Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

 

**(Amendment No. 1)**

 

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**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended May 31, 2012.**

 

**OR**

 

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

 

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**For the transition period from              to             .**

 

**Commission file number: 333-176538**

 

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**NEW ENTERPRISE STONE & LIME CO., INC.**

(Exact name of registrant as specified in its charter)

 

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| **Delaware**                    | ** ** | **23-1374051**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

| **3912 Brumbaugh Road**

**P.O. Box 77**

**New Enterprise, PA** | ** ** | **16664**  |
|-----------------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                              |       | (Zip Code) |

 

Registrant’s telephone number, including area code:**(814) 766-2211**

 

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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 o No x

 

The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o           |   | Accelerated filer o              |
|-----------------------------------------------|--------|---------------------------------------|
|                                          |   |                                  |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                                  |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of August 30, 2013, the number of shares outstanding of the registrant’s Class A Voting Common Stock, $1.00 par value, was 500 shares and the number of shares outstanding of the registrant’s Class B Non-Voting Common Stock, $1.00 par value, was 273,285 shares.

 

 

 

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Explanatory Note

 

The sole purpose of this Amendment No.1 to the Quarterly Report on Form 10-Q/A (the “Form 10-Q/A”) of New Enterprise Stone & Lime Co., Inc. for the quarterly period ended May 31, 2012, filed with the Securities and Exchange Commission on December 26, 2012, is to furnish Exhibits 32.1 and 32.2 to the Form 10-Q/A as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  In addition, this Form 10-Q/A includes updated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1 and 31.2, which include paragraph 4(b) thereto.

 

No other changes have been made to the Form 10-Q.  This Amendment No.1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Table of Contents**

**Quarter Ended May 31, 2012**

 
|                                           | **Page(s)**                                                                                                       |
|------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                              |
| **PART I —   FINANCIAL INFORMATION** |                                                                                                              |
|                                           |                                                                                                              |
| Item   1.                                      | Condensed   Consolidated Financial Statements (unaudited)                                                         |   |
|                                           |                                                                                                              |   |
|                                           | Condensed   Consolidated Balance Sheets at May 31, 2012 and February 29, 2012                                | 3 |
|                                           |                                                                                                              |   |
|                                           | Condensed   Consolidated Statements of Comprehensive Loss for the three months ended May   31, 2012 and 2011 | 4 |
|                                           |                                                                                                              |   |
|                                           | Condensed   Consolidated Statements of Cash Flows for the three months ended May 31, 2012   and 2011         | 5 |
|                                           |                                                                                                              |   |
|                                           | Notes to   Unaudited Condensed Consolidated Financial Statements                                                  | 6-22 |
|                                           |                                                                                                              |   |
| Item 2.                                        | Management’s   Discussion and Analysis of Financial Condition and Results of Operations                      | 23-33 |
|                                           |                                                                                                              |   |
| Item 3.                                        | Quantitative   and Qualitative Disclosures About Market Risk                                                      | 34 |
|                                           |                                                                                                              |   |
| Item 4.                                        | Controls and   Procedures                                                                                         | 34-37 |
|                                           |                                                                                                              |   |
| **PART II — OTHER   INFORMATION**    |                                                                                                              |
|                                           |                                                                                                              |   |
| Item 1.                                        | Legal Proceedings                                                                                                 | 38 |
|                                           |                                                                                                              |   |
| Item 1A.                                       | Risk Factors                                                                                                      | 38 |
|                                           |                                                                                                              |   |
| Item 2.                                        | Unregistered   Sales of Equity in Securities and Use of Proceeds                                                  | 38 |
|                                           |                                                                                                              |   |
| Item 3.                                        | Defaults   Upon Senior Securities                                                                                 | 38 |
|                                           |                                                                                                              |   |
| Item 4.                                        | Mine Safety   Disclosures                                                                                         | 38 |
|                                           |                                                                                                              |   |
| Item 5.                                        | Other Information                                                                                                 | 38 |
|                                           |                                                                                                              |   |
| Item   6.                                      | Exhibits                                                                                                          | 38 |
|                                           |                                                                                                              |   |
|                                           | Signature                                                                                                         | 40 |
|                                           |                                                                                                              |   |
|                                           | Exhibit   Index                                                                                                   | 41 |

 

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Table of Contents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL INFORMATION**

**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                                                     | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **In thousands, except share and per share data**                           | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                                                                                           |       |             |       |                  |       |
| **Assets**                                                                                                     |       |             |       |                  |       |
| Current assets                                                                                                 |       |             |       |                  |       |
| Cash and cash equivalents                                                                                      |       | $                | 4,532      |                  | $          | 15,032 |   |
| Restricted cash                                                                                                |       | 10,197           |       | 10,322                |       |
| Accounts receivable (less allowance for doubtful   accounts of $3,815 in May 2012 and $3,259 in February 2012) |       | 119,492          |       | 76,841                |       |
| Inventories                                                                                                    |       | 135,827          |       | 132,195               |       |
| Deferred income taxes                                                                                          |       | 15,312           |       | 16,019                |       |
| Other current assets                                                                                           |       | 7,220            |       | 7,390                 |       |
| Total current assets                                                                                           |       | 292,580          |       | 257,799               |       |
| Other assets                                                                                                   |       |             |       |                  |       |
| Property, plant and equipment, net                                                                             |       | 376,149          |       | 371,574               |       |
| Goodwill                                                                                                       |       | 90,847           |       | 90,847                |       |
| Other intangible assets                                                                                        |       | 26,184           |       | 26,344                |       |
| Other assets                                                                                                   |       | 36,267           |       | 26,825                |       |
| Total assets                                                                                                   |       | $                | 822,027    |                  | $          | 773,389 |   |
|                                                                                                           |       |             |       |                  |       |
| **Liabilities and Equity**                                                                                     |       |             |       |                  |       |
| Current liabilities                                                                                            |       |             |       |                  |       |
| Current maturities of long-term debt                                                                           |       | $                | 15,379     |                  | $          | 7,538 |   |
| Accounts payable — trade                                                                                  |       | 42,295           |       | 27,838                |       |
| Accrued liabilities                                                                                            |       | 48,609           |       | 50,953                |       |
| Total current liabilities                                                                                      |       | 106,283          |       | 86,329                |       |
| Long-term debt and other liabilities                                                                           |       |             |       |                  |       |
| Long-term debt, less current maturities                                                                        |       | 577,676          |       | 521,475               |       |
| Deferred income taxes                                                                                          |       | 84,458           |       | 96,674                |       |
| Other liabilities                                                                                              |       | 22,217           |       | 19,043                |       |
| Total liabilities                                                                                              |       | 790,634          |       | 723,521               |       |
| Commitments and contingencies (Note 7)                                                                         |       |             |       |                  |       |
|                                                                                                           |       |             |       |                  |       |
| **Equity**                                                                                                     |       |             |       |                  |       |
|                                                                                                           |       |             |       |                  |       |
| Common stock, Class A, voting, $1 par value.                                                                   |       | 21               |       | 21                    |       |
| Common stock, Class B, nonvoting, $1 par value.                                                                |       | 251              |       | 251                   |       |
| Retained deficit                                                                                               |       | (95,198          | )          | (76,779               | )          |
| Additional paid in capital                                                                                     |       | 126,964          |       | 126,964               |       |
| Accumulated other comprehensive loss                                                                           |       | (2,104           | )          | (2,181                | )          |
| Total New Enterprise Stone & Lime Co., Inc.   equity                                                       |       | 29,934           |       | 48,276                |       |
| Noncontrolling interest in consolidated   subsidiaries                                                         |       | 1,459            |       | 1,592                 |       |
| Total equity                                                                                                   |       | 31,393           |       | 49,868                |       |
| Total liabilities and equity                                                                                   |       | $                | 822,027    |                  | $          | 773,389 |   |

 

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

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Statements of Comprehensive Loss (unaudited)**

**Three Months Ended May 31, 2012, and May 31, 2011**

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **May 31,**                 | ** ** |
| **(in thousands)**                                                                   | ** ** | **2012**                         | ** ** | **2011** | ** ** |
| Revenue                                                                                   |       |                             |       |   |   |
| Construction materials                                                                    |       | $                                | 86,346     |   | $ | 76,904 |   |
| Heavy/highway construction                                                                |       | 51,031                           |       | 48,682 |   |
| Traffic safety services and equipment                                                     |       | 19,063                           |       | 18,471 |   |
| Other revenues                                                                            |       | 1,541                            |       | 2,714 |   |
| Total revenue                                                                             |       | 157,981                          |       | 146,771 |   |
| Cost of revenue (exclusive of items shown   separately below)                             |       |                             |       |   |   |
| Construction materials                                                                    |       | 64,629                           |       | 58,064 |   |
| Heavy/highway construction                                                                |       | 51,926                           |       | 47,908 |   |
| Traffic safety services and equipment                                                     |       | 14,898                           |       | 14,551 |   |
| Other expenses                                                                            |       | 910                              |       | 2,596 |   |
| Total cost of revenue                                                                     |       | 132,363                          |       | 123,119 |   |
| Depreciation, depletion and amortization                                                  |       | 11,843                           |       | 11,345 |   |
| Pension and profit sharing                                                                |       | 1,841                            |       | 1,715 |   |
| Selling, administrative and general expenses                                              |       | 18,640                           |       | 12,989 |   |
| Gain on sales of property and equipment                                                   |       | (35                              | )          | (1,196 | ) |
| Operating loss                                                                            |       | (6,671                           | )          | (1,201 | ) |
| Interest expense, net                                                                     |       | (22,930                          | )          | (11,596 | ) |
| Loss before income taxes                                                                  |       | (29,601                          | )          | (12,797 | ) |
| Income tax benefit                                                                        |       | (11,487                          | )          | (8,235 | ) |
| Net loss                                                                                  |       | (18,114                          | )          | (4,562 | ) |
| Unrealized actuarial gains and amortization of   prior service costs, net of income taxes |       | 77                               |       | 32 |   |
| Comprehensive loss                                                                        |       | (18,037                          | )          | (4,530 | ) |
| Less: Income attributable to noncontrolling   interest                                    |       | (305                             | )          | (299 | ) |
| Comprehensive loss attributable to New Enterprise   Stone & Lime Co., Inc.            |       | $                                | (18,342    | ) | $ | (4,829 | ) |

 

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

 

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**New Enterprise Stone & Lime Co., Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows (unaudited)**

**Three Months Ended May 31, 2012 and May 31, 2011**

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **May 31,**                 | ** ** |
| **(in thousands)**                                                          | ** ** | **2012**                         | ** ** | **2011** | ** ** |
| ** **                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Reconciliation of net income to   net cash used in operating activities**      |       |                             |       |   |   |
| Net loss                                                                         |       | $                                | (18,114    | ) | $ | (4,562 | ) |
| Adjustments to reconcile net loss to net cash   provided by operating activities |       |                             |       |   |   |
| Depreciation and cost depletion                                                  |       | 11,406                           |       | 11,185 |   |
| Gain on disposal of property, plant and equipment                                |       | (35                              | )          | (1,196 | ) |
| Amortization of other assets and liabilities                                     |       | 437                              |       | 950 |   |
| Noncash interest expense                                                         |       | 7,313                            |       | 986 |   |
| Deferred income taxes                                                            |       | (11,509                          | )          | (7,733 | ) |
| Allowance for doubtful accounts                                                  |       | 813                              |       | 636 |   |
| Changes in current assets and liabilities:                                       |       |                             |       |   |   |
| Accounts receivable                                                              |       | (43,464                          | )          | (57,512 | ) |
| Inventories                                                                      |       | (3,632                           | )          | (3,691 | ) |
| Other current assets                                                             |       | (867                             | )          | (1,045 | ) |
| Accounts payable                                                                 |       | 14,457                           |       | 27,997 |   |
| Other accruals                                                                   |       | 1,240                            |       | (4,712 | ) |
| Net cash used in operating activities                                            |       | (41,955                          | )          | (38,697 | ) |
| **Cash flows from investing   activities**                                       |       |                             |       |   |   |
| Capital expenditures                                                             |       | (14,382                          | )          | (11,998 | ) |
| Capitalized software                                                             |       | (393                             | )          | (832 | ) |
| Proceeds from sale of property, plant and   equipment                            |       | 221                              |       | 1,462 |   |
| Change in cash value of life insurance                                           |       | (2,573                           | )          | (198 | ) |
| Change in restricted cash                                                        |       | 125                              |       | (8,360 | ) |
| Net cash used in investing activities                                            |       | (17,002                          | )          | (19,926 | ) |
| **Cash flows from financing   activities**                                       |       |                             |       |   |   |
| Proceeds from revolving credit                                                   |       | 118,863                          |       | 57,377 |   |
| Repayment of revolving credit                                                    |       | (170,383                         | )          | (1,000 | ) |
| Repayment of long-term debt                                                      |       | (152,768                         | )          | (7,556 | ) |
| Payments on capital lease                                                        |       | (1,290                           | )          | (1,441 | ) |
| Proceeds from issuance of long-term debt                                         |       | 268,535                          |       | 4,000 |   |
| Debt issuance costs                                                              |       | (14,062                          | )          | (684 | ) |
| Distribution to noncontrolling interest                                          |       | (438                             | )          | (451 | ) |
| Net cash provided by financing activities                                        |       | 48,457                           |       | 50,245 |   |
| Net decrease in cash and cash equivalents                                        |       | (10,500                          | )          | (8,378 | ) |
| **Cash and cash equivalents**                                                    |       |                             |       |   |   |
| Beginning of period                                                              |       | 15,032                           |       | 20,029 |   |
| End of period                                                                    |       | $                                | 4,532      |   | $ | 11,651 |   |

 

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

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.        Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statements and notes included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  In the opinion of New Enterprise Stone & Lime Co., Inc. (“we,” “us,” “our,” or the “Company”) all adjustments (all of which are of a normal recurring nature) that are necessary for a fair presentation are reflected in the condensed consolidated financial statements.  The condensed consolidated financial statements do not include all of the information or disclosures required for a complete presentation in accordance with GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2012 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three month period ended May 31, 2012 and 2011 are not necessarily indicative of the operating results for the full fiscal year.

 

**Principles of Consolidation**

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary companies and entities where the Company has a controlling equity interest. Intercompany balances and transactions have been eliminated in consolidation.

 

**Cash and Cash Equivalents and Restricted Cash**

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. From time to time, certain U.S. cash balances exceed Federal Deposit Insurance Corporation limits. Historically the Company has not experienced credit losses due to excess balances.

 

Cash balances were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements as well as collateral on outstanding letters of credit or rentals.

 

As a result of the March 15, 2012 debt refinancing (see further discussion in *Note 4, “Long-Term Debt”*), the Company is utilizing a cash pooling arrangement with a single financial institution with specific provisions for the right to offset positive and negative cash balances.  Accordingly, we classify a positive amount of cash, equal to the aggregate bank overdraft position of subsidiaries participating in our cash pooling arrangement, as a compensating cash balance included in Cash and cash equivalents.  Due to the nature of these bank overdraft positions, these amounts have been classified as other obligations within the current maturities of long-term debt as of May 31, 2012.

