1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number. 333-64745 ---------------- PENHALL INTERNATIONAL CORP. (Exact Name of registrant as specified in its charter) ARIZONA 86-0634394 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1801 PENHALL WAY, ANAHEIM, CA 92803 (Address of principal executive offices) (Zip Code) (714) 772-6450 (Registrant's telephone number, including area code) ---------------- Indicate by check mark whether the Registrant (1) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS AND TITLE OF SHARES OUTSTANDING AS OF CAPITAL STOCK NOVEMBER 10, 2000 ------------------ ------------------------ Common Stock, $.01 Par Value 1,012,513 ================================================================================ 2 PENHALL INTERNATIONAL CORP. INDEX Page No. -------- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and September 30, 2000....................................... 3 Condensed Consolidated Statements of Operations for the three month periods ended September 30, 1999 and 2000.............. 4 Condensed Consolidated Statements of Cash Flows for the three month periods ended September 30, 1999 and 2000.............. 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 19 Part II - Other Information Items 1-5 are not applicable Item 6. Exhibits and Reports on Form 8-K................................ 20 (a) Exhibits 27.1 -- Financial Data Schedule............................ 22 (b) Reports on Form 8-K None 2 3 ITEM 1. FINANCIAL INFORMATION PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, SEPTEMBER 30, 2000 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ................................ $ 2,109,000 $ 2,798,000 Receivables: Contract and trade receivables ................ 31,834,000 37,325,000 Contract retentions ........................... 5,724,000 6,290,000 ------------- ------------- 37,558,000 43,615,000 Less allowance for doubtful receivables ....... 1,617,000 1,942,000 ------------- ------------- Net receivables ...................... 35,941,000 41,673,000 Costs and estimated earnings in excess of billings on uncompleted contracts .................................. 4,126,000 1,641,000 Deferred tax assets ...................................... 2,318,000 2,318,000 Inventories .............................................. 1,741,000 1,566,000 Prepaid expenses and other current assets ................ 916,000 889,000 ------------- ------------- Total current assets ................. 47,151,000 50,885,000 Property, plant and equipment, at cost: Land ..................................................... 5,229,000 5,229,000 Buildings and leasehold improvements ..................... 8,135,000 9,321,000 Construction and other equipment ......................... 102,284,000 104,541,000 ------------- ------------- 115,648,000 119,091,000 Less accumulated depreciation and amortization ........... 53,924,000 56,630,000 ------------- ------------- Net property, plant and equipment .... 61,724,000 62,461,000 Goodwill, net of accumulated amortization .................. 7,566,000 7,778,000 Debt issuance costs, net of accumulated amortization ....... 4,946,000 4,725,000 Other assets, net .......................................... 775,000 728,000 ------------- ------------- $ 122,162,000 $ 126,577,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current installments of long-term debt ................... $ 4,649,000 $ 5,379,000 Trade accounts payable ................................... 10,953,000 12,865,000 Accrued liabilities ...................................... 14,045,000 12,280,000 Income taxes payable ..................................... 451,000 2,260,000 Billings in excess of costs and estimated earnings on uncompleted contracts ............................... 2,635,000 997,000 ------------- ------------- Total current liabilities ............ 32,733,000 33,781,000 Long-term debt, excluding current installments ............. 20,586,000 20,694,000 Senior notes ............................................... 100,000,000 100,000,000 Deferred tax liabilities ................................... 6,045,000 6,045,000 Senior Exchangeable Preferred Stock, redemption value $12,547,000 at September 30, 2000. Authorized, issued and outstanding 10,000 shares at June 30, 2000 and September 30, 2000 ....................................... 12,220,000 12,547,000 Series A Preferred Stock, redemption value $13,811,000 at September 30, 2000. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2000 and September 30, 2000 ................................... 13,365,000 13,811,000 Stockholders' deficit: Series B Preferred Stock, par value $.01 per share Authorized 50,000 shares; issued and outstanding 19,052 at June 30, 2000 and September 30, 2000 ......... 