UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the year ended June 30, 2005 | ||
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OR | ||
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission File Number 333-64745
PENHALL INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
ARIZONA |
| 86-0634394 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate by the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
CLASS AND TITLE OF CAPITAL STOCK |
| SHARES OUTSTANDING AS OF SEPTEMBER 28, 2005 |
Common Stock, $.01 Par Value |
| 986,552 |
DOCUMENTS INCORPORATED BY REFERENCE:
None
TABLE OF CONTENTS
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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EXHIBIT INDEX |
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EXHIBIT 12 |
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EXHIBIT 31.3 |
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EXHIBIT 31.4 |
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EXHIBIT 32.3 |
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EXHIBIT 32.4 |
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ii
GENERAL
Penhall consists of Penhall International Corporation, an Arizona corporation, and its wholly owned subsidiary, Penhall Company, a California corporation. Penhall Company has four wholly owned subsidiaries, Penhall Investments, a California corporation, Bob Mack Company, a California corporation, Capitol Drilling Supplies, Inc., an Indiana corporation and Penhall Leasing, a California single member limited liability company (collectively Penhall International Corporation and the five subsidiaries are the “Company” or “Penhall”).
On August 4, 1998, a series of mergers (Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., became the corporate parent of Penhall International Inc. (collectively, the Parent Company). Concurrent with the Recapitalization, Phoenix Concrete Cutting, Inc. was renamed Penhall International Corp. and Penhall International Inc. was renamed Penhall Rental Corp. Effective October 1, 1998, all of the operations, and certain of the assets and liabilities of Penhall International Corp., were transferred into Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002. In connection with the Recapitalization in August of 1998, the Company became the successor obligor of $100,000,000 12% Senior Notes (Senior Notes) due August 2006. The foregoing transactions are collectively referred to herein as the “Transactions.”
Penhall was founded in 1957 and is one of the largest operated equipment rental providers in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators on an hourly or fixed-price quote basis (“Operated Equipment Rental Services”) to serve construction, industrial, manufacturing, governmental and residential customers. In addition, Penhall complements its Operated Equipment Rental Services by providing the same type of services on a fixed-price contract basis for long-term projects. Penhall employs over 800 skilled operators and has 706 revenue units in its diverse operated equipment rental fleet, which includes a broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units, to large equipment such as backhoes, excavators, water trucks and concrete grinders. Penhall provides its services from 39 locations in 18 states, including Arizona, Colorado, Nevada, Texas, Georgia, North and South Carolina, Oregon, New York and Utah. Penhall has a diverse base of over 14,000 customers. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of its total revenue in any of the past five fiscal years. Penhall has a reputation for high quality service, which results in a high degree of customer loyalty, and management believes that a significant percent of its revenues are derived through repeat business from existing customers. Penhall has increased its revenues from $95.3 million in fiscal 1997 to $175.3 million in fiscal 2005 through 1) increased rental fleet utilization, 2) increasing its rental equipment fleet, 3) acquisitions, and 4) opening of new offices.
Through its skilled operators and equipment rental fleet, Penhall performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, Penhall generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. For longer duration projects, which may last from a few days to several years, Penhall provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of fixed-price contract revenues are derived from long-term highway projects, which have an average contract length of approximately ten months. Penhall strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, Penhall is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 30% of Operated Equipment Rental Services revenues are generated from fixed-price contracts.
Beginning in 2004, the US equipment rental market resumed positive growth. This growth is driven by the continued recovery in private non-residential construction spending, which began to stabilize in July 2002 and has posted year-over-year gains since February 2004. In addition, the passage of the new Transportation Bill (TEA-LU) that became effective in July 2005 will translate into higher public construction spending. Economists expect that non-residential construction spending will continue to grow, with Maximus Advisors projecting growth of 4.8% for 2005 and 11.5% in 2006.
1
The Company is particularly sensitive to changes in state highway and non-residential construction activity because these sectors have been principal users of the Company’s services. The long-term growth of the equipment rental industry has been driven primarily by construction spending and continued outsourcing of equipment needs by construction and industrial companies. While customers traditionally have rented equipment for specific purposes such as supplementing capacity during peak periods and in connection with special projects, customers are increasingly looking to rental operators to provide an ongoing, comprehensive supply of equipment, enabling such customers to benefit from the economic advantages and convenience of rental.
EQUIPMENT RENTAL FLEET
Penhall owns and operates a well-maintained fleet of 706 units of operated equipment, including excavators, stompers, backhoes, and compressors, “bobcats,” crushing equipment, saws, drills and grinding, asphalt milling, and grooving equipment. Penhall also carries state-of-the-art manually-operated and remote-controlled breakers, which provide access to contaminated, hazardous or limited access areas and which have been used for hazardous projects such as the demolition of decommissioned nuclear power plants. The Company employs skilled operators, including trainees, for each piece of equipment it operates. The following table is a summary of Penhall’s operated equipment rental fleet as of June 30, 2005:
DESCRIPTION |
| QUANTITY |
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Diamond saws |
| 368 |
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Compressors |
| 110 |
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Excavators |
| 21 |
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Grinders/Tankers |
| 52 |
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Equipment |
| 123 |
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Rotomills |
| 15 |
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Miscellaneous |
| 17 |
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Total Units |
| 706 |
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In addition to its 706-unit operated equipment rental fleet, Penhall maintains an additional fleet of 34 tankers and 21 grinders which are used exclusively on fixed-price contracts. Also, Penhall has an inventory of approximately 523 Bare Equipment Rentals, which are rented out on an hourly, daily, weekly or monthly basis without skilled operators. Bare Equipment Rentals include personnel lifts, forklifts, front-end loaders and light towers. Each Penhall location has its own shop and repair and maintenance staff that routinely maintains and repairs the equipment rental fleet.
SERVICES
Penhall, through its operated equipment rental fleet and skilled operators, serves its customer base in a wide variety of infrastructure projects, including new construction, rehabilitation and demolition projects, and provides specialized services such as highway and airport runway grooving, asphalt cutting, concrete coring and demolition work. These services are available singly but are more commonly provided by Penhall in conjunction with other services necessary to their application to a particular project, including breaking, excavating, removing and recycling of construction materials. Penhall also provides services in connection with earthquake retrofit projects, particularly in California, which include retrofitting of highways, buildings, bridges and tunnels in order to bring them in compliance with more stringent earthquake safety laws. Moreover, the Company is the largest provider of grinding services in the United States.
Specialty Services:
• Cutting. Cutting is the use of diamond abrasive saws to cut concrete and asphalt. This service is frequently utilized in new construction to provide rectangular openings in walls or floors, and is generally more efficient than framing and forming the opening while the concrete is being poured. Flat sawing also is commonly used in modifying existing structures and road rehabilitation.
2
• Coring. Coring is the use of rotary drills to create holes ranging from less than one inch to 42 inches in diameter. This service is most frequently utilized both in new construction and in retrofit of existing facilities to create spaces needed for installation of ventilation ducts, conduits, electrical and other cables, and mechanical passageways. Coring is also used in the Company’s earthquake retrofit projects.
• Grinding. Grinding is the use of diamond abrasive grinders to mill away excess material as necessary to attain a uniform, level finish on flat surfaces, such as highways, airport runways and industrial floors. Grinding is also utilized as a maintenance process to extend the useful life of highways by evening the wear patterns caused by years of heavy traffic, to prevent cracking and subsequent failure of the surface.
• Grooving. Grooving is the use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with the construction or modification of highways and airport runways and provides for better tire traction on these surfaces.
• Sawing and Sealing. Sawing and sealing is the cutting of concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength.
• Asphalt Milling. Asphalt milling is the grinding of asphalt and concrete surfaces. This service uses equipment with carbide tools to change the elevation of existing roadways as part of highway rehabilitation projects. The work is performed using a fleet of various size machines, ranging from 200 horsepower, 48” wide machines to 800 horsepower, 8 1/2’ wide machines. This service may also involve road reclamation and asphalt recycling.
Other Services:
• Breaking. Breaking is the use of manually-operated or, in hostile environments, remotely-controlled high-energy hydraulic breaking equipment to remove concrete. This service was most visibly utilized by Penhall in the removal of large sections of the Nimitz Freeway in Oakland, California, following the 1989 earthquake, and in the removal of damaged freeway bridges and overpasses in southern California following the 1994 earthquake. Breaking equipment is more commonly used in less dramatic settings, such as interior renovation of industrial buildings to adapt them to a new use, and in removal of existing structures in preparation for redevelopment of the real estate. The Company has designed and used remotely-controlled breakers for modification and removal of facilities contaminated with radioactive material, such as nuclear power stations and development laboratories.
• Clearing and Removal. Clearing and removal is the use of excavators and other heavy-duty equipment to remove broken concrete and other material from a site to a point of recycling or disposal.
• Crushing and Recycling. Crushing and recycling is the use of specialized equipment to reduce the size of the material to a consistent specification, separating out the steel reinforcing material for sale as scrap, and providing an aggregate material suitable for use as construction fill material and roadbase material. Such recycling provides a valuable environmental benefit by conserving solid waste landfill space, and converting a waste into a usable product.
• Compaction. Compaction is the preparation of subsoil base and fill material to a specification suitable for new construction on the site. Compaction services typically are provided together with removal services in the site preparation process for new construction or redevelopment
OPERATIONS
Penhall provides the rental of operator assisted equipment through (i) Operated Equipment Rental Services, performed on an hourly as well as a fixed-price quote basis, and (ii) fixed-price contracts, in which Penhall is responsible for the completion of a particular project.
Penhall’s Operated Equipment Rental Services involve short duration assignments lasting from several hours to a few weeks and typically generate revenues of less than $7,500 per assignment. Services provided on this basis include specialized work such as highway and airport runway grooving, asphalt cutting, and demolition work such as concrete breaking, removal, and recycling. Although all lines of equipment are rented for these types of projects, a given project will typically use only one piece of equipment. Operated Equipment Rental Services are typically provided on an hourly basis or for a project with pre-determined specifications, and Penhall quotes a bid to perform and invoice the customer for the project.
3
Penhall’s services are made available to customers through its 39 regional locations. Penhall maintains a basic equipment rental fleet and operators at each of its 39 locations. If necessary, equipment can be shipped from any of Penhall’s locations to projects at remote sites. Rental fees for Penhall’s equipment range from $70 to $500 per hour and encompass both the equipment and the operator’s time.
Penhall solicits and receives business over the telephone, by facsimile, by written purchase order or through Penhall salesmen. Each day Penhall’s dispatcher at each location is responsible for the allocation of resources to meet the customer’s service and timing requirements. The dispatcher matches all of the work requests for that day to available equipment and operators. Each of Penhall’s skilled operators has an expertise with a particular piece of equipment. Depending on the requirements for that day, an operator may be assigned from one to four jobs on a given day. An operator’s time is allocated by job through job tickets, which generate both payroll and customer billing data.
Historically, Penhall rented its equipment only in conjunction with the services of a Penhall employee as the operator. However, in 1996, Penhall started operating rental yards and offering Bare Equipment Rentals, or renting equipment without operators. To date, such Bare Equipment Rentals have not yet constituted a significant part of Penhall’s revenues.
Contract pricing utilizes the same equipment and services provided through its Operated Equipment Rental Services; however, these services involve longer duration assignments lasting from a few days to several years and may generate revenues of between $7,500 and $10,000,000 per assignment. Services provided on this basis include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. Fixed-price contract projects typically use multiple types of equipment concurrently and require a Penhall supervisor to coordinate the safe and efficient function of Penhall’s workmen and equipment. For fixed-price contract projects, Penhall typically employs the use of its Operated Equipment Rental Services as well as outside rental equipment and sub-contractors. Although Penhall has obtained contractor’s licenses in 26 states (not including 24 states, which do not require licensing), it typically provides its services in the capacity of a subcontractor under prime or general contracts in approximately half of its fixed-price contract projects.
The majority of Penhall’s fixed-price contracts are obtained through competitive bidding for general contractors. Penhall determines whether to bid on a project primarily on the basis of the type of work involved. Other factors, including the time of the project, Penhall’s ongoing project schedule and any particular risks involved also affect Penhall’s determination whether to bid on a project. In preparing a bid, Penhall’s estimators analyze material, labor and all other cost components of the proposed project. Penhall also will make its own determination of the quantity of items needed for the project and assess any special risks involved. Penhall must specify in its bid a fixed-price per unit within the range of the estimated quantity to be provided under the contract. Generally, within this range, no adjustments in unit prices are made and Penhall is committed to provide the items at the fixed unit prices specified in its bid, and any unforeseen increase in the cost of the items over the prices bid is borne by Penhall. Penhall has not borne a significant amount of cost increases in connection with its fixed-price contracting services.
Penhall sometimes contracts directly with Federal, state or local governments or agencies, and in addition some of its work performed for general contractors may relate to a general or prime contract with a governmental entity. Generally the contracting agency reserves the right to terminate the contract with the general contractor, without cause, for its own convenience. In that event, Penhall generally is entitled to be paid its costs for the work performed to the date of termination. Penhall has not historically experienced any material contract cancellations.
SALES AND MARKETING
Penhall maintains a sales and estimating force of approximately 100 people, typically with at least two salespersons based at most of Penhall’s operating locations calling on both new and existing customers. These salespeople provide estimates and prepare bids for projects. Management believes that its fixed-price contract services serve as a unique marketing tool for its Operated Equipment Rental Services and help to increase the utilization of Penhall’s operated equipment rental fleet. Penhall also regularly participates in industry trade shows and conferences, and advertises in trade journals.
PURCHASING AND SUPPLIERS
Penhall’s size, status in the industry and relationships enable it to purchase equipment directly from manufacturers at prices and on terms that Penhall believes to be more favorable than are available to its smaller competitors. Penhall’s procurement of equipment for its rental fleet is generally coordinated through its headquarters in Anaheim, California, while smaller inventory items are typically purchased at the divisional level. Penhall’s suppliers must meet specified standards of quality and experience, and include well-known equipment manufacturers such as Caterpillar, John Deere, Ingersoll-Rand, Kenworth, General Motors Company and Ford Motor Company. The favorable pricing, service, training and information that Penhall receives from its suppliers represent what Penhall believes to be a significant competitive advantage. Management continually analyzes the effectiveness, quality and profitability of Penhall’s equipment and addresses equipment procurement issues. Penhall maintains no long-term supply or purchasing contracts and believes that it could readily replace existing suppliers if it were no longer advantageous to purchase equipment from such suppliers.
4
CUSTOMERS
Most of Penhall’s customers consist of highway, airport and building general contractors and subcontractors, and Federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. Some of Penhall’s major customers include the North Dakota Dept. of Transportation, Hathaway Dinwiddie, Clark Construction and Granite Construction. During fiscal 2005, Management estimates that Penhall served over 11,000 customers and that no one customer accounted for more than 4% of Penhall’s revenues. Management believes that a significant percent of Penhall’s revenues represented repeat business from existing customers.
COMPETITION
The operated equipment rental industry is a specialized niche of the overall equipment rental industry and is highly competitive. Penhall’s competitors include large national rental companies, regional companies, smaller independent businesses and equipment vendors, which sell and rent equipment to customers. The industry is also highly fragmented, and primarily consists of many relatively small, independent businesses typically serving discrete local markets within 30 to 50 miles of the equipment rental location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services companies have focused their operations on providing a broad array of services to relatively large customers, primarily in medium to large metropolitan markets, while generally serving smaller markets through delivery from distant major markets.
Competitive factors in the operated equipment rental industry include breadth of product lines, the availability of equipment and skilled operators, the condition of equipment, service, name recognition, proximity to customers and price. Penhall believes that it is able to successfully compete in the markets that it serves because of its reputation and large fleet of equipment. In addition, certain of the services provided by Penhall, such as diamond saw cutting services, are highly specialized and therefore not widely available; the market for these services therefore tends to be somewhat less competitive. Management does not believe that Penhall faces any significant competitor on a national scale, as the operated equipment rental industry is characterized primarily by local providers offering a limited array of services.
Management believes the operated equipment rental industry benefits from the continuing trend among businesses to outsource non-core operations to reduce capital investment, convert costs from fixed to variable and minimize the downtime, maintenance, repair and storage associated with equipment ownership. Customers are increasingly using Operated Equipment Rental Services companies to provide a comprehensive supply of equipment and operators.
Penhall’s fixed-price contract projects are obtained through competitive bidding. Penhall believes that it is able to compete effectively for fixed-price contract jobs because of its extensive resources and relationships with general contractors. In many cases, a customer requires a performance bond before a contract is awarded. Penhall believes that its bonding capacity is a competitive advantage over smaller, less financially stable competitors. The Company’s advantage in this area has been diminished by the reduced availability of bonding in the market. One of the Company’s sureties has notified the Company of its intent to withdraw from the Penhall account and the Company is in the process of replacing that surety. A new surety has offered to replace part of the bonding capacity of the withdrawing surety. In addition, the Company is negotiating with another surety for a new and larger bonding facility. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Penhall currently holds a United States trademark and service mark with respect to the “Penhall” name and logo, which it believes are of particular importance to Penhall’s business. Except with respect to the “Penhall” name and logo, Penhall is not dependent on any intellectual property rights.
MANAGEMENT INFORMATION SYSTEM
Penhall utilizes a management information system, which was implemented in fiscal 1997 and subsequently upgraded. The management information system gives management the ability to analyze certain cost results by line of equipment and location. This information network is used to make decisions with respect to investments in new equipment as well as certain other competitive decisions. In addition, the system provides information with respect to contract work-in-progress, which is used by project managers and contract division management to monitor the status of jobs in progress.
RADIO COMMUNICATIONS
Penhall licenses from Motorola and, in one case, from an individual, the right to operate and install certain radio repeater equipment at a number of sites in the State of California. This equipment allows Penhall and its operators in the field to communicate with each other by radio.
In connection with the radio communications referred to above, Penhall holds several licenses from the Federal Communications Commission (“FCC”) that allows it to broadcast over certain designated radio frequencies. These licenses may not be assigned without the FCC’s consent. During fiscal 2004, Penhall sold one of its three FCC licenses for the amount of $800,000. The gain on sale of $795,000 is reported in other income in the consolidated statement of operations.
5
LABOR RELATIONS
As of June 30, 2005 Penhall Company had approximately 1,200 full-time employees. The Company also hires, on an as-needed basis, equipment operators when work-in-progress necessitates additional personnel.
Approximately 500 of Penhall’s employees are represented by various labor unions. The Company’s unionized work force is divided into approximately 27 active and 10 inactive certified or lawfully recognized bargaining units.
All agreements originally set to expire during fiscal 2005 have been renewed or extended. There are 3 agreements representing approximately 125 field employees expiring during fiscal 2006, most at the end of the fiscal year. There is no reason to believe that any expiration will have a material effect on fiscal 2006 operations.
Penhall is headquartered in Anaheim, California. As of June 30, 2005 Penhall leased 36 facilities which are used for equipment yards and accompanying office space. The following table sets forth the location and square footage of each of such facilities.
LOCATION |
| APPROX. |
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Anaheim, California (1) |
| 18,300 |
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Gardena, California (1) |
| 3,850 |
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Camarillo, California (1) |
| 3,600 |
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San Leandro, California |
| 6,000 |
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Sacramento, California (1) |
| 8,000 |
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San Diego, California (1) |
| 5,600 |
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Riverside, California |
| 9,000 |
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Santa Clara, California (1) |
| 9,950 |
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Irvine, California |
| 9,500 |
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Bakersfield, California |
| 4,000 |
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Burbank, California (1) |
| 6,200 |
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Phoenix, Arizona (1) |
| 12,900 |
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Austin, Texas (1) |
| 6,100 |
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Grapevine, Texas |
| 7,500 |
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Denver, Colorado (1) |
| 15,100 |
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Austell, Georgia |
| 12,000 |
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Las Vegas, Nevada (1) |
| 11,000 |
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Portland, Oregon |
| 16,000 |
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Salt Lake City, Utah |
| 10,500 |
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Birmingham, Alabama |
| 9,600 |
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Golden Valley, Minnesota |
| 11,000 |
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Morrisville, North Carolina |
| 15,000 |
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Charlotte, North Carolina |
| 6,000 |
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Wilmington, North Carolina |
| 1,000 |
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Greenville, South Carolina |
| 3,500 |
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Columbia, South Carolina |
| 3,500 |
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Charleston, South Carolina |
| 5,000 |
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Buffalo, New York |
| 3,000 |
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Tukwila, Washington |
| 10,017 |
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Fresno, California |
| 4,500 |
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Richmond, Virginia |
| 1,000 |
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Reno, Nevada |
| 9,600 |
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Tucson, Arizona |
| 1,500 |
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Champaign, Illinois |
| 3,600 |
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Visalia, California |
| 13,600 |
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Rogers, Minnesota |
| 11,000 |
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6
(1) On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has 4 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.1 million will be amortized over the initial term of the leases of 20 years.
