. Our acquisition program targets opportunities for expansion in our existing markets and entering new geographic markets in the United States.

 

    Expanding in Existing Markets. We seek to continue acquiring other well-established companies operating in our existing markets in order to expand our market penetration. We have acquired operating companies in substantially all of our ready-mixed concrete markets following our initial entry into these markets. By expanding in existing markets through acquisitions, we expect to realize operating synergies, including:

 

    increased market coverage;

 

    improved utilization and range of mixer trucks through access to additional plants;

 

    customer cross-selling opportunities; and

 

    reduced operating costs and selling, general and administrative costs.

 

    Entering New Geographic Markets. We seek to continue entering new geographic markets that have demonstrated adequate sustainable demand and prospects for growth. In each new market we enter, we target for acquisition one or more of the leading local or regional companies that can serve as platform businesses into which we can consolidate other operations. Important criteria for these acquisition candidates include historically successful operating results, established customer relationships and superior operational management personnel, whom we generally seek to retain.

 

Products and Services

 

Ready-Mixed Concrete. Our ready-mixed concrete products consist of proportioned mixes we prepare and deliver in unhardened plastic states for placement and shaping into their designed forms. Selecting the optimum mix for a job entails determining not only the ingredients that will produce the desired permeability, strength,

 

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appearance and other properties of the concrete after it has hardened and cured, but also the ingredients necessary to achieve a workable consistency considering the weather and other conditions at the job site. We believe we can achieve product differentiation for the mixes we offer because of the variety of mixes we can produce, our volume production capacity and our scheduling, delivery and placement reliability. We also believe we distinguish ourselves with our value-added service approach that emphasizes reducing our customers’ overall construction costs by lowering the in-place cost of concrete and the time required for construction.

 

From a contractor’s perspective, the in-place cost of concrete includes both the amount paid to the ready-mixed concrete manufacturer and the internal costs associated with the labor and equipment the contractor provides. A contractor’s unit cost of concrete is often only a small component of the total in-place cost that takes into account all the labor and equipment costs required to build the forms for the ready-mixed concrete and place and finish the ready-mixed concrete, including the cost of additional labor and time lost as a result of substandard products or delivery delays not covered by warranty or insurance. By carefully designing proper mixes and using advances in mixing technology, we can assist our customers in reducing the amount of reinforcing steel, time and labor they will require in various applications.

 

We provide a variety of services in connection with our sale of ready-mixed concrete that can help reduce our customers’ in-place cost of concrete. These services include:

 

    production of new formulations and alternative product recommendations that reduce labor and materials costs;

 

    quality control, through automated production and laboratory testing, that ensures consistent results and minimizes the need to correct completed work; and

 

    automated scheduling and tracking systems that ensure timely delivery and reduce the downtime incurred by the customer’s placing and finishing crews.

 

We produce ready-mixed concrete by combining the desired type of cement, sand, gravel and crushed stone with water and typically one or more admixtures. These admixtures, such as chemicals, minerals and fibers, determine the usefulness of the product for particular applications.

 

We use a variety of chemical admixtures to achieve one or more of five basic purposes:

 

    relieve internal pressure and increase resistance to cracking in subfreezing weather;

 

    retard the hardening process to make concrete more workable in hot weather;

 

    strengthen concrete by reducing its water content;

 

    accelerate the hardening process and reduce the time required for curing; and

 

    facilitate the placement of concrete having low water content.

 

We frequently use various mineral admixtures as supplementary cementing materials to alter the permeability, strength and other properties of concrete. These materials include fly ash, ground granulated blast-furnace slag and silica fume.

 

We also use fibers, such as steel, glass and synthetic and carbon filaments, as an additive in various formulations of concrete. Fibers help to control shrinkage cracking, thus reducing permeability and improving abrasion resistance. In many applications, fibers replace welded steel wire and reinforcing bars. Relative to the other components of ready-mixed concrete, these additives generate comparatively high margins.

 

Precast Concrete. We produce precast concrete products at eight plants in four states, including six in California. Our precast concrete products consist of concrete we produce and then pour into molds at our plant sites. These operations produce a wide variety of specialized finished products, including specialty engineered

 

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structures, custom signage, manholes, catch basins, highway barriers and curb inlets. After the concrete sets, we strip the molds from the products and ship the finished product to our customers. Because these products are not perishable, precast concrete plants can serve a much larger market than ready-mixed concrete plants. Our precast operations in Northern California and Delaware are located near our ready-mixed concrete operations and consequently afford us various synergies.

 

Building Materials. Our building materials operations supply various materials, products and tools contractors use in the concrete construction industry. These materials include rebar, wire mesh, color additives, curing compounds, grouts, wooden forms and numerous other items. Our building materials operations are generally located near our ready-mixed concrete operations.

 

Aggregates. We produce crushed stone aggregates from our granite quarry in Northern New Jersey. We sell these aggregates for use in commercial, residential and public works projects primarily in that area and Orange County, New York. Production during 2003 was approximately 1.0 million tons, and we estimate the quarry has approximately 44 million tons of remaining reserves. We acquired the quarry in January 2002 principally to expand our market presence in Northern New Jersey and to provide crushed stone aggregates to third-party customers as well as to our existing ready-mixed concrete operations in that market.

 

Concrete Masonry. We manufacture various shapes and sizes of concrete masonry, commonly known as concrete block, for use in both residential and commercial applications. We produced approximately 7.5 million units of concrete masonry during 2003 at plants in Michigan, Delaware and New Jersey.

 

Operations

 

We have made substantial capital investments in equipment, systems and personnel to facilitate continuous multi-customer deliveries of highly perishable products. In any given market, we may maintain a number of plants whose production we centrally coordinate to meet customer production requirements. We must be able to adapt constantly to continually changing delivery schedules.

 

Our ready-mixed concrete plants consist of permanent and portable facilities that produce ready-mixed concrete in wet or dry batches. Our fixed-plant facilities produce ready-mixed concrete that we transport to job sites by mixer trucks. Our mobile-plant operations deploy our eight mobile-plant facilities to produce ready-mixed concrete at the job site that we direct into place using a series of conveyor belts or a mixer truck. Several factors govern the choice of plant type, including:

 

    capital availability;

 

    production consistency requirements;

 

    daily production capacity requirements; and

 

    job-site location.

 

A wet batch plant generally has a higher initial cost and daily operating expense, but yields greater consistency with less time required for quality control in the concrete produced and generally has greater daily production capacity, than a dry batch plant. We believe that a wet batch plant having an hourly capacity of 250 cubic yards currently would cost approximately $1.5 million, while a dry batch plant having the same capacity currently would cost approximately $0.7 million. At March 10, 2004, we operated 24 wet and 73 dry fixed and portable batch plants.

 

The market primarily will drive our future plant decisions. The relevant market factors include:

 

    the expected production demand for the plant;

 

    the expected types of projects the plant will service; and

 

    the desired location of the plant.

 

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Generally, plants intended primarily to serve high-volume, commercial or public works projects will be wet batch plants, while plants intended primarily to serve low-volume, residential construction projects will be dry batch plants. We use our portable plants to service large, long-term jobs and jobs in remote locations.

 

The batch operator in a dry batch plant simultaneously loads the dry components of stone, sand and cement with water and admixtures in a mixer truck that begins the mixing process during loading and completes that process while driving to the job site. In a wet batch plant, the batch operator blends the dry components and water in a plant mixer from which he loads the already mixed concrete into the mixer truck, which leaves for the job site promptly after loading.

 

Mixer trucks slowly rotate their loads en route to job sites in order to maintain product consistency. A mixer truck typically has a load capacity of 10 cubic yards, or approximately 20 tons, and an estimated useful life of 12 years. A new truck of this size currently costs approximately $130,000. Depending on the type of batch plant from which the mixer trucks generally are loaded, some components of the mixer trucks usually require refurbishment after three to five years. At March 10, 2004, we operated a fleet of approximately 923 mixer trucks.

 

In our manufacture and delivery of ready-mixed concrete, we emphasize quality control, pre-job planning, customer service and coordination of supplies and delivery. We often obtain purchase orders for ready-mixed concrete months in advance of actual delivery to a job site. A typical order contains various specifications the contractor requires the concrete to meet. After receiving the specifications for a particular job, we use computer modeling, industry information and information from previous similar jobs to formulate a variety of mixtures of cement, aggregates, water and admixtures which meet or exceed the contractor’s specifications. We perform testing to determine which mix design is most appropriate to meet the required specifications. The test results enable us to select the mixture that has the lowest cost and meets or exceeds the job specifications. The testing center creates and maintains a project file that details the mixture we will use when we produce the concrete for the job. For quality control purposes, the testing center also is responsible for maintaining batch samples of concrete we have delivered to a job site.

 

We use computer modeling to prepare bids for particular jobs based on the size of the job, location, desired margin, cost of raw materials and the design mixture identified in our testing process. If the job is large enough and has a projected duration beyond the supply arrangement in place at that time, we obtain quotes from our suppliers as to the cost of raw materials we use in preparing the bid. Once we obtain a quotation from our suppliers, the price of the raw materials for the specified job is informally established. Several months may elapse from the time a contractor has accepted our bid until actual delivery of the ready-mixed concrete begins. During this time, we maintain regular communication with the contractor concerning the status of the job and any changes in the job’s specifications in order to coordinate the multi-sourced purchases of cement and other materials we will need to fill the job order and meet the contractor’s delivery requirements. We confirm that our customers are ready to take delivery of manufactured product throughout the placement process. On any given day, a particular plant may have production orders for dozens of customers at various locations throughout its area of operation. To fill an order:

 

    the customer service office coordinates the timing and delivery of the concrete to the job site;

 

    a load operator supervises and coordinates the receipt of the necessary raw materials and operates the hopper that dispenses those materials into the appropriate storage bins;

 

    a batch operator, using a computerized batch panel, prepares the specified mixture from the order and oversees the loading of the mixer truck with either dry ingredients and water in a dry batch plant or the already-mixed concrete in a wet batch plant; and

 

    the driver of the mixer truck delivers the load to the job site, discharges the load and, after washing the truck, departs at the direction of the dispatch office.

 

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The central dispatch system tracks the status of each mixer truck as to whether a particular truck is:

 

    loading concrete;

 

    en route to a particular job site;

 

    on the job site;

 

    discharging concrete;

 

    being washed; or

 

    en route to a particular plant.

 

The system is updated continuously via signals received from the individual truck operators as to their status. In this manner, the dispatcher can determine the optimal routing and timing of subsequent deliveries by each mixer truck and monitor the performance of each driver.

 

A plant manager oversees the operation of each plant. Our employees also include:

 

    maintenance personnel who perform routine maintenance work throughout our plants;

 

    a full-time staff of mechanics who perform substantially all the maintenance and repair work on our vehicles;

 

    testing center staff who prepare mixtures for particular job specifications and maintain quality control;

 

    various clerical personnel who perform administrative tasks; and

 

    sales personnel who are responsible for identifying potential customers and maintaining existing customer relationships.

 

We generally operate each of our plants on a single shift, with some overtime operation during the construction season. On occasion, however, we may have projects that require deliveries around the clock.

 

Cement and Raw Materials

 

We obtain most of the materials necessary to manufacture ready-mixed concrete at each of our facilities on a daily basis. These raw materials include cement, which is a manufactured product, stone, gravel and sand. Each plant typically maintains an inventory level of these materials sufficient to satisfy its operating needs for a few days. Cement represents the highest cost material used in manufacturing a cubic yard of ready-mixed concrete, while the combined cost of the stone, gravel and sand used is slightly less than the cement cost. In each of our markets, we purchase each of these materials from several suppliers.

 

Marketing and Sales

 

General contractors typically select their suppliers of ready-mixed concrete. In large, complex projects, an engineering firm or division within a state transportation or public works department may influence the purchasing decision, particularly if the concrete has complicated design specifications. In those projects and in government-funded projects generally, the general contractor or project engineer usually awards supply orders on the basis of either direct negotiation or competitive bidding. We believe the purchasing decision in many cases ultimately is relationship-based. Our marketing efforts target general contractors, design engineers and architects whose focus extends beyond the price of ready-mixed concrete to product quality and consistency and reducing the in-place cost of concrete.

 

Customers

 

Of our 2003 sales, we made approximately 32% to commercial and industrial construction contractors, approximately 46% to residential construction contractors, approximately 7% to street and highway construction

 

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contractors and approximately 15% to other public works and infrastructure contractors. In 2003, no single customer or project accounted for more than 4.5% of our total sales.

 

We rely heavily on repeat customers. Our management and dedicated sales personnel are responsible for developing and maintaining successful long-term relationships with key customers. We believe that by expanding our operations into more geographic markets, we will be in a better position to market to and service large nationwide and regional contractors.

 

Competition

 

The ready-mixed concrete industry is highly competitive. Our competitive position in a market depends largely on the location and operating costs of our ready-mixed concrete plants and prevailing prices in that market. Price is the primary competitive factor among suppliers for small or simple jobs, principally in residential construction, while timeliness of delivery and consistency of quality and service as well as price are the principal competitive factors among suppliers for large or complex jobs. Our competitors range from small, owner-operated private companies to subsidiaries or operating units of large, vertically integrated cement manufacturing and concrete products companies. Competitors having lower operating costs or having the financial resources to enable them to accept lower margins have a competitive advantage over us for jobs that are particularly price-sensitive. Competitors having greater financial resources to build plants in new areas or pay for acquisitions also have competitive advantages.

 

Employees

 

As of March 10, 2004, we had approximately 421 salaried employees, including executive officers and management, sales, technical, administrative and clerical personnel, and approximately 1,573 hourly personnel, including delivery professionals, we generally employ on an as-needed basis. The number of employees fluctuates depending on the number and size of projects ongoing at any particular time, which may be impacted by variations in weather conditions throughout the year.

 

As of March 10, 2004, approximately 811 of our employees were represented by labor unions having collective bargaining agreements with us. Generally, these agreements have multi-year terms and expire on a staggered basis. Under these agreements, we pay specified wages to covered employees and make payments to multi-employer pension plans and employee benefit trusts rather than administering the funds on behalf of these employees.

 

We have not experienced any strikes or significant work stoppages in the past five years. We believe our relationships with our employees and union representatives are satisfactory.

 

Training and Safety

 

Our future success will depend, in part, on the extent to which we can attract, retain and motivate qualified employees. We believe that our ability to do so will depend on the quality of our recruiting, training, compensation and benefits, the opportunities we afford for advancement and our safety record. Historically, we have supported and funded continuing education programs for our employees. We intend to continue and expand these programs. We require all field employees to attend periodic safety training meetings and all delivery professionals to participate in training seminars. The responsibilities of our national safety director include managing and executing a unified, company-wide safety program.

 

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Governmental Regulation and Environmental Matters

 

A wide range of federal, state and local laws apply to our operations, including such matters as:

 

    land usage;

 

    street and highway usage;

 

    noise levels; and

 

    health, safety and environmental matters.

 

In many instances, we must have certificates, permits or licenses to conduct our business. Failure to maintain these required authorizations or to comply with applicable laws could result in substantial fines or possible revocation of our authority to conduct some of our operations. Delays in obtaining approvals for the transfer or grant of authorizations, or failures to obtain new authorizations, could impede our acquisition program.

 

Environmental laws that impact our operations include those relating to air quality, solid waste management and water quality. These laws are complex and subject to frequent change. They impose strict liability in some cases without regard to negligence or fault. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. In addition, businesses may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. These laws also may expose us to liability for the conduct of others, or for acts that complied with all applicable laws when performed.

 

We have conducted Phase I investigations to assess environmental conditions on substantially all the real properties we own or lease and have engaged independent environmental consulting firms in that connection. We have not identified any environmental concerns we believe are likely to have a material adverse effect on our business, financial position, results of operations or cash flows, but you have no assurance material liabilities will not occur. You also have no assurance our compliance with amended, new or more stringent laws, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional, material expenditures. OSHA regulations establish requirements our training programs must meet.

 

We have all material permits and licenses we need to conduct our operations and are in substantial compliance with applicable regulatory requirements relating to our operations. Our capital expenditures relating to environmental matters were not material in 2003. We currently do not anticipate any material adverse effect on our business, financial position, results of operations or cash flows as a result of our future compliance with existing environmental laws controlling the discharge of materials into the environment.

 

Product Warranties

 

Our operations involve providing ready-mixed and other concrete formulations that must meet building code or other regulatory requirements and contractual specifications for durability, stress-level capacity, weight-bearing capacity and other characteristics. If we fail or are unable to provide product meeting these requirements and specifications, material claims may arise against us and our reputation could be damaged. In the past, we have had significant claims of this kind asserted against us that we have resolved. There currently are, and we expect that in the future there will be, additional claims of this kind asserted against us. Some, but not all, claims of this type are covered by indemnity provisions in our acquisition agreements with the former owners of businesses we have acquired or by insurance. If a significant uninsured or unindemnified product–related claim is resolved against us in the future, that resolution may have a material adverse effect on our financial condition, results of operations and cash flows.

 

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Insurance

 

Our employees perform a significant portion of their work moving and storing large quantities of heavy raw materials, driving large mixer trucks in heavy traffic conditions or delivering concrete at construction sites or in other areas that may be hazardous. These operating hazards can cause personal injury and loss of life, damage to or destruction of property and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks we believe accord with industry practice, but this insurance may not be adequate to cover all losses or liabilities we may incur in our operations, and we may be unable to maintain insurance of the types or at levels we deem necessary or adequate or at rates we consider reasonable.

 

Available Information

 

Our web site address is www.us-concrete.com. We make available on this web site under “Investors,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC. We have adopted a code of ethics for our chief executive officer, chief financial officer and other senior financial officers, a copy of which is an exhibit to this report.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords.

 

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning our business strategies, revenues, income, cash flows and capital requirements. Forward-looking statements generally use words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

 

Various statements this report contains, including those that express a belief, expectation or intention and those that are not statements of historical fact, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those forward-looking statements appear in Item 1—“Business,” Item 2— “Properties,” Item 3—“Legal Proceedings,” Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 7A—“Quantitative and Qualitative Disclosures About Market Risk,” Item 9A—“Controls and Procedures” and elsewhere in this report, including in the notes to our consolidated financial statements in Item 8. These forward-looking statements speak only as of the date of this report. We disclaim any obligation to update these statements, and we caution you not to rely unduly on them. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

 

    our national operating and acquisition strategies;

 

    our ability to integrate the businesses we acquire;

 

    our ability to obtain the capital necessary to finance our growth strategies;

 

    the availability of qualified personnel;

 

    the trends we anticipate in the ready-mixed concrete industry and in our business;

 

    the level of activity in the construction industry generally and in our local markets for ready-mixed concrete and other concrete products;

 

    the highly competitive nature of our business;

 

    the cost of capital, including the interest expense associated with our outstanding borrowings, which is tied in part to market interest rates;

 

    changes in, or our ability to comply with, governmental regulations, including those relating to the environment;

 

    our labor relations and those of our suppliers of raw materials;

 

    the level of funding allocated by the United States Government, states and municipalities for general highway, transit and safety spending;

 

    unexpected events that delay or adversely affect our ability to deliver concrete according to our customers’ requirements;

 

    sustained adverse weather conditions or other events that delay or cause the postponement of our customers’ projects, or adversely affect our economics;

 

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    our ability to control costs and maintain quality; and

 

    our exposure to warranty and defect claims from end users of our products, developers and other customers.

 

We believe the items we have outlined above are important factors that could cause our actual results to differ materially from those expressed in a forward-looking statement in this report or elsewhere by us or on our behalf. We have discussed most of these factors in more detail elsewhere in this report. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report also could have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises. We advise our existing and potential security holders that they should (1) be aware that important factors to which we do not refer above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

 

Item 2.    Properties

 

Facilities

 

The table below lists our concrete plants at March 10, 2004. We believe these plants are sufficient for our current needs. The ready-mixed concrete volumes shown are the volumes each location produced in 2003.

 

     Ready-Mixed Concrete
Plants


   Precast
Plants


   Block
Plants


   Ready-Mixed
Concrete
Volume (in
thousands of
cubic yards)


     Fixed

   Portable

   Total

        

Locations:

                             

Northern California

   20    2    22    5       1,878

Atlantic Region

   26    3    29    1    2    1,206

North Texas/Southwest Oklahoma

   15    3    18          798

Michigan

   13       13       1    777

Tennessee/Northern Mississippi

   15       15          371

Southern California/ Arizona (1)

            2       —  
    
  
  
  
  
  
     89    8    97    8    3    5,030
    
  
  
  
  
  

(1)   Our locations in Southern California and Arizona have no ready-mixed concrete operations.