 

**Trade Accounts Receivable**

 

Trade accounts receivable, less allowance for doubtful accounts, are recorded at the invoiced amount plus service charges related to past due accounts.  The Company’s total accounts receivable consisted of the following:

 
| ** **                                         | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|----------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**                            | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                               |       |             |       |                  |       |
| Costs and estimated earnings in excess of billings |       | $                | 15,929     |                  | $          | 14,570 |   |
| Trade                                              |       | 102,467          |       | 60,172                |       |
| Retainages                                         |       | 4,911            |       | 5,358                 |       |
|                                               |       | 123,307          |       | 80,100                |       |
| Allowance for doubtful accounts                    |       | (3,815           | )          | (3,259                | )          |
| Accounts receivable, net                           |       | $                | 119,492    |                  | $          | 76,841 |   |

 

Costs and estimated earnings in excess of billings relate to uncompleted contracts and amounts not processed by governmental agencies.  State and local agencies often require several approvals to process billings or payments and this may cause a lag in payment times.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Concentrations of Credit Risk**

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and temporary investments with high-quality financial institutions. At times, such balances and investments may be in excess of federally insured limits; however the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. The Company conducts business with various governmental entities within the Commonwealth of Pennsylvania. These entities include the Pennsylvania Department of Transportation, the Pennsylvania Turnpike Commission and various townships, municipalities, school districts and universities within Pennsylvania. The Company has not experienced any material losses with these governmental agencies and does not believe it is exposed to any significant credit risk on the outstanding accounts receivable.

 

**Inventories**

 

Inventories are stated at the lower of cost or market.  Cost is determined using either first-in, first-out (“FIFO”) or weighted average method based on the applicable category of inventories.

 

The Company’s total inventory consists of the following:

 
| ** **                                | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**                   | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                      |       |             |       |                  |       |
| Crushed stone, agricultural lime and sand |       | $                | 83,357     |                  | $          | 84,016 |   |
| Raw materials                             |       | 11,782           |       | 9,400                 |       |
| Parts, tires and supplies                 |       | 11,459           |       | 11,313                |       |
| Concrete blocks                           |       | 4,456            |       | 4,547                 |       |
| Building materials                        |       | 4,163            |       | 3,982                 |       |
| Safety equipment                          |       | 18,258           |       | 16,901                |       |
| Other                                     |       | 2,352            |       | 2,036                 |       |
| Inventories                               |       | $                | 135,827    |                  | $          | 132,195 |   |

 

**Property, Plant and Equipment**

 

Property, plant and equipment are carried at cost.  Assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item.  Provision for depreciation is generally computed over estimated service lives by the straight-line method.

 

The Company’s property, plant & equipment consist of the following:

 
| ** **                                      | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**                         | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                            |       |             |       |                  |       |
| Limestone and sand acreage                      |       | $                | 139,767    |                  | $          | 142,034 |   |
| Land, buildings and building improvements       |       | 99,831           |       | 96,504                |       |
| Crushing, prestressing and manufacturing plants |       | 314,980          |       | 310,130               |       |
| Contracting equipment, vehicles and other       |       | 287,794          |       | 281,543               |       |
| Construction in progress                        |       | 9,421            |       | 8,829                 |       |
| Property, plant and equipment                   |       | 851,793          |       | 839,040               |       |
| Less: Accumulated depreciation and depletion    |       | (475,644         | )          | (467,466              | )          |
| Property, plant and equipment, net              |       | $                | 376,149    |                  | $          | 371,574 |   |

 

Repairs and maintenance are charged to operations as incurred. Renewals or betterments, which materially add to the useful lives of property and equipment, are capitalized.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

Depreciation expense was $10.8 million and $10.9 million for three months ended May 31, 2012 and 2011, respectively.   Included in the contracting equipment, vehicles and other asset category above are capital leases with a cost basis of $26.9 million and $25.8 million as of May 31, 2012 and February 29, 2012, respectively.

 

**Goodwill and Other Intangible Assets**

 

The Company tests goodwill for impairment on an annual basis or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  There were no changes to the carrying value of goodwill during the three months ended May 31, 2012.  While the Company has not identified any circumstances or changes with the Company’s operations that would indicate that the fair value of any of its reporting units is below its carrying value, the timing of a sustained recovery in the construction industry may have a significant effect on the fair value of its reporting units. A decrease in the estimated fair value of one or more of the Company’s reporting units could result in the recognition of goodwill impairment.

 

The Company had the following intangible assets:  

 
| ** **                       | ** ** | **Other intangible assets** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| **(In thousands)**          | ** ** | **Cost**                              | ** ** | **Accumulated   amortization** | ** ** | **February 29,   2012** | ** ** | **Current   amortization** | ** ** | **May 31,   2012** | ** ** |
|                             |       |                                  |       |   |   |   |   |   |   |   |   |
| Amortizable intangible assets    |       |                                  |       |   |   |   |   |   |   |   |   |
| Customer relationships           |       | $                                     | 12,000     |   | $ | (2,400 | ) | $ | 9,600 |   | $ | (150 | ) | $ | 9,450 |   |
| Technology                       |       | 600                                   |       | (160 | ) | 440 |   | (10 | ) | 430 |   |
|                             |       | 12,600                                |       | (2,560 | ) | 10,040 |   | (160 | ) | 9,880 |   |
| Nonamortizable intangible assets |       |                                  |       |   |   |   |   |   |   |   |   |
| Trademarks                       |       | 16,304                                |       | — |   | 16,304 |   | — |   | 16,304 |   |
| Total other intangible assets    |       | $                                     | 28,904     |   | $ | (2,560 | ) | $ | 26,344 |   | $ | (160 | ) | $ | 26,184 |   |

 

Amortization of intangible assets for each of the three months ended May 31, 2012 and May 31, 2011 was $0.2 million. The Company recorded $1.1 million intangible asset impairment on its trademarks during the year ended February 29, 2012. While there were no further circumstances or changes with the Company’s operations that would indicate a further impairment of its trademarks was necessary, the timing of a sustained recovery in the construction industry may have a significant effect on the fair value of its trademarks.  A decrease in the estimated fair value of the trademarks could result in the recognition of a further impairment.

 

**Other Assets**

 

The Company’s long-term other assets consist of the following:

 
| ** **                                                                                                             | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**                                                                                                | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                                                                                                   |       |             |       |                  |       |
| Deferred financing fees (net of current portion of   $3,656 at May 31, 2012 and $4,882 at February 29, 2012) |       | $                | 17,272     |                  | $          | 10,409 |   |
| Cash value of life insurance (net of loans of $0   at May 31, 2012 and $3,000 at February 29, 2012)          |       | 3,579            |       | 1,006                 |       |
| Capitalized software (net of amortization of $277   at May 31, 2012 and $160 at February 29, 2012)           |       | 11,835           |       | 11,719                |       |
| Deferred stripping costs                                                                                               |       | 3,072            |       | 2,994                 |       |
| Other                                                                                                                  |       | 509              |       | 697                   |       |
| Other assets                                                                                                           |       | $                | 36,267     |                  | $          | 26,825 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

As part of our debt refinancing transactions on March 15, 2012, we incurred and capitalized $15.1 million of deferred financing fees.  The Company recognized a loss on debt retirement of approximately $6.4 million related to the write-off of unamortized debt issuance costs.  The write-off of the debt issuance costs were recorded as a component of net interest expense.

 

**Use of Estimates**

 

The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment; valuation of receivables; inventories and goodwill; recognition of revenue and loss contract reserves under the percentage-of-completion method; assets and obligations related to employee benefit plans; asset retirement obligations; income tax valuation; and self-insurance reserves.  Actual results could differ from those estimates.

 

**Reclassifications**

 

Certain prior year balances have been reclassified to conform to current year presentation.

 

**Recently Issued Accounting Standards**

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross and net information about financial instruments that have been offset on the consolidated balance sheet. This ASU will be effective commencing with the three months ending May 31, 2013. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

 

In July 2012, the FASB issued ASU No. 2012-02, *Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment*. This ASU gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined that it is more likely than not the indefinite-lived intangible asset is impaired, a quantitative impairment test is required. However, if it is concluded otherwise, the quantitative test is not necessary. This ASU will be effective March 1, 2013. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

 

**Recently Adopted Accounting Standards**

 

In May, 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”.  The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”) and change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, it is not intended for the amendments to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update also eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08 “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” which amends the goodwill impairment testing guidance in ASC 350-20, “Goodwill.” Under the amended standard, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  We adopted this standard on March 1, 2012, which did not have a material impact on the consolidated financial statements.

 

**2.        Risks and Uncertainties**

 

Our business is heavily impacted by several factors which are outside the control of management, including the overall health of the economy, the level of commercial and residential construction, the level of federal, state and local publicly funded construction projects and seasonal variations generally attributable to weather conditions.  These factors impact the amount and timing of our revenues and our overall performance.

 

On March 15, 2012, the Company sold $265.0 million aggregate principal amount of its 13.0% senior secured notes due 2018 (the “Secured Notes”) at par and entered into a new $170.0 million asset-based secured revolving credit facility (the “ABL Facility”) with Manufacturers and Traders Trust Company (“M&T”).  The Company used the net proceeds of this issuance of Secured Notes and borrowings under the ABL Facility to repay and terminate all of its outstanding indebtedness under its second amended and restated credit agreement dated January 11, 2008 (the “Credit Agreement”) and certain other debt.  See further discussion of the ABL Facility in *Note 4*, “*Long-Term Debt -Asset-Based Loan Facility”*.

 

The Company was unable to file its Form 10-K on its due date of May 29, 2012, its first quarter Form 10-Q on its due date of July 16, 2012, and its second quarter Form 10-Q on its due date of October 15, 2012 as a result of complications in the ERP implementation and the material weaknesses in the Company’s internal control over financial reporting previously reported in the Company’s filings with the Securities and Exchange Commission.  The ABL Facility required the Company’s audited financial statements to be issued on May 29, 2012 and the Company’s first quarter Form 10-Q to be issued on July 16, 2012, and the Company’s second quarter Form 10-Q to be issued on October 15, 2012.  The indenture for the Secured Notes and the indenture for the Company’s $250.0 million 11% senior notes due 2018 (the “Notes”) required financial statements to be issued within 15 days of these aforementioned dates.  As a result, the Company obtained an amendment of the ABL Facility on September 7, 2012 and extensions to file its Form 10-K and first and second quarter Form 10-Q on September 28, 2012, November 9, 2012 and December 7, 2012. In accordance with the extension letter dated December 7, 2012, the Company has until December 15, 2012, January 1, 2013 and February 15, 2013 to file its Form 10-K, Form 10-Q for the first quarter of the 2013 fiscal year and Form 10-Q for the second quarter of the 2013 fiscal year, respectively.  Also, the first amendment to the ABL Facility required the Company to develop a Profit and Liquidity Enhancement Plan and a Reporting Enhancement Plan (together, the “Plans”) as defined in the amendment, by October 1, 2012 and October 15, 2012, respectively. The Company submitted the Plans to the bank in accordance with the first amendment. The first amendment also allows M&T, in the event they cannot syndicate the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, certain covenants and the interest and fees payable. M&T has not syndicated the ABL Facility. However, there have been no further modifications to the terms of the ABL Facility.

 

As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

On December 7, 2012, the Company entered into the second amendment to the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013. There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Secured Notes.

 

On September 5 and 6, 2012 the Company received notices of default from the trustee under the Secured Notes and the Notes, respectively. The notices of default were related to the Company’s inability to provide the trustee with copies of the Company’s Annual report on Form 10-K for the year ended February 29, 2012 and Quarterly report on Form10-Q for the period ended May 31, 2012 in a timely manner as required by the underlying indentures. In accordance with the terms and conditions of the underlying indentures, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

29, 2012 and its Quarterly report on Form 10-Q for the period ended May 31, 2012 and therefore has cured the defaults under the indentures. The Company has not received a notice of default related to the Secured Notes or Notes for the delay in filing its Quarterly Report on Form 10-Q for the second quarter ended August 31, 2012.

 

**3.        Accrued Liabilities**

 

Accrued liabilities consisted of the following:

 
| ** **                                                                    | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**                                                       | ** ** | **2012**         | ** ** | **2012**              | ** ** |
|                                                                          |       |             |       |                  |       |
| Payroll and vacation                                                          |       | $                | 11,511     |                  | $          | 8,496 |   |
| Contract expenses                                                             |       | 973              |       | 518                   |       |
| Withholding taxes                                                             |       | 3,347            |       | 2,862                 |       |
| Interest                                                                      |       | 9,384            |       | 14,055                |       |
| Insurance                                                                     |       | 16,325           |       | 18,153                |       |
| Deferred acquisition liability                                                |       | 3,522            |       | 3,610                 |       |
| Billings in excess of costs and estimated earnings   on uncompleted contracts |       | 1,666            |       | 255                   |       |
| Other                                                                         |       | 1,881            |       | 3,004                 |       |
| Accrued liabilities                                                           |       | $                | 48,609     |                  | $          | 50,953 |   |

 

**4.        Long-Term Debt**

 
| ** **                            | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| **(In thousands)**               | ** ** | **2012**         | ** ** | **2012**              | ** ** |
| ** **                            | ** ** | ** **       | ** ** | ** **            | ** ** |
| Land, equipment and other obligations |       | $                | 23,640     |                  | $          | 23,016 |   |
| First lien term loan A & B   |       | —           |       | 145,383               |       |
| First lien revolving credit facility  |       | —           |       | 100,113               |       |
| ABL Facility                          |       | 44,117           |       | —                |       |
| Senior notes due 2018                 |       | 250,000          |       | 250,000               |       |
| Secured notes due 2018                |       | 265,000          |       | —                |       |
| Obligations under capital leases      |       | 10,298           |       | 10,501                |       |
| Debt                                  |       | 593,055          |       | 529,013               |       |
| Less: Current portion                 |       | (15,379          | )          | (7,538                | )          |
| Long-term debt                        |       | $                | 577,676    |                  | $          | 521,475 |   |

 

*Refinancing*

 

On March 15, 2012, the Company completed the sale of $265.0 million of its 13.0% Secured Notes due 2018 at par.  In connection with the sale of the Secured Notes, the Company also entered into a new $170.0 million ABL Facility.  The Company utilized the proceeds from the sale of the Secured Notes and the new ABL Facility to repay all amounts outstanding under, and terminate the Credit Agreement and certain other debt.  See Note 2, “Risks and Uncertainties” and Note 10, “Subsequent Events” for additional discussion of the Secured Notes, the ABL Facility and the debt refinanced, as well as details on amendments received and notices of default received from the trustee. The Company classified the components of the debt refinanced on March 15, 2012 as long-term in the condensed consolidated balance sheet as of February 29, 2012.

 

*Land, equipment and other obligations*

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

Obligations include three revenue bonds, as of May 31, 2012 to different industrial development authorities with counties in Pennsylvania with a total outstanding of $6.2 million and four revenue bonds with outstanding of $10.6 million as of February 29, 2012. The effective interest rate on the industrial development bonds ranged from 0.23% to 0.46% as of May 31, 2012 and from 0.28% to 0.46% as of February 29, 2012.  The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

Cash overdrafts liability of $4.5 million, as disclosed in *Note 1, “Significant Accounting Policies, Cash and Cash Equivalents and Restricted Cash”*, is included within the current portion of long-term debt as of May 31, 2012.