Penhall presently leases 36 sites in 17 states (collectively, the “Leased Sites”). The average remaining term of the leases under which the Leased Sites are held (collectively, the “Real Property Leases”) is approximately 13.2 years (assuming the exercise of all option periods). The Real Property Leases for the following fourteen Leased Sites have remaining terms of less than three years:
Santa Clara, California - October 31, 2005
Irvine, California – December 31, 2006
Fresno, California – month to month
Tucson, Arizona – June 30, 2006
Grapevine, Texas – December 31, 2006
Salt Lake City, Utah – July 31, 2007
Wilmington, North Carolina – month to month
Richmond, Virginia – month to month
Greenville, South Carolina – month to month
Charleston, South Carolina – December 31, 2005
Buffalo, New York – October 31, 2006
Champaign, Illinois – month to month
Charlotte, North Carolina – October 31, 2006
Kansas City, Missouri – June 30, 2006
There are various additional lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management’s present opinion, based in part upon the advice of legal counsel, that the outcome of these proceedings will not have a material effect on the Company’s financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2005.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common equity is not publicly traded and, accordingly, an established market does not exist for such common equity. The Company did not pay any dividends in fiscal 2004 or 2005. The indenture agreement related to the Senior Notes contains covenants that restrict, among other things, the ability of the Company to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined therein), enter into transactions with affiliates, allow its subsidiaries to make certain payments, create liens, make certain asset dispositions and merge or consolidate with, or transfer substantially all of its assets to another person, or engage in certain change of control transactions.
7
ITEM 6. SELECTED FINANCIAL DATA
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| FISCAL YEAR ENDED JUNE 30, |
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| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
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| (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) |
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CONSOLIDATED STATEMENT OF OPERATIONS DATA: |
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Revenues |
| $ | 177,498 |
| $ | 163,207 |
| $ | 161,808 |
| $ | 157,778 |
| $ | 175,256 |
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Cost of revenues |
| 125,454 |
| 123,862 |
| 129,817 |
| 122,559 |
| 131,309 |
| |||||
Gross profit |
| 52,044 |
| 39,345 |
| 31,991 |
| 35,219 |
| 43,947 |
| |||||
General and administrative expenses |
| 28,347 |
| 28,364 |
| 27,935 |
| 28,328 |
| 31,024 |
| |||||
Goodwill impairment |
| — |
| — |
| — |
| 2,682 |
| — |
| |||||
Other operating income, net |
| 725 |
| 839 |
| 938 |
| 827 |
| 517 |
| |||||
Earnings from operations |
| 24,422 |
| 11,820 |
| 4,994 |
| 5,036 |
| 13,440 |
| |||||
Interest expense |
| 15,263 |
| 14,293 |
| 14,355 |
| 13,880 |
| 13,432 |
| |||||
Interest expense – accretion on preferred stock |
| — |
| — |
| — |
| — |
| 5,180 |
| |||||
Other income |
| — |
| — |
| — |
| 859 |
| 105 |
| |||||
Earnings (loss) before income taxes |
| 9,159 |
| (2,473 | ) | (9,361 | ) | (7,985 | ) | (5,067 | ) | |||||
Income tax expense (benefit) |
| 3,900 |
| (856 | ) | (3,441 | ) | (2,342 | ) | 95 |
| |||||
Net earnings (loss) |
| 5,259 |
| (1,617 | ) | (5,920 | ) | (5,643 | ) | (5,162 | ) | |||||
Accretion of preferred stock to redemption value |
| (3,207 | ) | (3,615 | ) | (4,074 | ) | (4,605 | ) | — |
| |||||
Accrual of cumulative dividends on preferred stock |
| (3,263 | ) | (3,794 | ) | (4,325 | ) | (4,944 | ) | (5,620 | ) | |||||
Net loss applicable to common stockholders |
| $ | (1,211 | ) | $ | (9,026 | ) | $ | (14,319 | ) | $ | (15,192 | ) | $ | (10,782 | ) |
LOSS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic and diluted |
| (1.22 | ) | (9.16 | ) | (14.52 | ) | (15.40 | ) | (10.93 | ) | |||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic and diluted |
| 995,747 |
| 985,345 |
| 986,406 |
| 986,552 |
| 986,552 |
| |||||
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by operating activities |
| 15,732 |
| 17,609 |
| 12,649 |
| 11,118 |
| 10,745 |
| |||||
Net cash provided by (used in) investing activities |
| (17,697 | ) | (12,482 | ) | (2,958 | ) | 6,848 |
| (12,568 | ) | |||||
Net cash provided by (used in) financing activities |
| 886 |
| 48 |
| (15,712 | ) | (17,074 | ) | 845 |
| |||||
Depreciation and amortization |
| 16,252 |
| 17,185 |
| 16,733 |
| 14,355 |
| 12,072 |
| |||||
Capital expenditures |
| 18,469 |
| 9,495 |
| 3,658 |
| 5,850 |
| 11,947 |
| |||||
Units of operated equipment rentals at end of period |
| 747 |
| 761 |
| 710 |
| 696 |
| 706 |
| |||||
Number of locations at end of period |
| 37 |
| 38 |
| 38 |
| 37 |
| 39 |
| |||||
Ratio of earnings to fixed charges (3) |
| 1.6 | x | — |
| — |
| — |
| — |
| |||||
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURE: |
|
|
|
|
|
|
|
|
|
|
| |||||
Adjusted EBITDA (1) |
| 40,674 |
| 29,005 |
| 21,727 |
| 22,932 |
| 25,617 |
| |||||
Adjusted EBITDA margin (2) |
| 22.9 | % | 17.8 | % | 13.4 | % | 14.5 | % | 14.6 | % | |||||
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| 126,962 |
| 132,915 |
| 112,601 |
| 89,407 |
| 95,231 |
| |||||
Long-term obligations, including current maturities |
| 125,208 |
| 128,970 |
| 117,395 |
| 100,995 |
| 100,852 |
| |||||
Mandatorily redeemable preferred stock |
| 28,792 |
| 32,407 |
| 36,481 |
| 41,086 |
| 46,266 |
| |||||
Series B Preferred and common stock subject to put option |
| 8,374 |
| 8,374 |
| 8,369 |
| 8,013 |
| 7,879 |
| |||||
Stockholders’ deficit |
| (69,449 | ) | (74,364 | ) | (84,313 | ) | (94,205 | ) | (99,233 | ) |
(1) Adjusted EBITDA is a supplemental non-generally accepted accounting principle (“GAAP”) financial measure. Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude goodwill impairment because we believe that this charge in 2004 to be a non-recurring charge. Regulation S-K (Item 10(e)) and other provisions of the Exchange Act of 1934 define and prescribe the conditions for use of certain non-GAAP financial information. We believe that our Adjusted EBITDA information, which meets the definition of a non-GAAP financial measure, is important supplemental information to investors.
8
Management has presented Adjusted EBITDA because it is used as a measure in the terms of the New Credit agreement and in the Indenture agreement (see Management’s Discussion and Analysis). Management has also presented Adjusted EBITDA because we believe it is a meaningful measure and represents an alternate view of our operating performance and allows our management and our investors to readily view operating trends and analyze the Company’s ability to incur and/or service debt. We additionally use Adjusted EBITDA and Adjusted EBITDA margin for internal managerial purposes, including for planning purposes, including the preparation of our internal annual operating budget and as a means to evaluate period-to-period comparisons. This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Adjusted EBITDA information reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and to not rely on any single financial measure. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, there are material limitations to its usefulness on a stand alone basis, including the lack of comparability of this presentation to the GAAP financial results of other companies. Adjusted EBITDA has certain material limitations as follows:
• It does not include interest expense. Because we have borrowed money to finance the purchase of a former shareholder’s interest in the Company, interest expense is a necessary and continuing part of our costs. Therefore, any measure that excludes interest expense has material limitations.
• It does not include taxes. Because the payment of taxes is a necessary and ongoing part of our operations, any measure that excludes taxes has material limitations.
• It does not include depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has material limitations.
Accordingly the non-GAAP information should not be used in isolation of, or as a substitute for, net loss or cash flows from operations as an indicator of operating performance or as a measure of profitability or liquidity. Adjusted EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs.
Adjusted EBITDA was computed as follows:
|
| FISCAL YEAR ENDED JUNE 30, |
| |||||||||||||
|
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| |||||
Net earnings (loss) |
| $ | 5,259 |
| $ | (1,617 | ) | $ | (5,920 | ) | $ | (5,643 | ) | $ | (5,162 | ) |
Interest expense |
| 15,263 |
| 14,293 |
| 14,355 |
| 13,880 |
| 13,432 |
| |||||
Interest expense - accretion on preferred stock |
| — |
| — |
| — |
| — |
| 5,180 |
| |||||
Income tax expense (benefit) |
| 3,900 |
| (856 | ) | (3,441 | ) | (2,342 | ) | 95 |
| |||||
Depreciation and amortization |
| 16,252 |
| 17,185 |
| 16,733 |
| 14,355 |
| 12,072 |
| |||||
Goodwill impairment |
| — |
| — |
| — |
| 2,682 |
| — |
| |||||
Adjusted EBITDA |
| $ | 40,674 |
| $ | 29,005 |
| $ | 21,727 |
| $ | 22,932 |
| $ | 25,617 |
|
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues.
(3) For the purpose of computing the ratio of earnings to fixed charges, “earnings” consists of earnings before income taxes and fixed charges. “Fixed Charges” consist of interest expense, which includes amortization of debt issuance costs and the interest portion of the Company’s rent expense. Earnings were insufficient to cover fixed charges by $2,473,000, $9,361,000, $7,985,000 and $5,067,000 for 2002, 2003, 2004, and 2005 respectively.
9
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Annual Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the approval of legislation and the corresponding anticipated benefits to our industry and other statements regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
The following discussion of the results of operations and financial condition of Penhall should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Part II of this report.
GENERAL
Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 39 locations in 18 states, with a presence in some of the fastest growing states in terms of construction spending and population growth.
The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1998, Penhall has effected nine strategic acquisitions, including:
1. HSI, a Minnesota-based firm acquired in April 1998,
2. Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,
3. Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,
4. Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,
5. Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000,
6. H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2002,
7. Bob Mack Company, California based company acquired in March 2002,
8. Arizona Curb Cut Company, an Arizona based company acquired in April 2002, and
9. Capitol Drilling Supplies, Inc, an Indiana based company acquired in June 2005.
During the same period, Penhall established operations in six new markets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno, and Seattle. Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are provided primarily under hourly rentals, which are complemented by long-term fixed-price contracts.
Revenue growth is influenced by infrastructure change, including new construction, modification, and regulatory changes. Penhall’s revenues are also impacted positively after the occurrence of natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence Penhall’s operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters.
10
The principal components of Penhall’s operating costs include the cost of labor, equipment rental fleet maintenance costs including parts and service, equipment rental fleet depreciation, insurance and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, Penhall utilizes a range of periods over which it depreciates its equipment on a straight-line basis. On average, Penhall depreciates its equipment over an estimated useful life of three to eight years with residual values averaging 7.5% to 10.0%.
Penhall invests in and maintains a large and versatile fleet of rental equipment ranging from relatively small items such as diamond abrasive saws and coring units to larger equipment, including backhoes, excavators, water trucks and concrete grinders. Used equipment is sometimes sold in the ordinary course of business, and gains or loss on sales of assets, net are recognized in “Other Operating Income” in Penhall’s consolidated statements of operations. In fiscal 2003, 2004 and 2005, net gains on equipment sales were $485,000, $493,000 and $238,000, respectively.
Decisions to dispose of assets in its operated equipment rental fleet (“revenue units”) and add revenue units, are primarily decided at each location. Revenue units are typically kept for their full economic life. In an effort to try to maximize fleet utilization, transfers of revenue units between locations are common. Overall, the Company tends to increase its fleet as total company utilization exceeds 72%.
The following table shows the number of units in Penhall’s operated equipment rental fleet for the following periods:
|
| FISCAL YEAR ENDED JUNE 30, |
| ||||
|
| 2003 |
| 2004 |
| 2005 |
|
Beginning of Period |
| 761 |
| 710 |
| 696 |
|
# Units Purchased |
| 12 |
| 19 |
| 32 |
|
# Units Disposed |
| (63 | ) | (33 | ) | (22 | ) |
End of Period |
| 710 |
| 696 |
| 706 |
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition on Long-Term Construction Contracts
The majority of our long-term fixed price contracts with our customers are either “fixed unit price” or “fixed price.” Under fixed unit price contracts, the Company is committed to provide materials or services required by a project at fixed unit prices. The fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by the Company unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount. All state and federal government contracts and many of our other contracts provide for termination of the contract for the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.
We use the percentage-of-completion accounting method for construction contracts in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue and earnings on construction contracts are recognized on the percentage-of-completion method in the ratio of costs incurred to estimated final costs. Revenue from contract claims is recognized when we have a signed settlement agreement and payment is reasonably assured. Revenue from contract change orders, which occur on most large projects, is recognized at an amount which approximates costs when it is probable that the costs will be recovered through a change in the contract price. Revenue is not recognized on unapproved contract change orders until such time we believe that recovery is probable. Provisions are recognized in the statement of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue.
Contract cost consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct
11
overhead costs and equipment expense. Contract costs are recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known.
The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of our estimates of the cost to complete each project which are completed by our project managers. However, projects can be complex and in most cases the profit margin estimates for a project will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have many projects of varying levels of complexity and size in process at any given time (during 2005 we worked on over 1,000 projects) these changes in estimates typically offset each other without materially impacting our overall profitability. However, large changes in cost estimates in the larger projects can have a more significant effect on profitability.
On certain projects and consistent within the construction industry, the Company is subject to milestone and/or contractual billing arrangements. These billing arrangements can result in an increase to Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts. Due to the volume of projects that the Company usually has at any one time, material fluctuations resulting from billing arrangements are not typical. As of June 30, 2004, the Company had a large project with a contractual billing arrangement. This project represented approximately $960,000 and $490,000 of our balance in Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts at June 30, 2004 and 2005, respectively.
Valuation of Long-Lived Assets
Effective July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Deteriorating market conditions could potentially impact valuation of long-lived assets. In markets where adverse market conditions exist, the Company will consider reallocation of long-lived assets to markets where those assets will produce cash flow. Further, technological improvements in equipment or processes could render certain long-lived assets as impaired, as could competitive pressures. We are not aware of any technological improvements or competitive pressures that could potentially result in impairment of long-lived assets; however such factors could occur in the future. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Goodwill
We use estimates in order to determine if goodwill has been impaired. An impairment loss may be recognized if the carrying amount of a reporting unit’s net book value exceeds the estimated fair value of the reporting unit. As of June 30, 2005, goodwill is assigned to five reporting units derived from individual acquisitions. We arrive at the estimated fair value of a reporting unit using a discounted cash flow approach. We will perform our valuation analysis at least annually or sooner if an event occurs or circumstances change that would indicate the carrying amount of goodwill may be impaired. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss to future periods. The Company evaluates goodwill for impairment at June 30 of each year.
Factors we consider important which could trigger an impairment review include, but are not limited to:
• Significant underperformance relative to expected historical or projected future operating results;
• Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
• Significant negative industry or economic trends;
• Unanticipated competition; and
• Adjusted EBITDA relative to net book value
We allocated goodwill to the reporting units that benefited from the related acquisitions. As of June 30, 2005, $6.0 million of the remaining goodwill of $6.7 million resides in one reporting unit in which profit levels have been sustained over time since the acquisition and have been consistent with the Company’s estimates. We expect such profit levels to continue. However, if profit levels were to decline, the reporting units’ goodwill could become impaired.
RESULTS OF OPERATIONS
As of July 29, 2005, the House and Senate both passed the long awaited six-year federal transportation bill which was subsequently signed into law by President Bush. The Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users (TEA-LU) provides $286.4 billion in transportation funding through Fiscal Year 2009 and achieves a 92% rate of return to donee states by fiscal year 2008. We are pleased to hear that the states will be able to retain their ability to establish long-
12
term infrastructure building programs which will provide much needed visibility to our industry.
Public sector work in California has improved dramatically due to a significant increase in funding for the state’s transportation projects. In the fiscal year 2005-06, California’s transportation construction budget increased to $4.2 billion from less than $1.0 billion in the prior fiscal year. The current budget, beginning July 1, includes the reinstatement of Proposition 42 funding from gasoline sales tax proceeds, expected Indian gaming revenues and regular revenues from state and federal gas taxes and truck weight fees. This recent commitment to reinvest into California’s transportation program provides us with the first positive funding event we have experienced for this part of our business in over three years.
The depressed spending by various state departments of transportation during the past few years appears to be turning and with the passing of TEA-LU we anticipate increases in spending on projects requiring the services of the Company. Additionally, in the private sector, demand for residential and commercial site development work continues to drive positive results. While we are encouraged by the strength in most of our markets and the growth opportunities for our business in both the private and public sectors, there is no guarantee that the improved market conditions will improve the Company’s operating results.
Year Ended June 30, 2005 Compared to Year Ended June 30, 2004
Revenues. Revenues for Fiscal 2005 were $175.3 million compared to $157.8 million for the prior year, an increase of $17.5 million or 11.1%. Contract revenue increased by $6.6 million or 14.0% and service revenue increased $10.8 million or 9.8%. The increase in revenues is attributable to the continuing rebound in the non-residential construction market and increased highway infrastructure work.
Penhall operated through 37 locations in 17 states at June 30, 2004 and through 39 locations in 18 states at June 30, 2005. At June 30, 2005, Penhall’s operated rental fleet consisted of 706 units compared to 696 units at June 30, 2004. In June of 2005 the Company completed its acquisition of Capitol Drilling Supplies, Inc. which added 16 units to the Company fleet as well as offices in Indianapolis, Indiana and Champaign, Illinois.
Gross Profit. Gross profit totaled $43.9 million in Fiscal 2005, an increase of $8.7 million or 24.8% from Fiscal 2004. Gross profit as a percentage of revenues increased from 22.3% in Fiscal 2004 to 25.1% in Fiscal 2005. The increase in gross profit from Fiscal 2004 to Fiscal 2005 is primarily attributable to higher revenues in Fiscal 2005, a $1.9 million decrease in depreciation expense, and higher revenues per production labor hour. The decrease in depreciation expense is the result of low capital expenditures during fiscal 2002, 2003, and 2004.
General and Administrative Expenses. General and administrative expenses were $31.0 million in Fiscal 2005 compared to $28.3 million in Fiscal 2004. As a percent of revenues, general and administrative expenses were 17.7% in Fiscal 2005 compared to 18.0% in Fiscal 2004. The increase in general and administrative expenses during Fiscal 2005 is primarily attributable to increases in rent expense of $0.5 million associated with the sale/leaseback of Company properties, incentive compensation of $1.4 million, $0.6 million in payroll and related expenses and bad debt expense of $0.3 million offset by decreases of $0.3 million in data processing expense and legal expense of $0.3 million.