24,385,000 25,197,000 Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,012,513 at June 30, 2000 and September 30, 2000, including 6,014 shares held in treasury ............................................ 10,000 10,000 Additional paid-in capital ............................... 1,522,000 1,522,000 Treasury stock, at cost, 6,014 common shares at June 30, 2000 and September 30, 2000 ............................ (14,000) (14,000) Accumulated deficit ...................................... (88,690,000) (87,016,000) ------------- ------------- Total stockholders' deficit .......... (62,787,000) (60,301,000) Commitments and contingencies ............................ ------------- ------------- $ 122,162,000 $ 126,577,000 ============= ============= See accompanying notes to condensed consolidated financial statements. 3 4 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTH PERIODS ENDED SEPTEMBER 30, ---------------------------- 1999 2000 ------------ ------------ Revenues .......................................... $ 49,857,000 $ 53,346,000 Cost of revenues .................................. 33,843,000 36,795,000 ------------ ------------ Gross profit .................................... 16,014,000 16,551,000 General and administrative expenses ............... 8,577,000 7,601,000 Other operating income, net ....................... 301,000 431,000 ------------ ------------ Earnings before interest expense and income taxes 7,738,000 9,381,000 Interest expense .................................. 3,952,000 3,857,000 ------------ ------------ Earnings before income taxes .................... 3,786,000 5,524,000 Income tax expense ................................ 1,634,000 2,265,000 ------------ ------------ Net earnings ...................................... 2,152,000 3,259,000 ------------ ------------ Accretion of preferred stock to redemption value .. (686,000) (773,000) Accrual of cumulative dividends on preferred stock (693,000) (812,000) ------------ ------------ Net income available to common stockholders ....... $ 773,000 $ 1,674,000 ============ ============ Earnings per share: Basic and diluted ............................... $ .78 $ 1.65 Weighted average number of shares outstanding: Basic and diluted ............................... 994,477 1,012,513 See accompanying notes to condensed consolidated financial statements. 4 5 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 2000 ----------- ------------ Cash flows from operating activities: Net earnings ............................................... $ 2,152,000 $ 3,259,000 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization .......................... 3,468,000 3,887,000 Amortization of debt issuance costs .................... 221,000 221,000 Provision for doubtful accounts ........................ 619,000 325,000 Gain on sale of assets ................................. (43,000) (110,000) Changes in assets and liabilities, net of effects of acquisition: Receivables .......................................... (7,997,000) (6,057,000) Inventories, prepaid expenses and other assets ....... (822,000) 255,000 Costs and estimated earnings in excess of billings on uncompleted contracts .............................. 892,000 2,485,000 Trade accounts payable, accrued liabilities and income taxes payable ...................................... 1,202,000 (3,292,000) Billings in excess of costs and estimated earnings on uncompleted contracts .............................. (376,000) (1,638,000) ----------- ------------ Net cash used in operating activities ............ (684,000) (665,000) ----------- ------------ Cash flows from investing activities: Proceeds from sale of assets ............................... 156,000 325,000 Capital expenditures ....................................... (3,394,000) (3,622,000) Acquisition of assets ...................................... -- (317,000) ----------- ------------ Net cash used in investing activities .............. (3,238,000) (3,614,000) ----------- ------------ Cash flows from financing activities: Borrowings under long-term debt ............................ 5,000,000 11,050,000 Repayments of long-term debt ............................... (2,204,000) (10,890,000) Book overdraft ............................................. 3,033,000 4,808,000 ----------- ------------ Net cash provided by financing activities .......... 5,829,000 4,968,000 ----------- ------------ Net increase in cash and cash equivalents .......... 1,907,000 689,000 Cash and cash equivalents at beginning of period ............. 