UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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| SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2005
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 |
| (I.R.S. Employer Identification Number) |
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrant’s telephone number, including area code)
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 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
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| June 30, 2005 |
| September 30, 2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 98,000 |
| $ | 103,000 |
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Receivables: |
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Contract and trade receivables |
| 37,749,000 |
| 43,619,000 |
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Contract retentions due upon completion and acceptance of work |
| 4,888,000 |
| 6,004,000 |
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| 42,637,000 |
| 49,623,000 |
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Less allowance for doubtful receivables |
| 1,263,000 |
| 1,484,000 |
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Net receivables |
| 41,374,000 |
| 48,139,000 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
| 3,065,000 |
| 2,081,000 |
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Deferred tax assets |
| 1,624,000 |
| 1,624,000 |
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Inventories |
| 2,454,000 |
| 2,324,000 |
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Prepaid expenses and other current assets |
| 1,019,000 |
| 2,843,000 |
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Total current assets |
| 49,634,000 |
| 57,114,000 |
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Property, plant and equipment, at cost: |
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Land |
| 152,000 |
| 152,000 |
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Buildings and leasehold improvements |
| 1,551,000 |
| 1,551,000 |
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Construction and other equipment |
| 123,059,000 |
| 126,401,000 |
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| 124,762,000 |
| 128,104,000 |
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Less accumulated depreciation and amortization |
| 87,499,000 |
| 89,004,000 |
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Net property, plant and equipment |
| 37,263,000 |
| 39,100,000 |
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Goodwill |
| 6,682,000 |
| 6,682,000 |
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Debt issuance costs, net |
| 1,149,000 |
| 858,000 |
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Other assets, net |
| 503,000 |
| 424,000 |
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| $ | 95,231,000 |
| $ | 104,178,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
2
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| June 30, 2005 |
| September 30, 2005 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Current installments of long-term debt |
| $ | 284,000 |
| $ | 267,000 |
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Borrowings under revolving credit facility |
| 468,000 |
| 5,368,000 |
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Trade accounts payable |
| 10,385,000 |
| 10,620,000 |
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Accrued liabilities |
| 14,222,000 |
| 11,815,000 |
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Income taxes payable |
| 923,000 |
| 2,123,000 |
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Current portion of insurance reserves |
| 1,602,000 |
| 2,136,000 |
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Current portion of deferred gain - sale-leaseback |
| 107,000 |
| 107,000 |
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Billing in excess of costs and estimated earnings on uncompleted contracts |
| 848,000 |
| 1,701,000 |
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Total current liabilities |
| 28,839,000 |
| 34,137,000 |
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Long-term debt, excluding current installments |
| 100,000 |
| 200,000 |
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Long-term portion of deferred gain - sale-leaseback |
| 1,861,000 |
| 1,834,000 |
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Long-term portion of insurance reserves |
| 6,333,000 |
| 6,333,000 |
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Senior notes |
| 100,000,000 |
| 100,000,000 |
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Deferred tax liabilities |
| 3,186,000 |
| 3,186,000 |
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Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $20,662,000 and $21,216,000 at June 30, 2005 and September 30, 2005, respectively. Authorized, issued and outstanding 10,000 shares |
| 20,662,000 |
| 21,216,000 |
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Series A Preferred stock, par value $.01 per share, redemption value $25,604,000 and $26,457,000 at June 30, 2005 and September 30, 2005, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2005 and September 30, 2005 |
| 25,604,000 |
| 26,457,000 |
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Series B Preferred stock subject to put option, 7,688 shares outstanding at June 30, 2005 and September 30, 2005 |
| 7,558,000 |
| 7,558,000 |
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Common stock subject to put option, 324,858 shares outstanding at June 30, 2005 and September 30, 2005 |
| 321,000 |
| 321,000 |
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Stockholders’ deficit: |
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Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 11,110 shares at June 30, 2005 and September 30, 2005 |
| 11,412,000 |
| 11,412,000 |
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Common stock, par value $.01 per share. Authorized 5,000,000 shares; issued and outstanding 697,012 at June 30, 2005 and September 30, 2005 |
| 7,000 |
| 7,000 |
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Additional paid-in capital |
| 1,764,000 |
| 1,764,000 |
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Treasury stock, at cost, 35,318 common shares at June 30, 2005 and September 30, 2005 |
| (336,000 | ) | (336,000 | ) | ||
Accumulated deficit |
| (112,080,000 | ) | (109,911,000 | ) | ||
Total stockholders’ deficit |
| (99,233,000 | ) | (97,064,000 | ) | ||
Commitments and contingencies |
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| $ | 95,231,000 |
| $ | 104,178,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| THREE MONTH PERIODS |
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| 2004 |
| 2005 |
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Revenues |
| $ | 52,819,000 |
| $ | 58,627,000 |
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Cost of revenues |
| 38,591,000 |
| 40,517,000 |
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Gross profit |
| 14,228,000 |
| 18,110,000 |
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General and administrative expenses |
| 8,115,000 |
| 8,970,000 |
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Other operating income, net |
| 57,000 |
| 376,000 |