 

The Company repaid all borrowings under the term loan agreement with Citizens Bank and terminated the related credit agreement on March 15, 2012.

 

*First lien term loan A & B*

 

The Company repaid all borrowings under the first lien term loan A & B and terminated the associated Credit Agreement on March 15, 2012.

 

*First lien revolving credit facility*

 

The Company repaid all borrowings under the first lien revolving credit facility and terminated the associated Credit Agreement on March 15, 2012.

 

*Asset-Based Loan Facility*

 

On March 15, 2012, the Company entered into a credit agreement for the ABL Facility (the “ABL Facility Agreement”) with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to $170.0 million from time to time for general corporate purposes, including working capital.  The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.  At May 31, 2012, the Company classified borrowings under the ABL Facility as long-term due to its ability to maintain such borrowings on a long term basis.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of the ABL Facility Agreement until August 31, 2012, the LIBOR margin was 2.75%, the base rate margin was 0.75% and the commitment fee was 0.50%.

 

Borrowings under the ABL Facility are guaranteed by all of the Company’s subsidiaries that guarantee the Secured Notes and the Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

*Covenants*

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*Amendment of ABL Facility*

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012 the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, and December 7, 2012 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 15, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On December 7, 2012, the Company entered into the second amendment of the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013. There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes.

 

*Notes due 2018*

 

In August 2010, the Company sold $250.0 million aggregate principal amount of 11.0% Notes due in 2018 at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.  From the proceeds of the issuance of Notes, the Company prepaid its second lien loan which had a principal balance outstanding of $85.0 million and paid down a portion of its term loan A, term loan B and the revolving credit facility in the amounts of $64.9 million, $50.1 million and $43.5 million, respectively.

 

*Secured Notes due 2018*

 

Interest on the Secured Notes will initially be payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15, commencing on September 15, 2012. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses.  The Secured Notes will mature on March 15, 2018.

 

With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest.  At May 31, 2012, $5.0 million of accrued PIK interest was recorded as a long-term obligation in Other liabilities.

 

With respect to any interest payment payable after March 15, 2017, interest will be payable solely in cash. In addition, at the beginning of and with respect to each 12-month period that begins on March 15, 2013, March 15, 2014 and March 15, 2015, the interest rate on the Secured Notes as of such date shall permanently increase by an additional 1.0% per annum (an ‘‘Interest Rate Increase’’) unless the Company delivers a written notice to the Trustee of the Company’s election for such 12-month period to either (x) alter the manner of interest payment on the Secured Notes going forward by increasing the Cash Interest Portion and decreasing the PIK Interest Portion in each case in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such election by, in each case, 1.0% per annum or (y) pay interest on the Secured Notes for such 12-month period entirely in cash (a ‘‘12-Month Cash Election’’). In the event of a 12-Month Cash 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

Election for any 12-month period prior to March 15, 2017, the interest rate on the Secured Notes applicable for such 12-month period shall be 1.0% less than the total interest rate applicable to the Secured Notes in effect with respect to the immediately preceding interest period for which any PIK Interest was paid. Any Interest Rate Increase shall be affected by increasing the PIK Interest Portion in effect with respect to the immediately preceding interest period for which any PIK Interest was paid prior to each such Interest Rate Increase. If the Company makes a 12-Month Cash Election for and in respect of the 12-month period beginning on March 15, 2016, the same interest rate will apply for and in respect of the 12-month period beginning on March 15, 2017.  The additional 1.0% per annum Interest Rate Increase will only apply to the three consecutive annual periods beginning March 15, 2013.

 

At any time prior to March 15, 2015, the Company may redeem at its option up to 35% of the Secured Notes with the net cash proceeds from certain public equity offerings at a redemption price equal to 113.0% of the principal amount outstanding, plus accrued and unpaid interest. The Company may also redeem some or all of the Secured Notes at any time prior to March 15, 2015 at a redemption price equal to 100.0% of the principal amount of the outstanding Secured Notes, plus accrued and unpaid interest, plus a ‘‘make-whole’’ premium. On and after March 15, 2015, the Secured Notes will be redeemable, in whole or in part, at the redemption prices specified as follows:

 
| **Year**   | ** ** | **Percentage** | ** ** |
|------------|------------|----------------|------------|
| ** ** | ** ** | ** **     | ** ** |
| 2015       |       | 106.50         | %          |
| 2016       |       | 103.25         | %          |
| 2017       |       | 100.00         | %          |

 

In addition, the Company may be required to make an offer to purchase the Secured Notes upon the sale of certain assets or upon a change of control. The Company will be required to redeem certain portions of the Secured Notes for tax purposes at the end of the first accrual period ending after the fifth anniversary of the Secured Notes issuance and each accrual period thereafter.

 

The Secured Notes are guaranteed on a joint and several basis by the Company’s existing and future domestic subsidiaries (the “Guarantors” as described in *Note 9,” Condensed Issuer, Guarantor and Non Guarantor Financial Information”*) that currently guarantee the Company’s Notes and the ABL Facility. The Secured Notes and related guarantees are senior secured obligations of the Company and the Guarantors that rank equally in right of payment with all existing and future senior debt of the Company and the Guarantors, including the Notes and ABL Facility, and senior to all existing and future subordinated debt of the Company and Guarantors.  The Secured Notes and related guarantees are secured, subject to certain permitted liens and except for certain excluded assets, by first priority liens on substantially all of the Company’s and Guarantors’ personal property and certain owned and leased real property and second-priority liens on certain real property and substantially all of the Company’s and Guarantors’ accounts receivable, inventory and deposit accounts and related assets and proceeds of the foregoing that secure the ABL Facility on a first-priority basis (the “ABL Priority Collateral”).

 

The indenture for the Secured Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

In accordance with the indenture for the Secured Notes, the Company must file a registration statement with the Securities and Exchange Commission and consummate a registered offer to exchange the Secured Notes for new Secured Notes having terms substantially identical in all material respects to the Secured Notes by March 11, 2013.  If the Company fails to consummate the exchange offer within such time period, the interest rate on the Secured Notes will increase by up to an additional 1.0% per annum until such exchange offer is completed or the Secured Notes are redeemed.

 

*Obligations under capital lease*

 

The Company has various arrangements for the lease of machinery and equipment which qualify as capital leases. These arrangements typically provide for monthly payments, some of which include residual value guarantees if the Company were to terminate the arrangement during certain specified periods of time for each underlying asset under lease.

 

**5.****                         ****Income Taxes**

 

The Company’s tax provision and the corresponding effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting, the 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly tax provision in accordance with the anticipated annual rate. As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to the Company’s expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining the Company’s effective interim tax rate and in evaluating its tax positions.

 

The Company’s effective income tax rate was 38.8% and 64.4% for the three months ended May 31, 2012 and May 31, 2011, respectively. The principal factor affecting the comparability of the effective income tax rate for the respective periods is the result of a larger projected pre-tax book loss for fiscal year ending February 28, 2013 when compared to fiscal year ended February 29, 2012.  A larger pre-tax book loss dilutes the impact of the permanent items, which remain relatively consistent year over year, causing a reduction in the applicable annual tax rate when compared to the prior year.  Our estimated annual tax rate anticipates a pre-tax book loss combined with substantial permanent percentage depletion benefits as well as changes in valuation allowance applied against certain of our deferred tax assets such that our estimated annual effective tax rate is in excess of the statutory federal rate of 35%.  Our benefit from income taxes for the three months ended May 31, 2012 is based on an estimated annual effective tax rate for fiscal year 2013 of 38.8%.

 

The cash taxes paid were not material for the three months ended May 31, 2012 and May 31, 2011, respectively, primarily as a result of a net operating loss.

 

**6.****                         ****Retirement and Benefit Programs**

 

Substantially all employees are covered by a defined contribution plan, a defined benefit plan, a collectively bargained multiemployer plan, or a noncontributory profit sharing plan.  The expense associated with these programs, excluding defined benefit plans, was $1.7 million for the three months ended May 31, 2012 and 2011, respectively.

 

The Company has two defined benefit pension plans covering certain union employees covered by labor union contracts. The benefits are based on years of service. Actuarial gains and losses are generally amortized subject to the corridor, over the average remaining service life of the Company’s active employees.  Net periodic pension expense recognized for the three month periods ended May 31, 2012 and 2011, was as follows:

 
| ** **                                    | ** ** | **Three Months Ended** |
|-----------------------------------------------|------------|----------------------------------|
| ** **                                    | ** ** | **May 31,**                 |
| **(in thousands)**                       | ** ** | **2012**                         | ** ** | **2011** | ** ** |
|                                          |       |                             |   |   |   |
| **Components of net periodic   benefit cost** |       |                             |   |   |   |
| Service cost                                  |       | $                                | 68 |   | $ | 54 |   |
| Interest cost                                 |       | 99                               |   | 110 |   |
| Expected return on plan assets                |       | (146                             | ) | (154 | ) |
| Amortization of prior service cost            |       | 15                               |   | 15 |   |
| Recognized net actuarial loss                 |       | 62                               |   | 29 |   |
| Total pension expense                         |       | $                                | 98 |   | $ | 54 |   |

 

**7.****                                     ****Commitments and Contingencies**

 

In the normal course of business, the Company has commitments, lawsuits, claims and contingent liabilities. The ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, statement of comprehensive loss or liquidity.

 

The Company maintains a captive insurance company, Rock Solid Insurance Company (Rock Solid), for workers’ compensation (non-Pennsylvania employees), general liability, auto, health and property coverage. On April 8, 2011, Rock Solid entered into a Collateral Trust Agreement with an insurer to eliminate a letter of credit that was required to maintain coverage of the deductible portion of its liability coverage.  The total amount of collateral provided in the arrangement was $8.8 million and is recorded as part of restricted cash as of May 31, 2012 on the Company’s condensed consolidated balance sheet.  Reserves for retained losses within this captive, which are recorded in accrued liabilities in the accompanying condensed consolidated balance sheet, were approximately $8.2 million and $9.7 million as of May 31, 2012 and February 29, 2012, respectively. Exposures for periods prior to the inception of the captive are covered by pre-existing insurance 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

policies. Other accrued amounts included as insurance, which mostly relates to worker’s compensation, included in Note 3, “Accrued Liabilities” totaled $8.1 million and $8.5 million as of May 31, 2012 and February 29, 2012, respectively.

 

**8.****                                     ****Segment Reporting**

 

The Company reports information about its operating segments using the “management approach,” which is based on the way management organizes and reports the segments within the organization for making operating decisions and assessing performance to the chief operating decision maker. The Company’s three reportable segments are: (i) construction materials; (ii) heavy/highway construction; and (iii) traffic safety services and equipment.  Almost all activity of the Company is domestic.

 

The Company reviews earnings of the segments principally at the operating profit level and accounts for intersegment sales at prices that range from negotiated rates to those that approximate fair market value. Segment operating profit consists of revenue less operating costs and expenses. Corporate and unallocated costs include those administrative and financial costs which are not allocated to segment operations and are excluded from segment operating profit.  These costs include corporate administrative functions, unallocated corporate functions and divisional administrative functions.

 

The following is a summary of certain financial data for the Company’s operating segments:

 
| ** **                              | ** ** | **Three Months Ended May 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
|                                    |       |                                               |       |   |   |
| **Revenue**                             |       |                                               |       |   |   |
| Construction materials                  |       | $                                                  | 122,282    |   | $ | 104,487 |   |
| Heavy/highway construction              |       | 53,983                                             |       | 51,411 |   |
| Traffic safety services and equipment   |       | 24,399                                             |       | 21,961 |   |
| Other revenues                          |       | 3,722                                              |       | 2,833 |   |
| Segment totals                          |       | 204,386                                            |       | 180,692 |   |
| Inter-segment eliminations              |       | (46,405                                            | )          | (33,921 | ) |
| Total net sales and other revenues      |       | $                                                  | 157,981    |   | $ | 146,771 |   |
| ** **                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Operating profit**                    |       |                                               |       |   |   |
| Construction materials                  |       | $                                                  | 3,982      |   | $ | 2,129 |   |
| Heavy/highway construction              |       | (1,636                                             | )          | (2,148 | ) |
| Traffic safety services and equipment   |       | (463                                               | )          | 227 |   |
| Corporate and unallocated               |       | (8,554                                             | )          | (1,409 | ) |
| Total operating loss                    |       | $                                                  | (6,671     | ) | $ | (1,201 | ) |
| ** **                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Product and services revenue**        |       |                                               |       |   |   |
| Construction materials                  |       |                                               |       |   |   |
| Aggregates                              |       | $                                                  | 53,477     |   | $ | 46,387 |   |
| Hot mix asphalt                         |       | 37,284                                             |       | 30,935 |   |
| Ready mixed concrete                    |       | 17,091                                             |       | 12,966 |   |
| Precast/prestressed structural concrete |       | 6,251                                              |       | 5,879 |   |
| Masonry products                        |       | 4,245                                              |       | 4,507 |   |
| Construction supply centers             |       | 3,934                                              |       | 3,813 |   |
| Heavy/highway construction              |       | 53,983                                             |       | 51,411 |   |
| Traffic safety services and equipment   |       | 24,399                                             |       | 21,961 |   |
| Other revenues                          |       | 3,722                                              |       | 2,833 |   |
| Inter-product sales eliminations        |       | (46,405                                            | )          | (33,921 | ) |
| Total net sales and other revenues      |       | $                                                  | 157,981    |   | $ | 146,771 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                     | ** ** | **Three Months Ended May 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                        | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
| ** **                                     | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Product and services operating   profit**    |       |                                               |       |   |   |
| Construction materials                         |       |                                               |       |   |   |
| Aggregates                                     |       | $                                                  | 2,932      |   | $ | 3,034 |   |
| Hot mix asphalt                                |       | 613                                                |       | (528 | ) |
| Ready mixed concrete                           |       | 1,210                                              |       | (41 | ) |
| Precast/prestressed structural concrete        |       | (631                                               | )          | (439 | ) |
| Masonry products                               |       | (316                                               | )          | (119 | ) |
| Construction supply centers                    |       | 174                                                |       | 222 |   |
| Heavy/highway construction                     |       | (1,636                                             | )          | (2,148 | ) |
| Traffic safety services and equipment          |       | (463                                               | )          | 227 |   |
| Corporate and unallocated                      |       | (8,554                                             | )          | (1,409 | ) |
| Total operating loss                           |       | $                                                  | (6,671     | ) | $ | (1,201 | ) |
| **Depreciation, Depletion and   Amortization** |       |                                               |       |   |   |
| Construction materials                         |       | $                                                  | 7,716      |   | $ | 7,223 |   |
| Heavy/highway construction                     |       | 1,897                                              |       | 2,018 |   |
| Traffic safety services and equipment          |       | 1,692                                              |       | 1,714 |   |
| Corporate and unallocated                      |       | 538                                                |       | 390 |   |
| Total depreciation, depletion and amortization |       | $                                                  | 11,843     |   | $ | 11,345 |   |
| **Capital Expenditures**                       |       |                                               |       |   |   |
| Construction materials                         |       | $                                                  | 11,655     |   | $ | 9,144 |   |
| Heavy/highway construction                     |       | 1,186                                              |       | 2,449 |   |
| Traffic safety services and equipment          |       | 383                                                |       | 1,177 |   |
| Corporate and unallocated                      |       | 1,949                                              |       | 259 |   |
| Total capital expenditures                     |       | $                                                  | 15,173     |   | $ | 13,029 |   |

 

**9.****                                     ****Condensed Issuer, Guarantor and Non Guarantor Financial Information**

 

The Company has $265.0 million in Secured Notes and $250.0 million in Notes for which certain subsidiaries are guarantors. Except for Rock Solid Insurance Company, NESL, II LLC, and Kettle Creek Partners GP, LLC, all existing consolidated subsidiaries of the Company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. These entities include Gateway Trade Center Inc., EII Transport Inc., Protections Services Inc., Work Area Protection Corp., SCI Products Inc., ASTI Transportation Systems, Inc., and Precision Solar Controls Inc. (“Guarantor Subsidiaries”).  There are no significant restrictions on the parent Company’s ability to obtain funds from any of the Guarantor Subsidiaries in the form of a dividend or loan.  Additionally, there are no significant restrictions on a Guarantor Subsidiary’s ability to obtain funds from the parent Company or its direct or indirect subsidiaries. Certain other wholly owned subsidiaries and consolidated partially owned partnerships do not guarantee the Secured Notes or the Notes.  These entities include Rock Solid Insurance Company, South Woodbury, L.P., NESL, II LLC, Kettle Creek Partners L.P., and Kettle Creek Partners GP, LLC (“Non Guarantors”).