 

Equipment

 

As of March 10, 2004, we operated a fleet of approximately 923 owned and leased mixer trucks and 548 other vehicles. Our own mechanics service most of the fleet. We believe these vehicles generally are well maintained and adequate for our operations. The average age of our mixer trucks is approximately 6.7 years.

 

Item 3.    Legal Proceedings

 

In January 2004, we settled a previously reported lawsuit that Bay-Crete Transportation & Materials, LLC filed in July 2000 in a California state court against us and our subsidiary, Central Concrete Supply Co., Inc., for an alleged breach of a 1983 contract. Under the settlement agreement resolving this dispute, Bay-Crete will perform certain hauling services for Central at market rates. The former owners of one of Central’s predecessors provided us with indemnification consideration that offset the settlement payment we made to Bay-Crete. As a result, the settlement did not impact our earnings.

 

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From time to time, and currently, we are subject to various claims and litigation brought by employees, customers and other third parties for, among other matters, employee grievances, personal injuries, property damages, product defects and delay damages that have, or allegedly have, resulted from the conduct of our operations.

 

We believe that the resolution of all litigation currently pending or threatened against us or any of our subsidiaries will not have a material adverse effect on our financial position, results of operations or cash flows; however, because of the inherent uncertainty of litigation, we provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our results of operations for the fiscal period in which that resolution occurs. In the future, we and our operating subsidiaries will from time to time be a party to litigation or administrative proceedings that arise in the normal course of our business.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

No matter was submitted to a vote of our security holders during the fourth quarter of 2003.

 

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PART II

 

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock is traded on the Nasdaq National Market under the symbol “RMIX.” As of March 10, 2004, 28,661,954 shares of our common stock were outstanding, held by approximately 854 stockholders of record. The number of record holders does not necessarily bear any relationship to the number of beneficial owners of our common stock.

 

The last reported bid price for our common stock on the Nasdaq National Market on March 10, 2004 was $6.38 per share. The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock:

 

     2003

   2002

     High

   Low

   High

   Low

First Quarter

   $ 5.78    $ 4.10    $ 7.29    $ 6.15

Second Quarter

     4.55      3.26      7.08      5.49

Third Quarter

     5.75      3.75      6.72      4.39

Fourth Quarter

     6.50      5.02      5.80      4.20

 

We have not paid or declared any dividends since our formation and currently intend to retain earnings to fund our working capital. For information concerning restrictions on the payment of cash dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Item 7 of this report and Note 9 to our Consolidated Financial Statements in Item 8 of this report.

 

The following table summarizes, as of December 31, 2003, certain information regarding equity compensation to our employees, officers, directors and other persons under our equity compensation plans. These plans use or are based on shares of our common stock.

 

Plan Category


   Number of
Securities to Be
Issued Upon
Exercise of
Outstanding Stock
Options


   Weighted Average
Exercise Price of
Outstanding Stock
Options


   Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in first column)


Equity compensation plans approved by security holders (1)

   2,054,898    $ 7.10    1,695,894

Equity compensation plans not approved by security holders (2)(3)

   1,045,409    $ 6.51    394,872
    
         

Total

   3,100,307           2,090,766
    
         

(1)   The number of shares of common stock available for issuance under our 1999 Incentive Plan at any time equals 15% of the number of shares of common stock issued and outstanding on the last day of the immediately preceding quarter.
(2)   The number of shares of common stock available for issuance under our 2001 Employee Incentive Plan at any time equals 5% of the number of shares of common stock outstanding on the last day of the immediately preceding quarter.
(3)   Our board adopted the U.S. Concrete, Inc. 2001 Employee Incentive Plan in February 2001. The purpose of this plan is to attract, retain and motivate our employees and consultants, to encourage a proprietary sense of those persons in us and to stimulate an active interest of those persons in our development and financial success. The plan provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and other long-term incentive awards. None of our officers or directors is eligible to participate in the plan.

 

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Item 6.    Selected Financial Data

 

Our financial statements present Central Concrete Supply Co., Inc., one of our initial six acquisitions at our inception of operations in 1999, as the acquirer of the other businesses and U.S. Concrete. The following historical financial information is of Central prior to June 1, 1999 and of U.S. Concrete and its consolidated subsidiaries after that date.

 

Arthur Andersen LLP audited our consolidated financial statements for 1999 through 2001, and this report includes a copy of the auditor’s report on our financial statements for the year ended December 31, 2001 it issued before it ceased operations. Arthur Andersen did not reissue that report.

 

     Year Ended December 31

 
     2003

    2002(1)

    2001

    2000

    1999

 
     (in thousands, except per share amounts)  

Statement of Operations Information:

                                        

Sales

   $ 473,124     $ 503,314     $ 493,591     $ 394,636     $ 167,912  

Income (loss) before cumulative effect of accounting change

   $ 10,303     $ (4,038 )   $ 9,545     $ 16,860     $ 8,190  

Net income (loss)

   $ 10,303     $ (28,366 )   $ 9,545     $ 16,860     $ 8,190  

Earnings (Loss) Per Share Information:

                                        

Basic and diluted income (loss) per share before cumulative effect of accounting change

   $ 0.37     $ (0.15 )   $ 0.39     $ 0.78     $ 0.70  

Basic and diluted income (loss) per share

   $ 0.37     $ (1.06 )   $ 0.39     $ 0.78     $ 0.70  

Balance Sheet Information (at end of period):

                                        

Total assets

   $ 400,974     $ 382,222     $ 430,836     $ 357,490     $ 212,734  

Total debt (including current maturities)

   $ 155,039     $ 161,808     $ 163,775     $ 157,134     $ 57,375  

Total stockholders’ equity

   $ 176,711     $ 161,845     $ 188,315     $ 150,555     $ 110,793  

Statement of Cash Flow Information:

                                        

Net cash provided by operating activities

   $ 26,692     $ 34,933     $ 44,874     $ 9,583     $ 9,046  

Net cash used in investing activities

   $ (17,259 )   $ (36,489 )   $ (58,387 )   $ (104,267 )   $ (83,417 )

Net cash provided by (used in) financing activities

   $ (7,007 )   $ (886 )   $ 19,929     $ 94,768     $ 70,785  

(1)   The 2002 results include restructuring and impairment charges of $28.4 million ($18.9 million net of tax). See Note 5 to our Consolidated Financial Statements in Item 8 of this report. Effective the beginning of fiscal 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and, accordingly, ceased amortization of goodwill and recorded a transitional goodwill impairment charge for the adoption of SFAS No. 142 of $24.3 million ($0.91 per share), net of tax, presented as a cumulative effect of accounting change. See Note 2 to our Consolidated Financial Statements in Item 8 of this report.

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical facts, are forward-looking statements that are subject to various risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties to which we refer to under the headings “Cautionary Statement Concerning Forward-Looking Statements” following Item 1 of this report and “—Factors That May Affect Our Future Operating Results” below.

 

Overview

 

We derive substantially all our revenues from the sale of ready-mixed concrete, other concrete products and related construction materials to the construction industry in the United States. We typically sell ready-mixed concrete under purchase orders that require us to formulate, prepare and deliver the product to our customers’ job sites. We recognize sales from these orders when we deliver the ordered products. The principal states in which we operate are California (44% of 2003 sales and 43% of 2002 sales), New Jersey (17% of 2003 sales and 18% of 2002 sales), Michigan (12% of 2003 sales and 10% of 2002 sales) and Texas (9% of 2003 sales and 12% of 2002 sales). We serve substantially all segments of the construction industry in our markets, and our customers include contractors for commercial and industrial, residential, street and highway and public works construction. The percentage of our concrete product sales contributed in 2003 and 2002 from our customers was as follows:

 

     2003

    2002

 

Residential

   46 %   41 %

Commercial and industrial

   32 %   37 %

Street and highway

   7 %   13 %

Other public works

   15 %   9 %

 

The markets for our products generally are local, and our operating results are subject to swings in the level and product mix of construction activity that occur in our markets. The level of activity affects the demand for our products, while the product mix of activity among the various segments of the construction industry affects both our relative competitive strengths and our operating margins.

 

Although the residential construction market remained strong throughout 2003, the nonresidential construction market continued to decline, reflecting the general state of the overall economy and employment in the United States. This general decline in nonresidential construction, sustained adverse weather conditions in several of our markets for a portion of the year and the realignment of our businesses in our North Texas operations had an adverse impact on our sales in 2003. We expect the nonresidential construction market to improve in 2004.

 

Our cost of goods sold consists principally of the costs we incur in obtaining the cement, aggregates and admixtures we combine to produce ready-mixed concrete and other concrete products. We obtain most of these materials from third parties and generally have only a few days supply at each of our plants. These costs vary with our levels of production. Our cost of goods sold also includes labor, primarily for delivery professionals, and insurance costs and the operating, maintenance and rental expenses we incur in operating our plants, mixer trucks and other vehicles.

 

Since our inception in 1999, our growth strategy has contemplated acquisitions. We purchased one business in 2003 and one business in 2002, both of which we have accounted for in accordance with the purchase method of accounting. The rate and extent to which appropriate further acquisition opportunities are available, and to the extent which acquired businesses are integrated and anticipated synergies and cost savings are achieved can affect our operations and results.

 

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Factors That May Affect Our Future Operating Results

 

Cyclicality of construction industry activity. Demand for ready-mixed concrete and other concrete products depends on the level of activity in the construction industry. That industry is cyclical in nature, and the general condition of the economy and a variety of other factors beyond our control affect its level of activity. These factors include, among others:

 

    commercial vacancy and residential new home inventory levels;

 

    employment levels;

 

    consumer spending habits;

 

    the availability of funds for public or infrastructure construction;

 

    changes in interest rates;

 

    sustained adverse weather conditions;

 

    the availability of short- and long-term financing; and

 

    levels of inflation.

 

Seasonality of construction industry activity. Reflecting the levels of construction activity, the demand for ready-mixed concrete is highly seasonal. Our results for any individual quarter are not necessarily indicative of the results to be expected for the year because seasonal changes and other weather-related conditions can affect construction activity and, as a result, our sales and earnings. Normally, we attain the highest sales and earnings in the second and third quarters and the lowest sales and earnings in the first quarter. For these reasons, you should not rely on (1) quarterly comparisons of our revenues and operating results as indicators of our future performance or (2) the results of any quarterly period during a year as an indicator of results you may expect for that entire year.

 

Regional Variability. The economic and seasonal factors described above can affect various local and regional economies in different ways. Accordingly, the levels of construction activity at any given time can vary greatly across the country. Markets for our products generally are local and, therefore, our results of operations are susceptible to fluctuations in the levels of construction activity that may occur in our local markets.

 

Product Supply and Demand. Generally, ready-mixed concrete is price-sensitive. Prices for our products are subject to changes in response to relatively minor fluctuations in supply and demand, general economic conditions and market conditions, all of which are beyond our control. Because of the fixed-cost nature of our business, our overall profitability is sensitive to price changes and minor variations in sales volumes.

 

Competition. Competitive conditions in our industry also may affect our future operating results.

 

Financing. We rely on third-party financing to fund, in part, our working capital and capital expenditure needs, the internal expansion of our operations and our acquisition activities. Our new credit facility and our senior subordinated notes contain covenants that limit our ability to take certain actions with respect to our company and our businesses. Future financing arrangements likely will contain similar restrictions. These restrictions on our activities may cause us to forego certain courses of action that we would otherwise choose to pursue.

 

Product Claims. Our operations generally involve providing concrete that must meet building code or other regulatory requirements and contractual specifications for durability, stress-level capacity, weight-bearing capacity and other characteristics. We may incur material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications.

 

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Regulation. We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. We believe we are in substantial compliance with applicable environmental laws and regulations. From time to time, we receive claims from federal and state environmental regulatory agencies and entities asserting that we may be in violation of environmental laws and regulations. On the basis of our experience and the information currently available, we believe these claims will not have a material impact on our consolidated financial position, results of operations or cash flows. Despite compliance and experience, it is possible that we could be held liable for future charges that might be material, but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements, or discovery of currently unknown conditions, could require additional expenditures. We reserved $0.3 million for remediation costs in connection with the aggregates business we acquired in 2002. We currently do not expect the costs of that remediation to exceed that amount.

 

Critical Accounting Estimates

 

Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our Consolidated Financial Statements describes the significant accounting policies we use in preparing those statements. We believe the most complex and sensitive judgments, because of their significance to our financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving our management judgments and estimates are described below. Actual results in these areas could differ from our estimates.

 

Allowance for Doubtful Accounts

 

We extend credit to customers and other parties in the normal course of business. We regularly review outstanding receivables and provide for estimated losses on accounts receivable we believe we may not collect in full. A provision for bad debt expense recorded to selling, general and administrative expenses increases the allowance and accounts receivable that we write off our books decrease the allowance. We determine the amount of bad debt expense we record each period and the resulting adequacy of the allowance at the end of each period by using a combination of our historical loss experience, customer-by-customer analyses of our accounts receivable balances each period and subjective assessments of our bad debt exposure. The allowance for doubtful accounts balance was $4.6 million as of December 31, 2003 and $4.5 million as of December 31, 2002.

 

Goodwill

 

We record as goodwill the amount by which the total purchase price we pay for our acquisitions exceeds our estimated fair value of the net assets we acquire. Beginning in 2002, we test our recorded goodwill annually for impairment and charge income with any impairment we recognize, but we do not otherwise amortize that goodwill. The impairment test we use consists of comparing our estimates of the current fair values of our reporting units with their carrying amounts. We use a variety of valuation approaches, primarily the discounted future cash flow approach, to arrive at these estimates. These approaches entail making numerous assumptions respecting future circumstances, such as general or local industry or market conditions, and, therefore, are uncertain. For the year ended December 31, 2002, we recognized a transitional impairment charge to earnings, net of tax, of $24.3 million and an impairment charge to income from operations of $25.6 million in the fourth quarter of 2002. We did not record a goodwill impairment charge for the year ended December 31, 2003. We can provide no assurance that future goodwill impairments will not occur. The goodwill balance was $165.2 million as of December 31, 2003 and $157.4 million as of December 31, 2002. See Note 2 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

 

Insurance Programs

 

We maintain third-party insurance coverage in amounts and against the risks we believe are reasonable. Under our insurance program since July 2001, we share the risk of loss with our insurance underwriters by

 

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maintaining high deductibles subject to aggregate annual loss limitations. We fund these deductibles and record an expense for losses we expect under the programs. We determine the expected losses using a combination of our historical loss experience and subjective assessments of our future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions. Although we believe the estimated losses are reasonable, significant differences related to the items we have noted above could materially affect our insurance obligations and future expense. The amount accrued for self-insurance claims was $6.6 million as of December 31, 2003 and $5.3 million as of December 31, 2002. We record these amounts as “accrued liabilities.”

 

Income Taxes

 

We use the liability method of accounting for income taxes. Under this method, we record deferred income taxes based on temporary differences between the financial reporting and tax basis of assets and liabilities and use enacted tax rates and laws that we expect will be in effect when we recover those assets or settle those liabilities, as the case may be, to measure those taxes. We believe our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. In cases where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, we would provide for a valuation allowance.

 

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax-planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax laws, changes in statutory tax rates and future taxable income levels. If we determined that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we determined that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Subsequently recognized tax benefits associated with valuation allowances, recorded in connection with a business combination, will be recorded as an adjustment to goodwill.

 

Property, Plant and Equipment, Net

 

We state our property, plant and equipment at cost and use the straight-line method to compute depreciation of these assets over their estimated remaining useful lives. Our estimates of those remaining useful lives may be affected by such factors as changing market conditions, technological advances within the industry or changes in regulations governing the industry.

 

We evaluate the recoverability of our property, plant and equipment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We compare the carrying value of long-lived assets to our projection of future undiscounted cash flows attributable to those assets. If the carrying value of the asset exceeds the future undiscounted cash flows, we record an impairment loss equal to the excess of the carrying value over the fair value. Actual useful lives and future cash flows could be different from those estimated by our management. These differences could have a material effect on our future operating results.

 

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Results of Operations

 

The following table sets forth selected historical statement of operations information and that information as a percentage of sales for the years indicated.

 

     Year Ended December 31

 
     2003

    2002

    2001

 
     (dollars in thousands)  

Sales

   $ 473,124    100.0 %   $ 503,314     100.0 %   $ 493,591    100.0 %

Cost of goods sold before depreciation, depletion and amortization

     388,717    82.2       404,376     80.3       396,769    80.4  
    

  

 


 

 

  

Gross profit before depreciation, depletion and amortization

     84,407    17.8       98,938     19.7       96,822    19.6  

Selling, general and administrative expenses

     42,550    8.9       47,204     9.4       44,933    9.1  

Special compensation charge

                        2,124    0.4  

Restructuring and impairments

              28,440     5.7           

Depreciation, depletion and amortization

     12,441    2.6       10,734     2.1       13,828    2.8  
    

  

 


 

 

  

Income from operations

     29,416    6.3       12,560     2.5       35,937    7.3  

Interest expense, net

     16,855    3.6       17,127     3.4       19,386    3.9  

Other income, net

     3,016    0.6       1,137     0.2       652    0.1  
    

  

 


 

 

  

Income (loss) before income tax provision

     15,577    3.3       (3,430 )   (0.7 )     17,203    3.5  

Income tax provision

     5,274    1.1       608     0.1       7,658    1.6  
    

  

 


 

 

  

Income (loss) before cumulative effect of accounting change

     10,303    2.2       (4,038 )   (0.8 )     9,545    1.9  

Cumulative effect of accounting change

              (24,328 )   (4.8 )         
    

  

 


 

 

  

Net income (loss)

   $ 10,303    2.2 %   $ (28,366 )   (5.6 )%   $ 9,545    1.9 %
    

  

 


 

 

  

 

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

 

Sales. Sales decreased $30.2 million, or 6.0%, from $503.3 million in 2002 to $473.1 million in 2003. The decrease is attributable to a 7.2% decrease in the volume of ready-mixed concrete we sold and a 0.1% decline in our average ready-mixed concrete price and was primarily due to the general decline in nonresidential construction markets reflecting the general state of the overall economy, employment levels in the United States, sustained adverse weather conditions in several of our markets for a portion of the year and the realignment of our businesses in our North Texas operations, partially offset by $11.3 million in additional sales contributed through our acquisition of Builders’ Redi-Mix, Inc. in February 2003.

 

Gross profit before depreciation, depletion and amortization. Gross profit before depreciation, depletion and amortization decreased $14.5 million, or 14.7%, from $98.9 million in 2002 to $84.4 million in 2003. Gross margins decreased from 19.7% in 2002 to 17.8% in 2003. The decline in gross margin is attributable in part to the correction of an inventory overstatement we describe below under “—Recent Events,” a relative decline in productivity due to the adverse weather conditions in some of our markets and a relative shift in our project mix from commercial and industrial construction projects to residential construction projects, which typically require products with lower margins, and higher risk and group health insurance costs. The decline in gross profit was partially offset by $2.1 million in additional gross profit contributed by the business we acquired in 2003.

 

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $4.6 million, or 9.9%, from $47.2 million in 2002 to $42.6 million in 2003. This decrease was attributable to a decline in salary and benefit expenses in 2003 primarily due to lower incentive compensation and a reduced provision for

doubtful accounts. This decline in expenses was partially offset by approximately $0.9 million in additional

 

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expenses associated with the business we acquired in 2003 and professional fees associated with our investigation of the inventory overstatement we describe below under “—Recent Events.”

 

Restructuring and impairments. We recorded no restructuring or impairment charges in 2003 as compared to the $28.4 million for impairments and restructuring charges we recorded in 2002, as described below.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $1.7 million, or 15.9%, from $10.7 million in 2002 to $12.4 million in 2003. This increase resulted from the additional property, plant and equipment we placed in service in 2003, including those associated with the business we acquired in February 2003.

 

Interest expense, net. Interest expense, net, decreased $0.2 million, or 1.6%, from $17.1 million in 2002 to $16.9 million in 2003. This decrease was attributable to a lower average outstanding balance under our revolving credit facility during 2003, partially offset by a write-off of $0.4 million in deferred financing costs.

 

Other income, net. Other income, net, increased $1.9 million, or 165.3%, from $1.1 million in 2002 to $3.0 million in 2003. This increase was attributable to a $2.0 million settlement we recorded in the fourth quarter of 2003 in connection with a claim we filed against the former owners of a subsidiary in our Atlantic Region. For additional information, see Note 4 to our Consolidated Financial Statements in Item 8 of this report.

 

Income tax provision. We provided for income taxes of $5.3 million in 2003, an increase of $4.7 million from our provision in 2002. Our income taxes increased principally because we had restructuring charges and goodwill impairments in 2002 that caused our results to be lower in that year. Our effective tax rate was 33.9% for 2003 and 17.7% for 2002.

