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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission File Number 333-64745
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PENHALL INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0634394
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
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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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of June 30, 2000, there were 1,012,513 shares of the registrant's
common stock outstanding, all of which were owned by affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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PART I
ITEM 1. BUSINESS
GENERAL
Penhall consists of Penhall International Corporation, an Arizona
Corporation, and two wholly owned subsidiaries, Penhall Company and Penhall
Rental Corporation, both California Corporations (collectively the "Company" or
"Penhall"). 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 700
skilled operators and has 664 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 31 locations in thirteen states, with a presence in some of the
fastest growing states in terms of construction spending and population growth,
including its primary market, California, as well as other strategic markets
including Arizona, Colorado, Nevada, Texas, Georgia, North and South Carolina
and Utah. Penhall has a diverse base of over 11,000 customers. With the
exception of the California Department of Transportation (which represents
approximately 7% of total revenue in fiscal 2000), 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 $74.9 million in fiscal 1996 to $173.1
million in fiscal 2000 through 1) increased rental fleet utilization, 2)
increasing its rental equipment fleet, and 3) acquisitions.
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 23% to 31% of
Operated Equipment Rental Services revenues are generated from fixed-price
contracts.
The operated equipment rental industry is a specialized niche segment of the
highly fragmented United States equipment rental industry. There are an
estimated 15,000 equipment rental companies in the United States, and no single
company represented more than 7% of total market revenues in 1999. According to
industry sources, the United States equipment rental industry grew from
approximately $600 million in revenues in 1982 to an estimated $28 billion in
1999, representing an approximate Compounded Annual Growth Rate (CAGR) of 25.4%.
Management believes that the operated equipment rental industry has grown at a
similar rate during this period. This growth 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. The Highway Transportation Bill was approved by the
President of the United States in June 1998, which calls for a $218 billion
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increase in national spending on highways and mass transit from current levels
over six years from date of approval and approximately a 58% increase in Penhall
markets overall on a non-weighted average basis.
THE REORGANIZATION
Penhall International, Inc., a California corporation ("PII"), prior to the
consummation of the Transactions (as defined below) conducted all its operations
through Phoenix Concrete Cutting, Inc., an Arizona corporation (the "Company"),
and the Penhall Company, a California corporation ("PenCo"). As of June 30,
1998, PII, the stockholders of PII, the Company, and Penhall Acquisition Corp.,
an Arizona Corporation (the "Issuer" or "PAC"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, the
Company formed PCC Merger Sub, a California corporation and wholly-owned
subsidiary ("PCC Merger Sub"), which on August 4, 1998, was merged with and into
PII (the "Reorganization Merger"), with the result that (i) PII continued as the
surviving corporation, (ii) each stockholder of PII had his or her common equity
in PII converted into common equity in the Company, (iii) PII received common
equity in the Company approximately equal in value to the value of its common
equity in the Company immediately prior to the consummation of the
Reorganization Merger and (iv) the Company received common equity in PII such
that the Company became the corporate parent of and owns all the outstanding
capital stock of PII (which continues to hold all the outstanding capital stock
of PenCo). Pursuant to the Merger Agreement, immediately following the
Reorganization Merger, the Issuer merged with and into the Company (the
"Recapitalization Merger" and, together with the Reorganization Merger, the
"Mergers"), with the Company continuing as the surviving corporation (the
"Surviving Corporation"). Prior to or simultaneously with the consummation of
the Recapitalization Merger, the Issuer entered into a new senior secured credit
facility (the "New Credit Facility") providing for $20.0 million of Term Loans
(as defined therein) and up to $30.0 million of Revolving Loans (as defined
therein), and all indebtedness of PII except $3.7 million of notes payable was
repaid (the "Refinancing"). Following the consummation of the Mergers, the
Company changed its corporate name to "Penhall International Corp." and PII
changed its corporate name to "Penhall Rental Corp."
The aggregate consideration paid upon consummation of the Recapitalization
Merger (the "Merger Consideration") was approximately $136.2 million. Pursuant
to the Merger Agreement, (i) certain management stockholders of PII (the
"Existing Management Stockholders") agreed to convert a portion of the common
equity in the Company received by them pursuant to the Reorganization Merger
into $8.7 million of common and preferred equity of the Surviving Corporation
(the "Equity Rollover"), (ii) the National Christian Charitable Foundation,
Inc., a foundation formed by the Company's former majority shareholder received
$10.0 million of preferred equity of the Surviving Corporation in lieu of $10.0
million of cash Merger Consideration otherwise payable to it in the
Recapitalization Merger, and (iii) BRS and certain persons affiliated with BRS
(together with BRS, the "BRS Entities") and the New Management Stockholders
(consisting of certain existing management and certain new management
shareholders) purchased $21.1 million and $0.2 million, respectively, of common
and preferred equity of the Surviving Corporation (the "Equity Contribution"
and, together with the Mergers, the Refinancing and the Equity Rollover, the
"Recapitalization"). Following the consummation of the Recapitalization, the BRS
Entities held approximately 62.5% of the Common stock, par value $.01 per share,
of the Surviving Corporation ("Common stock"), 100.0% of the Series A Preferred
stock, par value $.01 per share, of the Surviving Corporation ("Series A
Preferred stock") and 43.3% of the Series B Preferred stock, par value $.01 per
share, of the Surviving Corporation ("Series B Preferred stock"), the Management
Stockholders held approximately 37.5% of the Common stock and 38.6% of the
Series B Preferred stock, the Foundation held 100% of the Senior Exchangeable
Preferred stock and PII held approximately 18.1% of the Series B Preferred
stock.
In connection with the Recapitalization in August of 1998, the Issuer issued
$100,000,000 of 12% Senior Notes due 2006 (the "Existing Notes"). As part of the
Recapitalization, the Company became the successor obligor under the Exiting
Notes. In order to satisfy certain obligations of the Company and the Guarantors
(consisting of the Company's wholly-owned subsidiaries) contained in the
Registration Rights Agreement, dated August 4, 1998 (the "Registration Rights
Agreement") by and among the Issuer, the Company, the Guarantors, BT Alex. Brown
Incorporated ("BTAB") and Credit Suisse First Boston (collectively with BTAB,
the "Initial Purchasers") with respect to the initial sale of the Existing
Notes, the Company offered to exchange an aggregate principal amount of up to
$100,000,000 of its 12% Senior Notes due 2006 (the "New Notes") for a like
principal amount of the Existing Notes outstanding in December 1998. The New
Notes and the Existing Notes are hereinafter collectively referred to as the
"Notes." The terms of the New Notes are identical in all material respects to
those of the Existing Notes,
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except for certain transfer restrictions and registration rights relating to the
Existing Notes. The New Notes were issued pursuant to, and are entitled to the
benefits of, the Indenture (as defined) governing the Existing Notes.
The foregoing transactions, the application of the proceeds therefrom and the
payment of related fees and expenses, are collectively referred to herein as the
"Transactions."
Penhall was obligated to make approximately $3 million of tax gross-up
payments to certain members of Management on or before September 15, 1998. The
Company made such payments out of working capital on September 15, 1998. During
the fiscal years ended June 30, 1998 and 1999, Penhall realized tax benefits of
approximately $3 million in the form of reduced tax payment obligations or
refunds of tax overpayments as a result of deductions for certain of such tax
gross-up payments and deductions with respect to employee stock options.
RECENT DEVELOPMENTS
On June 9, 1998, the President of the United States approved the
approximately $218.0 billion transportation bill, the "Transportation Equity Act
(TEA-21)" which will increase spending by approximately 44% from current levels
nationally, and approximately 58% overall on a non-weighted average basis in
Penhall's markets, over the next five years and is aimed at financing the repair
and new construction of roads, mass transit, bridges, bike paths, bus garages
and other infrastructure in the United States. Approximately 80% of the funding
has been designated for maintenance and new construction of highways.
Approximately 24% of total United States highway spending appropriated by TEA-21
will be allocated to Penhall's markets, and Management believes that the TEA-21
represents a significant growth opportunity for the Penhall. In addition, in May
2000, the "Aviation Investment Reform Act (AIR-21)" was authorized which
provides for $40 billion to be spent upgrading airport facilities over three
years. The impact of TEA-21 and AIR-21 should become more apparent in calendar
year 2001.
EQUIPMENT RENTAL FLEET
Penhall owns and operates a well-maintained fleet of 664 units of operated
equipment, including excavators, stompers, backhoes, compressors, "bobcats,"
crushing equipment, saws, drills and grinding 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, 2000:
DESCRIPTION QUANTITY
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Diamonds.......................................................... 370
Compressors....................................................... 97
Excavators........................................................ 34
Grinders.......................................................... 22
Backhoes.......................................................... 40
Bobcats........................................................... 50
Tankers........................................................... 24
Stompers.......................................................... 10
Loaders........................................................... 4
Miscellaneous..................................................... 13
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Total Units....................................................... 664
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In addition to its 664-unit operated equipment rental fleet, Penhall
maintains an inventory of approximately 552 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 it's own shop and repair and
maintenance staff that routinely maintains and repairs the equipment rental
fleet.
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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, as a result of the HSI Acquisition in April
1998, 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.
- 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.
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. Penhall is currently providing breaking
services in connection with a large-scale project in Salt Lake City
which calls for the breaking and removal of approximately 115
highway overpasses on U.S. Interstate 15 in order to widen the
Interstate in preparation for the 2002 Olympic Games.
- 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.
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- 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
materials 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. 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.
Penhall's services are made available to customers through its 31 regional
locations. Penhall maintains a basic equipment rental fleet and operators at
each of its 31 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 $77 to $430 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 Group 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 has rented its equipment only in conjunction with the
services of a Penhall employee as the operator. Recently, however, Penhall has
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 generates
revenues of between $7,500 and $10,000,000. 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 23 states (not including 23 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
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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 the
Penhall Group. 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 110 people,
with at least two salespersons based at each 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 any of its existing suppliers if it were no longer
advantageous to purchase equipment from such suppliers.
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 California Department of
Transportation, Wasatch Constructors, Turner Construction, San Diego Gas &
Electric, Morrison Knudsen and Koll Construction Company. During fiscal 2000,
Penhall served over 11,000 customers and, with the exception of the California
Department of Transportation, no one customer has accounted for more than 5% of
Penhall's revenues in any of the past five fiscal years. Management believes
that a significant percent of Penhall's revenues represented repeat business
from existing customers.
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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 the 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. In many cases, a performance bond is required by a customer before a
contract is awarded. Penhall believes that its bonding capacity is a competitive
advantage over smaller, less financially stable competitors. Moreover, Penhall
believes that it is able to compete effectively for fixed-price contract jobs
because of its extensive resources and relationships with general contractors.
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 allow
it to broadcast over certain designated radio frequencies. These licenses may
not be assigned without the FCC's consent.
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LABOR RELATIONS
As of June 30, 2000 Penhall Company had approximately 1,500 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 19
certified or lawfully recognized bargaining units.
All agreements expiring during Fiscal 2000 have been renewed or extended.
There are four agreements expiring in June 2001, three expire in April 2001 and
one expires in May 2001. No discussions have begun on those agreements. There is
no reason to believe that any expiration will have a material effect on Fiscal
2001 operations. There are currently no unfair labor practice charges pending
against Penhall either before the National Labor Relations' Board or the courts.
ITEM 2. PROPERTIES
Penhall is headquartered in Anaheim, California. As of June 30, 2000 Penhall
owned or leased 31 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. SQUARE FEET
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Anaheim, California........................................ 18,300
Gardena, California........................................ 3,850
Camarillo, California...................................... 3,600
San Leandro, California.................................... 6,000
Sacramento, California..................................... 8,000
San Diego, California...................................... 5,600
Rialto, California (1)..................................... 6,000
Santa Clara, California (1)................................ 9,950
Irvine, California (1)..................................... 9,500
Bakersfield, California (1)................................ 4,000
Burbank, California........................................ 6,200
Phoenix, Arizona........................................... 12,900
Austin, Texas.............................................. 6,100
Grapevine, Texas (1)....................................... 11,000
Denver, Colorado........................................... 15,100
Austell, Georgia (1)....................................... 8,000
Las Vegas, Nevada.......................................... 11,000
Portland, Oregon (1)....................................... 24,000
Salt Lake City, Utah (1)................................... 10,500
Rogers, Minnesota (1)...................................... 11,000
Birmingham, Alabama (1).................................... 2,000
Golden Valley, Minnesota (1)............................... 24,000
Superior, Wisconsin (1).................................... 4,000
Morrisville, North Carolina (1)............................ 15,000
Charlotte, North Carolina (1).............................. 6,000
Greensboro, North Carolina (1)............................. 5,000
Wilmington, North Carolina (1)............................. 2,000
Greenville, South Carolina (1)............................. 3,500
Columbia, South Carolina (1)............................... 3,500
Charleston, South Carolina (1)............................. 6,500
College Park, Georgia (1).................................. 5,000
- ----------
(1) Leased property.
Penhall presently leases twenty sites in ten 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 5
years (assuming the exercise of all option periods). The Real Property Leases
for the following three Leased Sites
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have remaining terms of less than three years: (i) Santa Clara, California -
October 31, 2002, (ii) Austell, Georgia - January 31, 2001 and (iii)
Greensville, South Carolina October 15, 2000.
ITEM 3. LEGAL PROCEEDINGS
Penhall is from time to time involved in legal proceedings arising in the
ordinary course of business. Penhall believes there is no outstanding
litigation, which could have a material impact on its financial position or
results of operations.