 

The following condensed consolidating balance sheets, statements of comprehensive loss and statements of cash flows are provided for the Company, all Guarantor Subsidiaries and Non Guarantors. The information has been presented as if the parent Company accounted for its ownership of the Guarantor Subsidiaries and Non Guarantors using the equity method of accounting.

 

The Company revised its condensed consolidating statements of operations for the three months ended May 31, 2011, to correct certain errors in noncontrolling interest and certain other eliminating adjustments.  The revision was made to appropriately present parent company and eliminating activity in the appropriate column of the consolidating schedule. For the three months ended May 31, 2011, the revision resulted in a net decrease of $0.3 million to the “(Loss) income before income taxes” in the Eliminations column and an offsetting increase in the New Enterprise Stone & Lime Co., Inc. column and a $0.3 million increase to the “Income attributable to noncontrolling interest” in the Eliminations column with an offsetting decrease to the Non Guarantors column.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Condensed Consolidating Balance Sheet at May 31, 2012  (unaudited)**

(in thousands)

 
| ** **                                                                      | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| **Assets**                                                                      |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current assets                                                                  |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Cash and cash equivalents                                                       |       | $                                                                     | 39         |                         | $          | 2                    |       | $                | 4,491      |      | $          | — |   | $ | 4,532 |   |
| Restricted cash                                                                 |       | 1,253                                                                 |       | 102                          |       | 8,842                |       | —           |       | 10,197    |       |
| Accounts receivable (less allowance for doubtful   accounts)                    |       | 97,892                                                                |       | 19,464                       |       | 2,136                |       | —           |       | 119,492   |       |
| Inventories                                                                     |       | 117,228                                                               |       | 18,599                       |       | —               |       | —           |       | 135,827   |       |
| Net investment in lease                                                         |       | —                                                                |       | —                       |       | 610                  |       | (610             | )          | —    |       |
| Deferred income taxes                                                           |       | 14,302                                                                |       | 1,010                        |       | —               |       | —           |       | 15,312    |       |
| Other current assets                                                            |       | 6,183                                                                 |       | 957                          |       | 80                   |       | —           |       | 7,220     |       |
| Total current assets                                                            |       | 236,897                                                               |       | 40,134                       |       | 16,159               |       | (610             | )          | 292,580   |       |
| Other assets                                                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Property, plant and equipment, net                                              |       | 351,376                                                               |       | 24,633                       |       | 7,307                |       | (7,167           | )          | 376,149   |       |
| Goodwill                                                                        |       | 85,002                                                                |       | 5,845                        |       | —               |       | —           |       | 90,847    |       |
| Other intangible assets, net of amortization                                    |       | 10,797                                                                |       | 15,387                       |       | —               |       | —           |       | 26,184    |       |
| Investment in subsidiaries                                                      |       | 83,877                                                                |       | —                       |       | —               |       | (83,877          | )          | —    |       |
| Intercompany receivables                                                        |       | —                                                                |       | 11,628                       |       | —               |       | (11,628          | )          | —    |       |
| Other assets                                                                    |       | 34,797                                                                |       | 1,470                        |       | —               |       | —           |       | 36,267    |       |
| Total assets                                                                    |       | $                                                                     | 802,746    |                         | $          | 99,097               |       | $                | 23,466     |      | $          | (103,282 | ) | $ | 822,027 |   |
| **Liabilities and Stockholders’   Equity**                                 |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current liabilities                                                             |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current maturities of long-term debt                                            |       | $                                                                     | 15,512     |                         | $          | —               |       | $                | 477        |      | $          | (610 | ) | $ | 15,379 |   |
| Accounts payable - trade                                                        |       | 38,612                                                                |       | 3,223                        |       | 460                  |       | —           |       | 42,295    |       |
| Accrued liabilities                                                             |       | 35,972                                                                |       | 4,428                        |       | 8,209                |       | —           |       | 48,609    |       |
| Total current liabilities                                                       |       | 90,096                                                                |       | 7,651                        |       | 9,146                |       | (610             | )          | 106,283   |       |
| Long-term debt and other liabilities                                            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Intercompany payables                                                           |       | 11,628                                                                |       | —                       |       | —               |       | (11,628          | )          | —    |       |
| Long-term debt, less current maturities                                         |       | 570,509                                                               |       | —                       |       | 7,167                |       | —           |       | 577,676   |       |
| Obligations under capital leases, less current   installments                   |       | 7,167                                                                 |       | —                       |       | —               |       | (7,167           | )          | —    |       |
| Deferred income taxes                                                           |       | 71,681                                                                |       | 12,777                       |       | —               |       | —           |       | 84,458    |       |
| Other liabilities                                                               |       | 21,731                                                                |       | 486                          |       | —               |       | —           |       | 22,217    |       |
| Total liabilities                                                               |       | 772,812                                                               |       | 20,914                       |       | 16,313               |       | (19,405          | )          | 790,634   |       |
| Equity                                                                          |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| New Enterprise Stone & Lime   Co., Inc. stockholders’ equity |       | 29,934                                                                |       | 78,183                       |       | 5,694                |       | (83,877          | )          | 29,934    |       |
| Noncontrolling interest                                                         |       | —                                                                |       | —                       |       | 1,459                |       | —           |       | 1,459     |       |
| Total equity                                                                    |       | 29,934                                                                |       | 78,183                       |       | 7,153                |       | (83,877          | )          | 31,393    |       |
| Total liabilities and equity                                                    |       | $                                                                     | 802,746    |                         | $          | 99,097               |       | $                | 23,466     |      | $          | (103,282 | ) | $ | 822,027 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Condensed Consolidating Balance Sheet at February 29, 2012**

(in thousands)

 
| ** **                                                                                | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
| **Assets**                                                                                |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current assets                                                                            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Cash and cash equivalents                                                                 |       | $                                                                     | 7,106      |                         | $          | 476                  |       | $                | 7,450      |      | $          | — |   | $ | 15,032 |   |
| Restricted cash                                                                           |       | 1,379                                                                 |       | 102                          |       | 8,841                |       | —           |       | 10,322    |       |
| Accounts receivable (less allowance for doubtful   accounts)                              |       | 61,891                                                                |       | 14,933                       |       | 17                   |       | —           |       | 76,841    |       |
| Inventories                                                                               |       | 114,888                                                               |       | 17,307                       |       | —               |       | —           |       | 132,195   |       |
| Net investment in lease                                                                   |       | —                                                                |       | —                       |       | 610                  |       | (610             | )          | —    |       |
| Deferred income taxes                                                                     |       | 14,912                                                                |       | 1,107                        |       | —               |       | —           |       | 16,019    |       |
| Other current assets                                                                      |       | 7,036                                                                 |       | 326                          |       | 28                   |       | —           |       | 7,390     |       |
| Total current assets                                                                      |       | 207,212                                                               |       | 34,251                       |       | 16,946               |       | (610             | )          | 257,799   |       |
| Other assets                                                                              |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Property, plant and equipment, net                                                        |       | 345,461                                                               |       | 25,947                       |       | 7,451                |       | (7,285           | )          | 371,574   |       |
| Goodwill                                                                                  |       | 85,002                                                                |       | 5,845                        |       | —               |       | —           |       | 90,847    |       |
| Other intangible assets, net of amortization                                              |       | 10,904                                                                |       | 15,440                       |       | —               |       | —           |       | 26,344    |       |
| Investment in subsidiaries                                                                |       | 82,166                                                                |       | —                       |       | —               |       | (82,166          | )          | —    |       |
| Intercompany receivables                                                                  |       | —                                                                |       | 16,310                       |       | —               |       | (16,310          | )          | —    |       |
| Other assets                                                                              |       | 26,825                                                                |       | —                       |       | —               |       | —           |       | 26,825    |       |
| Total assets                                                                              |       | $                                                                     | 757,570    |                         | $          | 97,793               |       | $                | 24,397     |      | $          | (106,371 | ) | $ | 773,389 |   |
| **Liabilities and Stockholders’   Equity**                                           |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current liabilities                                                                       |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Current maturities of long-term debt                                                      |       | $                                                                     | 7,671      |                         | $          | —               |       | $                | 477        |      | $          | (610 | ) | $ | 7,538 |   |
| Accounts payable - trade                                                                  |       | 24,239                                                                |       | 3,166                        |       | 433                  |       | —           |       | 27,838    |       |
| Accrued liabilities                                                                       |       | 37,916                                                                |       | 3,309                        |       | 9,728                |       | —           |       | 50,953    |       |
| Total current liabilities                                                                 |       | 69,826                                                                |       | 6,475                        |       | 10,638               |       | (610             | )          | 86,329    |       |
| Long-term debt and other liabilities                                                      |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Intercompany payables                                                                     |       | 16,310                                                                |       | —                       |       | —               |       | (16,310          | )          | —    |       |
| Long-term debt, less current maturities                                                   |       | 514,191                                                               |       | —                       |       | 7,284                |       | —           |       | 521,475   |       |
| Obligations under capital leases, less current   installments                             |       | 7,285                                                                 |       | —                       |       | —               |       | (7,285           | )          | —    |       |
| Deferred income taxes                                                                     |       | 82,772                                                                |       | 13,902                       |       | —               |       | —           |       | 96,674    |       |
| Other liabilities                                                                         |       | 18,910                                                                |       | 133                          |       | —               |       | —           |       | 19,043    |       |
| Total liabilities                                                                         |       | 709,294                                                               |       | 20,510                       |       | 17,922               |       | (24,205          | )          | 723,521   |       |
| Equity                                                                                    |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| New Enterprise Stone & Lime   Co., Inc. stockholders’ equity (deficit) |       | 48,276                                                                |       | 77,283                       |       | 4,883                |       | (82,166          | )          | 48,276    |       |
| Noncontrolling interest                                                                   |       | —                                                                |       | —                       |       | 1,592                |       | —           |       | 1,592     |       |
| Total equity                                                                              |       | 48,276                                                                |       | 77,283                       |       | 6,475                |       | (82,166          | )          | 49,868    |       |
| Total liabilities and equity                                                              |       | $                                                                     | 757,570    |                         | $          | 97,793               |       | $                | 24,397     |      | $          | (106,371 | ) | $ | 773,389 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Condensed Consolidating Statements of Comprehensive Loss for the three months ended May 31, 2012**

(in thousands)

 
| ** **                                                                                | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                                                      |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Revenue                                                                                   |       | $                                                                     | 148,256    |                         | $          | 21,620               |       | $                | 1,978      |      | $          | (13,873 | ) | $ | 157,981 |   |
| Cost of revenue (exclusive of items shown   separately below)                             |       | 129,123                                                               |       | 17,113                       |       | —               |       | (13,873          | )          | 132,363   |       |
| Depreciation, depletion and amortization                                                  |       | 9,961                                                                 |       | 1,882                        |       | —               |       | —           |       | 11,843    |       |
| Pension and profit sharing                                                                |       | 1,762                                                                 |       | 79                           |       | —               |       | —           |       | 1,841     |       |
| Selling, administrative and general expenses                                              |       | 15,677                                                                |       | 2,249                        |       | 714                  |       | —           |       | 18,640    |       |
| Gain on sales of property and equipment                                                   |       | (35                                                                   | )          | —                       |       | —               |       | —           |       | (35       | )          |
| Operating (loss) profit                                                                   |       | (8,232                                                                | )          | 297                          |       | 1,264                |       | —           |       | (6,671    | )          |
| Interest expense, net                                                                     |       | (22,710                                                               | )          | (72                          | )          | (148                 | )          | —           |       | (22,930   | )          |
| (Loss) income before income taxes                                                         |       | (30,942                                                               | )          | 225                          |       | 1,116                |       | —           |       | (29,601   | )          |
| Income tax benefit                                                                        |       | (10,812                                                               | )          | (675                         | )          | —               |       | —           |       | (11,487   | )          |
| Equity in earnings of subsidiaries                                                        |       | 1,711                                                                 |       | —                       |       | —               |       | (1,711           | )          | —    |       |
| Net (loss) income                                                                         |       | (18,419                                                               | )          | 900                          |       | 1,116                |       | (1,711           | )          | (18,114   | )          |
| Unrealized actuarial gains and amortization of   prior service costs, net of income taxes |       | 77                                                                    |       | —                       |       | —               |       | —           |       | 77        |       |
| Comprehensive loss                                                                        |       | (18,342                                                               | )          | 900                          |       | 1,116                |       | (1,711           | )          | (18,037   | )          |
| Less: Income attributable to noncontrolling   interest                                    |       | —                                                                |       | —                       |       | (305                 | )          | —           |       | (305      | )          |
| Comprehensive loss attributable to New Enterprise   Stone & Lime Co., Inc.  |       | $                                                                     | (18,342    | )                            | $          | 900                  |       | $                | 811        |      | $          | (1,711 | ) | $ | (18,342 | ) |

 