 

Cumulative effect of accounting change. Our 2003 net income does not include any cumulative effect of accounting change. Our 2002 net loss included a cumulative effect of accounting change, net of tax, of $24.3 million as a result of our adoption of SFAS No. 142.

 

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

 

Sales. Sales increased $9.7 million, or 2.0%, from $493.6 million in 2001 to $503.3 million in 2002. The increase was attributable to a full year of revenues associated with businesses we acquired in 2001, revenues of $9.5 million associated with the aggregates business we acquired in the first quarter of 2002 and a modest 0.4% average ready-mixed concrete price increase. Partially offsetting these increases was a 6.8% decrease in volumes of ready-mixed concrete we sold.

 

Gross profit before depreciation, depletion and amortization. Gross profit before depreciation, depletion and amortization increased $2.1 million, or 2.2%, from $96.8 million in 2001 to $98.9 million in 2002. Gross margins increased from 19.6% in 2001 to 19.7% in 2002. These increases were attributable to a gross profit of $4.2 million associated with the aggregates business acquired in 2002. In 2002, the lower volumes of ready-mixed concrete depressed gross profit and margin.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.3 million, or 5.1%, from $44.9 million in 2001 to $47.2 million in 2002. The 2001 expenses included charges totaling $2.8 million relating to the settlement of litigation. Absent these litigation charges, selling, general and administrative expenses for 2002 would have increased $5.1 million, or 11.3%, from 2001. This increase was attributable to the inclusion of a full year of costs associated with businesses we acquired in 2001 and selling

 

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expenses incurred by the aggregate business we acquired in the first quarter of 2002, increased communication costs in some of our markets, increased professional fees, higher sales compensation costs, higher advertising and travel costs and higher incentive compensation expense.

 

Special compensation charge. In 2001, we granted additional compensation to members of our management team and some of our key employees in recognition of the overall contribution made by those employees to our various 2001 capital-raising initiatives. This special award was in addition to our recurring annual incentive compensation program.

 

Restructuring and impairments. In 2002, we recorded an impairment charge of $25.6 million for goodwill impairments related to two reporting units in our North Texas/Southwest Oklahoma and Memphis, Tennessee/Northern Mississippi markets. We also recorded charges totaling $2.8 million related primarily to the realignment of our business in North Texas. For additional information, see Note 5 to our Consolidated Financial Statements in Item 8 of this report.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense decreased $3.1 million, or 22.4%, from $13.8 million in 2001 to $10.7 million in 2002. In 2002, goodwill was not amortized due to the adoption of SFAS No. 142.

 

Interest expense, net. Interest expense, net, decreased $2.3 million, or 11.7%, from $19.4 million in 2001 to $17.1 million in 2002. This decrease was attributable to a lower average interest rate, partially offset by a higher average balance, under our revolving credit facility during 2002.

 

Other income, net. Other income, net, increased $0.5 million, or 74.4%, from $0.7 million in 2001 to $1.1 million in 2002. This increase was attributable to a gain we realized in 2002 on the sale of FCC licenses in our Northern California market.

 

Income tax provision. We provided for income taxes of $0.6 million in 2002, a decrease of $7.1 million from our provision in 2001. This decrease was principally the result of lower taxable income generated by our operations during 2002. The effective tax rate was 17.7% for 2002 and 44.5% for 2001. The change in this rate was due to the operating loss, nondeductible items relating to goodwill impairments and state income taxes.

 

Cumulative effect of accounting change. The 2002 net loss includes a cumulative effect of accounting change, net of tax, as a result of our adoption of SFAS No. 142. Under SFAS No. 142, we recorded a transitional goodwill impairment charge of $24.3 million, net of tax, effective January 1, 2002. This impairment charge was attributable to two reporting units, our divisions in North Texas/Southwest Oklahoma and Memphis, Tennessee/Northern Mississippi. Local market and economic conditions affected the value of acquisitions made in North Texas (in 2000 and 2001) and Memphis, Tennessee/Northern Mississippi (in 1999).

 

Liquidity and Capital Resources

 

We require cash to pay our operating expenses, make capital expenditures and service our debt and other long-term liabilities. Since our inception, cash also has been the primary component in the consideration we have paid to acquire businesses after our initial public offering. For the 23 acquisitions we have made since our initial public offering in May 1999, we have used $233.5 million in cash (net of $17.2 million in cash received) to pay approximately 70% of the total purchase price. We expect that cash would be a significant, if not principal, element in acquisitions we might make in the foreseeable future.

 

Our principal sources of funds are from our operations and the capital markets, principally the commercial and institutional debt markets.

 

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Table of Contents

The principal factors that could adversely affect the availability of our internally generated funds include:

 

    any further deterioration of sales due to weakness in markets in which we operate;

 

    any further decline in gross margins due to shifts in our project mix; and

 

    the extent to which we are unable to generate internal growth through integration of additional businesses or capital expansions of our existing business.

 

The principal factors that could adversely affect our ability to obtain cash from external sources include:

 

    financial covenants contained in our subordinated notes and our new credit facility;

 

    volatility in the markets for corporate debt; and

 

    fluctuations in the market price of our common stock.

 

The following key financial measurements reflect our financial position and capital resources as of December 31, 2003, 2002 and 2001 (dollars in thousands):

 

     2003

    2002

    2001

 

Cash and cash equivalents

   $ 7,111     $ 4,685     $ 7,127  

Working capital

   $ 37,941     $ 47,116     $ 46,941  

Total debt

   $ 155,039     $ 161,808     $ 163,775  

Debt as a percent of capital employed

     46.7 %     50.0 %     46.5 %

 

During 2003, we experienced a decrease in working capital of $9.2 million, due primarily to the classification of our first principal payment of $13.6 million on our subordinated debt, which is due in November 2004, as a current liability as of December 31, 2003, partially offset by the increase in trade receivables contributed by the business we acquired in 2003 and higher fourth quarter sales in 2003 compared to fourth quarter sales in 2002.

 

At December 31, 2003, we had outstanding borrowings totaling $155.0 million at a weighted average annual interest rate of 9.0%.

 

Refinancing of Prior Credit Facility

 

At December 31, 2003, we had borrowings of $60.0 million outstanding under a $100 million revolving credit facility that was scheduled to expire in May 2004. The weighted average annual interest cost of those borrowings on that date was 4.2%.

 

On March 12, 2004, we terminated that facility and repaid the entire amount then outstanding thereunder with borrowings under our new asset-backed revolving credit and term loan facility we describe below.

 

The availability of credit to us under the terminated facility was limited by various financial ratios, including a leverage ratio, we were required to maintain, and we paid commitment fees on our unused capacity regardless of its availability.

 

As of March 12, 2004, we estimate that the total lender and professional fees and expenses we incurred in connection with this refinancing, including fees paid to the holders of our senior subordinated notes, will be approximately $3.3 million. We estimate that we will charge approximately $0.2 million of this amount against income in the first quarter of 2004 and charge the remainder over the terms of our new facility and the senior subordinated notes.

 

New Credit Facility

 

Our new asset-backed credit facility consists of a revolving credit facility of up to $100 million and a term loan facility of up to $25 million which we have secured with substantially all our assets. The availability of

 

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credit to us under each facility will be tied to and limited by the value of specified assets we have pledged to secure the facilities. On March 12, 2004, we borrowed $44 million under the revolving credit facility and $20 million under the term loan facility. The balance of the term loan facility will be available to us until June 10, 2004 if we meet specified conditions, principally the establishment of additional collateral value for the term loan. We have the option until June 10, 2004 to reallocate the balance of the term loan to increase the revolving credit facility in such an amount.

 

The revolving credit facility will terminate, and all revolving credit loans will become due, on March 12, 2009. The term loan will be payable in a lump sum on March 12, 2007. Both the revolving credit loans and the term loan will be subject to the mandatory prepayment provisions we describe below. Prepayments under the revolving credit facility will not reduce the amount thereafter available to us under the facility, while amounts prepaid on the term loan cannot be reborrowed.

 

The revolving credit loans and the term loan will bear interest at fluctuating rates payable monthly in arrears. These rates will be either a domestic base rate or, after the earlier to occur of April 12, 2004 and the completion of syndication of the loans, a Eurodollar rate plus, in each case, a margin. We generally will have the option to specify whether the domestic rate or the Eurodollar rate will apply to all or a portion of the loans. In the case of domestic rate loans, the margin will be 125 basis points for revolving credit loans and 150 basis points for the term loan until September 12, 2004. Thereafter, the rate margins for revolving credit loans and the term loan will vary according to the amount of unused borrowing capacity available to us under the revolving credit facility. The maximum margins will apply if that capacity is less than $20 million, and the margins will decrease as that capacity increases in specified increments. At March 12, 2004, based on the domestic base rate, the weighted average annual interest rate of our initial borrowings under the new facility was 5.3%.

 

Our ability to borrow under the revolving credit facility will be limited at any time to our “available credit” at that time. Under the credit agreement for the facility, the available credit at any time will be the amount of our unborrowed capacity at that time which we actually may borrow and will be determined primarily by a borrowing base equal to 85% of certain of the following types of collateral meeting the agreement’s eligibility requirements for inclusion in the base:

 

    our receivables;

 

    our inventories; and

 

    our mixer trucks.

 

For purposes of computing the borrowing base, inventories and trucks will be valued at their “net orderly liquidation value” (as defined). The borrowing base generally will be determined monthly.

 

The credit agreement provides that the administrative agent may, on the bases specified, reduce the amount of the available credit from time to time. In addition, while our senior subordinated notes remain outstanding, the limitations these notes impose on our incurrence of debt also may reduce the amount of our available credit. At March 12, 2004, after giving effect to our initial borrowings under the revolving credit facility, the amount of our available credit was $19.9 million.

 

We will pay a monthly commitment fee on the average daily unused commitments under the revolving credit facility at the annual rate of 0.375%.

 

The credit agreement contains two financial covenants. One would require us to maintain a minimum fixed charge coverage ratio from time to time if our available credit under the revolving credit facility falls below $15 million. The other will restrict our capital expenditures (as defined) to $25 million in 2004 and, in each year thereafter, to 5% of our consolidated revenues for the preceding year.

 

The credit agreement also contains various affirmative and negative covenants with which we must comply, including a prohibition of cash dividends on or redemptions of our common stock and restrictions on our ability to incur additional debt and liens, sell assets otherwise than in the ordinary course of business, make investments and effect acquisitions of additional businesses.

 

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The credit agreement also provides for mandatory prepayments of the revolving credit loans in the event the amounts outstanding under the revolving credit facility become under-collateralized and in certain other events, including various types of asset sales, insured casualty or loss events, debt incurrences and equity issuances. The term loan also is subject to prepayment in the event it becomes under-collateralized and upon certain other events, including certain asset sales.

 

The credit agreement specifies various events that would constitute defaults or events of default thereunder, including a “change of control” (as defined), and provides for customary remedies during the continuation of any such event of default.

 

Senior Subordinated Notes

 

We have outstanding $95 million of our 12.00% senior subordinated notes due November 10, 2010. These notes are mandatorily repayable in equal annual installments of approximately $13.6 million in each of the years 2004 through 2010 and contain financial and other covenants with which we must comply.

 

Effective March 12, 2004, we amended the agreement relating to these notes in connection with our entry into our new credit facility. The amendments include:

 

    changes in the maximum senior and maximum total debt leverage ratios we must maintain; and

 

    changes to accommodate the operation of our new credit facility.

 

The amendment also prohibits our making new acquisitions of businesses, restricts our ability to make certain payments on or redemptions of our common stock through at least 2005 and requires us to pay the holders of the notes an additional amendment fee if we do not prepay the notes in their entirety prior to June 30, 2004. At March 12, 2004, in accordance with the original terms of the notes, this prepayment would entail payment of a loss-of-yield premium of approximately $26 million, which fluctuates with changes in interest rates. Thus the financing requirement for the retirement of these notes currently would be approximately $121 million plus accrued interest on the $95 million principal amount.

 

Future Capital Requirements

 

For 2004, our current capital requirements include approximately $15 million of capital expenditures we plan to make and the $13.6 million principal repayment due in November on our subordinated notes. This principal repayment and the scheduled principal repayments on these notes in the same amount in each of the next six years each would substantially equate to the cash flow, net of net property, plant and equipment additions, we generated from our operations in 2003.

 

Our management believes, on the basis of current expectations, that our internally generated cash flow and borrowings under our new credit facility will be sufficient to provide the liquidity necessary to fund our operations and meet our capital and debt-service requirements for at least the next 12 months.

 

If market conditions permit and we are able to refinance our subordinated notes on acceptable terms, we currently plan to do so in the near future. If we do not refinance these notes, their cash requirements and restrictive covenants, including the new prohibition of acquisitions, will impede continuation of our growth strategy.

 

Cash Flow

 

Our net cash provided by operating activities is generally the cash effects of transactions and other events used in the determination of net income or loss. Net cash provided by operating activities of $26.7 million in 2003 decreased $8.2 million, or 24.6%, from 2002. This decrease reflected lower operating profits, partially offset by income tax payments.

 

Our net cash used for investing activities of $17.3 in 2003 decreased $19.2 million, or 52.7%, from the net cash used in 2002, primarily due to decreases in funds used for capital expenditures and acquisitions.

 

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Our net cash used in financing activities of $7.0 million in 2003 increased $6.1 million, or 690.9%, from the net cash used in 2002. This increase was primarily attributable to an increase in debt repayments and debt issuance costs.

 

We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment (net of disposals). Free cash flow is a performance measure not prepared in accordance with generally accepted accounting principles (“GAAP”). Our management uses free cash flow in managing our business because we consider it to be an important indicator of our ability to service our debt and generate cash for acquisitions and other strategic investments. We believe free cash flow may provide users of our financial information additional meaningful comparisons between current results and results in prior operating periods. As a non-GAAP financial measure, free cash flow should be viewed in addition to, and not as an alternative for, our reported operating results or cash flow from operations or any other measure of performance prepared in accordance with GAAP.

 

Our historical net cash provided by operating activities and free cash flow is as follows (in thousands):

 

     Year Ended December 31

 
     2003

    2002

    2001

 

Net cash provided by operating activities

   $ 26,692     $ 34,933     $ 44,874  

Less: Purchases of property and equipment, net of disposals of $2,587, $1,068 and $2,214

     (10,700 )     (16,977 )     (8,645 )
    


 


 


Free cash flow

   $ 15,992     $ 17,956     $ 36,229  
    


 


 


 

Acquisitions

 

In February 2003, we acquired Builders Redi-Mix, Inc., which produces and distributes ready-mixed concrete in the greater Lansing, Michigan market. The purchase price was approximately $10.3 million, comprised of $5.8 million in cash, net of cash acquired, transaction costs of $0.2 million and 920,726 shares of common stock (valued at $4.3 million).

 

Other Matters

 

Off-Balance Sheet Arrangements

 

We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. From time to time we may enter into noncancellable operating leases that would not be reflected on our balance sheet.

 

Commitments

 

The following are our contractual commitments associated with our indebtedness and our lease obligations as of December 31, 2003 (in millions). The contractual commitments below reflect the refinancing of our prior credit facility on March 12, 2004, as discussed above:

 

Contractual Obligations


   Total

   Less
than 1
year


   1-3
years


   4-5
years


  

After 5

Years


Principal of long-term debt

   $ 155.0    $ 13.6    $ 27.2    $ 47.1    $ 67.1

Interest on long-term debt (1)

     45.6      11.4      24.4      8.2      1.6

Operating leases

     36.9      11.2      15.6      7.4      2.7
    

  

  

  

  

Total contractual obligations

   $ 237.5    $ 36.2    $ 67.2    $ 62.7    $ 71.4
    

  

  

  

  


(1)   Interest payments due under our 12.00% senior subordinated notes.

 

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The following are our commercial commitments expirations as of December 31, 2003 (in millions):

 

Other Commercial Commitments


   Total

   Less
than 1
year


   1-3
years


   4-5
years


  

After 5

Years


Standby letter of credit

   $ 0.1    $ 0.1         

Performance bonds

     4.0      4.0         
    

  

  
  
  

Total Commercial Commitments

   $ 4.1    $ 4.1         
    

  

  
  
  

 

Our purchase obligations were not significant as of December 31, 2003.

 

Related-Party Transactions

 

We enter into transactions in the normal course of business with related parties. These transactions consist principally of operating leases under which we lease facilities from former owners of our acquired businesses or their affiliates and include transactions with some of our officers and directors or their affiliates. For additional discussion on related-party transactions, see Note 12 to our Consolidated Financial Statements in Item 8 of this report.

 

Inflation

 

As a result of the relatively low levels of inflation during the past three years, inflation did not significantly affect our results of operations in any of those years.

 

Recent Events

 

Our results for 2003 include the correction of a $2.5 million inventory overstatement we identified at one of our subsidiaries in our Atlantic Region, which we acquired in 2001. Since the impact to our 2001 and 2002 annual financial statements was not material, we recorded an increase of $1.1 million, or $0.7 million net of tax, to cost of goods sold in the third quarter of 2003. The cost of goods sold, properly reflected in the respective prior periods, would have decreased annual net income for 2001 by $0.2 million and increased the annual net loss for 2002 by $0.5 million. We reflected the remaining $1.4 million of the overstatement, which related to the acquisition date, as a $0.8 million increase in goodwill and a $0.6 million increase in deferred tax assets as of December 31, 2003. Under the indemnification provisions of the acquisition agreement we entered into with the former owners of that subsidiary, those prior owners provided us with $2.0 million of indemnification consideration relating to the inventory overstatement. This amount was recorded as other income in the fourth quarter of 2003.

 

We identified the inventory overstatement issue in the third quarter of 2003 following the departure of the subsidiary’s controller. We subsequently appointed an accounting officer from our Atlantic Region as acting controller at that subsidiary and, following that officer’s identification of the issue, we began assessing the magnitude of the overstatement. In conjunction with that assessment, we also undertook an internal investigation to determine the cause and timing of events that led to the overstatement. Following the completion of our investigation, an independent investigation was conducted by outside legal counsel, under the direction of the Audit Committee of our Board of Directors. Our internal investigation, supported by this independent investigation, determined that certain accounting policies and procedures were not followed at that subsidiary. As a result, we increased our inventory controls and oversight of the accounting function at that subsidiary and took appropriate personnel action.

 

In addition to the actions taken to address this specific issue, our management recommended to the Audit Committee that we change the lines of reporting for our subsidiary controllers and other accounting personnel at our operating subsidiaries. Specifically, management recommended that such personnel should report directly to

 

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our corporate controller, rather than to local operating management. Our Board of Directors, upon recommendation from management and the Audit Committee, approved this change, which we implemented throughout our operating subsidiaries in the fourth quarter of 2003. In addition, we are also in the process of developing other enhancements to our overall system of internal controls in conjunction with our preparation for compliance with the SEC’s recently adopted rules under Section 404 of the Sarbanes-Oxley Act of 2002.

 

Recent Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of our participation in variable interest entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosure requirements regarding interests in VIEs that are deemed significant, even if consolidation is not required. As we do not maintain any VIEs, the adoption of FIN 46, effective January 1, 2004 for entities acquired before February 1, 2003, is not expected to have an impact on our consolidated financial position, results of operations or cash flows.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on our consolidated financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 provides that certain financial instruments having characteristics of both liabilities and equity are to be classified as liabilities. This statement was effective July 1, 2003 for existing financial instruments and May 31, 2003 for new or modified financial instruments. As we do not have any financial instruments that qualify under this statement, the adoption of SFAS No. 150 did not have an impact on our consolidated financial position, results of operations or cash flows.

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

We do not enter into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of our investments, changes in market interest rates would not have a significant impact on their aggregate fair value.

 

Borrowings under our prior credit facility exposed us to certain market risks. Interest on amounts drawn under that credit facility varied based on either the prime rate or one, two, three or six month Eurodollar rates. Based on the $60.0 million outstanding balance as of December 31, 2003, a one-percent change in the applicable rate would have changed the amount of interest paid by $0.6 million for 2003. Our new credit facility exposes us to the same market risks.

 

We purchase commodities, such as cement and aggregates, at market prices and do not currently use financial instruments to hedge commodity prices.

 

Our operations are subject to factors affecting the level of general construction activity, including the level of interest rates and availability of funds for construction. A significant decrease in the level of general construction activity in any of our market areas may have a material adverse effect on our sales and earnings.

 

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Item 8.    Financial Statements and Supplementary Data

 

U.S. CONCRETE, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Our Consolidated Financial Statements as of December 31, 2003 and 2002 and for each of the two years ended December 31, 2003, together with related notes and the report of PricewaterhouseCoopers LLP, are set forth herein.