Goodwill Impairment. Goodwill impairment of $2,682,000 was recorded during the year ended June 30, 2004. This expense was the result of impairment testing on all reporting units which had associated goodwill. A continuing decline in the California market resulted in two reporting units writing off all associated goodwill. Similar impairment testing in Fiscal 2005 determined that there was no further goodwill impairment.
Interest Expense. Interest expense was $13.4 million in Fiscal 2005 compared to interest expense of $13.9 million in Fiscal 2004. The decrease in interest expense is attributable to lower borrowings in Fiscal 2005 primarily resulting from the proceeds on the sale-leaseback of the Company owned properties, which was used to reduce the borrowings under the revolving credit facility, partially offset by higher costs for letters of credit.
Interest Expense – Accretion on Preferred Stock. During Fiscal 2005, the Company adopted SFAS No. 150 which required the Company to present separately as interest expense $5.2 million of accretion related to mandatorily redeemable instruments. Prior to Fiscal 2005, the Company recorded the accretion in the determination of net loss applicable to common stockholders which was $4.6 million in Fiscal 2004.
Other Income. During fiscal 2004, the Company sold one of its FCC licenses and also completed a sale - leaseback of its 11 owned properties, which resulted in a total gain of $0.9 million. There were no comparable transactions in Fiscal 2005.
Income Tax (Benefit) Expense. The Company recorded an income tax expense of $0.1 million, or 0.0% of loss before income taxes in Fiscal 2005, compared to an income tax benefit of $2.3 million, or 29.3% of loss before income taxes in Fiscal 2004. The change in the effective tax rate in fiscal 2005 is primarily due to non-taxable interest expense related to the accretion on preferred stock.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
Revenues. Revenues for Fiscal 2004 were $157.8 million compared to $161.8 million for the prior year, a decrease of $4.0 million or 2.5%. A $1.4 million increase in contract revenue (a 3.0% increase) was offset by a $5.4 million decrease in service revenues (a 4.7% decrease). The lower service revenues are a reflection of the slowdown in private, non-residential construction
13
activity, which declined 16% in 2003 according to Department of Commerce data, and continued into 2004. Additionally there was significantly lower state highway and bridge spending due to deficits in many state budgets and lack of a replacement program at the federal level for the Transportation Equity Act for the 21st Century, “TEA-21” which expired in 2003.
Penhall operated through 37 locations in 17 states at June 30, 2003 and 2004. At June 30, 2004, Penhall’s operated rental fleet consisted of 696 units compared to 710 units at June 30, 2003, a decrease of 2.0%. The smaller fleet of revenue units is attributable to the Company not replacing all of the disposed units since revenue unit utilization rates remain below 72%.
Gross Profit. Gross profit totaled $35.2 million in Fiscal 2004, an increase of $3.2 million or 10.1% from Fiscal 2003. Gross profit as a percentage of revenues increased from 19.8% in Fiscal 2003 to 22.3% in Fiscal 2004. The increase in gross profit from Fiscal 2003 to Fiscal 2004 is primarily attributable to significant profits from a major project, the successful settlement of an outstanding claim and a $1.9 million decrease in depreciation expense. The decrease in depreciation expense is the result of lower capital expenditures during 2002, 2003, and 2004 as compared to 2000 and 2001.
General and Administrative Expenses. General and administrative expenses were $28.3 million in Fiscal 2004 compared to $27.9 million in Fiscal 2003. As a percent of revenues, general and administrative expenses were 18.0% in Fiscal 2004 compared to 17.3% in Fiscal 2003. The small increase in general and administrative expenses as a percentage of revenues during Fiscal 2004 is primarily attributable to increases in rent expense of $0.8 million associated with the sale/leaseback of Company properties, incentive compensation of $1.3 million, and legal expense of $0.3 million offset by decreases $0.6 million in payroll and related expenses, $0.5 million in depreciation expense and $0.3 million in bad debt expense.
Goodwill Impairment. Total goodwill impairment of $2,682,000 has been recorded for the year ended June 30, 2004. This expense is the result of impairment testing on all reporting units which had associated goodwill in those reporting units. A continuing decline in the California market resulted in two California reporting units writing off all associated goodwill.
Other income. During fiscal 2004, the Company sold one of its FCC licenses and also completed a sale - leaseback of its 11 owned properties, which result in a total gain of $0.9 million.
Interest Expense. Interest expense was $13.9 million in Fiscal 2004 compared to interest expense of $14.4 million in Fiscal 2003. The decrease in interest expense is attributable to lower borrowings in Fiscal 2004 primarily resulting from the proceeds on the sale-leaseback of the Company owned properties, which was used to reduce the borrowings under the revolving credit facility, partially offset by higher costs for letters of credit.
Income Tax Benefit. The Company recorded an income tax benefit of $2.3 million, or 29.3% of loss before income taxes in Fiscal 2004, compared to an income tax benefit of $3.4 million, or 36.8% of loss before income taxes in Fiscal 2003. The decrease in the effective tax rate in fiscal 2004 is primarily due to non-deductible expenses related to goodwill impairment.
Contractual Obligations
The following is a summary of the Company’s contractual obligations as of June 30, 2005:
|
| Fiscal Year Ending June 30, |
| |||||||||||||||||||
|
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| Thereafter |
| Total |
| |||||||
Operating lease obligations |
| $ | 2,588,000 |
| $ | 2,255,000 |
| $ | 1,977,000 |
| $ | 1,836,000 |
| $ | 1,685,000 |
| $ | 20,865,000 |
| $ | 31,206,000 |
|
Long-term debt, including interest |
| 284,000 |
| 68,000 |
| 32,000 |
| — |
| — |
| — |
| 384,000 |
| |||||||
Revolving credit facility |
| 468,000 |
| — |
| — |
| — |
| — |
| — |
| 468,000 |
| |||||||
Senior notes, including interest |
| 12,000,000 |
| 101,000,000 |
| — |
| — |
| — |
| — |
| 113,000,000 |
| |||||||
Senior exchangeable preferred stock, including accretion |
| — |
| 24,420,000 |
| — |
| — |
| — |
| — |
| 24,420,000 |
| |||||||
Series A Preferred stock, including accretion |
| — |
| — |
| 33,587,000 |
| — |
| — |
| — |
| 33,587,000 |
| |||||||
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the Company’s principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company’s strategy of pursuing strategic acquisitions and expanding through internal growth. We believe that our current cash and cash equivalents, cash generated from operations, and the amount available under our existing credit facility will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with our existing operations through the next twelve months.
The Company’s principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility (“New Credit”) secured in May 2003. The New Credit is a $50 million; three year asset based borrowing facility, consisting of a revolving credit facility (“New Revolver”) of up to $50 million with a $25 million sub-facility for letters of credit. Availability under the revolver portion of the New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.
14
One of the provisions of the New Credit allows the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. Accordingly, borrowings under the agreement are classified as current. Borrowings under the New Credit are also subject to certain key financial covenants:
• Maintain a minimum interest coverage ratio (adjusted EBITDA divided by interest expense) of at least 1.35. At June 30, 2005, the actual ratio was 2.03.
• Maintain a maximum leverage ratio (debt senior to the senior notes divided by adjusted EBITDA) of less than 2.30. At June 30, 2005, the actual ratio was 0.88.
• The Company is limited to $1.5 million of capital expenditures annually for parts and property. This includes any fixed assets (other than equipment), parts, tools, supplies or improvements that have a useful life greater than one year. During the year ended June 30, 2005, the Company spent $0.4 million for parts and property.
• The Company is required to maintain a dollar utilization rate above 48% over the prior 4 quarters. Dollar utilization is total revenue for equipment divided by total standard available revenue during the period. At June 30, 2005, the Company’s dollar utilization was 67.2%.
At June 30, 2005, the Company was in compliance with all covenants. There are no anticipated trends that we are aware of that would indicate non-compliance with such covenants, however, significant deterioration in our financial performance could impact our ability to comply with such covenants.
The indebtedness of the Company under the New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2005, the Company had outstanding borrowings of $0.5 million, $20.8 million of outstanding letters of credit, borrowing base limitations of $9.0 million and borrowings unused and available under the New Credit of $24.6 million.
Summary Cash Flow Data (000’s) for the periods ending June 30, |
| ||||||||||
|
| 2003 |
| 2004 |
| 2005 |
| ||||
Cash and cash equivalents |
| $ | 184 |
| $ | 1,076 |
| $ | 98 |
| |
|
|
|
|
|
|
|
|
| |||
Net cash provided by (used in): |
|
|
|
|
|
|
| ||||
Operating activities |
| $ | 12,649 |
| $ | 11,118 |
| $ | 10,745 |
| |
Investing activities |
| $ | (2,394 | ) | $ | 7,440 |
| $ | (12,568 | ) | |
Financing activities |
| $ | (16,276 | ) | $ | (17,666 | ) | $ | 845 |
| |
Capital expenditures |
| $ | 3,658 |
| $ | 5,850 |
| $ | 11,947 |
| |
Cash provided by operating activities decreased from $11.1 million in fiscal 2004 to $10.7 million in fiscal 2005. The decrease in net cash provided by operating activities was primarily due to the increase in accounts receivable during 2005 which used $8.2 million in cash compared to $2.2 million during 2004. The increase in accounts receivable is primarily due to an increase in non-residential construction and increased infrastructure and highway work performed during the fourth quarter of fiscal 2005. The decrease in cash that resulted from the increase in accounts receivable was offset by an increase in accounts payable of $3.1 million in fiscal 2005 as compared to a decrease of $1.8 million in in fiscal 2004. The increase in 2005 resulted from the increase in revenues during the fourth quarter and the type of contract work being performed at June 2005 which had higher levels of subcontract and materials elements than the contract work at June 2004. The use of cash from accounts receivable was further offset by the change in cash provided by income tax which decreased from $3.0 million in fiscal 2004 to $0.5 million in fiscal 2005. This decrease consisted of Federal tax refunds received during 2004 totaling $2.5 million. The use of cash from costs and estimated earnings in excess of billings on uncompleted contracts decreased from $1.3 million during fiscal 2004 decreased to $0.1 million during fiscal 2005. This decrease is partially attributable to billings of approximately $0.5 million on one milestone billing contract. The remaining decrease is attributable to multiple projects. Billings in excess of costs and estimated earnings on uncompleted contracts used $0.7 million in net cash during fiscal 2005 compared to $0.7 million in net cash provided during 2004. The change of $1.4 million is attributable to multiple projects and typically results from milestone billing arrangements. Prepaid expenses provided $1.3 million during fiscal 2005 a decrease of $0.3 million compared to fiscal 2004. This decrease is primarily attributable to a decrease in prepaid insurance premiums of $1.1 million as of June 2005 due to a change in our insurance year and a reduction in premiums due to an increase in our insurance deductibles. A decrease of $1.3 million in insurance premium prepaids in fiscal 2004 resulted from a change payment terms from fiscal 2003.
Cash used by investing activities in fiscal 2005 of $12.6 million represents a $20.0 million decrease from the amount provided by investing activities in fiscal 2004. The increase is due to the $11.3 million cash received from the fiscal 2004 sale and leaseback of 11 sites and $0.8 million received from the sale of an FCC license. Capital expenditures increased by $6.1 million from $5.9 million in fiscal 2004 to $11.9 million in fiscal 2005. Additionally the Company acquired Capitol Drilling Supplies, Inc. in June 2005 with an investment of $1.2 million. The Company had no acquisitions in fiscal 2004. As all of our owned properties were subject to the sale-
15
leaseback transaction during Interim 2004 we don’t expect to generate additional liquidity through sale-leaseback transactions.
Cash provided by financing activities in fiscal 2005 was $0.8 million compared to cash used by financing activities of $17.7 million in fiscal 2004. In fiscal 2004 net long-term and short-term debt was reduced by $17.0 million due partially to cash received from the sale-leaseback and FCC license sale transaction. During fiscal 2005 net long-term and short-term debt was decreased by $0.7 million.
The Company had standby letters of credit totaling $20.8 million at June 30, 2005, all of which are automatically renewable unless participating parties notify the other party thirty days prior to cancellation. The letters of credit are provided as collateral for our surety and for our insurance programs. In addition, we are generally required to provide surety bonds that provide an additional measure of security under certain public and private sector contracts. Most of the Company’s surety bonds are performance bonds which do not have a stated expiration date; instead the bonds are generally released when each contract is accepted by our customer.
Management estimates that Penhall’s annual capital expenditures will be approximately $14.0 million for fiscal 2006, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property improvements.
Historically, Penhall has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of June 30, 2005, the Company and its subsidiaries had $147.1 million of total indebtedness outstanding (including the Senior Notes and mandatorily redeemable stock) and a stockholders’ deficit of $99.2 million. As of June 30, 2005 approximately $24.6 million of additional borrowing was available under the New Credit.
Debt service requirements include $100,000,000 of Senior Notes issued August 4, 1998. The Senior Notes are guaranteed by the wholly owned subsidiaries of Penhall International Corp. The Senior Notes bear interest at 12% per annum and interest is payable semiannually in arrears; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company’s option, in whole at any time or in part from time-to-time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Company’s Indenture dated August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”) contains certain financial and non-financial limitations. Some of these limitations are based upon the Company’s Adjusted EBIDTA, as defined, including the calculation of the Consolidated Fixed Charge Coverage Ratio (the “Coverage Ratio”), as defined. The Indenture permits repurchase of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness as defined by the Coverage Ratio.
From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with the Trustee, permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. The Trustee has indicated that it considers the infraction minor and will not pursue written notice of default to the Company. In the event that the Company receives written notice specifying the default and demanding that such default be remedied from either the Trustee or from Holders of at least 25% of the outstanding principal amount of the Notes, then the Company will arrange for a third party to repurchase Company stock in the aggregate consideration of $35,000 to remedy the default.
As of June 30, 2005, the Company has the following obligations subject to redemption or maturity in fiscal 2007 and 2008:
|
| Due date |
| Balance at |
| |
Senior Notes |
| 08/01/06 |
| $ | 100,000,000 |
|
Senior Exchangeable Preferred Stock |
| 02/01/07 |
| $ | 20,662,000 |
|
Preferred Series A |
| 08/01/07 |
| $ | 25,604,000 |
|
The Company also has certain common stock and Series B Preferred stock that are subject to the terms and conditions of a Securities Holders Agreement. The Company may be required to repurchase these shares if certain conditions are met. As of June 30, 2004 and June 30, 2005, the Company has recorded these shares at historical cost of $7,688,000 and $7,558,000, respectively, as temporary equity in the consolidated balance sheet. The Series B Preferred stock subject to the terms and conditions of the Stockholders Agreement and the remaining Series B Preferred stock include provisions for cumulative dividends of 13% which have not been recorded as the dividends have not been declared. Such dividends approximate $21,520,000 and $27,139,000 as of June 30, 2004 and 2005, respectively. The Company believes that the likelihood of the conditions allowing redemption by the stockholder occurring is remote.
16
The accretion of preferred stock will increase the total obligation through the dates of redemption. The Company is exploring various strategies to extend the maturity of its existing Senior Notes and mandatorily redeemable preferred stock. The Company plans to access the senior secured debt market within the next 30-60 days. No assurance can be given that such financing will be available to the Company or, if available that it may be obtained on terms and conditions that are satisfactory to the Company. If we are unable to refinance the Senior Notes and the mandatorily redeemable preferred stock and the Senior Notes and the mandatorily redeemable preferred stock are called, our ability to continue in business beyond such date could be impacted. The Senior Notes will be classified as a current liability commencing in the quarter ended September 30, 2005.
As long as the uncertainty associated with the resolution of these obligations remains, the Company could be subject to adverse consequences including, but not limited to:
• Making it more difficult to obtain surety support;
• Increasing our vulnerability to general adverse economic and industry conditions;
• Limiting our ability to extend or replace the Company’s existing credit facility;
• Limiting our ability to extend or replace the Company’s existing Senior Notes:
• Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
In connection with our business, the Company is often required to provide surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time to time. In the last few years we have seen a steady decrease in the capacity of the surety market, driven primarily by substantial increases in surety industry losses and consolidation in the surety market through acquisition. At June 30, 2005, over 18% of the Company’s backlog is bonded. The Company’s inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business. One of the Company’s sureties has notified the Company of its intent to withdraw from the account. The Company is in the process of replacing the surety.
CHANGE IN ACCOUNTING PRINCIPLE
In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Company’s fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004. As a result of the adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock is presented as interest expense in the Company’s consolidated statements of operations. Prior to the adoption accretion was included as part of the determination of net loss applicable to common stockholders.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP No. 109-1”) and FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). These staff positions provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a “special deduction” instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We do not expect adoption of FSP No 109-1 or FSP No 109-2 to have a material effect on our consolidated results of operations, cash flows and earnings per share.
In December 2004, the FASB Statement No. 123R (revised 2004), “Share-Based Payment” which replaces Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Statement No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under Statement No. 123, will no longer will be an alternative to financial statement recognition. We are required to adopt Statement No. 123R in our first quarter of fiscal 2006. Under Statement
17
No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of Statement No.123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of Statement No. 123R, and we do not expect that the adoption of Statement No.123R to have a material impact on our consolidated results of operations, cash flows and earnings per share unless we were to issue additional options under our stock incentive plan.
In November 2004, the FASB issued Statement No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4.” Statement No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Statement No. 151 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006. The adoption of Statement No. 151 is not expected to have a material impact on our consolidated results of operations, cash flows and earnings per share.
In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.�� Statement No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. Statement No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement No. 153 is effective for the fiscal periods beginning after June 15, 2005, and is required to be adopted by the Company in the first quarter of fiscal 2006. The adoption of Statement No. 153 is not expected to have a material impact on our consolidated results of operations, cash flows and earnings per share.
In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies the term conditional asset retirement obligation as used in Statement No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of adopting this interpretation on our consolidated results of operations, cash flows and earnings per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to interest rate changes primarily as a result of its notes payable, including New Revolver and Senior Notes which are used to maintain liquidity and fund capital expenditures and expansion of the Company’s operations. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the New Revolver. The Company does not enter into derivative or interest rate transactions for speculative purposes.
There are no derivative transactions during the years ended June 30, 2004 and 2005.
At June 30, 2005, the annual maturities of long-term debt and senior notes are as follows:
|
| YEARS ENDING JUNE 30, |
| ||||||||||||||||||||||
|
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| THERE- |
| TOTAL |
| FAIR |
| ||||||||
|
| (IN THOUSANDS) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed rate debt |
| $ | 284 |
| $ | 100,068 |
| $ | 32 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 100,384 |
| $ | 100,446 | (3) |
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
| 11.95 | % |
|
| ||||||||
Variable rate LIBOR debt (1) (2) |
| 468 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 468 |
| 468 |
| ||||||||
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
| 8.25 | % |
|
| ||||||||
18
At June 30, 2004, the annual maturities of long-term debt and senior notes are as follows:
|
| YEARS ENDING JUNE 30, |
| ||||||||||||||||||||||
|
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| THERE- |
| TOTAL |
| FAIR |
| ||||||||
|
| (IN THOUSANDS) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed rate debt |
| $ | 882 |
| $ | 113 |
| $ | 100,000 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 100,995 |
| $ | 95,495 | (3) |
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
| 11.89 | % |
|
| ||||||||
Variable rate LIBOR debt (1) (2) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||||||
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
(1) The revolving credit facility is classified as a short-term obligation in the consolidated balance sheet; however, the credit facility matures in 2006. This is a $50 million revolving credit facility with the interest based upon LIBOR plus 350 basis points. The total borrowing unused and available under the facility was $24.6 million at June 30, 2005. See Note 6 to the consolidated financial statements.
(2) The Company has different interest rate options for its variable rate debt. See note 6 in the consolidated financial statements for additional information.
(3) The fair value of fixed rate debt was determined based on quoted market price for the debt instrument.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company filed as part of this report on Form 10-K are listed in Item 15(a).