**Condensed Consolidating Statements of Comprehensive Loss for the three months ended May 31, 2011**

(in thousands)

 
| ** **                                                                                | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                                                      |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Revenue                                                                                   |       | $                                                                     | 129,570    |                         | $          | 20,274               |       | $                | 1,875      |      | $          | (4,948 | ) | $ | 146,771 |   |
| Cost of revenue (exclusive of items shown   separately below)                             |       | 111,988                                                               |       | 15,921                       |       | 303                  |       | (5,093           | )          | 123,119   |       |
| Depreciation, depletion and amortization                                                  |       | 9,443                                                                 |       | 1,902                        |       | —               |       | —           |       | 11,345    |       |
| Pension and profit sharing                                                                |       | 1,670                                                                 |       | 45                           |       | —               |       | —           |       | 1,715     |       |
| Selling, administrative and general expenses                                              |       | 10,646                                                                |       | 2,272                        |       | 71                   |       | —           |       | 12,989    |       |
| Gain on sales of property and equipment                                                   |       | (1,196                                                                | )          | —                       |       | —               |       | —           |       | (1,196    | )          |
| Operating (loss) profit                                                                   |       | (2,981                                                                | )          | 134                          |       | 1,501                |       | 145              |       | (1,201    | )          |
| Interest expense, net                                                                     |       | (11,542                                                               | )          | (66                          | )          | 12                   |       | —           |       | (11,596   | )          |
| (Loss) income before income taxes                                                         |       | (14,523                                                               | )          | 68                           |       | 1,513                |       | 145              |       | (12,797   | )          |
| Income tax benefit                                                                        |       | (7,547                                                                | )          | (688                         | )          | —               |       | —           |       | (8,235    | )          |
| Equity in earnings of subsidiaries                                                        |       | 1,970                                                                 |       | —                       |       | —               |       | (1,970           | )          | —    |       |
| Net (loss) income                                                                         |       | (5,006                                                                | )          | 756                          |       | 1,513                |       | (1,825           | )          | (4,562    | )          |
| Unrealized actuarial gains and amortization of   prior service costs, net of income taxes |       | 32                                                                    |       | —                       |       | —               |       | —           |       | 32        |       |
| Comprehensive loss                                                                        |       | (4,974                                                                | )          | 756                          |       | 1,513                |       | (1,825           | )          | (4,530    | )          |
| Less: Income attributable to noncontrolling   interest                                    |       | —                                                                |       | —                       |       | (299                 | )          | —           |       | (299      | )          |
| Comprehensive loss attributable to New Enterprise   Stone & Lime Co., Inc.  |       | $                                                                     | (4,974     | )                            | $          | 756                  |       | $                | 1,214      |      | $          | (1,825 | ) | $ | (4,829 | ) |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Condensed Consolidating Statements of Cash Flows for the three months ended May 31, 2012**

(in thousands)

 
| ** **                                            | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                  |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| **Cash flows from operating   activities**            |       | $                                                                     | (39,008    | )                            | $          | (543                 | )          | $                | (2,404     | )         | $          | — |   | $ | (41,955 | ) |
| **Cash flows from investing   activities**            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Capital expenditures                                  |       | (13,965                                                               | )          | (417                         | )          | —               |       | —           |       | (14,382   | )          |
| Capitalized software                                  |       | (393                                                                  | )          | —                       |       | —               |       | —           |       | (393      | )          |
| Proceeds from sale of property, plant and   equipment |       | 221                                                                   |       | —                       |       | —               |       | —           |       | 221       |       |
| Change in cash value of life insurance                |       | (2,573                                                                | )          | —                       |       | —               |       | —           |       | (2,573    | )          |
| Change in restricted cash                             |       | 126                                                                   |       | —                       |       | (1                   | )          | —           |       | 125       |       |
| Net cash used in investing activities                 |       | (16,584                                                               | )          | (417                         | )          | (1                   | )          | —           |       | (17,002   | )          |
| **Cash flows from financing   activities**            |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Proceeds from revolving credit                        |       | 118,377                                                               |       | 486                          |       | —               |       | —           |       | 118,863   |       |
| Repayment of revolving credit                         |       | (170,383                                                              | )          | —                       |       | —               |       | —           |       | (170,383  | )          |
| Repayment of long-term debt                           |       | (152,652                                                              | )          | —                       |       | (116                 | )          | —           |       | (152,768  | )          |
| Payments on capital leases                            |       | (1,290                                                                | )          | —                       |       | —               |       | —           |       | (1,290    | )          |
| Proceeds from issuance of long-term debt              |       | 268,535                                                               |       | —                       |       | —               |       | —           |       | 268,535   |       |
| Debt issuance costs                                   |       | (14,062                                                               | )          | —                       |       | —               |       | —           |       | (14,062   | )          |
| Distribution to noncontrolling interest               |       | —                                                                |       | —                       |       | (438                 | )          | —           |       | (438      | )          |
| Net cash provided by (used in) financing   activities |       | 48,525                                                                |       | 486                          |       | (554                 | )          | —           |       | 48,457    |       |
| Net decrease in cash and cash equivalents             |       | (7,067                                                                | )          | (474                         | )          | (2,959               | )          | —           |       | (10,500   | )          |
| **Cash and cash equivalents**                         |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Beginning of period                                   |       | 7,106                                                                 |       | 476                          |       | 7,450                |       | —           |       | 15,032    |       |
| End of period                                         |       | $                                                                     | 39         |                         | $          | 2                    |       | $                | 4,491      |      | $          | — |   | $ | 4,532 |   |

 

**Condensed Consolidating Statements of Cash Flows for the three months ended May 31, 2011**

(in thousands)

 
| ** **                                             | ** ** | **New Enterprise   Stone & Lime   Co., Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non   Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------|------------|-----------|------------|
|                                                   |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| **Cash flows from operating   activities**             |       | $                                                                     | (40,756    | )                            | $          | 1,191                |       | $                | 868        |      | $          | — |   | $ | (38,697 | ) |
| **Cash flows from investing   activities**             |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Capital expenditures                                   |       | (10,788                                                               | )          | (1,210                       | )          | —               |       | —           |       | (11,998   | )          |
| Capitalized software                                   |       | (832                                                                  | )          | —                       |       | —               |       | —           |       | (832      | )          |
| Proceeds from sale of property, plant and   equipment  |       | 1,462                                                                 |       | —                       |       | —               |       | —           |       | 1,462     |       |
| Change in cash value of life insurance                 |       | (198                                                                  | )          | —                       |       | —               |       | —           |       | (198      | )          |
| Change in restricted cash                              |       | 390                                                                   |       | —                       |       | (8,750               | )          | —           |       | (8,360    | )          |
| Net cash used in investing activities                  |       | (9,966                                                                | )          | (1,210                       | )          | (8,750               | )          | —           |       | (19,926   | )          |
| **Cash flows from financing   activities**             |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Proceeds from revolving credit                         |       | 57,377                                                                |       | —                       |       | —               |       | —           |       | 57,377    |       |
| Repayment of revolving credit                          |       | (1,000                                                                | )          | —                       |       | —               |       | —           |       | (1,000    | )          |
| Repayment of long-term debt                            |       | (7,410                                                                | )          | —                       |       | (146                 | )          | —           |       | (7,556    | )          |
| Payments on capital leases                             |       | (1,441                                                                | )          | —                       |       | —               |       | —           |       | (1,441    | )          |
| Proceeds from issuance of long-term debt               |       | 4,000                                                                 |       | —                       |       | —               |       | —           |       | 4,000     |       |
| Debt issuance costs                                    |       | (684                                                                  | )          | —                       |       | —               |       | —           |       | (684      | )          |
| Distribution to noncontrolling interest                |       | —                                                                |       | —                       |       | (451                 | )          | —           |       | (451      | )          |
| Net cash provided by (used in) financing   activities  |       | 50,842                                                                |       | —                       |       | (597                 | )          | —           |       | 50,245    |       |
| Net increase (decrease) in cash and cash   equivalents |       | 120                                                                   |       | (19                          | )          | (8,479               | )          | —           |       | (8,378    | )          |
| **Cash and cash equivalents**                          |       |                                                                  |       |                         |       |                 |       |             |       |      |       |
| Beginning of period                                    |       | 5,058                                                                 |       | 1,472                        |       | 13,499               |       | —           |       | 20,029    |       |
| End of period                                          |       | $                                                                     | 5,178      |                         | $          | 1,453                |       | $                | 5,020      |      | $          | — |   | $ | 11,651 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**10**        **Subsequent Events**

 

*Amendment of ABL Facility*

 

The ABL Facility required the Company’s fiscal year 2012 audited annual financial statements to be filed on May 29, 2012 and the Company’s first quarter and second quarter financial statement to be filed on July 16, 2012 and on October 15, 2012, respectively.  The Company was unable to file the reports by the due dates as a result of complications in the ERP implementation and the material weaknesses in the Company’s internal controls over financial reporting previously reported in the Company’s filings with the Securities and Exchange Commission.

 

On December 7, 2012, the Company entered into the second amendment to the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013. There can be no guarantee the Company will not need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Secured Notes.

 

On September 7, 2012 the Company entered into the first amendment of the ABL Facility to change the required delivery date of the fiscal year 2012 audited annual financial statements and the required delivery date of its first and second quarter results and subsequently received extensions of those dates on September 28, 2012, November 9, 2012 and December 7, 2012 to extend the delivery date of its Annual Report on Form 10-K to December 15, 2012, its Quarterly report on Form 10-Q for the first quarter of the fiscal year 2013 to January 1, 2013 and its Quarterly report on Form 10-Q for the second quarter of the 2013 fiscal year to February 15, 2013.

 

As part of the first amendment entered into on September 7, 2012, the borrowing base formula became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility.  However, there have been no further modifications to the terms of the ABL Facility.

 

*Notices of Default*

 

On September 5, 2012, the Company received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, the Company received a notice of default from the trustee under the indenture for the Notes, each to the effect that the Company has failed to provide to the trustees its Annual Report on Form 10-K for the fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2012 in compliance with the indentures.  In accordance with the terms and conditions of indentures for the Secured Notes and Notes, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly report on Form 10-Q for the period ended May 31, 2012 and therefore has cured the defaults under the indentures. The Company has not received a notice of default related to the Secured Notes or Notes for the delay in filing its Quarterly report on Form 10-Q for the second quarter ended August 31, 2012.  If the Company fails to comply with its filing requirements, an event of default under the indentures will occur and the trustees may exercise all rights and remedies available including accelerating the indebtedness under the indentures as referenced in *Note 2, “Risks and Uncertainties”*.

 

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**ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Overview

 

We are a leading privately held, vertically integrated construction materials supplier and heavy/highway construction contractor in Pennsylvania and western New York and a national traffic safety services and equipment provider. Founded in 1924, we are one of the top 10 construction aggregates producers based on tonnage of crushed stone produced and one of the top 15 highway contractors based on revenues in the United States, according to industry surveys.

 

We operate in three segments based upon the nature of our products and services: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials operations are comprised of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production, and the production of concrete products, including precast/prestressed structural concrete components and masonry blocks. Another segment of our core businesses, heavy/highway construction, includes heavy construction, blacktop paving and other site preparation services. Our heavy/highway construction operations are primarily supplied with construction materials from our construction materials operation. Our third core business, traffic safety services and equipment, consists primarily of sales, leasing, and servicing of general and specialty traffic control and work zone safety equipment and devices to industrial construction end-users.

 

Market conditions remained challenging through the first quarter of fiscal year 2013.  Our business continues to be impacted by the slow pace of economic recovery and the continued pressure on state budgets which has limited state spending on public highway construction projects. The overall housing market remains weak and private non-residential construction is still experiencing a slow recovery.  Competition remains strong as a result of the weak public and private sector demand, with residential and commercial contractors bidding aggressively on projects, which continues to affect our profitability.  Our margins also remain under pressure as a result of higher fuel and liquid asphalt costs.  We expect that the challenges to our business environment will persist throughout the remainder of fiscal year 2013, which will continue to affect for some time our heavy/highway construction and traffic safety services and equipment businesses, which constitute a significant portion of our overall business.  We expect that these conditions will continue to negatively impact our financial position, results of operations, cash flows and liquidity throughout the remainder of fiscal year 2013.  To address these challenges, we are continuing our efforts to monitor and adjust our cost structure in our operating plants and control administrative and general spending. We also actively review our assets and properties on an ongoing basis for strategic disposals of lesser performing or non-core assets.

 

**Seasonality and Cyclical Nature of Our Business**

 

Almost all of our products are produced and consumed outdoors. Our financial results for any quarter do not necessarily indicate the results expected for the year because seasonal changes and other weather-related conditions can affect the production and sales volumes of our products.  Normally, the highest sales and earnings are in the second and third quarters and the lowest are in the first and fourth quarters. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, especially in the private sector. Our primary balance sheet accounts, such as accounts receivable and accounts payable, vary greatly during these peak periods, but return to historical levels as our operating cycle is completed each fiscal year.

 

**Components of Operating Results**

 

*Revenue*

 

We derive our revenues predominantly from the operations of our three core businesses: construction materials, heavy/highway construction and traffic safety services and equipment. Our construction materials business consists of aggregate production (crushed stone and construction sand and gravel), hot mix asphalt production, ready mixed concrete production and concrete products including precast/prestressed structural concrete components and masonry blocks. Our heavy/highway construction business primarily relates to heavy construction, blacktop paving and other site preparation services. Our traffic safety services and equipment business consists primarily of sales, leasing, and servicing of general and specialty traffic control and work zone equipment and devices, including traffic cones, flashing lights, barricades, plastic drums, arrow boards, construction signs and crash attenuators.

 

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The following is a summary of how we recognize revenue in our core businesses:

 

·                  **Construction materials.** We generally recognize revenue on the sale of construction materials and concrete products, other than specialized concrete beams, when they are shipped and the customer takes title and assumes risk of loss.  We account for the sale of specialized concrete beams under the units-of-production method. Under this method, the revenue is recognized as the units are produced under firm contracts.

 

·                  **Heavy/highway construction**. The Company recognizes revenue on construction contracts under the percentage-of-completion method of accounting, as measured by the cost incurred to date over estimated total cost. The typical contract life cycle for these projects can be up to two to four years in duration. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues and costs, which are recognized during the period in which the revisions are identified. Amounts attributable to contract claims are included in revenues when realization is probable and the amounts can be reasonably estimated. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are identified. Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred.  Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract revenue recognized to date over billings to date. Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of billings to date over the amount of revenue recognized to date.

 

·                  **Traffic safety services and equipment.** Our rental contract periods for our traffic safety equipment are daily, weekly or monthly and are recognized on a straight-line basis. We recognize revenues from the sale of rental equipment and new equipment at the time of delivery to, or pick-up by, the customer. We also recognize sales of contractor supplies at the time of delivery to, or pick-up by, the customer.

 

*Operating Costs and Expenses*

 

The key components of our operating costs and expenses consist of the following:

 

·                  **Cost of revenue**. Cost of revenue consists of all production and delivery costs related to our revenue and primarily includes all labor, raw materials, subcontractor costs, equipment rental and maintenance and manufacturing overhead. Our cost of revenue is directly impacted by fluctuations in commodity prices. As a result, our operating profit margins can be significantly impacted by the underlying cost of raw materials. We attempt to limit our exposure to changes in commodity prices by entering into purchase commitments when appropriate. In addition, we have sales price escalators in place for most public contracts and we aggressively seek to obtain escalators on private and commercial contracts.

 

·                  **Depreciation, depletion and amortization**. Our business is relatively capital-intensive.  We carry property, plant and equipment at cost on our balance sheet and assets under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the leased item. Provision for depreciation is generally computed over estimated service lives by the straight-line method.