 

Our Consolidated Financial Statements for the year ended December 31, 2001 were audited by Arthur Andersen LLP, which has ceased operations. A copy of its previously issued report on those financial statements is set forth herein. It has not reissued that report.

 

U.S. Concrete, Inc. and Subsidiaries    Page

Report of Independent Auditors—PricewaterhouseCoopers LLP

   31

Report of Independent Public Accountants—Arthur Andersen LLP

   32

Consolidated Balance Sheets at December 31, 2003 and 2002

   33

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001

   34

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001

   35

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

   36

Notes to Consolidated Financial Statements

   37

 

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REPORT OF INDEPENDENT AUDITORS

 

To the Board of Directors and Stockholders of U.S. Concrete, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of U.S. Concrete, Inc. and its subsidiaries (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Company’s consolidated financial statements for the year ended December 31, 2001 were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated February 26, 2002.

 

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” as of January 1, 2002 and, accordingly, ceased amortizing goodwill and indefinite-lived intangible assets as of that date.

 

As discussed above, the Company’s consolidated financial statements for the year ended December 31, 2001 were audited by other independent accountants who have ceased operations. As described in Note 2, those financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. We audited the transitional disclosures for 2001 included in Note 2. In our opinion, the transitional disclosures for 2001 in Note 2 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

 

PRICEWATERHOUSECOOPERS LLP

 

Houston, Texas

March 12, 2004

 

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THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP (ARTHUR ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN AND ARTHUR ANDERSEN DID NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN THIS FORM 10-K) INTO ANY OF U.S. CONCRETE, INC.’S REGISTRATION STATEMENTS.

 

AS DISCUSSED IN NOTE 2, U.S. CONCRETE, INC. HAS REVISED ITS FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2001 TO INCLUDE THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, “GOODWILL AND INTANGIBLE ASSETS.” THE ARTHUR ANDERSEN REPORT DOES NOT EXTEND TO THOSE CHANGES. THE REVISION TO THE 2001 FINANCIAL STATEMENTS RELATED TO THESE TRANSITIONAL DISCLOSURES WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To U.S. Concrete, Inc.:

 

We have audited the accompanying consolidated balance sheets of U.S. Concrete, Inc., a Delaware corporation, and subsidiaries as of December 31, 2001 and 2000,* and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001.* These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits 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 U.S. Concrete, Inc. and subsidiaries as of December 31, 2001 and 2000,* and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,* in conformity with accounting principles generally accepted in the United States.

 

ARTHUR ANDERSEN LLP

 

Houston, Texas

February 26, 2002

 


*   U.S. Concrete’s consolidated balance sheets as of December 31, 2001 and 2000 and the consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2000 and 1999 are not included in this Form 10-K.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     December 31

     2003

    2002

ASSETS

              

Current assets:

              

Cash and cash equivalents

   $ 7,111     $ 4,685

Trade accounts receivable, net

     64,086       59,224

Inventories

     18,104       21,044

Deferred income taxes

     2,061       4,188

Prepaid expenses and other current assets

     18,109       13,575
    


 

Total current assets

     109,471       102,716
    


 

Property, plant and equipment, net

     121,022       117,199

Goodwill

     165,226       157,364

Other assets

     5,255       4,943
    


 

Total assets

   $ 400,974     $ 382,222
    


 

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Current liabilities:

              

Current maturities of long-term debt

   $ 13,610     $ 56

Accounts payable and accrued liabilities

     57,920       55,544
    


 

Total current liabilities

     71,530       55,600
    


 

Long-term debt, net of current maturities

     141,429       161,752

Other long-term obligations

     3,980       2,569

Deferred income taxes

     7,324       456
    


 

Total liabilities

     224,263       220,377
    


 

Commitments and contingencies (Note 14)

              

Stockholders’ equity:

              

Preferred stock, $0.001 value; 10,000,000 shares authorized; none issued and outstanding

     —         —  

Common stock, $0.001 value; 60,000,000 shares authorized; 28,805,632 and 27,024,286 shares issued and outstanding in 2003 and 2002, respectively

     29       27

Additional paid-in capital

     164,123       157,276

Deferred compensation

     (2,286 )     —  

Retained earnings

     14,845       4,542
    


 

Total stockholders’ equity

     176,711       161,845
    


 

Total liabilities and stockholders’ equity

   $ 400,974     $ 382,222
    


 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year Ended December 31

     2003

   2002

    2001

Sales

   $ 473,124    $ 503,314     $ 493,591

Cost of goods sold before depreciation, depletion and amortization

     388,717      404,376       396,769
    

  


 

Gross profit before depreciation, depletion and amortization

     84,407      98,938       96,822

Selling, general and administrative expenses

     42,550      47,204       44,933

Special compensation charge

     —        —         2,124

Restructuring and impairments

     —        28,440       —  

Depreciation, depletion and amortization

     12,441      10,734       13,828
    

  


 

Income from operations

     29,416      12,560       35,937

Interest expense, net

     16,855      17,127       19,386

Other income, net

     3,016      1,137       652
    

  


 

Income (loss) before income tax provision

     15,577      (3,430 )     17,203

Income tax provision

     5,274      608       7,658
    

  


 

Income (loss) before cumulative effect of accounting change

     10,303      (4,038 )     9,545

Cumulative effect of accounting change

     —        (24,328 )     —  
    

  


 

Net income (loss)

   $ 10,303    $ (28,366 )   $ 9,545
    

  


 

Earnings per share:

                     

Basic and diluted income (loss) per share before cumulative effect of accounting change

   $ 0.37    $ (0.15 )   $ 0.39

Cumulative effect of accounting change, net of tax

     —        (0.91 )     —  
    

  


 

Basic and diluted income (loss) per share

   $ 0.37    $ (1.06 )   $ 0.39
    

  


 

Number of shares used in calculating earnings per share:

                     

Basic

     28,003      26,825       24,551

Diluted

     28,105      26,825       24,621

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

 

     Common Stock

   Additional
Paid-In
Capital


    Deferred
Compensation


    Retained
Earnings


    Total
Stockholders’
Equity


 
     Shares

   Amount

        

BALANCE, December 31, 2000

   22,452    $ 22    $ 127,170     $ —       $ 23,363     $ 150,555  

Public offering, net of offering costs

   1,820      2      13,600       —         —         13,602  

Issuance of shares for acquisitions

   2,076      3      12,372       —         —         12,375  

Employee purchase of ESPP shares

   226      —        1,242       —         —         1,242  

Exercise of stock options

   17      —        125       —         —         125  

Stock issued to board member

   12      —        95       —         —         95  

Stock issued in connection with special compensation charge

   108      —        776       —         —         776  

Net income

   —        —        —         —         9,545       9,545  
    
  

  


 


 


 


BALANCE, December 31, 2001

   26,711      27      155,380       —         32,908       188,315  

Issuance of shares for acquisitions

   18      —        349       —         —         349  

Employee purchase of ESPP shares

   247      —        1,247       —         —         1,247  

Stock issued in connection with compensation plan

   48      —        300       —         —         300  

Net loss

   —        —        —         —         (28,366 )     (28,366 )
    
  

  


 


 


 


BALANCE, December 31, 2002

   27,024      27      157,276       —         4,542       161,845  

Issuance of shares for acquisitions and contingent consideration

   1,009      1      4,479       —         —         4,480  

Exchange of stock options for restricted common stock

   286      —        1,374       (1,374 )     —         —    

Employee purchase of ESPP shares

   265      1      866       —         —         867  

Restricted common stock issued in connection with compensation plan

   222      —        1,128       (1,128 )     —         —    

Amortization of deferred compensation

   —        —        —         216       —         216  

Receivable of common stock to be canceled

   —        —        (1,000 )     —         —         (1,000 )

Net income

   —        —        —         —         10,303       10,303  
    
  

  


 


 


 


BALANCE, December 31, 2003

   28,806    $ 29    $ 164,123     $ (2,286 )   $ 14,845     $ 176,711  
    
  

  


 


 


 


 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended December 31

 
     2003

    2002

    2001

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                        

Net income (loss)

   $ 10,303     $ (28,366 )   $ 9,545  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                        

Cumulative effect of accounting change

     —         24,328       —    

Restructuring and impairments

     —         28,115       —    

Depreciation, depletion and amortization

     12,441       10,734       13,828  

Debt issuance cost amortization

     1,930       1,361       1,719  

Net loss (gain) on sale of assets

     (60 )     (485 )     77  

Deferred income tax provision (benefit)

     8,445       (4,232 )     4,881  

Provision for doubtful accounts

     931       2,126       2,507  

Provision to write down inventories

     1,137       —         —    

Stock based compensation

     216       —         871  

Changes in assets and liabilities, excluding effects of acquisitions:

                        

Receivables

     (4,242 )     10,976       3,953  

Other assets and liabilities, net

     (1,837 )     (3,945 )     (1,801 )

Accounts payable and accrued liabilities

     (2,572 )     (5,679 )     9,294  
    


 


 


Net cash provided by operating activities

     26,692       34,933       44,874  
    


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                        

Purchases of property, plant and equipment

     (13,287 )     (18,045 )     (10,859 )

Payments for acquisitions, net of cash received of $1,081, $0 and $2,174

     (5,814 )     (17,064 )     (47,129 )

Payment of direct costs in connection with acquisitions

     (164 )     (242 )     (2,613 )

Proceeds from disposals of property, plant and equipment

     2,587       1,068       2,214  

Other investing activities

     (581 )     (2,206 )     —    
    


 


 


Net cash used in investing activities

     (17,259 )     (36,489 )     (58,387 )
    


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                        

Proceeds from borrowings

     —         —         6,620  

Repayments of borrowings

     (6,769 )     (1,967 )     (113 )

Proceeds from issuances of common stock

     867       1,247       15,200  

Cash paid related to common stock issuance costs

     (36 )     —         (180 )

Debt issuance costs

     (1,069 )     (166 )     (1,598 )
    


 


 


Net cash provided by (used in) financing activities

     (7,007 )     (886 )     19,929  
    


 


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     2,426       (2,442 )     6,416  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     4,685       7,127       711  
    


 


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 7,111     $ 4,685     $ 7,127  
    


 


 


Supplemental Disclosure of Cash Flow Information:

                        

Cash paid for interest

   $ 15,374     $ 15,306     $ 17,865  

Cash paid for income taxes

   $ 303     $ 6,445     $ 336  

Supplemental disclosure of noncash investing and financing activities:

                        

Additions to property, plant and equipment from exchanges

   $ —       $ 88     $ —    

Receivable from sale of assets

   $ —       $ 450     $ —    

Common stock and stock options issued in connection with acquisitions and contingent consideration

   $ 4,480     $ 349     $ 12,375  

Exchange of stock options for restricted stock

   $ 1,374     $ —       $ —    

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

U.S. Concrete, Inc., a Delaware corporation, provides ready-mixed concrete and related concrete products and services to the construction industry in several major markets in the United States. U.S. Concrete is a holding company and conducts its businesses through its consolidated subsidiaries.

 

U.S. Concrete commenced operations in May 1999 when it acquired six operating businesses in three major markets in the United States. Since then, and through December 31, 2003, U.S. Concrete has acquired an additional 23 operating businesses in these and seven additional markets in the United States.

 

U.S. Concrete’s future success depends on a number of factors, which include attracting and retaining qualified management and employees, complying with government regulations and other regulatory requirements or contract specifications and addressing risks associated with competition, seasonality and quarterly fluctuations, integrating operations successfully, managing growth, identifying and acquiring satisfactory acquisition candidates and obtaining acquisition financing.

 

Basis of Presentation

 

The consolidated financial statements consist of the accounts of U.S. Concrete and its wholly owned subsidiaries. All significant intercompany account balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Cash and Cash Equivalents

 

U.S. Concrete records as cash equivalents all highly liquid investments having maturities of three months or less at the date of purchase.

 

Inventories

 

Inventories consist primarily of raw materials, precast products, building materials and repair parts that U.S. Concrete holds for use or sale in the ordinary course of business. It uses the first-in, first-out method to value inventories at the lower of cost or market.

 

Prepaid Expenses

 

Prepaid expenses primarily include amounts U.S. Concrete has paid for insurance, licenses, property taxes, rent and maintenance contracts. It expenses or amortizes all prepaid amounts as used or over the period of benefit, as applicable.

 

Property, Plant and Equipment, Net

 

U.S. Concrete states property, plant and equipment at cost and uses the straight-line method to compute depreciation of these assets over the following estimated useful lives: buildings and land improvements, from 10 to 40 years; machinery and equipment, from 10 to 30 years; mixers, trucks and other vehicles, from 6 to 12 years; and other, from 3 to 10 years. It capitalizes leasehold improvements on properties held under operating leases and amortizes them over the lesser of their estimated useful lives or the applicable lease term.

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

U.S. Concrete expenses maintenance and repair costs when incurred and capitalizes and depreciates expenditures for major renewals and betterments that extend the useful lives of its existing assets. When U.S. Concrete retires or disposes of property, plant or equipment, it removes the related cost and accumulated depreciation from its accounts and reflects any resulting gain or loss in its statements of operations.

 

In January 2002, U.S. Concrete acquired mineral rights in its acquisition of an aggregates business. Depletion of the related mineral deposits is computed on the basis of the estimated quantity of recoverable raw materials.

 

Effective January 1, 2002, U.S. Concrete began evaluating the recoverability of its property, plant and equipment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” U.S. Concrete compares the carrying value of long-lived assets to its projection of future undiscounted cash flows attributable to such assets and in the event that the carrying value exceeds the future undiscounted cash flows, U.S. Concrete records an impairment charge against income equal to the excess of the carrying value over the asset’s fair value. Prior to January 1, 2002, U.S. Concrete evaluated its property, equipment and intangible assets in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” In the fourth quarter of 2002, U.S. Concrete recorded impairment charges totaling $2.5 million for certain equipment that was removed from service or held for disposal. This charge was classified as a component of the restructuring and impairments in the consolidated statement of operations for the year ended December 31, 2002 (see Note 5 for further discussion).

 

Goodwill

 

Goodwill represents the amount by which the total purchase price U.S. Concrete has paid to acquire businesses accounted for as purchases exceeds the estimated fair value of the net assets acquired. As a result of adopting SFAS No. 142, U.S. Concrete’s goodwill is no longer amortized. Under SFAS No. 142, U.S. Concrete’s goodwill is periodically tested for impairment. SFAS No. 142 provided a six-month transitional period to complete the initial impairment review. U.S. Concrete completed its initial impairment review during the quarter ended June 30, 2002. That review indicated impairments attributable to two reporting units. As a result, U.S. Concrete recorded a transitional goodwill impairment charge of $24.3 million, net of tax, which it has presented as a cumulative effect of accounting change in the consolidated statement of operations for the year ended December 31, 2002 (see Note 2 for further discussion). In the fourth quarter of 2002, U.S. Concrete recorded a goodwill impairment charge of $25.6 million, representing the remaining goodwill associated with those two reporting units (see Notes 2 and 5 for further discussion).

 

The following table reconciles net income, basic earnings per share and diluted earnings per share for the year ended December 31, 2001, adjusted for the effect of SFAS No. 142 (in thousands, except per share amounts):

 

     2001

Net income:

      

Reported net income

   $ 9,545

Add: goodwill amortization, net of tax

     3,993
    

Adjusted net income

   $ 13,538
    

Earnings per share:

      

Reported basic and diluted

   $ 0.39

Adjusted basic and diluted

   $ 0.55

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Debt Issue Costs

 

Other assets include debt issue costs related to U.S. Concrete’s prior revolving credit facility and senior subordinated notes. U.S. Concrete amortizes these costs as interest expense over the scheduled maturity period of the debt. As a result of a decrease in the commitment under the prior revolving credit facility (see Note 9 for discussion), U.S. Concrete expensed approximately $0.4 million of the unamortized debt issuance costs as interest expense during the year ended December 31, 2003. As of December 31, unamortized debt issuance costs were $2.5 million in 2003 and $3.6 million in 2002.

 

Allowance for Doubtful Accounts

 

U.S. Concrete provides an allowance for accounts receivable it believes it may not collect in full. A provision for bad debt expense recorded to selling, general and administrative expenses increases the allowance. Accounts receivable that U.S. Concrete writes off its books decrease the allowance. U.S. Concrete determines the amount of bad debt expense it records each period and the resulting adequacy of the allowance at the end of each period by using a combination of its historical loss experience, a customer-by-customer analysis of its accounts receivable balances each period and subjective assessments of its bad debt exposure.

 

Sales and Expenses

 

U.S. Concrete derives substantially all its sales from the production and delivery of ready-mixed concrete, other onsite products and related building materials. It recognizes sales when products are delivered. Amounts billed to customers for delivery costs are classified as a component of total revenues and the related delivery costs are classified as a component of total cost of goods sold. Cost of goods sold consists primarily of product costs and operating expenses (excluding depreciation, depletion and amortization). Operating expenses consist primarily of wages, benefits, insurance and other expenses attributable to plant operations, repairs and maintenance and delivery costs. Selling expenses consist primarily of sales commissions, salaries of sales managers, travel and entertainment expenses and trade show expenses. General and administrative expenses consist primarily of executive and administrative compensation and benefits, office rent, utilities, communication and technology expenses, provision for doubtful accounts and professional fees.

 

Insurance Programs

 

U.S. Concrete maintains third-party insurance coverage in amounts and against the risks it believes are reasonable. Under its insurance program in effect since July 2001, U.S. Concrete shares the risk of loss with its insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. U.S. Concrete funds those deductibles and records an expense for losses it expects under the programs. U.S. Concrete determines expected losses using a combination of its historical loss experience and subjective assessments of its future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation and economic conditions. Although U.S. Concrete believes that the estimated losses are reasonable, significant differences related to the items noted above could materially affect U.S. Concrete’s insurance obligations and future expense. As of December 31, the amounts accrued for self-insurance claims were $6.6 million in 2003 and $5.3 million in 2002.

 

Reclamation

 

The estimated cost of reclamation is accrued over the life of the mineral deposits based on tons mined in relation to total estimated tons of reserves. Expenditures to reclaim land are charged to the reserves as incurred.

 

Income Taxes

 

U.S. Concrete uses the liability method of accounting for income taxes. Under this method, it records deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

liabilities and uses enacted tax rates and laws that U.S. Concrete expects will be in effect when it recovers those assets or settles those liabilities, as the case may be, to measure those taxes.

 

U.S. Concrete files a consolidated federal income tax return, which includes the operations of all acquired businesses for periods subsequent to their respective acquisition dates. The acquired businesses file “short period” federal income tax returns for the period from their last fiscal year through their respective acquisition dates.

 

Fair Value of Financial Instruments

 

The financial instruments of U.S. Concrete consist primarily of cash and cash equivalents, trade receivables, trade payables and long-term debt. U.S. Concrete’s management considers the carrying values of cash and cash equivalents, trade receivables, trade payables and the revolving credit facility to be representative of their respective fair values. The fair value of the senior subordinated notes is estimated based on interest rates for the same or similar debt offered to U.S. Concrete having the same or similar remaining maturities and collateral requirements. As of December 31, the fair value of U.S. Concrete’s $95 million principal amount of senior subordinated notes was $107.3 million in 2003 and $99.1 million in 2002.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining 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. Estimates and assumptions that U.S. Concrete considers significant in the preparation of its financial statements include those related to its allowance for doubtful accounts, realization of goodwill, accruals for self-insurance, accruals for income tax provision and the valuation and useful lives of property, plant and equipment.

 

Earnings per Share

 

Basic earnings per share are computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted average number of common shares outstanding during the year, but also include the dilutive effect of stock-based incentives and option plans (including stock options and awards of restricted stock).

 

The following table reconciles the numerator and denominator of the basic and diluted earnings per share during the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share amounts).

 

     2003

   2002

    2001

Numerator:

                     

Net income (loss)

   $ 10,303    $ (28,366 )   $ 9,545

Denominator:

                     

Weighted average common shares outstanding-basic

     28,003      26,825       24,551

Effect of dilutive stock options and restricted stock

     102      —         70
    

  


 

Weighted average common shares outstanding-diluted

   $ 28,105    $ 26,825     $ 24,621
    

  


 

Earnings (loss) per share:

                     

Basic

   $ 0.37    $ (1.06 )   $ 0.39

Diluted

   $ 0.37    $ (1.06 )   $ 0.39

 

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U.S. CONCRETE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the years ended December 31, options to purchase 3.1 million in 2003, 4.1 million in 2002 and 1.9 million in 2001 shares of common stock were excluded from the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common stock.

 

Comprehensive Income

 

Comprehensive income represents all changes in equity of an entity during the reporting period, except those resulting from investments by and distributions to stockholders. For each of the three years in the period ended December 31, 2003, no differences existed between the historical consolidated net income and consolidated comprehensive income of U.S. Concrete.