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 ended June 30, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 1999 or 2000. The Indenture 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
it's assets to another person, or engage in certain change of control
transactions. As part of the Recapitalization, the Issuer issued the Existing
Notes in accordance with Rule 144A of the Securities Act of 1933, as amended. As
part of the Recapitalization, the Company became the successor obligor under the
Existing Notes. See "Business -- the Reorganization".
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ................................. $ 74,895 $ 95,298 $ 101,170 $ 143,446 $ 173,060
Cost of revenues ......................... 51,200 68,541 72,395 101,389 119,854
----------- ----------- ----------- ----------- -----------
Gross profit ............................. 23,695 26,757 28,775 42,057 53,206
General and administrative expenses ...... 15,156 16,953 18,673 32,570 28,474
Reorganization expenses .................. -- -- 1,207 3,501 43
Other compensation ....................... -- -- 3,271 --
Other operating income ................... 867 871 644 1,121 1,228
----------- ----------- ----------- ----------- -----------
Earnings before interest expense and
income taxes ........................... 9,406 10,675 6,268 7,107 25,917
Interest expense ......................... 783 811 1,036 14,334 15,591
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes ...... 8,623 9,864 5,232 (7,227) 10,326
Income tax expense (benefit) ............. 3,538 4,407 2,531 (1,388) 4,376
----------- ----------- ----------- ----------- -----------
Net earnings (loss) ...................... 5,085 5,457 2,701 (5,839) 5,950
Accretion of preferred stock to
redemption value ....................... -- -- -- (2,304) (2,854)
Accrual of cumulative dividends on
preferred stock ........................ -- -- -- (2,323) (2,946)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) available to
common stockholders .................... $ 5,085 $ 5,457 $ 2,701 $ (10,466) $ 150
=========== =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic ................................. $ 1.25 $ 1.29 $ .63 $ (8.16) $ .15
Diluted ............................... 1.24 1.27 .62 (8.16) $ .15
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic ................................. 4,054,596 4,232,585 4,277,888 1,282,996 1,000,953
Diluted ............................... 4,114,398 4,305,608 4,355,303 1,282,996 1,000,953
OTHER DATA:
Adjusted EBITDA (1) ...................... $ 15,644 $ 19,565 $ 20,931 $ 31,129 $ 40,481
Adjusted EBITDA margin (2) ............... 20.9% 20.5% 20.7% 21.7% 23.4%
Net cash provided by (used in)
operating activities ................... $ 10,686 $ 8,562 $ 16,628 $ (487) $ 20,282
Net cash used in investing activities .... $ (10,522) $ (15,086) $ (17,047) $ (21,188) $ (17,228)
Net cash provided by (used in)
financing activities ................... $ 735 $ 6,263 $ (23) $ 24,526 $ (4,030)
Depreciation and amortization ............ $ 5,417 $ 6,878 $ 8,870 $ 11,652 $ 14,521
Capital expenditures ..................... $ 11,511 $ 16,089 $ 12,287 $ 14,456 $ 18,093
Units of operated equipment rentals
at end of period ....................... 369 420 497 623 664
Number of locations at end of period ..... 16 21 22 32 31
Ratio of earnings to fixed charges (3) ... 10.4x 11.4x 5.3x .5x 1.7x
CONSOLIDATED BALANCE SHEET DATA AT
PERIOD END:
Total assets ............................. $ 53,378 $ 69,833 $ 88,323 $ 114,163 $ 122,162
Long-term obligations, including
current maturities ..................... 8,981 14,111 18,564 131,324 125,235
Stockholders' equity (deficit) ........... 32,032 39,253 43,606 (66,965) (62,787)
- -----------
(1) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, adjusted to exclude stock-related
compensation expense, reorganization costs and other compensation (for
discussion of the Company's stock-related compensation expense and
reorganization costs and other compensation, see notes 8 and 1,
respectively, to the Company's consolidated financial statements). Adjusted
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EBITDA is presented because Management believes it provides useful
information regarding a company's ability to incur and/or service debt. Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
cash flows, or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
The following chart depicts the components of Adjusted EBITDA:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Net earnings (loss) ............. $ 5,085 $ 5,457 $ 2,701 $ (5,839) $ 5,950
Interest expense ................ 783 811 1,036 14,334 15,591
Income tax expense (benefit) .... 3,538 4,407 2,531 (1,388) 4,376
Depreciation and amortization ... 5,417 6,878 8,870 11,652 14,521
Stock related compensation
Expense ....................... 821 2,012 1,315 8,869 --
Reorganization costs ............ -- -- 1,207 3,501 43
Other compensation .............. -- -- 3,271 -- --
-------- -------- -------- -------- --------
Adjusted EBITDA .......... $ 15,644 $ 19,565 $ 20,931 $ 31,129 $ 40,481
======== ======== ======== ======== ========
(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.
ITEM 7. 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 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 31 locations in
thirteen states, with a presence in some of the fastest growing states in terms
of construction spending and population growth.
From fiscal 1996 to fiscal 2000, revenue and Adjusted EBITDA have grown at a
CAGR of 23.3% and 26.8%, respectively, due primarily to management's successful
implementation of a strategy focused on (i) maximizing high-margin Operated
Equipment Rental Services revenues through increased equipment rental fleet
utilization, (ii) controlling overhead and (iii) successfully integrating
Penhall's acquisitions and start-up locations as well as a robust economy which
has stimulated all aspects of the construction industry.
The operated equipment rental industry is a specialized niche of the highly
fragmented United States equipment rental industry, in which there are
approximately 15,000 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 1994, Penhall has effected
seven strategic acquisitions, including Concrete Coring Company, an Austin-based
company acquired in 1995, Zig Zag Company, a Denver-based firm acquired in 1996,
Metro Concrete Cutting, an Atlanta-based company acquired in 1996, HSI, a
Minnesota-based firm acquired in April 1998, Daley Concrete Cutting, a South
Carolina-based division of U.S. Rentals acquired in October 1998, Lipscomb
Concrete Cutting, a North Carolina-based company acquired in November 1998 and
Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999.
During the same period, Penhall established operations in four new markets by
opening offices in Las Vegas, Salt Lake City, Portland and Dallas.
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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. During fiscal 2000, approximately 59% of Penhall's
revenues were derived from highway-related projects, approximately 24% of
revenues were generated from municipal-related projects such as road
construction and airport construction and the remainder of revenues were
generated from commercial, residential and other projects. The following table
shows the breakdown of the components of revenue for the periods indicated:
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1998 1999 2000
--------------------- --------------------- --------------------
$ % OF TOTAL $ % OF TOTAL $ % OF TOTAL
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Hourly Service Rentals ........... $ 77,445 76.5% $ 98,834 68.9% $121,256 70.1%
Long Term Service Contracts(1) ... 23,725 23.5 44,612 31.1 51,804 29.9
-------- ----- -------- ----- -------- -----
Total Revenues ................. $101,170 100.0% $143,446 100.0% $173,060 100.0%
======== ===== ======== ===== ======== =====
(1) Excludes services performed by the operated equipment rental divisions on
long-term 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.
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 six years with a 10% residual value.
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 and losses on sales of assets are recognized in "Other
Operating Income" in Penhall's consolidated statements of operations. In fiscal
1998, 1999, and 2000, gains and losses on sales of assets from such equipment
sales were $203,000, $420,000, and $305,000 respectively.
The following table shows the number of units in Penhall's operated equipment
rental fleet for the following periods:
FISCAL YEAR ENDED JUNE 30,
1998 1999 2000
---- ---- ----
Beginning of Period .......... 420 497 623
# Units Purchased ............ 99 185 75
# Units Disposed ............. (22) (59) (34)
---- ---- ----
End of Period ................ 497 623 664
==== ==== ====
RESULTS OF OPERATIONS
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
Revenues. Revenues for fiscal 2000 were $173.1 million, compared to revenues
of $143.4 million for the prior year, an increase of $29.7 million or 20.7%. The
increase was due primarily to the inclusion of a full year of operations of
Daley Concrete Cutting (acquired in October 1998), Lipscomb Concrete Cutting
(acquired in November 1998), Diamond Concrete Services (acquired in April 1999)
and Prospect Drilling and Sawing (acquired
13
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in June 1999). Combined, these operations contributed $22.5 million of revenue
in fiscal 2000. In addition, construction markets remained strong in fiscal 2000
in the areas the Company serves leading to increased fleet size and increased
utilization of the fleet.
Penhall operated through thirty-one locations in thirteen states at June 30,
20000, compared to thirty-two locations in thirteen states at June 30, 1999. At
June 30, 2000, Penhall's operating fleet consisted of 664 units compared to 623
units at June 30, 1999, an increase of 6.6%.
Gross Profit. For fiscal year 2000, gross profit was $53.2 million compared
to gross profit of $42.1 million for fiscal year 1999, an increase of $11.1
million, or 26.4%. As a percent of revenue, gross profit was 30.7% in fiscal
year 2000 compared to 29.3% in fiscal year 1999. The increase in gross profit in
2000 was due primarily to the increase in revenues in fiscal 2000 coupled with
better utilization of the equipment rental fleet in fiscal 2000. Gross profit
margins for contract services are generally lower than gross profit margins for
operated equipment rental services revenues.
General and Administrative Expenses. General and administrative expenses were
$28.5 million in fiscal year 2000 compared to $32.6 million in fiscal year 1999.
As a percent of revenues, general and administrative expenses were 16.5% in
fiscal 2000 compared to 22.7% in fiscal 1999. Included in the fiscal 1999
general and administrative expenses is $8.9 million of compensation expense
related to the Company's Employee Stock Purchase Plans. Without the compensation
expense, general and administrative expenses were $23.7 million, or 16.5% of
revenues in fiscal 1999.
General and Administrative expenses in fiscal 2000, compared to general and
administrative expenses in fiscal 1999 (net of stock related compensation
expense), increased by $4.8 million. The increase in general and administrative
expenses in fiscal 2000 was the result of the increased administration
associated with higher revenues compared to fiscal 1999. The increase in stock
related compensation expense in fiscal 1999 was the result of the Transactions
in August 1998.
Reorganization Expenses. Reorganization expenses, consisting primarily of
closing fees and legal expenses, were $43,000 in fiscal 2000 compared to $3.5
million in fiscal 1999. These expenses were associated with the reorganization
of the Company which occurred in August 1998 and are non-recurring expenses.
Other Operating Income. Other operating income consists primarily of gains
and losses on the sale of fixed assets, interest income, and discounts earned.
Other operating income in fiscal 2000 of $1.2 million is only slightly higher
than the $1.1 million in fiscal 1999. Most of the fiscal 2000 increase is due to
increased discounts earned partially offset by lower gains on sale of assets.
Interest Expense. Interest expense was $15.6 million in fiscal 2000 compared
to $14.3 million in fiscal 1999. The increase was due to both a full year of
significant debt resulting from the Transactions in August of fiscal 1999 as
well as higher interest rates during fiscal 2000 partially offset by lower
borrowing levels during fiscal 2000.
Income Tax Expense (Benefit). The Company recorded income tax expense of $4.4
million, or 42.4% of earnings before income taxes in fiscal 2000, compared to an
income tax benefit of $1.4 million, or 19% of loss before income taxes in the
prior year. The lower tax benefit in fiscal 1999 is attributable to certain
reorganization costs related to the Transactions, which are not deductible for
tax purposes.
Year Ending June 30, 1999 compared to Year Ending June 30, 1998
Revenues. Revenues for fiscal 1999 were $143.4 million, compared to revenues
of $101.2 million for the prior year, an increase of $42.2 million or 41.7%. The
increase was due primarily to the inclusion of a full year of operations of
Highway Services, Inc. in fiscal 1999 (HSI was acquired in April 1998) and to
the acquisitions of Daley Concrete Cutting in October 1998, Lipscomb Concrete
Cutting in November 1998, Diamond Concrete Services in April 1999 and Prospect
Drilling and Sawing in June 1999. In addition, construction markets remained
strong in fiscal 1999 in the areas which the Company serves.
14
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Penhall operated through thirty-two locations in thirteen states at June 30,
1999, compared to twenty-two locations in nine states at June 30, 1998. At June
30, 1999, Penhall's operating fleet consisted of 623 units compared to 497 units
at June 30, 1998, an increase of 25.4%.
Gross Profit. For fiscal year 1999, gross profit was $42.1 million compared
to gross profit of $28.8 million for fiscal year 1998, an increase of $13.3
million, or 46.2%. As a percent of revenue, gross profit was 29.3% in fiscal
year 1999 compared to 28.4% in fiscal year 1998. The increase in gross profit in
1999 was due primarily to the increase in revenues in fiscal 1999. The increase
in gross profit as a percent of revenues in fiscal 1999 was due to better
utilization of the equipment rental fleet in fiscal 1999, partially offset by a
higher portion of the Company's revenues derived from contract revenues in
fiscal 1999. Gross profit margins for contract services are generally lower than
gross profit margins for operated equipment rental services revenues.
General and Administrative Expenses. General and administrative expenses were
$32.6 million in fiscal year 1999 compared to $18.7 million in fiscal year 1998.
As a percent of revenues, general and administrative expenses were 22.7% in
fiscal 1999 compared to 18.5% in fiscal 1998. Included in general and
administrative expenses is $8.9 million in fiscal 1999 and $1.0 million in
fiscal 1998 of compensation expense related to the Company's Employee Stock
Purchase Plans. Without the compensation expense, general and administrative
expenses were $23.7 million, or 16.5% of revenues in fiscal 1999 compared to
$17.7 million, or 17.5% of revenues in fiscal 1998.