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Earnings from operations, net |
| 6,170,000 |
| 9,516,000 |
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Interest expense |
| 3,468,000 |
| 3,482,000 |
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Interest expense – accretion on preferred stock |
| 1,248,000 |
| 1,407,000 |
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Other income |
| 27,000 |
| 27,000 |
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Earnings before income taxes |
| 1,481,000 |
| 4,654,000 |
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Income tax expense |
| 1,092,000 |
| 2,485,000 |
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Net earnings |
| 389,000 |
| 2,169,000 |
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Accrual of cumulative dividends on preferred stock |
| (1,348,000 | ) | (1,536,000 | ) | ||
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Net earnings (loss) applicable to common stockholders |
| $ | (959,000 | ) | $ | 633,000 |
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Earnings (loss) per share - basic and diluted |
| $ | (0.97 | ) | $ | 0.64 |
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Weighted average number of shares outstanding: Basic and diluted |
| 986,552 |
| 986,552 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| THREE MONTH PERIODS ENDED |
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| 2004 |
| 2005 |
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Cash flows from operating activities: |
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Net earnings |
| $ | 389,000 |
| $ | 2,169,000 |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization |
| 3,165,000 |
| 2,832,000 |
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Interest expense – accretion on preferred stock |
| 1,248,000 |
| 1,407,000 |
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Amortization of debt issuance costs |
| 291,000 |
| 291,000 |
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Provision for doubtful receivables |
| 63,000 |
| 360,000 |
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Gains on sale of assets, net |
| (40,000 | ) | (370,000 | ) | ||
Stock compensation |
| — |
| 4,000 |
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Amortization of deferred gain on sale-leaseback |
| (28,000 | ) | (27,000 | ) | ||
Changes in operating assets and liabilities: |
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Receivables |
| (7,543,000 | ) | (7,125,000 | ) | ||
Inventories |
| 311,000 |
| 130,000 |
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Prepaid expenses and other assets |
| (351,000 | ) | (1,824,000 | ) | ||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 426,000 |
| 984,000 |
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Trade accounts payable |
| 867,000 |
| (770,000 | ) | ||
Accrued liabilities |
| (1,754,000 | ) | (2,411,000 | ) | ||
Insurance reserves |
| 100,000 |
| 534,000 |
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Income taxes receivable/payable |
| 1,088,000 |
| 1,200,000 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
| (337,000 | ) | 853,000 |
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Net cash used in operating activities |
| (2,105,000 | ) | (1,763,000 | ) | ||
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Cash flows from investing activities: |
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Proceeds from sale of assets |
| 113,000 |
| 524,000 |
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Capital expenditures |
| (2,328,000 | ) | (4,493,000 | ) | ||
Net cash used in investing activities |
| (2,215,000 | ) | (3,969,000 | ) | ||
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Cash flows from financing activities: |
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Repayments of long-term debt |
| (475,000 | ) | (168,000 | ) | ||
Borrowings under revolving credit facility |
| 50,534,000 |
| 61,671,000 |
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Repayments of revolving credit facility |
| (48,810,000 | ) | (56,771,000 | ) | ||
Book overdraft |
| 2,033,000 |
| 1,005,000 |
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Net cash provided by financing activities |
| 3,282,000 |
| 5,737,000 |
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Net change in cash and cash equivalents |
| (1,038,000 | ) | 5,000 |
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Cash and cash equivalents at beginning of period |
| 1,076,000 |
| 98,000 |
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Cash and cash equivalents at end of period |
| $ | 38,000 |
| $ | 103,000 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Income taxes |
| $ | 5,000 |
| $ | 1,285,000 |
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Interest |
| $ | 6,076,000 |
| $ | 6,153,000 |
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Noncash investing and financing activities: |
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Borrowings related to purchase of assets |
| $ | — |
| $ | 251,000 |
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Accrual of cumulative dividends on preferred stock |
| $ | 1,348,000 |
| $ | 1,536,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
5
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods condensed consolidated financial statements to conform to the current period presentation.
The Company’s business is seasonal in nature and the results of operations for these interim periods are not necessarily indicative of results for the full year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included on Form 10-K of Penhall International Corp. (together with its subsidiaries, the “Company”) for the year ended June 30, 2005, as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.
(2) Change in Accounting Principles – Stock-Based Compensation
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.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.
Effective July 1, 2005, the Company adopted SFAS No. 123R using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption will be measured at estimated fair value and included in operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123R.
As a result of adopting SFAS No. 123R, the Company recorded $4,000 of stock-based compensation expense in its statement of operations for the three months ended September 30, 2005. This stock-based compensation expense did not materially affect net earnings or basic or diluted earnings (loss) per share for the three months ended September 30, 2005.
The fair value concepts used in the Company’s presentation of proforma stock based compensation amounts were not changed significantly in SFAS No. 123R; however, in adopting this Standard, companies must choose among alternative valuation models and amortization assumptions. The Company has elected to continue to use both the Black-Scholes option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.
As of November 2001 (grant date), the weighted average fair value of options granted was $21.72. 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.
As of September 30, 2005, there was $103,000 of total unrecognized compensation cost related to non-vested options. This cost is expected to be fully amortized in 6 years. The fair market value of vested options utilizing the Black-Scholes option pricing method as of September 30, 2005 was $43,850.