 

Segment Information

 

U.S. Concrete has adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” which establishes standards for the manner by which public enterprises are to report information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to stockholders. All segments that meet a threshold of 10% of revenues, reported profit or loss or combined assets are defined as significant segments. U.S. Concrete currently aggregates its ready-mixed concrete and other concrete related products as one reportable segment. All of its operations, sales and long-lived assets are in the United States.

 

Stock Options

 

Under the requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123,” U.S. Concrete accounts for stock option awards in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and its related interpretations. Under APB No. 25, no compensation expense is recognized when the exercise price is greater than or equal to the market price of the underlying common stock on the date of grant. The exercise price per share of each stock option U.S. Concrete awarded during 2003, 2002 and 2001 was greater than or equal to the fair market value of a share of U.S. Concrete’s common stock on the date of grant.

 

The following table reflects pro forma net income (loss) and earnings (loss) per share implications if the fair value method of SFAS No. 123 had been applied to all awards that vested during the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share amounts):

 

     2003

    2002

    2001

 

Net income (loss)

   $ 10,303     $ (28,366 )   $ 9,545  

Add: Total stock-based employee compensation expense included in reported net income (loss), net of related tax effects

     216       —         871  

Deduct: Total stock-based employee compensation expense determined under fair value method for all awards vested during the year, net of any tax effects

     (1,918 )     (1,713 )     (2,299 )
    


 


 


Pro forma net income (loss)

   $ 8,601     $ (30,079 )   $ 8,117  
    


 


 


Earnings (loss) per share:

                        

Reported basic and diluted

   $ 0.37     $ (1.06 )   $ 0.39  

Pro forma basic and diluted

   $ 0.31     $ (1.12 )   $ 0.33  

 

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The weighted average fair values of options at their grant date for 2003, 2002 and 2001, where the exercise price equaled the market price on the grant date, were $1.43, $2.01 and $4.85, respectively. The estimated fair values for options granted in 2003, 2002 and 2001 were calculated using a Black-Scholes option pricing model, with the following weighted-average assumptions for 2003, 2002 and 2001, respectively: risk-free interest rate of 3.25%, 2.78% and 5.00%; no dividend yield; volatility factor of 0.314, 0.313 and 0.542; and an expected option life of 5, 5 and 10 years.

 

For additional discussion related to stock options, see Note 10.

 

Recent Accounting Requirements

 

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on U.S. Concrete’s consolidated financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity” (“SFAS No. 150”). SFAS No. 150 provides that certain financial instruments with characteristics of both liability and equity are to be classified as a liability. The statement is effective July 1, 2003 for existing financial instruments and May 31, 2003 for new or modified financial instruments. U.S. Concrete does not have financial instruments that qualify under this statement.

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” which clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for and disclosures of certain guarantees issued. FIN 45 requires enhanced disclosures for certain guarantees. It also will require U.S. Concrete to record certain guarantees that it issues or modifies after December 31, 2002, including certain third-party guarantees, on the balance sheet initially at fair value. For guarantees issued on or before December 31, 2002, liabilities are recorded when and if payments become probable and estimable. The adoption of FIN 45 did not have an impact on U.S. Concrete’s consolidated financial position, results of operations or cash flows.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of U.S. Concrete’s participation in variable interest entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE that are deemed significant, even if consolidation is not required. FIN 46 as amended must be applied at the end of periods ending after March 15, 2004, and is effective immediately for all new VIEs created or acquired after January 31, 2003. As U.S. Concrete does not maintain any VIE, the adoption of FIN 46 did not have an impact on its consolidated financial position, results of operations or cash flows.

 

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2.    GOODWILL

 

U.S. Concrete adopted SFAS No. 142 effective January 1, 2002. Under SFAS No. 142, substantially all of U.S. Concrete’s intangible assets are no longer amortized and U.S. Concrete must perform an annual impairment test for goodwill and other intangible assets. U.S. Concrete allocates these assets to various reporting units, consisting of eight operating divisions. SFAS No. 142 requires U.S. Concrete to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is a potential impairment. If the fair value of the reporting unit is less than its carrying value, U.S. Concrete would record an impairment loss to the extent of that difference. The impairment test for intangible assets consists of comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, U.S. Concrete would recognize an impairment. U.S. Concrete bases the fair values of its reporting units on a combination of valuation approaches, including discounted cash flows, multiples of sales and earnings before interest, taxes, depreciation, depletion and amortization and comparisons of recent transactions. Under SFAS No. 142, U.S. Concrete recorded a transitional goodwill impairment charge of $36.6 million ($24.3 million, net of tax), which it presented as a cumulative effect of accounting change in the first quarter of 2002. This impairment charge was attributable to two reporting units, its divisions in North Texas/Southwest Oklahoma and Memphis, Tennessee/Northern Mississippi. Local market and economic conditions affected the value of acquisitions made in North Texas (in 2000 and 2001) and Memphis, Tennessee/Northern Mississippi (in 1999).

 

Subsequently, in the fourth quarter of 2002, U.S. Concrete conducted its annual valuation test and determined that two reporting units, its divisions in North Texas/Southwest Oklahoma and Memphis, Tennessee/Northern Mississippi, had experienced a further decline in value and determined that the fair value of goodwill in those reporting units was less than its carrying amount. U.S. Concrete recorded a goodwill impairment charge of $25.6 million, representing the remaining goodwill associated with those reporting units. This charge was included as a component of restructuring and impairment charges in the consolidated statement of operations in 2002 (see Note 5 for further discussion). In the fourth quarter of 2003, U.S. Concrete conducted its annual valuation test and determined it was not required to recognize any goodwill impairment. There can be no assurance that goodwill impairments will not occur in the future.

 

The changes in the carrying amount of goodwill for the two years ended December 31, 2003 and 2002 were as follows (in thousands):

 

Balance at January 1, 2002

   $ 219,868  

Impairments

     (62,223 )

Adjustments

     (281 )
    


Balance at December 31, 2002

   $ 157,364  

Acquisition

     6,269  

Adjustments

     1,593  
    


Balance at December 31, 2003

   $ 165,226  
    


 

During the third quarter of 2003, U.S. Concrete increased goodwill by $0.8 million to correct an inventory overstatement related to the acquisition date of one of its subsidiaries in its Atlantic Region (see Note 6 for discussion). The $0.8 million increase in goodwill represents a correction of a $1.4 million overstatement of inventories in the opening balance sheet of that subsidiary and a $0.6 million increase of deferred tax assets established in the opening balance sheet related to the change in inventories. The other goodwill adjustments primarily represent post-acquisition adjustments to reflect the contingent consideration payment related to that 2001 business acquisition and the adjustment of certain preacquisition tax contingencies related to the acquisition of a business in 2000. The goodwill adjustments in 2002 primarily represent post-acquisition adjustments to reflect the final fair values of assets acquired and liabilities assumed in the acquisition of five businesses in 2001.

 

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See Note 1 for pro forma disclosure of net income and earnings per share for the year ended December 31, 2001 under SFAS No. 142.

 

3.    BUSINESS COMBINATIONS

 

In February 2003, U.S. Concrete completed the acquisition of Builders’ Redi-Mix, Inc., which produces and distributes ready-mixed concrete in the greater Lansing, Michigan market. The purchase price was approximately $10.3 million, comprised of $5.8 million in cash, net of cash acquired, transaction costs of $0.2 million and 920,726 shares of common stock (valued at $4.3 million). The purchase price has been allocated to the fair value of property and equipment of $4.4 million, goodwill of $6.3 million and net assumed liabilities of $0.4 million (net of other current assets of $2.3 million) in the accompanying consolidated balance sheet. U.S. Concrete has accounted for this transaction under the purchase method of accounting, and the excess of the purchase price compared to the fair market value of assets acquired has been allocated to goodwill. U.S. Concrete also effected one acquisition in 2002, seven in 2001, six in 2000 and 14 in 1999, including its initial six acquisitions at the time of its IPO, all of which were accounted for as purchases. The following table summarizes the aggregate consideration U.S. Concrete paid for transactions during the years ended December 31, 2003, 2002 and 2001:

 

Consideration (in thousands):    2003

   2002

   2001

Cash

   $ 6,895    $ 17,064    $ 49,303

Fair value of common stock issued

     4,333      —        12,375
    

  

  

Total

   $ 11,228    $ 17,064    $ 61,678
    

  

  

 

The following summarized unaudited pro forma consolidated financial information for the years ended December 31, 2003 and 2002 adjusts the historical consolidated financial information to reflect the assumption that all acquisitions since 2001 occurred on January 1, 2002 (in thousands, except per share data):

 

     2003

   2002

 
     (unaudited)  

Revenues

   $ 473,420    $ 517,326  

Net income (loss) before cumulative effect of accounting change

   $ 10,228    $ (3,311 )

Net income (loss)

   $ 10,228    $ (27,639 )

Basic and diluted earnings (loss) per share

   $ 0.37    $ (1.00 )

 

The pro forma financial information for 2002 includes a cumulative effect of a change in accounting principle effective January 1, 2002, which resulted in a transitional charge to earnings, net of tax, of $24.3 million (see Note 2 for discussion) and restructuring and impairment charges to income from operations of $28.4 million (see Note 5 for discussion).

 

Pro forma adjustments in these amounts primarily relate to:

 

    contractual reductions in salaries, bonuses and benefits to employees and former owners of the acquired businesses;

 

    elimination of sellers’ legal, accounting and other professional fees incurred in connection with the acquisitions;

 

    adjustments to interest expense, net to reflect borrowings incurred to fund acquisitions; and

 

    adjustments to the federal and state income tax provision based on pro forma operating results.

 

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The pro forma financial information does not purport to represent what the combined financial results of operations of U.S. Concrete actually would have been if these transactions and events had in fact occurred when assumed and are not necessarily representative of its financial results of operations for any future period.

 

In connection with the acquisitions, U.S. Concrete has determined the resulting goodwill during the years ended December 31, 2003, 2002 and 2001 as follows (in thousands):

 

     2003

    2002

    2001

 

Cash consideration

   $ 6,895     $ 17,064     $ 49,303  

Less: cash received from acquired companies

     (1,081 )     —         (2,174 )
    


 


 


Cash paid, net of cash acquired

     5,814       17,064       47,129  

Fair value of common stock issued

     4,333       —         12,375  

Direct acquisition costs incurred

     164       242       2,613  
    


 


 


Total purchase costs incurred, net of cash acquired

     10,311       17,306       62,117  
    


 


 


Fair value of assets acquired, net of cash acquired

     6,832       17,606       40,056  

Less: fair value of assumed liabilities

     (2,790 )     (300 )     (14,257 )
    


 


 


Fair value of net assets acquired, net of cash acquired

     4,042       17,306       25,799  
    


 


 


Costs incurred in excess of fair value of net assets acquired

   $ 6,269     $ —       $ 36,318  
    


 


 


 

4.    SPECIAL COMPENSATION AND SETTLEMENTS

 

Special Compensation

 

In 2001, U.S. Concrete granted incentive compensation to members of its management team and some of its key employees in recognition of the overall contribution those employees made to its various 2001 capital raising initiatives. This capital raising incentive compensation award was in addition to U.S. Concrete’s recurring annual incentive compensation program. U.S. Concrete recorded the $2.1 million special compensation charge as an operating expense in 2001.

 

Settlements

 

In 2001, U.S. Concrete and its subsidiary, Central Concrete Supply Co., Inc. (“Central”), entered into a settlement agreement with Del Webb California Corp. and its parent company, Del Webb Corporation (together, “Del Webb”), relating to litigation initiated against U.S. Concrete and others involving claims of defective concrete provided by Central for use in a large, single-family home tract-construction project in Northern California. Under the settlement agreement, U.S. Concrete agreed to accept a back charge in the amount of $0.6 million from Del Webb and pay an additional $2.2 million to Del Webb. U.S. Concrete recorded the $2.8 million charges as selling, general and administrative expenses in 2001.

 

In 2003, U.S. Concrete asserted a legal claim against two former owners of a U.S. Concrete subsidiary in the Atlantic Region for indemnification under an acquisition agreement for breach of representations made by the former owners in the acquisition agreement. Those prior owners provided U.S. Concrete with indemnification consideration of $2.0 million to settle their claim, consisting of cash, the return of U.S. Concrete common stock and other assets, which U.S. Concrete recorded as other income in the fourth quarter of 2003. Receivables of $0.8 million in cash and $0.2 million in other assets were included in other current receivables and other assets as of December 31, 2003. A receivable of $1.0 million in U.S. Concrete common stock was reflected as a reduction in stockholders’ equity as of that date.

 

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5.    RESTRUCTURING AND IMPAIRMENT CHARGES

 

In the fourth quarter of 2002, U.S. Concrete implemented operational initiatives focusing on the realignment of the business in its North Texas and Memphis, Tennessee/Northern Mississippi markets. In connection with those initiatives, U.S. Concrete completed a restructuring plan that included severance for one employee, lease terminations, the disposal of assets, the write-down of certain equipment and other actions. U.S. Concrete recorded restructuring and impairment charges totaling $28.4 million ($18.9 million, net of tax) for the year ended December 31, 2002. The restructuring and impairments charges were composed of goodwill impairments of $25.6 million related to two reporting units in U.S. Concrete’s North Texas/Southwest Oklahoma and Memphis, Tennessee/Northern Mississippi markets (see Note 2 for discussion), assets impairment charges of $2.5 million primarily related to rolling stock, severance costs of $0.1 million and lease termination and other exit costs of $0.2 million. The impaired assets sold, totaling approximately $0.9 million as of December 31, 2002, were included in prepaid and other current assets in the consolidated balance sheet. U.S. Concrete sold substantially all of those assets in the first quarter of 2003 for $1.3 million.

 

A summary of the remaining liability for restructuring costs is as follows (in thousands):

 

    

Total

Recorded


   Cash
paid in
2002


   Non-cash
items


   Liability at
December 31,
2002


   Cash
paid in
2002


   Noncash
items


   Liability at
December 31,
2003


Severance costs

   $ 90    $ —      $ —      $ 90    $ 90    $ —      $ —  

Lease termination and other exit costs

     250      44      15      191      130      —        61

Asset impairments

     2,503      —        2,503      —        —        —        —  

Goodwill impairments

     25,597      —        25,597      —        —        —        —  
    

  

  

  

  

  

  

Total

   $ 28,440    $ 44    $ 28,115    $ 281    $ 220    $ —      $ 61
    

  

  

  

  

  

  

 

The restructuring liability, totaling $0.1 million as of December 31, 2003, is included in accrued liabilities in the consolidated balance sheet.

 

6.    INVENTORIES

 

Inventory consists of the following (in thousands):

 

     December 31

     2003

   2002

Raw materials

   $ 8,218    $ 8,151

Precast products

     4,410      7,264

Building materials for resale

     3,605      4,050

Repair parts

     1,871      1,579
    

  

     $ 18,104    $ 21,044
    

  

 

During the third quarter of 2003, U.S. Concrete identified an inventory overstatement at one of its subsidiaries in its Atlantic Region. As a result, U.S. Concrete reduced inventory by $2.5 million to account for this overstatement in the third quarter of 2003. Since the impact to U.S. Concrete’s 2001 and 2002 annual financial statements was not material, U.S. Concrete recorded an increase of $1.1 million, or $0.7 million net of tax, to cost of goods sold in the third quarter of 2003. The cost of goods sold, properly reflected in the respective prior periods, would have decreased annual net income for 2001 by $0.2 million and increased the annual net loss

 

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for 2002 by $0.5 million. U.S. Concrete reflected the remaining $1.4 million of the overstatement, which related to the acquisition date, as a $0.8 million increase in goodwill and a $0.6 million increase in deferred tax assets as of December 31, 2003 (see Note 2 for discussion).

 

7.    PROPERTY, PLANT AND EQUIPMENT

 

A summary of property, plant and equipment is as follows (in thousands):

 

     December 31

 
     2003

    2002

 

Land and mineral deposits

   $ 33,461     $ 32,196  

Buildings and improvements

     10,094       9,377  

Machinery and equipment

     56,808       46,933  

Mixers, trucks and other vehicles

     62,934       56,680  

Other, including construction in progress

     2,346       5,824  
    


 


       165,643       151,010  

Less: accumulated depreciation and depletion

     (44,621 )     (33,811 )
    


 


     $ 121,022     $ 117,199  
    


 


 

8.    DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

 

Activity in U.S. Concrete’s allowance for doubtful accounts receivable consists of the following (in thousands):

 

     December 31

 
     2003

    2002

    2001

 

Balance, beginning of period

   $ 4,497     $ 3,667     $ 1,627  

Additions from acquisitions

     83       —         1,031  

Provision for doubtful accounts

     931       2,126       2,507  

Uncollectible receivables written off, net of recoveries

     (872 )     (1,296 )     (1,498 )
    


 


 


Balance, end of period

   $ 4,639     $ 4,497     $ 3,667  
    


 


 


 

Prepaid expenses and other current assets consist of the following (in thousands):

 

     December 31

     2003

   2002

Prepaid expenses

   $ 2,566    $ 2,639

Other current receivables

     7,953      5,969

Assets held for sale

     —        850

Other current assets

     7,590      4,117
    

  

     $ 18,109    $ 13,575
    

  

 

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Accounts payable and accrued liabilities consist of the following (in thousands):

 

     December 31

     2003

   2002

Accounts payable

   $ 35,395    $ 23,803

Accrued compensation and benefits

     1,329      3,999

Accrued interest

     2,009      2,319

Accrued income taxes

     775      2,844

Accrued insurance

     6,589      5,318

Other

     11,823      17,261
    

  

     $ 57,920    $ 55,544
    

  

 

9.    LONG-TERM DEBT

 

A summary of long-term debt is as follows (in thousands):

 

     December 31

 
     2003

    2002

 

Revolving credit facility

   $ 60,000     $ 66,730  

12.00% senior subordinated notes

     95,000       95,000  

Other

     39       78  
    


 


       155,039       161,808  

Less: current maturities

     (13,610 )     (56 )
    


 


Long-term debt, net of current maturities

   $ 141,429     $ 161,752  
    


 


 

Prior Credit Facility

 

Until March 12, 2004, U.S. Concrete maintained a revolving credit facility totaling $100 million that was scheduled to mature in May 2004. U.S. Concrete’s subsidiaries fully and unconditionally guaranteed the repayment of all amounts owing under the facility, and U.S. Concrete collateralized the facility with the capital stock and assets of its subsidiaries on a joint and several basis. U.S. Concrete used this credit facility for the following purposes:

 

    working capital;

 

    internal expansion of its operations;

 

    financing acquisitions; and

 

    general corporate purposes.

 

The credit agreement provided that at the time of each borrowing, U.S. Concrete selected an interest rate for that borrowing at a specified margin above either prime or LIBOR. Commitment fees at an annual rate of 0.50% were paid on the unused portion of this credit facility. As of December 31, 2003, $60.0 million was outstanding under this credit facility at a weighted average annual interest rate of 4.2%. As of December 31, 2002, the outstanding balance under this credit facility had a weighted average annual interest rate of 4.3%.

 

The credit agreement contained covenants that placed limitations on incurring certain indebtedness, prepaying indebtedness, paying dividends, purchasing treasury stock and making capital expenditures,

 

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acquisitions and investments. The agreement also required U.S. Concrete to maintain certain financial ratios as of the end of each quarter, including leverage, fixed coverage and asset coverage ratios. Effective as of October 15, 2003, U.S. Concrete entered into a fourth amendment to the agreement to, among other things, reduce the total commitments from $200 million to $100 million, increase the permissible total leverage ratio and decrease the minimum fixed charge coverage ratio. This amendment remained in effect through the repayment of this facility on March 12, 2004. As of December 31, 2003, U.S. Concrete was in compliance with these amended covenants. As of December 31, 2003, U.S. Concrete had $40.0 million of remaining capacity under this facility, of which it could have borrowed approximately $8.0 million based on its leverage ratio at that date.

 

Refinancing of Prior Credit Facility

 

On March 12, 2004, U.S. Concrete terminated that facility and repaid the entire amount then outstanding thereunder with borrowings under its new asset-backed revolving credit and term loan facility. This facility consists of a revolving credit facility of up to $100 million and a term loan facility of up to $25 million which it has secured with substantially all its assets. On March 12, 2004, U.S. Concrete initially borrowed $44 million under the revolving credit facility and $20 million under the term loan facility. The balance of the term loan facility will be available to U.S. Concrete until June 10, 2004 if it meets specified conditions, principally the establishment of additional collateral value for the term loan. U.S. Concrete has the option until June 10, 2004 to reallocate the balance of the term loan to increase the revolving credit facility in such an amount.