3,085,000 2,109,000 ----------- ------------ Cash and cash equivalents at end of period ................... $ 4,992,000 $ 2,798,000 =========== ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes ............................................. $ 123,000 $ 456,000 =========== ============ Interest ................................................. $ 6,876,000 $ 6,526,000 =========== ============ Supplemental disclosure of noncash investing and financing activities: Accrued liabilities related to the acquisition of assets . $ -- $ 440,000 =========== ============ Borrowings related to the acquisition of assets .......... $ -- $ 339,000 =========== ============ Borrowings related to capital leases and equipment financing agreements ................................... $ 2,262,000 $ 339,000 =========== ============ Accretion of preferred stock to redemption value ......... $ 686,000 $ 773,000 =========== ============ Accrual of cumulative dividends on preferred stock ....... $ 693,000 $ 812,000 =========== ============ See accompanying notes to condensed consolidated financial statements. 5 6 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) (1) BASIS OF PRESENTATION 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 the Third-Party did not change the accounting basis of the assets and liabilities in PII's separate stand-alone financial statements. The accompanying unaudited condensed consolidated financial statements of Penhall International Corp. ("Penhall" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the three month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the Company's audited consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended June 30, 2000. EARNINGS PER SHARE Basic earnings per share is computed by dividing adjusted net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential dilutive securities. There were no potential dilutive securities for the periods presented. 6 7 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2000 (UNAUDITED) (2) 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; 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. As of September 30, 2000 the Company was in compliance with all such covenants. LONG-TERM DEBT Long-term debt consists of the following: JUNE 30, SEPTEMBER 30, 2000 2000 ----------- ----------- Note payable secured by certain equipment, stated interest of 0%, imputed interest at 9.25% which resulted in a discount of $200,000; payable $400,000 due June 1, 2001, and $428,000 due June 1, 2002 ............................................ $ 728,000 $ 753,000 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 ....................... 100,000 100,000 Note payable secured by certain equipment, stated interest of 0%, imputed interest at 10.0% which resulted in a discount of $61,000; payable $100,000 due September 30, 2001 and $300,000 due September 30, 2002 ............................. -- 339,000 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 1.5% (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, 2000 and September 30, 2000 was 8.51% and 8.42%, respectively ............................... 2,850,000 4,000,000 $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 June 15, 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 1.5% (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, 2000 and September 30, 2000 was 8.44% and 8.41%, respectively 20,000,000 19,250,000 Various capital leases and equipment financing agreements due through November 2001 with interest rates ranging from 0% to .12% annually .................................... 1,351,000 1,426,000 Other ......................................................... 206,000 205,000 ----------- ----------- 25,235,000 26,073,000 Less current installments of long-term debt ................... 4,649,000 5,379,000 ----------- ----------- Long-term debt, excluding current installments ................ $20,586,000 $20,694,000 =========== =========== 7 8 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2000 (UNAUDITED) 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 September 30, 2000. No prepayments were required as of September 30, 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 $28,500,000 at September 30, 2000. (3) COMMITMENTS AND CONTINGENCIES 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. (4) ACQUISITION In September 2000, the Company purchased certain assets of Advanced Concrete Sawing & Drilling for $1,096,000. The purchase price included a cash payment of $317,000, $40,000 of covenants not to compete payable in equal installments through September 2004, $400,000 of additional consideration payable in equal installments in October 2000 and September 2001, and a seller unsecured carryback note of $339,000 at 10.0% interest, payable in installments of $100,000 due in September 2001 and $300,000 due in September 2002. The excess of the purchase price over the fair value of the net identifiable assets acquired of $384,000 has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. 