6
The following table summarizes stock option activity for the three months ended September 30, 2005:
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| Number of shares |
| Weighted-Average |
| Aggregate Intrinsic |
| Weighted – |
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Shares under option, July 1, 2005 |
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Shares under option, July 1, 2005 |
| 7,780 |
| $ | 58.51 |
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| 6.1 years |
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Options granted |
| — |
| $ | 58.51 |
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| 6.1 |
| |
Options exercised |
| — |
| $ | 58.51 |
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|
| 6.1 |
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Options cancelled and expired |
| — |
| $ | 58.51 |
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|
| 6.1 |
| |
Shares under option, September 30, 2005 |
| 7,780 |
| $ | 58.51 |
| $ | — |
| 6.1 |
|
Options exercisable at September 30, 2005 |
| 3,045 |
| $ | 58.51 |
| $ | — |
| 6.1 |
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Under the modified prospective method, results for the three months ended September 30, 2004, were not restated to include stock option expense. The previously disclosed pro forma effects of recognizing the estimated fair value of stock-based employee compensation for the three months ended September 30, 2004, are presented below:
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| September 30, |
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Net loss applicable to common stockholders as reported |
| $ | (959,000 | ) |
Add: |
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Stock-based compensation expense included in reported net loss applicable to common stockholders, net of related tax effects |
| — |
| |
Deduct: |
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Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects |
| $ | (3,000 | ) |
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Pro forma net loss applicable to common stockholders |
| $ | (962,000 | ) |
Basic and diluted loss per share as reported |
| $ | (0.97 | ) |
Pro forma basic and diluted loss per share |
| $ | (0.98 | ) |
(3) Earnings (loss) Per Share
Basic earnings (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 earnings (loss) per share is calculated by dividing net earnings (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. For the three month periods ended September 30, 2004 and 2005 diluted earnings (loss) per share is the same as basic earnings (loss) per share as options to purchase 8,060 and 7,780 shares of common stock were not included in the computation of diluted earnings (loss) per share for the three-month periods ended September 30, 2004 and 2005, respectively, as the effect would have been anti-dilutive.
(4) Related Party
The Company had no balance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) as of September 30, 2005 related to management services. The balance due at June 30, 2005 was $675,000 and was paid to BRS during the quarter ended September 30, 2005.
(5) Commitments and Contingencies
There are various lawsuits and claims pending 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.
7
(6) Subsequent Events
On November 1, 2005, Penhall International Corp. (the “Company”) entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”), by and among the Company, Penhall Company, a California corporation, Penhall Leasing, L.L.C., a California limited liability company, Penhall Investments, Inc., a California corporation, Bob Mack Co., Inc., a California corporation, Capitol Drilling Supplies, Inc., an Indiana corporation, General Electric Capital Corporation, a Delaware corporation, as a Senior Lender, Letter of Credit Issuer and Agent, and the other financial institutions party thereto (collectively, the “Senior Lenders” and individually each a “Senior Lender”). On November 1, 2005, the Company also entered into a second lien term loan agreement (the “Loan Agreement” and together with the Amended and Restated Credit Agreement, the “Refinancing Agreements”) by and among the Company, Deutsche Bank Trust Company Americas, as agent (“Agent”), Deutsche Bank Securities Inc., as Sole Lead Arranger and Sole Bookrunner and the other financial institutions party thereto. Approximately $109 million of the proceeds from the Refinancing Agreements will be used to redeem all of the Company’s $100 million aggregate principal amount of 12% Senior Notes due 2006 (including the redemption premium and accrued interest through redemption) and to pay other costs and expenses incurred by the Company in connection with the execution of the Refinancing Agreements.
General
The Loan Agreement consists of a term loan in the amount of $105 million, which will be due and payable on November 1, 2010, if not sooner paid in full in accordance with its terms. The Amended and Restated Credit Agreement consists of a revolving credit facility in an aggregate principal amount of $55 million, $35 million of which is available for the issuance of letters of credit. The revolving credit facility matures on November 1, 2010. The Refinancing Agreements are subject to certain mandatory prepayments upon the occurrence of certain events, including asset sales and issuances of stock (subject to certain exceptions set forth in the Refinancing Agreements). The Amended and Restated Credit Agreement and the Loan Agreement are secured by a perfected first priority security interest and a perfected second priority security interest, respectively, in substantially all of the Company’s tangible and intangible assets, subject to certain exceptions.
Interest and Fees
The interest rates per annum applicable to borrowings under the Amended and Restated Credit Agreement will be, at our option, the Index Rate or LIBOR Rate (each as defined in the Amended and Restated Credit Agreement) plus, in each case, an applicable margin. Borrowings under the Loan Agreement will bear interest at a rate per annum equal to the Company’s choice of an alternate base rate (which is equal to the higher of (i) the rate of interest announced by Agent as its prime rate in effect and (ii) the federal funds rate plus 0.50%) or the Adjusted Eurodollar Rate (as defined in the Loan Agreement), plus, in each case an applicable margin.
Initially, the applicable margin with respect to (i) the revolving credit facility under the Amended and Restated Credit Agreement is (A) 1.50% per annum for Index Rate loans and (B) 2.50% per annum for LIBOR Rate loans and (ii) the term loan under the Loan Agreement is (A) 5.75% per annum for alternate base rate loans and (B) 6.75% per annum for Adjusted Eurodollar Rate loans. After the Company’s fiscal quarter ending December 31, 2005, the margins applicable to the revolving credit facility under the Amended and Restated Credit Agreement will adjust (up or down) on a quarterly basis based on the monthly average borrowing availability under the revolving credit facility.