 

The revolving credit facility will terminate, and all revolving credit loans will become due, on March 12, 2009. The term loan will be payable in a lump sum on March 12, 2007. Both the revolving credit loans and the term loan will be subject to the mandatory prepayment provisions described below. Prepayments under the revolving credit facility will not reduce the amount thereafter available to U.S. Concrete under the facility, while amounts prepaid on the term loan cannot be reborrowed.

 

The revolving credit loans and the term loan will bear interest at fluctuating rates payable monthly in arrears. These rates will be either a domestic base rate or a Eurodollar base rate plus, in each case, a margin. U.S. Concrete generally will have the option to specify whether the domestic rate or the Eurodollar rate will apply to all or a portion of the loans. In the case of domestic rate loans, the margin will be 125 basis points for revolving credit loans and 150 basis points for the term loan until September 12, 2004. Thereafter, the domestic rate margins will vary from 50 to 125 basis points for revolving credit loans and from 75 to 150 basis points for the term loan. In the case of Eurodollar rate loans, the margin will be 275 basis points for revolving credit loans and 300 basis points for the term loan until September 12, 2004. Thereafter, the Eurodollar rate margins will vary from 200 to 275 basis points for revolving credit loans and from 225 to 300 basis points for the term loan. In each case, the amount of the margin will be keyed to the amount of unused borrowing capacity available to U.S. Concrete under the revolving credit facility. The maximum margins will apply if that capacity is less than $20 million, and the margins will decrease as that capacity increases in specified increments. At March 12, 2004, based on the domestic base rates, the weighted average annual interest rate of the initial borrowings under the new facility was 5.3%.

 

The credit agreement provides for mandatory prepayments of the revolving credit loans in the event the amounts outstanding under the revolving credit facility become under-collateralized and in certain other events, including various types of asset sales, insured casualty or loss events, debt incurrences and equity issuances. The term loan also is subject to prepayment in the event it becomes under-collateralized and upon certain other events, including certain asset sales.

 

Senior Subordinated Notes—12.00%

 

In 2000, U.S. Concrete issued and sold to institutional investors in a private placement $95 million aggregate principal amount of its 12.00% senior subordinated notes due November 10, 2010. These notes:

 

    are mandatorily repayable in equal annual installments of approximately $13.6 million on November 10 in each of the years 2004 through 2010;

 

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    are subordinated in right of payment to the indebtedness outstanding under the credit facility;

 

    are guaranteed by U.S. Concrete’s subsidiaries; and

 

    require U.S. Concrete to comply with covenants generally consistent with those required under its former credit facility.

 

U.S. Concrete used the net proceeds from its sale of the notes to reduce amounts outstanding under its former credit facility.

 

Long-term debt maturing over the next five years and thereafter are presented below (in thousands). The maturities below reflect the refinancing of U.S. Concrete’s credit facility on March 12, 2004.

 

Period


   Amount

2004

   $ 13,610

2005

     13,571

2006

     13,571

2007

     33,571

2008

     13,571

2009 and thereafter

     67,145
    

Total

   $ 155,039
    

 

10.    STOCKHOLDERS’ EQUITY

 

Restricted Stock

 

Shares of restricted common stock issued pursuant to U.S. Concrete’s 1999 Incentive Plan and 2001 Employee Incentive Plan are subject to restrictions on transfer and certain other conditions. During the restriction period, the plan participants are entitled to vote and receive dividends on their restricted shares. Upon issuance of the common stock, a deferred compensation expense equivalent to the market value of the shares on the date of grant is charged to stockholders’ equity and is amortized over the restriction period.

 

During the first quarter of 2003, U.S. Concrete awarded to certain key employees 97,561 restricted shares of common stock (valued at $0.4 million). The awards are subject to vesting requirements. The value of this stock was established by the market price on the date of grant and was recorded as deferred compensation. The deferred compensation is reflected as a reduction in stockholders’ equity on the consolidated balance sheet and is being amortized ratably over the applicable restricted stock vesting period of five years.

 

On August 22, 2003, U.S. Concrete offered eligible employees the opportunity to exchange their outstanding stock options, with an exercise price of $8.00 or more, for restricted shares of U.S. Concrete’s common stock, at an exchange ratio of one share of restricted stock for every three option shares tendered. As restricted stock, the shares are subject to forfeiture and other restrictions until they vest. Regardless of the vesting schedule of the eligible options offered for exchange, the restricted stock granted in the offer vests over three years in equal annual installments on September 22 of each year, beginning September 22, 2004, assuming the employee continues to meet the requirements for vesting. On September 22, 2003, U.S. Concrete accepted for exchange and canceled eligible options to purchase an aggregate of 859,140 shares of its common stock, representing approximately 93% of the 921,754 options that were eligible to be tendered in the offer as of the expiration date. Under the offer, U.S. Concrete granted an aggregate of 286,381 restricted shares of its common stock, or approximately $1.4 million in value, in exchange for the tendered eligible options. The value of this

 

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stock was established by the market price on the date of the grant and was recorded as a reduction in stockholders’ equity on the consolidated balance sheet. This restricted deferred compensation reflected as stock issuance requires U.S. Concrete to recognize a noncash stock compensation charge of approximately $0.5 million per year over the three-year vesting period of the restricted stock. U.S. Concrete is required to account for the remaining 62,614 eligible options that were not exchanged using variable plan accounting under APB Opinion No. 25 and its related interpretations. The weighted average exercise price of these remaining eligible options is $8.12. In the future, to the extent that U.S. Concrete’s stock price exceeds an option’s exercise price, the difference will be recorded as a noncash compensation charge, with an offset to additional paid-in capital. No charges have been recorded with respect to these remaining options through December 31, 2003.

 

In December 2003, U.S. Concrete awarded to certain employees 114,666 restricted shares of common stock (valued at $0.6 million). The awards are subject to vesting requirements. The value of this stock was established by the market price on the date of grant and was recorded as deferred compensation. The deferred compensation is reflected as a reduction in stockholders’ equity on the consolidated balance sheet and is being amortized ratably over the applicable restricted stock vesting period of 42 months.

 

The number of outstanding shares of restricted stock totaled 516,056 as of December 31, 2003 and 17,847 as of December 31, 2002 and 2001. U.S. Concrete recognized stock compensation expense of approximately $0.3 million in 2003 and $0.9 million in 2001 related to restricted stock awards. No stock compensation expense was incurred in 2002.

 

Stock Options

 

U.S. Concrete’s 1999 Incentive Plan and 2001 Employee Incentive Plans enable U.S. Concrete to grant nonqualified and incentive options, restricted stock, stock appreciation rights and other long-term incentive awards to employees and nonemployee directors of U.S. Concrete and nonemployee consultants and other independent contractors who provide services to U.S. Concrete (except that no officers or directors of U.S. Concrete are eligible to participate in the 2001 Employee Incentive Plan). Options U.S. Concrete grants under these plans generally vest over a four-year period and expire if not exercised prior to the tenth anniversary following the grant date. The number of shares available for awards under these plans was approximately 2.1 million as of December 31, 2003, approximately 1.3 million as of December 31, 2002 and approximately 1.8 million as of December 31, 2001. The board of directors of U.S. Concrete may, in its discretion, grant additional awards or establish other compensation plans.

 

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The following tables set forth certain stock option information (shares in thousands):

 

     Number
of
Options


    Weighted-
Average
Exercise
Price


Options outstanding at December 31, 2000

   2,400     $ 7.74

Granted

   1,179       7.07

Exercised

   (17 )     6.81

Canceled

   (148 )     7.52
    

 

Options outstanding at December 31, 2001

   3,414       7.53

Granted

   1,138       6.25

Exercised

   —         —  

Canceled

   (458 )     7.05
    

 

Options outstanding at December 31, 2002

   4,094       7.22

Granted

   125       4.58

Exercised

   —         —  

Canceled

   (1,119 )     7.80
    

 

Options outstanding at December 31, 2003

   3,100     $ 6.90
    

     

Options exercisable at December 31, 2001

   955     $ 7.84
    

     

Options exercisable at December 31, 2002

   1,698     $ 7.64
    

     

Options exercisable at December 31, 2003

   1,796     $ 7.16
    

     

 

Range of Exercise Prices


   Number of
Outstanding
Options


   Weighted-
Average
Remaining
Years of
Contractual
Life


   Weighted-
Average
Exercise
Price


   Number of
Exercisable
Options


   Weighted-
Average
Exercise
Price


$4.08—$6.26

   156    5.9    $ 4.74    98    $ 4.67

$6.27—$6.99

   1,265    7.7      6.35    453      6.41

$7.00—$7.99

   909    6.8      7.08    531      7.09

$8.00—$8.75

   770    5.4      8.03    714      8.03
    
              
      
     3,100                1,796       
    
              
      

 

See Note 1 for pro forma disclosure of net income (loss) and earnings (loss) per share under SFAS No. 123.

 

Employee Stock Purchase Plan

 

In January 2000, U.S. Concrete’s board of directors adopted, and its stockholders approved, the U.S. Concrete 2000 Employee Stock Purchase Plan (the “ESPP”). The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986. All U.S. Concrete personnel that are employed for at least 20 hours per week and five months per calendar year are eligible to participate in the ESPP. Under the ESPP, employees electing to participate are granted the right to purchase shares of U.S. Concrete common stock at a price generally equal to 85% of the lower of the fair market value of a share of U.S. Concrete common stock on the first or last day of the offering period. U.S. Concrete issued 264,768 shares in 2003, 246,268 shares in 2002 and 226,567 shares in 2001.

 

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11.    INCOME TAXES

 

U.S. Concrete’s consolidated federal and state tax returns include the results of operations of acquired businesses from their dates of acquisition.

 

The amounts of consolidated federal and state income tax provisions are as follows (in thousands):

 

     Year Ended December 31

     2003

    2002

    2001

Current:

                      

Federal

   $ (2,337 )   $ 3,478     $ 2,346

State

     (834 )     1,362       431
    


 


 

       (3,171 )     4,840       2,777
    


 


 

Deferred:

                      

Federal

   $ 7,209     $ (3,487 )   $ 4,532

State

     1,236       (745 )     349
    


 


 

       8,445       (4,232 )     4,881
    


 


 

Total provision

   $ 5,274     $ 608     $ 7,658
    


 


 

 

A reconciliation of U.S. Concrete’s effective income tax rate to the amounts calculated by applying the federal statutory corporate tax rate of 35% is as follows (in thousands):

 

     Year Ended December 31

 
     2003

    2002

    2001

 

Tax at statutory rate

   $ 5,452     $ (1,201 )   $ 6,021  

Add (deduct):

                        

State income taxes

     262       401       507  

Nondeductible expenses

     260       1,421       1,068  

Nontaxable items

     (700 )     —         —    

Other

     —         (13 )     62  
    


 


 


Income tax provision

   $ 5,274     $ 608     $ 7,658  
    


 


 


Effective income tax rate

     33.9 %     17.7 %     44.5 %
    


 


 


 

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Deferred income tax provisions result from temporary differences in the recognition of expenses for financial reporting purposes and for tax reporting purposes. U.S. Concrete presents the effects of those differences as deferred income tax liabilities and assets, as follows (in thousands):

 

     December 31

 
     2003

   2002

 

Deferred income tax liabilities:

               

Property, plant and equipment, net

   $ 19,499    $ 15,569  

Goodwill

     —        —    

Other

     50      122  
    

  


Total deferred income tax liabilities

     19,549      15,691  
    

  


Deferred income tax assets:

               

Goodwill

     11,886      14,937  

Allowance for doubtful accounts

     780      674  

Inventory

     390      935  

Accrued expenses

     304      2,579  

Net operating loss carryforwards

     652      65  

Other

     274      233  
    

  


Total deferred income tax assets

     14,286      19,423  
    

  


Net deferred income tax (assets) liabilities

   $ 5,263    $ (3,732 )
    

  


 

12.    RELATED-PARTY TRANSACTIONS

 

U.S. Concrete enters into transactions in the normal course of business with related parties. These transactions consist principally of operating leases under which U.S. Concrete leases facilities from former owners of its acquired businesses or their affiliates.

 

U.S. Concrete’s related party leases are for periods generally ranging from three to 20 years. Aggregate lease payments under these leases were approximately $1.9 million in 2003, $2.8 million in 2002 and $2.8 million in 2001. The schedule of minimum lease payments in Note 14 includes U.S. Concrete’s future commitments under these leases.

 

On completion of its IPO, U.S. Concrete entered into new facilities leases, or extended existing leases, with former stockholders or affiliates of former stockholders of Central Concrete Supply Co., Inc. and Eastern Concrete Materials, Inc. (formerly known as Baer Concrete, Incorporated). Those leases generally provide for initial lease terms of 15 to 20 years, with one or more extension options U.S. Concrete may exercise. The following summarizes the current annual rentals U.S. Concrete must pay during the initial lease terms:

 

Locations:


   Number
of
Facilities


   Aggregate
Annual
Rentals


Central

   2    $ 323,916

Eastern

   2    $ 311,745

 

Central purchased building materials from a company owned by two trusts of which William T. Albanese, a shareholder and the President of U.S. Concrete’s Bay Area Region, and Thomas J. Albanese, a shareholder and the Executive Vice President of Sales of U.S. Concrete’s Bay Area Region, are co-trustees. Central’s purchases

 

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from this company totaled approximately $210,000 in 2003, $278,000 in 2002 and $310,000 in 2001. U.S. Concrete believes the amounts it paid for these building materials were fair and substantially equivalent to amounts it would have paid to an unaffiliated third party. Both trusts sold their interest in this building materials company in early 2002.

 

Central sold concrete products to a company owned by a cousin of William T. Albanese and Thomas J. Albanese totaling $9.6 million in 2003, $14.1 million in 2002 and $15.8 million in 2001. U.S. Concrete believes the amounts it received for the concrete products were fair and substantially equivalent to amounts it would have received from an unaffiliated third party.

 

Central paid a company owned by a cousin of William T. Albanese and Thomas J. Albanese $0.6 million in 2003, $59,000 in 2002 and $78,000 in 2001. These payments were for construction related services.

 

In 2000, U.S. Concrete extended loans of $175,000 to Eugene P. Martineau, its chief executive officer and one of its directors, and $125,000 to Michael W. Harlan, its chief financial officer and one of its directors. U.S. Concrete recorded an expense related to these loans in 2001. U.S. Concrete forgave the indebtedness outstanding under these loans in 2002. In 2002, U.S. Concrete extended loans of $70,595 to Mr. Martineau and $50,000 to Mr. Harlan. The aggregate amount outstanding under these loans as of December 31, 2003 was $120,595. These loans do not bear interest.

 

U.S. Concrete reimbursed Main Street Mezzanine Fund, LLC (or its predecessor), of which Vincent D. Foster, U.S. Concrete’s chairman, is a senior managing director, $57,000, $396,578 and $213,000 in 2003, 2002 and 2001, respectively, for expenses primarily related to U.S. Concrete’s acquisition program and other business development activities.

 

In 2001, U.S. Concrete modified its non-compete arrangements with Neil J. Vannucci, one of its directors during 2001 and 2002. U.S. Concrete established these arrangements in the acquisition agreement for Bay Cities Building Materials Co., Inc., of which he is a former stockholder. The modifications further limit Mr. Vannucci’s right to compete against U.S. Concrete in exchange for $400,000 to be paid to Mr. Vannucci or his designee, of which U.S. Concrete paid $92,000 in 2001 and 2002. No payment was made to Mr. Vannucci in 2003.

 

In 2001, U.S. Concrete granted incentive compensation to Mr. Foster, the Chairman of its board, in the amount of 5,400 unrestricted shares of its common stock, valued at $7.19 per share, and $25,900 in cash in recognition of the overall contribution made by Mr. Foster to U.S. Concrete to various 2001 capital raising initiatives. In February 2002, we paid a bonus to Mr. Foster in the amount of 15,949 shares of our common stock, valued at $6.27 per share, and $50,000 in cash.

 

T. William Porter, a member of U.S. Concrete’s board of directors, is the Chairman of Porter & Hedges, L.L.P., a Houston, Texas law firm. In 2001, U.S. Concrete issued 12,000 restricted shares of its common stock, valued at $7.97 per share, to Mr. Porter for nominal consideration and paid to Mr. Porter $64,000 in connection with his election to its board. Porter & Hedges, L.L.P. performed legal services for U.S. Concrete in 2002 and 2003; however, the amount of fees paid to them was not material.

 

13.    RISK CONCENTRATION

 

U.S. Concrete grants credit, generally without collateral, to its customers, which include general contractors, municipalities and commercial companies located primarily in California, New Jersey/New York, Michigan,

 

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Texas and Tennessee. Consequently, it is subject to potential credit risk related to changes in business and economic factors in those states. U.S. Concrete generally has lien rights in the work it performs, and concentrations of credit risk are limited because of the diversity of its customer base. Further, management believes that its contract acceptance, billing and collection policies are adequate to minimize any potential credit risk.

 

14.    COMMITMENTS AND CONTINGENCIES

 

Litigation and Other Claims

 

In January 2004, we settled a previously reported lawsuit that Bay-Crete Transportation & Materials, LLC filed in July 2000 in a California state court against us and our subsidiary, Central Concrete Supply Co., Inc., for an alleged breach of a 1983 contract. Under the settlement agreement resolving this dispute, Bay-Crete will perform certain hauling services for Central at market rates. The former owners of one of Central’s predecessors provided us with indemnification consideration that offset the settlement payment we made to Bay-Crete. As a result, the settlement did not impact our earnings.

 

From time to time, and currently, U.S. Concrete is subject to various claims and litigation brought by employees, customers and other third parties for, among other matters, employee grievances, personal injuries, property damages, product defects and delay damages that have, or allegedly have, resulted from the conduct of its operations.

 

U.S. Concrete believes that the resolution of all litigation currently pending or threatened against it or any of its subsidiaries will not have a material adverse effect on its financial position, results of operations or cash flows; however, because of the inherent uncertainty of litigation, U.S. Concrete can provide no assurance that the resolution of any particular claim or proceeding to which it is a party will not have a material adverse effect on its results of operations for the fiscal period in which that resolution occurs. U.S. Concrete expects in the future it and its operating subsidiaries will from time to time be a party to litigation or administrative proceedings that arise in the normal course of its business.

 

Lease Payments

 

U.S. Concrete leases tracts of land, facilities, vehicles equipment it uses in its operations. Gross rental expense under operating leases was $12.6 million in 2003, $12.4 million in 2002 and $11.1 million in 2001.

 

Minimum lease payments under U.S. Concrete’s noncancellable leases as of December 31, 2003 are as follows (in thousands):

 

Period


   Amount

2004

   $ 11,194

2005

     8,666

2006

     6,955

2007

     4,741

2008

     2,713

2009 and thereafter

     2,670
    

Total

   $ 36,939
    

 

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Insurance Programs

 

U.S. Concrete maintains third-party insurance coverage in amounts and against the risks it believes are reasonable. Under certain components of its insurance program, U.S. Concrete shares the risk of loss with its insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. U.S. Concrete funds these deductibles and records an expense for expected losses under the programs. The expected losses are determined using a combination of U.S. Concrete’s historical loss experience and subjective assessments of U.S. Concrete’s future loss exposure. The estimated losses are subject to uncertainty from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions. Although U.S. Concrete believes that the estimated losses are reasonable, significant differences related to the items noted above could materially affect U.S. Concrete’s insurance obligations and future expense.

 

Performance Bonds

 

In the normal course of business, U.S. Concrete is contingently liable for performance under $4.0 million in performance bonds that various states and municipalities have required. The bonds are principally related to construction contracts, reclamation obligations and mining permits. U.S. Concrete has indemnified the underwriting insurance company against any exposure under the performance bonds. In U.S. Concrete’s past experience, no material claims have been made against these bonds.

 

15.    SIGNIFICANT CUSTOMERS AND SUPPLIERS

 

U.S. Concrete did not have any customers who accounted for more than 10% of its revenues in 2003, 2002 or 2001.

 

U.S. Concrete defines its significant suppliers as those suppliers who accounted for more than 10% of its cost of goods sold in a given period. U.S. Concrete did not have any significant suppliers during 2003 and 2002. One supplier accounted for 11.7% of total purchases (as a percentage of total cost of goods sold) during 2001.

 

16.    EMPLOYEE BENEFIT PLANS

 

In February 2000, U.S. Concrete established a defined contribution 401(k) profit sharing plan for employees meeting various employment requirements. Eligible employees may contribute amounts up to the lesser of 15% of their annual compensation or the maximum amount IRS regulations permit. U.S. Concrete matches 100% of employee contributions up to a maximum of 5% of their compensation. U.S. Concrete paid matching contributions of $2.2 million in 2003, $2.0 million in 2002 and $1.6 million in 2001.