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Penhall International Corp.:
We have audited the accompanying consolidated balance sheets of Penhall International Corp. and subsidiaries (the Company) as of June 30, 2004 and 2005, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the three-year period ended June 30, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penhall International Corp. and subsidiaries as of June 30, 2004 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 18 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and accordingly changed its method of accounting for certain financial instruments on July 1, 2004.
| (signed) KPMG LLP |
| |
Los Angeles, California | |
September 26, 2005 |
20
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
|
| 2004 |
| 2005 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 1,076,000 |
| $ | 98,000 |
|
Receivables: |
|
|
|
|
| ||
Contract and trade receivables |
| 30,386,000 |
| 37,749,000 |
| ||
Contract retentions, due upon completion and acceptance of work |
| 4,361,000 |
| 4,888,000 |
| ||
|
| 34,747,000 |
| 42,637,000 |
| ||
Less allowance for doubtful receivables |
| 1,317,000 |
| 1,263,000 |
| ||
Net receivables |
| 33,430,000 |
| 41,374,000 |
| ||
|
|
|
|
|
| ||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 2,957,000 |
| 3,065,000 |
| ||
Deferred tax assets |
| 2,034,000 |
| 1,624,000 |
| ||
Inventories |
| 2,171,000 |
| 2,454,000 |
| ||
Prepaid expenses and other current assets |
| 2,198,000 |
| 1,019,000 |
| ||
Total current assets |
| 43,866,000 |
| 49,634,000 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, at cost: |
|
|
|
|
| ||
Land |
| — |
| 152,000 |
| ||
Buildings and leasehold improvements |
| 1,302,000 |
| 1,551,000 |
| ||
Construction and other equipment |
| 115,998,000 |
| 123,059,000 |
| ||
|
| 117,300,000 |
| 124,762,000 |
| ||
Less accumulated depreciation and amortization |
| 81,260,000 |
| 87,499,000 |
| ||
Net property, plant and equipment |
| 36,040,000 |
| 37,263,000 |
| ||
|
|
|
|
|
| ||
Goodwill |
| 6,371,000 |
| 6,682,000 |
| ||
Debt issuance costs, net of accumulated amortization |
| 2,313,000 |
| 1,149,000 |
| ||
Other assets, net |
| 817,000 |
| 503,000 |
| ||
|
| $ | 89,407,000 |
| $ | 95,231,000 |
|
See accompanying notes to consolidated financial statements.
21
|
| 2004 |
| 2005 |
| ||
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current installments of long-term debt |
| $ | 882,000 |
| $ | 284,000 |
|
Borrowings under revolving credit facility |
| — |
| 468,000 |
| ||
Trade accounts payable |
| 5,664,000 |
| 10,385,000 |
| ||
Accrued liabilities |
| 12,471,000 |
| 14,222,000 |
| ||
Income taxes payable |
| 386,000 |
| 923,000 |
| ||
Current portion of insurance reserves |
| 2,698,000 |
| 1,602,000 |
| ||
Current portion of deferred gain – sale-leaseback |
| 109,000 |
| 107,000 |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 1,526,000 |
| 848,000 |
| ||
Total current liabilities |
| 23,736,000 |
| 28,839,000 |
| ||
|
|
|
|
|
| ||
Long-term debt, excluding current installments |
| 113,000 |
| 100,000 |
| ||
Long-term portion of deferred gain – sale-leaseback |
| 2,015,000 |
| 1,861,000 |
| ||
Long-term portion of insurance reserves |
| 4,878,000 |
| 6,333,000 |
| ||
Senior notes |
| 100,000,000 |
| 100,000,000 |
| ||
Deferred tax liabilities |
| 3,771,000 |
| 3,186,000 |
| ||
Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $18,602,000 and $20,662,000 at June 30, 2004 and 2005, respectively. Authorized, issued and outstanding 10,000 shares |
| 18,602,000 |
| 20,662,000 |
| ||
Series A Preferred stock, par value $.01 per share, redemption value $22,484,000 and $25,604,000 at June 30, 2004 and 2005, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares |
| 22,484,000 |
| 25,604,000 |
| ||
Series B Preferred stock subject to put option, 7,688 and 7,558 shares outstanding at June 30, 2004 and June 30, 2005, respectively |
| 7,688,000 |
| 7,558,000 |
| ||
Common stock subject to put option, 324,858 and 320,633 shares outstanding at June 30, 2004 and June 30, 2005, respectively |
| 325,000 |
| 321,000 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
Stockholders’ deficit: |
|
|
|
|
| ||
Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 11,110 and 11,240 shares at June 30, 2004 and June 30, 2005 |
| 11,282,000 |
| 11,412,000 |
| ||
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 697,012 and 701,237 at June 30, 2004 and June 30, 2005, respectively |
| 7,000 |
| 7,000 |
| ||
Additional paid-in capital |
| 1,760,000 |
| 1,764,000 |
| ||
Treasury stock, at cost, 35,318 common shares at June 30, 2004 and June 30, 2005 |
| (336,000 | ) | (336,000 | ) | ||
Accumulated deficit |
| (106,918,000 | ) | (112,080,000 | ) | ||
Total stockholders’ deficit |
| (94,205,000 | ) | (99,233,000 | ) | ||
|
| $ | 89,407,000 |
| $ | 95,231,000 |
|
See accompanying notes to consolidated financial statements.
22
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
|
| 2003 |
| 2004 |
| 2005 |
| |||
Revenues |
| $ | 161,808,000 |
| $ | 157,778,000 |
| $ | 175,256,000 |
|
Cost of revenues |
| 129,817,000 |
| 122,559,000 |
| 131,309,000 |
| |||
Gross profit |
| 31,991,000 |
| 35,219,000 |
| 43,947,000 |
| |||
|
|
|
|
|
|
|
| |||
General and administrative expenses |
| 27,935,000 |
| 28,328,000 |
| 31,024,000 |
| |||
Goodwill impairment |
| — |
| 2,682,000 |
| — |
| |||
Other operating income, net |
| 938,000 |
| 827,000 |
| 517,000 |
| |||
Earnings from operations, net |
| 4,994,000 |
| 5,036,000 |
| 13,440,000 |
| |||
|
|
|
|
|
|
|
| |||
Interest expense |
| 14,355,000 |
| 13,880,000 |
| 13,432,000 |
| |||
Interest expense – accretion on preferred stock |
| — |
| — |
| 5,180,000 |
| |||
Other income |
| — |
| 859,000 |
| 105,000 |
| |||
|
|
|
|
|
|
|
| |||
Loss before income taxes |
| (9,361,000 | ) | (7,985,000 | ) | (5,067,000 | ) | |||
Income tax (benefit) expense |
| (3,441,000 | ) | (2,342,000 | ) | 95,000 |
| |||
|
|
|
|
|
|
|
| |||
Net loss |
| (5,920,000 | ) | (5,643,000 | ) | (5,162,000 | ) | |||
Accretion of preferred stock to redemption value |
| (4,074,000 | ) | (4,605,000 | ) | — |
| |||
Accrual of cumulative dividends on preferred stock |
| (4,325,000 | ) | (4,944,000 | ) | (5,620,000 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss applicable to common stockholders |
| $ | (14,319,000 | ) | $ | (15,192,000 | ) | $ | (10,782,000 | ) |
|
|
|
|
|
|
|
| |||
Loss per share basic and diluted |
| $ | (14.52 | ) | $ | (15.40 | ) | $ | (10.93 | ) |
Weighted average number of shares outstanding: Basic and diluted |
| 986,406 |
| 986,552 |
| 986,552 |
|
See accompanying notes to consolidated financial statements.
23
PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2003, 2004 AND 2005
|
| SERIES B PREFERRED STOCK |
| COMMON STOCK |
| ADDITIONAL |
| TREASURY STOCK |
|
|
| TOTAL |
| ||||||||||||
|
| SHARES |
| AMOUNT |
| SHARES |
| AMOUNT |
| PAID-IN |
| SHARES |
| AMOUNT |
| ACCUMULATED |
| STOCKHOLDERS’ |
| ||||||
Balance at June 30, 2002 |
| 10,753 |
| $ | 10,911,000 |
| 684,899 |
| $ | 7,000 |
| $ | 1,711,000 |
| (34,796 | ) | $ | (317,000 | ) | $ | (86,676,000 | ) | $ | (74,364,000 | ) |
Shares issued |
| 22 |
| 37,000 |
| 743 |
| — |
| 38,000 |
| — |
| — |
| — |
| 75,000 |
| ||||||
Accretion of redeemable preferred stock |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,074,000 | ) | (4,074,000 | ) | ||||||
Shares transferred from temporary equity to permanent equity |
| 5 |
| 5,000 |
| 164 |
| — |
| — |
| — |
| — |
| — |
| 5,000 |
| ||||||
Repurchase of shares |
| (15 | ) | (16,000 | ) | — |
| — |
| — |
| (522 | ) | (19,000 | ) | — |
| (35,000 | ) | ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (5,920,000 | ) | (5,920,000 | ) | ||||||
Balance at June 30, 2003 |
| 10,765 |
| $ | 10,937,000 |
| 685,806 |
| $ | 7,000 |
| $ | 1,749,000 |
| (35,318 | ) | $ | (336,000 | ) | $ | (96,670,000 | ) | $ | (84,313,000 | ) |
Accretion of redeemable preferred stock |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,605,000 | ) | (4,605,000 | ) | ||||||
Shares transferred from temporary equity to permanent equity |
| 345 |
| 345,000 |
| 11,206 |
| — |
| 11,000 |
| — |
| — |
| — |
| 356,000 |
| ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (5,643,000 | ) | (5,643,000 | ) | ||||||
Balance at June 30, 2004 |
| 11,110 |
| $ | 11,282,000 |
| 697,012 |
| $ | 7,000 |
| $ | 1,760,000 |
| (35,318 | ) | $ | (336,000 | ) | $ | (106,918,000 | ) | $ | (94,205,000 | ) |
Shares transferred from temporary equity to permanent equity |
| 130 |
| 130,000 |
| 4,225 |
| — |
| 4,000 |
| — |
| — |
| — |
| 134,000 |
| ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (5,162,000 | ) | (5,162,000 | ) | ||||||
Balance at June 30, 2005 |
| 11,240 |
| $ | 11,412,000 |
| 701,237 |
| $ | 7,000 |
| $ | 1,764,000 |
| (35,318 | ) | $ | (336,000 | ) | $ | (112,080,000 | ) | $ | (99,233,000 | ) |
See accompanying notes to consolidated financial statements.
24
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
|
| 2003 |
| 2004 |
| 2005 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (5,920,000 | ) | $ | (5,643,000 | ) | $ | (5,162,000 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 16,733,000 |
| 14,355,000 |
| 12,072,000 |
| |||
Interest on preferred stock |
| — |
| — |
| 5,180,000 |
| |||
Amortization of debt issuance costs |
| 1,313,000 |
| 1,163,000 |
| 1,164,000 |
| |||
Provision for doubtful receivables |
| 767,000 |
| 427,000 |
| 717,000 |
| |||
Benefit from deferred income taxes |
| (1,348,000 | ) | (3,121,000 | ) | (515,000 | ) | |||
Gains on sale of assets, net |
| (485,000 | ) | (1,285,000 | ) | (238,000 | ) | |||
Amortization of deferred gain on sale-leaseback |
| — |
| (64,000 | ) | (105,000 | ) | |||
Goodwill impairment |
| — |
| 2,682,000 |
| — |
| |||
Changes in operating assets and liabilities, net of effects of acquisition: |
|
|
|
|
|
|
| |||
Receivables |
| 2,311,000 |
| (2,239,000 | ) | (8,173,000 | ) | |||
Inventories |
| (467,000 | ) | 191,000 |
| (229,000 | ) | |||
Prepaid expenses and other assets |
| (1,391,000 | ) | 1,568,000 |
| 1,253,000 |
| |||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 810,000 |
| (1,253,000 | ) | (108,000 | ) | |||
Trade accounts payable |
| 952,000 |
| (1,775,000 | ) | 3,074,000 |
| |||
Accrued liabilities |
| (1,775,000 | ) | 1,534,000 |
| 1,597,000 |
| |||
Income taxes receivable/payable, net |
| (658,000 | ) | 3,034,000 |
| 537,000 |
| |||
Insurance reserves |
| 1,656,000 |
| 849,000 |
| 359,000 |
| |||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 151,000 |
| 695,000 |
| (678,000 | ) | |||
Net cash provided by operating activities |
| 12,649,000 |
| 11,118,000 |
| 10,745,000 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Proceeds from sale of assets |
| 1,264,000 |
| 13,290,000 |
| 571,000 |
| |||
Capital expenditures |
| (3,658,000 | ) | (5,850,000 | ) | (11,947,000 | ) | |||
Acquisition of company, less cash acquired |
| — |
| — |
| (1,192,000 | ) | |||
Net cash (used in) provided by investing activities |
| (2,394,000 | ) | 7,440,000 |
| (12,568,000 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Borrowings under long-term debt |
| 62,597,000 |
| — |
| — |
| |||
Repayments of long-term debt |
| (89,221,000 | ) | (2,507,000 | ) | (1,186,000 | ) | |||
Borrowings under revolving credit facility |
| 42,159,000 |
| 201,781,000 |
| 179,243,000 |
| |||
Repayments of revolving credit facility |
| (27,674,000 | ) | (216,266,000 | ) | (178,775,000 | ) | |||
Book overdraft |
| (2,725,000 | ) | (514,000 | ) | 1,563,000 |
| |||
Debt issuance costs |
| (1,452,000 | ) | (160,000 | ) | — |
| |||
Proceeds from issuance of common stock |
| 38,000 |
| — |
| — |
| |||
Repurchase of common stock and Series B Preferred stock |
| (35,000 | ) | — |
| — |
| |||
Issuance of Series B Preferred stock |
| 37,000 |
| — |
| — |
| |||
Net cash (used in) provided by financing activities |
| (16,276,000 | ) | (17,666,000 | ) | 845,000 |
| |||
Net change in cash and cash equivalents |
| (6,021,000 | ) | 892,000 |
| (978,000 | ) | |||
Cash and cash equivalents at beginning of year |
| 6,205,000 |
| 184,000 |
| 1,076,000 |
| |||
Cash and cash equivalents at end of year |
| $ | 184,000 |
| $ | 1,076,000 |
| $ | 98,000 |
|
See note 16 for supplementary cash flow information.
See accompanying notes to consolidated financial statements.
25
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY’S ACTIVITIES AND OPERATING CYCLE
Penhall International, Inc. (“PII”) was founded in 1957 and was incorporated in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to effect the recapitalization of PII. As part of the recapitalization, a series of mergers (the Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly owned subsidiary of PII, became the corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor of the Senior Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall International Corp., and PII changed its name to Penhall Rental Corp. Under accounting principles generally accepted in the United States of America, the recapitalization mergers were accounted for as a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to a new investor did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.
Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental Corp. and Penhall Company (collectively, “the Company” or “Penhall”) serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company’s revenues are generated through equipment rentals, both short-term and longer term under fixed price agreements. The length of the fixed price agreements (contracts) varies, but typically range from one to twelve months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company’s base of operations includes among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc., the Company’s operations were expanded to include the mid-western states of the United States and some provinces of Canada. The Company’s operations are primarily conducted through Penhall International Corp. and its wholly owned subsidiary, Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Penhall International Corp. and its wholly owned subsidiary Penhall Company (collectively, “the Company” or “Penhall”). Penhall Company has four wholly owned subsidiaries, Penhall Investments, a California corporation, Penhall Leasing, a California single member limited liability company, Bob Mack Company, Inc. a California corporation, and Capitol Drilling Services, Inc. an Indiana corporation. All significant intercompany transactions have been eliminated in consolidation.
REVENUE RECOGNITION ON LONG-TERM CONSTRUCTION CONTRACTS
Income from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage-of-completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which the percentage-of-completion is determined based on costs to date as compared to total estimated costs at completion. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts, which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed.
Contract costs include all direct material, equipment rentals, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools, supplies, repairs and depreciation. General and administrative costs are charged to expense as incurred.
Income from claims for additional contract compensation is recorded upon settlement of the disputed amount. The asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. There is no restricted cash at June 30, 2004 and 2005.
26
INVENTORIES
Inventories, which consist primarily of diamond cutting blades and fuel, are stated at cost. Diamond cutting blades are utilized in the performance of many of the Company’s specialty services including cutting, coring, grinding and grooving concrete and are expensed based on periodic measurement of the wear of the blades.
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation of property, plant and equipment based on the following estimated useful lives of the assets, using the straight-line method and a residual value ranging from 7.5% to 10%:
Buildings and leasehold improvements 15 to 39 years
Construction and other equipment 3 to 8 years
Leasehold improvements are amortized over the lesser of the life of the lease or useful life of the asset.
The cost and accumulated depreciation applicable to assets sold or otherwise disposed of are eliminated from the asset and accumulated depreciation accounts. Gain or loss on disposition is reflected in other operating income.
GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. The Company adopted these accounting standards effective July 1, 2002. We perform our annual impairment analysis at June 30 of each year. We will perform an earlier impairment analysis if a triggering event occurs that warrants such analysis.
Factors we consider important which could trigger an impairment review include:
• Significant underperformance relative to expected historical or projected future operating results;
• Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
• Significant negative industry or economic trends;
• Unanticipated competition; and
• Adjusted EBITDA relative to net book value
IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS
Effective July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the years ended June 30, 2003, 2004 and 2005, the Company performed impairment tests and determined that there was no impairment of long-lived assets. Market conditions could potentially impact valuation of long-lived assets. In markets where adverse market conditions exist, or where the Company has under-utilized assets, the Company will consider reallocation of long-lived assets to markets where those assets will produce cash flow. The Company performs quarterly reviews of the utilization of our equipment and relocates equipment based on need. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
27
INCOME TAXES
We account for income taxes under the asset and liability method of SFAS No. 109, “Accounting for Income Taxes,” under which we recognize deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We evaluate the realizability of our deferred tax assets on a regular basis. In making this assessment, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers all available evidence, both positive and negative in making this assessment. Due to estimated future reversals of existing taxable temporary differences, management believes it is more likely than not that we will realize the benefits of these deductible differences. In the future, if we determine that we no longer expect to realize a portion of our deferred tax assets, we would recognize a deferred tax asset valuation allowance, which would increase income tax expense in the period such determination is made.
ENVIRONMENTAL REMEDIATION COSTS
Losses associated with environmental remediation obligations are accrued for when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. The Company has not historically experienced significant exposure related to environmental remediation costs.
SELF-INSURANCE
Effective May 2001, the Company increased its third-party insurance deductible to $250,000 per occurrence effectively creating self-insurance for the retained risk to the Company. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general and vehicle liability. Losses are accrued based upon the accumulation of estimates for reported losses and includes a provision, based on past experience and using actuarial assumptions, for losses incurred but not reported. The method of determining such estimates and establishing the resulting reserves is continually reviewed and updated. Any adjustments resulting therefrom are reflected in current operations. As of June 30, 2004 and June 30, 2005, the Company had recorded a discounted accrued liability for self-insurance of $7,576,000 and $7,935,000, respectively of which $2 ,698,000 and $1,602,000 are current at June 30, 2004 and 2005, respectively. The discount rate utilized was 4% for the years ended June 30, 2004 and 2005. The accrued liability on an undiscounted basis was $8,253,000 and $8,648,000 at June 30, 2004 and 2005, respectively. Management believes that the accrual is adequate to cover the losses incurred to date; however, this accrual is based on estimates and the ultimate liability may be more or less than the amount provided.
STOCK-BASED COMPENSATION
The Company observes the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring quarterly SFAS No. 123 pro forma disclosure, by continuing to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company applies the intrinsic value method as outlined in APB No. 25 and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant. The Company has certain shares of Series B Preferred stock and common stock issued under the Securities Holders Agreement. Certain compensation charges could result if triggering events (i.e. death, disability, or termination) occur. No compensation cost has been recognized on options granted to employees. SFAS No. 123 requires that the Company provide pro forma information regarding net loss and net loss per common share as if compensation cost for the Company’s stock option programs had been determined in accordance with the fair value method prescribed therein.