The increase in general and administrative expenses (net of stock related
compensation expense) in fiscal 1999 was the result of the increased revenues
and number of operating locations compared to fiscal 1998. The reduction in
general and administrative expenses as a percent of revenues occurred because
some of these types of expenses remain somewhat constant, and do not increase or
decrease in proportion to increases or decreases in revenues.
The increase in stock related compensation expense in fiscal 1999 was the
result of the Transactions in August 1998.
Reorganization Expenses. Reorganization expenses, consisting primarily of
closing fees and legal expenses, were $3.5 million in fiscal 1999 compared to
$1.2 million in fiscal 1998. These expenses were associated with the
reorganization of the Company which occurred in August 1998 and are
non-recurring expenses.
Other Operating Income. Other operating income consists primarily of gains
and losses on the sale of fixed assets, interest income, and discounts earned.
The increase in fiscal 1999 compared to fiscal 1998 was due to higher levels of
operations in fiscal 1999, producing greater gains on the sale of fixed assets
and higher discounts earned.
Interest Expense. Interest expense was $14.3 million in fiscal 1999 compared
to interest expense of $1.0 million in fiscal 1998. The increase was due to
additional debt incurred by the Company as part of the Transactions. This
additional debt consists of $100.0 million of Senior Notes and the New Credit
Facility (see Liquidity and Capital Resources below).
Income Tax Expense (Benefit). The Company recorded an income tax benefit of
$1,388,000, or 19% of loss before income taxes in the fiscal year ended June 30,
1999, compared to a provision of $2,531,000, or 48% of earnings before income
taxes in the prior year. The lower tax benefit in fiscal 1999 is attributable to
certain reorganization costs related to the Transactions which are not
deductible for tax purposes.
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. The Company's principal sources of liquidity are expected to be cash
flow from operations and borrowings under the New Credit Facility. The New
Credit Facility consists of two facilities: (i) a six-year senior secured term
loan facility in an aggregate principal amount equal to $20.0 million (the "Term
Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate
principal amount not to exceed $30.0 million (the "Revolving Credit Facility").
The Company drew $20.0 million of loans under the Term Loan Facility ("Term
Loans") on the closing date of the New Credit Facility in connection with the
Recapitalization. The Term Loans amortize on a quarterly
15
16
basis commencing in September 2000 and are payable in installments under a
schedule set forth in the New Credit Facility. Advances made under the Revolving
Credit Facility ("Revolving Loans") are due and payable in full on June 15,
2004. The Term Loans and the Revolving Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by the Company or any subsidiary of the Company
that guarantees amounts under the New Credit Facility. Such loans are also
required to be prepaid with 75% of the Excess Cash Flow (as such term is defined
in the New Credit Facility) of the Company or, if the Company's Leverage Ratio
(as such term is defined in the New Credit Facility) is less than 4.75 to 1.0,
50% of such Excess Cash Flow. For fiscal 2000 and 1999, no prepayments resulted
from Excess Cash Flow as defined above.
Cash provided by (used in) operating activities during fiscal, 1998, 1999 and
2000 was $16.6 million, $(0.5) million and $20.2 million respectively. In fiscal
2000, the Company's net earnings and increases in depreciation and amortization,
accounts payable and billings in excess of costs and estimated earnings on
uncompleted contracts, which were partially offset by increases in receivables
and inventories and costs and estimated earnings in excess of billings on
uncompleted contracts, resulted in net cash provided of $20.3 million. In fiscal
1999, the Company's net loss and increases in accounts receivable and cost and
estimated earnings in excess of billings on uncompleted contracts, which were
partially offset by increased depreciation and amortization expense and
increases in accounts payable, resulted in net cash used of $(0.5) million.
Management estimates that Penhall's annual capital expenditures will be
approximately $20.0 million for fiscal 2001, including replacement and
maintenance of equipment, purchases of new equipment, and purchases of real
property.
Net cash used in investing activities during fiscal 1998, 1999 and 2000 was
$17.0 million, $21.2 million and $17.2, respectively. Such cash was primarily
used for capital expenditures of $12.3 million in fiscal 1998, $14.5 million in
fiscal 1999, and $18.1 million in fiscal 2000. In fiscal 1999, $7.7 million of
cash was used for the acquisitions of Daley Concrete Cutting, Lipscomb Concrete
Cutting, Diamond Concrete Services and Prospect Drilling and Sawing.
Net cash provided by (used in) financing activities during fiscal 1998, 1999
and 2000 was $0.0 million, $24.5 million and $(4.0) million, respectively. Cash
used by financing activities in fiscal 2000 is primarily the result of net
repayments of long-term debt of $8.1 million partially offset by the book
overdraft of $3.0 million and proceeds from the issuance of common stock and
preferred stock of $1.1 million.
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, 2000, the Company and its subsidiaries had
approximately $125.2 million of total indebtedness outstanding (including the
Notes) and a stockholders' deficit of approximately $62.8 million. As of June
30, 2000 approximately $27.2 million of additional borrowing was available under
the Company's New Credit Facility.
RECENT DEVELOPMENTS
YEAR 2000
The Year 2000 ("Y2K") issue was the result of computer programs being written
using two digits rather than four to define the applicable year. The Company
established an informal Y2K task force, and developed a plan which listed the
milestones achieved and completed to become Y2K ready. A checklist of potential
failure sources was compiled and included both information technology and
embedded technology systems. The Company completed its assessment of its
information technology and embedded technology systems and has identified and
taken measures to correct potential failures in those systems.
The Company's basic business is to provide operator assisted equipment for
rental. As such, management believes the Company's main exposure to Y2K issues
was the telephone and radio communication systems needed to take orders for
rental, and for certain larger pieces of equipment (excavators, back hoes, etc.)
which have some level of computer operating controls.
16
17
The Company's information technology systems include its accounting systems,
billing, accounts payable, and equipment utilization reports. The Company has
completed testing of all information technology systems, and believes the
systems are Y2K compliant. In addition, major vendors for the Company's computer
hardware, software and data communications network have informed the Company
that their products are Y2K compliant.
The Company's non-information technology systems include primarily rental
location alarm systems, gasoline pumps, radios, telephones and certain types of
heavy equipment. The Company conducted a review for Y2K compliance for the major
non-information technology systems to insure compliance. This review included
determining if respective vendors of the non-information technology systems are
also Y2K compliant.
The Company has spent less than $50,000 as of June 30, 2000, including the
cost of outside consultants, to conduct the Y2K compliance reviews and tests.
The Company does not expect to incur additional substantial costs to complete
its Y2K reviews and remediation, if required.
The primary operational risk to the Company is that communication systems on
which the Company relies will not function properly, or that certain heavy
equipment will not function properly, after December 31, 1999. The primary
information technology risk is that accounting data, including billing customers
and paying vendors, will not function properly via computer after December 31,
1999. The Company believes it has adequate contingency plans to mitigate the
aforementioned potential Y2K related problems. The Company does not believe
potential Y2K problems would have a significant, long-term negative effect on
its operations or information technology.
Although Penhall is uncertain as to the extent its customers may be affected
by Year 2000 issues that require commitment of significant resources and may
cause disruptions in its customers' businesses, Penhall does not believe it has
a material relationship with any one third party that would have a significant
impact on Penhall if that third party was not Year 2000 ready.
As of June 30, 2000, the company has not experienced any disruption to
operations due to the Y2K issue.
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 Senior Notes, Term Loan and Revolving Loan 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
Term Loan and Revolving Loan. The Company does not enter into derivative or
interest rate transactions for speculative purposes.
At June 30, 2000, the annual maturities of long-term debt and senior notes
are as follows:
YEARS ENDING JUNE 30,
------------------------------------------------ FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
(IN THOUSANDS)
Fixed rate debt ............................. $ 1,649 $ 550 $ 3 $ 4 $ 4 $100,175 $102,385 $ 99,635
Average interest rate ....................... 12%
Variable rate LIBOR debt (1) ................ 3,000 5,000 6,000 8,850 0 0 22,850 22,850
Weighted average current interest rate (1) .. 8.45%
At June 30, 1999, the annual maturities of long-term debt and senior notes
are as follows:
YEARS ENDING JUNE 30,
------------------------------------------------ FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
(IN THOUSANDS)
Fixed rate debt ............................. $ 3,669 $ 575 $ 394 $ 3 $ 4 $100,179 $104,824 $101,724
Average interest rate ....................... 12%
Variable rate LIBOR debt (1) ................ 0 3,000 5,000 6,000 12,500 0 26,500 26,500
Weighted average current interest rate (1)... 7.25%
- ----------
17
18
(1) The Company has different interest rate options for its variable rate debt.
See note 5 in the consolidated financial statements for additional
information.
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 14(a).
18
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Penhall International Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Penhall
International Corp. (Note 1) and subsidiaries ("the Company") as of June 30,
1999 and 2000, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended June 30, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
---------------------------------
KPMG LLP
September 12, 2000
Orange County, California
19
20
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 3,085,000 $ 2,109,000
------------ ------------
Receivables:
Contract and trade receivables ........................... 27,808,000 31,834,000
Contract retentions, due upon completion and
acceptance of work (note 2) .......................... 4,957,000 5,724,000
------------ ------------
32,765,000 37,558,000
Less allowance for doubtful receivables (note 2) ......... 1,277,000 1,617,000
------------ ------------
Net receivables ................................... 31,488,000 35,941,000
------------ ------------
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 12) ...................... 3,154,000 4,126,000
Deferred tax assets (note 6) ................................. 3,663,000 2,318,000
Inventories .................................................. 1,316,000 1,741,000
Prepaid expenses and other current assets .................... 580,000 916,000
------------ ------------
Total current assets .............................. 43,286,000 47,151,000
------------ ------------
Property, plant and equipment, at cost:
Land ......................................................... 5,229,000 5,229,000
Buildings and leasehold improvements ......................... 7,472,000 8,135,000
Construction and other equipment ............................. 85,931,000 102,284,000
------------ ------------
98,632,000 115,648,000
Less accumulated depreciation and amortization ............... 43,035,000 53,924,000
------------ ------------
Net property, plant and equipment ................. 55,597,000 61,724,000
Goodwill, net of accumulated amortization of $1,175,000 and
$1,864,000, respectively (notes 14 and 15) ................... 8,255,000 7,566,000
Debt issuance costs net of accumulated amortization of $811,000
and $1,696,000, respectively (note 5) ........................ 5,824,000 4,946,000
Other assets, net (note 3) ....................................... 1,201,000 775,000
------------ ------------
$114,163,000 $122,162,000
============ ============
See accompanying notes to consolidated financial statements.
20
21
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30,
1999 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt (note 5) .............. $ 3,669,000 $ 4,649,000
Trade accounts payable ....................................... 8,295,000 10,953,000
Accrued liabilities (note 4) ................................. 12,735,000 14,045,000
Income taxes payable (note 6) ................................ -- 451,000
Billings in excess of costs and estimated
earnings on uncompleted contracts (note 12) .............. 1,050,000 2,635,000
------------- -------------
Total current liabilities ......................... 25,749,000 32,733,000
------------- -------------
Long-term debt, excluding current installments (note 5) .......... 27,655,000 20,586,000
Senior Notes (note 5) ............................................ 100,000,000 100,000,000
Deferred tax liabilities (note 6) ................................ 4,993,000 6,045,000
Senior Exchangeable Preferred stock, redemption value
$10,999,000 and $12,220,000 at June 30, 1999 and 2000,
respectively. Authorized, issued and outstanding
10,000 shares (note 9) ........................................ 10,999,000 12,220,000
Series A Preferred stock, redemption value $11,732,000 and
$13,365,000 at June 30, 1999 and 2000, respectively.
Authorized 25,000 shares; issued and outstanding
10,428 shares (note 9) ........................................ 11,732,000 13,365,000
Stockholders' deficit:
Series B Preferred stock, par value $.01 per share Authorized
50,000 shares; issued and outstanding 18,556 and
19,052 shares at June 30, 1999 and June 30, 2000,
respectively (note 9) ......................................... 20,880,000 24,385,000
Common stock, $.01 par value. Authorized 5,000,000 shares;
issued and outstanding 995,000 and 1,012,513 at June 30, 1999
and June 30, 2000, respectively ............................... 10,000 10,000
Additional paid-in capital ....................................... 985,000 1,522,000
Treasury stock, at cost, 523 and 6,014 common shares at June
30, 1999 and June 30, 2000, respectively ...................... -- (14,000)
Accumulated deficit .............................................. (88,840,000) (88,690,000)
------------- -------------
Total stockholders' deficit ....................... (66,965,000) (62,787,000)
Commitments and contingencies (notes 7, 8 and 10) ................
------------- -------------
$ 114,163,000 $ 122,162,000
============= =============
See accompanying notes to consolidated financial statements.