 

U.S. Concrete maintained defined contribution profit-sharing and money purchase pension plans for the non-union employees of certain of its companies for the period from their acquisition by U.S. Concrete through the date that those companies adopted the U.S. Concrete 401(k) plan. Contributions made to these plans were $117,000 in 2003, $0 in 2002 and $143,000 in 2001.

 

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U.S. Concrete’s subsidiaries are parties to various collective bargaining agreements with labor unions having multi-year terms that expire on a staggered basis. Under these agreements, U.S. Concrete pays specified wages to covered employees, observes designated workplace rules and makes payments to multi-employer pension plans and employee benefit trusts rather than administering the funds on behalf of these employees.

 

In connection with its collective bargaining agreements, U.S. Concrete participates with other companies in the unions’ multi-employer pension plans. These plans cover substantially all of U.S. Concrete’s employees who are members of such unions. The Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, imposes liabilities on employers who are contributors to a multi-employer plan in the event of the employer’s withdrawal from, or on termination of, that plan. In 2001, a subsidiary of U.S. Concrete withdrew from the multi-employer pension plan of the union that represented several of its employees. That union disclaimed interest in representing those employees. U.S. Concrete has no plans to withdraw from any other multi-employer plans. U.S. Concrete made contributions to these plans of $11.9 million in 2003, $11.3 million in 2002 and $10.9 million in 2001.

 

See Note 10 for discussions of U.S. Concrete’s incentive plans and employee stock purchase plan.

 

17.    SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION

 

     First
Quarter


    Second
Quarter


   Third
Quarter


   Fourth
Quarter


 
     (in thousands, except per share data)  

2003

                              

Sales

   $ 85,068     $ 124,610    $ 140,885    $ 122,561  

Income (loss) from operations

     (2,780 )     9,907      14,244      8,045  

Net income (loss)

     (4,040 )     3,546      6,244      4,553  

Basic and diluted earnings (loss) per share

     (0.15 )     0.13      0.22      0.16  

2002

                              

Sales

   $ 104,900     $ 140,187    $ 144,061    $ 114,166  

Income (loss) from operations (2)

     3,033       15,559      15,624      (21,656 )

Net income (loss) (1)

     (25,017 )     6,705      6,707      (16,761 )

Basic and diluted earnings (loss) per share

     (0.94 )     0.25      0.25      (0.62 )

(1)   Net income (loss) reflects the transitional goodwill impairment charge for the adoption of SFAS No. 142 of $24.3 million ($0.91 per share), net of tax, presented as a cumulative effect of accounting change in the first quarter of 2002. See Note 2.

 

(2)   Income (loss) from operations reflects restructuring and impairment charges of $28.4 million ($18.9 million net of tax) in the fourth quarter of 2002. See Note 5.

 

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

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Item 9A.    Controls and Procedures

 

In accordance with Rule 13a-15 under the Securities Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c)) as of the end of the period this report covers. On the basis of that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

During the period this report covers, we identified an inventory overstatement at one of our subsidiaries and took appropriate action to address the weakness in our disclosure controls and procedures and internal control over financial reporting at that subsidiary which led to this overstatement, and to ensure the future effectiveness of those controls and procedures. In particular, we increased our inventory controls and oversight of the accounting function at this subsidiary and took appropriate personnel actions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events” in Item 7 of this report. No other change in our internal control over financial reporting has occurred during the three months ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART III

 

In Items 10, 11, 12, 13 and 14 below, we are incorporating by reference the information we refer to in those Items from the definitive proxy statement for our 2004 Annual Meeting of Stockholders (the “2004 Annual Proxy Statement”). We intend to file that definitive proxy statement with the SEC by April 29, 2004.

 

Item 10.    Directors and Executive Officers of the Registrant

 

Please see the information under the headings “Proposal No. 1—Election of Directors” and “Executive Officers and Key Employees” in the 2004 Annual Proxy Statement for the information this Item requires.

 

Item 11.    Executive Compensation

 

Please see the information under the heading “Executive Compensation and Other Matters” in the 2004 Annual Proxy Statement for the information this Item requires.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Please see the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in the 2004 Annual Proxy Statement for the information this Item requires.

 

Item 13.    Certain Relationships and Related Transactions

 

Please see the information appearing (1) in the final table appearing in Item 5 – “Market for the Registrant’s Common Equity and Related Stockholder Matters” in this report and (2) under the heading “Certain Transactions” in the 2004 Annual Proxy Statement for the information this Item requires.

 

Item 14.    Principal Accountant Fees and Services

 

Please see the information appearing under the heading “Audit Fees” in the 2004 Annual Proxy Statement for the information this Item requires.

 

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PART IV

 

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

(a)(1) Financial Statements.

 

See Index to Consolidated Financial Statements on page 30.

 

(2) Financial Statement Schedules.

 

All financial statement schedules are omitted because they are not required or the required information is shown in our Consolidated Financial Statements or the notes thereto.

 

(3) Exhibits.

 

Exhibit
Number


   

Description


3.1 *  

—Restated Certificate of Incorporation of U.S. Concrete (Form S-1 (Reg. No. 333-74855), Exhibit 3.1).

3.2 *  

—Amended and Restated Bylaws of U.S. Concrete, as amended (Post Effective Amendment No. 1 to Form S-3 (Reg. No. 333-42860), Exhibit 4.2).

3.3 *  

—Certificate of Designation of Junior Participating Preferred Stock (Form 10-Q for the quarter ended June 30, 2000 (File No. 000-26025), Exhibit 3.3).

4.1 *  

—Form of certificate representing common stock (Form S-1 (Reg. No. 333-74855), Exhibit 4.3).

4.2 *  

—Rights Agreement by and between U.S. Concrete and American Stock Transfer & Trust Company, including form of Rights Certificate attached as Exhibit B thereto (Form S-1 (Reg. No. 333-74855), Exhibit 4.4).

4.3 *  

—Note Purchase Agreement, dated November 10, 2000, the parties to which include U.S. Concrete, Inc. and The Prudential Insurance Company of America, Metropolitan Life Insurance Company, Teachers Insurance & Annuity Association, Connecticut General Life Insurance Company, Allstate Life Insurance Company, Allstate Life Insurance Company of New York and Southern Farm Bureau Life Insurance Company (Form 10-K for the year ended December 31, 2000 (File No. 000-26025), Exhibit 4.4).

4.4 *  

—First Amendment to Exhibit 4.3 (Form 10-K for the year ended December 31, 2001 (File No. 000-26025), Exhibit 4.4).

4.5 *  

—Second Amendment to Exhibit 4.3 (Form 10-Q for the quarter ended March 31, 2003 (File No. 000-26025), Exhibit 4.7).

4.6 *  

—Waiver to Exhibit 4.3 (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025), Exhibit 4.9).

4.7 *  

—Third Amendment to Exhibit 4.3 (Form 10-Q for the quarter ended September 30, 2003 (File No. 000-26025), Exhibit 4.10).

4.8    

—Fourth Amendment to Exhibit 4.3.

4.9    

—Credit Agreement, dated as of March 12, 2004, among U.S. Concrete, the Lenders and Issuers named therein and Citicorp North America, Inc., as administrative agent.

10.1 *†  

—1999 Incentive Plan of U.S. Concrete (Form S-1 (Reg. No. 333-74855), Exhibit 10.1).

 

61


Table of Contents
Exhibit
Number


   

Description


10.2 *  

—2001 Employee Incentive Plan of U.S. Concrete, Inc. (Form S-8 dated May 11, 2001 (Reg. No. 333-60710), Exhibit 4.6).

10.3 *†  

—Employment Agreement between U.S. Concrete, Inc. and William T. Albanese (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.1).

10.4 *†  

—Employment Agreement between U.S. Concrete, Inc. and Thomas J. Albanese (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.2).

10.5 *†  

—Employment Agreement between U.S. Concrete, Inc. and Michael W. Harlan (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.3).

10.6 *†  

—Employment Agreement between U.S. Concrete, Inc. and Eugene P. Martineau (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.4).

10.7 *†  

—Employment Agreement between U.S. Concrete, Inc. and Michael D. Mitschele (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.6).

10.8 *†  

—Employment Agreement between U.S. Concrete, Inc. and Donald C. Wayne (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.7).

10.9 *†  

—Employment Agreement between U.S. Concrete, Inc. and Richard A. Williams (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.8).

10.10 *†  

—First Amendment to Exhibit 10.6 (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025), Exhibit 10.5).

10.11 *†  

—Amended and Restated Indemnification Agreements dated August 17, 2000 between U.S. Concrete and each of its directors and officers (Form 10-Q for the quarter ended September 30, 2000 (File No. 000-26025, Exhibit 10.1).

10.12 *  

—Agreement, dated March 15, 2000, between U.S. Concrete, Inc. and Neil J. Vannucci (Form 10-K for the year ended December 31, 2001 (File No. 000-26025), Exhibit 10.16).

10.13 *  

—Flexible Underwritten Equity FaciLity (FUEL®) Agreement dated as of January 7, 2002 between Ramius Securities, LLC and U.S. Concrete (Form S-3 (Reg. No. 333-42860), Exhibit 1.2).

10.14 *  

—Amended and restated engagement letter agreement dated as of January 18, 2002 between Credit Lyonnais Securities (USA) Inc. and U.S. Concrete (Form S-3 (Reg. No. 333-42860), Exhibit 1.3).

10.15 *  

—Promissory Note, dated May 24, 2002, issued by Eugene P. Martineau to U.S. Concrete, Inc. (Form 10-K for the year ended December 31, 2002 (File No. 000-26025), Exhibit 10.18).

10.16 *  

—Promissory Note, dated May 24, 2002, issued by Michael Harlan to U.S. Concrete, Inc. (Form 10-K for the year ended December 31, 2002 (File No. 000-26025), Exhibit 10.19).

14    

—U.S. Concrete, Inc. Code of Ethics for Chief Executive and Senior Financial Officers.

21    

—Subsidiaries.

23    

—Consent of independent accountants.

31.1    

—Rule 13a-14(a)/15d-14(a) Certification of Eugene P. Martineau.

31.2    

—Rule 13a-14(a)/15d-14(a) Certification of Michael W. Harlan.

32.1    

—Section 1350 Certification of Eugene P. Martineau.

32.2    

—Section 1350 Certification of Michael W. Harlan.


*   Incorporated by reference to the filing indicated.
  Management contract or compensatory plan or arrangement.

 

62


Table of Contents

(b) Reports on Form 8-K.

 

During the quarter ended December 31, 2003, U.S. Concrete furnished the following Report on Form 8-K to the SEC:

 

(1) Current report on Form 8-K furnished under Item 12 – Results of Operations and Financial Condition, dated November 13, 2003, setting forth U.S. Concrete’s earnings release for the fiscal quarter ended September 30, 2003.

 

63


Table of Contents

SIGNATURES

 

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.

 

       

U.S. CONCRETE, INC.

Date: March 15, 2004

      By:   /s/    EUGENE P. MARTINEAU        
           
           

Eugene P. Martineau

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 indicated on March 15, 2004

 

Signature


  

Title


/s/    EUGENE P. MARTINEAU        


Eugene P. Martineau

  

President and Chief Executive Officer and Director (Principal Executive Officer)

/s/    MICHAEL W. HARLAN        


Michael W. Harlan

  

Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/    VINCENT D. FOSTER        


Vincent D. Foster

  

Director

/s/    JOHN R. COLSON        


John R. Colson

  

Director

/s/    T. WILLIAM PORTER        


T. William Porter

  

Director

/s/    MARY P. RICCIARDELLO        


Mary P. Ricciardello

  

Director

/s/    MURRAY S. SIMPSON        


Murray S. Simpson

  

Director

/s/    ROBERT S. WALKER        


Robert S. Walker

  

Director

 

64


Table of Contents

INDEX TO EXHIBITS

 

Exhibit
Number


   

Description


3.1 *  

—Restated Certificate of Incorporation of U.S. Concrete (Form S-1 (Reg. No. 333-74855), Exhibit 3.1).

3.2 *  

—Amended and Restated Bylaws of U.S. Concrete, as amended (Post Effective Amendment No. 1 to Form S-3 (Reg. No. 333-42860), Exhibit 4.2).

3.3 *  

—Certificate of Designation of Junior Participating Preferred Stock (Form 10-Q for the quarter ended June 30, 2000 (File No. 000-26025), Exhibit 3.3).

4.1 *  

—Form of certificate representing common stock (Form S-1 (Reg. No. 333-74855), Exhibit 4.3).

4.2 *  

—Rights Agreement by and between U.S. Concrete and American Stock Transfer & Trust Company, including form of Rights Certificate attached as Exhibit B thereto (Form S-1 (Reg. No. 333-74855), Exhibit 4.4).

4.3 *  

—Note Purchase Agreement, dated November 10, 2000, the parties to which include U.S. Concrete, Inc. and The Prudential Insurance Company of America, Metropolitan Life Insurance Company, Teachers Insurance & Annuity Association, Connecticut General Life Insurance Company, Allstate Life Insurance Company, Allstate Life Insurance Company of New York and Southern Farm Bureau Life Insurance Company (Form 10-K for the year ended December 31, 2000 (File No. 000-26025), Exhibit 4.4).

4.4 *  

—First Amendment to Exhibit 4.3 (Form 10-K for the year ended December 31, 2001 (File No. 000-26025), Exhibit 4.4).

4.5 *  

—Second Amendment to Exhibit 4.3 (Form 10-Q for the quarter ended March 31, 2003 (File No. 000-26025), Exhibit 4.7).

4.6 *  

—Waiver to Exhibit 4.3 (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025), Exhibit 4.9).

4.7 *  

—Third Amendment to Exhibit 4.3 (Form 10-Q for the quarter ended September 30, 2003 (File No. 000-26025), Exhibit 4.10).

4.8    

—Fourth Amendment to Exhibit 4.3.

4.9    

—Credit Agreement, dated as of March 12, 2004, among U.S. Concrete, the Lenders and Issuers named therein and Citicorp North America, Inc., as administrative agent.

10.1 *†  

—1999 Incentive Plan of U.S. Concrete (Form S-1 (Reg. No. 333-74855), Exhibit 10.1).

10.2 *  

—2001 Employee Incentive Plan of U.S. Concrete, Inc. (Form S-8 dated May 11, 2001 (Reg. No. 333-60710), Exhibit 4.6).

10.3 *†  

—Employment Agreement between U.S. Concrete, Inc. and William T. Albanese (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.1).

10.4 *†  

—Employment Agreement between U.S. Concrete, Inc. and Thomas J. Albanese (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.2).

10.5 *†  

—Employment Agreement between U.S. Concrete, Inc. and Michael W. Harlan (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.3).

10.6 *†  

—Employment Agreement between U.S. Concrete, Inc. and Eugene P. Martineau (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.4).

10.7 *†  

—Employment Agreement between U.S. Concrete, Inc. and Michael D. Mitschele (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.6).

 

65


Table of Contents
Exhibit
Number


   

Description


10.8 *†  

—Employment Agreement between U.S. Concrete, Inc. and Donald C. Wayne (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.7).

10.9 *†  

—Employment Agreement between U.S. Concrete, Inc. and Richard A. Williams (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025, Exhibit 10.8).

10.10 *†  

—First Amendment to Exhibit 10.6 (Form 10-Q for the quarter ended June 30, 2003 (File No. 000-26025), Exhibit 10.5).

10.11 *†  

—Amended and Restated Indemnification Agreements dated August 17, 2000 between U.S. Concrete and each of its directors and officers (Form 10-Q for the quarter ended September 30, 2000 (File No. 000-26025, Exhibit 10.1).

10.12 *  

—Agreement, dated March 15, 2000, between U.S. Concrete, Inc. and Neil J. Vannucci (Form 10-K for the year ended December 31, 2001 (File No. 000-26025), Exhibit 10.16).

10.13 *  

—Flexible Underwritten Equity FaciLity (FUEL®) Agreement dated as of January 7, 2002 between Ramius Securities, LLC and U.S. Concrete (Form S-3 (Reg. No. 333-42860), Exhibit 1.2).

10.14 *  

—Amended and restated engagement letter agreement dated as of January 18, 2002 between Credit Lyonnais Securities (USA) Inc. and U.S. Concrete (Form S-3 (Reg. No. 333-42860), Exhibit 1.3).

10.15 *  

—Promissory Note, dated May 24, 2002, issued by Eugene P. Martineau to U.S. Concrete, Inc. (Form 10-K for the year ended December 31, 2002 (File No. 000-26025), Exhibit 10.18).

10.16 *  

—Promissory Note, dated May 24, 2002, issued by Michael Harlan to U.S. Concrete, Inc. (Form 10-K for the year ended December 31, 2002 (File No. 000-26025), Exhibit 10.19).

14    

—U.S. Concrete, Inc. Code of Ethics for Chief Executive and Senior Financial Officers.

21    

—Subsidiaries.

23    

—Consent of independent accountants.

31.1    

—Rule 13a-14(a)/15d-14(a) Certification of Eugene P. Martineau.

31.2    

—Rule 13a-14(a)/15d-14(a) Certification of Michael W. Harlan.

32.1    

—Section 1350 Certification of Eugene P. Martineau.

32.2    

—Section 1350 Certification of Michael W. Harlan.


*   Incorporated by reference to the filing indicated.
  Management contract or compensatory plan or arrangement.

 

66

Fourth Amendment to Note Agreement

Exhibit 4.8

 

FOURTH AMENDMENT TO NOTE AGREEMENT

 

THIS FOURTH AMENDMENT TO NOTE AGREEMENT (this “Amendment”), dated as of March 12, 2004, among U.S. CONCRETE, INC., a Delaware corporation (the “Company”), and the financial institutions listed on the signature pages hereto as Purchasers (the “Purchasers”), amends certain provisions of the Agreement referred to below. All capitalized terms used herein and not otherwise defined shall have the meanings provided such terms in the Agreement referred to below.

 

W I T N E S S E T H:

 

WHEREAS, the Company and the Purchasers are parties to a Note Agreement, dated as of November 10, 2000, as amended by First Amendment to Note Agreement dated as of November 30, 2001, as further amended by the Second Amendment to Note Agreement dated as of April 9, 2003, and as further amended by the Third Amendment to Note Agreement dated as of October 15, 2003 (as amended, modified and/or supplemented prior to the date hereof, the “Agreement”); and

 

WHEREAS, the Company is desirous of entering into the 2004 Credit Agreement (as defined below) with the Lenders and Issuers party thereto and Citicorp North America, Inc., as Administrative Agent, in order to replace the Company’s existing Principal Bank Lending Agreement; and

 

WHEREAS, the Company has represented to the Purchasers that the lenders are unwilling to provide loans and financial accommodations to the Company under the 2004 Credit Agreement unless the Maximum Senior Debt Leverage Ratio and the Maximum Total Debt Leverage Ratio in the Agreement are increased as set forth in Sections 1(g) and 1(h) below; and

 

WHEREAS, the Company has further represented to the Purchasers that the Company intends to issue as soon as practicable after the date hereof approximately $150,000,000 of Senior Subordinated Notes due 2014 in sales to qualified institutional buyers in accordance with Rule 144A under the Securities Act (the “Rule 144A Offering”) the proceeds of which the Company intends to use, in part, to make an optional prepayment of the Subordinated Notes in full pursuant to, and in full compliance with the terms of, paragraph 4B of the Agreement; and

 

WHEREAS, the Company has requested that the Purchasers agree to certain other amendments to the Agreement as set forth herein; and

 

WHEREAS, the Purchasers executing this Amendment are willing to agree to the foregoing amendments requested by the Company provided that the Company agrees to certain other amendments to the Agreement as set forth herein.


NOW, THEREFORE, it is agreed:

 

1. Effective on the Effective Date (as defined below), the Agreement is amended as follows:

 

(a) Paragraph 4C of the Agreement is amended to add the following immediately after “15 Business Days”:

 

“(except in the case of the notice of prepayment of the Subordinated Notes in full pursuant to paragraph 4B from the proceeds, and concurrently with the closing, of the Rule 144A Offering, in which case on the date of such prepayment so long as the Company shall have given notice to the holders of the Subordinated Notes, no later than the third Business Day prior to the date of such prepayment, of the expectation that the Subordinated Notes will be prepaid in full pursuant to paragraph 4B specifying the date prepayment occurs)”.