28
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:
|
| Year ended June 30, |
| |||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
Net loss applicable to common stockholders as reported |
| $ | (14,319,000 | ) | $ | (15,192,000 | ) | $ | (10,782,000 | ) |
Add: Stock-based compensation expense included in reported net loss available to common stockholders, net of related tax effects |
| — |
| — |
| — |
| |||
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects |
| (20,000 | ) | (10,000 | ) | (8,000 | ) | |||
Pro forma net loss available to common stockholders |
| $ | (14,339,000 | ) | $ | (15,202,000 | ) | $ | (10,790,000 | ) |
|
|
|
|
|
|
|
| |||
Basic and diluted loss per share as reported |
| $ | (14.52 | ) | $ | (15.40 | ) | $ | (10.93 | ) |
|
|
|
|
|
|
|
| |||
Pro forma basic and diluted loss per share |
| $ | (14.54 | ) | $ | (15.41 | ) | $ | (10.94 | ) |
As of November 2001 (grant date), the weighted average fair value of options granted was $58.51. This was determined using the Black-Scholes option pricing model with the following assumptions used for calculation: risk-free interest rate of 4.7%, volatility of 3.01%, dividend rate of 0% and an expected life of 10 years.
LOSS PER SHARE
Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potentially dilutive securities. The dilutive effect of outstanding options is reflected in diluted per share by application of the treasury stock method. During the years ended June 30, 2003, 2004 and 2005, diluted loss per share is the same as basic loss per share as options to purchase 9,125, 8,060, and 7,780 shares of common stock were not included in the computation of diluted loss per share for the years ended June 2003, 2004 and 2005, respectively, as the effect would have been anti-dilutive.
MANAGEMENT’S ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SEGMENT INFORMATION
The Company is organized into 46 operating divisions across the country. All of these divisions provide operator assisted equipment for use in infrastructure projects on an hourly and on a longer-term, fixed price basis. Management has considered the criteria of Statement of Financial Accounting Standards No. 131 (SFAS No. 131), “Disclosures about Segments of an Enterprise and Related Information”, and what level of segment information should be reported in the notes to the consolidated financial statements. Management has determined, consistent with the objectives of SFAS No. 131, that since all of the divisions have; similar long-term economic characteristics, provide similar services to the construction industry through operated equipment, have similar classes and type of customers, have similar methods of delivery of services, and operate in the same regulatory environment, the divisions qualify for aggregation into one reportable segment.
29
COMPREHENSIVE INCOME (LOSS)
In 1999, the Company adopted SFAS No. 130, “Reporting Comprehensive Income,” which established new rules for the reporting and display of comprehensive income and its components. Comprehensive income (loss) equals net income (loss) for each of the years in the three-year period ended June 30, 2005.
RECLASSIFICATIONS
Certain 2003 and 2004 balances have been reclassified to conform to the presentation used in 2005.
(2) RECEIVABLES
Contract receivables represent those amounts, which actually have been billed. Contract retentions are collectible upon completion or other milestones of contract performance. Based upon anticipated contract completion dates, these retainages are expected to be collected as follows:
|
| YEAR ENDED JUNE 30, |
| ||||
|
| 2004 |
| 2005 |
| ||
Years ending June 30: |
|
|
|
|
| ||
2005 |
| $ | 3,489,000 |
| $ | — |
|
2006 |
| 545,000 |
| 3,910,000 |
| ||
2007 |
| 327,000 |
| 611,000 |
| ||
2008 |
| — |
| 367,000 |
| ||
|
| $ | 4,361,000 |
| $ | 4,888,000 |
|
Activity in the allowance for doubtful receivables are summarized as follows:
|
| YEAR ENDED JUNE 30, |
| |||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
|
|
|
|
| |||
Balance, beginning of year |
| $ | 1,421,000 |
| $ | 1,592,000 |
| $ | 1,317,000 |
|
Provision for doubtful accounts |
| 767,000 |
| 427,000 |
| 717,000 |
| |||
Accounts (charged off) collected |
| (596,000 | ) | (702,000 | ) | (771,000 | ) | |||
|
|
|
|
|
|
|
| |||
Balance, end of year |
| $ | 1,592,000 |
| $ | 1,317,000 |
| $ | 1,263,000 |
|
(3) OTHER ASSETS:
Other assets consist of the following:
|
| JUNE 30, |
| JUNE 30, |
| ||
|
|
|
|
|
| ||
Covenants not to compete |
| $ | 1,887,000 |
| $ | 1,887,000 |
|
Accumulated amortization |
| (1,070,000 | ) | (1,384,000 | ) | ||
|
|
|
|
|
| ||
|
| $ | 817,000 |
| $ | 503,000 |
|
The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $376,000, $369,000, and $314,000 for the years ended June 30, 2003, 2004 and 2005, respectively. The Company expects amortization expense for these assets of $305,000 and $198,000 in 2006 and 2007 respectively.
30
4) GOODWILL IMPAIRMENT
Effective July 1, 2002, the Company adopted SFAS No. 142. Under this standard, goodwill is no longer amortized. Beginning July 1, 2002, goodwill is required to be tested for impairment on an annual basis, and is required to be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company recorded no goodwill impairment charges in the years ended June 30, 2003 and 2005. Goodwill impairment totalling $2,682,000 was recorded during the year ended June 30, 2004.
As part of its quarterly review of financial results in the third quarter of fiscal 2004, the Company determined that the continued decline in market conditions within the Company’s industry was a triggering event possibly indicating goodwill impairment. Accordingly, the Company evaluated the recoverability of its goodwill in accordance with SFAS No. 142.
Under the first step of the SFAS No. 142 test, we determined the fair value of the reporting unit based on cash flow utilizing a multiple of earnings before interest, depreciation, taxes and amortization (EBIDTA). The multiple was determined based on prior transactions conducted by the company and by others in comparable market sectors to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. As such, the Company was required to perform the second step analysis on the reporting unit that failed the first step in order to determine the amount of the impairment loss. The Company then performed a preliminary second step analysis in connection with the impairment and determined that an impairment charge of $353,000 was necessary for the reporting unit. The charge of $353,000 represents all of the goodwill for this reporting unit.
The Company performed the annual impairment test as of June 30, 2004 utilizing a multiple of EBITDA to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. The Company performed the second step analysis on the reporting unit to determine the impairment loss. The Company utilized a third party valuation specialist to assist in the calculation of the impairment on the reporting unit. In the second step analysis, we assigned fair market values to intangible assets that include non-compete agreements, trade name, and backlog to determine the remaining fair value of the goodwill. As a result of the second step analysis we determined that an impairment charge of $2,329,000 was necessary for the reporting unit. This represents all of the goodwill for this reporting unit. Total goodwill impairment of $2,682,000 has been included in loss from operations for the year ended June 30, 2004.
Substantially all of the remaining goodwill resides in one reporting unit. Goodwill as of June 30, 2004 and 2005 was $6,371,000 and $6,682,000, respectively.
5) ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
|
| JUNE 30, |
| JUNE 30, |
| ||
|
|
|
|
|
| ||
Union benefits |
| $ | 936,000 |
| $ | 983,000 |
|
Accrued bonuses |
| 990,000 |
| 2,095,000 |
| ||
Accrued interest |
| 5,020,000 |
| 5,052,000 |
| ||
Accrued insurance |
| 1,157,000 |
| 914,000 |
| ||
Accrued vacation |
| 446,000 |
| 631,000 |
| ||
Accrued payroll |
| 2,167,000 |
| 2,267,000 |
| ||
Non-compete agreements |
| 585,000 |
| 283,000 |
| ||
Due to BRS |
| 375,000 |
| 675,000 |
| ||
Accrued rent |
| 128,000 |
| 476,000 |
| ||
Other |
| 667,000 |
| 846,000 |
| ||
|
| $ | 12,471,000 |
| $ | 14,222,000 |
|
31
(6) LONG-TERM DEBT, REVOLVING CREDIT FACILITY AND SENIOR NOTES
Long-term Debt
Long-term debt consists of the following:
|
| JUNE 30, |
| JUNE 30, |
| ||
Note payable secured by certain equipment, interest of 0%, imputed interest at 3.9% per annum which resulted in a discount of $24,000; annual payments of $123,000 due December 31, 2003 and 2004 |
| $ | 121,000 |
| $ | — |
|
Various capital leases and equipment financing agreements due through March 2008 with interest ranging from 0% to 9% per annum |
| 874,000 |
| 384,000 |
| ||
|
| 995,000 |
| 384,000 |
| ||
Less current installments of long-term debt |
| 882,000 |
| 284,000 |
| ||
|
|
|
|
|
| ||
Long-term debt, excluding current installments |
| $ | 113,000 |
| $ | 100,000 |
|
Annual maturities of long-term debt for the next five years are as follows:
|
| JUNE 30 |
| |
2006 |
| $ | 284,000 |
|
2007 |
| 68,000 |
| |
2008 |
| 32,000 |
| |
2009 |
| — |
| |
2010 |
| — |
| |
Thereafter |
| — |
| |
|
|
|
| |
|
| $ | 384,000 |
|
Revolving Credit Facility
As of May 22, 2003, the Company entered into a new credit facility (“the New Credit”). The interest rate on the New Credit is calculated based upon LIBOR plus 350 basis points. In addition the Company is also required to pay the lender a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the New Credit. The New Credit is a $50 million, three year asset based borrowing facility, consisting of a $50 million revolving credit facility, the (“New Revolver”), with a $25 million sub-facility for letters of credit. Availability under the revolver portion of the New Credit is limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.
One of the provisions of the New Credit allows the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. Accordingly, borrowings under the agreement are classified as current. Borrowings under the New Credit are also subject to certain key financial covenants:
• Maintain a minimum interest coverage ratio (adjusted EBITDA divided by interest expense) of at least 1.35. At June 30, 2005, the actual ratio was 2.03.
• Maintain a maximum leverage ratio (debt senior to the senior notes divided by adjusted EBITDA) of less than 2.30. At June 30, 2005, the actual ratio was 0.88.
• The Company is limited to $1.5 million of capital expenditures annually for parts and property. This includes any fixed assets (other than equipment), parts, tools, supplies or improvements that have a useful life greater than one year. During the year ended June 30, 2005, the Company spent $379,000 for parts and property.
• The Company is required to maintain a dollar utilization rate above 48% over the prior 4 quarters. Dollar utilization is total revenue for equipment divided by total standard available revenue during the period. At June 30, 2005, the Company’s dollar utilization was 67.2%.
At June 30, 2005, the Company was in compliance with all covenants. There are no anticipated trends that we are aware of that would indicate non-compliance with such covenants, however, significant deterioration in our financial performance could impact our ability to comply with such covenants.
32
The indebtedness of the Company under the New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2005, the Company had outstanding borrowings of $0.5 million, $20.8 million of outstanding letters of credit, borrowing base limitations of $9.0 million and borrowings unused and available under the New Credit of $24.6 million.
Senior Notes
On August 4, 1998 the Company issued $100,000,000 of Senior Notes guaranteed by the wholly owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company’s option, in whole at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), contains certain financial and non-financial limitations. Some of these limitations are based upon the Company’s Adjusted EBITDA (as defined), including the calculation of the Consolidated Fixed Charge Coverage Ratio (as defined).
From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Indenture permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s Consolidated Fixed Charge Coverage Ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s Consolidated Fixed Charge Coverage Ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.
The Company is exploring various strategies to extend the maturity of its existing Senior Notes. The Company plans to access the senior secured debt market within the next 30-60 days. No assurance can be given that such financing will be available to the Company or, if available that it may be obtained on terms and conditions that are satisfactory to the Company.
(7) INCOME TAXES
The Company’s pre-tax loss for the years ended June 30, 2003, 2004 and 2005 was generated from domestic operations. Income tax expense (benefit) is comprised of the following components for each fiscal year ended June 30:
|
| YEAR ENDED JUNE 30, |
| |||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
Current tax expense (benefit): |
|
|
|
|
|
|
| |||
Federal |
| $ | (2,131,000 | ) | $ | 594,000 |
| $ | 138,000 |
|
State |
| 38,000 |
| 185,000 |
| 472,000 |
| |||
|
| (2,093,000 | ) | 779,000 |
| 610,000 |
| |||
Deferred tax benefit: |
|
|
|
|
|
|
| |||
Federal |
| (910,000 | ) | (2,570,000 | ) | (255,000 | ) | |||
State |
| (438,000 | ) | (551,000 | ) | (260,000 | ) | |||
|
| (1,348,000 | ) | (3,121,000 | ) | (515,000 | ) | |||
|
| $ | (3,441,000 | ) | $ | (2,342,000 | ) | $ | 95,000 |
|
As of June 30, 2004 and 2005, the Company has a current net deferred tax asset of $2,034,000 and $1,624,000, respectively, and a net non-current deferred tax liability of $3,771,000 and $3,186,000, respectively.
33
Significant components of the Company’s deferred income tax assets and liabilities are as follows:
|
| JUNE 30, |
| JUNE 30, |
| ||||
Deferred tax assets: |
|
|
|
|
| ||||
Allowance for doubtful receivables |
| $ | 529,000 |
| $ | 508,000 |
| ||
Accruals not currently deductible and other |
| 805,000 |
| 921,000 |
| ||||
Current insurance reserves |
| 655,000 |
| 195,000 |
| ||||
Non-current insurance reserves |
| 1,183,000 |
| 3,190,000 |
| ||||
Sale-leaseback |
| 854,000 |
| 791,000 |
| ||||
AMT and other |
| 199,000 |
| 16,000 |
| ||||
Net operating loss carryforwards |
| 45,000 |
| 39,000 |
| ||||
Total deferred tax assets |
| 4,270,000 |
| 5,660,000 |
| ||||
Deferred tax liabilities — depreciation and amortization |
| (6,007,000 | ) | (7,222,000 | ) | ||||
Net deferred tax liability |
| $ | (1,737,000 | ) | $ | (1,562,000 | ) | ||
As described in Note 16, the Company recorded a $340,000 deferred tax liability to goodwill in purchase accounting. Accordingly, this deferred tax liability did not give rise to deferred tax expense during fiscal 2005.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, therefore no valuation allowance has been recorded by the Company.
As of June 30, 2005, we had net operating loss carryforwards (after carrybacks) for federal income tax purposes of approximately $97,000. We had net operating loss carryforwards (after carrybacks) for state income tax purposes of approximately $109,000. The state carryforwards have varying expiration dates beginning in 2017.
Deferred income tax benefit consists of the following:
|
| YEAR ENDED JUNE 30 |
| |||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
Allowance for doubtful receivables |
| $ | (69,000 | ) | $ | 111,000 |
| $ | 21,000 |
|
Accruals not currently deductible and other |
| (187,000 | ) | (973,000 | ) | (1,663,000 | ) | |||
Depreciation and amortization |
| (392,000 | ) | (2,940,000 | ) | 920,000 |
| |||
Other and net operating loss carryforwards |
| (700,000 | ) | 681,000 |
| 207,000 |
| |||
|
| $ | (1,348,000 | ) | $ | (3,121,000 | ) | $ | (515,000 | ) |
Income tax benefit for each fiscal year ended June 30 differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to loss before income taxes as follows:
|
| YEAR ENDED JUNE 30 |
| |||||||
|
| 2003 |
| 2004 |
| 2005 |
| |||
Computed “expected” tax benefit |
| $ | (3,276,000 | ) | $ | (2,795,000 | ) | $ | (1,774,000 | ) |
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
| |||
State income taxes, net of Federal benefit |
| (264,000 | ) | (238,000 | ) | 137,000 |
| |||
Non-deductible goodwill impairment charge |
| — |
| 815,000 |
| — |
| |||
Interest expense – accretion on preferred stock |
| — |
| — |
| 1,813,000 |
| |||
Other, net |
| 99,000 |
| (124,000 | ) | (81,000 | ) | |||
|
| $ | (3,441,000 | ) | $ | (2,342,000 | ) | $ | 95,000 |
|
34
(8) EMPLOYEE RETIREMENT PLANS
The Company and its subsidiaries contribute to multi-employer pension plans, primarily defined benefit plans, as required by collective bargaining agreements. Contributions to such plans are determined in accordance with the provisions of negotiated labor contracts and are generally based on the number of hours worked. Amounts contributed to these plans in fiscal 2003, 2004 and 2005 aggregated $2,726,000, $2,878,000 and $2,749,000 respectively. The Company may also be assessed for its share of any unfunded vested benefits resulting from partial or total withdrawal from such plans and any non-payment by other employer participants. Less than 10% of the Company’s employees are covered by a collective bargaining agreement that will expire within one year.
The Company sponsors a defined contribution 401(k) plan. Subject to certain terms and conditions of the plan, substantially all of the Company’s non-union employees are eligible to participate in the plan. The Company may, but is not required to, make matching contributions to the plan each year, which are allocated to each participant’s account in proportion to the amount that he or she has contributed to the plan during the applicable plan year. All Company and employee contributions to the plan plus the earnings thereon are 100% vested. Company contributions expensed under the plan were $335,000, $174,000 and $149,000 for the years ended June 30, 2003, 2004 and 2005, respectively.
(9) STOCK COMPENSATION PLANS
Stock Incentive Plan
On October 7, 1999, the Company’s Board of Directors approved a stock incentive plan (the “Plan”) under which employees, officers, directors or consultants (“Eligible Participants”) may be granted stock options and restricted stock awards. The Board authorized the issuance of up to 50,000 shares of common stock and 2,500 shares of Series B Preferred Stock under the Plan. The Plan is administered by the Board of Directors or an appointed committee (Administrator). The exercise price for stock options or restricted stock awards shall not be less than the Fair Market Value (as defined) of the stock on the grant date subject to restrictions and conditions, including the Company’s option to repurchase, as determined by the Administrator at the time of the grant. The term of each stock option shall be fixed, and not exceeding 10 years from the grant date of the stock option. In addition, stock options may be subject to specific vesting and acceleration provisions as determined by the Administrator at or after the grant date.
On November 12, 1999, the Company issued 17,513 shares of common stock for an aggregate purchase price of $537,000 and 511 shares of Series B Preferred Stock for an aggregate purchase price of $574,000 to Eligible Participants under the Plan.
On October 20, 2000, the Company issued 4,967 shares of common stock for an aggregate purchase price of $309,000 and 146 shares of Series B Preferred Stock for an aggregate purchase price of $186,000 to Eligible Participants under the plan. On November 16, 2001, the Company issued 3,647 shares of common stock for an aggregate purchase price of $213,000 and 108 shares of Series B Preferred Stock for an aggregate purchase price of $158,000 to Eligible Participants under the Plan.
On November 16, 2001, 9,420 stock options were granted to Eligible Participants under the Plan at an exercise price of $58.51. These options vest ratably over 5 years and are exercisable up to ten years from date of grant. On November 1, 2002, the Company issued 743 shares of common stock for an aggregate purchase price of $38,000 and 22 shares of Series B Preferred Stock for an aggregate purchase price of $37,000 to Eligible Participants under the Plan.
35
Stock option activity during the periods indicated is as follows:
|
| Number of shares |
| Weighted-average |
| |
|
|
|
|
|
| |
Balance at June 30, 2003 |
| 9,125 |
| $ | 58.51 |
|
Granted |
| — |
| — |
| |
Forfeited |
| (1,065 | ) | 58.51 |
| |
|
|
|
|
|
| |
Balance at June 30, 2004 |
| 8,060 |
| 58.51 |
| |
Granted |
| — |
| — |
| |
Forfeited |
| (280 | ) | 58.51 |
| |
|
|
|
|
|
| |
Balance at June 30, 2005 |
| 7,780 |
| $ | 58.51 |
|
At June 30, 2005 there were 4,668 exercisable options. The weighted average price and the weighted average remaining life of outstanding options was $58.51 and 6.3 years, respectively.
Stockholders Agreement
Upon consummation of the Recapitalization Mergers, an affiliate, the management stockholders and Penhall International Corp. entered into a Securities Holders Agreement (the “Stockholders Agreement”) containing certain agreements among such stockholders with respect to the capital stock and corporate governance of the Company and its subsidiaries.