21
22
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
1998 1999 2000
------------- ------------- -------------
Revenues ............................................. $ 101,170,000 $ 143,446,000 $ 173,060,000
Cost of revenues ..................................... 72,395,000 101,389,000 119,854,000
------------- ------------- -------------
Gross profit ...................................... 28,775,000 42,057,000 53,206,000
General and administrative expenses (note 8) ......... 18,673,000 32,570,000 28,474,000
Reorganization expenses .............................. 1,207,000 3,501,000 43,000
Other compensation ................................... 3,271,000 -- --
Other operating income ............................... 644,000 1,121,000 1,228,000
------------- ------------- -------------
Earnings before interest expense and income taxes . 6,268,000 7,107,000 25,917,000
Interest expense ..................................... 1,036,000 14,334,000 15,591,000
------------- ------------- -------------
Earnings (loss) before income taxes ............... 5,232,000 (7,227,000) 10,326,000
Income tax expense (benefit) (note 6) ................ 2,531,000 (1,388,000) 4,376,000
------------- ------------- -------------
Net earnings (loss) .................................. 2,701,000 (5,839,000) 5,950,000
Accretion of preferred stock to redemption value ..... -- (2,304,000) (2,854,000)
Accrual of cumulative dividends on preferred stock ... -- (2,323,000) (2,946,000)
------------- ------------- -------------
Net earnings (loss) available to common stockholders . $ 2,701,000 $ (10,466,000) $ 150,000
============= ============= =============
Earnings (loss) per share:
Basic ............................................. $ .63 $ (8.16) $ .15
Diluted ........................................... $ .62 $ (8.16) $ .15
Weighted average number of shares outstanding:
Basic ............................................. 4,277,888 1,282,996 1,000,953
Diluted ........................................... 4,355,303 1,282,996 1,000,953
See accompanying notes to consolidated financial statements.
22
23
PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------------------ ------------------------------ -----------------------------
SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
------------- ------------- ------------- ------------- ------------- -------------
Balance at June 30, 1997 ......... -- $ -- 4,280,939 $ 40,000 -- $ --
Shares issued .................... -- -- 33,232 -- -- --
Exercise of stock options ........ -- -- 145,200 2,000 -- --
Repurchase of shares ............. -- -- (7,107) -- -- --
Net earnings ..................... -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance at June 30, 1998 ......... -- -- 4,452,264 42,000 -- --
Repurchase of shares ............. -- -- (3,856,501) (36,000) -- --
Shares issued .................... 18,572 18,572,000 399,237 4,000 -- --
Accretion of redeemable
preferred stock ................ -- -- -- -- -- --
Accrual of cumulative dividends .. -- 2,323,000 -- -- -- --
Repurchase of shares ............. (16) (15,000) -- -- (523) --
Net loss ......................... -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance at June 30, 1999 ......... 18,556 20,880,000 995,000 10,000 (523) --
Shares issued .................... 511 574,000 17,513 -- -- --
Accretion of redeemable
preferred stock ................ -- -- -- -- -- --
Accrual of cumulative dividends .. -- 2,946,000 -- -- -- --
Repurchase of shares ............. (15) (15,000) -- -- (5,491) (14,000)
Net earnings ..................... -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance at June 30, 2000 ......... 19,052 $ 24,385,000 1,012,513 $ 10,000 (6,014) $ (14,000)
============= ============= ============= ============= ============= =============
RETAINED
EARNINGS TOTAL
ADDITIONAL (ACCUMULATED STOCKHOLDERS'
PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
--------------- ------------- ---------------
Balance at June 30, 1997 ......... $ 12,848,000 $ 26,365,000 $ 39,253,000
Shares issued .................... 1,000,000 -- 1,000,000
Exercise of stock options ........ 706,000 -- 708,000
Repurchase of shares ............. (56,000) -- (56,000)
Net earnings ..................... -- 2,701,000 2,701,000
------------- ------------- -------------
Balance at June 30, 1998 ......... 14,498,000 29,066,000 43,606,000
Repurchase of shares ............. (13,908,000) (107,440,000) (121,384,000)
Shares issued .................... 395,000 -- 18,971,000
Accretion of redeemable
preferred stock ................ -- (2,304,000) (2,304,000)
Accrual of cumulative dividends .. -- (2,323,000) --
Repurchase of shares ............. -- -- (15,000)
Net loss ......................... -- (5,839,000) (5,839,000)
------------- ------------- -------------
Balance at June 30, 1999 ......... 985,000 (88,840,000) (66,965,000)
Shares issued .................... 537,000 -- 1,111,000
Accretion of redeemable
preferred stock ................ -- (2,854,000) (2,854,000)
Accrual of cumulative dividends .. -- (2,946,000) --
Repurchase of shares ............. -- -- (29,000)
Net earnings ..................... -- 5,950,000 5,950,000
------------- ------------- -------------
Balance at June 30, 2000 ......... $1,522,000 $ (88,690,000) $ (62,787,000)
============= ============= =============
See accompanying notes to consolidated financial statements.
23
24
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1999 2000
------------- ------------- -------------
Cash flows from operating activities:
Net earnings (loss) .................................................. $ 2,701,000 $ (5,839,000) $ 5,950,000
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................. 8,870,000 11,652,000 14,521,000
Amortization of debt issuance costs ............................ -- 811,000 885,000
Provision for doubtful accounts ................................ (115,000) 282,000 340,000
Provision for (benefit from) deferred income taxes ............. 1,281,000 (1,388,000) 2,397,000
Compensation expense related to exercise of stock options ...... 579,000 -- --
Gains on sale of assets, net ................................... (203,000) (420,000) (305,000)
Changes in assets and liabilities, net of effects of ........... -- -- --
acquisitions:
Receivables ................................................. (4,710,000) (1,114,000) (4,793,000)
Inventories, prepaid expenses and other assets .............. 295,000 1,275,000 (780,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts ..................................... (308,000) (2,178,000) (972,000)
Trade accounts payable, accrued liabilities and income
taxes payable ............................................. 7,100,000 1,353,000 1,454,000
Billings in excess of costs and estimated earnings on
uncompleted contracts ..................................... 458,000 385,000 1,585,000
Accrued compensation ........................................ 680,000 (5,306,000) --
------------- ------------- -------------
Net cash provided by (used in) operating activities ... 16,628,000 (487,000) 20,282,000
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets ................................... 1,122,000 968,000 865,000
Capital expenditures ........................................... (12,287,000) (14,456,000) (18,093,000)
Acquisition of companies, net of cash acquired ................. (5,882,000) (7,700,000) --
------------- ------------- -------------
Net cash used in investing activities ................. (17,047,000) (21,188,000) (17,228,000)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under long-term debt ................................ 30,341,000 45,945,000 28,726,000
Repayments of long-term debt ................................... (29,824,000) (35,582,000) (36,796,000)
Paydown on notes payable to stockholders ....................... (765,000) (405,000) --
Book overdraft ................................................. -- 2,471,000 2,965,000
Borrowings on Senior Notes ..................................... -- 100,000,000 --
Debt issuance costs ............................................ (719,000) (5,916,000) (7,000)
Proceeds from issuance of common stock ......................... 1,000,000 399,000 537,000
Repurchase of common stock and Series B preferred stock ........ (56,000) (93,050,000) (29,000)
Issuance of Series A preferred stock ........................... -- 10,427,000 --
Issuance of Series B preferred stock ........................... -- 237,000 574,000
------------- ------------- -------------
Net cash provided by (used in) financing activities ... (23,000) 24,526,000 (4,030,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .. (442,000) 2,851,000 (976,000)
Cash and cash equivalents at beginning of year ....................... 676,000 234,000 3,085,000
------------- ------------- -------------
Cash and cash equivalents at end of year ............................. $ 234,000 $ 3,085,000 $ 2,109,000
============= ============= =============
See note 17 for supplementary cash flow information.
See accompanying notes to consolidated financial statements.
24
25
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(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
generally accepted accounting principles, 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.
In connection with the recapitalization mergers, PII on June 30, 1998 entered
into a certain Compensation Tax Consistency and Indemnification Agreement (the
Agreement) with certain members of management. Under the Agreement, PII was
obligated to make approximately $3,000,000 of tax gross-up payments to certain
members of management. Such expense is included in the statement of operations
for the year ended June 30, 1998 as other compensation. For the years ended June
30, 1998, 1999 and 2000, $1,207,000, $3,501,000, and $43,000, respectively, is
included in reorganization expenses for the costs associated with the
recapitalization mergers.
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 12 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. (see note 14),
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.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Penhall
International Corp. and its wholly owned subsidiaries: Penhall Rental Corp. and
Penhall Company. Although the Recapitalization Mergers did not take place until
August 4, 1998, since the Recapitalization Mergers were accounted for in a
manner similar to a pooling of interests, there was no impact on Penhall
consolidated financial statements as of June 30, 1998 and for the three-year
period ended June 30, 2000. All significant intercompany transactions have been
eliminated in consolidation.
25
26
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
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
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.
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.
Income from claims for additional contract compensation is recorded upon
settlement of the disputed amount.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. As of June 30, 1999, cash
equivalents consisted of amounts held in one money market account. As of June
30, 2000, cash equivalents were insignificant.
INVENTORIES
Inventories, which consist primarily of diamond cutting blades and blade
fuel, are stated at cost. Cost is determined using the purchase price of the
assets and is expensed based on usage.
PROPERTY, PLANT AND EQUIPMENT
The Company and its subsidiaries provide for depreciation of property, plant
and equipment based on the estimated useful lives of the assets, using the
straight-line method and a residual value of 10% as follows:
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.
26
27
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. Amortization expense
related to goodwill amounted to $272,000, $700,000 and $689,000 for the years
ended June 30, 1998, 1999 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and 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.
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.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and to provide disclosures for employee
stock-based compensation grants as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123. No stock options have been granted since 1993. As such, no pro
forma disclosures have been made.
27
28
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing adjusted net earnings
(loss) available 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) available to common stockholders by
the weighted average number of common shares outstanding during the period plus
the impact of assumed potential diluted securities. The dilative effect of
outstanding options is reflected in diluted earnings per share by application of
the treasury stock method.
All common shares included in the consolidated financial statements and
earnings (loss) per share calculations have been restated to reflect a 10.56 to
one common stock split effected as part of the Recapitalization Mergers.
The following table sets forth the calculation of diluted earnings (loss) per
share for each fiscal year in the three-year period ended June 30, 2000:
YEAR ENDED JUNE 30,
-------------------------------------------------
1998 1999 2000
------------ ------------ ------------
Diluted earnings (loss) per share calculation:
Net earnings (loss) available to
common stockholders ..................... $ 2,701,000 $(10,466,000) $ 150,000
============ ============ ============
Weighted average shares - basic ........... 4,277,888 1,282,996 1,000,953
Plus-incremental shares from
assumed conversion of stock options ..... 77,415 -- --
------------ ------------ ------------
Weighted average shares - diluted ......... 4,355,303 1,282,996 1,000,953
============ ============ ============
Diluted earnings (loss) per share ............ $ .62 $ (8.16) $ .15
============ ============ ============
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
COMPREHENSIVE INCOME
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 equals net income for each of
the years in the three-year period ended June 30, 2000.
SEGMENT INFORMATION
The Company's only line of business is the rental of operator assisted
equipment for use in infrastructure projects. This equipment is rented on an
hourly basis (Services) and on a longer-term, fixed price basis (Contracts). In
fiscal 2000, approximately 70% of revenues were generated from Services, and
approximately 30% of revenues were generated from Contracts. The Company does
not account for, or manage, the hourly or fixed-price rentals in a separate
manner. Over the past 3 fiscal years, approximately 23% to 31% of Services
revenues have been generated from Contracts.
28
29
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
The Company has begun a non-operated assisted rental business (Bare Rentals).
Bare Rentals were insignificant to the consolidated operations for each of the
fiscal years ended June 30, 1998, 1999 and 2000.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years balances to conform to
the current presentation.
(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:
JUNE 30, JUNE 30,
1999 2000
---------- ----------
Years ending June 30:
2000 ................................... $3,115,000 $ --
2001 ................................... 1,612,000 4,693,000
2002 ................................... 230,000 687,000
2003 ................................... -- 344,000
---------- ----------
$4,957,000 $5,724,000
========== ==========
Transactions in the allowance for doubtful receivables are summarized as
follows:
YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
Balance, beginning of year ........ $ 1,110,000 $ 995,000 $ 1,277,000
Provision for doubtful accounts ... 14,000 554,000 1,818,000
Accounts charged off .............. (129,000) (272,000) (1,478,000)
----------- ----------- -----------
Balance, end of year .............. $ 995,000 $ 1,277,000 $ 1,617,000
=========== =========== ===========
(3) OTHER ASSETS:
Other assets consist of the following:
JUNE 30, JUNE 30,
1999 2000
----------- -----------
Covenants not to compete .......... $ 1,599,000 $ 1,602,000
Accumulated amortization .......... (462,000) (907,000)
Other ............................. 64,000 80,000
----------- -----------
$ 1,201,000 $ 775,000
=========== ===========
The covenants not to compete are amortized over the life of the agreements.
Amortization expense related to the covenants not to compete amounted to
$94,000, $314,000 and $445,000 for the years ended June 30, 1998, 1999 and 2000,
respectively.
29
30
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
(4) ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
JUNE 30, JUNE 30
1999 2000
----------- -----------
Union benefits ............... $ 863,000 $ 1,005,000
Accrued bonuses .............. 2,015,000 3,165,000
Accrued interest ............. 5,211,000 5,026,000
Accrued insurance ............ 602,000 1,076,000
Accrued vacation ............. 358,000 421,000
Accrued payroll .............. 2,726,000 2,257,000
Other ........................ 960,000 1,095,000
----------- -----------
$12,735,000 $14,045,000
=========== ===========
(5) SENIOR NOTES AND LONG-TERM DEBT
Senior Notes
On August 4, 1998, in connection with the Recapitalization Mergers, 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
Senior Notes contain certain financial and non-financial covenants. The Company
was in compliance with all such covenants at June 30, 2000.