In addition, the Company will be required to pay to the Senior Lenders under the Amended and Restated Credit Agreement a commitment fee in respect of the unused commitments thereunder at a per annum rate of one-half of one percent (0.50%). The Company may voluntarily prepay any borrowings under the revolving credit facility without premium or penalty, subject to LIBOR breakage fees, if any. The Company is required to pay a prepayment fee in respect of most mandatory and voluntary prepayments under the Loan Agreement in an amount equal to: (i) 2.0% of the principal amount prepaid if such prepayment is made on or before November 1, 2006; or (ii) 1.0% of the principal amount prepaid if such prepayment is made after November 1, 2006, but before November 1, 2007.
Collateral and Guarantees
The Company’s domestic subsidiaries (including any future direct or indirect subsidiaries that may be created or acquired by the Company), with certain exceptions as set forth in the Refinancing Agreements, guarantee our obligations under each of the Amended and Restated Credit Agreement and the Loan Agreement. The guarantees in respect of the Amended and Restated Credit Agreement and the Loan Agreement will be secured by a perfected first priority security interest, or by a second priority security interest, as applicable, in substantially all of the guarantors’ tangible and intangible assets (including, without limitation, intellectual property and all of the capital stock of each of our direct and indirect domestic subsidiaries and 65% of the capital stock of certain of our first-tier foreign subsidiaries), subject to certain exceptions.
8
Covenants and Other Matters
The Refinancing Agreements include certain negative covenants restricting or limiting the Company’s ability to, among other things:
• |
| incur any indebtedness or contingent obligations except as expressly provided therein; |
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• |
| create liens; |
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• |
| pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain of our subsidiaries to pay dividends or make other payments to us; |
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• |
| sell assets; |
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• |
| make certain capital expenditures, investments and acquisitions; |
|
|
|
• |
| enter into certain transactions with affiliates; |
|
|
|
• |
| enter into sale and leaseback transactions; and |
|
|
|
• |
| merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. |
The Refinancing Agreements contain certain customary representations and warranties, affirmative covenants and events of default, including failure to pay principal, interest or fees, material inaccuracy of representations and warranties, violations of covenants, certain bankruptcy and insolvency events, failure to comply with the terms of the Intercreditor Agreement, change of control, cross-defaults to other debt and material judgments.
Intercreditor Agreement
In connection with entering the Refinancing Agreements, we entered into an Intercreditor Agreement which sets forth the relative rights of the respective lenders under the Amended and Restated Credit Agreement and the Loan Agreement, including the subordination of the liens under the Loan Agreement to the liens under the Amended and Restated Credit Agreement.
Senior Notes
On November 1, 2005, we called for redemption all of our outstanding $100 million aggregate principal amount of 12% Senior Notes due 2006. The Redemption Date is December 1, 2005. On the Redemption Date, we will redeem $100,000,000 in aggregate principal amount of notes at a price of $1,020.00 per $1,000 in principal amount of notes redeemed, plus accrued interest through the Redemption Date. The aggregate redemption price of the notes (including redemption premium and accrued interest) is approximately $106 million. The Company expects to record a loss of approximately $2 million in the 2nd quarter of Fiscal 2006 relating to the redemption of the Senior Notes. The Company has classified the Senior Notes as a long-term liability as of September 30, 2005 consistent with the terms of the Loan Agreement in accordance with SFAS No. 6 “Classification of Short-Term Obligations Expected to Be Refinanced.” As a result of the redemption of the Senior Notes, the Company will no longer be a public registrant and therefore will no longer be required file information with the Securities and Exchange Commission (SEC).
Senior Exchangeable Preferred Stock
On November 1, 2005, we also exercised our right to redeem all of our outstanding 10.5% Senior Exchangeable Preferred Stock (“Preferred Stock”) pursuant to the terms as set forth in (i) a letter agreement, dated December 14, 2004, by and between the Company and National Christian Foundation (“NCF”) and (ii) a letter agreement, dated September 8, 2005, by and between the Company and NCF. The Redemption Date is December 1, 2005. Such letter agreements allow the Company to redeem all of the Preferred Stock for an aggregate redemption price of $7.5 million in cash on the Redemption Date. The Company has not yet completed analysis of the accounting impact of the redemption of the Senior Exchangeable Preferred Stock. We note that the redemption could result in a gain to be recorded during the 2nd quarter of Fiscal 2006 and that redemption will positively impact earnings per share as the interest expense – preferred stock will no longer include interest on the Senior Exchangeable Preferred Stock.
(7) Condensed Consolidating Financial Information
The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The 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.