8 9 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2000 (UNAUDITED) (5) CONDENSED CONSOLIDATING FINANCIAL INFORMATION The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries, (Penhall Rental Corp. and Penhall Company). 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. The condensed consolidating financial information presents condensed financial statements as of June 30, 2000 and September 30, 2000 and for the three month periods ended September 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. 9 10 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2000 ------------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL 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 Intercompany assets .................. 10,000,000 -- -- (10,000,000) -- 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 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 ============= ============= ============= ============= ============= 10 11 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2000 ------------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Assets Current assets: Receivables, net .................. $ -- $ -- $ 41,673,000 $ -- $ 41,673,000 Inventories ....................... -- -- 1,566,000 -- 1,566,000 Costs and estimated earnings in excess of billings on uncompleted contracts ........... -- -- 1,641,000 -- 1,641,000 Intercompany assets ............... 37,155,000 -- -- (37,155,000) -- Other current assets .............. 77,000 2,004,000 3,924,000 -- 6,005,000 ------------- ------------- ------------- ------------- ------------- Total current assets ........... 37,232,000 2,004,000 48,804,000 (37,155,000) 50,885,000 Intercompany assets .................. 9,002,000 -- -- (9,002,000) -- Net property, plant and equipment .... -- 9,905,000 52,556,000 -- 62,461,000 Other assets, net .................... 4,725,000 -- 8,506,000 -- 13,231,000 Investment in parent ................. -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries ........... 46,788,000 -- -- (46,788,000) -- ------------- ------------- ------------- ------------- ------------- $ 97,747,000 $ 15,910,000 $ 109,866,000 $ (96,946,000) $ 126,577,000 ============= ============= ============= ============= ============= Liabilities and Stockholders' Equity (Deficit) Current installments of long-term debt $ 3,500,000 $ 3,000 $ 1,876,000 $ -- $ 5,379,000 Trade accounts payable ............... 4,000 9,000 12,852,000 -- 12,865,000 Accrued liabilities .................. 2,175,000 -- 10,105,000 -- 12,280,000 Income taxes payable ................. 2,260,000 -- -- -- 2,260,000 Billings in excess of costs and estimated earnings on uncompleted contracts .............. -- -- 997,000 -- 997,000 Intercompany liabilities ............. -- 37,155,000 -- (37,155,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities ......... 7,939,000 37,167,000 25,830,000 (37,155,000) 33,781,000 Intercompany liabilities ............. -- -- 9,002,000 (9,002,000) -- Long-term debt, excluding current installments .............. 19,750,000 203,000 741,000 -- 20,694,000 Senior notes ......................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities ............. -- (540,000) 6,585,000 -- 6,045,000 Senior Exchangeable Preferred stock .. 12,547,000 -- -- -- 12,547,000 Series A Preferred stock ............. 13,811,000 -- -- -- 13,811,000 Stockholders' equity (deficit) ....... (56,300,000) (20,920,000) 67,708,000 (50,789,000) (60,301,000) ------------- ------------- ------------- ------------- ------------- $ 97,747,000 $ 15,910,000 $ 109,866,000 $ (96,946,000) $ 126,577,000 ============= ============= ============= ============= ============= 11 12 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 ----------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ----------- -------- ----------- ------------ ------------ Revenues ...................... $ -- $319,000 $49,857,000 $ (319,000) $49,857,000 Cost of revenues .............. -- -- 33,843,000 -- 33,843,000 ----------- -------- ----------- ----------- ----------- Gross profit ................ -- 319,000 16,014,000 (319,000) 16,014,000 General and administrative expenses .................... 122,000 121,000 8,653,000 (319,000) 8,577,000 Other operating income, net ... 17,000 -- 284,000 -- 301,000 Equity earnings in subsidiaries 4,459,000 -- -- (4,459,000) -- ----------- -------- ----------- ----------- ----------- Earnings before interest expense and income taxes .... 4,354,000 198,000 7,645,000 (4,459,000) 7,738,000 Interest expense .............. 3,806,000 -- 146,000 -- 3,952,000 ----------- -------- ----------- ----------- ----------- Earnings before income taxes ..................... 