Long-term Debt
Long-term debt consists of the following:
JUNE 30, JUNE 30,
1999 2000
---------- ----------
Note payable secured by certain equipment, bearing interest at 5.51%
per annum; repaid in April 2000 ............................................. $1,896,000 $ --
Note payable secured by certain equipment, stated interest of 0%, imputed
interest at 9.25% per annum which resulted in a discount
of $200,000; payable $400,000 due June 1, 2000 and 2001, and
$428,000 due June 1, 2002 ................................................... 1,028,000 728,000
Note payable secured by certain equipment bearing interest at 6.0% per annum;
principal and interest due either November 1, 1999 or upon collection of
specified accounts receivable in accordance with the Lipscomb
purchase (note 15) .......................................................... 876,000 100,000
30
31
JUNE 30, JUNE 30,
1999 2000
---------- ----------
Revolving Loan in the maximum credit amount of $30,000,000 secured by certain
assets of the Company. The Company may elect to maintain the Revolving Loan
as a Base Rate Loan, which accrues interest quarterly at .75% to 1.50% (as
defined) plus the higher of the Federal Funds Effective Rate (as defined) or
the then current prime rate and is payable quarterly, and/or convert into a
Eurodollar Loan, which accrues interest at 1.75% to 2.25% (as defined) plus
the Eurodollar Rate (as defined) and is payable on
the last day of each elected interest period, which shall range
from one to six months, as elected by the Company. All unpaid
principal and interest is due June 15, 2004. The effective
interest rate at June 30, 1999 and 2000 was 7.25% and 8.51%,
respectively ................................................................. 6,500,000 2,850,000
$20,000,000 Term Loan secured by certain assets of the Company; principal
payments of $750,000 per quarter commencing September 15, 2000 through June
15, 2001, $1,250,000 per quarter through June15, 2002, and $1,500,000 per
quarter through June 15, 2004. The Company may elect to maintain the Term
Loan as a Base Rate Loan, which accrues interest quarterly at .75% to 1.50%
(as defined) plus the higher of the Federal Funds Effective Rate (as defined)
or the current prime rate and is payable quarterly, and/or convert into a
Eurodollar Loan, which accrues interest at 1.75% to 2.25% (as defined) plus
the Eurodollar Rate (as defined) and is payable on the last day of each
elected interest period,
which shall range from one to six months, as elected by the
Company All unpaid principal and interest is due June 15, 2004
The effective interest rate at June 30, 1999 and 2000 was 7.25%
and 8.44%, respectively ...................................................... 20,000,000 20,000,000
Various capital leases and equipment financing agreements due through
November 2001 with interest ranging from 0% to .12% per annum .................. 613,000 1,351,000
Other ............................................................................. 411,000 206,000
----------- -----------
31,324,000 25,235,000
Less current installments of long-term debt ....................................... 3,669,000 4,649,000
----------- -----------
Long-term debt, excluding current installments .................................... $27,655,000 $20,586,000
=========== ===========
As part of the Revolving Loan, the Company has a Swingline Loan in the
maximum credit amount of $2,500,000 secured by certain assets of the Company;
interest accrues quarterly at 1.25% plus the higher of the Federal Funds
Effective Rate (as defined) or then current prime rate and is payable in
quarterly installments. All unpaid principal and interest is due June 10, 2004.
The Term Loan, Revolving Loan, and Swingline Loan (the "Credit Facility")
contain certain financial and non-financial covenants, including working
capital, net worth, and debt to equity ratios. The company is also required to
make defined prepayments in the event cash flows from operations exceed
specified amounts, as defined. The Company was in compliance with all covenants
and ratios at June 30, 2000. No prepayments were required during the years ended
June 30, 1999 and 2000. Additionally, under the terms of the Credit Facility,
the Company had pledged all of the assets of its wholly owned subsidiaries.
The Company had unused and available amounts under its Credit Facility in the
amount of $27,150,000 at June 30, 2000.
31
32
Annual maturities of long-term debt for the next five years are as follows:
JUNE 30,
2000
-----------
2001 .................... $ 4,649,000
2002 .................... 5,550,000
2003 .................... 6,003,000
2004 .................... 8,854,000
2005 .................... 4,000
Thereafter .............. 175,000
-----------
$25,235,000
===========
(6) INCOME TAXES
Income tax expense (benefit) is comprised of the following components for
each fiscal year ended June 30:
YEAR ENDED JUNE 30,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
Current tax expense:
Federal ....................... $ 918,000 $ -- $ 1,506,000
State ......................... 332,000 -- 473,000
----------- ----------- -----------
1,250,000 -- 1,979,000
----------- ----------- -----------
Deferred tax expense
(benefit):
Federal ....................... 1,062,000 (630,000) 2,490,000
State ......................... 219,000 (758,000) (93,000)
----------- ----------- -----------
1,281,000 (1,388,000) 2,397,000
----------- ----------- -----------
$2,531,000 $(1,388,000) $ 4,376,000
=========== =========== ===========
As of June 30, 1999 and 2000, the Company has a current net deferred tax
asset of $3,663,000 and $2,318,000, respectively, and a net non-current deferred
tax liability of $4,993,000 and $6,045,000, respectively.
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
JUNE 30, JUNE 30,
1999 2000
----------- -----------
Deferred tax assets:
Allowance for doubtful receivables .... $ 509,000 $ 606,000
Accruals not currently deductible ..... 946,000 1,344,000
Net operating loss carryforwards ...... 2,213,000 --
Other ................................. 47,000 442,000
----------- -----------
Total deferred tax assets ......... $ 3,715,000 $ 2,392,000
=========== ===========
Deferred tax liabilities:
Depreciation and amortization ......... $(4,880,000) (6,119,000)
Other ................................. (165,000) --
----------- -----------
Total deferred tax liabilities .... (5,045,000) (6,119,000)
----------- -----------
Net deferred tax liability ...... $(1,330,000) $(3,727,000)
=========== ===========
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
32
33
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
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.
At June 30, 1999, the Company had federal net operating loss ("NOL")
carryforwards of $5,980,000 arising primarily from interest expense on the
Senior Notes incurred in connection with the recapitalization mergers. These NOL
carryforwards were utilized to offset current taxable income during fiscal year
2000.
Deferred income tax expense (benefit) consists of the following:
YEARS ENDED JUNE 30
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
Allowance for doubtful receivables ............ $ 36,000 $ (101,000) $ (97,000)
Accruals not currently deductible and other ... (190,000) (230,000) (958,000)
Depreciation and amortization ................. 1,153,000 425,000 1,239,000
Accrued compensation .......................... 282,000 731,000 --
Net operating loss carryforwards .............. -- (2,213,000) 2,213,000
----------- ----------- -----------
$ 1,281,000 $(1,388,000) $ 2,397,000
=========== =========== ===========
Income tax expense (benefit) for each fiscal year ended June 30 differed from
the amounts computed by applying the U.S. Federal income tax rate of 34% for the
years ended June 30, 1998 and 1999, and 35% for the year ended June 30, 2000 to
earnings (loss) before income taxes as follows:
YEARS ENDED JUNE 30
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
Computed "expected" tax expense (benefit) ........... $ 1,779,000 $(2,457,000) $ 3,614,000
Increase (decrease) in taxes resulting from:
State income tax expense, net of Federal income
tax deduction ..................................... 367,000 (500,000) 250,000
Nondeductible portion of stock-based compensation ... 221,000 -- --
Nondeductible reorganization costs .................. -- 1,009,000 --
Other, net .......................................... 164,000 560,000 512,000
----------- ----------- -----------
$ 2,531,000 $(1,388,000) $ 4,376,000
=========== =========== ===========
(7) 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 1998, 1999 and
2000 aggregated $1,772,000, $2,597,000 and $2,475,000, respectively. In the
event of the Company's partial or total withdrawal from such plans, it may be
liable for its share of any unfunded vested benefits thereunder. 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.
Costs incurred under
33
34
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
the plan were $161,000, $316,000 and $349,000 related to the plan for the years
ended June 30, 1998, 1999 and 2000, respectively.
(8) STOCK COMPENSATION PLANS
Stock Plans
Employee Stock Purchase Plans - The Company had established employee stock
purchase plans. Selected employees were allowed to purchase shares at prices
that were determined based on a book value formula. The Company guaranteed to
repurchase the shares upon certain events or termination of the employee. The
repurchase price that was paid by the Company was determined based on a book
value formula that included increased multiples at dates specified in the
agreements. Such plans were terminated in August 1998.
The stock buy-out plans entered into subsequent to January 28, 1988 gave rise
to compensation expense that was accrued over the vesting period based on the
difference of the original purchase price and the buy-out price of the shares.
Shares outstanding that were subject to stock buy-outs were 792,000 at June
30, 1998. The contingent repurchase price of all these shares was $13,328,000 at
June 30, 1998.
Compensation expense related to the stock purchase plans amounted to
$994,000, $8,869,000 and $0 for the years ended June 30, 1998, 1999 and 2000,
respectively
Stock Option Plan - In March 1993, the Company adopted a stock option plan
(the "Plan") pursuant to which certain key employees were granted options to
purchase up to 145,200 shares of the Company's common stock. Stock options were
granted in March 1993 with an exercise price equal to $4.88 per share. All stock
options have 10-year terms and vest and become fully exercisable after 5 years
from the date of grant. In addition, specific vesting provisions provide for an
acceleration of the option exercise date in the event of the occurrence of
certain changes in control of the Company. Any shares acquired under these
agreements are subject to terms similar to the various employee stock buy-out
agreements, as described under Employee Stock Purchase Plans. There are no
additional options available for grant under the Plan.
Compensation expense (benefit) related to the stock option plans due to the
related stock buy-out agreements amounted to $(314,000), $0 and $0 for the years
ended June 30, 1998, 1999 and 2000, respectively
No stock options were outstanding June 30, 1999 and 2000. There was no stock
option activity during the years ended June 30, 1999 and 2000. All stock options
were exercised on June 30, 1998. The Company forgave the exercise price of $4.88
for 118,800 stock options exercised and the resulting compensation expense of
$579,000 was included in general and administrative expenses for the year ended
June 30, 1998.
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
34
35
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
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. No stock options have been
granted under the Plan.
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.
On August 4, 1998, the Recapitalization Mergers caused the stock buy-out
agreements to be terminated and replaced by the terms of the Stockholders
Agreement. The Recapitalization Mergers established a new cost basis for the
stock under the stock buy-out agreements which resulted in stock-based
compensation expense of $8,869,000 which is included in general and
administrative expenses for the year ended June 30, 1999. Management
shareholders rolled over certain shares in the Recapitalization Mergers at a new
cost basis resulting in the reduction of the remaining accrued compensation
recorded under the stock buy-out agreements as an equity contribution.
35
36
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
Shares outstanding that are subject to the buy-out provisions of the
Stockholders Agreement are 370,085 and 380,008 shares of common stock and 8,556
and 8,990 shares of Series B preferred stock at June 30, 1999 and 2000,
respectfully.
(9) REDEEMABLE PREFERRED STOCK
Senior Exchangeable Preferred Stock
As of August 4, 1998 and in connection with the Recapitalization Mergers,
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.
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 the 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
36
37
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
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 referred 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.
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.
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 or optional redemption by the Company.
37
38
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
(10) COMMITMENTS AND CONTINGENCIES
Leases
(a) Capital Leases
The Company is obligated under various capital leases for certain
construction equipment that expire at various dates through November 2001. At
June 30, 1999 and 2000, the cost of construction equipment and the related
depreciation recorded for equipment under capital leases were as follows:
1999 2000
---------- ----------
Construction Equipment $ 727,000 $1,600,000
Less accumulated amortization 27,000 343,000
---------- ----------
$ 700,000 $1,257,000
========== ==========
The present value of the minimum lease payments is substantially the same as
gross maturities due to interest rates of 0% - 0.12% (note 5).
(b) Operating Leases
The Company and its subsidiaries lease various properties and equipment under
long-term agreements, which expire at varying dates through October 2008.
Certain of these leases provide for renegotiations of annual rentals at
specified dates. Rent expense was $561,000, $821,000 and $1,098,000 for the
years ended June 30, 1998, 1999 and 2000, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30, 2000 are
as follows:
YEARS ENDING JUNE 30:
2001........................... $ 979,000
2002........................... 851,000
2003........................... 600,000
2004........................... 491,000
2005........................... 243,000
Thereafter..................... 512,000
----------
$3,676,000
==========
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.
The California Department of Transportation accounted for approximately 10%,
7% and 7% of consolidated revenues of the Company for the years ended June 30,
1998, 1999 and 2000, respectively. No other customer accounted for 5% or more of
consolidated revenues for the years end June 30, 1998, 1999 or 2000.
38
39
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
Risks and Uncertainties
The Company is required to meet certain financial and operating criteria as
established by the Department of Transportation 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.
Cash and Cash Equivalents
At June 30, 1999 and 2000, the Company had approximately $1,205,000 and
$1,611,000, respectively, on deposit at one financial institution. At June 30,
1999 and 2000, the Company also had approximately $1,853,000 and $472,000,
respectively, on deposit at a second financial institution.
Environmental Remediation Costs
During fiscal 1999, the Company was required to comply with regulatory
obligations to upgrade or close underground storage tanks under the Resource
Conservation and Recovery Act of 1980, including all applicable requirements of
state regulatory agencies by December 22, 1998. The Company complied with all
regulatory obligations in a timely manner. As of June 30, 1998, the Company
estimated the cost of compliance to be $72,000, which was accrued at June 30,
1998. The actual cost of compliance was approximately $100,000.
Letters of Credit
As of June 30, 1999, the Company has outstanding standby letters of credit of
$3,450,000 with a financial institution for the benefit of certain customers of
the Company. The standby letters of credit, which reduce the amount of borrowing
available under the Company's New Credit Facility (see Note 5), expired as
follows:
March 1, 2000.................. $ 450,000
March 31, 2000................. 2,000,000
April 30, 2000................. 1,000,000
----------
$3,450,000
==========
As of June 30, 2000, the Company had no outstanding standby letters of
credit.