9
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
Condensed Consolidating Balance Sheet
|
| JUNE 30, 2005 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Receivables, net |
| $ | — |
| $ | 41,374,000 |
| $ | — |
| $ | 41,374,000 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
| — |
| 3,065,000 |
| — |
| 3,065,000 |
| ||||
Inventories |
| — |
| 2,454,000 |
| — |
| 2,454,000 |
| ||||
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 |
|
10
|
| SEPTEMBER 30, 2005 |
| ||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Receivables, net |
| $ | — |
| $ | 48,139,000 |
| $ | — |
| $ | 48,139,000 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
| — |
| 2,081,000 |
| — |
| 2,081,000 |
| ||||
Inventories |
| — |
| 2,324,000 |
| — |
| 2,324,000 |
| ||||
Other current assets |
| 510,000 |
| 4,060,000 |
| — |
| 4,570,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total current assets |
| 510,000 |
| 56,604,000 |
| — |
| 57,114,000 |
| ||||
Net plant and equipment |
| — |
| 39,100,000 |
| — |
| 39,100,000 |
| ||||
Other assets, net |
| 558,000 |
| 7,406,000 |
| — |
| 7,964,000 |
| ||||
Investment in subsidiaries |
| 62,633,000 |
| — |
| (62,633,000 | ) | — |
| ||||
|
| $ | 63,701,000 |
| $ | 103,110,000 |
| $ | (62,633,000 | ) | $ | 104,178,000 |
|
Liabilities and Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
| ||||
Current installments of long-term debt |
| $ | — |
| $ | 267,000 |
| $ | — |
| $ | 267,000 |
|
Borrowings under revolving credit facility |
| — |
| 5,368,000 |
| — |
| 5,368,000 |
| ||||
Trade accounts payable |
| — |
| 10,620,000 |
| — |
| 10,620,000 |
| ||||
Accrued liabilities |
| 1,997,000 |
| 9,818,000 |
| — |
| 11,815,000 |
| ||||
Income taxes payable |
| 2,123,000 |
|
|
|
|
| 2,123,000 |
| ||||
Current portion of insurance reserves |
| — |
| 2,136,000 |
| — |
| 2,136,000 |
| ||||
Current portion of deferred gain- sale-leaseback |
| 107,000 |
| — |
| — |
| 107,000 |
| ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| — |
| 1,701,000 |
| — |
| 1,701,000 |
| ||||
Total current liabilities |
| 4,227,000 |
| 29,910,000 |
| — |
| 34,137,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt, excluding current installments |
| — |
| 200,000 |
| — |
| 200,000 |
| ||||
Long-term portion of deferred gain - sale-leaseback |
| 1,834,000 |
| — |
| — |
| 1,834,000 |
| ||||
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 |
| 21,216,000 |
| — |
| — |
| 21,216,000 |
| ||||
Series A Preferred stock |
| 26,458,000 |
| — |
| — |
| 26,457,000 |
| ||||
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) |
| (97,064,000 | ) | 62,633,000 |
| (62,633,000 | ) | (97,064,000 | ) | ||||
|
| $ | 63,701,000 |
| $ | 103,110,000 |
| $ | (62,633,000 | ) | $ | 104,178,000 |
|
11
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
Condensed Consolidating Statement of Operations
|
| THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004 |
| ||||||||||
|
| Penhall |
| Penhall |
| Eliminations |
| Consolidated |
| ||||
Revenues |
| $ | 1,579,000 |
| $ | 52,819,000 |
| $ | (1,579,000 | ) | $ | 52,819,000 |
|
Cost of revenues |
| — |
| 38,591,000 |
| — |
| 38,591,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 1,579,000 |
| 14,228,000 |
| (1,579,000 | ) | 14,228,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
General and administrative expenses |
| 408,000 |
| 8,103,000 |
| (396,000 | ) | 8,115,000 |
| ||||
Royalties |
| — |
| 1,183,000 |
| (1,183,000 | ) | — |
| ||||
Other operating income, net |
| — |
| 57,000 |
| — |
| 57,000 |
| ||||
Equity in earnings of subsidiary |
| 2,870,000 |
| — |
| (2,870,000 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from operations, net |
| 4,041,000 |
| 4,999,000 |
| (2,870,000 | ) | 6,170,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| 3,252,000 |
| 216,000 |
| — |
| 3,468,000 |
| ||||
Interest expense – accretion on preferred stock |
| 1,248,000 |
| — |
| — |
| 1,248,000 |
| ||||
Other income |
| 27,000 |
| — |
| — |
| 27,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) before income taxes |
| (432,000 | ) | 4,783,000 |
| (2,870,000 | ) | 1,481,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense (benefit) |
| (821,000 | ) | 1,913,000 |
| — |
| 1,092,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings |
| $ | 389,000 |
| $ | 2,870,000 |
| $ | (2,870,000 | ) | $ | 389,000 |
|
12
|
| THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005 |
| ||||||||||||||
|
| Penhall |
| Penhall |
| Eliminations |
| Consolidated |
| ||||||||
Revenues |
| $ | 1,709,000 |
| $ | 58,627,000 |
| $ | (1,709,000 | ) | $ | 58,627,000 |
| ||||
Cost of revenues |
| — |
| 41,830,000 |
| (1,313,000 | ) | 40,517,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Gross profit |
| 1,709,000 |
| 16,797,000 |
| (396,000 | ) | 18,110,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
General and administrative expenses |
| 416,000 |
| 8,950,000 |
| (396,000 | ) | 8,970,000 |
| ||||||||
Other operating income, net |
| — |
| 376,000 |
| — |
| 376,000 |
| ||||||||
Equity in earnings of subsidiary |
| 4,716,000 |
| — |
| (4,716,000 | ) | — |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Earnings from operations |
| 6,009,000 |
| 8,223,000 |
| (4,716,000 | ) | 9,516,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Interest expense |
| 3,252,000 |
| 230,000 |
| — |
| 3,482,000 |
| ||||||||
Interest expense - preferred stock |
| 1,407,000 |
| — |
| — |
| 1,407,000 |
| ||||||||
Other income |
| 27,000 |
| — |
| — |
| 27,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Income before income taxes |
| 1,377,000 |
| 7,993,000 |
| (4,716,000 | ) | 4,654,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Income tax expense (benefit) |
| (792,000 | ) | 3,277,000 |
| — |
| 2,485,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
Net earnings |
| $ | 2,169,000 |
| $ | 4,716,000 |
| $ | (4,716,000 | ) | $ | 2,169,000 |
| ||||
13
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