 

The range of depreciable lives by fixed asset category is as follows:

 
| Land improvements                                 |   | 20 years       |   |
|---------------------------------------------------|--------|----------------|--------|
| Buildings, improvements, and capitalized software |   | 8 - 40 years   |   |
| Crushing, prestressing and manufacturing plants   |   | 5 - 33 years   |   |
| Contracting equipment                             |   | 3 - 12.5 years |   |
| Trucks and autos                                  |   | 3 - 8 years    |   |
| Office equipment                                  |   | 5 - 10 years   |   |

 

Depletable limestone deposits are reduced by cost depletion estimated on the basis of recoverable quantities of each quarry. Amortization expense is the periodic expense related to our other intangible assets, which were primarily acquired as part of the Stabler acquisition and the amortization of software cost related to our ERP system

 

·                  **Pension and profit sharing.** We participate in several multiemployer pension plans, which provide defined benefits to certain employees covered by labor union contracts. These amounts were determined by the union contracts and we do not administer or control the funds. We also maintain, for certain salaried and hourly employees, an investment plan under which eligible employees can invest various percentages of their earnings, matched by an employer contribution of up to 6.0%. We may make special voluntary contributions to all employees eligible to participate in the investment plan, 

 

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regardless of whether they contributed during the year. Additionally, we have two defined benefit pension plans covering certain union employees of one of our divisions located in Buffalo, New York.

 

·                  **Selling, administrative and general expenses**. Selling, administrative and general expenses consist primarily of salaries and personnel costs for our sales and marketing, administration, finance and accounting, legal, information systems and human resources employees. Additional expenses include marketing programs, consulting and professional fees, travel, insurance and other corporate expenses.

 

**RESULTS OF OPERATIONS**

 

The following table summarizes the operating results on a consolidated basis:

 
| ** **                                                    | ** ** | **Three Months Ended May 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                                       | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
|                                                          |       |                                               |       |   |   |
| Revenue                                                       |       | $                                                  | 157,981    |   | $ | 146,771 |   |
| Cost of revenue (exclusive of items shown   separately below) |       | 132,363                                            |       | 123,119 |   |
| Depreciation, depletion and amortization                      |       | 11,843                                             |       | 11,345 |   |
| Pension and profit sharing                                    |       | 1,841                                              |       | 1,715 |   |
| Selling, administrative and general expenses                  |       | 18,640                                             |       | 12,989 |   |
| Gain on sales of property and equipment                       |       | (35                                                | )          | (1,196 | ) |
| Operating loss                                                |       | (6,671                                             | )          | (1,201 | ) |
| Interest expense, net                                         |       | (22,930                                            | )          | (11,596 | ) |
| Loss before income taxes                                      |       | (29,601                                            | )          | (12,797 | ) |
| Income tax benefit                                            |       | (11,487                                            | )          | (8,235 | ) |
| Net Loss                                                      |       | $                                                  | (18,114    | ) | $ | (4,562 | ) |

 

The tables below disclose revenue and operating profit data for our reportable segments on a gross basis. We include inter-segment sales in our comparative analysis of revenue at the product line level and this presentation is consistent with the basis on which we review results of operations.  Revenue and operating expenses exclude intersegment sales and delivery revenues and costs. We also operate ancillary port operations and certain rental operations, which are included in our other non-core business operations line items presented below. We include all non-allocated operating costs in the inter-segment eliminations line item presented below.

 
| ** **                            | ** ** | **Three Months Ended May 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**               | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
|                                  |       |                                               |       |   |   |
| **Revenue:**                          |       |                                               |       |   |   |
| Construction materials                |       | $                                                  | 122,282    |   | $ | 104,487 |   |
| Heavy/highway construction            |       | 53,983                                             |       | 51,411 |   |
| Traffic safety services and equipment |       | 24,399                                             |       | 21,961 |   |
| Other revenues                        |       | 3,722                                              |       | 2,833 |   |
| Segment totals                        |       | 204,386                                            |       | 180,692 |   |
| Inter-segment eliminations            |       | (46,405                                            | )          | (33,921 | ) |
| Total net revenue                     |       | $                                                  | 157,981    |   | $ | 146,771 |   |

 

The following tables summarize the percentage of revenue and the operating profit by our primary lines of business:

 
| ** **                            | ** ** | **Three Months Ended May 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
| ** **                            | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Revenue:**                          |       |                                               |       |   |   |
| Construction materials                |       | 59.8                                               | %          | 57.8 | % |
| Heavy/highway construction            |       | 26.4                                               | %          | 28.5 | % |
| Traffic safety services and equipment |       | 11.9                                               | %          | 12.2 | % |
| Other revenues                        |       | 1.9                                                | %          | 1.5 | % |
| Gross sales and other revenues        |       | 100.0                                              | %          | 100.0 | % |

 

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| ** **                            | ** ** | **Three Months Ended May 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**               | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
|                                  |       |                                               |       |   |   |
| **Operating profit (loss)**           |       |                                               |       |   |   |
| Construction materials                |       | $                                                  | 3,982      |   | $ | 2,129 |   |
| Heavy/highway construction            |       | (1,636                                             | )          | (2,148 | ) |
| Traffic safety services and equipment |       | (463                                               | )          | 227 |   |
| Other non-core business operations    |       | (828                                               | )          | (201 | ) |
| Segment totals                        |       | 1,056                                              |       | 7 |   |
| Corporate and unallocated             |       | (7,726                                             | )          | (1,208 | ) |
| Total operating loss                  |       | $                                                  | (6,671     | ) | $ | (1,201 | ) |

 

***Three Months Ended May 31, 2012 Compared to Three Months Ended May 31, 2011***

 

*Revenue*

 

Revenue for our construction materials business increased $17.8 million, or 17.0%, to $122.3 million for the three months ended May 31, 2012 compared to $104.5 million for the three months ended May 31, 2011. The increase in revenue in our construction materials business was primarily attributable to the increase in sales of aggregates, hot mix asphalt and ready mixed concrete in the amount of $7.1 million, $6.4 million and $4.1 million, respectively. Sales volumes of aggregates increased 8.7% to 4.5 million tons shipped and consumed and the average price per ton shipped and consumed increased 6.0% to $11.99 for the period. Sales volumes of ready mixed concrete increased 21.8% to 139 thousand cubic yards shipped and consumed and the average price per cubic yard shipped and consumed increased 8.2% to $122.92 for the three months ended May 31, 2012.  Sales volumes of hot mix asphalt increased 17.9% to 0.7 million tons shipped and consumed while the average price per ton shipped and consumed increased 2.2% to $54.17 for the period.  The price and demand for our materials is largely based upon local markets and varies across the Company.  The overall increase in sales volume of materials was attributable to a warmer spring compared to prior year as well as increased heavy/highway sales.

 

Revenue for our heavy/highway construction business increased $2.6 million, or 5.1%, to $54.0 million for the three months ended May 31, 2012 compared to $51.4 million for the three months ended May 31, 2011. The increase was attributable to favorable weather conditions which allowed for projects to begin earlier than in the prior year.

 

Revenue for our traffic safety services and equipment businesses increased $2.4 million, or 10.9%, to $24.4 million for the three months ended May 31, 2012 compared to $22.0 million for the three months ended May 31, 2011.  The increase was the result of an increase in highway safety equipment sales, which was offset by a decrease in rental service activity.  The increase in equipment sales for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 can be attributed primarily to the continued benefits associated with the enhancement of our product offerings of trailer products and a redesigned barrel product which has allowed us to enter the market at varying price points.  Overall rental service activity decreased for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 primarily as the result of the decrease in equipment rentals to third parties associated with Marcellus Shale natural gas extraction activities.

 

*Cost of Revenue*

 

Cost of revenue increased $9.3 million, or 7.6%, to $132.4 million for the three months ended May 31, 2012 compared to $123.1 million for the three months ended May 31, 2011.  Cost of revenue as a percentage of revenue for the three months ended May 31, 2012 was 83.8% compared to 83.9% in the three months ended May 31, 2011. The overall increase in cost of revenue was due to increased sales.

 

*Depreciation, Depletion and Amortization*

 

Depreciation, depletion and amortization increased $0.5 million, or 4.4%, to $11.8 million for the three months ended May 31, 2012 compared to $11.3 million for the three months ended May 31, 2011. Annual depreciation percentage rates vary from approximately 3% to 33% for the three months ended May 31, 2012 and May 31, 2011, respectively. The increase in depreciation, depletion and amortization expense is primarily related to new assets placed in service. Amortization of Other intangible assets and Capitalized software for the three months ended May 31, 2012 was $0.4 million compared to $0.2 million for the three months ended May 31, 2011.

 

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*Selling, Administrative and General Expenses*

 

Selling, administrative and general expenses increased $5.6 million, or 43.1%, to $18.6 million for the three months ended May 31, 2012 compared to $13.0 million for the three months ended May 31, 2011.  The increase in selling, administrative and general expenses when compared to the three months ended May 31, 2011 is attributable primarily to $3.1 million of costs associated with the efforts to correct issues associated with our ERP. The remaining increase was attributable to increased costs associated with a warm spring, compliance and reporting.

 

*Operating Profit or Loss*

 

Operating profit for our construction materials business increased $1.9 million, or 90.5%, to $4.0 million for the three months ended May 31, 2012, compared to $2.1 million for the three months ended May 31, 2011. Operating profit as a percentage of construction materials revenue for the three months ended May 31, 2012 was 3.3% compared to 2.0% for the three months ended May 31, 2011. Profit related to the sale of aggregates decreased $0.1 million, or 3.3%, to $2.9 million for the three months ended May 31, 2012 compared to $3.0 million for the three months ended May 31, 2011. Profit related to the sale of hot mix asphalt increased $1.1 million to $0.6 million for the three months ended May 31, 2012, compared to a loss of $0.5 million for the three months ended May 31, 2011.  Profit related to the sale of ready mixed concrete increased $1.2 million for the three months ended May 31, 2012 from break even in the prior year quarter. The price and demand for our materials is largely based upon local markets and varies across the Company. The increase in profit for construction materials was primarily attributable to increased volumes as a result of the warm spring.

 

Operating loss for our heavy/highway construction business decreased $0.5 million, or 23.8%, to $1.6 million for the three months ended May 31, 2012 compared to a loss of $2.1 million for the three months ended May 31, 2011.  Operating loss as a percentage of heavy/highway construction revenue for the three months ended May 31, 2012 was 3.0% compared to 4.2% for the three months ended May 31, 2011. The decrease in operating loss for the first quarter is primarily attributable to the increased amount of work completed during the first quarter due to the warm spring.

 

Operating results for our traffic safety services and equipment businesses decreased $0.7 million to a loss of $0.5 million for the three months ended May 31, 2012 compared to a profit of $0.2 million for three months ended May 31, 2011.  Operating results as a percentage of traffic safety services and equipment revenue for the three months ended May 31, 2012 was a loss of 1.9% compared to a profit of 1.0% for the three months ended May 31, 2011.  The decrease in operating profit for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 is attributable to a decrease in rental service activity.  The decrease in rental service activity was due to a decrease in equipment rentals to third parties involved in Marcellus Shale natural gas extraction activities.

 

*Interest Expense, net*

 

Net interest expense was $22.9 million for the three months ended May 31, 2012 compared to $11.6 million for the three months ended May 31, 2011. For the three months ended May 31, 2012, we recognized a $6.4 million loss on extinguishment of debt associated with the write-off of unamortized deferred financing fees. The remaining increase in interest expense for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 was attributable to higher interest rates associated with the $265.0 million of Secured Notes issued on March 15, 2012.

 

*Income Tax Benefit*

 

Income tax benefit increased $3.3 million to $11.5 million for the three months ended May 31, 2012 compared to $8.2 million for the three months ended May 31, 2011. The increase in tax benefit is the result of a decline in the annual projected pre-tax book earnings for the Company for the current fiscal year, when compared to projected annual pre-tax book earnings for the Company in May 2011, the impact of permanent differences, primarily percentage depletion, resulting in an increase to the Company’s expected effective tax benefit for the year, as well as the impact of a valuation allowance being recorded against certain state net operating losses and federal deferred tax assets. The impact on the Company’s permanent differences can be significant when the Company’s operating results are declining. We estimate our annual tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the anticipated annual rate. As the year progresses, we refine our estimate of the year’s taxable income as new information becomes available, such as year-to-date financial results.  This continuous estimation process may result in a change to our expected effective tax rate for the year.  When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective interim tax rate.  There may be large swings on a quarterly basis due to the seasonal nature of the Company’s business.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of liquidity include cash and cash equivalents, cash from operations and amounts available for borrowing under our credit facilities. As of May 31, 2012, we had $4.5 million in cash and cash equivalents and working capital of $186.3 million as compared to $15.0 million in cash and cash equivalents and working capital of $171.5 million as of February 29, 2012.  During the three months ended May 31, 2012, we began managing our cash and cash equivalents through a cash pooling arrangement with a single financial institution, which has resulted in lower overall cash and cash equivalents balances as excess cash is applied daily to our ABL Facility.

 

Given the nature and seasonality of our business, we typically experience significant fluctuations in working capital needs and balances during our peak summer season; these amounts are converted to cash over the course of our normal operating cycle.

 

Restricted cash balances of $10.2 million and $10.3 million as of May 31, 2012 and February 29, 2012, respectively, were restricted in certain consolidated subsidiaries for bond sinking fund and insurance requirements, as well as collateral on outstanding letters of credit or rentals.

 

Operating losses incurred during our most recent fiscal year as well as reductions in our cash flow generated by operations have resulted in an increase in interest expense due to higher debt levels along with an increase in overall interest rates, which is attributable primarily to the issuance of our Secured Notes on March 15, 2012 and the existing Notes.

 

On March 15, 2012, the Company completed the sale of its Secured Notes at par.  In connection with the sale of the Secured Notes, the Company also entered into a new ABL Facility. The Company utilized the proceeds from the sale of the Secured Notes and the new ABL Facility to repay all amounts outstanding under, and terminate the Credit Agreement and certain other debt.

 

As of May 31, 2012, the total borrowings under the ABL Facility were approximately $44.1 million with a borrowing base of $163.0 million. On September 7, 2012, we entered into the first amendment to the ABL Facility. Among certain other things, the amendment changed the reserve percentages used for calculating the borrowing base.  If the September 7, 2012 amendment were in place as of May 31, 2012, the borrowing base would have been $132.9 million.

 

We believe that we have sufficient financial resources, including cash and cash equivalents, cash from operations and available borrowings under our ABL Facility, to fund our business and operations for at least the next twelve months, including capital expenditures and debt service obligations. However, in the past we have failed to meet certain operating performance measures as well as the financial covenant requirements set forth under our previous credit facilities, which resulted in the need to obtain several amendments and we cannot guarantee that we will be able to comply with our covenants in the future. Any default under our ABL Facility, the indenture for our Notes, or the indenture for our Secured Notes would result in a cross-default and acceleration of indebtedness under the other.