Litigation
There are various 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 advise 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
Upon consummation of the Recapitalization Mergers (note 1), the Company paid
the Third Party 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 Third Party pursuant to which the Third Party 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
39
40
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
negotiated on an arm's-length basis by representatives of the Third Party 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.
(11) RELATED PARTY TRANSACTIONS AND NOTES PAYABLE TO STOCKHOLDERS
In December 1997, the Company repurchased 7,107 shares from a stockholder
with a $111,000 promissory note. The note bore interest at 8.0% and was payable
in monthly principal and interest installments of $8,333. All unpaid principal
and interest was paid in January 1999.
(12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings on uncompleted contracts consists of the
following:
JUNE 30, JUNE 30,
1999 2000
------------ ------------
Costs incurred on uncompleted contracts .......... $ 30,160,000 $ 53,559,000
Estimated earnings to date ....................... 6,471,000 7,040,000
------------ ------------
36,631,000 60,599,000
Less billings to date ............................ 34,527,000 59,108,000
------------ ------------
$ 2,104,000 $ 1,491,000
============ ============
Included in accompanying consolidated balance
sheets under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts ......... $ 3,154,000 $ 4,126,000
Billings in excess of costs and estimated
earnings on uncompleted contracts ......... (1,050,000) (2,635,000)
------------ ------------
$ 2,104,000 $ 1,491,000
============ ============
(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
41
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at June 30, 1999 and 2000.
1999 2000
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets:
Cash and Cash Equivalents ........... $ 3,085,000 $ 3,085,000 $ 2,109,000 $ 2,109,000
Net receivables ..................... 31,488,000 31,488,000 35,941,000 35,941,000
Financial liabilities:
Current installments of
long-term debt .................. 3,669,000 3,669,000 4,649,000 4,649,000
Trade accounts payable .............. 8,295,000 8,295,000 10,953,000 10,953,000
Accrued liabilities and income
taxes payable ................... 12,735,000 12,735,000 14,496,000 14,496,000
Long-term debt, excluding current
installments .................... 27,655,000 27,655,000 20,586,000 20,586,000
Senior Notes ........................ 100,000,000 96,900,000 100,000,000 97,250,000
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, current installments of long-term
debt, trade accounts payables and accrued liabilities and income taxes payable:
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Long-term debt, excluding current installments, and Senior Notes: The fair
value of the Company's long-term debt and Senior Notes 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 for similar
debt instruments by the Company's bankers.
(14) HIGHWAY SERVICES ACQUISITION
On April 29, 1998, Penhall Company, a wholly-owned subsidiary of the Company,
purchased substantially all of the assets of Highway Services, Inc. (HSI) for
approximately $9,654,000 plus the assumption of approximately $1,324,000 of
liabilities. Penhall Company paid approximately $5,962,000 in cash, with the
remainder payable in equal installments in April 1999 and 2000 pursuant to a
$3,692,000 secured promissory note, which bore interest at 5.51% per annum. HSI
is based in Minnesota and operates in approximately 25 states and is a national
provider of construction services including grinding, grooving, sawing, sealing
and pavement replacement. The acquisition has been accounted for by the purchase
method and accordingly, the results of operations of HSI have been included in
the Company's consolidated financial statements since April 29, 1998. The excess
of the purchase price over the fair value of the net identifiable assets
acquired of approximately $8,291,000 has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The purchase agreement also
required certain stockholders of HSI to purchase 3,147 shares of the Company's
common stock for $1,000,000.
41
42
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
The following unaudited pro forma financial information presents the combined
results of operations of the Company and HSI as if the acquisition had occurred
as of the beginning of fiscal year 1998, after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
debt related to the acquisition, and related income taxes. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and HSI constituted a single entity
during such periods.
YEAR ENDED
JUNE 30, 1998
-------------
(unaudited)
Revenues ......................................... $114,706,000
------------
Net earnings ..................................... $ 3,701,000
------------
Earnings per share:
Basic ......................................... $ .87
Diluted ....................................... $ .85
Weighted average number of shares outstanding:
Basic ......................................... 4,277,888
Diluted ....................................... 4,355,303
(15) ACQUISITIONS
The Company completed the following acquisitions during fiscal 1999, which
were accounted for as purchases:
In October 1998, the Company purchased certain assets of Daley Concrete
Cutting, a division of U.S. Rentals for a cash payment of $3,743,000. The excess
of the purchase price over the fair value of the net identifiable assets
acquired of $300,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 15 years.
In November 1998, the Company purchased Lipscomb Concrete Cutting (Lipscomb)
for $4,251,000. The purchase price included a cash payment of $3,376,000 and a
seller unsecured carryback note of $876,000 at 6% interest, all due and payable
November 1, 1999, subject to certain conditions.
In April 1999, the Company purchased certain assets of Diamond Concrete
Services for a cash payment of $388,000, which represents the fair value of the
net identifiable assets acquired.
In June 1999, the Company purchased certain assets of Prospect Drilling and
Sawing for $1,528,000. The purchase price included a cash payment of $500,000,
and a seller unsecured carryback note of $1,028,000 at 9.25% interest, due in
three annual installments through June 2002.
Pro-forma information has not been presented since the results of these
operations did not have a significant effect on Penhall's consolidated
operations.
(16) GUARANTORS AND FINANCIAL INFORMATION
The following consolidating financial information is presented for purposes
of complying with the reporting requirements of the Guarantor Subsidiaries.
Separate financial statements and other disclosures with respect to the
Guarantor Subsidiaries are not presented because the Company believes that such
financial statements and other information would not provide additional
information that is material to investors.
42
43
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
The condensed consolidating financial information presents condensed
financial statements for the year ended June 30, 1998 of:
a) Penhall Rental Corp. on a parent company only basis ("Parent")
(carrying its investments in the subsidiaries under the equity
method),
b) the Subsidiaries (Penhall International Corp. and Penhall Company),
c) elimination entries necessary to consolidate the parent company and
its subsidiaries, and
d) the Company on a consolidated basis.
The condensed consolidating financial information presents condensed
financial statements as of and for the years ended June 30, 1999 and 2000 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. and Penhall
Company),
c) elimination entries necessary to consolidate the parent company and
its subsidiaries, and
d) the Company on a consolidated basis.
43
44
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
-------------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
Assets
Current assets:
Receivables, net .................... $ -- $ -- $ 31,488,000 $ -- $ 31,488,000
Inventories ......................... -- -- 1,316,000 -- 1,316,000
Costs and estimated earnings in
excess of billings on
uncompleted contracts ............. -- -- 3,154,000 -- 3,154,000
Intercompany assets ................. 48,069,000 -- -- (48,069,000) --
Other current assets ................ 3,481,000 1,877,000 3,103,000 (1,133,000) 7,328,000
------------- ------------- ------------- ------------- -------------
Total current assets .............. 51,550,000 1,877,000 39,061,000 (49,202,000) 43,286,000
Net property, plant and equipment ..... -- 9,171,000 46,426,000 -- 55,597,000
Other assets, net ..................... 5,824,000 -- 9,456,000 -- 15,280,000
Intercompany assets ................... 10,000,000 -- -- (10,000,000) --
Investment in parent .................. -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries ............ 25,989,000 -- -- (25,989,000) --
------------- ------------- ------------- ------------- -------------
$ 93,363,000 $ 15,049,000 $ 94,943,000 $ (89,192,000) $ 114,163,000
============= ============= ============= ============= =============
Liabilities and Stockholders'
Equity (Deficit):
Current installments of long-term
debt ................................ $ -- $ 2,000 $ 3,667,000 $ -- $ 3,669,000
Trade accounts payable ................ -- 165,000 8,130,000 -- 8,295,000
Accrued liabilities ................... 5,158,000 -- 7,577,000 -- 12,735,000
Billings in excess of costs and
estimated earnings on uncompleted
contracts ........................... -- -- 1,050,000 -- 1,050,000
Intercompany liabilities .............. 1,939,000 41,679,000 10,893,000 (54,511,000) --
------------- ------------- ------------- ------------- -------------
Total current liabilities ......... 7,097,000 41,846,000 31,317,000 (54,511,000) 25,749,000
Intercompany liabilities .............. -- -- 10,000,000 (10,000,000) --
Long-term debt, excluding
current installments ................ 26,500,000 213,000 942,000 -- 27,655,000
Senior notes .......................... 100,000,000 -- -- -- 100,000,000
Deferred tax liabilities .............. -- (5,406,000) 5,090,000 5,309,000 4,993,000
Senior Exchangeable Preferred stock ... 10,999,000 -- -- -- 10,999,000
Series A Preferred stock .............. 11,732,000 -- -- -- 11,732,000
Stockholders' equity (deficit) ........ (62,965,000) (21,604,000) 47,594,000 (29,990,000) (66,965,000)
------------- ------------- ------------- ------------- -------------
$ 93,363,000 $ 15,049,000 $ 94,943,000 $ (89,192,000) $ 114,163,000
============= ============= ============= ============= =============
44
45
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
-------------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
Assets
Current assets:
Receivables, net .................... $ -- $ -- $ 35,941,000 $ -- $ 35,941,000
Inventories ......................... -- -- 1,741,000 -- 1,741,000
Costs and estimated earnings in
excess of billings on
uncompleted contracts ............. -- -- 4,126,000 -- 4,126,000
Intercompany assets ................. 41,702,000 -- -- (41,702,000) --
Other current assets ................ 217,000 1,394,000 3,732,000 -- 5,343,000
------------- ------------- ------------- ------------- -------------
Total current assets .............. 41,919,000 1,394,000 45,540,000 (41,702,000) 47,151,000
Net property, plant and equipment ..... -- 8,882,000 52,842,000 -- 61,724,000
Other assets, net ..................... 4,946,000 -- 8,341,000 -- 13,287,000
Intercompany assets ................... 10,000,000 -- -- (10,000,000) --
Investment in parent .................. -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries ............ 41,222,000 -- -- (41,222,000) --
------------- ------------- ------------- ------------- -------------
$ 98,087,000 $ 14,277,000 $ 106,723,000 $ (96,925,000) $ 122,162,000
============= ============= ============= ============= =============
Liabilities and Stockholders'
Equity (Deficit):
Current installments of long-term
debt ................................ $ 3,000,000 $ 3,000 $ 1,646,000 $ -- $ 4,649,000
Trade accounts payable ................ -- 103,000 10,850,000 -- 10,953,000
Accrued liabilities ................... 5,066,000 -- 8,979,000 -- 14,045,000
Income taxes payable .................. 451,000 -- -- -- 451,000
Billings in excess of costs and
estimated earnings on uncompleted
contracts ........................... -- -- 2,635,000 -- 2,635,000
Intercompany liabilities .............. 2,922,000 35,586,000 3,194,000 (41,702,000) --
------------- ------------- ------------- ------------- -------------
Total current liabilities ......... 11,439,000 35,692,000 27,304,000 (41,702,000) 32,733,000
Intercompany liabilities .............. -- -- 10,000,000 (10,000,000) --
Long-term debt, excluding
current installments ................ 19,850,000 203,000 533,000 -- 20,586,000
Senior notes .......................... 100,000,000 -- -- -- 100,000,000
Deferred tax liabilities .............. -- (540,000) 6,585,000 -- 6,045,000
Senior Exchangeable Preferred stock ... 12,220,000 -- -- -- 12,220,000
Series A Preferred stock .............. 13,365,000 -- -- -- 13,365,000
Stockholders' equity (deficit) ........ (58,787,000) (21,078,000) 62,301,000 (45,223,000) (62,787,000)
------------- ------------- ------------- ------------- -------------
$ 98,087,000 $ 14,277,000 $ 106,723,000 $ (96,925,000) $ 122,162,000
============= ============= ============= ============= =============
45
46
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Revenues ................................. $ 19,952,000 $ 3,213,000 $ 81,218,000 $ (3,213,000) $101,170,000
Cost of revenues ......................... 13,316,000 (35,000) 59,114,000 -- 72,395,000
------------ ------------ ------------ ------------ ------------
Gross profit .......................... 6,636,000 3,248,000 22,104,000 (3,213,000) 28,775,000
General and administrative expenses ...... 3,804,000 3,445,000 13,718,000 (2,294,000) 18,673,000
Reorganization expenses .................. -- 1,207,000 -- -- 1,207,000
Other compensation ....................... -- 3,271,000 -- -- 3,271,000
Other operating income ................... 105,000 6,000 533,000 -- 644,000
Equity earnings in subsidiaries .......... -- 6,441,000 -- (6,441,000) --
------------ ------------ ------------ ------------ ------------
Earnings before interest
expense and income taxes ............ 2,937,000 1,772,000 8,919,000 (7,360,000) 6,268,000
Interest expense ......................... 193,000 926,000 836,000 (919,000) 1,036,000
------------ ------------ ------------ ------------ ------------
Earnings before income taxes .......... 2,744,000 846,000 8,083,000 (6,441,000) 5,232,000
Income tax expense (benefit) ............. 1,105,000 (1,855,000) 3,281,000 -- 2,531,000
------------ ------------ ------------ ------------ ------------
Net earnings ............................. $ 1,639,000 $ 2,701,000 $ 4,802,000 $ (6,441,000) $ 2,701,000
============ ============ ============ ============ ============
46
47
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ----------- ------------
Revenues............................... $ 5,904,000 $ 1,244,000 $137,542,000 $(1,244,000) $143,446,000
Cost of revenues....................... 3,569,000 5,000 97,815,000 -- 101,389,000
------------ ------------ ------------ ----------- ------------