Condensed Consolidating Statement of Cash Flows
|
| THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004 |
| ||||||||||
|
| Penhall |
| Penhall |
| Eliminations |
| Consolidated |
| ||||
Net cash provided by (used in) operating activities |
| $ | (2,817,000 | ) | $ | 712,000 |
| $ | — |
| $ | (2,105,000 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Proceeds from sale of assets |
| — |
| 113,000 |
| — |
| 113,000 |
| ||||
Capital expenditures |
| — |
| (2,328,000 | ) | — |
| (2,328,000 | ) | ||||
Net cash used in investing activities |
| — |
| (2,215,000 | ) | — |
| (2,215,000 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Due to (from) affiliates |
| 2,815,000 |
| (2,815,000 | ) | — |
| — |
| ||||
Repayments of long-term debt |
| — |
| (475,000 | ) | — |
| (475,000 | ) | ||||
Borrowings under revolving credit facility |
| — |
| 50,534,000 |
| — |
| 50,534,000 |
| ||||
Repayments of revolving credit facility |
| — |
| (48,810,000 | ) | — |
| (48,810,000 | ) | ||||
Book overdraft |
| — |
| 2,033,000 |
| — |
| 2,033,000 |
| ||||
Net cash provided by financing activities |
| 2,815,000 |
| 467,000 |
| — |
| 3,282,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
| (2,000 | ) | (1,036,000 | ) | — |
| (1,038,000 | ) | ||||
Cash and cash equivalents at beginning of period |
| 8,000 |
| 1,068,000 |
| — |
| 1,076,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of period |
| $ | 6,000 |
| $ | 32,000 |
| $ | — |
| $ | 38,000 |
|
14
|
| THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005 |
| |||||||||||
|
| PENHALL |
| PENHALL |
| ELIMINATIONS |
| CONSOLIDATED |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by (used in) operating activities |
| $ | (3,942,000 | ) | $ | 2,179,000 |
| $ | — |
| $ | (1,763,000 | ) | |
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||||
Proceeds from sale of assets |
| — |
| 524,000 |
| — |
| 524,000 |
| |||||
Capital expenditures |
| — |
| (4,493,000 | ) | — |
| (4,493,000 | ) | |||||
Net cash used in investing activities |
| — |
| (3,969,000 | ) | — |
| (3,969,000 | ) | |||||
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||||
Due to (from) affiliates |
| 3,942,000 |
| (3,942,000 | ) | — |
| — |
| |||||
Repayments of long-term debt |
| — |
| (168,000 | ) | — |
| (168,000 | ) | |||||
Borrowings under revolving credit facility |
| — |
| 61,671,000 |
| — |
| 61,671,000 |
| |||||
Repayments of revolving credit facility |
| — |
| (56,771,000 | ) | — |
| (56,771,000 | ) | |||||
Book overdraft |
| — |
| 1,005,000 |
| — |
| 1,005,000 |
| |||||
Net cash provided by financing activities |
| 3,942,000 |
| 1,795,000 |
| — |
| 5,737,000 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Net change in cash and cash equivalents |
| — |
| 5,000 |
| — |
| 5,000 |
| |||||
Cash and cash equivalents at beginning of period |
| 5,000 |
| 93,000 |
| — |
| 98,000 |
| |||||
Cash and cash equivalents at end of period |
| $ | 5,000 |
| $ | 98,000 |
| $ | — |
| $ | 103,000 |
| |
15
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the results of operations and financial condition of Penhall International Corp. and subsidiaries (Penhall or the Company) should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto included in this quarterly report on Form 10-Q and the Company’s audited consolidated financial statements and footnotes thereto included in its Fiscal 2005 annual report on Form 10-K, filed with the Securities and Exchange Commission.
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.
Fixed-price contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
The two primary economic drivers of our business are (1) federal, state and local public funding levels for transportation and other infrastructure projects and (2) the overall health of the economy, nationally and locally, particularly as it affects private non-residential construction. The level of demand for our services will have a direct correlation to these drivers. For example, a weak economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for fewer private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce revenue growth and/or increase pressure on gross
16
profit margins. A weak economy also tends to produce less tax revenue, thereby decreasing the funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as gasoline taxes, which are not necessarily directly impacted by a weak economy. However, even these funds can be temporarily at risk as state and local governments struggle to balance their budgets. Conversely, higher public funding and/or a robust economy will increase demand for our services and provide opportunities for revenue growth and margin improvement.
Revenue growth is also 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.
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 a 10% residual value.
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 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
17
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.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” the Company reviews its assets for impairment. 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 September 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.
Three months Ended September 30, 2005 Compared to Three months Ended September 30, 2004
Revenues. Revenues for the three months ended September 30, 2005 (“Interim 2006”) were $58.6 million an increase of $5.8 million or 11.0% from the three months ended September 30, 2004 (“Interim 2005”). In Interim 2006, service revenues increased $5.5 million or 16.2% and contract revenues increased $0.3 million or 1.8% as compared to Interim 2005. The increase in service revenues is primarily attributable to increases in non-residential construction nationwide and particularly in California as well as the increase in concrete restoration projects undertaken by many states. The minor increase in contract revenues is primarily attributable to timing of projects and not indicative of any known trend.