548,000 198,000 7,499,000 (4,459,000) 3,786,000 Income tax expense (benefit) .. (1,604,000) 81,000 3,157,000 -- 1,634,000 ----------- -------- ----------- ----------- ----------- Net earnings .................. $ 2,152,000 $117,000 $ 4,342,000 $(4,459,000) $ 2,152,000 =========== ======== =========== =========== =========== 12 13 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 ------------------------------------------------------------------------ PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ----------- -------- ----------- ------------ ------------ Revenues ...................... $ -- $387,000 $53,346,000 $ (387,000) $53,346,000 Cost of revenues .............. -- -- 36,795,000 -- 36,795,000 ----------- -------- ----------- ----------- ----------- Gross profit ................ -- 387,000 16,551,000 (387,000) 16,551,000 General and administrative expenses .................... 110,000 118,000 7,760,000 (387,000) 7,601,000 Other operating income, net ... 4,000 -- 427,000 -- 431,000 Equity earnings in subsidiaries 5,566,000 -- -- (5,566,000) -- ----------- -------- ----------- ----------- ----------- Earnings before interest expense and income taxes . 5,460,000 269,000 9,218,000 (5,566,000) 9,381,000 Interest expense .............. 3,804,000 -- 53,000 -- 3,857,000 ----------- -------- ----------- ----------- ----------- Earnings before income taxes ..................... 1,656,000 269,000 9,165,000 (5,566,000) 5,524,000 Income tax expense (benefit) .. (1,603,000) 110,000 3,758,000 -- 2,265,000 ----------- -------- ----------- ----------- ----------- Net earnings .................. $ 3,259,000 $159,000 $ 5,407,000 $(5,566,000) $ 3,259,000 =========== ======== =========== =========== =========== 13 14 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 --------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ------------ Net cash provided by (used in) operating activities ............. $(3,050,000) $ 99,000 $ 2,267,000 $ -- $ (684,000) ----------- ----------- ----------- ---------- ----------- Cash flows from investing activities: Proceeds from sale of assets ...... -- 16,000 140,000 -- 156,000 Capital expenditures .............. -- (3,000) (3,391,000) -- (3,394,000) ----------- ----------- ----------- ---------- ----------- Net cash provided by (used in) investing activities ...... -- 13,000 (3,251,000) -- (3,238,000) ----------- ----------- ----------- ---------- ----------- Cash flows from financing activities: Due to (from) affiliates .......... 50,000 2,184,000 (2,234,000) -- -- Borrowings under long-term debt ... 5,000,000 -- -- -- 5,000,000 Repayments of long-term debt ...... (2,000,000) -- (204,000) -- (2,204,000) Book overdraft .................... -- -- 3,033,000 -- 3,033,000 ----------- ----------- ----------- ---------- ----------- Net cash provided by financing activities ..... 3,050,000 2,184,000 595,000 -- 5,829,000 ----------- ----------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents -- 2,296,000 (389,000) -- 1,907,000 Cash and cash equivalents at beginning of period ............... -- 1,853,000 1,232,000 -- 3,085,000 ----------- ----------- ----------- ---------- ----------- Cash and cash equivalents at end of period ..................... $ -- $ 4,149,000 $ 843,000 $ -- $ 4,992,000 =========== =========== =========== ========== =========== 14 15 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ----------- ----------- ------------ ------------ Net cash provided by (used in) operating activities ............. $ (3,124,000) $ 179,000 $ 2,280,000 $ -- $ (665,000) ------------ ----------- ----------- ----------- ------------ Cash flows from investing activities: Proceeds from sale of assets ...... -- -- 325,000 -- 325,000 Capital expenditures .............. -- (1,129,000) (2,493,000) -- (3,622,000) Acquisition of assets ............. -- -- (317,000) -- (317,000) ------------ ----------- ----------- ----------- ------------ Net cash used in investing activities .................... -- (1,129,000) (2,485,000) -- (3,614,000) ------------ ----------- ----------- ----------- ------------ Cash flows from financing activities: Due to (from) affiliates .......... 2,623,000 1,570,000 (4,193,000) -- -- Borrowings under long-term debt ... 11,050,000 -- -- -- 11,050,000 Repayments of long-term debt ...... (10,649,000) (1,000) (240,000) -- (10,890,000) Book overdraft .................... -- -- 4,808,000 -- 4,808,000 ------------ ----------- ----------- ----------- ------------ Net cash provided by financing activities .......... 3,024,000 1,569,000 375,000 -- 4,968,000 ------------ ----------- ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents .......... (100,000) 619,000 170,000 -- 689,000 Cash and cash equivalents at beginning of period ............... 