Gross profit........................ 2,335,000 1,239,000 39,727,000 (1,244,000) 42,057,000
General and administrative expenses.... 1,390,000 9,412,000 23,035,000 (1,267,000) 32,570,000
Reorganization expenses................ -- 3,501,000 -- -- 3,501,000
Other operating income................. 84,000 919,000 818,000 (700,000) 1,121,000
Equity earnings in subsidiaries........ 3,489,000 -- -- (3,489,000) --
------------ ------------ ------------ ----------- ------------
Earnings (loss) before interest
expense and income taxes.......... 4,518,000 (10,755,000) 17,510,000 (4,166,000) 7,107,000
Interest expense....................... 13,552,000 168,000 591,000 23,000 14,334,000
------------ ------------ ------------ ----------- ------------
Earnings (loss) before income taxes. (9,034,000) (10,923,000) 16,919,000 (4,189,000) (7,227,000)
Income tax expense (benefit)........... (3,895,000) (4,456,000) 6,963,000 -- (1,388,000)
------------ ------------ ------------ ----------- ------------
Net earnings (loss).................... $ (5,139,000) $ (6,467,000) $ 9,956,000 $(4,189,000) $ (5,839,000)
============ ============ ============ =========== ============
47
48
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2000
------------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
Revenues ............................... $ -- $ 1,318,000 $ 173,060,000 $ (1,318,000) $ 173,060,000
Cost of revenues ....................... -- -- 119,854,000 -- 119,854,000
------------- ------------- ------------- ------------- -------------
Gross profit ........................ -- 1,318,000 53,206,000 (1,318,000) 53,206,000
General and administrative expenses .... 444,000 410,000 28,938,000 (1,318,000) 28,474,000
Reorganization expenses ................ -- 43,000 -- -- 43,000
Other operating income ................. 64,000 -- 1,164,000 -- 1,228,000
Equity earnings in subsidiaries ........ 15,233,000 -- -- (15,233,000) --
------------- ------------- ------------- ------------- -------------
Earnings before interest
expense and income taxes .......... 14,853,000 865,000 25,432,000 (15,233,000) 25,917,000
Interest expense ....................... 15,115,000 28,000 448,000 -- 15,591,000
------------- ------------- ------------- ------------- -------------
Earnings (loss) before income taxes . (262,000) 837,000 24,984,000 (15,233,000) 10,326,000
Income tax expense (benefit) ........... (6,212,000) 311,000 10,277,000 -- 4,376,000
------------- ------------- ------------- ------------- -------------
Net earnings ........................... $ 5,950,000 $ 526,000 $ 14,707,000 $ (15,233,000) $ 5,950,000
============= ============= ============= ============= =============
48
49
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1998
-------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities ................................. $ 1,547,000 $ (56,000) $ 15,137,000 -- $ 16,628,000
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets .............. 113,000 1,000 1,008,000 -- 1,122,000
Capital expenditures ...................... (1,165,000) (781,000) (10,341,000) -- (12,287,000)
Acquisition of companies, net of cash
acquired ................................ -- -- (5,882,000) -- (5,882,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities ......................... (1,052,000) (780,000) (15,215,000) -- (17,047,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Due to (from) affiliates .................. 299,000 (1,491,00) 1,192,000 -- --
Borrowings under long-term debt ........... -- 29,708,000 633,000 -- 30,341,000
Repayments of long-term debt .............. (175,000) (27,625,000) (2,024,000) -- (29,824,000)
Paydown on notes payable to stockholders .. -- (765,000) -- -- (765,000)
Debt issuance costs ....................... (719,000) -- -- -- (719,000)
Proceeds from issuance of common stock .... -- 1,000,000 -- -- 1,000,000
Repurchase of common stock ................ -- (56,000) -- -- (56,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities ............... (595,000) 771,000 (199,000) -- (23,000)
------------ ------------ ------------ ------------ ------------
Net decrease in cash and cash
equivalents ........................ (100,000) (65,000) (277,000) -- (442,000)
Cash and cash equivalents at beginning
of year ................................... -- 150,000 526,000 -- 676,000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year ..... $ (100,000) $ 85,000 $ 249,000 $ -- $ 234,000
============ ============ ============ ============ ============
49
50
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1999
-----------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities ............................... $ (593,000) $ (16,821,000) $ 17,627,000 $ (700,000) $ (487,000)
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets ............ 76,000 363,000 529,000 -- 968,000
Capital expenditures .................... (865,000) (921,000) (12,670,000) -- (14,456,000)
Acquisition of companies, net of cash ...
acquired .............................. -- -- (7,700,000) -- (7,700,000)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities. (789,000) (558,000) (19,841,000) -- (21,188,000)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Due to (from) affiliates ................ (36,415,000) 33,421,000 2,994,000 -- --
Book overdraft .......................... -- -- 2,471,000 -- 2,471,000
Borrowings under long-term debt ......... 43,200,000 2,745,000 -- -- 45,945,000
Repayments of long-term debt ............ (16,700,000) (16,614,000) (2,268,000) -- (35,582,000)
Paydown on notes payable to stockholders. -- (405,000) -- -- (405,000)
Borrowings on Senior Notes .............. 100,000,000 -- -- -- 100,000,000
Debt issuance costs ..................... (5,916,000) -- -- -- (5,916,000)
Dividends paid .......................... (700,000) -- -- 700,000 --
Proceeds from issuance of common stock .. 399,000 -- -- -- 399,000
Repurchase of common stock .............. (93,050,000) -- -- -- (93,050,000)
Issuance of Series A Preferred stock .... 10,427,000 -- -- -- 10,427,000
Issuance of Series B Preferred stock .... 237,000 -- -- -- 237,000
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities 1,482,000 19,147,000 3,197,000 700,000 24,526,000
------------- ------------- ------------- ------------- -------------
Net increase in cash and cash equivalents 100,000 1,768,000 983,000 -- 2,851,000
Cash and cash equivalents at beginning
of year .................................. (100,000) 85,000 249,000 -- 234,000
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of year ... $ -- $ 1,853,000 $ 1,232,000 $ -- $ 3,085,000
============= ============= ============= ============= =============
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51
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000
-----------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------ ------------
Net cash provided by (used in) operating .......
activities ................................... $ (4,676,000) $ 5,723,000 $ 25,678,000 $ (6,443,000) $ 20,282,000
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets ................ -- -- 865,000 -- 865,000
Capital expenditures ........................ -- (102,000) (17,991,000) -- (18,093,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities .... -- (102,000) (17,126,000) -- (17,228,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Due to (from) affiliates .................... 7,350,000 (6,094,000) (7,699,000) 6,443,000 --
Book overdraft .............................. -- -- 2,965,000 -- 2,965,000
Borrowings under long-term debt ............. 28,726,000 -- -- -- 28,726,000
Repayments of long-term debt ................ (32,375,000) (10,000) (4,411,000) -- (36,796,000)
Debt issuance costs ......................... (7,000) -- -- -- (7,000)
Proceeds from issuance of common stock ...... 537,000 -- -- -- 537,000
Repurchase of common stock and Series B
preferred stock .......................... (29,000) -- -- -- (29,000)
Issuance of Series B preferred stock ........ 574,000 -- -- -- 574,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.................... 4,776,000 (6,104,000) (9,145,000) 6,443,000 (4,030,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ....................... 100,000 (483,000) (593,000) -- (976,000)
Cash and cash equivalents at beginning
of year....................................... -- 1,853,000 1,232,000 -- 3,085,000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year ....... $ 100,000 $ 1,370,000 $ 639,000 $ -- $ 2,109,000
============ ============ ============ ============ ============
51
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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 2000
(17) 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:
1998 1999 2000
------------ ------------ ------------
Cash paid (received) during the year for:
Income taxes ........................................ $ 2,730,000 $ (2,294,000) $ 1,822,000
Interest ............................................ 1,085,000 8,334,000 14,891,000
------------ ------------ ------------
Noncash investing and financing activities -
Borrowings related to the acquisition of assets .... $ 3,692,000 $ 1,904,000 $ 1,981,000
Exercise of stock options .......................... 708,000 -- --
Issuance of Senior Exchangeable Preferred Stock in
connection with the Recapitalization Mergers .... -- 10,000,000 --
Accretion of preferred stock to redemption value ... -- 2,304,000 2,854,000
Accrual of cumulative dividends on preferred stock . -- 2,323,000 2,946,000
Issuance of Series B preferred stock ............... -- 18,336,000 --
The fair value of Daley Concrete Cutting, Lipscomb Concrete Cutting, Diamond
Concrete Cutting and Prospect Drilling and Sawing net assets at the date of
acquisition was $3.4 million, $3.4 million, $.4 million and $.6 million,
respectively. Goodwill of $300,000 was recorded in connection with the
acquisitions.
The following table details the fiscal 1999 acquisitions:
Accounts receivable, net................................... $ 1,452,000
Inventory.................................................. 317,000
Prepaid expenses........................................... 507,000
Property, plant and equipment.............................. 6,725,000
Goodwill................................................... 300,000
Other assets............................................... 1,330,000
Trade accounts payable..................................... 298,000
Accrued liabilities........................................ 288,000
Amounts due to parent company, net ........................ 108,000
Long-term debt............................................. 2,237,000
============
52
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers 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. For information concerning certain arrangements with respect
to the election of directors.
NAME AGE TITLE
- ---- --- -----
John T. Sawyer................ 56 Chairman of the Board of Directors,
President
and Chief Executive Officer
Clark George Bush............. 45 Vice President and Regional Manager,
Southern
California Region
M. Bruce Repchinuck........... 52 Vice President and Regional Manager,
Northwest Region
Bruce F. Varney............... 48 Vice President and Regional Manager,
Southwest Region
Jeffrey E. Platt.............. 49 Vice President-Finance and Chief Financial
Officer
Gary Aamold................... 50 Vice President and Regional Manager,
Highway Services Division
Bruce C. Bruckmann............ 46 Director
Harold O. Rosser II........... 51 Director
Paul N. Arnold................ 54 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 Penhall since 1989.
CLARK 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 the Company,
where he served until his recent appointment as Vice President of Penhall with
responsibility for the Southern California region.
M. BRUCE REPCHINUCK, Vice President and Regional Manager, Northwest Region,
began his career with Penhall in 1975 and served in several capacities before
being named as Manager of the Oakland Division in 1980. In 1987, Mr. Repchinuck
was promoted to Regional Manager and in 1989 was named as Vice President. Mr.
Repchinuck currently serves as Regional Manager of the Northwest 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. Mr. Platt is a Certified Public Accountant.
GARY AAMOLD, Vice President and Regional Manager, Highway Services Division,
joined Penhall as a result of the HSI Acquisition in April 1998. Since 1989, Mr.
Aamold has served in various managerial capacities for HSI.
53
54
BRUCE C. BRUCKMANN, Director, is a Managing Director of Bruckmann, Rosser,
Sherrill & Co., Inc. (the "Sponsor"). Prior to forming the Sponsor in 1995, Mr.
Bruckmann was an officer of Citicorp Venture Capital Ltd. from 1983 through
1994. Previously, he was an associate at the New York law firm of Patterson,
Belknap, Webb & Tyler. Mr. Bruckmann is a director of AmeriSource Health
Corporation, Anvil Knitwear, Inc., California Pizza Kitchen, Inc., Chromecraft
Revington Corporation, Cort Furniture Rental Corp., Jitney-Jungle Stores of
America, Inc., MEDIQ Incorporated, Mohawk Industries, Inc. and Town Sports
International, Inc.
HAROLD O. ROSSER II, Director, is a Managing Director of the Sponsor. Prior
to forming the Sponsor in 1995, Mr. Rosser was an officer of Citicorp Venture
Capital Ltd. from 1987 through 1994. Previously, he spent twelve years with
Citicorp/Citibank in various management and corporate finance positions. Mr.
Rosser is a director of American Paper Group, Inc., B&G Foods, Inc., California
Pizza Kitchen, Inc., Jitney-Jungle Stores of America, Inc. and Acapulco
Restaurants, 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.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Each non-employee director of the Company is paid an annual retainer of
$12,000 plus fees of $1,000 for each board meeting attended and $500 for each
committee meeting attended. Directors who are employees of the Company will not
receive additional compensation as directors.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued for fiscal
2000 to the Chief Executive Officer of Penhall and to each of the four other
most highly compensated executive officers of Penhall. Upon consummation of the
Transactions, Roger C. Stull retired as Chief Executive Officer of Penhall.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) COMPENSATION(3)
- --------------------------- --------- -------- --------------- ----------------
John T. Sawyer ....................................... $255,000 $130,441 $ 8,856 $ 4,972(4)
Chief Executive Officer-Penhall and President-PenCo
C. George Bush ....................................... 173,734 90,000 8,856 3,384(5)
Vice President-Penhall
M. Bruce Repchinuck .................................. 153,505 125,000 8,856 3,462(6)
Vice President-Penhall
Bruce F. Varney ...................................... 153,206 110,227 8,856 4,087(7)
Vice President-Penhall
Gary L. Aamond ....................................... 146,509 102,000 -- 10,496(8)
Vice President-Penhall
- ----------
(1) Includes amounts contributed as salary deferral contributions in fiscal
2000 under the Penhall International, Inc. and Affiliated Companies
Employees' Profit Sharing (401(k)) Plan (the "Plan"), as follows: $10,251
for Mr. Sawyer; $10,000 for Mr. Bush; $11,000 for Mr. Repchinuck; $10,000
for Mr. Varney; and $11,600 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 and split-dollar life insurance, premiums for health care insurance
and long-term disability insurance premiums.