 

On September 5, 2012, we received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, we received a notice of default from the trustee under the indenture for the Notes, each to the effect that we had failed to provide to the trustee our Annual Report on Form 10-K for our fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for our fiscal quarter ended May 31, 2012 in compliance with the indentures. In accordance with the terms and conditions of the indentures for the Secured Notes and the Notes, we had 120 days from the date of those notices to cure such default by providing the required filings. We filed our Annual Report on Form 10-K for the year ended February 29, 2012 and our Quarterly Report on Form 10-Q for the period ended May 31, 2012 and therefore have cured the defaults under the indentures. We have not received a notice of default related to the Secured Notes or Notes for the delay in filing our Quarterly Report on Form 10-Q for the second quarter ended August 31, 2012.

 

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*Cash Flows*

 

The following table summarizes our net cash provided by or used by operating activities, investing activities and financing activities and our capital expenditures for the three months ended May 31, 2012 and May 31, 2011.

 
| ** **                         | ** ** | **Three Months Ended May 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **2012**                                           | ** ** | **2011** | ** ** |
| Net cash provided by (used in):    |       |                                               |       |   |   |
| Operating activities               |       | $                                                  | (41,955    | ) | $ | (38,697 | ) |
| Investing activities               |       | (17,002                                            | )          | (19,926 | ) |
| Financing activities               |       | 48,457                                             |       | 50,245 |   |
| Cash paid for capital expenditures |       | (14,775                                            | )          | (12,830 | ) |
|                                    |            |                                                    |            |  |  |  |  |

 

*Operating Activities*

 

Net cash used in operating activities was $ 42.0 million for the three months ended May 31, 2012 compared to net cash used in operating activities of $38.7 million for the three months ended May 31, 2011, resulting in an increase of $3.3 million of cash used in operating cash flows.  The cash used in operating activities increased primarily as the result of less cash generated from operations and was partially offset by working capital items, as compared to the three months ended May 31, 2011.

 

*Investing Activities*

 

Net cash used in our investing activities decreased $2.9 million to $ 17.0 million in the three months ended May 31, 2012 compared to $19.9 million in the three months ended May 31, 2011.  Net cash used in investing activities for the three months ended May 31, 2012 compared to the three months ended May 31, 2011 decreased due to the fiscal year 2012 commitment of $8.8 million of cash collateral related to our captive insurance arrangement.

 

*Financing Activities*

 

Net cash provided by financing activities decreased $1.7 million to $ 48.5 million in the three months ended May 31, 2012 compared to $50.2 million in the three months ended May 31, 2011.  Net cash provided by our financing activities in the three months ended May 31, 2012 were primarily driven by the March 15, 2012 refinancing, which included a new ABL Facility and $265.0 million in Secured Notes which was offset by the repayment of our previous first lien term loan A & B, first lien revolving credit facility and other long-term debt.  Financing activity during the three months ended May 31, 2011 was primarily driven by a net $56.4 million of borrowings on our former line of credit.

 

*Capital Expenditures*

 

Cash capital expenditures increased $2.0 million to $ 14.8 million for the three months ended May 31, 2012 compared to $12.8 million in the three months ended May 31, 2011. Cash and noncash capital expenditures were $15.2 million and $13.0 million as of May 31, 2012 and 2011, respectively. Cash and noncash capital expenditures increased approximately $2.2 million primarily as the result of increased spending on existing manufacturing and other plant related equipment as well as increased purchases of other equipment.

 

**Our Indebtedness**

 

**Refinancing Transactions**

 

On March 15, 2012, we completed the sale of our Secured Notes at par.  In connection with the sale of the Secured Notes, we also entered into a new $170.0 million ABL Facility.  We utilized the proceeds from the sale of the Secured Notes and the new ABL Facility to repay all amounts outstanding under, and terminated the Credit Agreement and certain other debt.  In our consolidated balance sheet as of February 29, 2012, we classified the components of debt refinanced on March 15, 2012 as long-term.

 

**Asset-Based Loan Facility**

 

As noted in the Refinancing section above, we entered into a new ABL Facility with M&T, as the issuing bank, a lender, the swing lender, the agent and the arranger. The ABL Facility provides for maximum borrowings on a revolving basis of up to 

 

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$170.0 million from time to time for general corporate purposes, including working capital. The ABL Facility includes a $15.0 million letter of credit sub-facility and a $20.0 million swing line sub-facility for short-term borrowings. The ABL Facility will mature on March 15, 2017.

 

Borrowings under the ABL Facility will be classified as long-term debt due to our ability to extend borrowings at the end of each borrowing period.

 

Borrowings under the ABL Facility (except swing line loans) bear interest at a rate per annum equal to, at the Company’s option to draw on a sub-facility, either (a) a base rate or (b) a LIBOR rate, in each case plus an applicable margin.  Swing line loans bear interest at the base rate plus the applicable margin. Pricing on the ABL Facility is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. LIBOR margins for the ABL Facility range from 2.50% to 3.50% and base rate margins range from 0.50% to 1.50%.  The ABL Facility also contains a commitment fee that is tied to the quarterly average Excess Availability, as defined in the ABL Facility Agreement. The commitment fee ranges from 0.25% to 0.63%.  From the commencement of this ABL Facility Agreement until August 31, 2012, the LIBOR margin will be 2.75%, the base rate margin was 1.25% and the commitment fee is 0.50%.  The Company classified borrowings under the ABL Facility as long-term as a result of the March 15, 2017 maturity date and the revolving nature of the ABL Facility.

 

Borrowings under the ABL Facility are guaranteed by the Company’s subsidiaries that guarantee the Secured Notes and Notes and are secured, subject to certain permitted liens, by first-priority liens on the ABL Priority Collateral and by second priority liens on the collateral securing the Secured Notes on a first-priority basis, except for certain real property.

 

*Covenants*

 

The ABL Facility provides that if excess availability is less than the greater of (i) $25.0 million or (ii) 15% of the lesser of the commitments and the borrowing base, the Company must comply with a minimum fixed charge coverage ratio test of at least 1.0 to 1.0 for the immediately preceding four fiscal quarters or twelve consecutive months, as applicable. In addition, the ABL Facility includes customary affirmative and negative covenants that, subject to significant exceptions, limit the ability of the Company and the Guarantors to undertake certain actions, including, among other things, limitations on (i) the incurrence of indebtedness and liens, (ii) asset sales, (iii) dividends and other payments with respect to capital stock, (iv) acquisitions, investments and loans, (v) affiliate transactions, (vi) altering the business, (vii) issuances of equity that have mandatory redemption or put rights prior to the maturity of the ABL Facility and (viii) providing negative pledges to third parties.

 

*Amendment of ABL Facility*

 

The ABL Facility contained a covenant that required the Company to deliver its fiscal year 2012 annual financial statements to the lender by May 29, 2012.  On September 7, 2012 the Company entered into the first amendment to the ABL Facility, and subsequent letters on September 28, 2012, November 9, 2012, and December 7, 2012 to change the required delivery date of the audited February 29, 2012 financial statements and the required delivery date of its first and second quarter results and financial statements to December 15, 2012, January 1, 2013, and February 15, 2013, respectively.

 

Availability under the ABL Facility is restricted to a borrowing base formula. As part of the first amendment entered into on September 7, 2012, the borrowing base formula under the ABL Facility became subject to adjustment based on the most recent Fixed Charge Coverage Ratio.  If the calculation of the Fixed Charge Coverage Ratio was less than 1.0 to 1.0, the borrowing base would be equal to the sum of (a) the lesser of (i) $56.0 million (from $65 million) and (ii) 65% (from 75%) of the appraised value of the eligible real property plus (b) 70% (from 85%) of the outstanding balance of eligible accounts receivable plus (c) 40% (from 60%) of eligible inventory, minus (d) reserves imposed by the agent of the ABL Facility in the exercise of reasonable business judgment from the perspective of a secured asset-based lender, minus (e) reserves imposed by the agent to the ABL Facility with respect to branded inventory in its sole discretion.

 

The first amendment also allows M&T, in the event M&T is unable to reduce its final participation in the ABL Facility to no more than $75.0 million during the primary syndication of the ABL Facility by December 15, 2012, to add or modify terms of the ABL Facility that were previously prohibited from being added or modified, including but not limited to the advance rates, and certain covenants and the interest and fees payable.  M&T has not syndicated the ABL Facility. However, there have been no further modifications of the terms of the ABL Facility.

 

On December 7, 2012, the Company entered into the second amendment of the ABL Facility to change the required January 14, 2013 delivery date of its third quarter Form 10-Q to March 15, 2013. There can be no guarantee the Company will not

 

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need to obtain similar amendments in the future. A failure to obtain such amendment could result in an acceleration of the Company’s indebtedness under the ABL Facility and a cross-default under the Company’s other indebtedness, including the Notes.

 

**Secured Notes due 2018**

 

Interest on the Secured Notes will initially be payable at 13.0% per annum, semi-annually in arrears on March 15 and September 15, commencing on September 15, 2012. The Company will make each interest payment to the holders of record of the Secured Notes as of the immediately preceding March 1 and September 1. The Company used the proceeds from this offering to repay certain existing indebtedness and to pay related fees and expenses.  The Secured Notes will mature on March 15, 2018.

 

With respect to any interest payment date on or prior to March 15, 2017, the Company may, at its option, elect (an ‘‘Interest Form Election’’) to pay interest on the Secured Notes (i) entirely in cash (‘‘Cash Interest’’) or (ii) subject to any Interest Rate Increase (as defined below), initially at the rate of 4% per annum in cash (‘‘Cash Interest Portion’’) and 9% per annum by increasing the outstanding principal amount of the Secured Notes or by issuing additional paid in kind notes under the indenture on the same terms as the Secured Notes (‘‘PIK Interest Portion’’ or “PIK Interest”); provided that in the absence of an Interest Form Election, interest on the Secured Notes will be payable as PIK Interest.  At May 31, 2012 $5.0 million of accrued PIK interest was recorded as a long-term liability in Other liabilities.

 

The indenture for the Secured Notes contains restrictive covenants that limit our ability and the ability of our subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with affiliates.

 

*Notices of Default*

 

On September 5, 2012, the Company received a notice of default from the trustee under the indenture for the Secured Notes, and on September 6, 2012, the Company received a notice of default from the trustee under the indenture for the Notes, each to the effect that the Company has failed to provide to the trustees its Annual Report on Form 10-K for the fiscal year ended February 29, 2012 and Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2012 in compliance with the indentures.  In accordance with the terms and conditions of indentures for the Secured Notes and Notes, the Company had 120 days from the date of those notices to cure such default by complying with its reporting requirements and related filings.  The Company filed its Annual Report on Form 10-K for the year ended February 29, 2012 and its Quarterly report on Form 10-Q for the period ended May 31, 2012 and therefore has cured the defaults under the indentures. The Company has not received a notice of default related to the Secured Notes or Notes for the delay in filing its Quarterly report on Form 10-Q for the second quarter ended August 31, 2012.  If the Company fails to comply with its filing requirements, an event of default under the indentures will occur and the trustees may exercise all rights and remedies available including accelerating the indebtedness under the indentures as referenced in Note 2, “Risks and Uncertainties”.

 

**Notes due 2018**

 

In August 2010, the Company sold $250.0 million aggregate principal amount of Notes at par value.  Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year.

 

The Notes are subject to redemption in whole or in part, at any time on or after September 1, 2014 at certain redemption prices specified in the indenture for the Notes. The Company may also at any time before September 1, 2013 at its option redeem up to 35% of the Notes with the net cash proceeds from certain equity offerings. The Company may also redeem some or all of the Notes at any time prior to September 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest on the existing notes plus a make-whole premium defined in the indenture for the Notes. In addition, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon a change of control. The Notes are senior unsecured notes guaranteed on a joint and several basis on a senior unsecured basis by each of the Company’s subsidiaries that guarantees payments of the Company’s indebtedness under the ABL Facility and the Secured Notes.

 

The indenture for the Notes contains restrictive covenants that limit the Company’s ability and the ability of its subsidiaries that are restricted under the indenture to, among other things, incur additional debt, pay dividends or make distributions, repurchase capital stock or make other restricted payments, make certain investments, incur liens, merge, amalgamate or 

 

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consolidate, sell, transfer, lease or otherwise dispose of all or substantially all assets and enter into transactions with its affiliates.

 

**Land and Equipment Obligations**

 

The Company has various notes, mortgages and other financing arrangements resulting from the purchase of principally land and equipment.  All loans provide for at least annual payments, which include interest ranging up to 10.0% per annum.  Principally all loans are secured by the land and equipment acquired.

 

Obligations include three revenue bonds, as of May 31, 2012 to different industrial development authorities with counties in Pennsylvania with a total outstanding of $6.2. The Company prepaid $3.8 million of industrial development bonds during the first quarter of fiscal year 2012 with the proceeds from an unsecured borrowing which was subsequently refinanced on March 15, 2012.

 

**Changes in Future Contractual Obligations**

 

There were no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt and Contractual Obligations”.

 

**Off Balance Sheet Arrangements**

 

We utilize off-balance sheet arrangements in our outstanding letters of credit associated with our industrial development authority bonds totaling $8.9 million and $14.5 million at May 31, 2012 and February 29, 2012, respectively, which were not included in our Consolidated Balance Sheets.

 

**Critical Accounting Policies and Significant Judgments and Estimates**

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

 

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, product warranties, taxes and goodwill and intangible assets. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to Note 1 “*Summary of Significant Accounting Policies*” as reported in our notes to our financial statements for the fiscal year ended February 29, 2012 as filed as part of the Company’s Annual Report on Form 10-K and our financial statements herein.

 

***Recently Issued Accounting Standards***

 

Refer to Note 1, “Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of recent accounting guidance and pronouncements.

 

***Forward-looking Statements***

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify certain forward-looking statements by our use of forward-looking terminology such as, but not limited to, “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “likely,” “will,” “would,” “could” and similar expressions that identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some

 

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or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

·                  risks associated with the cyclical nature of our business and dependence on activity within the construction industry;

 

·                  declines in public sector construction and reductions in governmental funding which could continue to adversely affect our operations and results;

 

·                  our reliance on private investment in infrastructure and a slower than normal recovery which continue to adversely affect our results;

 

·                  a decline in the funding of PennDOT, the Pennsylvania Turnpike Commission, the New York State Thruway or other state agencies;

 

·                  difficult and volatile conditions in the credit markets may adversely affect our financial position, results of operations and cash flows;

 

·                  our ability to amend, extend or enter into new financing arrangements to refinance our existing financing arrangements and to generate a sufficient amount of cash to service our existing indebtedness, the notes and fund our operations

 

·                  the risk of default on our existing and future indebtedness which may or may not result in an acceleration of our indebtedness thereunder

 

·                  the potential to inaccurately estimate the overall risks, requirements or costs when we bid on or negotiate a contract that is ultimately awarded to us, which may result in a lower than anticipated profit or incurrence of a loss on the contract;

 

·                  the weather and seasonality;

 

·                  our operation in a highly competitive industry within our local markets;

 

·                  our dependence upon securing and permitting aggregate reserves in strategically located areas;

 

·                  risks related to our ability to acquire other businesses in our industry and successfully integrate them with our existing operations;

 

·                  risks associated with our capital-intensive business;

 

·                  risks related to our ability to meet schedule or performance requirements of our contracts;

 

·                  changes to environmental, health and safety laws;

 

·                  our dependence on our senior management;

 

·                  the potential risks if we are unable to recruit additional management and other personnel and are not able to grow our business effectively or successfully implement our growth plans;

 

·                  the potential for labor disputes to disrupt operations of our businesses;

 

·                  special hazards related to our operations that may cause personal injury or property damage;

 

·                  unexpected self-insurance claims and reserve estimates;

 

·                  material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications;

 

·                  material weaknesses and significant deficiencies in our internal controls over financial reporting;

 

·                  cancellation of significant contracts or our disqualification from bidding for new contracts;

 

·                  general business and economic conditions, particularly an economic downturn; and

 

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·                  the other factors discussed under Item 1A-Risk Factors in our Annual Report on Form 10-K for our fiscal year ended February 29, 2012.