100,000 1,370,000 639,000 -- 2,109,000 ------------ ----------- ----------- ----------- ------------ Cash and cash equivalents at end of period ..................... $ -- $ 1,989,000 $ 809,000 $ -- $ 2,798,000 ============ =========== =========== =========== ============ 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of Penhall International Corp. (Penhall) should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto included in this quarterly report on Form 10-Q and the Company's audited consolidated financial statements and footnotes thereto included in the annual report on Form 10-K, filed with the Securities and Exchange Commission. GENERAL Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its operated equipment rental services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 34 locations in fourteen states, with a presence in some of the fastest growing states in terms of construction spending and population growth. The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1994, Penhall has effected nine strategic acquisitions, including Concrete Coring Company, an Austin-based company acquired in 1995, Zig Zag Company, a Denver-based company acquired in 1996, Metro Concrete Cutting, an Atlanta-based company acquired in 1996, Highway Services, a Minnesota-based company 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, Diamond Concrete Services, an Alabama-based company acquired in April 1999, Prospect Drilling and Sawing, a Minneapolis-based company acquired in June 1999 and Advance Concrete Sawing & Drilling, Inc., a Bakersfield California-based company purchased in September 2000. During the same period, Penhall established operations in five new markets by opening offices in Las Vegas, Salt Lake City, Portland, Dallas and Richmond. Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall's Operated Equipment Rental Services are complemented by long-term fixed-price contracts. Penhall's revenues are derived from highway-related projects, building-related projects, airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated: THREE MONTH PERIODS ENDED SEPTEMBER 30, --------------------------------------- 1999 2000 ------------------ ---------------- % OF % OF $ TOTAL $ TOTAL ------- ----- ------- ----- (DOLLARS IN THOUSANDS) Operated Equipment Rental Services $32,652 65.5% $35,443 66.4% Contract Services(1) ............. 17,205 34.5% 17,903 33.6% ------- ----- ------- ----- Total Revenues ............... $49,857 100.0% $53,346 100.0% ======= ===== ======= ===== - ---------- (1) Contract services revenues exclude services performed by the operated equipment rental divisions on long-term contracts. Revenue growth is influenced by infrastructure change, including new construction, modification and 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. 16 17 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. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Revenues. Revenues for the three months ended September 30, 2000 ("Interim 2001") were $53.3 million, an increase of $3.5 million or 7.0% over the three months ended September 30, 1999 ("Interim 2000"). The increase, due primarily to the continued strength in construction markets served in the southwest region of the United States, was partially offset in Interim 2001 by lower revenues from the Highway Services division. The decrease in revenues for the Highway Services division is attributable to increased competition in its traditional markets, delays by various state Department of Transportation agencies in releasing new contracts, as well as the division performing less work as a prime contractor which resulted in a reduction of subcontract revenues. Gross Profit. Gross profit totaled $16.6 million in Interim 2001, an increase of $0.5 million or 3.4% from Interim 2000. Gross profit as a percentage of revenues decreased from 32.1% in Interim 2000 to 31.0% in Interim 2001. The increase in gross profit from Interim 2000 to Interim 2001 is primarily attributable to increased revenue. The decrease in gross profit as a percentage of revenues was due to increased competition in several Company markets during Interim 2001. The Company divisions most impacted by increased competition were the markets served by the Highway Services division, and offices located in the southwest and southern regions of the United States. General and Administrative Expenses. General and administrative expenses were $7.6 million in Interim 2001 compared to $8.6 million in Interim 2000. As a percent of revenues, general and administrative expenses were 14.3% in Interim 2001 compared to 17.2% in Interim 2000. The decrease in general and administrative expenses in Interim 2001 and the decrease in general and administrative expenses as a percent of revenues in Interim 