(4) Includes $1,100 of Penhall matching contributions under the Plan,
approximately $258 of premiums for group term life insurance, approximately
$3,184 of premiums for health care insurance and approximately $430 for
long-term disability insurance premiums.
54
55
(5) Includes $1,100 of Penhall matching contributions under the Plan,
approximately $60 of premiums for group term life insurance, approximately
$1,794 of premiums for health care insurance and approximately $430 for
long-term disability insurance premiums.
(6) Includes $1,100 of Penhall matching contributions under the Plan,
approximately $138 of premiums for group term life insurance, approximately
$1,794 of premiums for health care insurance and approximately $430 for
long-term disability insurance premiums.
(7) Includes $1,100 of Penhall matching contributions under the Plan,
approximately $90 of premiums for group term life insurance, approximately
$2,467 of premiums for health care insurance and approximately $430 for
long-term disability insurance premiums.
(8) Includes $2,000 of Penhall matching contributions under the Plan,
approximately $83 of premium for group term life insurance, approximately
$8,194 of premium health care insurance and approximately $219 for
disability insurance premiums.
EMPLOYMENT AGREEMENTS
Upon consummation of the Transactions, the Company entered into a five-year
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 employment agreements with Messrs. Bush and Varney
pursuant to which each of such executives 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 or without
cause. In the event an agreement 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 $316,000 and $349,000 to general and administrative
expense related to contributions to and expenses of the Plan for the year ended
June 30, 1999 and 2000, respectively.
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.
55
56
STOCK OPTION PLAN
In March 1993, Penhall adopted a stock option plan pursuant to which certain
key employees of Penhall were granted options to purchase up to 13,750 shares of
Penhall's common stock at an exercise price equal to $51.49 per share. All stock
options had ten-year terms, and vested and became fully exercisable five years
following the date of grant. In connection with the provisions of the Merger
Agreement, on June 30, 1998 each holder of an option exercised all options held
by such holder and delivered a promissory note to Penhall in payment of the
exercise price therefor. Upon consummation of the Transactions, Penhall forgave
all but approximately $129,000 of the indebtedness represented by such
promissory notes.
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. No stock options have been
granted under the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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
--------------------------------------
COMMON SENIOR EXCHANGEABLE SERIES A SERIES B
NAME OF BENEFICIAL OWNER STOCK (1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- ------------------------ ---------------- ------------------- --------------- ---------------
Bruckmann, Rosser, Sherrill &
Co., L.P (2) ............................ 582,312/57.85 % -- 9,717/93.18% 9,333/40.49%
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
The National Christian Charitable
Foundation Inc. ......................... -- 10,000/100.0% -- --
Penhall Rental Corp. (Penhall) ............ -- -- -- 4,000/17.35%
John T. Sawyer ............................ 110,113/10.94% -- -- 2,465/10.69%
C. George Bush ............................ 41,168/4.09% -- -- 896.21/3.89%
M. Bruce Repchinuck (3) ................... 27,843/2.77% -- -- 487/2.12%
Bruce F. Varney ........................... 36,504/3.63% -- -- 754/3.27%
Bruce C. Bruckmann (4) .................... 624,915/62.09% -- 10,428/100.0% 10,016/43.45%
Harold O. Rosser II (4) ................... 624,915/62.09% -- 10,428/100.0% 10,016/43.45%
All directors and officers as a group
(9 persons) ............................... 837,375/83.20% -- 10,428/100.0% 15,305/66.39%
- ----------
56
57
(1) The Company 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) BRS is a limited partnership, the sole general partner of which is BRS
Partners, Limited Partnership ("BRS Partners") and the manager of which is
the Sponsor. 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 the Sponsor
and 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) All such shares are held in the name of the Michael Bruce Repchinuck
Revocable Trust.
(4) 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
NOTE PAYABLE TO ROGER STULL
In December 1995, Penhall purchased from Roger Stull (former majority owner)
certain facilities previously leased to Penhall for $2.2 million, consisting of
$700,000 in cash and a $1.5 million promissory note bearing interest at the
prime rate plus 0.25%. The promissory note was secured by a deed of trust and
was paid in equal quarterly installments of $375,000, the last of which was made
on October 1, 1997.
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 an arm's-length basis 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.
SPLIT-DOLLAR INSURANCE POLICIES
In addition to group term life insurance (prior to the Transaction), Penhall
maintained and paid the premiums on five split-dollar whole life insurance
policies on the lives of Mr. Roger C. Stull and his wife, Ann R. Stull. Mr.
Stull is the beneficiary under three of the policies and Mrs. Stull is the
beneficiary under two of the policies. The split-dollar insurance provides death
benefits equal to, in the aggregate, $1,762,216 for Mr. Stull and $1,530,789 for
Mrs. Stull. Since July 1, 1997, Penhall has paid premiums on the policies in the
aggregate amount of $20,173, net of premiums, which were paid by borrowing
against the policies. As of July 13, 1998, Penhall had borrowed a total of
$1,432,236 against the policies and the aggregate net cash surrender value of
the policies as of such date was $301,269.
Upon consummation of the Transactions, (i) Penhall and the Stulls terminated
their split-dollar insurance arrangement, (ii) Penhall relinquished any and all
claims against the Stulls for reimbursement of premiums paid by Penhall on the
policies, (iii) the Stulls relinquished any and all claims against Penhall
arising out of borrowings by Penhall against the policies, and (iv) the Stulls
obtained ownership of the policies free and clear of any claims by Penhall.
57
58
TAX GROSS-UP PAYMENTS
Pursuant to the terms of a certain Compensation, Tax Consistency and
Indemnification Agreement executed on June 30, 1998, by and among Penhall and
certain members of Management (the "Compensation Agreement"), Penhall was
obligated to make approximately $3.0 million of tax gross-up payments on or
before September 15, 1998. John T. Sawyer, Vice President of Penhall and
President of PenCo, C. George Bush, Vice President of Penhall, M. Bruce
Repchinuck, Vice President of Penhall and Bruce F. Varney, Vice President of
Penhall, received approximately $1,007,511, $444,184, $322,443 and $312,411,
respectively, pursuant to the Compensation Agreement.
On September 15, 1998, Penhall made such payments out of working capital.
Penhall realized tax benefits of approximately $3.0 million in the form of
reduced tax payment obligations or refunds of tax overpayments as a result of
deductions for certain of such tax gross-up payments and deductions with respect
to employee stock options in fiscal years 1998 and 1999.
INDEBTEDNESS OF MANAGEMENT
On or about April 15, 1998, Penhall advanced approximately $205,862 to John
T. Sawyer, President of Penhall, to pay income taxes resulting from compensation
income recognized by Mr. Sawyer in calendar year 1997. Pursuant to the
Compensation Agreement, the amount advanced to Mr. Sawyer was offset against
certain supplemental cash compensation payments that Penhall made to Mr. Sawyer
on September 15, 1998.
PART IV
ITEM 14. 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 set forth on pages 18 through 51 are
incorporated by reference into this item 14 of Form 10-K by item 8 hereof:
- Independent Auditors' Report
- Consolidated Balance Sheets as of June 30, 1999 and 2000.
- Consolidated Statements of Operations for the Years Ended June 30,
1998, 1999 and 2000.
- Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended June 30, 1998, 1999 and 2000.
- Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1999 and 2000.
- 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.
(a)(3) EXHIBITS.
EXHIBIT NO. 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,
58
59
EXHIBIT NO. DESCRIPTION
----------- -----------
Sherrill & Co., L.P. and Penhall Acquisition Corp.*
3.1 Amended and Restated Articles of Incorporation of the Company
(formerly known as Phoenix Concrete Cutting, Inc.)*
3.2 Bylaws of the Company*
3.3 Restated Articles of Incorporation of Penhall Rental Corp.
(formerly known as Penhall International, Inc.)*
3.4 Bylaws of Penhall Rental Corp. (formerly known as Penhall
International, Inc.)*
3.5 Articles of Incorporation of Penhall Company*
3.6 Bylaws of Penhall Company*
4.1 Indenture dated as of August 1, 1998, between Penhall Acquisition
Corp. and United States Trust Company of New York, as Trustee*
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*
4.3 Assumption Agreement dated as of August 4, 1998 among the
Company, Penhall Rental Corp. and Penhall Company*
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*
4.5 Form of the Company's 12% Senior Notes due 2006 (included in
Exhibit 4.1)*
4.6 Credit Agreement dated August 4, 1998, by and among the Company,
Penhall Acquisition Corp., Bankers Trust Company, as
administrative agent, Credit Suisse First Boston, as syndication
agent, and various lending institutions named therein*
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*
5 Opinion of Dechert Price & Rhoads*
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*
10.2 Management Agreement dated August 4, 1998, by and between the
Company and Bruckmann, Rosser, Sherrill & Co., Inc.*
10.3 Employment Agreement dated as of August 4, 1998, by and between
the Company and C. George Bush*
10.4 Employment Agreement dated as of August 4, 1998, by and between
the Company and Bruce Varney*
10.5 Employment Agreement dated as of August 4, 1998, by and between
the Company and Scott E. Campbell*
10.6 Employment Agreement dated as of August 4, 1998, by and between
the Company and Jack S. Hobbs*
10.7 Employment Agreement dated as of August 4, 1998, by and between
the Company and Vincent M. Gutierrez*
10.8 Employment Agreement dated as of August 4, 1998, by and between
the Company and Leif McAfee*
10.9 Penhall International, Inc. and Affiliated Companies Employees'
Profit Sharing (401(k)) Plan*
10.10 Form of Penhall International Corp. 1998 Stock Option Plan*
12 Statement of Ratio of Earnings to Fixed Charges*
21 Subsidiaries of the Company
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)*
24 Power of Attorney*
59
60
EXHIBIT NO. DESCRIPTION
----------- -----------
Statement of Eligibility and Qualification, Form T-1, of United
States Trust
25 Company of New York, as Trustee under the Indenture filed as
Exhibit 4.1*
27 Financial Data Schedule
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
- ------------
* Previously filed.
(b) REPORTS ON FORM 8-K
None
60
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PENHALL INTERNATIONAL CORP.
By: /s/ JOHN T. SAWYER
--------------------------------------
John T. Sawyer
Chairman of the Board, President
and Chief Executive Officer
September 28, 2000
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, 2000.
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
61
62
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant has not sent the following to security holders: (i) any annual
report to security holders covering the registrant's last fiscal year; or (ii)
any proxy statements, forms of proxy or other proxy soliciting material wither
respect to any annual or other meeting of security holders.
EXHIBIT INDEX
EXHIBIT NO. 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.*
3.1 Amended and Restated Articles of Incorporation of the Company
(formerly known as Phoenix Concrete Cutting, Inc.)*
3.2 Bylaws of the Company*
3.3 Restated Articles of Incorporation of Penhall Rental Corp.
(formerly known as Penhall International, Inc.)*
3.4 Bylaws of Penhall Rental Corp. (formerly known as Penhall
International, Inc.)*
3.5 Articles of Incorporation of Penhall Company*
3.6 Bylaws of Penhall Company*
4.1 Indenture dated as of August 1, 1998, between Penhall Acquisition
Corp. and United States Trust Company of New York, as Trustee*
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*
4.3 Assumption Agreement dated as of August 4, 1998 among the
Company, Penhall Rental Corp. and Penhall Company*
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*
4.5 Form of the Company's 12% Senior Notes due 2006 (included in
Exhibit 4.1)*
4.6 Credit Agreement dated August 4, 1998, by and among the Company,
Penhall Acquisition Corp., Bankers Trust Company, as
administrative agent, Credit Suisse First Boston, as syndication
agent, and various lending institutions named therein*
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*
5 Opinion of Dechert Price & Rhoads*
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*
10.2 Management Agreement dated August 4, 1998, by and between the
Company and Bruckmann, Rosser, Sherrill & Co., Inc.*
10.3 Employment Agreement dated as of August 4, 1998, by and between
the Company and C. George Bush*
10.4 Employment Agreement dated as of August 4, 1998, by and between
the Company and Bruce Varney*
10.5 Employment Agreement dated as of August 4, 1998, by and between
the Company and Scott E. Campbell*
62
63
EXHIBIT NO. DESCRIPTION
----------- -----------
10.6 Employment Agreement dated as of August 4, 1998, by and between
the Company and Jack S. Hobbs*
10.7 Employment Agreement dated as of August 4, 1998, by and between
the Company and Vincent M. Gutierrez*
10.8 Employment Agreement dated as of August 4, 1998, by and between
the Company and Leif McAfee*
10.9 Penhall International, Inc. and Affiliated Companies Employees'
Profit Sharing (401(k)) Plan*
10.10 Form of Penhall International Corp. 1998 Stock Option Plan*
12 Statement of Ratio of Earnings to Fixed Charges*
21 Subsidiaries of the Company
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)*
24 Power of Attorney (included on signature page)*
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*
27 Financial Data Schedule
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
- ------------
* Previously filed.
63