The Stockholders Agreement contains certain provisions, which, with certain exceptions, restrict the ability of the management stockholders from transferring any common stock or Series B Preferred stock except pursuant to the terms of the Stockholders Agreement. If the Board of Directors of Penhall International Corp. and holders of at least a majority of the common stock of Penhall International Corp. then outstanding shall approve the sale of Penhall International Corp. or any of its subsidiaries to an unaffiliated third person (an “Approved Sale”), each stockholder of the Company shall consent to, vote for and raise no objections against, and waive dissenters and appraisal rights (if any) with respect to, the Approved Sale and, if such sale shall include the sale of capital stock, each stockholder shall sell such stockholder’s capital stock on the terms and conditions approved by the Board of Directors of Penhall International Corp. and the holders of a majority of the common stock of Penhall International Corp. then outstanding. The Stockholders Agreement also provides for certain additional restrictions on transfer of Penhall International Corp.’s common stock and Series B Preferred stock by the management stockholders, including the right of Penhall International Corp. to purchase certain common stock and Series B Preferred stock of Penhall International Corp. held by a management stockholder upon termination of such management stockholder’s employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering (as defined below), at its original issuance price, and the grant of a right of first refusal in favor of Penhall International Corp. in the event a management stockholder elects to transfer such common stock or Series B Preferred stock. Under the Stockholders Agreement, a management stockholder has the right, subject to the restrictions set forth in agreements relating to indebtedness of the Company, to require Penhall International Corp. to purchase certain common stock and Series B Preferred stock of the Company held by such management stockholder upon termination of such management stockholder’s employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering, at its original issuance price. “Initial Public Offering” means the sale by the Company in an underwritten public offering made pursuant to an effective registration statement under the Securities Act of common stock for gross offering proceeds of at least $30 million. The Stockholders Agreement also contains certain provisions that provide the management stockholders with a termination benefit upon termination of employment without cause, death or disability. The amount of the termination benefit is based upon the book value of the common stock and Series B Preferred stock, as defined in the Stockholders Agreement. However, if Penhall International Corp. does not meet certain EBITDA growth criteria, the amount that a management stockholder will receive for outstanding common stock or Series B Preferred stock under any form of termination is the lower of the original issuance price or book value.
Shares outstanding that are subject to the buy-out provisions of the Stockholders Agreement are 324,858 and 320,633 shares of common stock and 7,688 and 7,558 shares of Series B Preferred stock at June 30, 2004 and 2005, respectively.
36
(10) REDEEMABLE PREFERRED STOCK
Senior Exchangeable Preferred Stock
Penhall International Corp. is authorized to issue up to 250,000 shares of preferred stock, par value $.01 per share (“Preferred stock”), of which 10,000 shares have been designated as Senior Exchangeable Preferred stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Senior Exchangeable Preferred stock ranks senior to the Common stock, the Series A Preferred stock and the Series B Preferred stock. Holders of Senior Exchangeable Preferred stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Senior Exchangeable Preferred stock at a rate per annum equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Senior Exchangeable Preferred stock (“Senior Exchangeable Junior Stock”) with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. “Senior Exchangeable Preferred Liquidation Preference” means, on any specific date, with respect to each share of Senior Exchangeable Preferred stock, the sum of (i) $1,000 per share plus (ii) the accumulated unpaid dividends with respect to such share.
Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefore, in whole or in part, any or all of the shares of Senior Exchangeable Preferred stock, at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On February 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefore, all of the then outstanding shares of Senior Exchangeable Preferred stock at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On February 1, 2007, the Senior Exchangeable Preferred Stock plus accretion will be valued at approximately $24.4 million. The Company anticipates extending or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.
The Senior Exchangeable Preferred stock is exchangeable by Penhall International Corp. at any time and from time to time for junior subordinated notes (the “Junior Subordinated Notes”) in an amount equal to the Senior Exchangeable Preferred Liquidation Preference plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the exchange date to the exchange date. The Junior Subordinated Notes will pay interest from the date of exchange at the rate of 10.5% per annum in cash; provided, however, that Penhall International Corp. shall be prohibited from paying interest on the Junior Subordinated Notes in cash for so long as such notes shall remain outstanding. In such event, interest shall be deemed to be paid by such amount being added to the outstanding principal amount of the Junior Subordinated Notes and shall accrue interest as a portion of the principal amount of the Junior Subordinated Notes to the maximum extent permitted by law. If issued, the Junior Subordinated Notes will mature on February 1, 2007.
In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Senior Exchangeable Preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Senior Exchangeable Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Senior Exchangeable Preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Senior Exchangeable Preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders.
37
Series A Preferred Stock
Penhall International Corp. has designated 25,000 shares of preferred stock as Series A Preferred stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Series A Preferred stock ranks senior to the common stock and on a parity with the Series B Preferred stock. Holders of Series A Preferred stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Series A Preferred stock at a rate per annum equal to 13% of the Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Series A Preferred stock (“Junior Stock”) with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. “Liquidation Preference” means, on any specific date, with respect to each share of Series A Preferred stock, the sum of (i) $1,000 per share plus (ii) the accumulated dividends with respect to such share.
Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefore, in whole or in part, any or all of the shares of Series A Preferred stock, at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On August 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefore, all of the then outstanding shares of Series A Preferred stock at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On August 1, 2007, the Series A Preferred Stock plus accretion will be valued at $33.6 million. The Company anticipates extending or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.
In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Series A Preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of junior stock. If such available assets are insufficient to pay the holders of the outstanding shares of Series A Preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Series A Preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders.
Series B Preferred Stock
The Company has designated 50,000 shares of preferred stock as Series B Preferred stock. The preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions (including, without limitation, dividend rights and rights on liquidation, winding up and dissolution of the Company) of the Series B Preferred stock are identical to those of the Series A Preferred stock, except that the Series B Preferred stock is not subject to any mandatory redemption by the Company. However, certain shares of Series B Preferred stock are subject to the terms and conditions of the Stockholders Agreement which contains provisions that grant the option to certain management stockholders upon death, disability or termination of the management stockholder to require the Company to repurchase the securities at specified amounts. The Series B Preferred stock also calls for cumulative dividends of 13% per annum, which have not been recorded as the dividends have not been declared by the Company’s Board of Directors. Such dividends approximate $21,520,000 and $27,140,000 as of June 30, 2004 and June 30, 2005, respectively.
Common Stock
The Company has authorized 5,000,000 shares of common stock. As of June 30, 2004 and June 30, 2005, the Company has issued and outstanding shares totaling 1,021,870. Certain shares of common stock are subject to the terms and conditions of the Stockholders Agreement, which contains provisions that grant the option to certain management stockholders upon death, disability or termination of the management stockholder to require the Company to repurchase the securities at specified amounts.
38
(11) COMMITMENTS AND CONTINGENCIES
Leases
(a) Capital Leases
The Company was obligated under various capital leases for certain construction equipment that were terminated prior to June 30, 2005. At June 30, 2004, the cost of construction equipment and the related depreciation recorded for equipment under capital leases were as follows:
|
| 2004 |
| |
Construction Equipment |
| $ | 340,000 |
|
Less accumulated depreciation |
| 292,000 |
| |
|
| $ | 48,000 |
|
Amortization of assets held under capital leases is included in depreciation expense.
(b) Operating Leases
The Company and its subsidiaries lease various properties and equipment under long-term agreements, which expire at varying dates through December 2023. Certain of these leases provide for renegotiation of annual rentals at specified dates. Rent expense was $1,573,000, $2,549,000 and $3,187,000 for the years ended June 30, 2003, 2004 and 2005, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2005 are as follows:
YEARS ENDING JUNE 30: |
|
|
| |
2006 |
| $ | 2,588,000 |
|
2007 |
| 2,255,000 |
| |
2008 |
| 1,977,000 |
| |
2009 |
| 1,836,000 |
| |
2010 |
| 1,685,000 |
| |
Thereafter |
| 20,865,000 |
| |
|
| $ | 31,206,000 |
|
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalent accounts, and contract and trade receivables. At June 30, 2004, the Company had approximately $975,000 on deposit at one financial institution. There were no significant cash and cash equivalents on deposit at June 30, 2005.
There were no customers that accounted for more than 5% of consolidated revenues or outstanding accounts receivable as of June 30, 2003, 2004 or 2005.
Risks and Uncertainties
The Company is required to meet certain financial and operating criteria as established by respective Department of Transportation agencies to bid and work in certain states. There is no assurance that state regulatory agencies will not change the established criteria or that the Company will continue to comply with the established criteria. Should the Company lose its ability to bid and work in certain states, the operations and the financial position of the Company could be adversely effected.
Letters of Credit
As of June 30, 2005, the Company had outstanding standby letters of credit of $20,752,000 with a financial institution for the benefit of the Company’s insurers (note 6). Outstanding standby letters of credit of $20,683,000 at June 30, 2005 reduce the amount of borrowings available under the Company’s New Credit. The standby letters of credit are automatically renewable unless participating parties notify the other party thirty days prior to cancellation.
39
Surety Bonds
As is customary in the construction business, the Company is required to provide surety bonds to secure our performance under construction contracts. The Company’s ability to obtain surety bonds primarily depends upon capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of the backlog and their underwriting standards, which may change from time to time. Since 2001, the surety industry has undergone significant changes with several companies withdrawing completely from the industry or significantly reducing their bonding commitment. In addition, certain re-insurers of surety risk have limited their participation in this market. One of the Company’s sureties has notified the Company of its intent to withdraw from the Penhall account and the Company is in the process of replacing that surety. A new surety has offered to replace part of the bonding capacity of the withdrawing surety. In addition, the Company is negotiating with another surety for a new and larger bonding facility. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.
Litigation
There are various additional lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management’s present opinion, based in part upon the advice of legal counsel, that the outcome of these proceedings will not have a material effect on the Company’s consolidated financial statements taken as a whole.
Certain Fees Payable to BRS; BRS Management Agreement – Related Party
Upon consummation of the Recapitalization Mergers, the Company entered into a management services agreement (the “Management Agreement”) with Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) pursuant to which BRS will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The fees payable pursuant to the Management Agreement were negotiated by representatives of BRS and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company. The amount owed to BRS as of June 30, 2004 and 2005 was $375,000 and $675,000, respectively, and is recorded in accrued liabilities. During the years ended June 30, 2003, 2004 and 2005, the Company recorded $300,000, respectively, under the arrangement which has been recorded in general and administrative expenses in the statement of operations.
Labor Relations
Approximately 42% of Penhall’s employees are represented by various labor unions. The Company’s unionized work force is divided into approximately 27 active and 10 inactive certified or lawfully recognized bargaining units. All agreements originally set to expire during fiscal 2005 have been renewed or extended. There are 3 agreements representing approximately 10.0% of Penhall’s employees expiring during fiscal 2006, most at the end of the fiscal year. There is no reason to believe that any expiration will have a material effect on fiscal 2006 operations.
(12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings on uncompleted contracts consists of the following:
|
| JUNE 30, |
| JUNE 30, |
| ||
Costs incurred on uncompleted contracts |
| $ | 50,785,000 |
| $ | 62,475,000 |
|
Estimated earnings to date |
| 7,232,000 |
| 10,009,000 |
| ||
|
| 58,017,000 |
| 72,484,000 |
| ||
Less billings to date |
| 56,586,000 |
| 70,267,000 |
| ||
|
| $ | 1,431,000 |
| $ | 2,217,000 |
|
Included in accompanying consolidated balance sheets under the following captions: |
|
|
|
|
| ||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| $ | 2,957,000 |
| $ | 3,065,000 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
| (1,526,000 | ) | (848,000) |
| ||
|
| $ | 1,431,000 |
| $ | 2,217,000 |
|
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
40
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2004 and 2005:
|
| 2004 |
| 2005 |
| ||||||||
|
| CARRYING |
| FAIR |
| CARRYING |
| FAIR |
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 1,076,000 |
| $ | 1,076,000 |
| $ | 98,000 |
| $ | 98,000 |
|
Net receivables |
| 33,430,000 |
| 33,430,000 |
| 41,374,000 |
| 41,374,000 |
| ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 2,957,000 |
| 2,957,000 |
| 3,065,000 |
| 3,065,000 |
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
| ||||
Current installments of long-term debt |
| 882,000 |
| 882,000 |
| 284,000 |
| 284,000 |
| ||||
Borrowings under revolving credit facility |
| — |
| — |
| 468,000 |
| 468,000 |
| ||||
Trade accounts payable |
| 5,664,000 |
| 5,664,000 |
| 10,385,000 |
| 10,385,000 |
| ||||
Accrued liabilities, short-term portion of insurance reserves, and taxes payable |
| 15,555,000 |
| 15,555,000 |
| 16,747,000 |
| 16,747,000 |
| ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 1,526,000 |
| 1,526,000 |
| 848,000 |
| 848,000 |
| ||||
Long-term debt, excluding current installments |
| 113,000 |
| 113,000 |
| 100,000 |
| 100,000 |
| ||||
Long-term portion of insurance reserves |
| 4,878,000 |
| 4,878,000 |
| 6,333,000 |
| 6,333,000 |
| ||||
Mandatorily redeemable preferred stock |
| 41,086,000 |
| 41,086,000 |
| 46,266,000 |
| 46,266,000 |
| ||||
Series B Preferred and common stock subject to put option |
| 8,013,000 |
| 2,571,000 |
| 7,879,000 |
| 2,528,000 |
| ||||
Senior notes |
| 100,000,000 |
| 94,500,000 |
| 100,000,000 |
| 100,060,000 |
| ||||
The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, net receivables, costs and estimated earnings in excess of billings on uncompleted contracts, current installments of long-term debt, trade accounts payables, accrued liabilities, short-term portion of insurance reserves and taxes payable, and billings in excess of costs and estimated earnings on uncompleted contracts: The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-term debt, excluding current installments, borrowings under revolving credit facility, and Senior notes: The fair value of the Company’s long-term debt and revolving credit facility is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company as of the date of the consolidated balance sheets. The fair value of the Senior Notes is the quoted market price as of June 30, 2004 and 2005.
Long-term portion of insurance reserves: The fair value of the Company’s long-term portion of insurance reserves has been calculated utilizing a 4% discount rate as of June 30, 2004 and 2005. The rate is consistent with market discount rates for determining the present value of future liabilities.
Mandatorily redeemable preferred stock: The fair value of the mandatorily redeemable preferred stock is calculated utilizing redemption values. See Note 10.
Series B Preferred and common stock subject to put option: The fair value of the Series B Preferred and common stock subject to put option is calculated based on an appraisal prepared in fiscal 2004 and adjusted by management based on fiscal 2005 operations.
(14) SALE-LEASEBACK
On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of our 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has four 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.1 million will be amortized over the initial term of the leases of 20 years. Through June 30, 2005, the Company has amortized $169,000 of the gain and recorded $1,933,000 of rent expense under the leaseback.
41
(15) GUARANTORS AND FINANCIAL INFORMATION
The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The 100% owned Guarantor Subsidiaries, (Penhall Company and subsidiaries), fully guarantee jointly, severally, unconditionally and irrevocably certain obligations of the Company, including the Senior Notes. Separate financial statements and other disclosures with respect to each of the individual Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not, in the opinion of management, provide additional information that is material to investors.
The condensed consolidating financial information presents condensed financial statements as of June 30, 2004 and 2005 and for the years ended June 30, 2003, 2004 and 2005 of:
a. Penhall International Corp. on a parent company only basis (“Parent”) (carrying its investments in the subsidiaries under the equity method),
b. the Guarantor Subsidiaries (Penhall Rental Corp. (through dissolution effective July 1, 2002) and Penhall Company and subsidiaries),
c. elimination entries necessary to consolidate the parent company and its subsidiaries,
d. the Company on a consolidated basis.