 

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

**ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We have exposure to financial market risks, including changes in commodity prices, interest rates and other relevant market prices.

 

**Commodity Price Risk**

 

We are subject to commodity price risk with respect to price changes in energy, including fossil fuels, electricity and natural gas for production of hot mix asphalt and cement and diesel fuel for distribution and production related vehicles. We attempt to limit our exposure to changes in commodity prices by putting sales price escalators in place for most public contracts, and we aggressively seek to obtain escalators on private and commercial contracts.

 

**Interest Rate Risk**

 

We are subject to interest rate risk in connection with borrowings under our indebtedness.  As of May 31, 2012, we have $44.1 million in indebtedness outstanding under our ABL Facility subject to variable interest rates.  Each change of 0.125% in interest rates would result in an approximate $0.1 million change in our annual interest expense in total on our ABL Facility.  Any debt we incur in the future could also bear interest at floating rates.

 

**ITEM 4 — CONTROLS AND PROCEDURES**

 

This report includes the certifications attached as Exhibits 31.1 and 31.2 of our CEO and CFO required by Rule 13a-14 of the Exchange Act.  This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

 

***Evaluation of Disclosure Controls and Procedures***

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.  Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2012.  Based upon that evaluation and the material weaknesses and control deficiencies which are described in detail in Item 9A-Controls and Procedures in our Annual Report on Form 10-K, our CEO and CFO concluded that, as of May 31, 2012, our disclosure controls and procedures were not effective as the result of the material weaknesses and control deficiencies identified in our Annual Report on Form 10-K.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that:

 

(i)            pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii)           provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and

 

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(iii)          provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for the year ended February 29, 2012, management identified certain material weaknesses in our internal control over financial reporting as of February 29, 2012. The material weaknesses are as follows:

 

·      We did not maintain effective controls over the implementation of a new enterprise resource planning system “ERP.”.  Specifically, we did not implement appropriate logical security design and testing, perform sufficient data conversion testing, maintain appropriate system documentation, or provide sufficient end user training. This material weakness contributed to other deficiencies, some of which have resulted in additional material weaknesses, as further described below.

 

·      We did not implement appropriate information technology controls related to change management, data integrity, access and segregation of duties. This material weakness resulted in both not having adequate automated and manual controls designed and in place and not achieving the intended operating effectiveness of controls to ensure accuracy of our financial reporting.

 

·      We did not maintain effective controls over the recording of journal entries, both recurring and non-recurring. Specifically, effective controls were not in place to ensure that journal entries were properly prepared, included sufficient supporting documentation, or were reviewed and approved to ensure the validity, accuracy and completeness of the journal entries. This material weakness resulted in additional procedures performed by management and contributed to other deficiencies, some of which have resulted in additional material weaknesses and adjustments during the fiscal 2012 year-end financial closing process, as further described below.

 

·      We did not maintain effective controls over the recording of intercompany transactions. Specifically, effective controls were not in place to ensure that intercompany balances were properly reconciled and eliminated on a timely basis. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls over accounting for contracts. Specifically, we did not design and maintain effective controls over the reconciliation of contract billings and accruals to the general ledger, or formally analyze the recognition of contract revenue, profit and loss. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls to ensure the completeness and accuracy of recorded revenue.  Specifically, we did not design and maintain effective controls over pricing, billing practices and credit memos. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls to ensure the completeness, accuracy, cutoff and valuation of accounts receivable.  Specifically, we did not timely reconcile accounts receivable balances and did not implement and maintain a formal review process. Further, we did not have a formal process in place to determine and appropriately assess the adequacy of accounts receivable valuation reserves. There also is no required formal approval process to determine and write-off uncollectible account balances. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls over the completeness and accuracy of property, plant and equipment and related depreciation expense. Specifically, we did not design and maintain effective controls to ensure that assets are properly capitalized on the Company’s books. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls over the completeness and accuracy of our accounting estimates related to inventory reserves.  Specifically, we did not design and maintain effective controls with respect to the review and 

 

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analysis of excess and obsolete inventory and lower of cost or market considerations. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·      We did not maintain effective controls over the estimation process related to changes in asset retirement obligations and related activity. Specifically, we did not design and maintain effective controls to ensure that changes in asset retirement obligations were properly estimated and recorded timely on our books. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls over the completeness, accuracy and cutoff of our inventory counts.  Specifically, we did not design and maintain effective controls and policies with respect to physical inventory counting procedures, including the appropriate level of review. We also did not capitalize inventory variances for materials, labor, and overhead. This material weakness resulted in adjustments identified through additional procedures performed by management and audit adjustments recorded in 2012.

 

·      We did not maintain effective controls to ensure the completeness and timely recording of accounts payable and accrued liabilities. Specifically, we did not timely reconcile accounts payable and accrued liabilities or properly accrue for invoices payable in the period.  This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not maintain effective controls over the completeness, accuracy and valuation of our deferred tax assets and liabilities.  Specifically, we did not design and maintain effective controls with respect to accounting for the difference between the book and tax bases of the company’s property, plant and equipment and capital leases. This material weakness resulted in additional procedures performed by management and adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      We did not adequately segregate the duties of personnel within our Accounting Department, including those related to cash management, payroll processing, accounts payable processing, and accounts receivable and general ledger maintenance, due to an insufficient complement of staff.

 

Despite the fact that we are not required to and have not completed an assessment of the effectiveness of the Company’s internal control over financial reporting, as a result of the foregoing material weaknesses, we believe we identified control deficiencies that individually and in aggregate also constituted material weaknesses in our internal control over financial reporting as of February 29, 2012, as described below:

 

We did not maintain an effective control environment primarily attributable to the following:

 

·      We did not maintain an effective control environment that consistently emphasized adherence to GAAP.  This control deficiency, in certain instances, led to adjustments during the fiscal 2012 year-end financial closing and reporting process.

 

·      In certain areas (finance, tax, accounting and information technology departments), we did not maintain effective controls to ensure a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements.

 

·      We did not maintain effective controls to ensure complete and accurate business documentation to support certain transactions and accounting records.  The controls in these areas with respect to the creation, maintenance and retention of complete and accurate business records were not effective.

 

·      We did not design or maintain effective controls relating to policies and procedures to adequately review and account for significant accounting transactions. Specifically, we did not maintain and communicate sufficient and consistent accounting policies, which limited our ability to make accounting decisions and to detect and correct accounting errors.  This deficiency contributed to other control deficiencies, some of which have resulted in material weaknesses.

 

·      We do not maintain an internal audit or similar function. This deficiency resulted in not having an adequate independent, objective body to assess, monitor, and evaluate the intended operating effectiveness of controls or to conduct operational audits for the identification of recommendations to improve operating effectiveness of the organization.

 

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·      We did not maintain effective monitoring of controls in certain areas, for example in areas related to period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·      We did not maintain effective controls over risk assessments. Specifically, we did not maintain processes to evaluate certain business and fraud risks. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·      We did not maintain effective control activities in certain areas, including period-end financial reporting process, revenue recognition, cash, contracts, inventory, property, plant and equipment and estimates in accruals. Specifically, we did not maintain formal policies and procedures in several of the major areas that would help to ensure that management directives are carried out appropriately. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

·      We did not maintain effective controls over information and communication, specifically around reports and financial data, as we had several issues with our system implementation.  Thus, we had issues in providing the identification, capture, and exchange of information in a form and time frame that enabled our employees to carry out their responsibilities.  Specifically, due to the system implementation, there were issues revolving around the actual information/reports provided, which proved to be a pervasive issue. This deficiency resulted from either not having adequate controls designed and in place or not achieving the intended operating effectiveness of controls.

 

Misstatements could result in substantially all of the accounts and disclosures associated with the material weaknesses described above and as a result a material misstatement in our annual or interim consolidated financial statements would not be prevented or detected in a timely manner. Management has performed procedures designed to ensure the reliability of our financial reporting and related financial statements and we believe the consolidated financial statements included in this report as of and for the period ended February 29, 2012, are fairly stated in all material respects.

 

***Plans for Remediation of Material Weaknesses***

 

With the oversight of our CEO and CFO we have begun efforts to improve our internal control over financial reporting and our disclosure controls and procedures. Specific initiatives to date have been focused on the following:

 

·      we are instituting a formal code of ethics review annually to communicate, both internally and externally, our commitment to a strong effective control environment, high ethical standards and financial reporting integrity,

 

·      we are providing training to reinforce the importance of our control environment for Finance, Accounting, Information Technology Department personnel and all operations Managers across the Company,

 

·      we are implementing policies and procedures to ensure that we maintain appropriate business and accounting records and formally document the application of generally accepted accounting principles for business transactions,

 

·      we are performing a review of existing Accounting, Tax and Information Technology Department personnel with the goals of enhancing our complement of resources with a higher degree of accounting and internal control knowledge, experience, and training,

 

·      we are documenting and formalizing our period end financial reporting processes, including the implementation of a monthly close checklist and formal policies and procedures concerning journal entries, account reconciliations, accrued expenses and estimates,

 

·      we are implementing policies and procedures to ensure revenue is properly valued and recognized,

 

·      we have hired a new information technology director that is responsible for overseeing the completion of the ERP implementation,

 

·      we are in the process of implementing a more formalized internal risk assessment process and evaluating the potential to add an in-house internal audit function as well.

 

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We believe the steps taken to date have improved the effectiveness of our internal control over financial reporting; however, we have not completed all of the corrective processes, procedures and related evaluation or remediation efforts identified herein that we believe are necessary.  As we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we will perform additional procedures prescribed by management, including the use of manual mitigating control procedures, to ensure that our financial statements continue to be fairly stated in all material respects.  We do not anticipate that we will be able to remediate all of the foregoing material weaknesses during our fiscal year ending February 28, 2013.

 

***Changes in Internal Control over Financial Reporting***

 

During the three months ended February 2012, we began the implementation of a new ERP at certain divisions.  The implementation materially affected our internal control over financial reporting and has contributed to the material weaknesses previously disclosed. After we fully address the implementation issues discussed above, we currently plan to implement the new ERP at the Company’s remaining locations during fiscal 2014.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1 - LEGAL PROCEEDINGS**

 

We are a party from time to time to legal proceedings relating to our operations. Our ultimate legal and financial liability in respect to all legal proceedings in which we are involved at any given time cannot be estimated with any certainty. However, based upon examination of such matters and consultation with counsel, management currently believes that the ultimate outcome of these contingencies will not have a material adverse effect on our consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on our results of operations and/or cash flows for that period.

 

**ITEM 1A - RISK FACTORS**

 

There have been no material changes from the risk factors previously disclosed in our Form 10-K under the caption “Risk Factors.”  You should carefully consider the risks described in our Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in our Form 10-K are not the only risks we face.  Additional regulatory and other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.  If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

 

**ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES**

 

There are no other defaults upon senior securities except as described in the financial statements and accompanying notes herein and disclosed in the applicable Current Reports on Form 8-K filed with the Securities and Exchange Commission.

 

**ITEM 4 - MINE SAFETY DISCLOSURES**

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this Quarterly Report on Form 10-Q.

 

**ITEM 5 — OTHER INFORMATION**

 

None.

 

**ITEM 6 - EXHIBITS**

 

| **Exhibit   Number** | ** ** | **Description**                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                |
| 31.1*                |       | Certification   of the Chief Executive Officer Pursuant to Rule 13a-14(a) or   15d-14(a). |

 

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| 31.2*                |   | Certification   of the Chief Financial Officer Pursuant to Rule 13a-14(a) or   15d-14(a). |
|----------------------|--------|-----------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                |
| 32.1**               |   | Certification   of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.                  |
|                 |   |                                                                                                |
| 32.2**               |   | Certification   of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.                  |
|                 |   |                                                                                                |
| 95***                |   | Mine   Safety Disclosure                                                                            |
|                 |   |                                                                                                |
| 101.INS XBRL*** |   | Instance   document                                                                                 |
|                 |   |                                                                                                |
| 101.SCH XBRL*** |   | Taxonomy   Extension Schema                                                                         |
|                 |   |                                                                                                |
| 101.CAL XBRL*** |   | Taxonomy   Extension Calculation Linkbase                                                           |
|                 |   |                                                                                                |
| 101.DEF XBRL*** |   | Taxonomy   Extension Definition Linkbase                                                            |
|                 |   |                                                                                                |
| 101.LAB XBRL*** |   | Taxonomy   Extension Label Linkbase                                                                 |
|                 |   |                                                                                                |
| 101.PRE XBRL*** |   | Taxonomy   Extension Presentation Linkbase                                                          |

 

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*        Filed herewith.

**      Furnished herewith.

***    Previously furnished.

 

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**SIGNATURES**

 

Pursuant to the requirements 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.

 

 
|                  | NEW ENTERPRISE STONE & LIME CO., INC. |
|-----------------------|-----------------------------------------------------|
|                  |                                                |   |
| Date: August 30, 2012 | By:                                                 | /s/   Albert L. Stone |
|                  |                                                | Albert L. Stone |
|                  | * *                                            | *Senior Vice President and Chief Financial Officer* |

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                |
| 31.1*                |       | Certification   of the Chief Executive Officer Pursuant to Rule 13a-14(a) or   15d-14(a). |
|                 |       |                                                                                                |
| 31.2*                |       | Certification   of the Chief Financial Officer Pursuant to Rule 13a-14(a) or   15d-14(a). |
|                 |       |                                                                                                |
| 32.1**               |       | Certification   of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.                  |
|                 |       |                                                                                                |
| 32.2**               |       | Certification   of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.                  |
|                 |       |                                                                                                |
| 95***                |       | Mine   Safety Disclosure                                                                            |
|                 |       |                                                                                                |
| 101.INS XBRL*** |       | Instance   document                                                                                 |
|                 |       |                                                                                                |
| 101.SCH XBRL*** |       | Taxonomy   Extension Schema                                                                         |
|                 |       |                                                                                                |
| 101.CAL XBRL*** |       | Taxonomy   Extension Calculation Linkbase                                                           |
|                 |       |                                                                                                |
| 101.DEF XBRL*** |       | Taxonomy   Extension Definition Linkbase                                                            |
|                 |       |                                                                                                |
| 101.LAB XBRL*** |       | Taxonomy   Extension Label Linkbase                                                                 |
|                 |       |                                                                                                |
| 101.PRE XBRL*** |       | Taxonomy   Extension Presentation Linkbase                                                          |

 

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*        Filed herewith.

**      Furnished herewith.

***    Previously furnished.

 

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