Penhall operated through 39 locations in 18 states at September 30, 2005, and through 37 locations in 17 states at September 30, 2004. At September 30, 2005, Penhall’s operated rental fleet consisted of 698 units compared to 693 units at September 30, 2004, an increase of 0.7%. The increase in revenue units is attributable to a slight increase in equipment utilization.
18
Gross Profit. Gross profit totaled $18.1 million in Interim 2006, an increase of $3.9 million or 27.3% from Interim 2005. Gross profit as a percentage of revenues increased from 26.9% in Interim 2005 to 30.9% in Interim 2006. The increase in gross profit from Interim 2005 to Interim 2006 is primarily attributable to higher market demand for operated equipment which increased demand for the Company’s services during Interim 2006.
General and Administrative Expenses. General and administrative expenses were $9.0 million in Interim 2006 compared to $8.1 million in Interim 2005. As a percent of revenues, general and administrative expenses were 15.3% in Interim 2006 compared to 15.4% in Interim 2005. The increase in general and administrative expenses during Interim 2006 is primarily attributable to increases in bonus expense, salaries and bad debt expense offset by a decrease in insurance premiums.
Other Operating Income, net. Other operating income was $0.4 million in Interim 2006, an increase of $0.3 million as compared to $0.1 million in Interim 2005. This increase is comprised primarily of gains on sales of equipment of which $0.2 million is attributable to the sale of one piece of equipment.
Interest Expense. Interest expense was $3.5 million in Interim 2006 and Interim 2005. Interest expense in consistent during both periods due to consistent borrowing during both three month periods.
Interest Expense - Preferred Stock. The Company presents separately as interest expense the accretion related to mandatorily redeemable instruments. Interest expense – Preferred stock totaled $1.4 million in Interim 2006 an increase of $0.2 million compared to Interim 2005.
Other Income. Other income was $27,000 in Interim 2006 and in Interim 2005. Other income is attributable to the amortization of deferred profit related to the sale-leaseback which occurred in December 2003.
Income Tax Expense. The Company recorded income tax expense of $2.5 million or 41% of earnings before income taxes excluding the impact of non-deductible interest expense on preferred stock in Interim 2006, compared to income tax benefit of $1.1 million, or 40.0% of earnings before income taxes in Interim 2005. The change in the effective tax rate adjusted for the non-deductible interest expense related to preferred stock for Interim 2006 is primarily attributable to changes in the mix of earnings in differing tax jurisdictions.
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 which was replaced on November 1, 2005 by the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement consists of a revolving credit facility in an aggregate principal amount of $55 million, $35 million of which is available for the issuance of letters of credit. The revolving credit facility matures on November 1, 2010. See Note 6 to the condensed consolidated financial statements. At September 30, 2005, the Company was in compliance with all covenants under the then existing credit facility which was secured in May 2003.
As of November 14, 2005, the Company had outstanding borrowings of $9.5 million, $20.0 million of outstanding letters of credit, borrowing base limitations of $5.0 million and borrowings unused and available under the Amended and Restated Credit Agreement of $20.4 million.
Summary Cash Flow Data (000’s) for the periods ending September 30.
|
| 2004 |
| 2005 |
| ||||||
Cash and cash equivalents |
| $ | 38 |
| $ | 103 |
| ||||
|
|
|
|
|
| ||||||
Net cash provided by (used in): |
|
|
|
|
| ||||||
Operating activities |
| $ | (2,105 | ) | $ | (1,763 | ) | ||||
Investing activities |
| $ | (2,215 | ) | $ | (3,969 | ) | ||||
Financing activities |
| $ | 3,282 |
| $ | 5,737 |
| ||||
Capital expenditures |
| $ | 2,328 |
| $ | 4,493 |
| ||||
19
Cash used in operating activities decreased from $2.1 million in Interim 2005 to $1.8 million in Interim 2006. The decrease in net cash used in operating activities was primarily due to the increase in net earnings which increased from $0.4 million in Interim 2005 to $2.2 million in Interim 2006. This increase was offset by the following: Prepaid expenses and other assets used $0.4 million in cash during Interim 2005 compared to $1.8 million in Interim 2006. This increase was due to the timing of insurance premium prepayments during Interim 2006. The payments related to Interim 2005 were paid prior to June 2004. Accounts payable provided $0.9 million in cash during Interim 2005 compared to using $0.8 million during Interim 2006. This increase in use of cash is primarily related to payments made against accounts payable during Interim 2006 which were related to materials and subcontract costs. Accrued liabilities used $1.8 million during Interim 2005 compared to $2.4 million during Interim 2006. This increase was primarily attributable to the payment of $0.8 million to BRS related to management fees. Annual management fees of $0.3 million were held until the Company met a certain EBITDA minimum according to the Indenture Agreement.
Cash used by investing activities in Interim 2006 was $4.0 million compared to $2.2 million during Interim 2005. This change is due primarily to an increase in capital expenditures from $2.3 million during Interim 2005 to $4.5 million during Interim 2006. The increase in capital expenditures is related to a slight increase in equipment utilization and replacement of aging equipment.
Cash provided by financing activities in Interim 2006 was $5.7 million compared to $3.3 million in Interim 2005. The increase is primarily related to an increase in borrowing against our revolving credit line during Interim 2006.