42
CONDENSED CONSOLIDATING BALANCE SHEET
|
| JUNE 30, 2004 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Receivables, net |
| $ | — |
| $ | 33,430,000 |
| $ | — |
| $ | 33,430,000 |
|
Inventories |
| — |
| 2,171,000 |
| — |
| 2,171,000 |
| ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| — |
| 2,957,000 |
| — |
| 2,957,000 |
| ||||
Other current assets |
| 114,000 |
| 5,194,000 |
| — |
| 5,308,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total current assets |
| 114,000 |
| 43,752,000 |
| — |
| 43,866,000 |
| ||||
Net property, plant and equipment |
| 23,000 |
| 36,017,000 |
| — |
| 36,040,000 |
| ||||
Other assets, net |
| 1,388,000 |
| 8,113,000 |
| — |
| 9,501,000 |
| ||||
Investment in subsidiaries |
| 60,171,000 |
| — |
| (60,171,000 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 61,696,000 |
| $ | 87,882,000 |
| $ | (60,171,000 | ) | $ | 89,407,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Current installments of long-term debt |
| $ | — |
| $ | 882,000 |
| $ | — |
| $ | 882,000 |
|
Trade accounts payable |
| 3,000 |
| 5,661,000 |
| — |
| 5,664,000 |
| ||||
Accrued liabilities and taxes payable |
| 5,725,000 |
| 7,132,000 |
| — |
| 12,857,000 |
| ||||
Current portion of insurance reserves |
| — |
| 2,698,000 |
| — |
| 2,698,000 |
| ||||
Current portion of deferred gain–sale-leaseback |
| 109,000 |
| — |
| — |
| 109,000 |
| ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| — |
| 1,526,000 |
| — |
| 1,526,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total current liabilities |
| 5,837,000 |
| 17,899,000 |
| — |
| 23,736,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt, excluding current installments |
| — |
| 113,000 |
| — |
| 113,000 |
| ||||
Long-term portion of deferred gain–sale-leaseback |
| 2,015,000 |
| — |
| — |
| 2,015,000 |
| ||||
Long-term portion of insurance reserves |
| — |
| 4,878,000 |
| — |
| 4,878,000 |
| ||||
Senior notes |
| 100,000,000 |
| — |
| — |
| 100,000,000 |
| ||||
Deferred tax liabilities |
| (1,050,000 | ) | 4,821,000 |
| — |
| 3,771,000 |
| ||||
Senior Exchangeable Preferred stock |
| 18,602,000 |
| — |
| — |
| 18,602,000 |
| ||||
Series A Preferred stock |
| 22,484,000 |
| — |
| — |
| 22,484,000 |
| ||||
Series B Preferred stock subject to put option |
| 7,688,000 |
| — |
| — |
| 7,688,000 |
| ||||
Common stock subject to put option |
| 325,000 |
| — |
| — |
| 325,000 |
| ||||
Stockholders’ equity (deficit) |
| (94,205,000 | ) | 60,171,000 |
| (60,171,000 | ) | (94,205,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 61,696,000 |
| $ | 87,882,000 |
| $ | (60,171,000 | ) | $ | 89,407,000 |
|
43
|
| JUNE 30, 2005 |
| |||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| |||||
Assets |
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
| |||||
Receivables, net |
| $ | — |
| $ | 41,374,000 |
| $ | — |
| $ | 41,374,000 |
| |
Inventories |
| — |
| 2,454,000 |
| — |
| 2,454,000 |
| |||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| — |
| 3,065,000 |
| — |
| 3,065,000 |
| |||||
Other current assets |
| 16,000 |
| 2,725,000 |
| — |
| 2,741,000 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Total current assets |
| 16,000 |
| 49,618,000 |
| — |
| 49,634,000 |
| |||||
Net property, plant and equipment |
| — |
| 37,263,000 |
| — |
| 37,263,000 |
| |||||
Other assets, net |
| 724,000 |
| 7,610,000 |
| — |
| 8,334,000 |
| |||||
Investment in subsidiaries |
| 61,859,000 |
| — |
| (61,859,000 | ) | — |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
|
| $ | 62,599,000 |
| $ | 94,491,000 |
| $ | (61,859,000 | ) | $ | 95,231,000 |
| |
|
|
|
|
|
|
|
|
|
| |||||
Liabilities and Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Current installments of long-term debt |
| $ | — |
| $ | 284,000 |
| $ | — |
| $ | 284,000 |
| |
Borrowings under revolving credit facility |
|
| — |
|
| 468,000 |
|
| — |
|
| 468,000 |
| |
Trade accounts payable |
| — |
| 10,385,000 |
| — |
| 10,385,000 |
| |||||
Accrued liabilities and taxes payable |
| 6,567,000 |
| 8,578,000 |
| — |
| 15,145,000 |
| |||||
Current portion of insurance reserves |
| — |
| 1,602,000 |
| — |
| 1,602,000 |
| |||||
Current portion of deferred gain–sale-leaseback |
| 107,000 |
| — |
| — |
| 107,000 |
| |||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| — |
| 848,000 |
| — |
| 848,000 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Total current liabilities |
| 6,674,000 |
| 22,165,000 |
| — |
| 28,839,000 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt, excluding current installments |
| — |
| 100,000 |
| — |
| 100,000 |
| |||||
Long-term portion of deferred gain–sale-leaseback |
| 1,861,000 |
| — |
| — |
| 1,861,000 |
| |||||
Long-term portion of insurance reserves |
| — |
| 6,333,000 |
| — |
| 6,333,000 |
| |||||
Senior notes |
| 100,000,000 |
| — |
| — |
| 100,000,000 |
| |||||
Deferred tax liabilities |
| (848,000 | ) | 4,034,000 |
| — |
| 3,186,000 |
| |||||
Senior Exchangeable Preferred stock |
| 20,662,000 |
| — |
| — |
| 20,662,000 |
| |||||
Series A Preferred stock |
| 25,604,000 |
| — |
| — |
| 25,604,000 |
| |||||
Series B Preferred stock subject to put option |
| 7,558,000 |
| — |
| — |
| 7,558,000 |
| |||||
Common stock subject to put option |
| 321,000 |
| — |
| — |
| 321,000 |
| |||||
Stockholders’ equity (deficit) |
| (99,233,000 | ) | 61,859,000 |
| (61,859,000 | ) | (99,233,000 | ) | |||||
|
|
|
|
|
|
|
|
|
| |||||
|
| $ | 62,599,000 |
| $ | 94,491,000 |
| $ | (61,859,000 | ) | $ | 95,231,000 |
| |
44
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
| YEAR ENDED JUNE 30, 2003 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 5,174,000 |
| $ | 161,808,000 |
| $ | (5,174,000 | ) | $ | 161,808,000 |
|
Cost of revenues |
| — |
| 133,408,000 |
| (3,591,000 | ) | 129,817,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 5,174,000 |
| 28,400,000 |
| (1,583,000 | ) | 31,991,000 |
| ||||
General and administrative expenses |
| 829,000 |
| 28,689,000 |
| (1,583,000 | ) | 27,935,000 |
| ||||
Other operating income, net |
| 11,000 |
| 927,000 |
| — |
| 938,000 |
| ||||
Equity in earnings of subsidiaries |
| 106,000 |
| — |
| (106,000 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from operations |
| 4,462,000 |
| 638,000 |
| (106,000 | ) | 4,994,000 |
| ||||
Interest expense |
| 13,918,000 |
| 437,000 |
| — |
| 14,355,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) before income taxes |
| (9,456,000 | ) | 201,000 |
| (106,000 | ) | (9,361,000 | ) | ||||
Income tax expense (benefit) |
| (3,536,000 | ) | 95,000 |
| — |
| (3,441,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings (loss) |
| $ | (5,920,000 | ) | $ | 106,000 |
| $ | (106,000 | ) | $ | (5,920,000 | ) |
45
|
| YEAR ENDED JUNE 30, 2004 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 5,102,000 |
| $ | 157,778,000 |
| $ | (5,102,000 | ) | $ | 157,778,000 |
|
Cost of revenues |
| — |
| 126,076,000 |
| (3,517,000 | ) | 122,559,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 5,102,000 |
| 31,702,000 |
| (1,585,000 | ) | 35,219,000 |
| ||||
General and administrative expenses |
| 1,276,000 |
| 28,637,000 |
| (1,585,000 | ) | 28,328,000 |
| ||||
Goodwill impairment |
| — |
| 2,682,000 |
| — |
| 2,682,000 |
| ||||
Other operating income, net |
| — |
| 827,000 |
| — |
| 827,000 |
| ||||
Equity in loss of subsidiaries |
| (465,000 | ) | — |
| 465,000 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from operations |
| 3,361,000 |
| 1,210,000 |
| 465,000 |
| 5,036,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| 12,720,000 |
| 1,160,000 |
| — |
| 13,880,000 |
| ||||
Other income |
| 64,000 |
| 795,000 |
| — |
| 859,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) before income taxes |
| (9,295,000 | ) | 845,000 |
| 465,000 |
| (7,985,000 | ) | ||||
Income tax expense (benefit) |
| (3,652,000 | ) | 1,310,000 |
| — |
| (2,342,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings (loss) |
| $ | (5,643,000 | ) | $ | (465,000 | ) | $ | 465,000 |
| $ | (5,643,000 | ) |
46
|
| YEAR ENDED JUNE 30, 2005 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 5,490,000 |
| $ | 175,256,000 |
| $ | (5,490,000 | ) | $ | 175,256,000 |
|
Cost of revenues |
| — |
| 135,215,000 |
| (3,906,000 | ) | 131,309,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 5,490,000 |
| 40,041,000 |
| (1,584,000 | ) | 43,947,000 |
| ||||
General and administrative expenses |
| 1,755,000 |
| 30,853,000 |
| (1,584,000 | ) | 31,024,000 |
| ||||
Other operating income, net |
| 1,000 |
| 516,000 |
| — |
| 517,000 |
| ||||
Equity in earnings of subsidiaries |
| 5,233,000 |
| — |
| (5,233,000 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from operations |
| 8,969,000 |
| 9,704,000 |
| (5,233,000 | ) | 13,440,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| 12,664,000 |
| 768,000 |
| — |
| 13,432,000 |
| ||||
Interest expense – accretion on preferred stock |
| 5,180,000 |
| — |
| — |
| 5,180,000 |
| ||||
Other income |
| 105,000 |
| — |
| — |
| 105,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) before income taxes |
| (8,770,000 | ) | 8,936,000 |
| (5,233,000 | ) | (5,067,000 | ) | ||||
Income tax expense (benefit) |
| (3,608,000 | ) | 3,703,000 |
| — |
| 95,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings (loss) |
| $ | (5,162,000 | ) | $ | 5,233,000 |
| $ | (5,233,000 | ) | $ | (5,162,000 | ) |
47
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
| YEAR ENDED JUNE 30, 2003 |
| |||||||||||||
|
| PENHALL |
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by (used in) operating activities |
| $ | (6,029,000 | ) | $ | — |
| $ | 18,678,000 |
| $ | — |
| $ | 12,649,000 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Proceeds from sale of assets |
| — |
| — |
| 1,264,000 |
| — |
| 1,264,000 |
| |||||
Capital expenditures |
| — |
| — |
| (3,658,000 | ) | — |
| (3,658,000 | ) | |||||
Cash from Penhall Rental merger |
| 6,143,000 |
| (6,143,000 | ) | — |
| — |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by (used) in investing activities |
| 6,143,000 |
| (6,143,000 | ) | (2,394,000 | ) | — |
| (2,394,000 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Due to (from) affiliates |
| 21,456,000 |
| — |
| (21,456,000 | ) | — |
| — |
| |||||
Borrowings under long-term debt |
| 61,520,000 |
| — |
| 1,077,000 |
| — |
| 62,597,000 |
| |||||
Repayments of long-term debt |
| (82,874,000 | ) | — |
| (6,347,000 | ) | — |
| (89,221,000 | ) | |||||
Borrowings under revolving credit facility |
| — |
| — |
| 42,159,000 |
| — |
| 42,159,000 |
| |||||
Repayments of revolving credit facility |
| — |
| — |
| (27,674,000 | ) | — |
| (27,674,000 | ) | |||||
Book overdraft |
| — |
| — |
| (2,573,000 | ) | (152,000 | ) | (2,725,000 | ) | |||||
Debt issuance costs |
| (104,000 | ) | — |
| (1,348,000 | ) | — |
| (1,452,000 | ) | |||||
Proceeds from issuance of common stock |
| 38,000 |
| — |
| — |
| — |
| 38,000 |
| |||||
Repurchase of common stock and Series B Preferred stock |
| (35,000 | ) | — |
| — |
| — |
| (35,000 | ) | |||||
Issuance of Series B Preferred stock |
| 37,000 |
| — |
| — |
| — |
| 37,000 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by (used in) financing activities |
| 38,000 |
| — |
| (16,162,000 | ) | (152,000 | ) | (16,276,000 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net change in cash and cash equivalents |
| 152,000 |
| (6,143,000 | ) | 122,000 |
| (152,000 | ) | (6,021,000 | ) | |||||
Cash and cash equivalents at beginning of year |
| — |
| 6,143,000 |
| 62,000 |
| — |
| 6,205,000 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents at end of year |
| $ | 152,000 |
| $ | — |
| $ | 184,000 |
| $ | (152,000 | ) | $ | 184,000 |
|
48
|
| YEAR ENDED JUNE 30, 2004 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) operating activities |
| $ | (1,012,000 | ) | $ | 12,130,000 |
| $ | — |
| $ | 11,118,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Proceeds from sale of assets |
| 11,312,000 |
| 1,978,000 |
| — |
| 13,290,000 |
| ||||
Capital expenditures |
| — |
| (5,850,000 | ) | — |
| (5,850,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used) in investing activities |
| 11,312,000 |
| (3,872,000 | ) | — |
| 7,440,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Due to (from) affiliates |
| (10,109,000 | ) | 10,109,000 |
| — |
| — |
| ||||
Borrowings under long-term debt |
| — |
| — |
| — |
| — |
| ||||
Repayments of long-term debt |
| (183,000 | ) | (2,324,000 | ) | — |
| (2,507,000 | ) | ||||
Borrowings under revolving credit facility |
| — |
| 201,781,000 |
| — |
| 201,781,000 |
| ||||
Repayments of revolving credit facility |
| — |
| (216,266,000 | ) | — |
| (216,266,000 | ) | ||||
Book overdraft |
| (152,000 | ) | (514,000 | ) | 152,000 |
| (514,000 | ) | ||||
Debt issuance costs |
| — |
| (160,000 | ) | — |
| (160,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) financing activities |
| (10,444,000 | ) | (7,374,000 | ) | 152,000 |
| (17,666,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
| (144,000 | ) | 884,000 |
| 152,000 |
| 892,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at beginning of year |
| 152,000 |
| 184,000 |
| (152,000 | ) | 184,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of year |
| $ | 8,000 |
| $ | 1,068,000 |
| $ | — |
| $ | 1,076,000 |
|
49
|
| YEAR ENDED JUNE 30, 2005 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) operating activities |
| $ | (3,497,000 | ) | $ | 14,242,000 |
| $ | — |
| $ | 10,745,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Proceeds from sale of assets |
| — |
| 571,000 |
| — |
| 571,000 |
| ||||
Capital expenditures |
| — |
| (11,947,000 | ) | — |
| (11,947,000 | ) | ||||
Acquisition of company |
| — |
| (1,192,000 |
| — |
| (1,192,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash used in investing activities |
| — |
| (12,568,000 | ) | — |
| (12,568,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Due to (from) affiliates |
| 3,494,000 |
| (3,494,000 | ) | — |
| — |
| ||||
Borrowings under long-term debt |
| — |
| — |
| — |
| — |
| ||||
Repayments of long-term debt |
| — |
| (1,186,000 | ) | — |
| (1,186,000 | ) | ||||
Borrowings under revolving credit facility |
| — |
| 179,243,000 |
| — |
| 179,243,000 |
| ||||
Repayments of revolving credit facility |
| — |
| (178,775,000 | ) | — |
| (178,775,000 | ) | ||||
Book overdraft |
| — |
| 1,563,000 |
| — |
| 1,563,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) financing activities |
| 3,494,000 |
| (2,649,000 | ) | — |
| 845,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
| (3,000 | ) | (975,000 | ) | — |
| (978,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at beginning of year |
| 8,000 |
| 1,068,000 |
| — |
| 1,076,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of year |
| $ | 5,000 |
| $ | 93,000 |
| $ | — |
| $ | 98,000 |
|
50
(16) SUPPLEMENTARY CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect to interest and tax payments as well as certain non-cash investing and financing activities for the years ended June 30:
|
| 2003 |
| 2004 |
| 2005 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid during the year for: |
|
|
|
|
|
|
| |||
Income taxes |
| $ | — |
| $ | — |
| $ | 73,000 |
|
Interest |
| 13,227,000 |
| 12,666,000 |
| 12,237,000 |
| |||
Noncash investing and financing activities - |
|
|
|
|
|
|
| |||
Borrowings related to acquisition of assets |
| 564,000 |
| 592,000 |
| 395,000 |
| |||
Accretion of preferred stock to redemption value |
| 4,074,000 |
| 4,605,000 |
| — |
| |||
Transfer of temporary equity instruments to permanent equity upon expiration of put option |
| 5,000 |
| 356,000 |
| 134,000 |
| |||
The following table details the assets acquired and liabilities assumed as part of the fiscal 2005 acquisition of Capitol Drilling Supplies, Inc. There were no acquisitions in 2003 or 2004:
|
| 2005 |
| |
Account receivable |
| $ | 488,000 |
|
Inventory |
| 53,000 |
| |
Prepaids |
| 74,000 |
| |
Property, plant and equipment |
| 1,023,000 |
| |
Goodwill |
| 311,000 |
| |
Accounts payable |
| 84,000 |
| |
Accrued liabilities |
| 154,000 |
| |
Long term debt |
| 180,000 |
| |
Deferred tax liability |
| 340,000 |
| |
(17) ACQUISITION
In June 2005, the Company purchased 100% of the stock of Capitol Drilling Supplies, Inc. Total consideration for the purchase of Capitol Drilling Supplies, Inc. was approximately $1.2 million. The Company recorded approximately $0.3 million of goodwill related to this transaction. Based in Indianapolis, Indiana and Champaign, Illinois, Capitol Drilling Supplies, Inc. provides the same operated equipment rental services as the Company. Results of operations from June 2005 and thereafter are included in the consolidated results of the Company. For the year ended June 30, 2005, the fair value of Capitol Drilling Supplies, Inc. net assets at the date of acquisition was $0.9 million. The Company is still in the process of determining the fair value of certain assets and liabilities, thus the allocation of the purchase price is subject to refinement.
(18) CHANGE IN ACCOUNTING PRINCIPLE
In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Company’s fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004. As a result of the adoption of Statement 150, the Senior Exchangeable Preferred stock and the Series A Preferred stock previously classified as mezzanine level equity instruments, are now classified as indebtedness. Further, accretion related to the Senior Exchangeable Preferred stock and the Series A Preferred stock is presented as interest expense in the Company’s consolidated statements of operations. Prior to the adoption accretion was included as part of the determination of net loss applicable to common stockholders.
51
(19) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following is unaudited supplementary financial information for 2004 and 2005:
|
| FOR THE QUARTERS ENDED 2004 |
| ||||||||||
|
| SEPTEMBER 30, |
| DECEMBER 31, |
| MARCH 31, |
| JUNE 30, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 47,524,000 |
| $ | 37,875,000 |
| $ | 31,368,000 |
| $ | 41,011,000 |
|
Gross profit |
| 11,270,000 |
| 9,910,000 |
| 5,286,000 |
| 8,753,000 |
| ||||
Earnings (loss) before income taxes |
| 804,000 |
| 77,000 |
| (5,538,000 | ) | (3,328,000 | ) | ||||
Net earnings (loss) |
| 498,000 |
| 48,000 |
| (3,456,000 | ) | (2,733,000 | ) | ||||
Net loss available to common stockholders |
| (1,787,000 | ) | (2,316,000 | ) | (5,868,000 | ) | (5,221,000 | ) | ||||
Basic and diluted loss per share |
| (1.81 | ) | (2.35 | ) | (5.95 | ) | (5.29 | ) | ||||
|
| FOR THE QUARTERS ENDED 2005 |
| ||||||||||
|
| SEPTEMBER 30, |
| DECEMBER 31, |
| MARCH 31, |
| JUNE 30, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 52,819,000 |
| $ | 38,390,000 |
| $ | 30,860,000 |
| $ | 53,187,000 |
|
Gross profit |
| 14,228,000 |
| 8,719,000 |
| 6,157,000 |
| 14,843,000 |
| ||||
Earnings (loss) before income taxes |
| 1,481,000 |
| (2,800,000 | ) | (5,413,000 | ) | 1,665,000 |
| ||||
Net earnings (loss) |
| 389,000 |
| (2,206,000 | ) | (3,753,000 | ) | 408,000 |
| ||||
Net loss available to common stockholders |
| (959,000 | ) | (3,600,000 | ) | (5,161,000 | ) | (1,062,000 | ) | ||||
Basic and diluted loss per share |
| (0.97 | ) | (3.65 | ) | (5.23 | ) | (1.08 | ) | ||||
During the quarter ended June 30, 2004 the Company recorded a goodwill impairment charge of $2,329,000.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures for the fiscal year ended June 30, 2005. We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective in that they provide reasonable assurance that information relating to our Company required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms and that information required to be disclosed by our Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures for the fiscal year ended June 30, 2004. As of June 30, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2004 in that they provided reasonable assurance that information relating to our Company required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms and that information required to be disclosed by our Company in the reports that it filed or submitted under the Securities Exchange Act of 1934 was accumulated and communicated to its management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Upon our adoption of Financial Accounting Standards Board Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” in July 2004, we determined that we should reevaluate the financial statement presentation of our equity securities, in particular shares of our common stock and Series B Preferred Stock that were issued to certain members of management, under ASR 268 and EITF Topic D-98. As a result of the reevaluation, management concluded that an error was made in the initial accounting determination made in 1998. As a result, we filed an amendment to our Annual Report on Form 10-K for the fiscal year ended June 30, 2004 and as discussed in Note 18 to our consolidated financial statements included in the Form 10-K/A, we restated our consolidated balance sheets and statements of stockholders’ deficit as of and for the three-year period ended June 30, 2004, to reclassify from permanent equity to temporary equity, the portions of our common stock and Series B Preferred Stock which contain redemption provisions that are outside our control under the 1998 security holders agreement (the “Stockholders Agreement”). We also restated the consolidated balance sheets as of June 30, 2004 and 2003, and the statements of stockholders’ deficit as of and for the three-year period ended June 30, 2004, to reverse the recognition of cumulative dividends that had historically been recorded as an increase to the carrying value of the Series B Preferred Stock and accumulated deficit.
Notwithstanding the fact that we restated our consolidated balance sheets and statements of stockholders’ deficits as described in the previous paragraph, we continue to believe that our disclosure controls and procedures were effective as of June 30, 2004 in the manner described above, since at the time the shares were issued, our then-Chief Financial Officer conducted an extensive review of the relevant documentation and related materials in reaching his determination as to the classification of these equity securities.
In response to these reclassifications, and to confirm the analysis and support for our financial statement presentation of our redeemable securities, senior management recommended a formal review of the accounting treatment relating to all material financial agreements including the Stockholders Agreement. This review was completed during the period ended December 31, 2004. In general, we do not review accounting treatment determinations on an annual basis, but do so upon the occurrence of an event requiring such a reassessment. In light of the reclassification from permanent equity to temporary equity of the portions of our common stock and Series B Preferred Stock which contain redemption provisions that are outside our control under the Stockholders Agreement, we have implemented an appropriate change to our disclosure controls and procedures relating to the reclassification of the common stock and Series B Preferred Stock upon the expiration of such redemption provision. Further, we believe that our current management has the expertise that is necessary to enable us to make appropriate determinations regarding accounting matters, including classification of our equity securities.