 

(b) Clause (vii) of paragraph 5A of the Note Agreement is amended to add the following to the end thereof:

 

“; provided, however, that the Company will deliver to each Significant Holder a copy of any notice, report or other written communication delivered under the 2004 Credit Agreement concurrently with the delivery thereof to the holders of the Senior Indebtedness thereunder”

 

(c) New paragraph 6A(4) is added to the Agreement, such paragraph 6A(4) to read as follows:

 

“6A(4). Additional Funded Debt. Notwithstanding the provisions of paragraphs 6A(1), (2) and (3) hereof or any other provision of this Agreement, until the Original Covenant Compliance Date the Company covenants that it will not, and will not permit any Subsidiary to, issue, create, incur, assume or permit to exist any Funded Debt other than (a) Senior Indebtedness outstanding on the Fourth Amendment Effective Date (except to the extent refinanced with Senior Indebtedness incurred under the 2004 Credit Agreement), (b) Senior Indebtedness incurred under the 2004 Credit Agreement in compliance with the provisions of paragraphs 6A(1) and 6A(2), and (c) Capitalized Lease Obligations and purchase money Senior Indebtedness incurred by the Company or a Subsidiary in compliance with the provisions of paragraphs 6A(1) and 6A(2) to finance the acquisition of fixed assets and assets related thereto; provided, however, that the capital expenditure related thereto is otherwise permitted under the 2004 Credit Agreement as in effect on the Fourth Amendment Effective Date and that the aggregate outstanding principal amount of all such Capitalized Lease Obligations and purchase money Indebtedness shall not exceed $5,000,000 at any time.”

 

2


(d) Paragraph 6F of the Agreement is amended by adding the following to the end thereof:

 

“Notwithstanding the foregoing, until the Original Covenant Compliance Date the Company covenants that it will not, and will not permit any of its Subsidiaries to, declare or make any Restricted Payment other than Restricted Payments as a result of the redemption of capital stock or options held by employees and members of management of the Company and its Subsidiaries in an amount not to exceed $2,000,000 in any fiscal year so long as no Default or Event of Default has occurred and is continuing (both before and after giving effect to such Restricted Payment).”

 

(e) New paragraph 6N is added to the Agreement, such paragraph 6N to read as follows:

 

6N. Acquisitions. Until the Original Covenant Compliance Date the Company covenants that it will not, and it will not permit any Subsidiary to, make any Acquisition.”

 

(f) Clause (d) of Paragraph 6H of the Agreement is amended in its entirety to read as follows:

 

“(d) the foregoing shall not apply to restrictions and conditions as in effect on the Fourth Amendment Effective Date contained in the 2004 Credit Agreement.”

 

(g) The defined term of “Maximum Senior Debt Leverage Ratio” in paragraph 11B of the Agreement is hereby amended to delete the proviso at the end thereof, so that such definition shall read in its entirety as follows:

 

“Maximum Senior Debt Leverage Ratio” shall mean (a) 2.00 to 1.00 during the period from September 30, 2003 to December 30, 2003, and (b) 2.25 to 1.00 during the period from January 1, 2004 and thereafter.”

 

(h) The defined term of “Maximum Total Debt Leverage Ratio” in paragraph 11B of the Agreement is hereby amended in its entirety to read as follows:

 

“Maximum Total Debt Leverage Ratio” shall mean (u) 3.75 to 1.00 during the period from September 30, 2003 to December 30, 2003, (v) 3.50 on December 31, 2003, (w) 4.00 to 1.0 during the period from January 1, 2004 to September 30, 2004, (x) 3.75 to 1.0 during the period from October 1, 2004 to March 31, 2005, (y) 3.50 to 1.0 during the period from April 1, 2005 to December 31, 2005 and (z) 3.25 to 1.0 during the period from January 1, 2006 and thereafter.”

 

3


(i) The defined term of “Senior Indebtedness” is hereby amended by deleting the phrase “Borrowing Request” (as said term is defined in the Existing Credit Agreement)” and inserting in lieu thereof “request for borrowing delivered in connection with the issuance of any Senior Indebtedness.”

 

(i) The following new defined terms are added to paragraph 11B of the Agreement, to read as follows:

 

“Acquisition” shall mean any transaction, or any series of related transactions, by which the Company or any of its Subsidiaries (a) acquires any ongoing business or all or substantially all of the assets of any Person or division thereof, whether through purchase of assets or securities, merger, consolidation, share exchange or otherwise, or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) (i) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors, or (ii) at least a majority of the ownership interests, having ordinary voting power, of any partnership, association, joint venture or other business organization.

 

“Fourth Amendment Effective Date” shall mean the “Effective Date”, as defined in the Fourth Amendment to this Agreement.

 

“Original Covenant Compliance Date” shall mean the later of (i) January 1, 2006, or (ii) the date upon which (a) the ratio of (1) the outstanding amount of all Funded Debt (including all Subordinated Debt) to (2) EBITDA for the four consecutive fiscal quarters then ended is less than or equal to 3.25 to 1.0, (b) the ratio of (1) the outstanding amount of all Senior Funded Debt to (2) EBITDA for the four consecutive fiscal quarters then ended is less than or equal to 2.25 to 1.00, and (c) no other Event of Default is in existence.”

 

“2004 Credit Agreement” shall mean the Credit Agreement, dated as of March 12, 2004, among the Company, the Lenders and Issuers party thereto, Citicorp North America, Inc., as Administrative Agent, and Bank of America, N.A., as Syndication Agent.

 

2. This Amendment is limited solely to the purposes and to the extent provided herein and shall have no applicability to any other obligation of the Company under the Agreement. This Amendment shall not be construed to be an amendment, except as specifically provided in this Amendment of any term, condition or provision of the Agreement. Except as specifically provided herein, the Agreement will continue in full force and effect.

 

3. To induce the Purchasers to enter into this Amendment, the Company hereby represents and warrants that (a) no Default or Event of Default exists as of the Effective Date (as defined below) either prior to or after giving effect to this Amendment, (b) this Amendment has been duly executed and delivered on behalf of the Company and each

 

4


Guarantor, (c) this Amendment constitutes a valid and legally binding agreement enforceable against the Company and each Guarantor, as the case may be, in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law, (d) the representations and warranties contained in the Agreement are true and correct in all material respects on and as of the date hereof, except to the extent any such representation or warranty relates to a prior date, and (e) the execution, delivery and performance of this Amendment has been duly authorized by the Company and each Guarantor.

 

4. To induce the Purchasers to enter into this Amendment, each of the parties listed on the signature page as Guarantors hereby ratifies and confirms that the Guaranty Agreement of such Guarantor remains in full force and effect after giving effect to this Amendment.

 

5. To induce the Purchasers to enter into this Amendment (i) the Company agrees that it will pay to each holder of a Subordinated Note the amendment fee described in Section 8(ii) hereof, and (ii) if the Company shall not have prepaid the Subordinated Notes in full pursuant to, and in full compliance with the terms of, paragraph 4B of the Agreement prior to June 30, 2004, then, on June 30, 2004, the Company agrees that it will pay to each holder of a Subordinated Note then outstanding an additional amendment fee in an amount equal to .50% of the principal amount of the Subordinated Notes held by such holder. The Company agrees that any failure to pay the additional amendment fee pursuant to clause (ii) of this Section 5 when due shall constitute an Event of Default under the Agreement.

 

6. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. The recitals to this Amendment are incorporated by reference herein.

 

7. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK (EXCLUDING ANY CONFLICTS OF LAW RULES WHICH WOULD OTHERWISE CAUSE THIS AMENDMENT TO BE CONSTRUED OR ENFORCED IN ACCORDANCE WITH OR THE RIGHTS OF THE PARTIES TO BE GOVERNED BY THE LAWS OF ANY OTHER JURISDICTION).

 

8. This Amendment shall become effective on the date (the “Effective Date”) when (i) the Company, each Guarantor and the Required Holders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Company, (ii) the Company shall have paid as of the Effective Date to each holder of a Subordinated Note then outstanding an amendment fee equal to .50% of the principal amount of the Subordinated Notes of such holder and (iii) the 2004 Credit Agreement shall have been duly executed and delivered by the parties thereto and shall be in full force and effect.

 

5


9. The Company confirms its agreement in paragraph 12B of the Agreement to pay the fees and expenses of the Purchasers special counsel, Schiff Hardin & Waite, in connection with this Amendment.

 

10. From and after the Effective Date, all references in the Agreement shall be deemed to be references to the Agreement as amended hereby.

 

[Rest of Page Intentionally Left Blank]

 

6


IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute and deliver this Amendment as of the date first above written.

 

“Company”

U.S. CONCRETE, INC.

By:

 

/s/ Michael W. Harlan

   
   

Name:    Michael W. Harlan

   

Title:      Executive Vice President, Chief Operating

               Officer and Chief Financial Officer

“Purchasers”

THE PRUDENTIAL INSURANCE COMPANY

OF AMERICA

By:

 

/s/ Brian E. Lemons

   
   

Name:    Brian E. Lemons

   

Title:      Vice President

Principal Amount of Subordinated Notes: $25,000,000

METROPOLITAN LIFE INSURANCE COMPANY

By:

   
   
   

Name:

   

Title:

Principal Amount of Subordinated Notes: $20,000,000

TEACHERS INSURANCE & ANNUITY ASSOCIATION OF AMERICA

By:

   
   
   

Name:

   

Title:

Principal Amount of Subordinated Notes: $20,000,000

CONNECTICUT GENERAL LIFE INSURANCE COMPANY

By:

 

CIGNA, Investments, Inc. (authorized agent)

By:

 

/s/ Debra J. Height

   
   

Name:    Debra J. Height

   

Title:      Managing Director

Principal Amount of Subordinated Notes: $15,000,000

 

7


   

ALLSTATE LIFE INSURANCE COMPANY

By:

 

/s/ Robert B. Bodett

   
   

Name:    Robert B. Bodett

   

Title:      Authorized Signatory

By:

 

/s/ Jerry D. Zinkula

   
   

Name:    Jerry D. Zinkula

   

Title:      Authorized Signatory

   

Principal Amount of Subordinated Notes: $7,000,000

   

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

By:

 

/s/ Robert B. Bodett

   
   

Name:    Robert B. Bodett

   

Title      Authorized Signatory

By:

 

/s/ Jerry D. Zinkula

   
   

Name:    Jerry D. Zinkula

   

Title:      Authorized Signatory

   

Principal Amount of Subordinated Notes: $3,000,000

   

SOUTHERN FARM BUREAU LIFE

   

INSURANCE COMPANY

By:

 

/s/ Carol Robertson

   
   

Name:    Carol Robertson

   

Title:      Senior Portfolio Manager

   

Principal Amount of Subordinated Notes: $3,000,000

 

Acknowledged and Agreed to:

 

“Guarantors”

 

   

AFTM Corporation, a Michigan corporation

By:

 

/s/ Cesar Monroy

   
   

Name:    Cesar Monroy

   

Title:      Vice President

 

8


American Concrete Products, Inc., a California corporation

Atlas-Tuck Concrete, Inc., an Oklahoma corporation

B.W.B., Inc. of Michigan, a Delaware corporation (successor to Superior Materials Company, Inc., a Delaware corporation)

Beall Industries, Inc., a Texas corporation

Beall Management, Inc., a Texas corporation

Builders’ Redi-Mix, LLC, a Delaware limited liability company

Central Concrete Corp., a Delaware corporation

Central Concrete Supply Co., Inc., a California corporation

Central Precast Concrete, Inc., a California corporation

Ready Mix Concrete Company of Knoxville, a Delaware corporation

San Diego Precast Concrete, Inc., a Delaware corporation

Sierra Precast, Inc., a California corporation

Smith Pre-Cast, Inc., a Delaware corporation

Superior Concrete Materials, Inc. (f/k/a Opportunity Concrete Corporation), a District of Columbia corporation

   

USC GP, Inc., a Delaware corporation

By:

 

/s/ Donald Wayne

   
   

Name:    Donald Wayne

   

Title:      Vice President

   

Beall Concrete Enterprises, Ltd., a Texas limited partnership

    By: Beall Management, Inc., a Texas corporation, its general partner

By:

 

/s/ Donald Wayne

   
   

Name:    Donald Wayne

   

Title:      Vice President

 

9


    Eastern Concrete Materials, Inc., a New Jersey corporation
    Superior Materials, Inc. (f/k/a Superior Redi-Mix, Inc.), a Michigan corporation
    Titan Concrete Industries, Inc. (f/k/a Carrier Excavation and Foundation Company), a Delaware corporation (successor to USC Midsouth, Inc., a Delaware corporation)

By:

 

/s/ Cesar Monroy

   
   

Name:    Cesar Monroy

   

Title:      Vice President

   

USC Atlantic, Inc., a Delaware corporation

   

USC Michigan, Inc., a Delaware corporation

By:

 

/s/ Michael W. Harlan

   
   

Name:    Michael W. Harlan

   

Title:      Vice President

    USC Management Co., LP, a Texas limited partnership
    By: USC GP, Inc., a Delaware corporation, its general partner

By:

 

/s/ Donald Wayne

   
   

Name:    Donald Wayne

   

Title:      Vice President

    Wyoming Concrete Industries, Inc., a Delaware corporation

By:

 

/s/ Eugene P. Martineau

   
   

Name:    Eugene P. Martineau

   

Title:      Vice President

 

10

Credit Agreement

EXHIBIT 4.9

 

$125,000,000

 

CREDIT AGREEMENT

 

Dated as of March 12, 2004

 

among

 

U.S. CONCRETE, INC.

as Borrower

 

and

 

THE LENDERS AND ISSUERS PARTY HERETO

 

and

 

CITICORP NORTH AMERICA, INC.

as Administrative Agent

 

and

 

BANK OF AMERICA, N.A.,

as Syndication Agent

 

and

 

JPMORGAN CHASE BANK,

as Documentation Agent

 

* * *

 

CITIGROUP GLOBAL MARKETS INC.

as Joint Book Manager and Joint Lead Arranger

 

and

 

BANC OF AMERICA SECURITIES, LLC

as Joint Book Manager and Joint Lead Arranger

 

WEIL, GOTSHAL & MANGES LLP

767 FIFTH AVENUE

NEW YORK, NEW YORK 10153-0119


TABLE OF CONTENTS

 

Article I       Definitions, Interpretation And Accounting Terms

   1

        Section 1.1

  

Defined Terms

   1

        Section 1.2

  

Computation of Time Periods

   37

        Section 1.3

  

Accounting Terms and Principles

   37

        Section 1.4

  

Certain Terms

   38

Article II      The Facilities

   39

        Section 2.1

  

The Commitments

   39

        Section 2.2

  

Borrowing Procedures

   39

        Section 2.3

  

Swing Loans

   40

        Section 2.4

  

Letters of Credit

   42

        Section 2.5

  

Reduction and Termination of the Commitments

   47

        Section 2.6

  

Repayment of Loans

   47

        Section 2.7

  

Evidence of Debt

   47

        Section 2.8

  

Optional Prepayments

   49

        Section 2.9

  

Mandatory Prepayments

   49

        Section 2.10

  

Interest

   51

        Section 2.11

  

Conversion/Continuation Option

   52

        Section 2.12

  

Fees

   53

        Section 2.13

  

Payments and Computations

   54

        Section 2.14

  

Special Provisions Governing Eurodollar Rate Loans

   57

        Section 2.15

  

Capital Adequacy

   58

        Section 2.16

  

Taxes

   59

        Section 2.17

  

Substitution of Lenders

   61

Article III    Conditions to Loans and Letters of Credit

   62

        Section 3.1

  

Conditions Precedent to Initial Loans and Letters of Credit

   62

        Section 3.2

  

Conditions Precedent to Each Loan and Letter of Credit

   66

        Section 3.3

  

Determinations of Initial Borrowing Conditions

   67

Article IV    Representations and Warranties

   67

        Section 4.1

  

Corporate Existence; Compliance with Law

   67

        Section 4.2

  

Corporate Power; Authorization; Enforceable Obligations

   67

        Section 4.3

  

Ownership of Borrower; Subsidiaries

   68

 

i


TABLE OF CONTENTS

(CONTINUED)

 

        Section 4.4

  

Financial Statements

   69

        Section 4.5

  

Material Adverse Change

   70

        Section 4.6

  

Solvency

   70

        Section 4.7

  

Litigation

   70

        Section 4.8

  

Taxes

   70

        Section 4.9

  

Full Disclosure

   71

        Section 4.10

  

Margin Regulations

   71

        Section 4.11

  

No Burdensome Restrictions; No Defaults

   71

        Section 4.12

  

Investment Company Act; Public Utility Holding Company Act

   71

        Section 4.13

  

Use of Proceeds

   72

        Section 4.14

  

Insurance

   72

        Section 4.15

  

Labor Matters

   72

        Section 4.16

  

ERISA

   72

        Section 4.17

  

Environmental Matters

   73

        Section 4.18

  

Intellectual Property

   74

        Section 4.19

  

Title; Real Property

   74

        Section 4.20

  

Related Documents

   75

Article V        Financial Covenants

   75

        Section 5.1

  

Minimum Fixed Charge Coverage Ratio

   75

        Section 5.2

  

Capital Expenditures

   75

Article VI      Reporting Covenants

   76

        Section 6.1

  

Financial Statements

   76

        Section 6.2

  

Default Notices

   78

        Section 6.3

  

Litigation

   78

        Section 6.4

  

Asset Sales

   78

        Section 6.5

  

Notices under Related Documents

   78

        Section 6.6

  

SEC Filings; Press Releases

   78

        Section 6.7

  

Labor Relations

   79

        Section 6.8

  

Tax Returns

   79

        Section 6.9

  

Insurance

   79

        Section 6.10

  

ERISA Matters

   79

 

ii


TABLE OF CONTENTS

(CONTINUED)

 

        Section 6.11

  

Environmental Matters

   80

        Section 6.12

  

Borrowing Base Deliverables and Determination

   81

        Section 6.13

  

Customer Contracts

   82

        Section 6.14

  

Tax Reporting

   82

        Section 6.15

  

Other Information

   82

Article VII      Affirmative Covenants

   82

        Section 7.1

  

Preservation of Corporate Existence, Etc

   82

        Section 7.2

  

Compliance with Laws, Etc

   82

        Section 7.3

  

Conduct of Business

   83

        Section 7.4

  

Payment of Taxes, Etc

   83

        Section 7.5

  

Maintenance of Insurance

   83

        Section 7.6

  

Access

   83

        Section 7.7

  

Keeping of Books

   84

        Section 7.8

  

Maintenance of Properties, Etc

   84

        Section 7.9

  

Application of Proceeds

   84

        Section 7.10

  

Environmental

   84

        Section 7.11

  

Additional Collateral and Guaranties

   84

        Section 7.12

  

Control Accounts; Approved Deposit Accounts

   85

        Section 7.13

  

Landlord Waivers and Bailee’s Letters

   87

        Section 7.14

  

Real Property

   87

Article VIII    Negative Covenants

   88

        Section 8.1

  

Indebtedness

   88

        Section 8.2

  

Liens, Etc

   89

        Section 8.3

  

Investments

   90

        Section 8.4

  

Sale of Assets

   91

        Section 8.5

  

Restricted Payments

   92

        Section 8.6

  

Prepayment and Cancellation of Indebtedness

   92

        Section 8.7

  

Restriction on Fundamental Changes; Permitted Acquisitions

   93

        Section 8.8

  

Change in Nature of Business

   93

        Section 8.9

  

Transactions with Affiliates

   93

        Section 8.10

  

Limitations on Restrictions on Subsidiary Distributions; No New Negative Pledge

   94

 

iii


TABLE OF CONTENTS

(CONTINUED)

 

        Section 8.11

  

Modification of Constituent Documents

   94

        Section 8.12

  

Modification of Debt Agreements

   94

        Section 8.13

  

Accounting Changes; Fiscal Year

   94

        Section 8.14

  

Margin Regulations

   95

        Section 8.15

  

Operating Leases; Sale/Leasebacks

   95

        Section 8.16

  

No Speculative Transactions

   95

        Section 8.17

  

Compliance with ERISA

   95

Article IX        Events of Default

   95

        Section 9.1

  

Events of Default

   95

        Section 9.2

  

Remedies

   97

        Section 9.3

  

Actions in Respect of Letters of Credit

   98

        Section 9.4

  

Rescission

   98

Article X          The Administrative Agent

   98

        Section 10.1

  

Authorization and Action

   98

        Section 10.2

  

Administrative Agent’s Reliance, Etc

   99

        Section 10.3

  

Posting of Approved Electronic Communications

   100

        Section 10.4

  

The Administrative Agent Individually

   101

        Section 10.5

  

Lender Credit Decision

   101

        Section 10.6

  

Indemnification

   101

        Section 10.7

  

Successor Administrative Agent

   102

        Section 10.8

  

Concerning the Collateral and the Collateral Documents

   102

        Section 10.9

  

Collateral Matters Relating to Related Obligations

   103

Article XI        Miscella