The Company had standby letters of credit totaling $20.0 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 September 30, 2005, the Company and its subsidiaries had $153.5 million of total indebtedness outstanding (including the Senior Notes and mandatorily redeemable stock) and a stockholders’ deficit of $97.1 million. As of September 30, 2005 approximately $23.9 million of additional borrowing was available under the New Credit which was replaced by the Amended and Restated Credit Agreement on November 1, 2005.
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.
On November 1, 2005, we called for redemption all of our outstanding $100 million aggregate principal amount of 12% Senior Notes due 2006. The Redemption Date is December 1, 2005. On the Redemption Date, we will redeem $100,000,000 in aggregate principal amount of notes at a price of $1,020.00 per $1,000 in principal amount of notes redeemed, plus accrued interest through the Redemption Date. The aggregate redemption price of the notes (including redemption premium and accrued interest) is approximately $106 million.
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. 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
20
to remedy the default.
As of September 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 |
| $ | 21,216,000 |
| |
Preferred Series A |
| 08/01/07 |
| $ | 26,458,000 |
| |
On November 1, 2005, we exercised our right to redeem all of our outstanding 10.5% Senior Exchangeable Preferred Stock (“Preferred Stock”) pursuant to the terms as set forth in (i) a letter agreement, dated December 14, 2004, by and between the Company and National Christian Foundation (“NCF”) and (ii) a letter agreement, dated September 8, 2005, by and between the Company and NCF. The Redemption Date is December 1, 2005. Such letter agreements allow the Company to redeem all of the Preferred Stock for an aggregate redemption price of $7.5 million in cash on the Redemption Date.
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, 2005 and September 30, 2005, the Company has recorded these shares at historical cost of $7,558,000, 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 $28,675,000 as of September 30, 2005. The Company believes that the likelihood of the conditions requiring redemption by the stockholder occurring is remote.
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 September 30, 2005, approximately $13 million 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. Effective November 2005, we successfully replaced one of our sureties.
NEW ACCOUNTING PRINCIPLES
In December 2004, the FASB issued 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, are no longer an alternative to financial statement recognition. Under Statement No. 123R, we determined that the appropriate fair value model to be used for valuing share-based payments is the Black-Scholes option pricing model. We are using the straight-line method for amortization of compensation cost and elected to use the modified prospective method at July 1, 2005 for the transition. The modified 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. Adoption of Statement 123R has not had a material impact on our consolidated results of operations and earnings per share. See note 2 to the condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 Company’s credit facility. The Company does not enter into derivative or interest rate transactions for speculative purposes.
21
The table below presents the principal amounts of debt, weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2005.
|
| YEARS ENDING JUNE 30, |
| ||||||||||||||||||||||
|
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| THERE- |
| TOTAL |
| FAIR |
| ||||||||
|
| (IN THOUSANDS) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed rate debt (5) |
| $ | 221 |
| $ | 100,182 |
| $ | 64,000 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 100,467 |
| $ | 99,967 | (3) |
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
| 11.94 | % |
|
| ||||||||
Variable rate LIBOR |
| 5,368 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 5,368 |
| 5,368 |
| ||||||||
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
| 8.25 | % |
|
| ||||||||
(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 and an optional loan with the interest based on prime plus 200 basis points. The total borrowing unused and available under the facility was $23.9 million at September 30, 2005.
(2) The Company has different interest rate options for its variable rate debt.
(3) The fair value of fixed rate debt was determined based on quoted market price for the debt instrument.
(4) As of November 1, 2005 the Company replaced the revolving credit facility. See Note 6 to the condensed consolidated financial statements.
(5) As of November 1, 2005 the Company entered into a second lien term loan agreement (“Loan Agreement”). The proceeds will be used to redeem all of the Company’s $100 million 12% Senior Notes. The Loan Agreement consists of a term loan in the amount of $105 million, which will be due and payable on November 1, 2010, if not sooner paid in full in accordance with its terms. See note 6 to the condensed consolidated financial statements.
Item 4. Controls and Procedures
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer 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.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, during our most recent fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
Part II Other Information
Items 1 – 5 are not applicable
Item 6. Exhibits
EXHIBIT NO. |
| DESCRIPTION |
31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 14, 2005* |
|
|
|
31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 14, 2005* |
|
|
|
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 November 14, 2005* |
|
|
|
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 November 14, 2005* |
* Filed herewith.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2005
SIGNATURE |
| TITLE | ||
|
|
|
| |
| /s/ JOHN T. SAWYER |
| Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | |
| John T. Sawyer |
|
| |
|
|
|
| |
| /s/ JEFFREY E. PLATT |
| Vice President-Finance and Chief Financial Officer (Principal Accounting Officer) | |
| Jeffrey E. Platt |
|
| |
|
|
|
| |
| /s/ PAUL N. ARNOLD |
| Director | |
| Paul N. Arnold |
|
| |
|
|
|
| |
| /s/ HAROLD O. ROSSER |
| Director | |
| Harold O. Rosser |
|
| |
|
|
|
| |
| /s/ J. RICE EDMONDS |
| Director | |
| J. Rice Edmonds |
|
| |
24
EXHIBIT |
| DESCRIPTION |
31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 14, 2005* |
|
|
|
31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 14, 2005* |
|
|
|
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 November 14, 2005* |
|
|
|
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 November 14, 2005* |
* Filed herewith.
25