53
On May 27, 2004, Bruce C. Bruckmann resigned from the Company’s Board of Directors citing other commitments as his reason for leaving. On August 17, 2004, Rice Edmonds, a principle at BRS, was elected to the Company’s Board of Directors. Mr. Edmonds joined BRS in 1996. Previously, he worked in the high yield finance group of Bankers Trust. Mr. Edmonds received his BS from the University of Virginia McIntire School of Commerce and his MBA from The Wharton School of the University of Pennsylvania. Mr. Edmonds is a director of H&E Equipment Services, L.L.C., Real Mex Restaurants, Inc., II Fornaio (America) Corporation, McCormick & Schmick Restaurant Corporation, Copeland Enterprises, Inc., Town Sports International, Inc., The Sheridan Group, Inc., Penhall International, Inc. and Lazy Days’ RV Center, Inc.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the directors and executive officers as of June 30, 2005 of the Company. Directors of the Company hold their offices for a term of one year or until their successors are elected and qualified; executive officers of the Company serve at the discretion of the Board of Directors.
NAME |
| AGE |
| TITLE |
John T. Sawyer |
| 60 |
| Chairman of the Board of Directors, President and Chief Executive Officer |
C. George Bush |
| 49 |
| Vice President and Regional Manager, Southern California Region |
Bruce F. Varney |
| 52 |
| Vice President and Regional Manager, Southwest Region |
Jeffrey E. Platt |
| 53 |
| Vice President-Finance and Chief Financial Officer |
Gary Aamold |
| 54 |
| Vice President and Regional Manager, Highway Services Division |
Harold O. Rosser II |
| 55 |
| Director |
Paul N. Arnold |
| 58 |
| Director |
J. Rice Edmonds |
| 34 |
| Director |
JOHN T. SAWYER, Chairman of the Board of Directors, President and Chief Executive Officer, joined Penhall in 1978 as the Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was appointed Manager of Penhall’s National Contracting Division, and in 1984, he assumed the position of Vice President and became responsible for managing all construction services divisions. Mr. Sawyer has been President of the Company since 1989.
C. GEORGE BUSH, Vice President and Regional Manager, Southern California Region, joined Penhall in 1980 as an Estimator and Jobsite Manager and became a Division Manager in 1984. Mr. Bush was promoted to Regional Manager of Southern California in 1986. In 1990, Mr. Bush was appointed as President of Penhall Company, where he served until his recent appointment as Vice President of Penhall with responsibility for the Southern California region.
BRUCE F. VARNEY, Vice President and Regional Manager, Southwest Region, began his employment with Penhall in 1977, and in 1981 was named Manager of the San Diego Division. From 1991 to 1993, Mr. Varney served as Regional Manager for Southern California, and in 1993 he was appointed as Southwest Regional Manager. In April 1998, Mr. Varney was promoted to Vice President.
JEFFREY E. PLATT, Vice President-Finance and Chief Financial Officer, joined Penhall in July 2000 as Chief Financial Officer. From 1987 to 2000, Mr. Platt was Vice President-Finance and Chief Financial Officer for Nielsen Dillingham Builders Inc. He received his BA and MBA from the University of California at Los Angeles. Mr. Platt is a Certified Public Accountant.
GARY AAMOLD, Vice President and Regional Manager, Highway Services Division, joined Penhall in April 1998 as part of the Highway Services acquisition. Since 1989, Mr. Aamold has served in various managerial capacities for Highway Services.
HAROLD O. ROSSER is a founder and Managing Director of BRS. Previously, he was an officer of CVC from 1987 through 1994. Prior to joining CVC, he spent 12 years with Citicorp/Citibank in various management and corporate finance positions. Mr. Rosser earned his BS from Clarkson University and attended Management Development Programs at Carnegie-Mellon University and the Stanford University Business School. Mr. Rosser is a director of Real Mex Restaurants, Inc., Penhall International, Inc., H&E Equipment Services, L.L.C., O’Sullivan Industries, Il Fornaio (America) Corporation, McCormick & Schmick Restaurant Corporation, and Remington Arms Company, Inc.
PAUL N. ARNOLD, Director, is Chairman and Chief Executive Officer of CORT Business Services Corporation. Mr. Arnold has been with CORT for over 30 years, holding group management positions and regional management positions within CORT since 1976. Mr. Arnold served as President and Chief Executive Officer from 1992 to 2000. Mr. Arnold is a director of Town Sports International, Inc.
J. RICE EDMONDS, Director. Previously, he worked in the high yield finance group of Bankers Trust. Mr. Edmonds received his BS from the University of Virginia McIntire School of Commerce and his MBA from The Wharton School of the University of Pennsylvania. Mr. Edmonds is a director of Real Mex Restaurants, Inc., Il Fornaio (America) Corporation, McCormick & Schmick Restaurant Corporation, Copeland Enterprises, Inc., Town Sports International, Inc., and The Sheridan Group, Inc.
54
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued for fiscal 2005 to the Chief Executive Officer of Penhall and to each of the four other most highly compensated executive officers of Penhall.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION |
| SALARY(1) |
| BONUS |
| OTHER ANNUAL |
| ALL OTHER COMPENSATION(3) |
| ||||
John T. Sawyer |
| $ | 288,472 |
| $ | 75,000 |
| $ | 16,572 |
| $ | 8,346 | (4) |
Chief Executive Officer and President-Penhall Company |
|
|
|
|
|
|
|
|
| ||||
C. George Bush |
| 200,550 |
| 81,000 |
| 6,720 |
| 6,777 | (5) | ||||
Vice President-Penhall |
|
|
|
|
|
|
|
|
| ||||
Jeffrey E. Platt |
| 219,180 |
| 25,000 |
| 6,432 |
| 4,579 | (6) | ||||
Vice President-Penhall |
|
|
|
|
|
|
|
|
| ||||
Bruce F. Varney |
| 190,256 |
| 35,000 |
| 6,720 |
| 6,945 | (7) | ||||
Vice President-Penhall |
|
|
|
|
|
|
|
|
| ||||
Gary L. Aamold |
| 183,004 |
| 100,615 |
| 9,140 |
| 11,309 | (8) | ||||
Vice President-Penhall |
|
|
|
|
|
|
|
|
| ||||
(1) Includes amounts contributed as salary deferral contributions in fiscal 2004 under the Penhall International Corp. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (the “Plan”), as follows: $16,654 for Mr. Sawyer; $10,400 for Mr. Bush; $12,003 for Mr. Platt; $16,680 for Mr. Varney and $14,547 for Mr. Aamold.
(2) Includes the amount attributable to the use of an automobile furnished by Penhall.
(3) Includes Penhall matching contributions under the Plan, premiums for group term insurance, premiums for health care insurance and long-term disability insurance premiums.
(4) Includes $500 of Penhall matching contributions under the Plan, approximately $396 of premiums for group term life insurance, approximately $6,996 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums.
(5) Includes $500 of Penhall matching contributions under the Plan, approximately $90 of premiums for group term life insurance, approximately $5,733 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums.
(6) Includes $500 of Penhall matching contributions under the Plan, approximately $258 of premiums for group term life insurance, approximately $3,367 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums.
(7) Includes $500 of Penhall matching contributions under the Plan, approximately $258 of premiums for group term life insurance, approximately $5,733 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums.
(8) Includes $1,100 of Penhall matching contributions under the Plan, approximately $138 of premium for group term life insurance, approximately $9,617 of premium health care insurance and approximately $454 for disability insurance premiums.
The Board has not yet made a determination as to whether the Company has an audit committee financial expert serving on its audit committee. The Board intends to review whether there is an audit committee financial expert during the fiscal year ending June 30, 2006.
The Company currently abides by the provisions of the employee manual which includes many of the provisions required to be included in a code of ethics. During fiscal 2006 the Company will develop a code of ethics specifically geared towards our principal executive officer, principal financial officer, and principal accounting officer.
EMPLOYMENT AGREEMENTS
Upon consummation of the Transactions, the Company entered into a five-year evergreen employment agreement with John T. Sawyer pursuant to which Mr. Sawyer is employed as President and Chief Executive Officer of the Company; the Company also entered into three-year evergreen employment agreements with Messrs. Bush and Varney pursuant to which each executive is employed as a Vice President of the Company. The agreements provide for a base salary (approximately $246,000 for Mr. Sawyer, $134,000 for C. George Bush and $119,000 for Bruce F. Varney), which will be subject to annual merit increases and an annual performance bonus. In addition, the agreements provide for the receipt by the executives of standard company benefits. The agreements are terminable by the Company with cause. In the event employment is terminated without cause, the executive will be entitled to continue to receive his base salary and, for certain executives, bonus, and certain other benefits, for specified periods. Following any termination of employment of an executive, it is expected that the executive will be subject to a non-competition covenant with a duration of two years pursuant to the terms of the Stockholders Agreement (as defined).
401(k) PLAN
Penhall sponsors the Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (the “Plan”), which is intended to satisfy the tax qualification requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Subject to certain terms and conditions of the Plan, substantially all of Penhall’s non-union employees are eligible to participate in the Plan. Eligible employees may contribute between 1% and 15% of their compensation to the Plan on a pre-tax basis.
Penhall may, but is not required, to make matching contributions to the Plan each year. Any matching contributions will be allocated to each participant’s account under the Plan proportionate to the amount that he or she has contributed to the Plan during the applicable Plan year. All Penhall and employee contributions to the Plan are allocated to a participant’s individual account. Penhall charged $335,000, $174,000 and $149,000 to general and administrative expense related to contributions to and expenses of the Plan for the years ended June 30, 2003, 2004 and 2005, respectively.
55
All Penhall and employee contributions to the Plan plus the earnings thereon are 100% vested. Employees may direct the investment of their accounts to various investment funds. The Plan provides for hardship withdrawals and loans to participants.
STOCK OPTION PLAN
On October 7, 1999, the Company’s Board of Directors approved a Stock Incentive Plan (the “Plan”) under which employees, officers, directors or consultants (“Eligible Participants”) may be granted stock options and restricted stock awards. The Board authorized the sale of up to 50,000 shares of common stock and 2,500 shares of Series B Preferred Stock under the Plan. The Plan is administered by the Board of Directors or an appointed committee (Administrator). The exercise price for stock options or restricted stock awards shall not be less than the Fair Market Value (as defined) of the stock on the grant date subject to restrictions and conditions, including the Company’s option to repurchase, as determined by the Administrator at the time of the grant. The term of each stock option shall be fixed, and not exceeding 10 years from the grant date of the stock option. In addition, stock options may be subject to specific vesting and acceleration provisions as determined by the Administrator at or after the grant date. On November 12, 1999, the Company issued 17,513 shares of common stock for an aggregate purchase price of $537,000 and 511 shares of Series B Preferred Stock for an aggregate purchase price of $574,000 to Eligible Participants under the Plan. On October 20, 2000, the Company issued 4,967 shares of common stock for an aggregate purchase price of $309,000 and 146 shares of Series B Preferred Stock for an aggregate purchase price of $186,000 to Eligible Participants under the Plan. On November 16, 2001, the Company issued 3,647 shares of common stock for an aggregate purchase price of $213,000 and 108 shares of Series B Preferred Stock for an aggregate purchase price of $158,000 to Eligible Participants under the Plan. On November 16, 2001, 9,420 options were granted to Eligible Participants under the Plan. On November 1, 2002, the Company issued 743 shares of common stock for an aggregate purchase price of $38,000 and 22 shares of Series B Preferred Stock for an aggregate purchase price of $37,000 to Eligible Participants under the Plan. No options were granted during the year ended June 30, 2005 and no options have been exercised under the plan as of June 30, 2005.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to (i) the beneficial ownership of the common stock of the Company by each person or entity who owns five percent or more thereof and (ii) the beneficial ownership of each class of equity securities of the Company by each director of the Company who is a shareholder, the Chief Executive Officer of the Company and the other executive officers named in the “Summary Compensation Table” above who are shareholders, and all directors and officers of the Company as a group. The table also sets forth certain information with respect to the ownership of the Senior Exchangeable Preferred stock, Series A Preferred stock and Series B Preferred stock of the Company by BRS, the Foundation and Penhall. Unless otherwise specified, all shares are directly held. Except as otherwise noted below, the address of the following beneficial owners is 1801 Penhall Way, Anaheim, CA 92803
|
| NUMBER AND PERCENT OF SHARES |
| ||||||
NAME OF BENEFICIAL OWNER |
| COMMON |
| SENIOR |
| SERIES A |
| SERIES B |
|
Bruckmann, Rosser, Sherrill & Co., L.P. (2) Two Greenwich Plaza, Suite 100 Greenwich, CT 06830 |
| 582,312/59.02 | % | — |
| — |
| 9,333/49.65 | % |
The National Christian Charitable Foundation Inc. |
| — |
| 10,000/100.0 | % | — |
| — |
|
John T. Sawyer |
| 110,309/11.18 | % | — |
| — |
| 2,471/13.14 | % |
C. George Bush |
| 41,168/ 4.17 | % | — |
| — |
| 896/4.77 | % |
Bruce F. Varney |
| 36,554/3.71 | % | — |
| — |
| 755/4.02 | % |
Bruce C. Bruckmann (3) |
| 624,915/63.34 | % | — |
| 10,428/100.0 | % | 10,015/52.28 | % |
Harold O. Rosser II (3) |
| 624,915/63.34 | % | — |
| 10,428/100.0 | % | 10,015/52.28 | % |
All directors and officers as a group (9 persons) |
| 837,915/84.94 | % | — |
| 10,428/100.0 | % | 14,812/78.79 | % |
(1) The Company has granted and expects to grant options to acquire Common stock to certain employees to be designated. The shares of Common stock issuable upon the exercise of such options would equal, in the aggregate, up to an additional 5.0% of the common stock on a fully-diluted basis. The table does not include any such shares.
(2) Bruckmann, Rosser, Sherrill & Co., L.P. (“BRS”) is a limited partnership, the sole general partner of which is BRS Partners, Limited Partnership (“BRS Partners”) and the manager of which is Bruckmann, Rosser, Sherrill Co., Inc. The sole general partner of BRS Partners is BRSE Associates, Inc. (“BRSE Associates”). Bruce C. Bruckmann, Harold O. Rosser II, Stephen C. Sherrill and Stephen F. Edwards are the only stockholders of BRSE Associates and may be deemed to share beneficial ownership of the shares shown as beneficially owned by BRS. Such individuals disclaim beneficial ownership of any such shares.
(3) Includes shares of Common stock, Series A Preferred stock and Series B Preferred stock, which are owned by BRS and certain other entities and individuals affiliated with BRS. Although Messrs. Bruckmann and Rosser may be deemed to share beneficial ownership of such shares, such individuals disclaim beneficial ownership thereof. See Note 2 above.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN FEES PAYABLE TO BRS; BRS MANAGEMENT AGREEMENT
Upon consummation of the Transactions, the Company paid the Sponsor a closing fee of $2.0 million (the “Closing Fee”). In addition, the Company entered into a management services agreement (the “Management Agreement”) with the Sponsor pursuant to which the Sponsor will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The Closing Fee and the fees payable pursuant to the Management Agreement were negotiated on by representatives of the Sponsor and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company. Due to a governing covenant in the Indenture Agreement, since March 31, 2003, these fees have been accrued and not paid. The amount owed at June 30, 2005 was $675,000.
57
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table summarizes the aggregate fees billed to us by our independent auditor KPMG LLP:
Principal Accountant Fees and Services
|
| 2004 |
| 2005 |
| ||
|
|
|
|
|
| ||
Audit Fees (a) |
| $ | 220,000 |
| $ | 417,000 |
|
Audit-Related Fees |
| — |
| — |
| ||
Tax Fees (b) |
| 83,000 |
| 76,000 |
| ||
Tax-Related Fees |
| — |
| — |
| ||
|
|
|
|
|
| ||
Total |
| $ | 303,000 |
| $ | 493,000 |
|
(a) Audit Fees include the aggregate fees billed by our auditors, for professional services rendered for the audit of the Company’s annual financial statement, along with fees for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q.
(b) Tax fees include the preparation of federal and state tax returns and quarterly estimates.
The audit committee pre-approves all audit and permissible non-audit services provided to the Company by KPMG LLP.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and the Report of Independent Auditors are incorporated by reference into this item 15 of Form 10-K by item 8 hereof:
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets as of June 30, 2004 and 2005
• Consolidated Statements of Operations for the Years Ended June 30, 2003, 2004 and 2005
• Consolidated Statements of Stockholders’ Deficit for the years ended June 30, 2003, 2004 and 2005
• Consolidated Statements of Cash Flows for the Years Ended June 30, 2003, 2004 and 2005
• Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULE
No financial statement schedules have been filed herewith since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes.
58
(a)(3) EXHIBITS.
EXHIBIT |
| DESCRIPTION |
2 |
| Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
|
|
3.1 |
| Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
3.2 |
| Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
3.3 |
| Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-4, registration number |
|
|
|
3.4 |
| Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
3.5 |
| Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
3.6 |
| Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.1 |
| Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.2 |
| First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.3 |
| Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.4 |
| Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.5 |
| Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
4.7 |
| Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
10.1 |
| Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
10.2 |
| Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
10.3 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-4, registration number |
|
|
|
10.4 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-4, registration number |
|
|
|
10.5 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-4, registration number |
|
|
|
10.6 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-4, registration number |
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10.7 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.8 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.9 |
| Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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10.10 |
| Form of Penhall International Corp. 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.10 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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10.40 |
| Credit Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.40 to the registrants Form 8-K dated May 29, 2003.) |
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10.41 |
| Security Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.41 to the registrants Form 8-K dated May 29, 2003.) |
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12 |
| Statement of Ratio of Earnings to Fixed Charges * |
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21 |
| Subsidiaries of the Company (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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24 |
| Power of Attorney (included on signature page) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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25 |
| Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1 (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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99.1 |
| Form of Letter of Transmittal (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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99.2 |
| Form of Notice of Guaranteed Delivery (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
* |
| Filed herewith. |
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PENHALL INTERNATIONAL CORP. | ||
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| By: | /s/ JOHN T. SAWYER |
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| John T. Sawyer |
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September 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 28, 2005.
SIGNATURE |
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| TITLE | |
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| /s/ JOHN T. SAWYER |
| Chairman of the Board, President and Chief Executive Officer | |
| John T. Sawyer |
| (Principal Executive Officer) | |
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| /s/ JEFFREY E. PLATT |
| Vice President-Finance and Chief Financial Officer (Principal | |
| Jeffrey E. Platt |
| Accounting Officer) | |
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| /s/ PAUL N. ARNOLD |
| Director | |
| Paul N. Arnold |
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| /s/ HAROLD O. ROSSER |
| Director | |
| Harold O. Rosser |
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| /s/ J. RICE EDMONDS |
| Director | |
| J. Rice Edmonds |
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61
EXHIBITS.
EXHIBIT |
| DESCRIPTION |
2 |
| Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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3.1 |
| Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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3.2 |
| Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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3.3 |
| Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-4, registration number |
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3.4 |
| Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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3.5 |
| Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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3.6 |
| Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.1 |
| Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.2 |
| First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.3 |
| Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.4 |
| Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.5 |
| Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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4.7 |
| Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.1 |
| Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.2 |
| Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.3 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-4, registration number |
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10.4 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-4, registration number |
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10.5 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-4, registration number |
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10.6 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-4, registration number |
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10.7 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.8 |
| Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.9 |
| Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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10.10 |
| Form of Penhall International Corp. 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.10 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
62
10.40 |
| Credit Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.40 to the registrants Form 8-K dated May 29, 2003.) |
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10.41 |
| Security Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.41 to the registrants Form 8-K dated May 29, 2003.) |
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12 |
| Statement of Ratio of Earnings to Fixed Charges * |
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21 |
| Subsidiaries of the Company (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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24 |
| Power of Attorney (included on signature page) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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25 |
| Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1 (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
|
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32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005. * |
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32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated September 28, 2005 * |
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99.1 |
| Form of Letter of Transmittal (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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99.2 |
| Form of Notice of Guaranteed Delivery (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
* |
| Filed herewith. |
63