2001 was attributable to a reduction in the provision for doubtful accounts of $0.6 million and a reduction of legal expense of $0.4 million in Interim 2001 as compared to Interim 2000. Interest Expense. Interest expense was $3.9 million in Interim 2001 compared to interest expense of $4.0 million in Interim 2000. The small decrease in interest expense is attributable to higher interest rates offset by lower borrowings by the Company in Interim 2001. Income Tax Expense (Benefit). The Company recorded an income tax provision of $2.3 million, or 41% of earnings before income taxes in Interim 2001, compared to an income tax provision of $1.6 million, or 43% of earnings before income taxes in Interim 2000. The decrease in the effective tax rate is attributable to non-deductible, non-recurring reorganization costs which occurred in Interim 2000. 17 18 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 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 5.25 to 1.0, 50% of such Excess Cash Flow. Cash used in operating activities during both Interim 2001 and Interim 2000 was $0.7 million. In Interim 2001, the Company's higher net earnings, decrease in costs and estimated earnings in excess of billings on uncompleted contracts, and higher depreciation and amortization expense offset by decreases in accounts payable and accrued liabilities, and increases in accounts receivables and decreases in billings in excess of costs and estimated earnings on uncompleted contracts resulted in a small use of cash from operations. In Interim 2000, the Company's higher net earnings, increase in accounts payable and accrued liabilities, higher depreciation and amortization expense offset by increases in accounts receivable resulted in a small use of cash from operations during that period. Management estimates that the Company's annual capital expenditures will be approximately $22.5 million for fiscal 2001, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property. Cash used in investing activities was $3.6 million in Interim 2001 as compared to $3.2 million in Interim 2000. Such cash was primarily used for capital expenditures of $3.6 million in Interim 2001 and $3.4 million in Interim 2000. Net cash provided by financing activities in Interim 2001 was $5.0 million as compared to $5.8 million in Interim 2000. In Interim 2001, the Company's financing activities are primarily a result of borrowings and repayments of long-term debt and a book overdraft. In Interim 2000, the Company's financing activities are also primarily the result of borrowings and repayments of long-term debt and a book overdraft. Historically, the Company has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of September 30, 2000, the Company and its subsidiaries had approximately $126.1 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $60.3 million. As of September 30, 2000, approximately $26.0 million of additional borrowing was available under the Company's New Credit Facility. YEAR 2000 As of September 30, 2000, the Company has not experienced any disruption to operations due to the Y2K issue. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The Company is exposed to interest rate changes primarily as a result of its notes payable, including Senior Notes, Term Loan and Revolving Loan 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 it's 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. The table below presents the principal amounts of debt (excluding capital lease obligations of $353,000), weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2000. YEARS ENDED JUNE 30, ------------------------------------------------- FAIR 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE ------- ------ ------ ------- ------ ---------- -------- -------- (IN THOUSANDS) Fixed rate debt .............. $1,246 $ 765 $ 276 $ 4 $4 $100,175 $102,470 $101,970(2) Average interest rate......... 10.70% 10.31% 10.13% 10.00% 10.00% 12.00% 12.00% 12.00% Variable rate LIBOR debt (1).. $2,250 $5,000 $6,000 $10,000 $0 $ 0 $ 23,250 $ 23,250 Weighted average current interest rate (1)........... 8.41% - ----------- (1) The Company has different interest rate options for its variable rate debt. See Footnote 2 in the condensed consolidated financial statements for additional information. (2) The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities. 19 20 PART II - OTHER INFORMATION Items 1-5 are not applicable Item 6. Exhibits and Reports on Form 8-K. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Penhall International Corp. Date: November 8, 2000 /s/ John T. Sawyer -------------------------------- John T. Sawyer Chairman of the Board, President and Chief Executive Officer 21 22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule