<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1998
REGISTRATION NO. 333-64745
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PENHALL INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ARIZONA 7353 86-0634394
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
1801 PENHALL WAY
P.O. BOX 4609
ANAHEIM, CALIFORNIA 92803
(714) 772-6450
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
--------------------------
MARTIN W. HOUGE
VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER
PENHALL INTERNATIONAL CORP.
1801 PENHALL WAY, P.O. BOX 4609
ANAHEIM, CALIFORNIA 92803
(714) 772-6450
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH COPIES TO:
BRUCE B. WOOD, ESQ.
DECHERT PRICE & RHOADS
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-3500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
12% Senior Notes due 2006.................. $100,000,000 100% $100,000,000 $29,500
Guarantees of Senior Notes................. $100,000,000 -- -- None
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PENHALL INTERNATIONAL CORP.
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR
OTHER IRS
JURISDICTION PRIMARY STANDARD EMPLOYER
OF INDUSTRIAL CLASSIFICATION IDENTIFICATION
NAME INCORPORATION CODE NUMBER NUMBER
- ------------------------------------------------------------ ------------- ------------------------- -------------
<S> <C> <C> <C>
Penhall Rental Corp......................................... California 7353 33-0286366
Penhall Company............................................. California 7353 33-0349226
</TABLE>
The address, including zip code and telephone number, including area code,
for each of the additional registrants' principal executive offices is 1801
Penhall Way, P.O. Box 4609, Anaheim, California 92803, (714) 772-6450.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1998
THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO CHANGE,
COMPLETION OR AMENDMENT WITHOUT NOTICE. THESE SECURITIES MAY NOT BE SOLD NOR MAY
AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN
FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH JURISDICTION.
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2006
FOR ALL OUTSTANDING
12% SENIOR NOTES DUE 2006
OF
PENHALL INTERNATIONAL CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 199 , UNLESS EXTENDED
------------------------
Penhall International Corp., an Arizona corporation formerly known as
Phoenix Concrete Cutting, Inc. (the "Company"), hereby offers 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 its 12% Senior Notes due
2006 (the "Existing Notes") outstanding on the date hereof upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
letter of transmittal (the "Letter of Transmittal" and, together with this
Prospectus, the "Exchange Offer"). 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, except
for certain transfer restrictions and registration rights relating to the
Existing Notes. The New Notes will be issued pursuant to, and be entitled to the
benefits of, the Indenture (as defined) governing the Existing Notes.
The New Notes will bear interest from and including the date of consummation
of the Exchange Offer. Interest on the New Notes will be payable semi-annually
on February 1 and August 1 of each year, commencing February 1, 1999.
Additionally, interest on the New Notes will accrue from the last interest
payment date on which interest was paid on the Existing Notes surrendered in
exchange therefor or, if no interest has been paid on the Existing Notes, from
the date of original issue of the Existing Notes. Holders whose Existing Notes
are accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Existing Notes.
The New Notes will mature on August 1, 2006. The New Notes will be
redeemable, in whole or in part, at the option of the Company on or after August
1, 2003 at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition, at any time on or prior to
August 1, 2001, the Company, at its option, may redeem, with the net cash
proceeds of one or more Public Equity Offerings (as defined) by the Company, up
to 30% of the aggregate principal amount of the Notes, at a redemption price
equal to 112% of the principal amount thereof, plus accrued and unpaid interest
to the date of redemption; PROVIDED that at least 70% of the aggregate principal
amount of the Notes remains outstanding immediately following such redemption.
Upon a Change of Control (as defined), each holder of New Notes will have the
right, subject to certain conditions, to require the Company to repurchase such
holder's New Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the repurchase date. There can be no
assurance, however, that the Company will have available funds sufficient to
purchase the New Notes upon a Change of Control. In addition, the Company will
be obligated to offer to repurchase the New Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase in the
event of certain Asset Sales (as defined). See "Description of the Notes."
(CONTINUED ON FOLLOWING PAGE)
<PAGE>
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF EXISTING NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
The New Notes will be general unsecured senior obligations of the Company
and will rank PARI PASSU in right of payment with all existing and future
unsubordinated indebtedness of the Company and senior in right of payment to all
existing and future subordinated indebtedness of the Company. The New Notes will
be effectively subordinated in right of payment to all secured indebtedness of
the Company, including indebtedness incurred under the New Credit Facility (as
defined), to the extent of the assets securing such indebtedness. The New Notes
will be fully and unconditionally guaranteed (the "Guarantees") on a senior
basis, jointly and severally, by Penhall Rental Corp. and Penhall Company (the
"Guarantors") and by any Restricted Subsidiary (as defined), other than a
Foreign Subsidiary (as defined), having total assets with a book value in excess
of $500,000 that in the future executes and delivers to the Trustee (as defined)
a supplemental indenture in which such Restricted Subsidiary agrees to
unconditionally guarantee all of the Company's obligations under the New Notes
and the Indenture. See "Description of the Notes--Certain Covenants--Additional
Subsidiary Guarantees." The Guarantees will be general unsecured obligations of
the Guarantors and will rank PARI PASSU in right of payment with all existing
and future unsubordinated indebtedness of the Guarantors and senior in right of
payment to all existing and future subordinated indebtedness of the Guarantors.
The Guarantees will be effectively subordinated in right of payment to all
secured indebtedness of the Guarantors to the extent of the assets securing such
indebtedness. As of September 30, 1998, the Company had approximately $121.1
million of indebtedness outstanding (including $20.8 million of secured
indebtedness outstanding pursuant to the New Credit Facility but exclusive of
$29.2 million of unused commitments thereunder), and the Guarantors had
approximately $4.3 million of indebtedness outstanding (including $3.9 million
of secured indebtedness but exclusive of the guarantees by the Guarantors of the
Company's obligations under the Notes and the New Credit Facility). See
"Description of Certain Indebtedness." The Indenture permits the Company and the
Guarantors to incur additional indebtedness (including secured indebtedness)
subject to certain restrictions. See "Description of the Notes."
The Existing Notes were issued by Penhall Acquisition Corp., an Arizona
corporation (the "Issuer") formed by Bruckmann, Rosser, Sherrill & Co., L.P.
("BRS") to effect a recapitalization (the "Recapitalization") of Penhall
International, Inc., a California corporation and former corporate parent of the
Company ("PII"). As part of the Recapitalization, a series of mergers (the
"Mergers") were consummated pursuant to which the Company became the corporate
parent of PII, BRS acquired an interest in the Company and the Company became
the successor obligor on the Existing Notes. Immediately following consummation
of the Transactions (as defined), PII changed its name to "Penhall Rental Corp."
and the Company changed its name from "Phoenix Concrete Cutting, Inc." to
"Penhall International Corp."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors 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 will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined) for the Exchange Offer. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Existing Notes with respect to the Exchange Offer, the Company will promptly
return such Existing Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivery of a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Existing Notes
ii
<PAGE>
where such Existing Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. If a market for the New Notes should develop, such New Notes
could trade at a discount from their principal amount. The Company currently
does not intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system, and no active
public market for the New Notes is currently anticipated. There can be no
assurance that an active public market for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange pursuant to the Exchange Offer.
iii
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the New Notes being offered hereby.
This Prospectus does not contain all the information set forth in the Exchange
Offer Registration Statement. For further information with respect to the
Company and the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Exchange Offer Registration Statement, reference is made to
the exhibit for a more complete description of the document or matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Company is not currently subject to the periodic reporting and other
information requirements of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed that, whether or not it is required
to do so by the rules and regulations of the Commission, for so long as any of
the Notes remain outstanding, it will furnish to the holders of the Notes and to
the extent permitted by applicable law or regulation, file with the Commission
following the consummation of the Exchange Offer (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
Forms, including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's independent auditors and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. All reports filed with the
Commission will be available on the Commission's web site at http:\\www.sec.gov.
In addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or beneficial
owner of the Notes, in connection with any sale thereof, the information
required by Rule 144A(d)(4) under the Securities Act.
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," ANTICIPATES," "INTENDS,"
"EXPECT," "SHOULD," "MAY," "WILL," "CONTINUE" AND "ESTIMATE," AND WORDS OF
SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS." SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR
INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS
CONDITIONS, BOTH DOMESTIC AND FOREIGN; INDUSTRY AND MARKET CAPACITY; DEMOGRAPHIC
CHANGES; EXISTING GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO
COMPLY WITH, GOVERNMENT REGULATIONS; LIABILITY AND OTHER CLAIMS ASSERTED AGAINST
THE COMPANY; COMPETITION; THE LOSS OF ANY SIGNIFICANT CUSTOMERS; CHANGES IN
OPERATING STRATEGY OR DEVELOPMENT PLANS; THE ABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL; THE SIGNIFICANT INDEBTEDNESS OF THE COMPANY AFTER THE
TRANSACTIONS CONTEMPLATED HEREBY; THE AVAILABILITY AND TERMS OF CAPITAL TO FUND
THE EXPANSION OF THE COMPANY'S BUSINESS; AND OTHER FACTORS REFERENCED IN THIS
PROSPECTUS. CERTAIN OF THESE FACTORS ARE DISCUSSED IN MORE DETAIL ELSEWHERE IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, UNDER THE CAPTIONS "SUMMARY,"
"RISK FACTORS," "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS." GIVEN THESE UNCERTAINTIES, PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE FACTORS OR TO
PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
iv
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO
(I) THE "ISSUER" ARE TO PENHALL ACQUISITION CORP., AN ARIZONA CORPORATION, (II)
"PENHALL GROUP" ARE TO PENHALL INTERNATIONAL, INC., A CALIFORNIA CORPORATION,
AND EACH OF ITS SUBSIDIARIES FOR PERIODS PRIOR TO THE TRANSACTIONS (AS DEFINED)
AND TO PENHALL INTERNATIONAL CORP., AN ARIZONA CORPORATION, AND ITS DIRECT AND
INDIRECT SUBSIDIARIES FROM AND AFTER THE TRANSACTIONS, AFTER GIVING EFFECT
THERETO, (III) "MANAGEMENT" ARE TO THE EXECUTIVE OFFICERS IDENTIFIED UNDER
"MANAGEMENT--DIRECTORS AND EXECUTIVE OFFICERS" AND (IV) "FISCAL YEARS" ARE TO
THE FISCAL YEARS OF PENHALL INTERNATIONAL, INC., WHICH END ON JUNE 30. AS USED
HEREIN, THE TERMS "ADJUSTED EBITDA" AND "ADJUSTED EBITDA MARGIN" HAVE THE
MEANINGS SET FORTH IN NOTES 1 AND 2, RESPECTIVELY, TO THE TABLE SET FORTH UNDER
"--SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION." INFORMATION PROVIDED
HEREIN ON A "PRO FORMA BASIS" FOR ANY PERIOD OR AS OF ANY DATE GIVES EFFECT TO
THE HSI ACQUISITION (AS DEFINED) AND THE TRANSACTIONS IN THE MANNER DESCRIBED
UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS."
CERTAIN MARKET DATA USED IN THIS PROSPECTUS REFLECT MANAGEMENT ESTIMATES;
WHILE SUCH ESTIMATES ARE BELIEVED BY MANAGEMENT TO BE RELIABLE, NO ASSURANCE CAN
BE GIVEN THAT SUCH DATA IS ACCURATE IN ALL MATERIAL RESPECTS.
THE PENHALL GROUP
The Penhall Group, founded in 1957, is one of the largest operated equipment
rental providers in the United States. The Penhall Group 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, the Penhall Group complements its
Operated Equipment Rental Services by providing services on a fixed-price
contract basis for long-term projects. The Penhall Group employs over 517
skilled operators and has approximately 513 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. The
Penhall Group provides its services from 22 locations in nine 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 and
Utah (collectively, the "Markets"). The Penhall Group has a diverse base of over
6,800 customers. With the exception of the California Department of
Transportation, no one customer has accounted for more than 5% of its total
revenue in any of the past five fiscal years. The Penhall Group has a reputation
for high quality service which results in a high degree of customer loyalty and,
based on the last fiscal quarter, Management believes that on average in excess
of 95% of its revenues are derived through repeat business from existing
customers. The Penhall Group has increased its Adjusted EBITDA margin from 13.2%
in fiscal 1993 to 20.7% in fiscal 1998 due to Management's focus on (i)
maximizing high-margin Operated Equipment Rental Services revenues through
increased equipment rental fleet utilization, (ii) controlling overhead and
(iii) successfully integrating acquisitions and start-up locations. During that
same period, revenues and Adjusted EBITDA grew at a compound annual growth rate
("CAGR") of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall
Group generated revenues and Adjusted EBITDA of approximately $114.7 million and
$24.7 million, respectively, during fiscal 1998 and approximately $38.9 million
and $8.7 million, respectively, during the three months ended September 30,
1998. The Penhall Group had a net loss of approximately $1.0 million on a Pro
Forma Basis during fiscal 1998 and net earnings of approximately $1.4 million on
a Pro Forma Basis during the three months ended September 30, 1998.
1
<PAGE>
Through its skilled operators and equipment rental fleet, the Penhall Group
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, the Penhall Group 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. Operated Equipment Rental Services represented
approximately three quarters of total revenues for fiscal 1998. For longer
duration projects, which may last from a few days to several years, the Penhall
Group 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. The Penhall Group
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, the Penhall Group is responsible for completion of
an entire job or project, and typically employs its Operated Equipment Rental
Services. On average, approximately 20% to 30% of Operated Equipment Rental
Services revenues are generated from fixed-price contracts. Revenues generated
by Penhall's contract divisions, excluding services performed by the equipment
rental divisions on long-term contracts, represent approximately 23.5% of the
total revenues for fiscal 1998.
The operated equipment rental industry ("Operated Equipment Rental
Industry") is a specialized niche segment of the highly fragmented United States
equipment rental industry. There are an estimated 17,000 equipment rental
companies in the United States, and no single company represented more than 2%
of total market revenues in 1996. According to industry sources, the United
States equipment rental industry grew from approximately $600 million in
revenues in 1982 to an estimated $18 billion in 1997, representing a CAGR of
23.7%. 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. Also, according to industry sources, for the six months
ended January 31, 1998, construction spending in the Penhall Group's Markets
grew by an average of 12.3%, significantly outperforming the 8% growth of United
States construction spending, primarily due to strong regional economies,
favorable demographics and growing levels of construction activity present in
these Markets. In addition, Management believes the Operated Equipment Rental
Industry will continue to grow significantly as, according to the United States
Department of Transportation, 59% of the nation's major roads are in poor or
mediocre condition and 31% of the nation's bridges are structurally deficient
and/or functionally obsolete. Also, the Transportation Bill (as defined)
recently approved by the President of the United States calls for approximately
a 44% increase in national spending on highways and mass transit from current
levels over the next six years and approximately a 58% increase in the Penhall
Group's Markets overall on a non-weighted average basis.
The mailing address and telephone number of the principal executive offices
of Penhall International Corp., Penhall Rental Corp. and Penhall Company is 1801
Penhall Way, P.O. Box 4609, Anaheim, California 92803, (714) 772-6450.
COMPETITIVE STRENGTHS
Management believes that the following strengths will provide the Penhall
Group with significant competitive advantages and the opportunity to achieve
continued growth and increased profitability:
2
<PAGE>
DIVERSIFIED REVENUE BASE. The Penhall Group has a diverse revenue base
resulting from (i) a broad base of over 6,800 customers, (ii) serving a broad
array of end-user markets, and (iii) offering a variety of services. Management
believes that the Penhall Group's diverse revenue base, along with the portion
of its business derived from customers that have fixed spending budgets, help
insulate it from economic downturns. The Penhall Group derives its revenues from
a diverse group of customers consisting of highway, airport and building general
contractors, and federal, state and municipal agencies in various construction,
industrial, manufacturing, governmental and residential markets. With the
exception of the California Department of Transportation, no one customer has
accounted for more than 5% of the Penhall Group's total revenue in any of the
past five fiscal years. A significant portion of the Penhall Group's revenues
are generated from federal, state and municipal agencies, which typically invest
in infrastructure projects based on a fixed budget for a certain time period, as
opposed to discretionary spending tied to economic cycles. The Penhall Group
also offers a broad array of services ranging from the rental of a single unit
to contracting for an entire job, and its specialized services are concentrated
in both new construction as well as rehabilitation and maintenance of existing
infrastructure, which serves to mitigate the effects of cycles within the
construction industry. Within its array of services, the Penhall Group's
fixed-price contracts complement its Operated Equipment Rental Services and
serve to diversify the Penhall Group's revenue base, increase utilization of its
operated equipment rental fleet, and differentiate it from other equipment
rental competitors.
BROAD, MODERN OPERATED EQUIPMENT RENTAL FLEET. Management believes that the
Penhall Group has one of the most modern, diversified and well-maintained
operated equipment rental fleets in the United States and believes that the
quality and breadth of its fleet differentiates the Penhall Group from other
local operators. The Penhall Group has invested over $57.5 million in new
equipment over the past five fiscal years, during which period the Penhall
Group's operated equipment rental fleet grew from 298 to approximately 497 units
of equipment. The units in the Penhall Group's operated equipment rental fleet
have an average age of approximately four and a half years and an average useful
life of approximately nine years. The Penhall Group conducts a preventative
maintenance program which increases fleet utilization, extends the useful life
of the equipment and generally results in higher resale values.
WELL-POSITIONED FOR GROWTH. Management believes that the Penhall Group is
well-positioned for continued growth, primarily due to (i) its presence in
high-growth Markets, (ii) its leadership position in the growing Operated
Equipment Rental Industry, especially with respect to services for highway
projects, and (iii) acquisition opportunities resulting from the fragmented
nature of the Operated Equipment Rental Industry. In fiscal 1997, construction
spending in the Penhall Group's Markets significantly outperformed the national
growth rate of 8%. Management expects construction growth in the Markets to
continue to outpace national growth due to strong local economies, favorable
demographics and increased spending under the new Transportation Bill. In
addition, Management believes that based on the number of grinder units in its
operated equipment rental fleet, the Penhall Group is the largest provider of
grinding services in the United States, maintaining a market share of over 40%
of the national grinding market and approximately 80% of the grinding market in
California. As a market leader, the Penhall Group is well-positioned to benefit
from highway spending, which will increase from current levels by approximately
44% nationally, and approximately 58% in the Penhall Group's Markets overall on
a non-weighted average basis, under the new Transportation Bill. Finally,
Management believes that the financial resources available to the Penhall Group
following consummation of the Transactions, along with the fragmented nature of
the Operated Equipment Rental Industry, will enable the Penhall Group to take
advantage of strategic acquisition opportunities in both existing and new
markets.
The Penhall Group has benefited from having the majority of its operations
located in some of the fastest growing states in terms of construction spending
and population growth. The following table shows construction spending and
population growth statistics, two widely used indicators of activity in the
Operated Equipment Rental Industry, in the Penhall Group's Markets as compared
to national levels:
3
<PAGE>
<TABLE>
<CAPTION>
INCREASE IN
% OF FISCAL 1998 PENHALL CONSTRUCTION POPULATION PROJECTED INCREASE IN
MARKETS GROUP REVENUES SPENDING(1) GROWTH(2) HIGHWAY SPENDING(3)
- ----------------------------- ------------------------- --------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Arizona...................... 8.7% 10.1% 2.7% 59.5%
California................... 70.8 19.5 1.3 45.6
Colorado..................... 3.4 4.0 2.0 52.3
Georgia...................... 2.9 5.3 2.0 69.7
Nevada....................... 4.3 19.5 4.8 61.8
Texas........................ 3.8 19.4 2.0 60.7
Utah......................... 1.6 8.6 2.1 57.8
Other........................ 4.5
Non-weighted average
for the Markets.......... 12.3% 2.4% 58.2%
National average........... 8.0% 0.9% 44.1%
</TABLE>
- ------------------------
(1) Year-over-year growth for six months ended January 31, 1998.
(2) Year-over-year growth for year ended December 31, 1997.
(3) Represents the projected percentage increase in aggregate highway spending
under the Transportation Bill for the period between 1998-2003 as compared
to the aggregate highway spending for the period between the 1992-1997.
STRONG REPUTATION AND SUPERIOR CUSTOMER SERVICE. Over its 40-year history,
the Penhall Group has built a reputation for high quality service, encompassing
(i) responsiveness to customer requirements, (ii) quality and availability of
equipment, (iii) experienced operators, and (iv) reliability of service. As a
result of its focus on customer service, the Penhall Group has developed many
long-term relationships, and based on the last fiscal quarter, Management
believes that on average in excess of 95% of its revenues are derived through
repeat business from existing customers. In addition, the Penhall Group's
skilled operators contribute to its superior customer service as they are
trained to specialize in the operation of particular types of equipment and
provide effective and efficient on-site services to complement the Penhall
Group's modern equipment rental fleet.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Management has
an average of approximately 19 years of industry experience and 17 years of
experience with the Penhall Group. The Penhall Group's senior and regional
managers have successfully developed and implemented equipment rental fleet
management and financial strategies which have enabled the Penhall Group to
become one of the largest operators in its Markets. Upon consummation of the
Transactions, the Management Stockholders (as defined) held approximately 37.5%
of the common equity of the Company.
GROWTH STRATEGY
Management has implemented a business strategy which is designed to enhance
the Penhall Group's position as one of the leading Operated Equipment Rental
Services companies in its Markets and to capitalize on opportunities to enter
new markets through a combination of acquisitions and start-up operations. The
Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993
to 20.7% in fiscal 1998, and during the same period revenues and Adjusted EBITDA
grew at a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the
Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7
million and $24.7 million, respectively, during fiscal 1998 and approximately
$38.9 million and $8.7 million, respectively, during the three months ended
September 30, 1998. The Penhall Group had a net loss of approximately $1.0
million on a Pro Forma Basis during fiscal 1998 and net earnings of
approximately $1.4 million on a Pro Forma Basis during the three months ended
September 30, 1998. The Penhall Group believes that the following key elements
of its on-going strategy will provide it with the opportunity to continue to
achieve growth and increased profitability:
EXPAND GEOGRAPHIC PRESENCE. Management intends to continue to expand the
Penhall Group's geographic presence through both acquisitions and start-up
operations. Since 1994, the Penhall Group has effected six strategic
acquisitions and plans to continue to opportunistically target acquisition
candidates
4
<PAGE>
that (i) have a strong local market share and participate in a high-growth
market, and (ii) are led by an experienced management team that will continue to
manage the acquired business. Acquisitions enable the Penhall Group to (i) enter
new markets and increase geographic diversity, (ii) realize synergies by
leveraging its expertise in operated equipment rental fleet management, and
(iii) expand its operated equipment rental fleet and range of services.
Management believes that the equipment rental industry offers substantial
consolidation opportunities for large equipment rental providers such as the
Penhall Group. Relative to smaller companies with only one or two rental
locations, multi-regional operators such as the Penhall Group benefit from a
number of competitive advantages, including access to capital, the ability to
offer a broader range of modern, high-quality equipment, standardized management
information systems, volume purchasing discounts and the ability to service
larger, multi-regional accounts. Management also plans to selectively enter new
markets which have favorable growth dynamics through start-up operations. The
Penhall Group's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. The Penhall Group opened three start-up locations in fiscal 1997,
the benefits of which have not yet been fully realized. Based on the Penhall
Group's historical experience, a new location tends to realize significant
increases in revenues, cash flow and profitability during the first two years of
operation as the Penhall Group builds a diverse operated equipment rental fleet
and contributes skilled management.
EXPAND OPERATED EQUIPMENT RENTAL FLEET AND INCREASE RANGE OF SERVICES
OFFERED. Management intends to continue to grow the Penhall Group's business in
both new and existing markets through further expansion of its operated
equipment rental fleet and services provided to its customers. Management plans
to expand the Penhall Group's operated equipment rental fleet by (i) adding new
units to existing equipment lines as utilization increases, and (ii) expanding
into new equipment lines which complement an existing Penhall Group service. In
addition, Management intends to further increase utilization through the
introduction of new services. To that end, the Penhall Group has recently
started offering non-operated equipment rentals ("Bare Equipment Rentals") to
its customers in Southern California and expects to introduce this service to
other markets. Management believes that this strategy will help continue to
increase profitability and enable the Penhall Group to attract new business as a
single source supplier for its customers.
RECENT DEVELOPMENTS
ACQUISITION OF HSI. In April 1998, Penhall Company, a California
corporation and a wholly-owned subsidiary of PII ("PenCo"), purchased
substantially all of the assets of Highway Services, Inc. ("HSI") for
approximately $9.7 million plus the assumption of approximately $1.3 million of
liabilities (the "HSI Acquisition"). PenCo paid approximately $6.0 million of
the purchase price in cash, with the remainder payable in equal installments in
April 1999 and 2000 pursuant to a $3.7 million secured promissory note which
bears interest at 5.5% per annum. In connection with the HSI Acquisition,
certain stockholders of HSI purchased $1.0 million of PII's common stock. Based
in Minnesota, HSI operates in approximately 25 states and is a national provider
of construction services including grinding, grooving, sawing, sealing and
pavement replacement. The HSI Acquisition has combined two of the largest
grinding operations in the United States, and will provide the Penhall Group
with a strong platform for growth in the Mid-West and the South.
THE TRANSPORTATION BILL. On June 9, 1998, the President of the United
States approved the approximately $216.0 billion transportation bill (the
"Transportation Bill") which will increase spending by approximately 44% from
current levels nationally, and approximately 58% overall on a non-weighted
average basis in the Penhall Group's Markets, over the next six 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 proposed funding has been designated for maintenance
and new construction of highways. Approximately 24% of total United States
highway spending appropriated by the Transportation Bill will be allocated to
the Penhall Group's Markets, and Management believes that the Transportation
Bill represents a significant growth opportunity for the Penhall Group.
5
<PAGE>
THE TRANSACTIONS
PII is a California corporation which, prior to the consummation of the
Transactions, conducted all its operations through the Company, an Arizona
corporation, and PenCo, a California corporation. As of June 30, 1998, PII, the
stockholders of PII, the Company, BRS and the Issuer entered into an Agreement
and Plan of Merger (as amended pursuant to letter agreements executed in
connection therewith, the "Merger Agreement"). Pursuant to the Merger Agreement,
a newly formed, wholly-owned subsidiary of the Company ("Phoenix Merger Sub")
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 obtained
ownership of all the outstanding capital stock of PII (which continued to hold
all the outstanding capital stock of PenCo). In accordance with the Merger
Agreement, immediately following the Reorganization Merger the Issuer was 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) and up to $30.0 million of Revolving
Loans (as defined), and all indebtedness of the Penhall Group except $4.7
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."
CORPORATE STRUCTURE PRIOR TO THE TRANSACTIONS
[LOGO]
EXISTING CORPORATE STRUCTURE
[LOGO]
- ------------------------
(1) Corporate name was changed from "Phoenix Concrete Cutting, Inc." to
"Penhall International Corp."
(2) Corporate name was changed from "Penhall International, Inc." to "Penhall
Rental Corp."
6
<PAGE>
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") converted 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., an existing
stockholder of PII (the "Foundation"), 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 certain members of PII management other than the Existing
Management Stockholders (the "New Management Stockholders" and, together with
the Existing Management Stockholders, the "Management Stockholders"), purchased
$21.1 million and $0.2 million, respectively, of common and preferred equity of
the Surviving Corporation for an aggregate of $21.3 million (the "Equity
Contribution" and, together with the Mergers, the Refinancing, the Equity
Rollover and the issuance of preferred equity of the Surviving Corporation to
the Foundation, 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 10.5% Senior Exchangeable Preferred Stock, par value $.01 per share, of
the Surviving Corporation ("Senior Exchangeable Preferred Stock"); and PII held
approximately 18.1% of the Series B Preferred Stock.
The foregoing transactions, together with the issuance of the Notes, the
application of the proceeds therefrom and the payment of related fees and
expenses, are collectively referred to herein as the "Transactions." See "The
Transactions."
The Company will not receive any proceeds from the Exchange Offer. The
following table sets forth the sources and uses of funds in connection with the
Recapitalization. To reflect the conversion by the Existing Management
Stockholders of 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 and the receipt by the Foundation of $10.0
million of Senior Exchangeable Preferred Stock in lieu of $10.0 million of cash
Merger Consideration otherwise payable to if in the Recapitalization Merger, the
table includes each of the Equity Rollover and the issuance of Senior
Exchangeable Preferred Stock as both a source and a use of funds.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(IN
MILLIONS)
-----------
<S> <C>
SOURCES OF FUNDS:
Term Loans(1).................................................................... $ 20.0
Senior Notes..................................................................... 100.0
Equity Rollover.................................................................. 8.7
Senior Exchangeable Preferred Stock.............................................. 10.0
Equity Contribution.............................................................. 21.3
Working capital.................................................................. 1.0
-----------
Total sources.............................................................. $ 161.0
-----------
-----------
USES OF FUNDS:
Cash portion of Merger Consideration(2).......................................... $ 117.5
Equity Rollover.................................................................. 8.7
Senior Exchangeable Preferred Stock.............................................. 10.0
Refinancing of existing indebtedness(3).......................................... 14.5
Fees and expenses................................................................ 10.3
-----------
Total uses................................................................. $ 161.0
-----------
-----------
</TABLE>
- ------------------------
(1) The New Credit Facility entered into in connection with the
Recapitalization provides for $20.0 million of Term Loans and up to $30.0
million of Revolving Loans. See "Description of Certain Indebtedness--New
Credit Facility." Term Loans in an aggregate principal amount of $20.0
million were drawn on the closing date of the New Credit Facility in
connection with the Recapitalization.
(2) The $117.5 million cash portion of the Merger Consideration is net of the
$8.7 million Equity Rollover and the issuance of $10.0 million of Senior
Exchangeable Preferred Stock. See "The Transactions."
(3) The outstanding indebtedness which was repaid pursuant to the Refinancing
consisted of $14.5 million of revolving loans (including approximately $6.3
million of revolving loans used to finance the HSI Acquisition and repay
certain notes payable assumed in connection with the HSI Acquisition).
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
SECURITIES OFFERED........................... Up to $100,000,000 aggregate principal amount
of 12% Senior Notes due 2006. The terms of
the New Notes and Existing Notes are
identical in all material respects, except
for certain transfer restrictions and
registration rights relating to the Existing
Notes.
THE EXCHANGE OFFER........................... The New Notes are being offered in exchange
for a like principal amount of Existing
Notes. Existing Notes may be exchanged only
in integral multiples of $1,000. The issuance
of the New Notes is intended to satisfy
obligations of the Company contained in the
Registration Rights Agreement.
EXPIRATION DATE; WITHDRAWAL OF TENDER........ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 199 , or such
later date and time to which it may be
extended by the Company. The tender of
Existing Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the
Expiration Date. Any Existing Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer.
ACCRUED INTEREST ON THE NEW NOTES AND THE
EXISTING NOTES............................. The New Notes will bear interest from and
including the date of consumation of the
Exchange Offer. Additionally, interest on the
New Notes will accrue from the last interest
payment date on which interest was paid on
the Existing Notes surrendered in exchange
therefor or, if no interest has been paid on
the Existing Notes, from the date of original
issue of the Existing Notes. Holders whose
Existing Notes are accepted for exchange will
be deemed to have waived the right to receive
any interest accrued on the Existing Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER..... The Company's obligation to accept for
exchange, or to issue New Notes in exchange
for, any Existing Notes is subject to certain
customary conditions relating to compliance
with any applicable law and any applicable
interpretation by the staff of the
Commission, which may be waived by the
Company in its reasonable discretion. The
Company currently expects that each of the
conditions will be satisfied and that no
waivers will be necessary. See "The Exchange
Offer--Certain Conditions to the Exchange
Offer."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
PROCEDURES FOR TENDERING EXISTING NOTES...... Each holder of Existing Notes wishing to
accept the Exchange Offer must complete, sign
and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Existing Notes and any other required
documentation, to the Exchange Agent (as
defined) at the address set forth herein. See
"The Exchange Offer--Procedures for Tendering
Existing Notes."
USE OF PROCEEDS.............................. The Company will not receive any proceeds
from the Exchange Offer.
EXCHANGE AGENT............................... United States Trust Company of New York (the
"Exchange Agent") is serving as the Exchange
Agent in connection with the Exchange Offer.
FEDERAL INCOME TAX CONSEQUENCES.............. The exchange of Notes pursuant to the
Exchange Offer should not be a taxable event
for federal income tax purposes. See "Certain
Federal Income Tax Considerations."
</TABLE>
CONSEQUENCES OF EXCHANGING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that
holders of Existing Notes (other than any holder who is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) who exchange
their Existing Notes for New Notes pursuant to the Exchange Offer generally may
offer such New Notes for resale, resell such New Notes and otherwise transfer
such New Notes without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Notes are acquired in the
ordinary course of the holders' business and such holders have no arrangement
with any person to participate in a distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for
Existing Notes must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the New
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdictions or in compliance with an available exemption from
registration or qualification. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the Notes
reasonably requests in writing. If a holder of Existing Notes does not exchange
such Existing Notes for New Notes pursuant to the Exchange Offer, such Existing
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon. In general, the Existing Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Holders of Existing Notes do not have any appraisal or
dissenters' rights under the Arizona Business Corporation Act in connection with
the Exchange Offer. See "The Exchange Offer--Consequences of Failure to
Exchange; Resales of New Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the New Notes will not be eligible for
PORTAL trading.
10
<PAGE>
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the
Existing Notes, except for certain transfer restrictions and registration rights
relating to the Existing Notes.
<TABLE>
<S> <C>
SECURITIES OFFERED........................... $100,000,000 aggregate principal amount of
12% Senior Notes due 2006.
MATURITY DATE................................ August 1, 2006.
INTEREST PAYMENT DATES....................... February 1 and August 1 of each year,
commencing February 1, 1999.
RANKING...................................... The New Notes will be general unsecured
senior obligations of the Company and will
rank PARI PASSU in right of payment with all
existing and future unsubordinated
indebtedness of the Company and senior in
right of payment to all existing and future
subordinated indebtedness of the Company. The
New Notes will be effectively subordinated in
right of payment to all secured indebtedness
of the Company, including indebtedness
incurred under the New Credit Facility, to
the extent of the assets securing such
indebtedness. As of September 30, 1998, the
Company had approximately $121.1 million of
indebtedness outstanding (including $20.8
million of secured indebtedness outstanding
pursuant to the New Credit Facility but
exclusive of $29.2 million of unused
commitments thereunder).
The Indenture permits the Company to incur
additional indebtedness (including secured
indebtedness) subject to certain
restrictions. See "Description of the Notes."
GUARANTEES................................... The Guarantors will fully and unconditionally
guarantee, on a senior basis, jointly and
severally, the full and prompt performance of
the Company's obligations under the Indenture
and the Notes. The Guarantees will be general
unsecured obligations of the Guarantors and
will rank PARI PASSU in right of payment with
all existing and future unsubordinated
indebtedness of the Guarantors and senior in
right of payment to all existing and future
subordinated indebtedness of the Guarantors.
The Guarantees will be effectively
subordinated in right of payment to all
secured indebtedness of the Guarantors to the
extent of the assets securing such
indebtedness. As of September 30, 1998, the
Guarantors had approximately $4.3 million of
indebtedness outstanding (including $3.9
million of secured indebtedness but exclusive
of guarantees by the Guarantors of the
Company's obligations under the Notes and the
New Credit Facility). The Indenture permits
the Guarantors to incur additional
indebtedness (including secured indebtedness)
subject to certain restrictions. See
"Description of the Notes."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
OPTIONAL REDEMPTION.......................... The New Notes will be redeemable, in whole or
in part, at the option of the Company on or
after August 1, 2003, at the redemption
prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In
addition, at any time on or prior to August
1, 2001, the Company, at its option, may
redeem up to 30% of the aggregate principal
amount of the New Notes with the net cash
proceeds of one or more Public Equity
Offerings (as defined) of the Company, at a
redemption price equal to 112% of the
principal amount thereof, plus accrued and
unpaid interest to the date of redemption;
PROVIDED that at least 70% of the aggregate
principal amount of New Notes originally
issued remains outstanding immediately
following such redemption. See "Description
of the Notes-- Redemption."
CHANGE OF CONTROL............................ Upon a Change of Control, each holder of the
New Notes will have the right, subject to
certain conditions, to require the Company to
repurchase such holder's New Notes at a price
equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to
the repurchase date. There can be no
assurance, however, that the Company will
have available funds sufficient to purchase
the New Notes upon a Change of Control. See
"Description of Notes."
CERTAIN COVENANTS............................ The Indenture governing the New Notes (the
"Indenture") contains certain covenants that
limit the ability of the Company and its
Restricted Subsidiaries to, among other
things, incur additional indebtedness, pay
dividends or make investments and certain
other restricted payments, consummate certain
asset sales, enter into certain transactions
with affiliates, incur liens, impose
restrictions on the ability of a subsidiary
to pay dividends or make certain payments to
the Company and its subsidiaries, merge or
consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the
assets of the Company. In addition, the
Company will be obligated to offer to
repurchase the New Notes at 100% of the
principal amount thereof plus accrued and
unpaid interest to the date of repurchase in
the event of certain Asset Sales (as
defined). See "Description of the
Notes--Certain Covenants."
</TABLE>
For additional information regarding the New Notes, see "Description of the
Notes."
RISK FACTORS
Holders of Existing Notes should carefully consider the specific matters set
forth under "Risk Factors," as well as the other information and data included
in this Prospectus, in connection with the Exchange Offer.
12
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information of the Company for the three fiscal years ended June 30, 1998 and
for the three months ended September 30, 1997 and 1998. The consolidated
statement of operations data for the three years ended June 30, 1998 and the
consolidated balance sheet data as of June 30, 1997 and 1998 was derived from
the audited consolidated financial statements of the Company included elsewhere
herein. The consolidated balance sheet data as of June 30, 1996 was derived from
audited consolidated financial statements of the Company. The consolidated
statement of operations data for the three months ended September 30, 1997 and
1998 and the consolidated balance sheet data as of September 30, 1998 was
derived from the unaudited consolidated financial statements of the Company
included elsewhere herein which, in the opinion of Management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of the Company for such periods. The results of operations
for interim periods are not necessarily indicative of a full year's operations.
The other data presented below was derived from Company prepared schedules. This
table is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the related notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED JUNE 30, ENDED SEPTEMBER 30,
----------------------------------- ----------------------
1996 1997 1998 1997 1998
---------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 74,895 $ 95,298 $ 101,170 $ 28,351 $ 38,913
Gross profit....................................... 23,695 26,757 28,775 8,336 11,045
General and administrative expenses................ 15,156 16,953 19,880 4,703 17,211
Other compensation................................. -- -- 3,271 -- --
Earnings (loss) before interest expense and income
taxes............................................ 9,406 10,675 6,268 3,786 (5,906)
Interest expense................................... 783 811 1,036 250 2,616
Net earnings (loss)................................ 5,085 5,457 2,701 2,141 (6,801)
Accretion of preferred stock to redemption value... -- -- -- -- (395)
Accrual of cumulative dividends on preferred
stock............................................ -- -- -- -- (388)
Net earnings (loss) available to common
stockholders..................................... 5,085 5,457 2,701 2,141 (7,584)
EARNINGS (LOSS) PER SHARE:
Basic.............................................. $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32)
Diluted............................................ 1.24 1.27 .62 .49 (3.32)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.............................................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725
Diluted............................................ 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725
OTHER DATA:
Adjusted EBITDA (1)................................ $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615
Adjusted EBITDA margin (2)......................... 20.9% 20.5% 20.7% 21.3% 22.1%
Net cash provided by (used in) operating
activities....................................... $ 10,686 $ 8,562 $ 16,628 $ 4,940 $ (14,675)
Net cash used in investing activities.............. $ (10,522) $ (15,086) $ (17,047) $ (3,455) $ (3,216)
Net cash provided by (used in) financing
activities....................................... $ 735 $ 6,263 $ (23) $ (1,292) $ 19,649
Depreciation and amortization...................... $ 5,417 $ 6,878 $ 8,870 $ 2,045 $ 2,488
Capital expenditures............................... $ 11,511 $ 16,089 $ 12,287 $ 3,588 $ 3,337
Units of operated equipment rentals at end of
period........................................... 369 420 497 432 513
Number of operating locations at end of period..... 16 21 22 21 22
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END:
Total assets....................................... $ 53,378 $ 69,833 $ 88,323 $ 78,374 $ 101,794
Long-term obligations, including current
maturities....................................... 8,981 14,111 18,564 12,819 125,405
Stockholders' equity (deficit)..................... 32,032 39,253 43,606 41,394 (66,002)
</TABLE>
13
<PAGE>
- ------------------------
(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 stock-related compensation expense and reorganization costs
and other compensation, see notes 8 and 1, respectively, to the Company's
consolidated financial statements). Adjusted 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 ("GAAP") or as a measure of a
company's profitability or liquidity.
The following chart depicts the components of Adjusted EBITDA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net earnings (loss)....................... $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (6,801)
Interest expense.......................... 783 811 1,036 250 2,616
Income taxes.............................. 3,538 4,407 2,531 1,395 (1,721)
Depreciation and amortization............. 5,417 6,878 8,870 2,045 2,488
Stock related compensation expense........ 821 2,012 1,315 215 8,942
Reorganization costs...................... -- -- 1,207 -- 3,091
Other compensation........................ -- -- 3,271 -- --
--------- --------- --------- --------- ---------
Adjusted EBITDA....................... $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total
revenues.
14
<PAGE>
SUMMARY UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following table sets forth summary unaudited consolidated pro forma
financial data of the Company for the fiscal year ended June 30, 1998 and for
the three months ended September 30, 1998. The summary unaudited consolidated
pro forma financial data is based on the historical consolidated financial
statements of the Company and the historical financial statements of HSI, and
gives effect to the HSI Acquisition and the Transactions in the manner described
under "Unaudited Pro Forma Condensed Consolidated Financial Statements." The
summary unaudited consolidated pro forma financial data is presented for
informational purposes only and is not necessarily indicative of the results of
operations of the Company had the HSI Acquisition and the Transactions actually
occurred on the indicated date or been in effect for the periods presented and
does not purport to be indicative of the results of operations of the Company
for any future period. The summary unaudited consolidated pro forma financial
data is qualified in its entirety by reference to, and should be read in
conjunction with, "Unaudited Pro Forma Condensed Consolidated Financial
Statements," the consolidated financial statements of the Company and the
financial statements of HSI, including the related notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED THREE MONTHS ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
-------------------- ------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE INFORMATION)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 114,706 $ 38,913
Gross profit................................................... 32,526 11,045
General and administrative expenses............................ 20,449 5,249
Earnings before interest expense and income taxes.............. 12,721 6,056
Interest expense............................................... 14,323 3,803
Net earnings (loss)............................................ (962) 1,352
Accretion of preferred stock to redemption value............... (2,554) (687)
Accrual of cumulative dividends on preferred stock............. (2,577) (697)
Net loss available to common stockholders...................... (6,093) (32)
LOSS PER SHARE:
Basic.......................................................... $ (6.12) $ (.03)
Diluted........................................................ $ (6.12) $ (.03)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.......................................................... 995,000 995,000
Diluted........................................................ 995,000 995,000
OTHER DATA:
Adjusted EBITDA (1)............................................ $ 24,735 $ 8,704
Adjusted EBITDA margin (2)..................................... 21.6% 22.4%
Depreciation and amortization.................................. $ 10,699 $ 2,575
Capital expenditures........................................... $ 12,287 $ 3,337
Units of operated equipment rentals at end of period........... 497 513
Number of operating locations at end of period................. 22 22
Ratio of Total Debt to Adjusted EBITDA......................... 5.0x 3.6x
Ratio of Adjusted EBITDA to Interest Expense................... 1.7x 2.3x
</TABLE>
- ------------------------
(1) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, adjusted to exclude stock-related
compensation expense and reorganization costs and other compensation (for
discussion of stock-related compensation expense and reorganization costs
and other compensation, see notes 8 and 1, respectively, to the Company's
consolidated financial statements). Adjusted 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 GAAP
or as a measure of a company's profitability or liquidity.
15
<PAGE>
The following chart depicts the components of Adjusted EBITDA:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30, THREE MONTHS ENDED
1998 SEPTEMBER 30, 1998
---------------- -------------------
<S> <C> <C>
Net earnings (loss)............................... $ (962) $ 1,352
Interest expense.................................. 14,323 3,803
Income taxes...................................... (640) 901
Depreciation and amortization..................... 10,699 2,575
Stock related compensation expense................ 1,315 73
------- -------
Pro Forma Adjusted EBITDA....................... $ 24,735 $ 8,704
------- -------
------- -------
</TABLE>
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total
revenues.
16
<PAGE>
RISK FACTORS
HOLDERS OF EXISTING NOTES SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET
FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS, IN
CONNECTION WITH THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE EXISTING NOTES AS WELL AS THE NEW NOTES.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company has substantial indebtedness and debt service obligations. See
"Description of Certain Indebtedness--New Credit Facility" and "Description of
the Notes." As of September 30, 1998, the Company and its subsidiaries had
approximately $125.4 million of total indebtedness outstanding (including the
Notes) and a stockholders' deficit of approximately $66.0 million. The Company
would also have had borrowing availability under the New Credit Facility of
$29.2 million, subject to the borrowing conditions contained therein. On a Pro
Forma Basis, the Company's earnings were insufficent to cover its fixed charges
by approximately $7.9 million during fiscal 1998 and approximately $9.7 million
during the three months ended September 30, 1998.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate or other purposes
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on
indebtedness; (iii) the agreements governing the Company's long-term
indebtedness will contain restrictive financial and operating covenants that
could limit the Company's ability to compete and expand; (iv) the Company's
leverage may make it more vulnerable to industry-related or general economic
downturns and may limit its ability to withstand competitive pressures; and (v)
certain of the Company's borrowings are and will continue to be at variable
rates of interest, which exposes the Company to the risk of increased interest
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company's ability to meet its debt service
obligations and to reduce or refinance its total debt (including the Notes) will
depend upon its future operating performance, which, in turn, is subject to
general economic conditions and to financial, business and other factors
affecting the Company, many of which are beyond its control. There can be no
assurance that the Company's business will generate sufficient cash flow for the
Company to meet its debt service obligations. If the Company is unable to
generate sufficient cash flow from operations or to borrow sufficient funds in
the future to service its debt, it may be required to sell assets, reduce
capital expenditures, refinance all or a portion of its existing debt (including
the Notes) or obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained, particularly in view of the Company's high level of debt, the
restrictions on the Company's ability to incur additional debt under the New
Credit Facility and the Indenture, and the fact that substantially all of the
Company's assets will be pledged to secure obligations under the New Credit
Facility.
RANKING; ASSET ENCUMBRANCE
The Notes are general unsecured senior obligations of the Company and rank
PARI PASSU in right of payment with all existing and future unsubordinated
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Notes are fully and
unconditionally guaranteed on a senior basis, jointly and severally, by the
Guarantors. The Guarantees are general unsecured obligations of the Guarantors
and rank PARI PASSU in right of payment with all existing and future
unsubordinated indebtedness of the Guarantors and senior in right of payment to
all existing and future subordinated indebtedness of the Guarantors. However,
the Notes are effectively subordinated in right of payment to all secured
indebtedness of the Company and the Guarantees are effectively subordinated in
right of payment to all secured indebtedness of the Guarantors, in each case to
the extent of the assets securing such indebtedness.
17
<PAGE>
As of September 30, 1998, the Company had approximately $121.1 million of
indebtedness outstanding (including $20.8 million of secured indebtedness
outstanding pursuant to the New Credit Facililty but exclusive of $29.2 million
of unused commitments thereunder), and the Guarantors had approximately $4.3
million of indebtedness outstanding (including $3.9 million of secured
indebtedness but exclusive of the guarantees by the Guarantors of the Company's
obligations under the Notes and the New Credit Facility). The Indenture permits
the Company and the Guarantors to incur additional indebtedness (including
secured indebtedness) subject to certain restrictions. See "Description of the
Notes." In the event of a default on such secured indebtedness (or other secured
indebtedness incurred by the Company), or a bankruptcy, liquidation or
reorganization of the Company and its subsidiaries, the assets secured by such
indebtedness will be available to satisfy obligations with respect to such
secured indebtedness before any payment therefrom will be made on the Notes.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
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 certain
liens, make certain asset dispositions and merge or consolidate with, or
transfer substantially all of its assets to, another person, or engage in
certain change of control transactions. See "Description of the Notes--Certain
Covenants." If the Company fails to comply with these covenants, it would be in
default under the Indenture and the principal and accrued interest on the Notes
would become due and payable. In addition, the New Credit Facility contains
other and more restrictive covenants and prohibits the Company from prepaying
certain of its indebtedness, including the Notes. Under the New Credit Facility,
the Company is required to maintain specified financial ratios, including
maintaining specified Interest Coverage Ratios, Fixed Charge Coverage Ratios and
Leverage Ratios (each as defined in the New Credit Facility). The failure by the
Company to maintain such financial ratios or to comply with the restrictions
contained in the New Credit Facility or the Indenture could result in a default
thereunder, which in turn could cause such indebtedness (and by reason of
cross-default provisions, other indebtedness) to become immediately due and
payable. No assurance can be given that the Company's future operating results
will be sufficient to enable compliance with such covenants, or in the event of
a default, to remedy such default. If the Company is unable to pay amounts due
under the New Credit Facility, the lenders thereunder could proceed against the
collateral granted to them to secure that indebtedness. There can be no
assurance that the Company's assets would be sufficient to repay in full such
indebtedness or the Company's other indebtedness, including the Notes. See
"Description of Certain Indebtedness--New Credit Facility" and "Description of
the Notes--Certain Covenants."
RISKS INHERENT IN GROWTH STRATEGY
The Penhall Group has recently accelerated its growth, expanding its
operated equipment rental fleet at existing locations, adding three new
locations during fiscal 1997 and consummating the HSI Acquisition in April 1998.
The Penhall Group intends to continue this rapid growth by expanding its
operated equipment rental fleet at existing locations, continuing to make
acquisitions and opening several new locations each year. There can be no
assurance that the Penhall Group will be able to identify acquisition candidates
and attractive new locations or obtain financing for acquisitions and internal
expansion on satisfactory terms, or at all. The Penhall Group's growth strategy
presents the risks inherent in assessing the value, strengths and weaknesses of
growth opportunities, in evaluating the costs and uncertain returns of expanding
its operations, and in integrating acquisitions with existing operations. The
Penhall Group expects that its growth strategy will affect short-term cash flow
and net income as the Penhall Group increases the amount of its indebtedness and
incurs expenses to expand its operated equipment rental fleet, make acquisitions
and open new locations. There can be no assurance that the Penhall Group will
successfully expand, that any acquired businesses will be successfully
integrated into its operations or that any expansion will result in
profitability.
18
<PAGE>
The integration of the administrative, finance and other operations of HSI
and other acquired businesses, the coordination of their respective sales and
marketing organizations with those of the Penhall Group and the implementation
of appropriate operational, financial and management systems and controls may
require significant financial resources and substantial attention from
Management, and will result in the diversion of such resources and attention
from the Penhall Group's existing businesses. Any inability of the Penhall Group
to integrate the operations of such businesses successfully in a timely and
efficient manner could adversely affect the its financial condition and results
of operations. In addition, the Penhall Group's future growth will place
significant demands on Management and its operational, financial and marketing
resources. In connection with acquisitions and the start-up of new locations,
the Penhall Group anticipates experiencing growth in the number of its
employees, the scope of its operating and financial systems and the geographic
area of its operations. The Penhall Group believes this growth will increase the
operating complexity of the Penhall Group and the level of responsibility
exercised by both existing and new management personnel. To manage this expected
growth, the Penhall Group intends to invest further in its operating and
financial systems and to continue to expand, train and manage its employee base.
There can be no assurance that the Penhall Group will be able to attract and
retain qualified management and employees or that the its current operating and
financial systems and controls will be adequate as the Penhall Group grows or
that any steps taken to improve such systems and controls will be successful.
See "Business--Growth Strategy."
COMPETITION
The equipment rental industry is highly competitive. The Penhall Group's
competitors include large national rental companies, regional companies, smaller
independent businesses and equipment vendors which both sell and rent equipment
to customers. Some of the Penhall Group's competitors are more geographically
diverse, have greater name recognition than the Penhall Group, have greater
financial and other resources available to them and may be substantially less
leveraged than the Penhall Group. There can be no assurance that the Penhall
Group will not encounter increased competition from existing competitors or new
market entrants, such as manufacturers of heavy equipment, that may be
significantly larger and have greater financial and marketing resources than the
Penhall Group. If existing or future competitors reduce prices to gain or retain
market share and the Penhall Group must also reduce prices to remain
competitive, the Penhall Group's operating results could be adversely affected.
Additionally, existing or future competitors may seek to compete with the
Penhall Group for start-up locations or acquisition candidates, which may have
the effect of increasing acquisition prices and reducing the number of suitable
acquisition candidates or expansion locations. See "Business--Competition."
GOVERNMENTAL REGULATION
The operations of the Penhall Group are subject to certain federal, state
and local laws and regulations concerning labor relations, wage rates, equal
opportunity employment and affirmative action. While compliance with such laws
and regulations has not adversely affected the Penhall Group's operations in the
past, there can be no assurance that these requirements will not change or that
future compliance will not adversely affect the Penhall Group's operations.
The Penhall Group's facilities and operations are also subject to certain
federal, state and local laws and regulations relating to environmental
protection and occupational health and safety, including those governing
wastewater discharges, the treatment, storage and disposal of solid and
hazardous wastes and materials, and the remediation of contamination associated
with the release of hazardous substances. The Penhall Group believes that it is
in material compliance with such requirements. The Penhall Group operates at a
number of locations at which petroleum products are stored in underground tanks.
The Penhall Group is currently in the process of complying with up-coming
regulatory obligations to upgrade or close underground storage tanks under the
Resource Conservation and Recovery Act of 1980, as amended ("RCRA"), including
all applicable requirements of state regulatory agencies, which must be met by
December 22, 1998. The Penhall Group believes that the costs associated with the
storage tank
19
<PAGE>
upgrades or closures (including the cost to address any associated
contamination) would not reasonably be expected to exceed $170,000.
Certain of the Penhall Group's present and former facilities and operations
at off-site construction sites have used substances and generated or disposed of
wastes which may include material which is or may be considered hazardous or are
otherwise regulated by environmental laws, and the Penhall Group may incur
liability in connection therewith. Moreover, there can be no assurance that
environmental and safety requirements will not become more stringent or be
interpreted and applied more stringently in the future. Such future changes or
interpretations, or the identification of adverse environmental conditions
currently unknown to the Penhall Group, could result in additional environmental
compliance or remediation costs to the Penhall Group. Such compliance and
remediation costs could be material to the Penhall Group's financial condition
or results of operations. See "Business--Governmental Regulation."
SENSITIVITY TO GENERAL ECONOMIC CONDITIONS; SEASONALITY
A majority of the Penhall Group's revenues are derived from customers who
are in industries and businesses that are cyclical in nature and subject to
changes in general economic conditions, such as the construction industry. In
addition, because the Penhall Group conducts its operations in a variety of
geographic markets, it is subject to economic conditions in each such geographic
market. In fiscal 1998, the Penhall Group derived 70.8% and 8.7% of its revenues
from customers located in California and Arizona, respectively, and therefore
the Penhall Group's operations are particularly affected by the economic
conditions in such states. Although the Penhall Group believes that its
operating strategy may help to mitigate the effects of economic downturns,
general economic conditions or localized downturns in markets where the Penhall
Group has operations, including any downturns in the construction industry,
could have a material adverse effect on the Penhall Group's financial condition
and results of operations.
Equipment rental businesses often experience a slowdown in demand during the
winter months when adverse weather conditions affect construction activity. To
date, seasonal demand fluctuations have not materially affected the Penhall
Group's operating results. However, as the Penhall Group expands geographically,
seasonal demand fluctuations may lower operating results, particularly in the
second and third fiscal quarters.
INSURANCE AND BONDING
The Penhall Group's business exposes it to possible claims for property
damage and personal injury or death resulting from the use of equipment rented
by the Penhall Group and from injuries caused in motor vehicle accidents in
which Penhall Group delivery and service personnel are involved. In addition, in
the course of providing its operated equipment rental services, the Penhall
Group places its employees at the worksites of other companies. An attendant
risk of such activity includes possible claims for property damage caused by the
activities of such employees, in addition to possible claims for theft of
property, discrimination, harassment and other criminal or tort claims. While
the Penhall Group has not historically experienced any material claims of these
types, there can be no assurance that the Penhall Group will not experience such
claims in the future. The Penhall Group maintains general liability and excess
liability insurance for all of its operations (including the activities of its
employees at the worksites of other companies), as well as an equipment floater
covering contractors' equipment. Workers' compensation insurance is maintained
in amounts consistent with industry practices. Although Management believes that
the Penhall Group's insurance programs are sufficient to cover existing and
future claims, there can be no assurance that existing or future claims will not
exceed the level of the Penhall Group's insurance or that such insurance will
continue to be available on economically reasonable terms, or at all.
The Penhall Group is required under the terms of approximately 15% of its
subcontracts to provide surety bonds to ensure that such contracts will be
completed in accordance with their terms and conditions. The Penhall Group
recently retained a new surety for the writing of all of its surety bonds. The
Penhall Group believes that there are a number of other companies providing
similar services that would be
20
<PAGE>
available to the Penhall Group in the event that such surety becomes unable or
unwilling to continue to meet the Penhall Group's surety bond needs. In the
short term, however, the loss of such surety's services could have a material
adverse effect on the Penhall Group and its operations.
DEPENDENCE ON KEY PERSONNEL
The Penhall Group's success depends to a significant degree upon the
continued contributions of Management, certain of whom would be difficult to
replace. The loss of the services of certain of these executives could have an
adverse effect on the Penhall Group. There can be no assurance that the services
of such personnel will continue to be available to the Penhall Group. See
"Management."
LABOR RELATIONS
Approximately 376 of the Penhall Group's employees are represented by
various labor unions. These unionized employees are organized into 16 certified
or lawfully recognized bargaining units several of which are represented by the
same local union. Although the Penhall Group considers its employee relations
generally to be good, a prolonged work stoppage or strike by union employees
could have a material adverse effect on the business and operations of the
Penhall Group. In addition, there can be no assurance that upon the expiration
of existing collective bargaining agreements new agreements will be reached
without union action or that any such new agreements will be on terms
satisfactory to the Penhall Group. One collective bargaining agreement expired
in May 1998, and the Penhall Group and the union have agreed to abide by the
terms of the expired agreement on a month-to-month basis while the multi-
employer association attempts to negotiate a successor agreement. Although the
Penhall Group is currently negotiating a successor agreement, there can be no
assurance that the Penhall Group will be able to successfully negotiate a new
agreement or that the terms of any such new agreement will not have an adverse
effect on the Penhall Group's results of operations. Moreover, the ability of
the Penhall Group to implement its growth strategy may be adversely affected by
the unavailability of qualified and skilled workers. See "Business--Labor
Relations."
MULTI-EMPLOYER PENSION PLANS
The Penhall Group's collective bargaining agreements provide for Penhall's
participation in multi-employer pension plans. In the event of the Penhall
Group's partial or total withdrawal from such plans, it may be liable for its
share of any unfunded vested benefits thereunder. The Penhall Group also may 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.
FRAUDULENT CONVEYANCE CONSIDERATIONS; AVOIDANCE OF GUARANTEES
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes or
any Guarantee in favor of other existing or future creditors of the Company or a
Guarantor.
The Company believes that the indebtedness represented by the Existing Notes
was incurred for proper purposes and in good faith, and that based on asset
valuations and other financial information, the Company was, at the time it
issued the Existing Notes, solvent, will have sufficient capital for carrying on
its business and will be able to pay its debts as they mature. Notwithstanding
the Company's belief, if a court of competent jurisdiction in a suit by an
unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy or a debtor-in-possession) were to find that, at the time of the
incurrence of the indebtedness represented by the Existing Notes, either (i) the
Company incurred such indebtedness with the intent of hindering, delaying or
defrauding creditors, or (ii) the Company received less than a reasonably
equivalent value or fair consideration for incurring such indebtedness and the
Company (a) was insolvent or rendered insolvent by reason of the incurrence of
such indebtedness, (b) was engaged in business or a transaction, or was about to
engage in business or a transaction, for which any property
21
<PAGE>
remaining with the Company after giving effect to the incurrence of such
indebtedness constituted an unreasonably small amount of capital or (c) intended
to incur, or believed that it would incur, debts beyond its ability to pay as
they matured, such court could avoid the Company's obligations under the Notes
and direct the repayment of any amounts paid thereunder to a fund for the
benefit of the Company's creditors, or take other action detrimental to the
holders of the Notes. Such other action could include subordinating the Notes to
claims of existing or future creditors of the Company.
Similarly, indebtedness under the Guarantees also may be subject to review
under relevant federal and state fraudulent conveyance and similar laws in a
bankruptcy or reorganization of a Guarantor or in a lawsuit brought by or on
behalf of creditors of a Guarantor under the same standards described above.
Pursuant to the terms of the Guarantees, the liability of each Guarantor is
limited to the maximum amount of indebtedness permitted to be incurred in
compliance with fraudulent conveyance or similar laws. To the extent any
Guarantee was avoided as a fraudulent conveyance, limited as described above or
held unenforceable for any other reason, holders of the Notes would, to such
extent, cease to have a claim in respect to such Guarantee and, to such extent,
would be creditors solely of the Company and any Guarantor whose Guarantee was
not avoided, limited or held unenforceable. In such event, the claims of the
holders of the Notes with respect to an avoided, limited or unenforceable
Guarantee would be subject to the prior payment of all liabilities of such
Guarantor. There can be no assurance that, after providing for all prior claims,
there would be sufficient assets to satisfy the claims of the holders of Notes.
VOTING CONTROL OF THE COMPANY
Following consummation of the Transactions, the BRS Entities held
approximately 62.5% of the outstanding voting stock of the Company. Accordingly,
the BRS Entities have the ability to elect the entire Board of Directors of the
Company and, in general, to determine the outcome of any other matter submitted
to the stockholders for approval, including the power to determine the outcome
of all corporate transactions, such as mergers, consolidations and the sale of
all or substantially all of the assets of the Company. Circumstances may occur
in which the interests of the BRS Entities could be in conflict with the
interests of the holders of the Notes. For example, the BRS Entities may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of Notes. See "Ownership of
Capital Stock."
POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control (as
defined therein), the Company will be required to make an offer to purchase all
of the Notes issued and then outstanding under the Indenture at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages (if any) thereon to the date of purchase. Any Change of
Control under the Indenture would constitute a default under the New Credit
Facility and may result in a default under other indebtedness of the Company
that may be incurred in the future. Therefore, upon the occurrence of a Change
of Control, the lenders under the New Credit Facility would have the right to
accelerate the Company's obligations under the New Credit Facility and the
holders of the Notes would have the right to require the Company to purchase
their Notes. The New Credit Facility prohibits the purchase of outstanding Notes
prior to repayment of borrowings under the New Credit Facility and the exercise
by the holders of their right to require the Company to repurchase the Notes
will cause an Event of Default under the New Credit Facility. If a Change of
Control were to occur, it is unlikely that the Company would be able to repay
all of its obligations under the New Credit Facility and the Notes, unless it
could obtain alternate financing. There can be no assurance that the Company
would be able to obtain any such financing on commercially reasonable terms, or
at all, and consequently no assurance can be given that the Company would be
able to purchase any of the Notes tendered pursuant to such an offer.
22
<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Existing Notes currently are eligible for trading in the PORTAL Market.
The New Notes are new securities for which there is currently no established
market. The Company does not intend to list the New Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes but that they are not obligated to do so and any such market
making may be discontinued at any time. There can be no assurance as to the
development of any market or the liquidity of any market that may develop for
the New Notes. If an active public market does not develop, the market, price
and liquidity of the New Notes may be adversely affected. Future trading prices
of the New Notes will depend on prevailing interest rates, the market for
similar securities and other factors, including general economic conditions and
the financial condition and performance of the Company. Holders of the New Notes
should be aware that they may be required to bear the financial risks of their
investment for an indefinite period of time. See "Description of the Notes."
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Penhall Group has
established an informal Year 2000 task force. The Penhall Group has a plan which
lists the milestones achieved and yet to be completed to become Year 2000 ready.
A checklist of potential failure sources has been compiled and includes both
information technology and embedded technology systems. The Penhall Group has
completed its assessment of its information technology and embedded technology
systems and is in the testing phase of their plan. The Penhall Group expects to
be Year 2000 ready by June 30, 1999. The Penhall Group does not believe it has a
material relationship with any one third party that would have a significant
impact to the Penhall Group if that third party was not Year 2000 ready.
The Penhall Group recently upgraded their information technology system,
both hardware and software, and feel those systems are Year 2000 ready. The
Penhall Group does not anticipate significant additional costs to become Year
2000 ready.
Delays in the implementation of the Year 2000 solutions or the failure of
any critical technology components to operate properly in the Year 2000 could
adversely affect the Penhall Group's operations. In addition, the Penhall Group
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. Contingency plans have not been developed for all
mission critical information and embedded technologies in the event Year 2000
readiness is not met. The Penhall Group plans to have these contingency plans in
place by June 30, 1999.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," anticipates," "intends,"
"expect," "should," "may," "will," "continue" and "estimate," and words of
similar import, constitute "forward-looking statements." Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both domestic and foreign; industry and market capacity; demographic
changes; existing government regulations and changes in, or the failure to
comply with, government regulations; liability and other claims asserted against
the Company; competition; the loss of any significant customers; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company after the
Transactions; the availability and terms of capital to fund the
23
<PAGE>
expansion of the Company's business; and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including, without limitation, under the captions "Summary,"
"Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update factors or to
publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
24
<PAGE>
THE TRANSACTIONS
PII is a California corporation which, prior to the consummation of the
Transactions, conducted all its operations through the Company and PenCo. As of
June 30, 1998, PII, the stockholders of PII, the Company, BRS and the Issuer
entered into the Merger Agreement, pursuant to which the following transactions
(among others) were consummated: (i) PII and the Company amended their charters
to authorize various new classes of capital stock necessary for the consummation
of the Mergers; (ii) the stockholders of PII exchanged their common equity in
PII for shares of the newly-authorized classes of common equity of PII; (iii)
the Company formed Phoenix Merger Sub; (iv) Phoenix Merger Sub was merged with
and into PII pursuant to the Reorganization Merger, with the result that (A) PII
continued as the surviving corporation, (B) each stockholder of PII had his or
her common equity in PII converted into common equity in the Company, (C) 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 (D) the Company received common equity in PII such
that the Company became the corporate parent of and obtained ownership of all
the outstanding capital stock of PII (which continued to hold all the
outstanding capital stock of PenCo); and (v) the Issuer was merged with and into
the Company pursuant to the Recapitalization Merger, with the Company continuing
as the Surviving Corporation.
Prior to or simultaneously with the consummation of the Recapitalization
Merger, the Issuer entered into the New Credit Facility providing for $20.0
million of Term Loans (as defined) and up to $30.0 million of Revolving Loans
(as defined), and all indebtedness of the Penhall Group except $4.7 million of
notes payable was repaid pursuant to 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 Merger Consideration paid upon consummation of the Recapitalization
Merger was approximately $136.2 million. Pursuant to the Merger Agreement, (i)
the Existing Management Stockholders converted 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 pursuant to
the Equity Rollover, (ii) the Foundation 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)
the BRS Entities and the New Management Stockholders purchased $21.1 million and
$0.2 million, respectively, of common and preferred equity of the Surviving
Corporation pursuant to the Equity Contribution for an aggregate of $21.3
million. Following the consummation of the Recapitalization, the BRS Entities
held approximately 62.5% of the Common Stock, 100.0% of the Series A Preferred
Stock and 43.3% of the 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.
PII 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. The Penhall
Group expects that it will realize 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. The Penhall Group has realized or
anticipates it will realize these tax benefits during a four-month period that
began June 15, 1998.
In addition, the Company will be obligated to pay approximately $2.2 million
to the current stockholders of PII within ten days following the first
anniversary of the HSI Acquisition in the event that certain performance
criteria concerning the business of HSI acquired by PenCo is satisfied.
25
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
following table sets forth the sources and uses of funds in connection with the
Recapitalization. To reflect the conversion by the Existing Management
Stockholders of 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 and the receipt by the Foundation of $10.0
million of Senior Exchangeable Preferred Stock in lieu of $10.0 million of cash
Merger Consideration otherwise payable to it in the Recapitalization Merger, the
table includes each of the Equity Rollover and the issuance of Senior
Exchangeable Preferred Stock as both a source and a use of funds.
<TABLE>
<CAPTION>
AMOUNT
(IN
MILLIONS)
-----------
<S> <C>
SOURCES OF FUNDS:
Term Loans(1).................................................................... $ 20.0
Senior Notes..................................................................... 100.0
Equity Rollover.................................................................. 8.7
Senior Exchangeable Preferred Stock.............................................. 10.0
Equity Contribution.............................................................. 21.3
Working capital.................................................................. 1.0
-----------
Total sources.............................................................. $ 161.0
-----------
-----------
USES OF FUNDS:
Cash portion of Merger Consideration(2).......................................... $ 117.5
Equity Rollover.................................................................. 8.7
Senior Exchangeable Preferred Stock.............................................. 10.0
Refinancing of existing indebtedness(3).......................................... 14.5
Fees and expenses................................................................ 10.3
-----------
Total uses................................................................. $ 161.0
-----------
-----------
</TABLE>
- ------------------------
(1) The New Credit Facility entered into in connection with the
Recapitalization provides for $20.0 million of Term Loans and up to $30.0
million of Revolving Loans. See "Description of Certain Indebtedness--New
Credit Facility." Term Loans in an aggegate principal amount of $20.0
million were drawn on the closing date of the New Credit Facility in
connection with the Recapitalization.
(2) The $117.5 million cash portion of the Merger Consideration is net of the
$8.7 million Equity Rollover and the issuance of $10.0 million of Senior
Exchangeable Preferred Stock. See "The Transactions."
(3) The outstanding indebtedness which was repaid pursuant to the Refinancing
consisted of $14.5 million of revolving loans (including approximately $6.3
million of revolving loans used to finance the HSI Acquisition and repay
certain notes payable assumed in connection with the HSI Acquisition) that
were to mature on October 31, 1998. At June 30, 1998, the weighted average
interest rate with respect to such indebtedness was approximately 7.55%.
26
<PAGE>
CAPITALIZATION
The following table sets forth, at September 30, 1998, the capitalization of
the Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1998
----------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Long-term debt, including current portion:
Notes payable................................................................................. $ 4,655
Term Loans.................................................................................... 20,750
Senior Notes.................................................................................. 100,000
--------
Total long-term debt........................................................................ 125,405
Mandatorily redeemable preferred stock:
Senior Exchangeable Preferred Stock........................................................... 10,167
Series A Preferred Stock...................................................................... 10,655
Stockholders' equity (deficit).................................................................. (66,002)
--------
Total capitalization.......................................................................... $ 80,225
--------
--------
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated statements of
operations of the Company present pro forma information giving effect to the HSI
Acquisition and the Transactions which are described in the accompanying notes
to the unaudited pro forma condensed consolidated statements of operations.
No pro forma condensed consolidated balance sheet has been included as the
Transactions took place on August 4, 1998 and therefore are included in the
September 30, 1998 unaudited interim balance sheet. The unaudited pro forma
condensed consolidated statements of operations for the year ended June 30, 1998
and for the three-month period ended September 30, 1998 assume that the HSI
Acquisition and the Transactions occurred on July 1, 1997.
The unaudited pro forma condensed consolidated statements of operations are
presented for informational purposes only, are not necessarily indicative of the
results of operations of the Company had the HSI Acquisition and the
Transactions actually occurred on July 1, 1997 or been in effect for the periods
presented and do not purport to be indicative of the results of operations of
the Company for any future period. The unaudited pro forma condensed
consolidated statements of operations should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of the Company and the
financial statements of HSI, including the related notes thereto, included
elsewhere herein.
The pro forma adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
HSI
HISTORICAL HISTORICAL ACQUISITION TRANSACTION
COMPANY(A) HSI(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.................................. $ 101,170 $ 13,536 $ 114,706
Cost of Revenues.......................... 72,395 9,785 82,180
----------- ----------- ----- ----------- -----------
Gross profit............................ 28,775 3,751 32,526
General and administrative expense........ 19,880 2,164 $ 461(b) $ (2,056)(b) 20,449
Other compensation........................ 3,271 -- -- (3,271)(c) --
Other operating income.................... 644 -- 644
----------- ----------- ----- ----------- -----------
Earnings before interest expense and
income taxes.......................... 6,268 1,587 (461) 5,327 12,721
Interest expense.......................... 1,036 21 169(f) 13,097(d) 14,323
----------- ----------- ----- ----------- -----------
Earnings (loss) before income taxes..... 5,232 1,566 (630) (7,770) (1,602)
Income tax expense (benefit).............. 2,531 -- (3,171)(e) (640)
----------- ----------- ----- ----------- -----------
Net earnings (loss)..................... 2,701 1,566 (630) (4,599) (962)
Accretion of preferred stock to redemption
value................................... -- -- -- (2,554)(g) (2,554)
Accrual of cumulative dividends on
preferred stock......................... -- -- -- (2,577)(g) (2,577)
----------- ----------- ----- ----------- -----------
Net earnings (loss) available to common
stockholders.......................... $ 2,701 $ 1,566 $ (630) $ (9,730) $ (6,093)
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
Earnings (loss) per share:
Basic................................... $ .63 $ (6.12)
Diluted................................. $ .62 $ (6.12)
Weighted average number of shares
outstanding:
Basic................................... 4,277,888 995,000
Diluted................................. 4,355,303 995,000
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL TRANSACTION
COMPANY ADJUSTMENTS PRO FORMA
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................................... $ 38,913 $ 38,913
Cost of Revenues....................................................... 27,868 27,868
------------ ----------- -----------
Gross profit......................................................... 11,045 11,045
General and administrative expense..................................... 17,211 $ (3,093)(b) 5,249
(8,869)(i)
Other operating income................................................. 260 260
------------ ----------- -----------
Earnings (loss) before interest expense and income taxes............. (5,906) 11,962 6,056
Interest expense....................................................... 2,616 1,187(d) 3,803
------------ ----------- -----------
Earnings (loss) before income taxes.................................. (8,522) 10,775 2,253
Income tax expense (benefit)........................................... (1,721) (926)(e) 901
3,548(i)
------------ ----------- -----------
Net earnings (loss).................................................. (6,801) 8,153 1,352
Accretion of preferred stock to redemption value....................... (395) (292)(g) (687)
Accrual of cumulative dividends on preferred stock..................... (388) (309)(g) (697)
------------ ----------- -----------
Net earnings (loss) available to common stockholders................. $ (7,584) $ 7,552 $ (32)
------------ ----------- -----------
------------ ----------- -----------
Earnings (loss) per share:
Basic................................................................ $ (3.32) $ (.03)
Diluted.............................................................. $ (3.32) $ (.03)
Weighted average number of shares outstanding:
Basic................................................................ 2,286,725 995,000
Diluted.............................................................. 2,286,725 995,000
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
30
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Historical Company includes twelve months of Company results of operations
and HSI results of operations from April 30, 1998 through June 30, 1998.
Historical HSI includes HSI results of operations for the period July 1,
1997 through April 29, 1998.
(b) Pro forma adjustment to reflect general and administrative expenses is as
follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE-MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
HSI Acquisition--Goodwill amortization (i).................................... $ 461 --
------------- -------
------------- -------
Compensation expense for certain employee salaries
and bonuses (ii)............................................................ $ (1,180) $ (46)
Inclusion of the Company in the BRS and Co. Portfolio Insurance Program
(iii)(vi)................................................................... (814) (68)
Nonrecurring Transactions related expenses incurred during the period......... (1,200) (3,091)
Sponsor management fee (iv)(vi)............................................... 300 25
Pro forma amortization of financing fees (v)(vi).............................. 838 87
------------- -------
Net pro forma general and administrative transaction adjustment............. $ (2,056) $ (3,093)
------------- -------
------------- -------
</TABLE>
----------------------------
(i) Reflects goodwill amortization related to the HSI Acquisition which is
being amortized on a straight line basis over 15 years.
(ii) As a result of the Recapitalization these functions will no longer be
performed or will be performed by other personnel of the Company or by the
Sponsor.
(iii) Reflects the difference between the Company's actual insurance costs and
the insurance costs which have been contracted for as a result of the
Company's inclusion in the BRS Portfolio Company Insurance Program.
(iv) Under the terms of the Management Agreement, the Sponsor will receive an
annual management fee in consideration for financial and strategic
advisory services. See "Certain Relationships and Related Transactions."
(v) Adjustment to reflect amortization of financing fees related to the
Revolving Credit Facility, Term Loan Facility and the Notes is as follows:
<TABLE>
<CAPTION>
PRO FORMA AMORTIZATION
--------------------------------------
FOR THE
ASSUMED FOR THE YEAR THREE MONTHS
FINANCING MATURITY ENDED ENDED
ASSUMED NEW DEBT FEES (IN YEARS) JUNE 30, 1998 SEPTEMBER 30, 1998
- --------------------------------------------------- ----------- --------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Revolving Credit Facility.......................... $ 600 6 $ 100 10
Term Loan Facility................................. 600 6 100 10
Notes.............................................. 5,100 8 638 67
----------- ----- -----
Total $ 6,300 $ 838 87
----------- ----- -----
----------- ----- -----
</TABLE>
(vi) For the three-months ended September 30, 1998 the pro forma adjustment
includes amounts related to the period prior to the Transactions of July
1, 1998 through August 4, 1998.
31
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
(c) The pro forma adjustment is to eliminate nonrecurirng other compensation
expense incurred in connection with the Transactions.
(d) Pro forma adjustment to record interest expense related to the Revolving
Credit Facility, Term Loan Facility and the Notes, net of a decrease in
interest expense from the assumed repayment of existing debt, is as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
Pro forma interest expense on new debt (i).................................... $ 13,950 $ 1,298
Fee for unused portion of Revolving Credit Facility (ii)...................... 150 13
Decrease from repayment of actual interest expense on existing debt........... (1,003) (124)
------------- ------
Net pro forma interest expense adjustment................................... $ 13,097 $ 1,187
------------- ------
------------- ------
</TABLE>
(i) Pro forma adjustment to record interest expense on new debt is as follows:
<TABLE>
<CAPTION>
PRO FORMA
INTEREST PRO FORMA INTEREST
ASSUMED ASSUMED EXPENSE FOR EXPENSE FOR THE
INTEREST OUTSTANDING YEAR ENDED THREE MONTHS ENDED
ASSUMED NEW DEBT RATE BALANCE JUNE 30, 1998 SEPTEMBER 30, 1998
- -------------------------------------------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C>
Revolving Credit Facility......................... 9.75%(1) -- -- --
Term Loan Facility................................ 9.75%(2) $ 20,000 $ 1,950 $ 205(3)
Notes............................................. 12.0% 100,000 12,000 1,093(3)
------------- ------
Total pro forma interest expense on new debt.... $ 13,950 $ 1,298
------------- ------
------------- ------
</TABLE>
------------------------------
(1) Interest on the Revolving Credit Facility is based on 1.25% in excess of
prime rate (prime rate assumed to be 8.50%). See "Description of Certain
Indebtedness--New Credit Facility".
(2) Interest on the Term Loan Facility is based on 1.25% in excess of prime
rate (prime rate assumed to be 8.50%). See "Description of Certain
Indebtedness--New Credit Facility".
If interest rates for the Term Loan Facility and the Revolving Credit
Facility were to increase (decrease) by 1/8 of 1%, net income (loss) would
decrease (increase) by less than $0.1 million each for the year ended June
30, 1998 and the three months ended September 30, 1998.
(3) For the three-months ended September 30, 1998 the pro forma adjustment
includes amounts related to the period prior to the Transactions of July 1,
1998 through August 4, 1998.
(ii) Represents the commitment fee equal to 1/2 of 1% per annum on the undrawn
portion of the available commitment under the Revolving Credit Facility.
See "Description of Certain Indebtedness--New Credit Facility".
(e) The pro forma income tax adjustment has been computed to result in a pro
forma income tax expense (benefit) that is at a 40% effective rate.
32
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
(f) Reflects ten months of interest expense for the period ended June 30, 1998
related to the promissory note due to the seller of HSI that will remain
outstanding after the Transactions. The note bears interest at a rate of
5.51% per annum.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
JUNE 30, 1998
-------------
<S> <C>
Interest expense related to promissory note..................................................... $ 169
</TABLE>
(g) Reflects the accretion of redeemable preferred stock to the mandatory
redemption price and accrual of cumulative dividends on preferred stock.
Increase represents the cumulative dividends which accrue at a 13%, 10.5%,
and 13% per annum rate for the Series A Preferred Stock, Senior Exchangeable
Preferred Stock and Series B Preferred Stock, respectively.
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
Accretion of Senior Exchangeable Preferred Stock to redemption value.......... $ 1,107 $ 128(1)
Accretion of Series A Preferred Stock to redemption value..................... 1,447 164(1)
------ ------
$ 2,554 $ 292
------ ------
------ ------
Accrual of cumulative dividends on Series B preferred stock................... $ 2,577 $ 309(1)
------ ------
------ ------
</TABLE>
------------------------------
(1) For the three-months ended September 30, 1998 the pro forma adjustment
includes amounts related to the period prior to the Transactions (July 1,
1998 through August 4, 1998).
(h) Pro forma Adjusted EBITDA is calculated as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
Earnings before interest expense and income taxes............................. $ 12,721 $ 6,056
Depreciation and amortization................................................. 10,699 2,575
Stock-based compensation expense.............................................. 1,315 73
------------- ------
Pro Forma Adjusted EBITDA................................................. $ 24,735 $ 8,704
------------- ------
------------- ------
</TABLE>
(i) The pro forma adjustment is to eliminate nonrecurring stock-based
compensation expense of $8,869 and related income tax benefit of $3,548 that
is triggered by the Transactions as this is a material nonrecurring charge.
33
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company for the five fiscal years ended June 30, 1998 and for the
three months ended September 30, 1997 and 1998. The consolidated statement of
operations data for the three years ended June 30, 1998 and the consolidated
balance sheet data as of June 30, 1997 and 1998 was derived from the audited
consolidated financial statements of the Company included elsewhere herein. The
consolidated statement of operations data for the two years ended June 30, 1995
and the consolidated balance sheet data as of June 30, 1994, 1995 and 1996 was
derived from audited consolidated financial statements of the Company. The
consolidated statement of operations data for the three months ended September
30, 1997 and 1998 and the consolidated balance sheet data as of September 30,
1998 was derived from the unaudited consolidated financial statements of the
Company included elsewhere herein which, in the opinion of Management, include
all adjustments necessary for a fair presentation of the financial condition and
results of operations of the Company for such periods. The results of operations
for interim periods are not necessarily indicative of a full year's operations.
The other data presented below was derived from Company prepared schedules. This
table is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the related notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ 69,808 $ 70,839 $ 74,895 $ 95,298 $ 101,170 $ 28,351 $ 38,913
Cost of revenues................. 50,799 50,142 51,200 68,541 72,395 20,015 27,868
Gross profit..................... 19,009 20,697 23,695 26,757 28,775 8,336 11,045
General and administrative
expenses....................... 12,659 12,989 15,156 16,953 19,880 4,703 17,211
Other compensation............... -- -- -- -- 3,271 -- --
Other operating income, net...... 502 1,025 867 871 644 153 260
Earnings (loss) before interest
expense and income taxes....... 6,852 8,733 9,406 10,675 6,268 3,786 (5,906)
Interest expense................. 205 418 783 811 1,036 250 2,616
Earnings (loss) before income
taxes.......................... 6,647 8,315 8,623 9,864 5,232 3,536 (8,522)
Income taxes..................... 2,849 3,455 3,538 4,407 2,531 1,395 (1,721)
---------- ---------- ---------- ---------- ---------- --------- ----------
Net earnings (loss).............. 3,798 4,860 5,085 5,457 2,701 2,141 (6,801)
Accretion of preferred stock to
redemption value............... -- -- -- -- -- -- (395)
Accrual of cumulative dividends
on preferred stock............. -- -- -- -- -- -- (388)
---------- ---------- ---------- ---------- ---------- --------- ----------
Net earnings (loss) available to
common stockholders............ $ 3,798 $ 4,860 $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (7,584)
---------- ---------- ---------- ---------- ---------- --------- ----------
---------- ---------- ---------- ---------- ---------- --------- ----------
EARNINGS (LOSS) PER SHARE:
Basic.......................... $ .93 $ 1.20 $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32)
Diluted........................ .98 1.18 1.24 1.27 .62 .49 (3.32)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic.......................... 4,077,205 4,059,940 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725
Diluted........................ 4,100,606 4,103,806 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725
OTHER DATA:
Adjusted EBITDA(1)............... $ 10,709 $ 13,638 $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615
Adjusted EBITDA margin(2)........ 15.3% 19.3% 20.9% 20.5% 20.7% 21.3% 22.1%
Net cash provided by (used in)
operating activities........... $ 4,624 $ 9,120 $ 10,686 $ 8,562 $ 16,628 $ 4,940 $ (14,675)
Net cash used in investing
activities..................... $ (5,613) $ (11,168) $ (10,522) $ (15,086) $ (17,047) $ (3,455) $ (3,216)
Net cash provided by (used in)
financing activities........... $ 1,060 $ 270 $ 735 $ 6,263 $ (23) $ (1,292) $ 19,649
Depreciation and amortization.... $ 3,303 $ 4,168 $ 5,417 $ 6,878 $ 8,870 $ 2,045 $ 2,488
Capital expenditures............. $ 5,809 $ 11,834 $ 11,511 $ 16,089 $ 12,287 $ 3,588 $ 3,337
Units of operated equipment
rentals at end of period....... 298 335 369 420 497 432 513
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
34
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
Number of locations at end of
period......................... 15 15 16 21 22 21 22
Ratio of earnings to fixed
charges(3)..................... 17.7x 14.3x 10.4x 11.4x 5.3x 13.4x --
CONSOLIDATED BALANCE SHEET DATA
AT PERIOD END:
Total assets..................... $ 39,376 $ 45,473 $ 53,378 $ 69,833 $ 88,323 $ 78,374 $ 101,794
Long-term obligations, including
current maturities............. 6,200 6,781 8,981 14,111 18,564 12,819 125,405
Stockholders' equity (deficit)... 22,363 26,912 32,032 39,253 43,606 41,394 (66,002)
</TABLE>
- ------------------------
(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
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 GAAP or as a measure of a company's
profitability or liquidity.
The following chart depicts the components of Adjusted EBITDA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss)............ $ 3,798 $ 4,860 $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (6,801)
Interest expense............... 205 418 783 811 1,036 250 2,616
Income taxes................... 2,849 3,455 3,538 4,407 2,531 1,395 (1,721)
Depreciation and
amortization................. 3,303 4,168 5,417 6,878 8,870 2,045 2,488
Stock related compensation
expense...................... 554 737 821 2,012 1,315 215 8,942
Reorganization costs........... -- -- -- -- 1,207 -- 3,091
Other compensation............. -- -- -- -- 3,271 -- --
--------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA $ 10,709 $ 13,638 $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(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 issue costs and the interest portion of the Company's rent expense. The
Company's earnings were insufficient to cover its fixed charges by
approximately $8.5 million during the three months ended September 30, 1998.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE PENHALL GROUP SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Penhall Group 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. The Penhall Group 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, the Penhall Group 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. The Penhall Group provides
its services from 22 locations in nine states, with a presence in some of the
fastest growing states in terms of construction spending and population growth.
From fiscal 1993 to fiscal 1998, revenue and Adjusted EBITDA have grown at a
CAGR of 15.0% and 25.7%, 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 the
Penhall Group's acquisitions and start-up locations.
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. The Penhall Group 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, the Penhall
Group has effected six 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 and Lipscomb Concrete Cutting, a North Carolina-based company
acquired in November 1998. During the same period, the Penhall Group established
operations in four new markets by opening offices in Las Vegas, Salt Lake City,
Portland and Dallas.
The Penhall Group derives its revenues primarily from services provided for
infrastructure related jobs. The Penhall Group's Operated Equipment Rental
Services are complemented by long-term fixed-price contracts. Approximately 53%
of the Penhall Group's revenues are derived from highway-related projects,
approximately 29% of revenues are generated from building-related projects and
the remainder of revenues are generated from airport, residential and other
projects. The following table shows the breakdown of the components of revenue
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------------- ------------------------------------------
1996 1997 1998 1997 1998
-------------------- -------------------- -------------------- -------------------- --------------------
% OF % OF % OF % OF % OF
$ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Operated Equipment
Rental Services.... $ 59,759 79.8% $ 69,510 72.9% $ 77,445 76.5% $ 20,999 74.1% $ 24,331 62.5%
Contract
Services(1)........ 15,136 20.2 25,788 27.1 23,725 23.5 7,352 25.9 14,582 38.5
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues..... $ 74,895 100.0% $ 95,298 100.0% $ 101,170 100.0% $ 28,351 100.0% $ 38,913 100.0%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Contract services revenues excludes services performed by the operated
equipment rental divisions on long-term contracts.
36
<PAGE>
Revenue growth is influenced by infrastructure change, including new
construction, modification, and regulatory changes. The Penhall Group'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 the Penhall Group'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 the Penhall Group'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, the Penhall Group utilizes a range of periods over which it
depreciates its equipment on a straight line basis. On average, the Penhall
Group depreciates its equipment over an estimated useful life of six years with
a 10% residual value.
The Penhall Group 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 on sales of assets are recognized in "Other
Operating Income" in PII's consolidated statements of earnings. In fiscal 1996,
1997 and 1998, gains on sales of assets from such equipment sales were $331,000,
$258,000 and $203,000, respectively.
The following table shows the number of units in the Penhall Group's
operated equipment rental fleet for the following periods:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
TWELVE MONTHS ENDED SEPTEMBER
JUNE 30, 30,
------------------------------------- -----------
1996 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Beginning of Period.................................................. 335 369 420 420
# Units Purchased.................................................... 70 75 99 16
# Units Disposed..................................................... 36 24 22 4
--- --- --- ---
End of Period........................................................ 369 420 497 432
--- --- --- ---
--- --- --- ---
<CAPTION>
1998
-----
<S> <C>
Beginning of Period.................................................. 497
# Units Purchased.................................................... 19
# Units Disposed..................................................... 3
---
End of Period........................................................ 513
---
---
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues for the three months ended September 30, 1998 ("Interim
1999") were $38.9 million, an increase of $10.6 million or 37.4% over the three
months ended September 30, 1997 ("Interim 1998"). The growth in revenues is
attributable to the acquisition of HSI, which added $7.7 million of revenues in
Interim 1999, and strength in the Company's operated equipment rental business
in most of the markets it serves.
The Company operated through 22 locations in nine states at September 30,
1998, compared to 21 locations in eight states at September 30, 1997. The
Company's equipment fleet grew from 432 to 513 or 18.8% during this period.
GROSS PROFIT. Gross profit totaled $11.0 million in Interim 1999, an
increase of $2.7 million or 32.5% from Interim 1998. Gross profit as a
percentage of revenues decreased from 29.4% in Interim 1998 to 28.4% in Interim
1999. The decrease in gross profit as percentage of revenues was primarily
attributable to a higher percentage of the Company's revenues being derived from
contract revenues in Interim 1999. Gross margins for contract services are
generally lower than for Operated Equipment Rental Services revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for Interim 1999 were $17.2 million, an increase of $12.5 million or 266.0% from
Interim 1998. The substantial increase in these costs was caused by an increase
of $8.7 million in stock compensation costs triggered by the Transactions
37
<PAGE>
and $3.1 million of costs incurred with respect to the Mergers. After adjusting
for the impact of these costs related to the Transactions and the expenses
related to HSI which was acquired in April 1998, general and administrative
expenses were $5.3 million, approximately the same as in Interim 1998.
EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and
income taxes decreased $9.7 million from a profit of $3.8 million in Interim
1998 to a loss of $5.9 million in Interim 1999. After adjusting for the impact
of the stock compensation expense and transaction costs mentioned above,
earnings before interest and income taxes increased $2.1 million or 55.3%. This
increase was primarily attributable to increased revenues.
INTEREST EXPENSE. Interest expense in Interim 1999 was $2.6 million, an
increase of $2.4 million or 946.4% from Interim 1998. The substantial increase
in interest expense was directly attributable to the issuance of $100.0 million
of Senior Notes and the incurrence of $20.0 million of Term Loans in connection
with the Transactions.
INCOME TAXES. The effective tax rate changes from 39.5% of earnings before
income taxes in Interim 1998 to 20.2% of loss before income taxes in Interim
1999. The lower tax benefit in Interim 1999 is attributable to approximately
$1.3 million of reorganization costs related to the Transactions which is not
deductible for tax purposes.
NET EARNINGS (LOSS). Net earnings decreased by $8.9 million from net
earnings of $2.1 million in Interim 1998 to a net loss of $6.8 million in
Interim 1999 for the reasons discussed above.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
REVENUES. Revenues for fiscal 1998 were $101.2 million, an increase of $5.9
million, or 6.2%, over fiscal 1997 revenues. The increase was primarily
attributable to the acquisition of HSI in April 1998, the opening of new
locations in Dallas, Portland and Salt Lake City late in fiscal 1997 and general
strength in the construction markets which the Company serves. These
improvements were partially offset by the impact of the unusual amount of rain
experienced during the winter of 1998 in all of California as well as the
Southeast.
The Penhall Group operated through 22 locations in nine states at June 30,
1998, compared to 21 locations in eight states at June 30, 1997. The Penhall
Group also expanded the size of its operated equipment rental fleet during this
time period from 420 units to 497 units, or 18.3%.
GROSS PROFIT. Gross profit totaled $28.8 million in fiscal 1998, an
increase of $2.0 million, or 7.5%, from fiscal 1997. Gross profit as a
percentage of revenues increased from 28.1% for 1997, to 28.4% for 1998. This
increase in gross profit as a percentage of revenues was primarily attributable
to a lower proportion of the Company's revenues being derived from contract
revenues in fiscal 1998. Gross margins for contract services are generally lower
than for Operated Equipment Rental Services revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for fiscal 1998 were $19.9 million, an increase of $2.9 million, or 17.3%, over
fiscal 1997. General and administrative expenses as a percentage of revenues
increased from 17.8% for fiscal 1997, to 19.7% for fiscal 1998. This increase in
general and administrative expenses as a percentage of revenues was primarily
attributable to costs associated with the Transactions and increases in payroll
and payroll related expenses, offset by a reduction in stock compensation
expense.
OTHER COMPENSATION. During fiscal 1998, approximately $3.3 million was
accrued for tax gross-up payments to be made to certain members of Management in
reimbursement for income taxes required to be paid by them. The other
compensation expense is directly related to the Transactions and will not be a
recurring item.
EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and
income taxes decreased $4.4 million, or 41.1%, to $6.3 million for fiscal 1998
as compared to $10.7 million during fiscal 1997. Earnings before interest and
income taxes as a percentage of revenues decreased from 11.2% in 1997, to 6.2%
in
38
<PAGE>
fiscal 1998. The decrease in earnings before interest and income taxes, and
decrease in earnings before interest and income taxes as a percentage of
revenues, during fiscal 1998 was primarily attributable to $1.2 million in costs
associated with the Transactions and other compensation expense of $3.3 million
for tax gross-up payments to certain members of management associated with the
Transactions.
INTEREST EXPENSE. Interest expense was slightly higher in fiscal 1998 at
$1.0 million as a result of higher average outstanding debt balances during
fiscal 1998 as compared with fiscal 1997.
INCOME TAXES. The effective income tax rate increased from 45% of earnings
before income taxes for fiscal 1997 to 48% for fiscal 1998. The increase was
attributable to an increase in the non-deductible portion of stock based
compensation, state income tax expense and permanent differences as a percentage
of total income tax expense.
NET EARNINGS. Net earnings were $2.7 million in fiscal 1998 compared to net
earnings of $5.5 million in fiscal 1997. This decrease of $2.8 million, or
50.5%, was attributable to improved results from operations offset by costs
associated with the Transactions.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
REVENUES. Revenues for fiscal 1997 were $95.3 million, an increase of $20.4
million, or 27.2%, over fiscal 1996 revenues. This increase was primarily
attributable to an improvement in the Southern California construction market, a
large contract in Northern California and the impact of the acquisition of Zig
Zag Company, a Denver-based firm, during fiscal 1996, which contributed to
revenues in fiscal 1997.
The Penhall Group operated through 21 locations in eight states at June 30,
1997, compared to 16 locations in five states at June 30, 1996. The Penhall
Group also expanded the size of its operated equipment rental fleet during this
time period, increasing units from 369 to 420, or 13.8%.
GROSS PROFIT. Gross profit totaled $26.8 million in fiscal 1997, an
increase of $3.1 million, or 12.9%, from fiscal 1996. Gross profit as a
percentage of revenues decreased from 31.6% for 1996, to 28.1% for 1997. This
decrease in gross profit as a percentage of revenues was primarily attributable
to a higher proportion of the Company's revenues being derived from contract
revenues in fiscal 1997. Gross margins for contract services are generally lower
than for Operated Equipment Rental Services revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for fiscal 1997 were $17.0 million, an increase of $1.8 million, or 11.9%, over
fiscal 1996. General and administrative expenses as a percentage of revenues
decreased from 20.2% for fiscal 1996, to 17.8% for fiscal 1997. This decrease in
general and administrative expenses as a percentage of revenues was primarily
attributable to the Penhall Group's ability to expand its operations and grow
without a proportionate increase in overhead cost offset by an increase of $1.2
million in stock related compensation expense for the year ended June 30, 1997
as compared to 1996.
EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and
income taxes increased $1.3 million, or 13.5%, to $10.7 million for fiscal 1997
as compared to $9.4 million during fiscal 1996. Earnings before interest and
income taxes as a percentage of revenues decreased slightly from 12.6% in 1996,
to 11.2% in fiscal 1997. The increase in earnings before interest and income
taxes, and decrease in earnings before interest and income taxes as a percentage
of revenues, during fiscal 1997 was primarily attributable to substantially
higher revenues partially offset by lower gross margins and increases in general
and administrative expenses.
INTEREST EXPENSE. Interest expense was relatively unchanged in fiscal 1997
at $0.8 million as a result of similar average outstanding debt balances during
fiscal 1997 as compared with fiscal 1996.
INCOME TAXES. The effective income tax rate increased from 41% of earnings
before income taxes for fiscal 1996 to 45% for fiscal 1997. The increase was
attributable to an increase in the non-deductible portion of stock based
compensation related to the vesting and increase in repurchase value of PII's
common stock under certain buy-out agreements.
39
<PAGE>
NET EARNINGS. Net earnings were $5.5 million in fiscal 1997 compared to net
earnings of $5.1 million in fiscal 1996. This increase of $0.4 million, or 7.3%,
was attributable to an improvement in earnings before interest and income taxes
partially offset by the increase in the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during fiscal 1996, 1997 and 1998 was
$10.7 million, $8.6 million and $16.6 million, respectively. Cash provided by
operating activities for the three months ended September 30, 1997 was $4.9
million compared to a use of cash in operations of $14.7 million for the three
months ended September 30, 1998. In fiscal 1998, higher depreciation, deferred
taxes and higher accrued liabilities due to the Transactions accounted for the
improved cash from operations. In fiscal 1997, accounts receivable increased due
to an increase in average days sales outstanding and strong fourth quarter 1997
revenues. Offsetting this was higher depreciation costs resulting from growth in
the Penhall Group's equipment rental fleet and an increase in trade accounts
payable. For the three months ended September 30, 1998, the significant use of
cash from operations primarily arose from the stock compensation expense of $8.9
million, $3.1 million in costs incurred with respect to the Mergers and the
payment of $2.9 million of tax gross-up payments accrued as of June 30, 1998.
Management estimates that the Penhall Group's annual capital expenditures
will be approximately $12.0 million to $13.0 million for fiscal 1999, including
replacement and maintenance of equipment, purchases of new equipment and
acquisitions.
Net cash used in investing activities during fiscal 1996, 1997 and 1998 was
$10.5 million, $15.1 million and $17.0 million, respectively. Cash used in
investing activities for the three months ended September 30, 1997 was $3.5
million as compared to $3.2 million for the same period in fiscal 1999. Such
cash was primarily used for capital expenditures of $11.5 million in fiscal
1996, $16.1 million in fiscal 1997, $12.3 million in fiscal 1998, $3.6 million
for the three months ended September 30, 1997 and $3.3 million for the same
period in fiscal 1999. Also, in fiscal 1998 cash used in investing activities
includes $5.9 million related to the HSI acquisition.
Net cash provided by (used in) financing activities during fiscal 1996, 1997
and 1998 was $0.7 million, $6.3 million and $0.0 million, respectively. For the
three months ended September 30, 1997 cash used in financing activities was $1.3
million as compared to cash provided by financing activities of $19.6 million
for the same period in fiscal 1999. Financing activities of the Penhall Group
are primarily the result of the Transactions for the three months ended
September 30, 1998 and borrowings and repayments of long-term debt.
Historically, the Penhall Group 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. See "Description of Certain Indebtedness--New
Credit Facility" and "Description of the Notes." As of September 30, 1998, the
Company and its subsidiaries had approximately $125.4 million of total
indebtedness outstanding (including the Notes) and a stockholders' deficit of
approximately $66.0 million. On a Pro Forma Basis, the Company's earnings were
insufficient to cover its fixed charges by approximately $7.9 million during
fiscal 1998 and approximately $9.7 million during the three months ended
September 30, 1998.
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. As of September 30, 1998, $29.2 million of additional
borrowings were available under the Revolving Credit Facility. The Term Loans
amortize on a quarterly basis
40
<PAGE>
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 at maturity. 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 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.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate or other purposes
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on
indebtedness; (iii) the agreements governing the Company's long-term
indebtedness will contain restrictive financial and operating covenants that
could limit the Company's ability to compete and expand; (iv) the Company's
leverage may make it more vulnerable to industry-related or general economic
downturns and may limit its ability to withstand competitive pressures; and (v)
certain of the Company's borrowings are and will continue to be at variable
rates of interest, which exposes the Company to the risk of increased interest
rates.
RECENT DEVELOPMENTS
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued two new
pronouncements: SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components; and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes new standards for reporting information
about operating segments in interim and annual financial statements.
Implementation of these statements are effective for fiscal years beginning
after December 15, 1997, although SFAS No. 131 does not need to be implemented
for interim periods. In the initial year of application, comparative information
for earlier years is to be restated. The Company does not expect that adoption
of these standards will have a material effect on its financial position or
results of operations.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Penhall Group has
established an informal Year 2000 task force. The Penhall Group has a plan which
lists the milestones achieved and yet to be completed to become Year 2000 ready.
A checklist of potential failure sources has been compiled and includes both
information technology and embedded technology systems. The Penhall Group has
completed its assessment of its information technology and embedded technology
systems and is in the testing phase of their plan. The Penhall Group expects to
be Year 2000 ready by June 30, 1999. The Penhall Group does not believe it has a
material relationship with any one third party that would have a significant
impact to the Penhall Group if that third party was not Year 2000 ready.
The Penhall Group recently upgraded their information technology system,
both hardware and software, and feel those systems are Year 2000 ready. The
Penhall Group does not anticipate significant additional costs to become Year
2000 ready.
Delays in the implementation of the Year 2000 solutions or the failure of
any critical technology components to operate properly in the Year 2000 could
adversely affect the Penhall Group's operations. In addition, the Penhall Group
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. Contingency plans have not been developed for all
mission critical information and embedded technologies in the event Year 2000
readiness is not met. The Penhall Group plans to have these contingency plans in
place by June 30, 1999.
41
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Existing Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on , 199 ; provided, however, that if the Company has
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended.
As of the date of this Prospectus, $100.0 million aggregate principal amount
of the Existing Notes are outstanding. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about , 1998 to all holders
of Existing Notes known to the Company. The Company's obligation to accept
Existing Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for any exchange of any Existing Notes, by giving
notice of such extension to the holders thereof. During any such extension, all
Existing Notes previously tendered will remain subject to the Exchange Offer and
may be accepted for exchange by the Company. Any Existing Notes not accepted for
exchange for any reason will be returned without expense to the tendering holder
thereof as promptly as practicable after the expiration or termination of the
Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Existing Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Company will give notice of any extension, amendment, non-acceptance
or termination to the holders of the Existing Notes as promptly as practicable,
such notice in the case of any extension to be issued no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
Holders of Existing Notes do not have any appraisal or dissenters' rights
under the Arizona Business Corporation Act in connection with the Exchange
Offer.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Existing Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to United States Trust Company
of New York at one of the addresses set forth below under "Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such
Existing Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Existing Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or the holder must comply with the guaranteed delivery
procedure described below. THE METHOD OF DELIVERY OF EXISTING NOTES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
42
<PAGE>
HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Existing Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Existing Notes
who has not completed the box entitled "Special Issuance Instruction" or
"Special Delivery Instruction" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Existing Notes are registered in the name of a person other
than a signer of the Letter of Transmittal, the Existing Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by, the registered holder with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Existing Notes not properly tendered or to not accept
any particular Existing Notes which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Existing Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Existing Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Existing Notes either
before or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
Existing Notes for exchange must be cured within such reasonable period of time
as the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Existing Notes for exchange, nor
shall any of them incur any liability for failure to give such notification.
If the Letter of Transmittal or any Existing Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder of Existing Notes will represent to the Company
that, among other things, the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company. If
the holder is not a broker-dealer, the holder must represent that it is not
engaged in nor does it intend to engage in a distribution of the New Notes.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive a New Note having a principal amount equal to that of the
surrendered Existing Note. For purposes of the
43
<PAGE>
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Existing Notes for exchange when, as and if the Company has given oral and
written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Existing Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Existing Notes or a timely
Book-Entry Confirmation of such Existing Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Existing
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Existing Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged
Existing Notes will be returned without expense to the tendering holder thereof
(or, in the case of Existing Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below, such non-exchanged Existing
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Existing Notes by causing the
Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Existing Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Existing Notes desires to tender such Existing
Notes and the Existing Notes are not immediately available, or time will not
permit such holder's Existing Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the Company
(by telegram, telex, facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of Existing Notes and the amount of
Existing Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Existing Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Existing Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to the
Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent at one of the addresses set
forth below under "Exchange Agent." Any such notice of withdrawal must specify
the
44
<PAGE>
name of the person having tendered the Existing Notes to be withdrawn, identify
the Existing Notes to be withdrawn (including the principal amount of such
Existing Notes), and (where certificates for Existing Notes have been
transmitted) specify the name in which such Existing Notes are registered, if
different from that of the withdrawing holder. If certificates for Existing
Notes have been delivered or otherwise identified to the Exchange Agent then,
prior to the release of such certificates, the withdrawing holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such holder is an Eligible Institution. If Existing Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Existing
Notes and otherwise comply with the procedures of such facility. All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Existing Notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any Existing Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Existing Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Existing Notes will
be credited to an account maintained with such Book-Entry Transfer Facility for
the Existing Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Existing Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Existing Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Existing Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Existing Notes for exchange or the exchange of New
Notes for such Existing Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no New Notes will be issued in exchange for any such Existing
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). In any such event the Company is
required to use every reasonable effort to obtain the withdrawal of any stop
order at the earliest possible time.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
45
<PAGE>
BY MAIL, OVERNIGHT COURIER OR HAND:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036
Attention: Corporate Trust Administration
BY FACSIMILE:
(212) 852-1626
CONFIRM BY TELEPHONE:
(212) 852-1600
Delivery other than as set forth above will not constitute a valid delivery.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Existing
Notes, which is the principal amount as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The debt issuance costs will be capitalized for
accounting purposes.
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that
Existing Notes not tendered or not accepted in the Exchange Offer be returned
to, a person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
accrue interest at 12% per annum and will otherwise remain outstanding in
accordance with their terms. Holders of Existing Notes do not have any appraisal
or dissenters' rights under the Arizona Business Corporation Act in connection
with the Exchange Offer. In general, the Existing Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Existing Notes under the Securities Act. However, (i) if the
Initial Purchasers so request with respect to Existing Notes not eligible to be
exchanged for New Notes in the
46
<PAGE>
Exchange Offer and held by them following consummation of the Exchange Offer or
(ii) if any holder of Existing Notes is not eligible to participate in the
Exchange Offer or, in the case of any holder of Existing Notes that participates
in the Exchange Offer, does not receive freely tradable New Notes in exchange
for Existing Notes, the Company is obligated to file a registration statement on
the appropriate form under the Securities Act relating to the Existing Notes
held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Notes. If any
holder has any arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. A
broker-dealer who holds Existing Notes that were acquired for its own account as
a result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
47
<PAGE>
INDUSTRY OVERVIEW
The United States equipment rental industry serves a wide variety of
construction, industrial, manufacturing, governmental and residential markets
and benefits from the trend among businesses to outsource non-core operations.
Outsourcing reduces capital investment, converts costs from fixed to variable
and allows customers to focus on core operations and to minimize the downtime,
maintenance, repair and storage associated with equipment ownership. Customers
are increasingly using rental companies to provide a comprehensive supply of
equipment, ranging from construction and industrial equipment to general tools
and homeowner equipment. According to industry sources, the United States
equipment rental industry grew from approximately $600 million in 1982 to an
estimated $18 billion in 1997, resulting in a CAGR of 23.7%. The industry is
highly fragmented, with an estimated 17,000 equipment rental companies in the
United States, 85% of which operate four or fewer locations. The top 100
equipment rental firms account for only approximately 17% of industry revenue.
The Operated Equipment Rental Industry is a specialized niche of the United
States equipment rental industry and is characterized by heavy equipment which
is rented along with skilled operators to provide demolition, rehabilitation and
construction services in connection with infrastructure projects. Like the
overall equipment rental industry, the Operated Equipment Rental Industry is
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. The basis of competition in the Operated Equipment Rental Industry is
typically the breadth of product lines, the availability of equipment and
skilled operators, the condition of equipment, service, name recognition,
proximity to customers and price.
Management does not believe that the Penhall Group faces any significant
competitor on a national scale, as the Operated Equipment Rental Services niche
of the United States equipment rental industry is characterized primarily by
local providers offering a limited array of services. The Penhall Group believes
that there are substantial consolidation opportunities for large Operated
Equipment Rental Services providers such as itself.
48
<PAGE>
BUSINESS
GENERAL
The Penhall Group, founded in 1957, is one of the largest operated equipment
rental providers in the United States. The Penhall Group 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, the Penhall Group complements its
Operated Equipment Rental Services by providing services on a fixed-price
contract basis for long-term projects. The Penhall Group employs over 517
skilled operators and has approximately 513 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. The
Penhall Group provides its services from 22 locations in nine 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 and
Utah. The Penhall Group has a diverse base of over 6,800 customers. With the
exception of the California Department of Transportation, no one customer has
accounted for more than 5% of its total revenue in any of the past five fiscal
years. The Penhall Group has a reputation for high quality service which results
in a high degree of customer loyalty and, based on the last fiscal quarter,
Management believes that on average in excess of 95% of its revenues are derived
through repeat business from existing customers. The Penhall Group has increased
its Adjusted EBITDA margin from 13.2% in fiscal 1993 to 20.7% in fiscal 1998 due
to Management's focus on (i) maximizing high-margin Operated Equipment Rental
Services revenues through increased equipment rental fleet utilization, (ii)
controlling overhead and (iii) successfully integrating acquisitions and
start-up locations. During that same period, revenue and Adjusted EBITDA grew at
a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall Group
generated revenues and Adjusted EBITDA of approximately $114.7 million and $24.7
million, respectively, during fiscal 1998 and approximately $38.9 million and
$8.7 million, respectively, during the three months ended September 30, 1998.
The Penhall Group had a net loss of approximately $1.0 million on a Pro Forma
Basis during fiscal 1998 and net earnings of approximately $1.4 million on a Pro
Forma Basis during the three months ended September 30, 1998.
Through its skilled operators and equipment rental fleet, the Penhall Group
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, the Penhall Group 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. Operated Equipment Rental Services represented
approximately three quarters of total revenues for fiscal 1998. For longer
duration projects, which may last from a few days to several years, the Penhall
Group 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. The Penhall Group
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, the Penhall Group is responsible for completion of
an entire job or project, and typically employs its Operated Equipment Rental
Services. On average, approximately 20% to 30% of Operated Equipment Rental
Services revenues are generated from fixed-price contracts. Revenues generated
by Penhall's contract divisions, excluding services performed by the equipment
rental divisions on long-term contracts, represent approximately 23.5% of the
total revenues for fiscal 1998.
49
<PAGE>
The Operated Equipment Rental Industry is a specialized niche segment of the
highly fragmented United States equipment rental industry. There are an
estimated 17,000 equipment rental companies in the United States, and no single
company represented more than 2% of total market revenues in 1996. According to
industry sources, the United States equipment rental industry grew from
approximately $600 million in revenues in 1982 to an estimated $18 billion in
1997, representing a CAGR of 23.7%. 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. Also, according to
industry sources, for the six months ended January 31, 1998, construction
spending in the Penhall Group's Markets grew by an average of 12.3%,
significantly outperforming the 8% growth of United States construction
spending, primarily due to strong regional economies, favorable demographics and
growing levels of construction activity present in these Markets. In addition,
Management believes the Operated Equipment Rental Industry will continue to grow
significantly as, according to the United States Department of Transportation,
59% of the nation's major roads are in poor or mediocre condition and 31% of the
nation's bridges are structurally deficient and/or functionally obsolete. Also,
the Transportation Bill recently approved by the President of the United States
calls for approximately a 44% increase in national spending on highways and mass
transit from current levels over the next six years and approximately a 58%
increase in the Penhall Group's Markets overall on a non-weighted average basis.
COMPETITIVE STRENGTHS
Management believes that the following strengths will provide the Penhall
Group with significant competitive advantages and the opportunity to achieve
continued growth and increased profitability:
DIVERSIFIED REVENUE BASE. The Penhall Group has a diverse revenue base
resulting from (i) a broad base of over 6,800 customers, (ii) serving a broad
array of end-user markets, and (iii) offering a variety of services. Management
believes that the Penhall Group's diverse revenue base, along with the portion
of its business derived from customers that have fixed spending budgets, help
insulate it from economic downturns. The Penhall Group derives its revenues from
a diverse group of customers consisting of highway, airport and building general
contractors, and federal, state and municipal agencies in various construction,
industrial, manufacturing, governmental and residential markets. With the
exception of the California Department of Transportation, no one customer has
accounted for more than 5% of the Penhall Group's total revenue in any of the
past five fiscal years. A significant portion of the Penhall Group's revenues
are generated from federal, state and municipal agencies, which typically invest
in infrastructure projects based on a fixed budget for a certain time period, as
opposed to discretionary spending tied to economic cycles. The Penhall Group
also offers a broad array of services ranging from the rental of a single unit
to contracting for an entire job, and its specialized services are concentrated
in both new construction as well as rehabilitation and maintenance of existing
infrastructure, which serves to mitigate the effects of cycles within the
construction industry. Within its array of services, the Penhall Group's
fixed-price contracts complement its Operated Equipment Rental Services and
serve to diversify the Penhall Group's revenue base, increase utilization of its
operated equipment rental fleet, and differentiate it from other equipment
rental competitors.
BROAD, MODERN OPERATED EQUIPMENT RENTAL FLEET. Management believes that the
Penhall Group has one of the most modern, diversified and well-maintained
operated equipment rental fleets in the United States and believes that the
quality and breadth of its fleet differentiates the Penhall Group from other
local operators. The Penhall Group has invested over $57.5 million in new
equipment over the past five fiscal years, during which period the Penhall
Group's operated equipment rental fleet grew from 298 to approximately 497 units
of equipment. The units in the Penhall Group's operated equipment rental fleet
50
<PAGE>
have an average age of approximately four and a half years and an average useful
life of approximately nine years. The Penhall Group conducts a preventative
maintenance program which increases fleet utilization, extends the useful life
of the equipment and generally results in higher resale values.
WELL-POSITIONED FOR GROWTH. Management believes that the Penhall Group is
well-positioned for continued growth, primarily due to (i) its presence in
high-growth Markets, (ii) its leadership position in the growing Operated
Equipment Rental Industry, especially with respect to services for highway
projects, and (iii) acquisition opportunities resulting from the fragmented
nature of the Operated Equipment Rental Industry. In fiscal 1998, construction
spending in the Penhall Group's Markets significantly outperformed the national
growth rate of 8%. Management expects construction growth in the Markets to
continue to outpace national growth due to strong local economies, favorable
demographics and increased spending under the new Transportation Bill. In
addition, Management believes that based on the number of grinder units in its
operated equipment rental fleet, the Penhall Group is the largest provider of
grinding services in the United States, maintaining a market share of over 40%
of the national grinding market and approximately 80% of the grinding market in
California. As a market leader, the Penhall Group is well-positioned to benefit
from highway spending, which will increase from current levels by approximately
44% nationally, and approximately 58% in the Penhall Group's Markets overall on
a non-weighted average basis, under the new Transportation Bill. Finally,
Management believes that the financial resources available to the Penhall Group
following consummation of the Transactions, along with the fragmented nature of
the Operated Equipment Rental Industry, will enable the Penhall Group to take
advantage of strategic acquisition opportunities in both existing and new
markets.
The Penhall Group has benefited from having the majority of its operations
located in some of the fastest growing states in terms of construction spending
and population growth. The following table shows construction spending and
population growth statistics, two widely used indicators of activity in the
Operated Equipment Rental Industry, in the Penhall Group's Markets as compared
to national levels:
<TABLE>
<CAPTION>
INCREASE IN
% OF 1998 PENHALL CONSTRUCTION POPULATION PROJECTED INCREASE IN
MARKETS GROUP REVENUES SPENDING(1) GROWTH(2) HIGHWAY SPENDING(3)
- ----------------------------------------------- ------------------- --------------- ------------- -----------------------
<S> <C> <C> <C> <C>
Arizona........................................ 8.7% 10.1% 2.7% 59.5%
California..................................... 70.8 19.5 1.3 45.6
Colorado....................................... 3.4 4.0 2.0 52.3
Georgia........................................ 2.9 5.3 2.0 69.7
Nevada......................................... 4.3 19.5 4.8 61.8
Texas.......................................... 3.8 19.4 2.0 60.7
Utah........................................... 1.6 8.6 2.1 57.8
Other.......................................... 4.5
Non-weighted average for the Markets....... 12.3% 2.4% 58.2%
National average........................... 8.0% 0.9% 44.1%
</TABLE>
- ------------------------------
(1) Year-over-year growth for six months ended January 31, 1998.
(2) Year-over-year growth for year ended December 31, 1997.
(3) Represents the projected percentage increase in aggregate highway spending
under the Transportation Bill for the period between 1998-2003 as compared
to the aggregate highway spending for the period 1992-1997.
STRONG REPUTATION AND SUPERIOR CUSTOMER SERVICE. Over its 40-year history,
the Penhall Group has built a reputation for high quality service, encompassing
(i) responsiveness to customer requirements, (ii) quality and availability of
equipment, (iii) experienced operators, and (iv) reliability of service. As a
result of its focus on customer service, the Penhall Group has developed many
long-term relationships, and based on the last fiscal quarter, Management
believes that on average in excess of 95% of its revenues are derived through
repeat business from existing customers. In addition, the Penhall Group's
skilled operators contribute to its superior customer service as they are
trained to specialize in the operation of particular
51
<PAGE>
types of equipment and provide effective and efficient on-site services to
complement the Penhall Group's modern equipment rental fleet.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Management has an
average of approximately 19 years of industry experience and 17 years of
experience with the Penhall Group. The Penhall Group's senior and regional
managers have successfully developed and implemented equipment rental fleet
management and financial strategies which have enabled the Penhall Group to
become one of the largest operators in its Markets. Upon consummation of the
Transactions, the Management Stockholders held approximately 37.5% of the common
equity of the Company.
GROWTH STRATEGY
Management has implemented a business strategy which is designed to enhance
the Penhall Group's position as one of the leading Operated Equipment Rental
Services companies in its Markets and to capitalize on opportunities to enter
new markets through a combination of acquisitions and start-up operations. The
Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993
to 20.7% in fiscal 1998, and during the same period revenues and Adjusted EBITDA
grew at a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the
Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7
million and $24.7 million, respectively, during fiscal 1998 and approximately
$38.9 million and $8.7 million, respectively, during the three months ended
September 30, 1998. The Penhall Group had a net loss of approximately $1.0
million on a Pro Forma Basis during fiscal 1998 and net earnings of
approximately $1.4 million on a Pro Forma Basis during the three months ended
September 30, 1998. The Penhall Group believes that the following key elements
of its on-going strategy will provide it with the opportunity to continue to
achieve growth and increased profitability:
EXPAND GEOGRAPHIC PRESENCE. Management intends to continue to expand the
Penhall Group's geographic presence through both acquisitions and start-up
operations. Since 1994, the Penhall Group has effected six strategic
acquisitions and plans to continue to opportunistically target acquisition
candidates that (i) have a strong local market share and participate in a
high-growth market, and (ii) are led by an experienced management team that will
continue to manage the acquired business. Acquisitions enable the Penhall Group
to (i) enter new markets and increase geographic diversity, (ii) realize
synergies by leveraging its expertise in operated equipment rental fleet
management, and (iii) expand its operated equipment rental fleet and range of
services. Management believes that the equipment rental industry offers
substantial consolidation opportunities for large equipment rental providers
such as the Penhall Group. Relative to smaller companies with only one or two
rental locations, multi-regional operators such as the Penhall Group benefit
from a number of competitive advantages, including access to capital, the
ability to offer a broader range of modern, high-quality equipment, standardized
management information systems, volume purchasing discounts and the ability to
service larger, multi-regional accounts. Management also plans to selectively
enter new markets which have favorable growth dynamics through start-up
operations. The Penhall Group's decision to open a start-up location is based
upon its review of demographic information, business growth projections and the
level of existing competition. The Penhall Group opened three start-up locations
in fiscal 1997, the benefits of which have not yet been fully realized. Based on
the Penhall Group's historical experience, a new location tends to realize
significant increases in revenues, cash flow and profitability during the first
two years of operation as the Penhall Group builds a diverse operated equipment
rental fleet and contributes skilled management.
EXPAND OPERATED EQUIPMENT RENTAL FLEET AND INCREASE RANGE OF SERVICES
OFFERED. Management intends to continue to grow the Penhall Group's business in
both new and existing markets through further expansion of its operated
equipment rental fleet and services provided to its customers. Management plans
to expand the Penhall Group's operated equipment rental fleet by (i) adding new
units to existing equipment lines as utilization increases, and (ii) expanding
into new equipment lines which complement an existing Penhall Group service. In
addition, Management intends to further increase utilization through the
introduction of new services. To that end, the Penhall Group has recently
started offering Bare Equipment Rentals to its customers in Southern California
and expects to introduce this service to other
52
<PAGE>
markets. Management believes that this strategy will help continue to increase
profitability and enable the Penhall Group to attract new business as a single
source supplier for its customers.
EQUIPMENT RENTAL FLEET
The Penhall Group owns and operates a well-maintained fleet of approximately
513 units of operated equipment, including excavators, stompers, backhoes,
compressors, "bobcats," crushing equipment, saws, drills and grinding and
grooving equipment. The Penhall Group 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
following table is a summary of the Penhall Group's operated equipment rental
fleet and skilled operators as of September 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SKILLED
DESCRIPTION QUANTITY OPERATORS
- ----------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Diamonds............................................................... 212 209
Compressors............................................................ 81 82
Excavators............................................................. 30 32
Grinders............................................................... 28 30
Backhoes............................................................... 37 38
Bobcats................................................................ 41 42
Tankers................................................................ 34 37
Stompers............................................................... 10 8
Loaders................................................................ 5 7
Miscellaneous.......................................................... 35 32
--- ---
Total Units.......................................................... 513 517
--- ---
--- ---
</TABLE>
Management believes that the size of the Penhall Group's operated equipment
rental fleet, combined with its inventory of specialty equipment, enables it to
compete more effectively by ensuring the availability of equipment at a
favorable cost.
Management estimates the average utilization of the Penhall Group's operated
equipment rental fleet to be approximately 71%. The average age of the operated
equipment rental fleet is approximately four and a half years, and the average
useful life of the fleet is approximately nine years.
In addition to its 513 unit operated equipment rental fleet, the Penhall
Group maintains an inventory of approximately 361 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, and revenue generated by such units was not
significant for fiscal 1998.
The Penhall Group protects its investments in its equipment rental fleet
with an emphasis on proper operation and regular maintenance of the equipment.
Each Penhall Group location has its own shop, repair and maintenance staff that
routinely maintains and repairs the equipment rental fleet. The Penhall Group
believes that its maintenance program helps ensure maximum economic life of the
equipment and improves its ultimate resale value upon disposition. This
maintenance program also improves the availability of the equipment for use,
which in turn results in higher utilization rates.
SERVICES
The Penhall Group, 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 the Penhall Group in
conjunction with other services necessary to their application
53
<PAGE>
to a particular project, including breaking, excavating, removing and recycling
of construction materials. The Penhall Group 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, 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 the Penhall
Group 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 Penhall Group 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. The Penhall Group 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.
- 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.
54
<PAGE>
- 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
The Penhall Group provides its services 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 the Penhall Group is responsible for
the completion of a particular project.
The Penhall Group'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 the Penhall Group quotes a fixed-price to bid
on, perform, and invoice the customer for the project. In fiscal 1998, the
Penhall Group generated 76.5% of its revenues from Operated Equipment Rental
Services.
The Penhall Group's services are made available to customers through its 22
regional locations. The Penhall Group maintains a basic equipment rental fleet
and operators at each of its 22 locations. If necessary, equipment can be
shipped from any of the Penhall Group's locations to projects at remote sites.
Rental fees for the Penhall Group's equipment range from $90 to $400 per hour
and encompass both the equipment and the operator's time. The Penhall Group
guarantees the availability of its equipment and operators for a committed job
with an "on-time guarantee," and will provide the first hour of work free if the
Penhall Group's operators fail to arrive for work at an appointed time. The
Penhall Group has not experienced any significant amount of lost revenues
through its "on-time guarantee" policy.
The Penhall Group solicits and receives business over the telephone, by
facsimile, by written purchase order or through Penhall Group salesmen. Each day
the Penhall Group'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 the Penhall Group'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, the Penhall Group has rented its equipment only in conjunction
with the services of a Penhall Group employee as the operator. Recently,
however, the Penhall Group has started operating rental yards and offering Bare
Equipment Rentals, or renting equipment without operators. To date, such Bare
Equipment Rentals have not constituted a material part of the Penhall Group's
revenues; however, the Penhall Group regards equipment only rentals as a
potential source of growth going forward.
Contract pricing involves longer duration assignments lasting from a few
days to several years and normally 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 Group supervisor to coordinate the
safe and efficient function of the Penhall Group's workmen and equipment. For
fixed-price contract projects, the Penhall Group typically employs the use of
its Operated Equipment Rental Services as well as outside rental equipment and
sub-contractors. Although the Penhall Group has obtained contractor's licenses
in approximately 15 states (not including 16 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. On average, approximately 20% to 30% of Operated
Equipment Rental Services revenues are generated from fixed-price contracts.
Revenues generated by Penhall's contract divisions, excluding services performed
by the
55
<PAGE>
equipment rental divisions on long-term contracts, represent approximately 23.5%
of the total revenues for fiscal 1998.
The majority of the Penhall Group's fixed-price contracts are obtained
through competitive bidding for general contractors. The Penhall Group
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, the Penhall
Group's ongoing project schedule and any particular risks involved also affect
the Penhall Group's determination whether to bid on a project. In preparing a
bid, the Penhall Group's estimators analyze material, labor and all other cost
components of the proposed project. The Penhall Group also will make its own
determination of the quantity of items needed for the project and assess any
special risks involved. The Penhall Group 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 the Penhall Group 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. The Penhall Group has not borne a
significant amount of cost increases in connection with its fixed-price
contracting services.
The Penhall Group 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, the Penhall Group generally is entitled to be paid its costs for the
work performed to the date of termination. The Penhall Group has not experienced
any material contract cancellations in the past.
SALES AND MARKETING
The Penhall Group maintains a sales and estimating force of approximately 64
people, with at least two salespersons based at each of the Penhall Group'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 the
Penhall Group's operated equipment rental fleet.
Each of the Penhall Group's offices also maintains a sales and marketing
staff of approximately five people, which receives and schedules orders for
equipment rentals. The Penhall Group also regularly participates in industry
trade shows and conferences, and advertises in trade journals.
PURCHASING AND SUPPLIERS
The Penhall Group's size, status in the industry and relationships enable it
to purchase equipment directly from manufacturers at prices and on terms that
the Penhall Group believes to be more favorable than are available to its
smaller competitors. The Penhall Group'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.
The Penhall Group'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 the
Penhall Group receives from its suppliers represent what the Penhall Group
believes to be a significant competitive advantage. Management continually
analyzes the effectiveness, quality and profitability of the Penhall Group's
equipment and addresses equipment procurement issues. The Penhall Group
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.
56
<PAGE>
CUSTOMERS
Most of the Penhall Group'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 the Penhall Group'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 1998, the Penhall Group served
approximately 6,800 customers and, with the exception of the California
Department of Transportation, no one customer has accounted for more than 5% of
the Penhall Group's revenues in any of the past five fiscal years. The Company
believes that a loss of the California Department of Transportation as a
customer would have a material adverse effect on the Company's business. Based
on the last fiscal quarter, Management believes that on average, in excess of
95% of the Penhall Group's revenues represented repeat business from existing
customers. The capture rate for contracts on which the Penhall Group bids is
greater than 25% based on volume.
COMPETITION
The Operated Equipment Rental Industry is a specialized niche of the overall
equipment rental industry and is highly competitive. The Penhall Group'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. The Penhall Group 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 Group,
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 the Penhall Group 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
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.
The Penhall Group'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. The Penhall Group believes that its bonding
capacity is a competitive advantage over smaller, less financially stable
competitors. Moreover, the Penhall Group believes that it is able to compete
effectively for fixed-price contract jobs because of its extensive resources and
relationships with general contractors. See "Risk Factors-- Competition."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Penhall Group 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 the Penhall Group's business.
57
<PAGE>
Except with respect to the "Penhall" name and logo, the Penhall Group is not
dependent on any intellectual property rights.
MANAGEMENT INFORMATION SYSTEM
The Penhall Group utilizes a state-of-the-art management information system,
which was implemented at the beginning of fiscal 1997 and gives Management the
ability to analyze divisional results by line of equipment. 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. The Penhall Group continues to invest in state-of-the-art network and
communications equipment in order to provide more timely information to the
outlying locations and to ensure on-line access to the information needed to run
their operations.
RADIO COMMUNICATIONS
The Penhall Group 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 the Penhall
Group and its operators in the field to communicate with each other by radio.
In connection with the radio communications referred to above, the Penhall
Group 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. The Penhall Group
believes that the Mergers constituted an assignment for purposes of the FCC
licenses and has applied for the necessary FCC consent. The Penhall Group
expects to receive the FCC's consent by the end of August 1998, if not sooner,
and has applied for temporary authorization to continue to use the FCC licenses
during the pendency of its application for such consent.
LABOR RELATIONS
The Penhall Group has approximately 950 full-time employees, including
approximately 510 skilled workers and approximately 76 management and
supervisory employees who have been employed with the Penhall Group for an
average of 11 years. The Penhall Group also hires hourly equipment operators on
a project basis and when the number of jobs in progress necessitates additional
operators.
While none of the employees at the Company are represented by a labor union,
approximately 376 employees at PenCo are represented by various labor unions.
The Penhall Group's unionized workforce is divided into approximately 16
certified or lawfully recognized bargaining units, several of which are
represented by the same local union. Approximately 319 of the Penhall Group's
employees fall into six bargaining units; the remaining ten bargaining units are
quite small, consisting in some cases of only one or two employees. As is common
in the industry, most of the collective bargaining agreements covering these
bargaining units are multi-employer agreements negotiated by various employer
associations.
One of the agreements expired in May 1998, and the Penhall Group and the
union have agreed to abide by the terms of the expired agreement on a
month-to-month basis while the multi-employer association attempts to negotiate
a successor agreement. The Penhall Group cannot provide assurances that a
successor agreement will be reached or that work stoppages will not occur in
connection with the negotiation of a successor agreement. Another master
agreement covering three bargaining units in Southern California (consisting of
approximately 76 employees) expired on June 30, 1998. A successor agreement
proposed by the multi-employer bargaining association has been accepted by the
unions (and ratified by their members), and it is anticipated that the
multi-employer association will sign the agreement shortly. A third
multi-employer agreement covering a bargaining unit of 31 employees in Nevada
also expired on June 30, 1998, and a successor agreement has recently been
entered into with the union. Of the remaining collective bargaining agreements,
one expires in October 1998; one in May 1999; two in June 1999; three in June
2000; three in April 2001; and one in May 2001.
58
<PAGE>
There are currently no unfair labor practice charges pending against the
Penhall Group either before the National Labor Relations Board or the courts.
However, Local 12 of the Operating Engineers, which represents workers at three
of the bargaining units, claims that its master agreement covers certain Penhall
Group employees whom the Penhall Group has not recognized as covered by the
agreement. Local 12 claims, in particular, that the Penhall Group is required to
contribute to a certain union benefit fund on behalf of these employees; the
claimed delinquency payments owed to the fund were, as of the fund's last audit
in 1994, approximately $392,074. Local 12 has not, however, filed any legal
proceedings or grievances arising from this dispute, even though the dispute is
long-standing. In addition to this dispute with Local 12, the Penhall Group is
party to two union grievances, neither of which is likely have any material
adverse effect on the Penhall Group's operations or financial condition
regardless of their resolution.
PROPERTIES
The Penhall Group is headquartered in Anaheim, California. As of September
30, 1998, the Penhall Group owned or leased 22 facilities (one of which is
currently vacant and for sale) 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.
<TABLE>
<CAPTION>
LOCATION APPROX. SQUARE FEET
- -------------------------------------------------------------------------- -------------------
<S> <C>
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
San Diego, California(1).................................................. 3,750
Rialto, California(2)..................................................... 6,000
Santa Clara, California(2)................................................ 9,950
Irvine, California(2)..................................................... 3,600
Irvine, California(2)..................................................... 9,500
Bakersfield, California(2)................................................ 4,000
Burbank, California....................................................... 6,200
Phoenix, Arizona.......................................................... 12,900
Austin, Texas............................................................. 6,100
Grapevine, Texas(2)....................................................... 11,000
Denver, Colorado.......................................................... 15,100
Austell, Georgia(2)....................................................... 8,000
Las Vegas, Nevada(2)...................................................... 4,000
Portland, Oregon(2)(3).................................................... 24,000
Salt Lake City, Utah(2)................................................... 10,500
Rogers, Minnesota(2)...................................................... 11,000
</TABLE>
- ------------------------
(1) Property is currently vacant and for sale.
(2) Leased property.
(3) 12,000 square feet of this property is sub-leased to a sub-tenant.
The Penhall Group presently leases ten sites in six 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 5.6 years
(assuming the exercise of all option periods). The Real Property Leases for the
following four Leased Sites have remaining terms of less than three years:
(i) Las Vegas, Nevada-- monthly tenancy; (ii) Irvine California (16332
Construction Circle West)--monthly tenancy; (iii) Bakersfield, California--May
30, 2000; and (iv) Austell, Georgia--January 31, 2001.
59
<PAGE>
The Penhall Group acquired a property in Las Vegas, Nevada, on or about July
30, 1998, upon which it intends to construct a new facility. The lease term for
the Las Vegas facility which the Penhall Group currently occupies has expired
and the Penhall Group is leasing the property on a month-to-month basis. Once it
constructs the new facility, the Penhall Group's operations in Las Vegas will be
transferred and the current month-to-month lease will be terminated.
The lease for one of the two facilities that the Penhall Group has in
Irvine, California (located at 16332 Construction Circle West) has expired and
the Penhall Group is occupying the property on a month to month basis. The
Penhall Group is currently negotiating a renewal of the expired Irvine,
California lease and does not foresee any difficulties in finalizing the
renewal.
Based on the rental rates in effect on July 1, 1998, aggregate annual base
rent payable under all of the Real Property Leases totals approximately $596,000
and the average annual base rent payable under each of the Real Property Leases
is approximately $54,000 exclusive of common area maintenance charges and other
items of additional rent. Several of the Real Property Leases provide for
increases in the base rent during the remaining term thereof (including option
periods). In some cases, the amounts of the increases are fixed, while in
others, the increases are tied to the Consumer Price Index.
The Penhall Group believes that its facilities are suitable for its current
operations and provide sufficient capacity to meet present needs. However, if
the Penhall Group expands its geographic base of operations it may have to
obtain additional facilities.
GOVERNMENTAL REGULATION
The operations of the Penhall Group are subject to certain federal, state
and local laws and regulations concerning labor relations, wage rates, equal
opportunity employment and affirmative action. While compliance with such laws
and regulations has not adversely affected the Penhall Group's operations in the
past, there can be no assurance that these requirements will not change or that
future compliance will not adversely affect the Penhall Group's operations.
The Penhall Group's facilities and operations are also subject to certain
federal, state and local laws and regulations relating to environmental
protection and occupational health and safety, including those governing
wastewater discharges, the treatment, storage and disposal of solid and
hazardous wastes and materials, and the remediation of contamination associated
with the release of hazardous substances. The Penhall Group believes that it is
in material compliance with such requirements and does not currently anticipate
any material capital expenditures for environmental compliance or remediation
for the current or the immediately succeeding fiscal year. The Penhall Group
operates at a number of locations at which petroleum products are stored in
underground tanks. The Penhall Group is currently in the process of complying
with up-coming regulatory obligations to upgrade or close underground storage
tanks under the Resource Conservation and Recovery Act of 1980, as amended
("RCRA"), including all applicable requirements of state regulatory agencies,
which must be met by December 22, 1998. The Penhall Group believes that the
costs associated with the storage tank upgrades or closures (including the cost
to address any associated contamination) would not reasonably be expected to
exceed $170,000.
Certain of the Penhall Group's present and former facilities and operations
at off-site construction sites have used substances and generated or disposed of
wastes which may include material which is or may be considered hazardous or are
otherwise regulated by environmental laws, and the Penhall Group may incur
liability in connection therewith. Moreover, there can be no assurance that
environmental and safety requirements will not become more stringent or be
interpreted and applied more stringently in the future. Such future changes or
interpretations, or the identification of adverse environmental conditions
currently unknown to the Penhall Group, could result in additional environmental
compliance or remediation costs to the Penhall Group. Such compliance and
remediation costs could be material to the Penhall Group's financial condition
or results of operations. See "Risk Factors--Governmental Regulation."
LEGAL PROCEEDINGS
The Penhall Group is from time to time involved in various legal proceedings
and claims arising in the ordinary course of business. The Penhall Group
believes that there is no outstanding litigation which could have a material
impact on its operations.
60
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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, see "Ownership of Capital Stock -- Stockholders
Agreement."
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John T. Sawyer....................................... 53 Chairman of the Board of Directors, President and
Chief Executive Officer
Clark George Bush.................................... 43 Vice President and Regional Manager, Southern
California Region
M. Bruce Repchinuck.................................. 49 Vice President and Regional Manager, Northwest Region
Bruce F. Varney...................................... 46 Vice President and Regional Manager, Southwest Region
Martin W. Houge...................................... 40 Vice President-Finance and Chief Financial Officer
David S. Neal........................................ 36 Regional Manager, Southern Region
Gary Aamold.......................................... 48 Vice President and Regional Manager,
Highway Services Division
Bruce C. Bruckmann................................... 44 Director
Harold O. Rosser II.................................. 49 Director
</TABLE>
JOHN T. SAWYER, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, joined PII in 1978 as the Estimating Manager of the Anaheim
Division. In 1980, Mr. Sawyer was appointed Manager of PII'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 PenCo since 1989.
CLARK GEORGE BUSH, VICE PRESIDENT AND REGIONAL MANAGER, SOUTHERN CALIFORNIA
REGION, joined PII 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 PII with
responsibility for the Southern California region.
M. BRUCE REPCHINUCK, VICE PRESIDENT AND REGIONAL MANAGER, NORTHWEST REGION,
began his career with PII 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 PII 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.
MARTIN W. HOUGE, VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER, joined
PII in 1996 as Chief Financial Officer. From 1989 to 1996, Mr. Houge served in
various financial positions with the Furon Company, including Director of
Accounting, Division Controller and Director of Internal Audit. From 1979 to
1989, he was in public accounting with Arthur Young and Company. Mr. Houge is a
certified public accountant.
DAVID S. NEAL, REGIONAL MANAGER, SOUTHERN REGION, joined PII in 1990. Mr.
Neal served as an estimator and division manager prior to being named Regional
Manager in April 1998. Prior to joining PII, Mr. Neal held several project
management positions in the highway contracting industry.
61
<PAGE>
GARY AAMOLD, VICE PRESIDENT AND REGIONAL MANAGER, HIGHWAY SERVICES DIVISION,
joined PII as a result of the HSI Acquisition in April 1998. Since 1989, Mr.
Aamold has served in various managerial capacities for HSI.
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.
For information concerning certain arrangements with respect to the
composition of the Board of Directors of the Company, see "Ownership of Capital
Stock -- Stockholders Agreement."
DIRECTOR COMPENSATION AND ARRANGEMENTS
Following consummation of the Transactions, each non-employee director of
the Company will be 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.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued for fiscal
1998 to the Chief Executive Officer of PII and to each of the four other most
highly compensated executive officers of the Penhall Group. Upon consummation of
the Transactions, Roger C. Stull retired as Chief Executive Officer of PII.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) COMPENSATION(3)
- -------------------------------------------------------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Roger C. Stull.......................................... $ 402,412 $ 500,000 $ 8,856 $ 79,109(4)
Chief Executive Officer-PII
John T. Sawyer.......................................... $ 254,676 $ 155,000 $ 8,856 $ 3,452(5)
Vice President-PII and President-PenCo
C. George Bush.......................................... $ 142,607 $ 90,000 $ 8,856 $ 3,262(6)
Vice President-PII
M. Bruce Repchinuck..................................... $ 137,340 $ 120,000 $ 8,856 $ 3,373(7)
Vice President-PII
Bruce F. Varney......................................... $ 128,091 $ 100,000 $ 8,856 $ 3,452(8)
Vice President-PII
</TABLE>
- ------------------------------
(1) Includes amounts contributed as salary deferral contributions in fiscal
1998 under the Penhall International, Inc. and Affiliated Companies
Employees' Profit Sharing (401(k)) Plan (the "Plan"), as follows: $9,204 for
Mr. Stull; $9,046 for Mr. Sawyer; $9,024 for Mr. Bush; $9,840 for Mr.
Repchinuck; and $10,400 for Mr. Varney.
(2) Includes the amount attributable to the use of an automobile furnished by
PII.
(3) Includes PII 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 $910 of PII matching contributions under the Plan, approximately
$444 of premiums for group term life insurance, approximately $1,763 of
premiums for health care insurance, approximately $430 for long-term
disability insurance premiums
62
<PAGE>
and approximately $75,562 of premiums, in the aggregate, for life insurance
policies on the lives of Mr. Stull and his wife, Ann R. Stull, maintained by
PII under a split-dollar insurance arrangement. In fiscal 1998, all of the
premiums for the split-dollar insurance were paid directly, or by borrowing
against the policies, by PII.
(5) Includes $910 of PII matching contributions under the Plan, approximately
$444 of premiums for group term life insurance, approximately $1,668 of
premiums for health care insurance and approximately $430 for long-term
disability insurance premiums.
(6) Includes $910 of PII matching contributions under the Plan, approximately
$331 of premiums for group term life insurance, approximately $1,591 of
premiums for health care insurance and approximately $430 for long-term
disability insurance premiums.
(7) Includes $910 of PII matching contributions under the Plan, approximately
$444 of premiums for group term life insurance, approximately $1,589 of
premiums for health care insurance and approximately $430 for long-term
disability insurance premiums.
(8) Includes $910 of PII matching contributions under the Plan, approximately
$444 of premiums for group term life insurance, approximately $1,668 of
premiums for health care insurance and approximately $430 for long-term
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
PII 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 the Penhall Group'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.
PII 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 PII and employee
contributions to the Plan are allocated to a participant's individual account.
$161,000 was charged to general and administrative expense by PII related to
contributions to and expenses of the Plan for the year ended June 30, 1998.
All PII and employee contributions to the Plan plus the earnings thereon are
100% vested. Employees may direct the investment of their accounts to various
investment funds. The Plan provides for hardship withdrawals and loans to
participants.
STOCK OPTION PLAN
In March 1993, PII adopted a stock option plan pursuant to which certain key
employees of PII were granted options to purchase up to 13,750 shares of PII'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 PII in payment of the exercise price
therefor. Upon consummation of the Transactions, PII forgave all but
approximately $129,000 of the indebtedness represented by such promissory notes.
63
<PAGE>
OWNERSHIP OF CAPITAL STOCK
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 PII. Unless otherwise
specified, all shares are directly held.
<TABLE>
<CAPTION>
NUMBER AND PERCENT OF SHARES
--------------------------------------------------------------------
SERIES A SERIES B
COMMON SENIOR EXCHANGEABLE PREFERRED PREFERRED
NAME OF BENEFICIAL OWNER STOCK(1) PREFERRED STOCK STOCK STOCK
- ------------------------------------------ --------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill & Co., 582,312/58.52% --/-- 9,717/93.18% 9,333/41.35%
L.P.(2).................................
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
The National Christian Charitable
Foundation Inc.......................... --/-- 10,000/100.0% --/-- --/--
Penhall Rental Corp. (PII)................ --/-- --/-- --/-- 4,000/17.72%
John T. Sawyer............................ 110,113/11.07% --/-- --/-- 2,465/10.92%
C. George Bush............................ 40,380/4.06% --/-- --/-- 873/3.87%
M. Bruce Repchinuck(3).................... 27,843/2.80% --/-- --/-- 487/2.16%
Bruce F. Varney........................... 36,504/3.67% --/-- --/-- 754/3.34%
Bruce C. Bruckmann(4)..................... 624,915/62.81% --/-- 10,428/100.0% 10,016/44.37%
Harold O. Rosser II(4).................... 624,915/62.81% --/-- 10,428/100.0% 10,016/44.37%
All directors and officers as a group
(9 persons)............................. 878,978/88.34% --/-- 10,428/100.0% 15,433/68.37%
</TABLE>
- ------------------------
(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. See "Certain Relationships and Related
Transactions--Stock Options."
(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.
COMMON STOCK
The Company is authorized to issue up to 5,000,000 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all matters
submitted for action by the stockholders. There is no provision for cumulative
voting with respect to the election of directors. Accordingly, the holders of
more than 50% of the shares of Common Stock will be able to elect all of the
directors. In such event, the holders of the remaining shares of Common Stock
will not be able to elect any directors.
64
<PAGE>
Subject to the rights of any holders of outstanding preferred stock of the
Company, all shares of Common Stock are entitled to share in such dividends as
the Board of Directors of the Company may from time to time declare from sources
legally available therefor. Subject to the rights of any holders of outstanding
preferred stock of the Company, upon liquidation or dissolution of the Company,
whether voluntary or involuntary, all shares of Common Stock are entitled to
share equally in the assets available for distribution to stockholders after
payment of all prior obligations of the Company.
SENIOR EXCHANGEABLE PREFERRED STOCK
The Company 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 the Company, 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 the Company, 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. The New Credit Facility and the Indenture restrict, and any future credit
agreements or indentures to which the Company becomes a party may restrict, the
ability of the Company to pay cash dividends.
The Company may, at its option, redeem at any time, from any source of funds
legally available therefor, 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, the Company shall redeem, from any source of funds
legally available therefor, 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 the Company 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 the
Company shall be prohibited from paying interest on the Junior Subordinated
Notes in cash for so long as the 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. The New Credit Facility and the Indenture
restrict, and any future credit agreements or indentures to which the Company
becomes a party may restrict, the ability of the Company to exchange the Senior
Exchangeable Preferred Stock for the Junior Subordinated Notes and redeem or
repurchase the Junior Subordinated Notes.
65
<PAGE>
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Senior Exchangeable Preferred Stock shall
be entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount in cash equal to the Senior
Exchangeable Preferred Liquidation Preference per share, plus an amount equal to
a prorated dividend from the last dividend payment date to the date fixed for
liquidation, dissolution or winding up, before any distribution is made on any
shares of Senior Exchangeable Junior Stock. If such available assets are
insufficient to pay the holders of the outstanding shares of Senior Exchangeable
Preferred Stock in full, such assets, or the proceeds thereof, shall be
distributed ratably among such holders. Except as otherwise required by law, the
holders of Senior Exchangeable Preferred Stock have no voting rights and are not
be entitled to any notice of meeting of stockholders.
SERIES A PREFERRED STOCK
The Company 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 the Company, 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 the Company, 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. The New Credit
Facility and the Indenture restrict, and any future credit agreements or
indentures to which the Company becomes a party may restrict, the ability of the
Company to pay cash dividends.
The Company may, at its option, redeem at any time, from any source of funds
legally available therefor, 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, the
Company shall redeem, from any source of funds legally available therefor, 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 the Company, holders of Series A Preferred Stock shall be entitled
to be paid out of the assets of the Company 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 be 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
66
<PAGE>
Preferred Stock, except that the Series B Preferred Stock is not be subject to
any mandatory or optional redemption by the Company.
STOCKHOLDERS AGREEMENT
Upon consummation of the Transactions, the BRS Entities, the Management
Stockholders and the Company 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 following is a summary description of the principal terms
of the Stockholders Agreement, a copy of which is available upon request to the
Company.
Pursuant to the Stockholders Agreement, the Board of Directors of the
Company shall be comprised of no less than three and no more than seven persons
(with the exact number to be determined by BRS from time to time). If the Board
of Directors is composed of three or four persons, then one individual shall be
designated by the Management Stockholders holding a majority of the Common Stock
owned by the Management Stockholders and the remainder shall be designated by
BRS. If the Board of Directors is composed of five or more persons, then two
individuals shall be designated by the Management Stockholders holding a
majority of the Common Stock owned by the Management Stockholders (who shall be
Management Stockholders and officers of the Company during the term of their
directorship) and the remainder shall be designated by BRS. The initial
designees of BRS will be Bruce C. Bruckmann and Harold O. Rosser II. Subject to
certain rights of removal, John T. Sawyer shall be the designee of the
Management Stockholders.
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 the Company
and holders of at least a majority of the Common Stock of the Company then
outstanding shall approve the sale of the Company 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 the Company and the holders of a majority of the
Common Stock of the Company then outstanding. The Stockholders Agreement also
provides for certain additional restrictions on transfer of the Company's Common
Stock and Series B Preferred Stock by the Management Stockholders, including the
right of the Company to purchase certain Common Stock and Series B Preferred
Stock of the Company 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 Transactions and the 180th day following
an Initial Public Offering (as defined below), at a formula price, and the grant
of a right of first refusal in favor of the Company 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 the Indenture, the New Credit Facility
and other agreements relating to indebtedness of the Company, to require the
Company 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 Transactions and the 180th day following an Initial
Public Offering, at a formula 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.
REGISTRATION RIGHTS AGREEMENT
Upon consummation of the Transactions, the BRS Entities, the Management
Stockholders and the Company entered into a Registration Rights Agreement (the
"Company Registration Rights Agreement")
67
<PAGE>
pursuant to which the Company granted certain registration rights to the
stockholders of the Company with respect to the Company's Common Stock. Under
the Company Registration Rights Agreement, the Company granted to the BRS
Entities demand registration rights with respect to the shares of Common Stock
held by the BRS Entities. All of the stockholders party to the Company
Registration Rights Agreement have the right to participate, or "piggyback," in
certain registrations initiated by the Company.
STOCK OPTIONS
It is expected that certain employees of the Company to be designated will
be provided with an opportunity to receive non-qualified options (the "New
Options") to purchase shares of Common Stock representing approximately 5% of
the outstanding Common Stock on a fully diluted basis. Such persons will have
the opportunity to acquire one-fifth of the New Options during each year of the
five-year period beginning with the consummation of the Transactions. For each
such year, the opportunity to receive any New Option will be subject to the
Company's achievement of certain financial performance goals. In certain
circumstances, such persons will have the right to immediately receive any
unissued or unvested New Options regardless of whether such performance goals
have been met.
68
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTE PAYABLE TO ROGER STULL
In December 1995, PII purchased from Roger Stull certain facilities
previously leased to PII 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. See "Description of the Notes--Certain Covenants--Transactions
with Affiliates."
SPLIT-DOLLAR INSURANCE POLICIES
In addition to group term life insurance, PII maintains and pays 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, PII 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, PII 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) PII and the Stulls terminated
their split-dollar insurance arrangement, (ii) PII relinquished any and all
claims against the Stulls for reimbursement of premiums paid by PII on the
policies, (iii) the Stulls relinquished any and all claims against PII arising
out of borrowings by PII against the policies, and (iv) the Stulls obtained
ownership of the policies free and clear of any claims by PII.
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 PII and
certain members of Management (the "Compensation Agreement"), PII 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 PII and President of
PenCo, C. George Bush, Vice President of PII, M. Bruce Repchinuck, Vice
President of PII and Bruce F. Varney, Vice President of PII, received
approximately $1,007,511, $444,184, $322,443 and $312,411, respectively,
pursuant to the Compensation Agreement.
On September 15, 1998, PII made such payments out of working capital. The
Penhall Group expects that it will realize 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. The Penhall Group has
realized or anticipates it will realize these tax benefits during a four-month
period that began on June 15, 1998.
INDEBTEDNESS OF MANAGEMENT
On or about April 15, 1998, PII advanced approximately $205,862 to John T.
Sawyer, Vice President of PII and President of PenCo, 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 PII made
to to Mr. Sawyer on September 15, 1998.
69
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company. To the
extent such summary contains descriptions of the New Credit Facility and other
loan documents, such descriptions do not purport to be complete and are
qualified in their entirety by reference to such documents, which are available
upon request from the Company.
NEW CREDIT FACILITY
In order to finance a portion of the cash consideration to be paid pursuant
to the Merger, the Company's existing credit facility (the "Existing Credit
Facility") was replaced by the $50.0 million New Credit Facility with Bankers
Trust Company ("BTCo") as administrative agent (the "Administrative Agent"),
Credit Suisse First Boston ("CSFB") as syndication agent (the "Syndication
Agent") and a syndicate of banks formed by BTCo (the "Senior Lenders").
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; and (ii) a six-year Revolving Credit Facility in an aggregate principal
amount not to exceed $30.0 million.
Term Loans in an aggregate principal amount of $20.0 million were drawn on
the closing date of the New Credit Facility in connection with the
Recapitalization. Subject to compliance with customary conditions precedent,
Revolving Loans will be available at any time prior to the final maturity of the
Revolving Credit Facility. Amounts repaid under the Revolving Credit Facility
may be reborrowed prior to the final maturity of the Revolving Credit Facility,
provided that availability requirements are met. Standby letters of credit will
be available at any time and will have an expiry date occurring no later than
one year after issuance and, in any case, no later than one business day prior
to the final maturity of the Revolving Credit Facility. Trade letters of credit
will be available at any time and will have an expiry date occurring no later
than 180 days after issuance and, in any case, no later than the thirtieth day
prior to the final maturity of the Revolving Credit Facility.
All obligations of the Company under the New Credit Facility are
unconditionally guaranteed (the "Facility Guaranties") by each existing and each
subsequently acquired or organized subsidiary of the Company (the "Facility
Guarantors"). The New Credit Facility and the related guarantees are secured by
substantially all the assets of the Company and each Facility Guarantor,
including but not limited to (i) a first priority pledge of all the capital
stock and notes owned by the Company and each Facility Guarantor and (ii)
perfected first priority security interests in substantially all tangible and
intangible assets of the Company and each Facility Guarantor.
Borrowings under the New Credit Facility bear interest at a floating rate
based upon, at the Company's option, (i) the Applicable Margin plus the Base
Rate (as such terms are defined in the New Credit Facility) in effect from time
to time, or (ii) the Applicable Margin plus the Eurodollar Rate (as such term is
defined in the New Credit Facility), adjusted for required reserves. The Company
may elect interest periods of one, two, three or six months for Eurodollar
borrowings. Interest on Eurodollar borrowings shall be payable at the end of
each interest period and, in any event, at least every three months, at the time
of repayment of any loans and at maturity. Interest on Base Rate borrowings
shall be payable quarterly and at maturity. In addition to paying interest on
outstanding principal under the New Credit Facility, the Company is required to
pay a commitment fee to the Senior Lenders equal to 0.5% per annum of the
undrawn portion of the commitments in respect of the Revolving Credit Facility,
payable quarterly in arrears and upon the termination of the Revolving Credit
Facility, in each case for the actual number of days elapsed in a 360-day year.
The New Credit Facility contains provisions under which margins on interest
rates under the facilities will be adjusted in increments based on performance
goals.
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
70
<PAGE>
Credit Facility are due and payable in full at maturity. 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 Facility Guarantor. 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.
The New Credit Facility contains numerous restrictive financial and other
covenants, including, but not limited to (i) limitations on the incurrence of
liens and indebtedness, (ii) restrictions on consolidations, mergers and sales
of assets, investments (including the purchase of stock, obligations or
securities), advances and loans, capital expenditures, changes in business,
prepayment of indebtedness (including the Notes), affiliate transactions,
issuances of capital stock, payments of interest on certain indebtedness and
creation of subsidiaries, (iii) a prohibition (with certain limited exceptions)
on dividends, distributions and payments on, and redemptions of, shares of
capital stock, and (iv) a requirement to meet certain identified financial
targets, based generally on rolling four fiscal quarter periods, such as a
maximum leverage ratio and a minimum interest coverage ratio and a requirement
to maintain a minimum Consolidated EBITDA (as defined in the New Credit
Facility) during specified quarterly periods.
Events of default under the New Credit Facility include, among others, (i)
breach of representations and warranties, (ii) nonpayment of interest, fees or
principal when due, (iii) breach in the observance or performance of any
covenants, condition or agreement, (iv) voluntary or involuntary bankruptcy
proceedings, (v) default in any other indebtedness that permits acceleration of
such indebtedness, (vi) any events or conditions which would result in the
termination of a pension plan or the creation of certain liabilities under the
Employment Retirement Income Security Act of 1974, as amended, (vii) judgments
or decrees involving liability of $3.5 million or more that remain undischarged
or unbonded for 60 consecutive days, (viii) the invalidity of certain security
documents and security interests or the cessation of any Subsidiary Guarantees
(as defined in the New Credit Facility) or any denial or disaffirmation by a
Guarantor as to its obligations under a Subsidiary Guarantee and (ix) the
occurrence of a Change of Control (as defined in the New Credit Facility). Upon
the occurrence of any event of default under the New Credit Facility, the Senior
Lenders may accelerate the maturity of the loans made thereunder and terminate
the commitments under the New Credit Facility.
The New Credit Facility contains representations, warranties and other
provisions customary for credit facilities of this type. The Company will pay
the Senior Lenders certain syndication and administration fees, reimburse
certain expenses and provide certain indemnities, in each case which are
customary for credit facilities of this type.
NOTE PAYABLE TO HSI
In April 1998, PenCo purchased substantially all of the assets of HSI for
approximately $9.7 million plus the assumption of approximately $1.3 million of
liabilities. PenCo paid approximately $6.0 million of the purchase price in
cash, with the remainder payable in equal installments in April 1999 and 2000
pursuant to a $3.7 million secured promissory note which bears interest at 5.51%
per annum.
71
<PAGE>
DESCRIPTION OF THE NOTES
The Existing Notes were issued under an indenture (the "Indenture"), dated
as of August 1, 1998, between the Issuer and United States Trust Company of New
York, as trustee (the "Trustee"). Upon consummation of the Recapitalization
Merger, the Company assumed all of the Issuer's obligations under the Existing
Notes and the Indenture and the Guarantors became parties to the Indenture and
executed the Guarantees. The terms of the Indenture apply to the Existing Notes
and to the New Notes to be issued in exchange therefor pursuant to the Exchange
Offer (all such Notes being referred to herein collectively as the "Notes").
The following is a summary of the material provisions of the Indenture. This
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the TIA as in effect on the date of the Indenture. A copy of the
Indenture has been filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part. The definitions of certain
capitalized terms used in this summary are set forth below under "-- Certain
Definitions." For purposes of this section, references to the "Company" include
only the Company and not its Subsidiaries.
The Notes will be senior unsecured obligations of the Company, ranking PARI
PASSU in right of payment to all senior unsecured obligations of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any paying agent and registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150,000,000, of
which $100,000,000 were issued in connection with the Transactions. The Notes
will mature on August 1, 2006. Additional amounts may be issued in one or more
series from time to time subject to the limitations set forth under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness" and
restrictions contained in the New Credit Facility. Interest on the Notes will
accrue at the rate of 12% per annum and will be payable semiannually in arrears
on each February 1 and August 1, commencing on February 1, 1999, to the persons
who are registered Holders at the close of business on the January 15 and July
15, respectively, immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from and including the date of
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after August 1, 2003,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if
72
<PAGE>
redeemed during the twelve-month period commencing on August 1 of the years set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 106.000%
2004.............................................................................. 104.000%
2005.............................................................................. 102.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to August 1, 2001, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 30% of the sum of (i) the initial aggregate principal amount of
Notes issued in connection with the Transactions and (ii) the respective initial
aggregate principal amounts of Notes issued under the Indenture after the Issue
Date, at a redemption price equal to 112.0% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption; PROVIDED
that at least 70% of the sum of (i) the initial aggregate principal amount of
Notes issued in connection with the Transactions and (ii) the respective initial
aggregate principal amounts of Notes issued under the Indenture after the Issue
Date remains outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity Offering,
the Company shall make such redemption not more than 120 days after the
consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as
is practicable (subject to DTC procedures or the procedures of any other
depositary), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption as long
as the Company has deposited with the paying agent funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
RANKING
The Notes will be general unsecured senior obligations of the Company. The
Notes will rank on a parity in right of payment with all existing and future
unsubordinated Indebtedness of the Company and senior in right of payment to all
existing and future subordinated Indebtedness of the Company.
The Notes will be effectively subordinated to all secured Indebtedness of
the Company (including all Indebtedness outstanding under the New Credit
Facility) to the extent of the value of the assets securing such Indebtedness
and to all Indebtedness of any other Subsidiaries of the Company (other than the
73
<PAGE>
Guarantors). The Guarantees will be effectively subordinated to all existing and
future secured Indebtedness of the related Guarantor (including all Indebtedness
outstanding under the New Credit Facility and guaranteed by the Guarantors) to
the extent of the value of the assets securing such Indebtedness. All of the
outstanding Indebtedness under the New Credit Facility will be guaranteed by the
Guarantors on a secured basis. See "Description of Certain Indebtedness -- New
Credit Facility."
As of September 30, 1998, the Company had approximately $121.1 million of
indebtedness outstanding (including $20.8 million of secured indebtedness
outstanding pursuant to the New Credit Facility but exclusive of $29.2 million
of unused commitments thereunder), and the Guarantors had approximately $4.3
million of indebtedness outstanding (including $3.9 million of secured
indebtedness but exclusive of guarantees by the Guarantors of the Company's
obligations under the Notes and the New Credit Facility).
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be secured. Although the Indenture limits the incurrence of Indebtedness and
the issuance of preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by such subsidiaries
of liabilities that are not considered Indebtedness under the Indenture. See
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
GUARANTEES
Each Guarantor will unconditionally guarantee, on a senior basis, jointly
and severally, to each Holder and the Trustee, the full and prompt performance
of the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount PRO RATA, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Restricted Subsidiary of the Company
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "Certain Covenants -- Merger, Consolidation and Sale
of Assets." In the event all of the Capital Stock of a Guarantor is sold by the
Company and the sale complies with the provisions set forth in "--Certain
Covenants -- Limitation on Asset Sales," the Guarantor's Guarantee will be
released. Each Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Guarantee and related
obligations set forth in the Indenture for so long as it remains an Unrestricted
Subsidiary.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a portion
of such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date for the
Notes, which must be no earlier than 30 days nor later than 60 days from the
date such notice is mailed,
74
<PAGE>
other than as may be required by law (the "Change of Control Payment Date").
Holders electing to have a Note purchased pursuant to a Change of Control Offer
will be required to surrender the Note, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance the Company
will have available funds sufficient to pay the Change of Control purchase price
for all the Notes that might be delivered by Holders seeking to accept the
Change of Control Offer. In the event the Company is required to purchase
outstanding Notes pursuant to a Change of Control Offer, the Company expects
that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations or any applicable exchange
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
exchange regulations and shall not be deemed to have breached its obligations
under the "Change of Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries may incur Indebtedness (including, without limitation, Acquired
Indebtedness) if on the date of the incurrence of such Indebtedness, after
giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than (i) 2.0 to 1.0, if the Indebtedness is to
be incurred prior to August 1, 2000, (ii) 2.25 to 1.0, if the Indebtedness is to
be incurred on or after August 1, 2000 and prior to August 1, 2002, or (iii)
2.50 to 1.0, if the Indebtedness is to be incurred on or after August 1, 2002;
PROVIDED, FURTHER, HOWEVER, that the Company shall not be permitted to exchange
any of its Senior Exchangeable Preferred Stock for Junior Subordinated Notes or
any other instrument of Indebtedness unless, after giving effect to
75
<PAGE>
the exchange thereof, the Consolidated Fixed Charge Coverage Ratio of the
Company is greater than 2.75 to 1.0.
For purposes of determining compliance with this covenant, (i) in the event
that an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness permitted by this covenant, the Company in its sole discretion will
classify such item of Indebtedness and will only be required to include the
amount and type of each class of Indebtedness in the test specified in the first
paragraph of this covenant or in one of the clauses of the definition of the
term "Permitted Indebtedness," (ii) the amount of Indebtedness issued at a price
which is less than the principal amount thereof shall be equal to the amount of
liability in respect thereof determined in accordance with GAAP, (iii)
Indebtedness incurred in connection with, or in contemplation of, any
transaction described in the definition of the term "Acquired Indebtedness"
shall be deemed to have been incurred by the Company or one of its Restricted
Subsidiaries, as the case may be, at the time an acquired Person becomes such a
Restricted Subsidiary (or is merged into the Company or such a Restricted
Subsidiary) or at the time of the acquisition of assets, as the case may be, and
(iv) guarantees or Liens supporting Indebtedness permitted to be incurred under
this covenant may be issued or granted if otherwise issued or granted in
accordance with the terms of the Indenture.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock (other than purchases, redemptions,
acquisitions or retirements of Capital Stock of the Company otherwise allowed
pursuant to the definition of Permitted Investments), (c) make any principal
payment on, purchase, defease, redeem, prepay or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company or a Guarantor that is
subordinate or junior in right of payment to the Notes or a Guarantee, as the
case may be, or (d) make any Investment (other than Permitted Investments) (each
of the foregoing actions set forth in clauses (a), (b), (c) and (d) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto, (i) a Default or an Event of
Default shall have occurred and be continuing or (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of the following amounts
(without duplication): (1) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company accrued on a cumulative basis during the period beginning on the
first day of the fiscal quarter immediately following the Issue Date and ending
on the last day of the last fiscal quarter preceding the date the Restricted
Payment occurs (the "Reference Date") (treating such period as a single
accounting period); plus (2) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company or any options, warrants or other
rights to acquire Qualified Capital Stock of the Company; plus (3) 100% of the
aggregate net cash proceeds received subsequent to the Issue Date by the Company
from any Person (other than a Subsidiary of the Company) from the issuance or
sale of debt securities or shares of Disqualified Capital Stock that have been
converted into or exchanged for Qualified Capital Stock, together with the
aggregate cash received by the Company at the time of such conversion or
exchange; plus (4) 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Qualified
Capital Stock subsequent to the Issue Date; plus (5) an amount equal to the net
reduction in
76
<PAGE>
Investments in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary (except to the extent any
such payment is otherwise included in the calculation of Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries, valued in each case as provided in the definition of
"Investments," not to exceed, in the case of an Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition, redemption, repurchase
or retirement of any shares of Capital Stock of the Company, either (i) solely
in exchange for shares of Qualified Capital Stock of the Company or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company; (3) if no Default or Event of Default shall have
occurred and be continuing, the acquisition of any Indebtedness of the Company
or a Guarantor that is subordinate or junior in right of payment to the Notes or
the Guarantees, as applicable, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the
Company or (B) Refinancing Indebtedness; (4) repurchases by the Company of
Capital Stock of the Company from employees, officers or directors of the
Company or any of its Subsidiaries or their authorized representatives upon the
death, disability or termination of employment of such employees, officers or
directors, or as otherwise required by existing employment agreements, in an
aggregate amount not to exceed $1,000,000 in any calendar year (including any
cash payments made during such calendar year pursuant to Indebtedness incurred
in order to repurchase Capital Stock of the Company from employees, officers or
directors of the Company) and $5,000,000 in the aggregate during the term of the
Notes, in each case plus (i) the aggregate cash proceeds actually received from
any reissuance during such calendar year of Capital Stock by the Company to
employees, officers or directors of the Company and its Subsidiaries and (ii)
the aggregate cash proceeds actually received in such calendar year from any
payments on life insurance policies in which the Company or any of its
Subsidiaries is the beneficiary with respect to any employees, officers or
directors of the Company and its Subsidiaries which proceeds are used to
purchase the Capital Stock of the Company held by any such employees, officers
or directors; PROVIDED, HOWEVER, that the Company shall not be permitted to
repurchase Capital Stock pursuant to this clause (4), if (x) any Default or
Event of Default shall have occurred and be continuing or (y) on the date of any
such repurchase the Company could not incur at least $1.00 of Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant; (5) repurchases of Capital
Stock deemed to occur upon the exercise of stock options if such Capital Stock
represents a portion of the exercise price thereof; and (6) the exchange of
Senior Exchangeable Preferred Stock for Junior Subordinated Notes; PROVIDED,
that after giving effect to the exchange thereof, the Consolidated Fixed Charge
Coverage Ratio of the Company is greater than 2.75 to 1.0. In determining the
aggregate amount of Restricted Payments made subsequent to the Issue Date in
accordance with clause (iii) of the immediately preceding paragraph, amounts
expended pursuant to clauses (1), (2)(ii), (3)(ii)(A), and (4) shall be included
in such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors); (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; PROVIDED, HOWEVER, that the amount of (A) any
liabilities (as shown on the
77
<PAGE>
Company's or such Restricted Subsidiary's most recent balance sheet or the notes
thereto) of the Company or any Restricted Subsidiary that are assumed by the
transferee in such Asset Sale and from which the Company or such Restricted
Subsidiary is released and (B) any notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
immediately converted by the Company or such Restricted Subsidiary into cash or
Cash Equivalents (to the extent of the cash or Cash Equivalents received) shall
be deemed to be cash for the purposes of this covenant; and (iii) upon the
consummation of an Asset Sale, the Company shall apply, or cause such Restricted
Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within
360 days of receipt thereof either (A) to repay any Indebtedness ranking at
least PARI PASSU with the Notes (including amounts under Bank Credit
Facilities), (B) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in properties
and assets that will be used in the business of the Company and its Restricted
Subsidiaries as existing on the Issue Date or in businesses reasonably related
thereto ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
361st day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), an amount equal to such aggregate amount of Net
Cash Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than
45 nor more than 60 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders on a PRO RATA basis, that amount of Notes equal to the
Net Proceeds Offer Amount at a price equal to 100% of the principal amount of
the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase; PROVIDED, HOWEVER, that if at any time any consideration
other than cash or Cash Equivalents received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset Sale
is converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. A
transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by
a Restricted Subsidiary to the Company or to a Wholly Owned Restricted
Subsidiary will not be deemed to be an Asset Sale. A transaction that is subject
to and made in compliance with the "Merger, Consolidation and Sale of Assets"
covenant shall not be subject to the application of this covenant. The Company
may defer the Net Proceeds Offer until there is an aggregate unutilized Net
Proceeds Offer Amount equal to or in excess of $5,000,000 resulting from one or
more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $5,000,000, shall be applied as
required pursuant to this paragraph).
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraph to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered) unless otherwise
78
<PAGE>
required by law or any applicable exchange regulations. A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations or any applicable exchange
regulations conflict with the "Asset Sale" provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
exchange regulations and shall not be deemed to have breached its obligations
under the "Asset Sale" provisions of the Indenture by virtue thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture, the Notes and the Guarantees;
(3) customary non-assignment provisions of any contract or any lease governing a
leasehold interest of any Restricted Subsidiary of the Company; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired (and such
Person's direct and indirect Subsidiaries); (5) agreements existing on the Issue
Date to the extent and in the manner such agreements are in effect on the Issue
Date; (6) a Bank Credit Facility; (7) an agreement governing Indebtedness
incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to
an agreement referred to in clause (2), (4), (5) or (6) above; PROVIDED,
HOWEVER, that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness are no less favorable to the Company or the
relevant Restricted Subsidiary of the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4), (5) or (6); (8) any
restriction or encumbrance contained in contracts for sale of assets permitted
by the Indenture in respect of the assets being sold pursuant to such contracts
pending the close of such sale, which encumbrance or restriction is not
applicable to any asset other than the assets being sold pursuant to such
contracts; (9) Purchase Money Obligations incurred in accordance with the terms
of the Indenture for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (c) above on the property
so acquired; or (10) restrictions of the nature described in clause (c) above on
the transfer of assets subject to any Lien permitted under the Indenture imposed
by the holder of such Lien.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company unless at the time of such issuance such
Restricted Subsidiary would be entitled to create, incur or assume Indebtedness
pursuant to the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness" in the aggregate amount equal to the aggregate
liquidation value, plus any accrued and unpaid dividends, of the Preferred Stock
to be issued. Notwithstanding the foregoing, nothing contained in such covenant
will prohibit the ownership of Preferred Stock issued by a Person prior to the
time (a) such Person becomes a Restricted Subsidiary of the Company, (b) such
Person merges with or into a Restricted Subsidiary of the Company or (c) a
Restricted Subsidiary of the Company merges with or into
79
<PAGE>
such Person; PROVIDED that such Preferred Stock was not issued by such Person in
anticipation of a transaction contemplated by any of clauses (a), (b) or (c)
above.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes or any Guarantee, the
Notes and such Guarantee, as the case may be, are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (ii)
in all other cases, the Notes and the Guarantees are equally and ratably
secured, except for (A) Liens existing as of the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date; (B) Liens securing
Indebtedness incurred pursuant to Bank Credit Facilities; (C) Liens securing the
Notes and the Guarantees; (D) Liens in favor of the Company or a Restricted
Subsidiary of the Company on assets of any Subsidiary of the Company; (E) Liens
securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
PROVIDED, HOWEVER, that such Liens (a) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (b) do not extend to
or cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted
Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company shall be the surviving
or continuing corporation or (2) the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
and be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
80
<PAGE>
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing in which the Company is not the continuing
corporation, the Surviving Entity formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under, and the Company shall be discharged from its obligations
under, the Indenture, the Notes and the Registration Rights Agreement with the
same effect as if such Surviving Entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "-- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Guarantor on the Guarantee; and (iii) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing.
Any merger or consolidation of a Restricted Subsidiary with and into the
Company (with the Company being the Surviving Entity) or any Guarantor need only
comply with clause (iv) of the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $2,500,000 shall be
approved by a majority of non-interested directors of the Board of Directors of
the Company or such Restricted Subsidiary, as the case may be, such approval to
be evidenced by a Board Resolution stating that such majority of non-interested
directors of the Board of Directors has determined that such transaction
complies with the foregoing provisions. If the Company or any Restricted
Subsidiary of the Company enters into an Affiliate Transaction (or a series of
related Affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $5,000,000, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain an opinion stating that such transaction or series of related
transactions are fair to the Company or the relevant Restricted Subsidiary, as
the case may be, from a financial point of view, from an Independent Financial
Advisor and file the same with the Trustee.
(b) The restrictions set forth in paragraph (a) above shall not apply to (i)
reasonable fees and compensation paid to, and indemnity provided on behalf of,
officers, directors, employees, agents or consultants of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management; (ii) transactions exclusively
between or among
81
<PAGE>
the Company and any of its Restricted Subsidiaries or exclusively between or
among such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; (iii) any agreement (including the Management
Agreement and the payment of all fees and expenses contemplated thereunder;
PROVIDED, that no payment of management fees or expenses (other than the Closing
Fee) contemplated under the Management Agreement shall be made unless (i) the
Consolidated Fixed Charge Coverage Ratio during the four full fiscal quarters
ending on or prior to the date of any such payment is greater than or equal to
1.75 to 1.0 and (ii) the Consolidated Fixed Charge Coverage Ratio calculated
solely for the one full fiscal quarter ending on or prior to the date of any
such payment is greater than or equal to 1.75 to 1.0) as in effect as of the
Issue Date or any amendment thereto or any transaction contemplated thereby
(including pursuant to any amendment thereto) in any replacement agreement
thereto so long as any such amendment or replacement agreement is not more
disadvantageous to the Company or its Restricted Subsidiaries, as the case may
be, in any material respect than the original agreement as in effect on the
Issue Date; (iv) Restricted Payments permitted by the Indenture; (v) any
issuance of securities or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans of the Company entered into in the ordinary
course of business and approved by the Board of Directors; (vi) loans and
advances, or guarantees of loans of third parties, to employees and officers of
the Company and its Restricted Subsidiaries in the ordinary course of business
not in excess of $2.0 million at any one time outstanding; and (vii)
indemnification agreements provided for the benefit of the Company or any
Restricted Subsidiary of the Company from officers, directors or employees of
the Company or any Restricted Subsidiary.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary (other
than a Foreign Subsidiary) that is not a Guarantor, or if the Company or any of
its Restricted Subsidiaries shall organize, acquire or otherwise invest in
another Restricted Subsidiary (other than a Foreign Subsidiary), in each case
having total assets with a book value in excess of $500,000, then such
transferee or acquired or other Restricted Subsidiary (other than a Foreign
Subsidiary) shall (i) execute and deliver to the Trustee a supplemental
indenture in form reasonably satisfactory to the Trustee pursuant to which such
Restricted Subsidiary shall unconditionally guarantee all of the Company's
obligations under the Notes and the Indenture on the terms set forth in the
Indenture and (ii) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Restricted Subsidiary; PROVIDED that such opinion may contain
exceptions that are customary in opinions of that type. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
REPORTS TO HOLDERS. The Indenture provides that the Company will deliver to
the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will, beginning on the earlier of the date the Exchange Offer Registration
Statement becomes effective and 180 days after the Issue Date, file with the
Commission, to the extent permitted, and provide the Trustee and Holders with
such annual reports and such information, documents and other reports specified
in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with
the other provisions of TIA Section 314(a).
NO RESTRICTIONS ON CONSUMMATION OF THE RECAPITALIZATION. The Indenture
provides that notwithstanding any provision contained therein to the contrary,
the consummation of the Recapitalization will not be prohibited.
82
<PAGE>
ADDITIONAL EQUITY CONTRIBUTIONS. The Indenture provides that if the
Company's Consolidated EBITDA for the quarter ended June 30, 1998 is less than
$5.6 million on a Pro Forma Basis, BRS or any other Principal will purchase,
with cash or Cash Equivalents, Qualified Capital Stock of the Company, in an
amount equal to the difference between (x) $5.6 million and (y) the amount of
the Company's Consolidated EBITDA for the quarter ended June 30, 1998. The
Indenture further provides that any purchase of Qualified Capital Stock required
pursuant to this covenant shall occur on or prior to September 30, 1998 and that
no other provision of the Indenture will prohibit the issuance of such Qualified
Capital Stock.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default with
such notice requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company,
which failure continues for a period of 20 days or more, or the acceleration
of the final stated maturity of any such Indebtedness (which acceleration is
not rescinded, annulled or otherwise cancelled within 20 days of receipt by
the Company or such Restricted Subsidiary of notice of any such
acceleration) if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at final maturity or which has been
accelerated, in each case with respect to which the 20-day period described
above has passed, aggregates $5,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
(excluding judgments to the extent covered by insurance by one or more
reputable insurers and as to which such insurers have acknowledged coverage
for) shall have been rendered against the Company or any of its Restricted
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect or any Guarantee of a Significant Subsidiary is declared to
be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any Guarantor that is a Significant
Subsidiary denies its liability under its Guarantee (other than by reason of
release of a Guarantor in accordance with the terms of the Indenture);
PROVIDED, HOWEVER, that an Event of Default will also be deemed to occur
with respect to Subsidiaries that are not Significant Subsidiaries
("Insignificant Subsidiaries") if the Guarantees of such Insignificant
Subsidiaries cease to be in full force and effect or are declared null and
void and unenforceable or such Insignificant Subsidiaries deny their
liability under their Guarantees, if when aggregated and taken as a whole
the Insignificant Subsidiaries subject to this clause (vii) would meet the
definition of a Significant Subsidiary.
83
<PAGE>
If an Event of Default (other than an Event of Default specified in clause
(vi) above relating to the Company) shall occur and be continuing, the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default specified in clause (vi) above relating to the Company
occurs and is continuing, then all unpaid principal of, and premium, if any, and
accrued and unpaid interest on all of the outstanding Notes shall IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due solely
because of the acceleration, (iii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of acceleration, has
been paid, (iv) if the Company has paid the Trustee its reasonable compensation
and reimbursed the Trustee for its expenses, disbursements and advances and (v)
in the event of the cure or waiver of an Event of Default of the type described
in clause (vi) of the description above of Events of Default, the Trustee shall
have received an officers' certificate and an opinion of counsel that such Event
of Default has been cured or waived. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes or
except as otherwise prohibited by the TIA.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company
84
<PAGE>
may, at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "--Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied. Notwithstanding the foregoing, the opinion
of counsel required by clauses (ii) and (iii) above need not be delivered if all
Notes not theretofore delivered to the Trustee for cancellation (x) have become
due and payable or (y) will become due and payable on the maturity date within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid
85
<PAGE>
to the Company or discharged from such trust) have been delivered to the Trustee
for cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) after the Company's
obligation to purchase Notes arises thereunder, amend, change or modify in any
material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; (vii) modify
or change any provision of the Indenture or the related definitions affecting
the ranking of the Notes or any Guarantee in a manner which adversely affects
the Holders; or (viii) release any Guarantor from any of its obligations under
its Guarantee or the Indenture otherwise than in accordance with the terms of
the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS OR DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Issuer, the
Company, the Guarantors or any other successor entity shall have any personal
liability in connection with the Indenture or the Notes solely by reason of his
or its status as such stockholder, employee, officer or director. Each holder of
Notes by accepting a Note waives and releases all such liability, and
acknowledges and consents to the transactions described under "The
86
<PAGE>
Transactions" for purposes of Section 506 of the California General Corporation
Law and Section 10-640
of the Arizona Business Corporation Act. The waiver and release are part of the
consideration for the issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Subsidiary of the Company, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; PROVIDED that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company, or shall be merged with or
into the Company or any Restricted Subsidiary of the Company, or (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any Person (other than a Restricted Subsidiary of the Company) which
constitute all or substantially all of the assets of such Person or comprise any
division or line of business of such Person or any other properties or assets of
such Person other than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of the Company of
(a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any
other property or assets of the Company or any Restricted Subsidiary of the
Company other than in the ordinary course of business; PROVIDED, HOWEVER, that
87
<PAGE>
Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $1,000,000, (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "Merger, Consolidation and Sale of
Assets," (iii) disposals or replacements of obsolete or outdated equipment in
the ordinary course of business and (iv) a disposition consisting of a Permitted
Investment or Restricted Payment permitted under "Limitation on Restricted
Payments."
"BANK CREDIT FACILITY" means the New Credit Facility and any other agreement
or agreements between the Company and/or one or more of the Guarantors and a
financial institution or institutions, providing for the making of loans, on a
term or revolving basis, the issuance of letters of credit and/or the creation
of bankers' acceptances.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"BORROWING BASE" means the sum of (i) 85% of the net book value of the
accounts receivable of the Company and the Restricted Subsidiaries of the
Company and (ii) 50% of the net book value of the inventory of the Company and
the Restricted Subsidiaries of the Company.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and including any warrants,
options or rights to acquire any of the foregoing and instruments convertible
into any of the foregoing, and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"CAPITALIZED LEASE OBLIGATIONS" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of
88
<PAGE>
the Exchange Act (a "Group"), together with any Affiliates thereof (whether or
not otherwise in compliance with the provisions of the Indenture) (other than a
Person or Group controlled by a Permitted Holder); (ii) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than the Permitted Holders) shall become the owner, directly or
indirectly, beneficially or of record, of shares of Capital Stock of the Company
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; (iv) Permitted Holders
cease to beneficially own shares of Capital Stock of the Company representing
more than 35% of the aggregate ordinary voting power represented by the issued
and outstanding Capital Stock of the Company, and any Person or Group (other
than Permitted Holders), directly or indirectly, beneficially or of record owns
shares of Capital Stock having more of the aggregate ordinary voting power of
the Capital Stock of the Company than the aggregate ordinary voting power
represented by shares of Capital Stock of the Company owned by Permitted
Holders; or (v) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board of
Directors of the Company at the beginning of such period, and such replacement
shall not have been approved by a vote of at least a majority of the Board of
Directors of the Company then still in office who either were members of such
Board of Directors at the beginning of such period or whose election as a member
of such Board of Directors was previously so approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "-- Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "-- Change
of Control."
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of, such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary, unusual
or nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense, (C)
Consolidated Non-cash Charges, less any non-cash items increasing Consolidated
Net Income for such period, (D) fees and expenses of the HSI Acquisition and the
Transactions, including but not limited to capitalization of costs and expenses
related thereto, and (E) non-recurring severance and transaction costs incurred
in connection with any acquisition, all as determined on a consolidated basis in
accordance with GAAP for such Person and its Restricted Subsidiaries.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for such Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis (including any pro forma expense and cost reductions calculated on a
basis consistent with Regulation S-X under the Securities Act) for the period of
such calculation to (i) the incurrence or repayment of any Indebtedness of such
Person or any of its Restricted Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the
89
<PAGE>
case may be (and the application of the proceeds thereof), occurred on the first
day of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed such
guaranteed Indebtedness; PROVIDED, HOWEVER, that where such Person and one or
more of its Restricted Subsidiaries is, or two or more of such Person's
Restricted Subsidiaries are, liable for the same Indebtedness, whether as
principal or guarantor, the above sentence shall be calculated to avoid
duplication. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) to the extent not included in Consolidated Interest Expense, the product of
(x) the amount of all dividend payments actually paid in cash in such period on
any series of Preferred Stock of such Person or its Restricted Subsidiaries
(other than dividends paid by any Restricted Subsidiary to the Company or any
other Restricted Subsidiary) and (y) a fraction, the numerator of which is one
and the denominator of which is one minus the then current effective
consolidated federal, state and local tax rate of such Person, expressed as a
decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP (excluding any
accrued and unpaid interest on the Junior Subordinated Notes; PROVIDED, that
such interest is not payable in cash prior to the maturity of the Notes),
including without limitation, (a) any amortization of debt discount and
amortization or write-off of deferred financing costs, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED, that aggregate net income (or loss) of such Person and its
Restricted Subsidiaries for such period shall be determined before any reduction
in respect of accrued and unpaid Preferred Stock dividends and before any
reduction for accrued and unpaid interest on the Junior
90
<PAGE>
Subordinated Notes that is not payable in cash prior to the maturity of the
Notes; and PROVIDED, FURTHER, that there shall be excluded from aggregate net
income (or loss) of such Person and its Restricted Subsidiaries for such period
(a) after-tax gains or losses from Asset Sales (less fees and expenses related
thereto) or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains or losses, (c) for purposes of
the covenant entitled "-- Limitation on Restricted Payments," the net income (or
loss) of any Person acquired in a "pooling of interests" transaction accrued
prior to the date it becomes a Restricted Subsidiary of the referent Person or
is merged or consolidated with the referent Person or any Restricted Subsidiary
of the referent Person, (d) the net income (but not loss) of any Restricted
Subsidiary of the referent Person to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is restricted by a contract, operation of law or otherwise, except to the extent
of cash dividends or distributions paid to the referent Person or to a
Restricted Subsidiary of the referent Person by such Restricted Subsidiary, (e)
the net income (or loss) of any Person, other than a Restricted Subsidiary of
the referent Person, except to the extent of cash dividends or distributions
paid to the referent Person or to a Restricted Subsidiary of the referent Person
by such Person, (f) any restoration to income of any contingency reserve, except
to the extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date, (g) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), and (h) for purposes of the covenant entitled "--
Limitations on Restricted Payments," in the case of a successor to the referent
Person by consolidation or merger or as a transferee of the referent Person's
assets, any earnings (or losses) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash charges or
expenses of such Person and its Restricted Subsidiaries reducing Consolidated
Net Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges constituting an extraordinary item or loss or any such charge which
requires an accrual of or a reserve for cash charges for any future period).
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof, in each case on or prior
to the final maturity date of the Notes, other than Capital Stock of the Company
which certain management stockholders have the right to put to the Company
pursuant to the terms of the Stockholders' Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company.
91
<PAGE>
"FOREIGN SUBSIDIARY" means any Subsidiary of the Company which (i) is not
organized under the laws of the United States, any state thereof or the District
of Columbia and (ii) conducts substantially all of its business operations in a
country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTOR" means (i) each of the Subsidiaries of the Company on the Issue
Date and (ii) each of the Company's Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees to
be bound by the terms of the Indenture as a Guarantor; PROVIDED that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture. Notwithstanding the above, no direct or indirect Foreign
Subsidiary of the Company will be considered a Guarantor.
"HSI ACQUISITION" means the acquisition by Penhall Company of substantially
all of the assets of Highway Services Inc. prior to the Issue Date.
"HSI NOTE" means the $3.7 million secured promissory note incurred by
Penhall Company in connection with the HSI Acquisition.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any Lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person, and (ix) all Disqualified Capital Stock issued by
such Person with the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but excluding
accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock. The amount of Indebtedness of any Person at
any date shall be the outstanding balance on such date of all unconditional
Obligations as described above, and the maximum liability upon the occurrence of
the contingency giving rise to the Obligation, on any contingent Obligations at
such date; PROVIDED, HOWEVER, that the amount outstanding at any time of any
Indebtedness incurred with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
92
<PAGE>
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment (other than as
specified in clause (i) above) shall be the original cost of such Investment
plus the cost of all additional Investments by the Company or any of its
Restricted Subsidiaries, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment,
reduced by the payment of dividends, distributions, interest payments or
repayments of loans or advances in connection with such Investment or any other
amounts received in respect of such Investment; PROVIDED that no such payment of
dividends, distributions, interest payments or repayments of loans or advances
or receipt of any such other amounts shall reduce the amount of any Investment
if such payment of dividends, distributions, interest payments or repayments of
loans or advances or receipt of any such amounts would be included in
Consolidated Net Income. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, it ceases to be a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"JUNIOR SUBORDINATED NOTES" means the Company's 10.5% Junior Subordinated
Notes due 2007 which may be issued in exchange for Senior Exchangeable Preferred
Stock.
"LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MANAGEMENT AGREEMENT" means the Management Services Agreement that becomes
effective upon consummation of the Recapitalization Merger among Bruckmann,
Rosser, Sherrill & Co., Inc. and the Company, as in effect on the Issue Date.
93
<PAGE>
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"NET PROCEEDS OFFER" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Asset Sales."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER PAYMENT DATE" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"NEW CREDIT FACILITY" means the Credit Agreement dated as of the Issue Date,
between the Issuer, the lenders party thereto in their capacities as lenders
thereunder and Bankers Trust Company, as Administrative Agent and Credit Suisse
First Boston, as Syndication Agent, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding or deleting Restricted Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, matured indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"PERMITTED HOLDERS" means the Principals and their Related Parties.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in connection with the
Transactions and the Guarantees thereof;
(ii) Indebtedness incurred pursuant to any Bank Credit Facility in an
aggregate principal amount at any time outstanding not to exceed an amount
equal to (x) $20.0 million plus (y) the greater of (i) $30.0 million, less
the amount of any required permanent repayments of Bank Credit Facilities in
accordance with the provisions set forth under "--Certain Covenants --
Limitation on Asset Sales" (which are accompanied by a corresponding
permanent commitment reduction thereunder) or (ii) the Borrowing Base;
94
<PAGE>
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company, in each case subject to no Lien (other than a Lien in connection
with a Bank Credit Facility) held by a Person other than the Company or a
Restricted Subsidiary of the Company; PROVIDED that if as of any date any
Person other than the Company or a Restricted Subsidiary of the Company owns
or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness (other than a Lien in connection with a Bank Credit Facility),
such date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien (other than a Lien in
connection with the a Bank Credit Facility); PROVIDED that (a) any
Indebtedness of the Company to any Restricted Subsidiary of the Company is
unsecured and subordinated in right of payment, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes
and (b) if as of any date any Person other than a Restricted Subsidiary of
the Company owns or holds any such Indebtedness or any Person holds a Lien
in respect of such Indebtedness (other than a Lien in connection with a Bank
Credit Facility), such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business; PROVIDED,
HOWEVER, that such Indebtedness is extinguished within five business days of
incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $5,000,000 at
any one time outstanding (which may, but need not, be incurred under a Bank
Credit Facility);
(xii) Obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business, in
95
<PAGE>
accordance with customary industry practice, in amounts and for purposes
customary in the Company's industry;
(xiii) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for adjustment of purchase price, earn
out or other similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Restricted
Subsidiary of the Company or any of its Restricted Subsidiaries, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition; PROVIDED that the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(xiv) Guarantees of Indebtedness permitted to be incurred under the
Indenture and guarantees of third-party loans to employees or officers of
the Company or its Restricted Subsidiaries permitted by clause (vii) of the
definition of "Permitted Investments;"
(xv) Capitalized Lease Obligations and Purchase Money Obligations of the
Company or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $5,000,000 at any one time outstanding;
(xvi) Indebtedness of the Company or any of its Restricted Subsidiaries
that is subordinate to the Notes and is incurred in order to repurchase
Capital Stock of the Company from employees, officers or directors of the
Company or any of its Subsidiaries upon the death, disability or termination
of employment of such employees, officers or directors or as otherwise
required by existing employment agreements in an aggregate principal amount
not to exceed $1,000,000 in any calender year; and
(xvii) Indebtedness incurred as a result of accrued and unpaid interest
being added to the principal amount of the Junior Subordinated Notes in
accordance with the terms of such Junior Subordinated Notes; PROVIDED that
such interest is not payable in cash prior to the maturity of the Notes.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
Company, (ii) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment is unsecured
and subordinated in right of payment, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture; (iii) Investments in
cash and Cash Equivalents; (iv) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (v) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers; (vi) Investments
made by the Company or its Restricted Subsidiaries as a result of consideration
received in connection with an Asset Sale made in compliance with the
"Limitation on Asset Sales" covenant; (vii) loans and advances to, or guarantees
of third-party loans to, employees and officers of the Company and its
Restricted Subsidiaries for relocation expenses and purchasing Capital Stock of
the Company not in excess of $2.0 million at any one time outstanding; (viii)
Investments the payment for which consists exclusively of Qualified Capital
Stock of the Company; (ix) guarantees of Indebtedness permitted to be incurred
under the Indenture; and (x) additional Investments not to exceed $2.5 million
at any time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
96
<PAGE>
(ii) statutory Liens of landlords or of mortgagees of landlords and
Liens of carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen and other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent or being contested in good faith, if
such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation or
other property subject to a Permitted Lien held by the lienholder of such
Capitalized Lease Obligation;
(vii) purchase money Liens to finance property or assets (including the
cost of construction) of the Company or any Restricted Subsidiary of the
Company acquired in the ordinary course of business; PROVIDED, HOWEVER, that
(A) the related purchase money Indebtedness shall not exceed the cost of
such property or assets (including the cost of construction) and shall not
be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired or
constructed and (B) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition or construction;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods or
construction;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that (A) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do
not extend to or cover any property or assets of the
97
<PAGE>
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
(xiv) Liens securing Indebtedness under any Bank Credit Facility;
(xv) Liens arising out of consignment or similar arrangements for the
sale of goods in the ordinary course of business;
(xvi) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xvii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xviii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods;
(xix) Liens securing Indebtedness under the HSI Note; and
(xx) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $2.5 million at any one time outstanding.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PRINCIPAL" means (i) Bruckmann, Rosser, Sherrill & Co., Inc., a Delaware
corporation, and any of its Affiliates, and (ii) Messrs. Bruckmann, Rosser,
Sherrill and Edwards, each of whom is a principal on the Issue Date of
Bruckmann, Rosser, Sherrill & Co., Inc.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such
Person or any of its Subsidiaries to any seller or any other person incurred or
assumed in connection with the purchase, installation, construction or
improvement of real or personal property to be used in the business of such
Person or any of its Subsidiaries within 180 days of such purchase,
installation, construction or improvement.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (xii), (xiii),
(xiv) or (xvi) of the definition of Permitted Indebtedness), in each case that
does not (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company in connection with such Refinancing) or (2) create Indebtedness
with (A) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or (B) a final
maturity earlier than the final maturity of the Indebtedness being Refinanced;
PROVIDED that (x) if such Indebtedness
98
<PAGE>
being Refinanced is Indebtedness solely of the Company, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company and (y) if such
Indebtedness being Refinanced is subordinate or junior to the Notes, then such
Refinancing Indebtedness shall be subordinate to the Notes at least to the same
extent and in the same manner as the Indebtedness being Refinanced.
"RELATED PARTY" means, with respect to any Principal, (A) any spouse or
immediate family member (in the case of an individual) of such Principal or (B)
a trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners or Persons beneficially holding a 66 2/3% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (A).
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; PROVIDED that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means one or more revolving credit facilities
under a Bank Credit Facility.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SENIOR EXCHANGEABLE PREFERRED STOCK" means the Company's 10.5% Senior
Exchangeable Preferred Stock, par value $.01 per share.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"STOCKHOLDERS' AGREEMENT" means that Securities Holders Agreement, dated the
Issue Date, among the Company and the stockholders of the Company.
"SUBSIDIARY", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary of the Company; PROVIDED that (x) the
Company certifies to the Trustee that such designation complies with the
"Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of designation, and
does not thereafter, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant to which
the lender has recourse to any of the assets of the Company or any of its
Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving
99
<PAGE>
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
100
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one registered note in global form without coupons (the "Global Note").
Upon issuance, the Global Note will be deposited with, or on behalf of, the
Depository Trust Company (the "Depository") and registered in the name of Cede &
Co., as nominee of the Depository.
If a holder tendering Existing Notes so requests, such holder's New Notes
will be issued as described below under "Certificated Securities" in registered
form without coupons (the "Certificated Securities").
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchaser), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Note, the Depository will credit the
accounts of Participants who elect to exchange Existing Notes with an interest
in the Global Note and (ii) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the New Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in the Global Note will not be entitled to have New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in New Notes represented by the Global Note to pledge such
interest to persons or entities that do not participate in the Depository's
system, or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
The Company understands that under existing industry practice, in the event
the Company requests any action of holders or an owner of a beneficial interest
in the Global Note desires to take any action that the Depository, as the holder
of such Global Note, is entitled to take, the Depository would authorize the
Participants to take such action and the Participant would authorize persons
owning through such Participants to take such action or would otherwise act upon
the instruction of such persons. Neither the Company nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such New
Notes.
101
<PAGE>
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by the Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered holder of the Global Note representing such New Notes under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the New Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of New Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depository of
its Global Note, Certificated Securities will be issued to each person that the
Depository identifies as the beneficial owner of the New Notes represented by
the Global Note. In addition, any person having a beneficial interest in the
Global Note or any holder of Existing Notes whose Existing Notes have been
accepted for exchange may, upon request to the Trustee or the Exchange Agent, as
the case may be, exchange such beneficial interest or Existing Notes for
Certificated Securities. Upon any such issuance, the Trustee is required to
register such Certificated Securities in the name of such person or persons (or
the nominee of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related New Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depository
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the New Notes to be issued).
102
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of Existing Notes that
is an individual citizen or resident of the United States or a United States
corporation that purchased the Existing Notes pursuant to their original issue
(a "U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended
to the date hereof (the "Code"), existing and proposed Treasury regulations, and
judicial and administrative determinations, all of which are subject to change
at any time, possibly on a retroactive basis. The following relates only to the
Existing Notes, and the New Notes received therefor, that are held as "capital
assets" within the meaning of Section 1221 of the Code by U.S. Holders. It does
not discuss state, local, or foreign tax consequences, nor does it discuss tax
consequences to subsequent purchasers (persons who did not purchase the Existing
Notes pursuant to their original issue), or to categories of holders that are
subject to special rules, such as foreign persons, tax-exempt organizations,
insurance companies, banks, and dealers in stocks and securities. Tax
consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service with respect to the
federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE EXISTING
NOTES FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR
CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO
ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE EXISTING NOTES
FOR NEW NOTES.
THE EXCHANGE OFFER
The exchange of Existing Notes pursuant to the Exchange Offer should be
treated as a continuation of the corresponding Existing Notes because the terms
of the New Notes are not materially different from the terms of the Existing
Notes. Accordingly, such exchange should not constitute a taxable event to U.S.
Holders and, therefore, (i) no gain or loss should be realized by a U.S. Holder
upon receipt of a New Note, (ii) the holding period of the New Note should
include the holding period of the Existing Note exchanged therefor and (iii) the
adjusted tax basis of the New Note should be the same as the adjusted tax basis
of the Existing Note exchanged therefor immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will be its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange or retirement
of a Note in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note (excluding amounts
received in respect of accrued interest, which will be taxable as ordinary
interest income) generally will be capital gain or loss and will be long-term
capital gain or loss if the Note was held for more than one year.
BACKUP WITHHOLDING
Under certain circumstances, a U.S. Holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest thereon
or the gross proceeds from the disposition thereof.
103
<PAGE>
This withholding generally applies if the U.S. Holder fails to furnish his or
her social security number or other taxpayer identification number in the
specified manner and in certain other circumstances. Any amount withheld from a
payment to a U.S. Holder under the backup withholding rules is allowable as a
credit against such U.S. Holder's federal income tax liability, provided that
the required information is furnished to the IRS. Corporations and certain other
entities described in the Code and Treasury regulations are exempt from backup
withholding if their exempt status is properly established.
PLAN OF DISTRIBUTION
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Notes. If any
holder has any arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. A
broker-dealer who holds Existing Notes that were acquired for its own account as
a result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of New Notes received in
exchange for Existing Notes where such Existing Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Exchange Offer Registration Statement
is declared effective, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1999 (90 days after the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
104
<PAGE>
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Existing Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Existing Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
105
<PAGE>
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Dechert Price & Rhoads, New York, New York.
EXPERTS
The consolidated financial statements of Penhall International Corp. and
subsidiaries as of June 30, 1997 and 1998 and for each of the years in the
two-year period ended June 30, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in accounting and auditing. The consolidated
financial statements of Penhall International Corp. for the year ended June 30,
1996, included in this Prospectus, have been audited by Moss Adams LLP,
independent auditors, as stated in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing. The financial statements of
Highway Services, Inc. for the year ended December 31, 1997 included in this
Prospectus, have been audited by John A. Knutson & Co., PLLP, independent
auditors, as stated in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
Moss Adams L.L.P. was replaced in July 1997 by KPMG Peat Marwick LLP. The
decision to change auditors was approved by the Company's Board of Directors.
Moss Adams LLP's report does not contain an adverse opinion or a disclaimer of
opinion, nor is it qualified or modified as to uncertainty, audit scope or
accounting principles. There were no disagreements between the Company and Moss
Adams LLP on any matter or practices, financial statement disclosure, or
auditing scope or procedure.
106
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PENHALL INTERNATIONAL CORP.
Independent Auditors' Report of KPMG Peat Marwick LLP ..................................................... F-2
Independent Auditors' Report of Moss Adams LLP ............................................................ F-3
Consolidated Balance Sheets as of June 30, 1997 and 1998, and September 30, 1998 (unaudited)............... F-4
Consolidated Statements of Operations for the years ended June 30, 1996, 1997 and 1998, and for the three
month periods ended September 30, 1997 and 1998 (unaudited).............................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1996, 1997 and 1998,
and for the three month period ended September 30, 1998 (unaudited)...................................... F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 and 1998, and for the three
month periods ended September 30, 1997 and 1998 (unaudited).............................................. F-7
Notes to Consolidated Financial Statements................................................................. F-9
HIGHWAY SERVICES, INC.
Independent Auditors' Report of John A. Knutson & Co., PLLP................................................ F-39
Statements of Income for the year ended December 31, 1997, and for the three month periods ended March 31,
1997 and 1998 (unaudited)................................................................................ F-40
Statements of Cash Flows for the year ended December 31, 1997, and for the three month periods ended March
31, 1997 and 1998 (unaudited)............................................................................ F-41
Notes to Financial Statements.............................................................................. F-42
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
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,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period ended June 30, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, the results
of their operations and their cash flows for each of the years in the two-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
September 25, 1998
Orange County, California
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Penhall International Corp. (Note 1) and
Subsidiaries for the year ended June 30, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Penhall International Corp. and Subsidiaries for the year ended June 30, 1996,
in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Costa Mesa, California
September 26, 1996,
except as to the
sixth paragraph
of Note 1 which
is as of August 4,
1998
F-3
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------------ 1998
1997 1998 (UNAUDITED)
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 676,000 $ 234,000 $ 1,992,000
----------- ----------- -------------
Receivables:
Contract and trade receivables................................................. 20,896,000 23,454,000 26,667,000
Contract retentions, due upon completion and acceptance of work (note 2)....... 3,744,000 4,454,000 4,808,000
Income taxes receivable........................................................ 216,000 2,399,000 4,575,000
----------- ----------- -------------
24,856,000 30,307,000 36,050,000
Less allowance for doubtful receivables (note 2)............................... 1,110,000 995,000 1,033,000
----------- ----------- -------------
Net receivables............................................................ 23,746,000 29,312,000 35,017,000
----------- ----------- -------------
Costs and estimated earnings in excess of billings on uncompleted contracts (note
12)............................................................................ 668,000 976,000 670,000
Deferred tax assets (note 6)..................................................... 1,042,000 891,000 1,194,000
Inventories...................................................................... 1,066,000 1,458,000 1,765,000
Prepaid expenses and other current assets........................................ 615,000 670,000 820,000
----------- ----------- -------------
Total current assets....................................................... 27,813,000 33,541,000 41,458,000
----------- ----------- -------------
Property, plant and equipment, at cost:
Land............................................................................. 3,919,000 4,538,000 5,338,000
Buildings and leasehold improvements............................................. 6,962,000 7,715,000 7,745,000
Construction and other equipment................................................. 59,062,000 67,934,000 69,982,000
----------- ----------- -------------
69,943,000 80,187,000 83,065,000
Less accumulated depreciation and amortization................................... 29,282,000 35,180,000 37,136,000
----------- ----------- -------------
Net property, plant and equipment.......................................... 40,661,000 45,007,000 45,929,000
Goodwill, net of accumulated amortization of $199,000, $471,000 and $801,000
(unaudited) at June 30, 1997, 1998 and September 30, 1998, respectively.......... 631,000 8,649,000 8,465,000
Debt issuance costs net of accumulated amortization of $0, $0, and $123,000
(unaudited) at June 30, 1997, 1998 and September 30, 1998, respectively.......... -- 719,000 5,801,000
Other assets, net (note 3)......................................................... 728,000 407,000 141,000
----------- ----------- -------------
$69,833,000 $88,323,000 $101,794,000
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt (note 5).................................. $ 185,000 $ 2,034,000 $ 1,984,000
Current installments of notes payable to stockholders (note 11).................. 819,000 131,000 109,000
Trade accounts payable........................................................... 4,233,000 7,532,000 7,663,000
Accrued liabilities (note 4)..................................................... 4,924,000 9,041,000 8,479,000
Billings in excess of costs and estimated earnings on uncompleted contracts (note
12)............................................................................ 207,000 665,000 931,000
----------- ----------- -------------
Total current liabilities.................................................. 10,368,000 19,403,000 19,166,000
----------- ----------- -------------
Long-term debt, excluding current portion (note 5)................................. 12,756,000 16,125,000 23,064,000
Notes payable to stockholders, excluding current portion (note 11)................. 351,000 274,000 248,000
Senior Notes (note 5).............................................................. -- -- 100,000,000
Deferred tax liabilities (note 6).................................................. 2,479,000 3,609,000 4,423,000
Accrued compensation (note 8)...................................................... 4,626,000 5,306,000 73,000
Senior Exchangeable Preferred Stock, redemption value $10,167,000. Authorized,
issued and outstanding 10,000 shares............................................. -- -- 10,167,000
Series A Preferred Stock, redemption value $10,655,000. Authorized 25,000 shares;
issued and outstanding 10,428 shares............................................. -- -- 10,655,000
Stockholders' equity (deficit):
Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares;
issued and outstanding 18,572 shares........................................... -- -- 18,960,000
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding
4,280,939, 4,452,264 and 995,000 (unaudited) shares at June 30, 1997, June 30,
1998 and September 30, 1998, respectively...................................... 40,000 42,000 10,000
Additional paid-in capital....................................................... 12,848,000 14,498,000 985,000
Retained earnings (accumulated deficit).......................................... 26,365,000 29,066,000 (85,957,000)
----------- ----------- -------------
Total stockholders' equity (deficit)....................................... 39,253,000 43,606,000 (66,002,000)
Commitments and contingencies (notes 7, 8 and 10)................................
----------- ----------- -------------
$69,833,000 $88,323,000 $101,794,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE MONTH PERIODS
ENDED JUNE 30, ENDED SEPTEMBER 30,
----------------------------------------- ---------------------------
1996 1997 1998 1997 1998
------------ ------------ ------------- ------------ -------------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 74,895,000 $ 95,298,000 $ 101,170,000 $ 28,351,000 $ 38,913,000
Cost of revenues......................... 51,200,000 68,541,000 72,395,000 20,015,000 27,868,000
------------ ------------ ------------- ------------ -------------
Gross profit........................... 23,695,000 26,757,000 28,775,000 8,336,000 11,045,000
General and administrative expenses
(notes 1 and 8)........................ 15,156,000 16,953,000 19,880,000 4,703,000 17,211,000
Other compensation (note 1).............. -- -- 3,271,000 -- --
Other operating income, net.............. 867,000 871,000 644,000 153,000 260,000
------------ ------------ ------------- ------------ -------------
Earnings before interest expense and
income taxes......................... 9,406,000 10,675,000 6,268,000 3,786,000 (5,906,000)
Interest expense......................... 783,000 811,000 1,036,000 250,000 2,616,000
------------ ------------ ------------- ------------ -------------
Earnings (loss) before income taxes.... 8,623,000 9,864,000 5,232,000 3,536,000 (8,522,000)
Income taxes (note 6).................... 3,538,000 4,407,000 2,531,000 1,395,000 (1,721,000)
------------ ------------ ------------- ------------ -------------
Net earnings (loss)...................... 5,085,000 5,457,000 2,701,000 2,141,000 (6,801,000)
------------ ------------ ------------- ------------ -------------
Accretion of preferred stock to
redemption value....................... -- -- -- -- (395,000)
Accrual of cumulative dividends on
preferred stock........................ -- -- -- -- (388,000)
------------ ------------ ------------- ------------ -------------
Net earnings (loss) available to common
stockholders........................... $ 5,085,000 $ 5,457,000 $ 2,701,000 $ 2,141,000 $ (7,584,000)
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Earnings (loss) per share:
Basic.................................. $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32)
Diluted................................ $ 1.24 $ 1.27 $ .62 $ .49 $ (3.32)
Weighted average number of shares
outstanding:
Basic.................................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725
Diluted................................ 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES B PREFERRED STOCK COMMON STOCK RETAINED
------------------------- ---------------------- ADDITIONAL EARNINGS TOTAL
SHARES SHARES PAID-IN (ACCUMULATED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT) EQUITY
----------- ------------ ----------- --------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30,
1995.................... -- -- 4,052,421 $ 38,000 $ 10,947,000 $ 15,927,000 $ 26,912,000
Issuance of shares........ -- -- 22,144 -- 224,000 -- 224,000
Repurchase of shares...... -- -- (14,372) -- (85,000) (104,000) (189,000)
Net earnings.............. -- -- -- -- -- 5,085,000 5,085,000
----------- ------------ ----------- --------- -------------- ------------- -------------
Balance at June 30, 1996.. -- -- 4,060,193 38,000 11,086,000 20,908,000 32,032,000
Issuance of shares........ -- -- 220,746 2,000 1,762,000 -- 1,764,000
Net earnings.............. -- -- -- -- -- 5,457,000 5,457,000
----------- ------------ ----------- --------- -------------- ------------- -------------
Balance at June 30, 1997.. -- -- 4,280,939 40,000 12,848,000 26,365,000 39,253,000
Issuance of shares........ -- -- 33,232 -- 1,000,000 -- 1,000,000
Exercise of stock
options................. -- -- 145,200 2,000 706,000 -- 708,000
Repurchase of shares...... -- -- (7,107) -- (56,000) -- (56,000)
Net earnings.............. -- -- -- -- -- 2,701,000 2,701,000
----------- ------------ ----------- --------- -------------- ------------- -------------
Balance at June 30, 1998.. -- -- 4,452,264 42,000 14,498,000 29,066,000 43,606,000
Repurchase of shares
(unaudited)............. (3,856,501) (36,000) (13,908,000) (107,439,000) (121,383,000)
Shares issued
(unaudited)............. 18,572 $ 18,572,000 399,237 4,000 395,000 -- 18,971,000
Accretion of redeemable
preferred stock
(unaudited)............. -- -- -- -- -- (395,000) (395,000)
Accrual of cumulative
dividends (unaudited)... -- 388,000 -- -- -- (388,000) --
Net loss (unaudited)...... -- -- -- -- -- (6,801,000) (6,801,000)
----------- ------------ ----------- --------- -------------- ------------- -------------
Balance at September 30,
1998 (unaudited)........ 18,572 $ 18,960,000 995,000 $ 10,000 $ 985,000 $ (85,957,000) $ (66,002,000)
----------- ------------ ----------- --------- -------------- ------------- -------------
----------- ------------ ----------- --------- -------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
FOR THE YEARS PERIODS ENDED
ENDED JUNE 30, SEPTEMBER 30,
------------------------------------- -----------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................... $ 5,085,000 $ 5,457,000 $ 2,701,000 $2,141,000 $(6,801,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 5,417,000 6,878,000 8,870,000 2,045,000 2,488,000
Amortization of debt issuance costs.................... -- -- -- -- 123,000
Provision for doubtful accounts........................ 337,000 (94,000) (115,000) (4,000) 38,000
Provision for deferred taxes........................... 642,000 (332,000) 1,281,000 (113,000) 511,000
Compensation expense related to exercise of stock
options.............................................. -- -- 579,000 -- --
(Gains) loss on sale of assets......................... (331,000) (258,000) (203,000) (31,000) 4,000
(Increase) decrease in assets and increase (decrease)
in liabilities net of effects of acquisition of
Highway Services, Inc.:
Receivables.......................................... 914,000 (6,427,000) (4,710,000) (6,828,000) (5,743,000)
Inventories, prepaid expenses and other assets....... (735,000) (662,000) 295,000 105,000 (203,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. (717,000) 212,000 (308,000) (50,000) 306,000
Trade accounts payable and accrued liabilities....... (1,341,000) 2,248,000 7,100,000 6,489,000 (431,000)
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 594,000 (472,000) 458,000 971,000 266,000
Accrued compensation................................. 821,000 2,012,000 680,000 215,000 (5,233,000)
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities....................................... 10,686,000 8,562,000 16,628,000 4,940,000 (14,675,000)
----------- ----------- ----------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of assets............................. 989,000 1,003,000 1,122,000 133,000 121,000
Capital expenditures..................................... (11,511,000) (16,089,000) (12,287,000) (3,588,000) (3,337,000)
Acquisition of Highway Services, Inc., net of cash
acquired............................................... -- -- (5,882,000) -- --
----------- ----------- ----------- ---------- -----------
Net cash used in investing activities.............. (10,522,000) (15,086,000) (17,047,000) (3,455,000) (3,216,000)
----------- ----------- ----------- ---------- -----------
Cash flows from financing activities:
Borrowings under long-term debt.......................... 700,000 31,744,000 30,341,000 5,275,000 23,495,000
Repayments of long-term debt............................. -- (26,495,000) (29,824,000) (6,171,000) (16,606,000)
Paydown on notes payable to stockholders................. (750,000) (765,000) (396,000) (48,000)
Borrowings on Senior Notes............................... -- -- -- -- 100,000,000
Debt issuance costs...................................... -- -- (719,000) -- (5,205,000)
Proceeds from issuance of common stock................... 224,000 1,764,000 1,000,000 -- 399,000
Repurchase of common stock............................... (189,000) -- (56,000) -- (93,050,000)
Issuance of Series A Preferred Stock..................... -- -- -- -- 10,427,000
Issuance of Series B Preferred Stock..................... -- -- -- -- 237,000
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities....................................... 735,000 6,263,000 (23,000) (1,292,000) 19,649,000
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash.................... 899,000 (261,000) (442,000) 193,000 1,758,000
Cash at beginning of period................................ 38,000 937,000 676,000 676,000 234,000
----------- ----------- ----------- ---------- -----------
Cash at end of period...................................... $ 937,000 $ 676,000 $ 234,000 $ 869,000 $ 1,992,000
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes........................................... $ 2,825,000 $ 4,390,000 $ 2,730,000 $ 20,000 $ --
Interest............................................... 783,000 746,000 1,085,000 215,000 478,000
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
F-7
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
FOR THE YEARS PERIODS ENDED
ENDED JUNE 30, SEPTEMBER 30,
------------------------------------- -----------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of noncash investing and financing
activities:
Borrowings related to the acquisition of assets.......... $ 1,500,000 $ 556,000 $ 3,692,000 $ -- $ --
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
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......... $ -- $ -- $ -- $ -- $ 395,000
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Accrual of cumulative dividends on preferred stock....... $ -- $ -- $ -- $ -- $ 388,000
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Issuance of Series B Preferred Stock..................... $ -- $ -- $ -- $ -- $18,335,000
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
The fair value of Highway Services, Inc. net assets at the date of
acquisition in fiscal 1998 was $1,283,000. Goodwill of $8,291,000 was recorded
in connection with the acquisition.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(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 Indemnificaiton 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 year ended June
30, 1998 and the three months ended September 30, 1998, $1,200,000 and
$3,090,000 (unaudited), respectively, is included in general and administrative
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") 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 and construction contracts. The length of
the construction 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 include among others, the states of California, Arizona, Colorado,
Nevada, Texas, Georgia, and Utah. Additionally, through its purchase in April of
1998 of Highway Services, Inc. (see note 14), the Company's operations have been
expanded to include the mid-western states of the United States and Canada. The
Company's operations are primarily conducted through Penhall International Corp.
and its wholly-owned subsidiary, Penhall Company.
The California Department of Transportation accounted for approximately 1%, 18%,
10%, 14% (unaudited) and 3% (unaudited) of consolidated revenues of the Company
for the years ending June 30, 1996, 1997, 1998 and the three month periods ended
September 30, 1997 and 1998, respectively.
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
F-9
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 PII consolidated financial statements as of June 30, 1997 and 1998 and for
the three-year period ended June 30, 1998. All significant intercompany
transactions have been eliminated in consolidation.
REVENUE RECOGNITION ON LONG-TERM CONSTRUCTION CONTRACTS
Income from construction operations is recorded using the
percentage-of-completion method of accounting. The Company has two types of
contracts. The first type of contract is fixed unit in which the percentage of
completion is determined based on the units completed as a percentage of
estimated total units. The second type of contract is lump sum in which
percentage of completion is determined based on costs to date as compared to
total estimated costs to complete. 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 cost. 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.
INVENTORIES
Inventories, which consist 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:
<TABLE>
<S> <C>
Buildings 15 to 39
years
Equipment 3 to 8 years
</TABLE>
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.
F-10
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $28,000, $171,000 and $272,000 for the years ended June 30,
1996, 1997 and 1998, respectively and was $3,000 (unaudited) and $140,000
(unaudited) for the three-month periods ending September 30, 1997 and 1998,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on July 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be 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 exceed 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. Adoption of this Statement did not have an impact on the Company's
consolidated financial position, results of operations or liquidity.
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 carryforwards. 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.
F-11
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Prior to June 30, 1996, the Company accounted for its stock-based compensation
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. In accordance with APB Opinion No. 25, compensation expense for
"fixed" stock compensation plans is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. For
"variable" stock compensation plans, compensation expense is recorded at the end
of each reporting period based on the difference between the purchase or
exercise price and the buy-out price or market value of the underlying security.
On July 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which 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 made in 1995
and future years 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.
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. Dilutive earnings (loss) per share is
calculated by dividing net earnings (loss) available to common stockholders plus
the impact of assumed dilutive potential securities. The Company has granted
certain options which have been treated as common share equivalents for purposes
of calculating diluted earnings (loss) per share.
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.
F-12
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the calculation of diluted earnings (loss) per
share for each of the years in the three-year period ended June 30, 1998 and the
three-month periods ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
THREE-MONTHS PERIOD
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------- ---------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share
calculation
Net earnings (loss) available to
common stockholders........... $5,085,000 $5,457,000 $2,701,000 $2,141,000 $(7,584,000)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Weighted average
shares--basic................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725
Plus-incremental shares from
assumed conversion of stock
options....................... 59,802 73,023 77,415 73,974 --
--------- --------- --------- --------- ----------
Weighted average
shares--dilutive.............. 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Diluted earnings (loss) per
share............................. $ 1.24 $ 1.27 $ .62 $ .49 $ (3.32)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
effective for fiscal years ending after December 15, 1997. SFAS 128 introduces
and requires the presentation of "basic" earnings per share which represents net
earnings divided by the weighted average shares outstanding. Dual presentation
of "diluted" earnings per share, reflecting the effects of all potentially
dilutive securities, is also required. The Company adopted the provisions of
SFAS No. 128 on July 1, 1997. Earnings per share for all periods presented prior
to the Company's adoption of SFAS No. 128 have been restated to conform to the
provisions of SFAS No. 128. The adoption of SFAS No. 128 did not have a material
impact on the consolidated financial statements of the Company.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to conform to
the current presentation.
F-13
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Years ending June 30:
1998............................................... $ 1,872,000 $ -- $ --
1999............................................... 1,123,000 445,000 480,000
2000............................................... 749,000 1,782,000 1,923,000
2001............................................... -- 1,336,000 1,442,000
2002............................................... -- 891,000 963,000
------------ ------------ -------------
$ 3,744,000 $ 4,454,000 $ 4,808,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Transactions in the allowance for doubtful receivables are summarized as
follows:
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Balance, beginning of
period..................... $ 998,000 $ 1,335,000 $ 1,110,000 $ 995,000
Provision for doubtful
accounts................... 346,000 (94,000) 14,000 44,000
Accounts charged off......... (9,000) (131,000) (129,000) (6,000)
------------- ------------- ------------- ------------------
Balance end of period........ $ 1,335,000 $ 1,110,000 $ 995,000 $ 1,033,000
------------- ------------- ------------- ------------------
------------- ------------- ------------- ------------------
</TABLE>
(3) OTHER ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- SEPTEMBER 30,
1997 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Cash surrender value on officers' life insurance
policies....................................... $ 1,685,000 $ 574,000 $ --
Loans on officers' life insurance policies....... (1,357,000) (449,000) --
Covenants not to compete......................... 288,000 288,000 288,000
Accumulated amortization......................... (52,000) (146,000) (160,000)
Other............................................ 164,000 140,000 13,000
------------- ------------- -------------
$ 728,000 $ 407,000 $ 141,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-14
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(3) OTHER ASSETS (CONTINUED)
The covenants not to compete are amortized over the life of the agreement.
Amortization expense related to the covenants not to compete amounted to
$171,000, $107,000 and $94,000 for the years ended June 30, 1996, 1997 and 1998,
respectively and $30,000 (unaudited) and $14,000 (unaudited) for the three-month
periods ended September 30, 1997 and 1998, respectively.
(4) ACCRUED LIABILITIES
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1997 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Union benefits..................................... $ 770,000 $ 700,000 $ 712,000
Accrued bonuses.................................... 1,056,000 807,000 1,317,000
Accrued debt issuance costs........................ -- 351,000 --
Accrued merger costs............................... -- 905,000 76,000
Accrued tax gross-up payments (note 1)............. -- 2,936,000 --
Accrued interest................................... -- -- 2,046,000
Accrued insurance.................................. 764,000 618,000 775,000
Accrued vacation................................... 320,000 320,000 320,000
Accrued payroll.................................... 459,000 1,521,000 1,907,000
Other.............................................. 1,555,000 883,000 1,326,000
------------ ------------ -------------
$ 4,924,000 $ 9,041,000 $ 8,479,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-15
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(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.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- SEPTEMBER 30,
1997 1998 1998
------------- ------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
The Company had a secured bank line of credit with the
Company's principal bank for working capital purposes as
follows: $20,000,000 through October 31, 1998 and
$15,000,000 from November 1, 1998 through October 31,
1999. Advances under the line bore interest at various
rates of interest ranging from 7.4% to 8.5% at June 30,
1997 and 1998. Interest was payable monthly and principal
was due upon maturity on October 31, 1999. Repaid in full
on August 4, 1998........................................ $ 12,150,000 13,860,000 --
Note payable secured by certain equipment, bearing interest
at 6.0%; payable in annual principal and interest
installments of $208,000; all unpaid principal and
interest due June 4, 2000................................ 556,000 381,000 381,000
Note payable secured by property in Austin, Texas, bearing
interest at 10.0%; payable in monthly principal and
interest installments of $1,815; all unpaid principal and
interest due November 1, 2021............................ 199,000 197,000 196,000
Note payable secured by certain equipment, bearing interest
at 5.51%; payable in two installments of principal and
interest of $2,000,000 due on April 29, 1999 and 2000.... -- 3,692,000 3,692,000
</TABLE>
F-16
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(5) SENIOR NOTES AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- SEPTEMBER 30,
1997 1998 1998
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
$20,000,000 Term Loan secured by certain assets of the
Company; quarterly 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 1.25% 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
2.25% 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............................................ -- -- 20,000,000
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 1.25% 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
2.25% 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............................................ -- -- 750,000
Other...................................................... 36,000 29,000 29,000
------------- ------------- --------------
12,941,000 18,159,000 25,048,000
Less current installments of long-term debt................ 185,000 2,034,000 1,984,000
------------- ------------- --------------
Long-term debt, excluding current installments............. $ 12,756,000 $ 16,125,000 $ 23,064,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
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.
F-17
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(5) SENIOR NOTES AND LONG-TERM DEBT (CONTINUED)
The Company had unused and available amounts under its line of credit with its
principal bank in the amounts of $1,850,000 and $6,140,000, at June 30, 1997 and
1998, respectively.
Under the terms of its line of credit, the Company was required to meet certain
financial covenants and ratios, including working capital, net worth, and debt
to equity ratios. The Company was in compliance with all covenants and ratios at
June 30, 1997 and 1998. Additionally, under the terms of the line of credit, the
Company had pledged all of the assets of its wholly owned subsidiaries for the
line of credit.
The Term Loan, Revolving Loan, and Swingline Loan (the "Credit Facility")
contain certain financial and non-financial covenants.
Annual maturities of long-term debt for the next five years for the periods
ended June 30, 1998 and September 30, 1998 (unaudited) are as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
1999................................................. $ 2,034,000 $ 1,984,000
2000................................................. 15,919,000 2,843,000
2001................................................. 10,000 3,503,000
2002................................................. 10,000 5,253,000
2003................................................. 3,000 6,003,000
Thereafter........................................... 183,000 5,462,000
------------- -------------
$ 18,159,000 $ 25,048,000
------------- -------------
------------- -------------
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) is comprised of the following components:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
----------------------------------------- ---------------------------
1996 1997 1998 1997 1998
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current tax expense:
Federal...................... $ 2,270,000 $ 3,674,000 $ 918,000 $ 1,217,000 $ (2,232,000)
State........................ 626,000 1,065,000 332,000 291,000 --
------------ ------------ ------------- ------------ -------------
2,896,000 4,739,000 1,250,000 1,508,000 (2,232,000)
------------ ------------ ------------- ------------ -------------
Deferred tax expense (benefit):
Federal...................... 494,000 (252,000) 1,062,000 (60,000) 569,000
State........................ 148,000 (80,000) 219,000 (53,000) (58,000)
------------ ------------ ------------- ------------ -------------
642,000 (332,000) 1,281,000 (113,000) 511,000
------------ ------------ ------------- ------------ -------------
$ 3,538,000 $ 4,407,000 $ 2,531,000 $ 1,395,000 $ (1,721,000)
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
</TABLE>
F-18
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(6) INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- SEPTEMBER 30,
1997 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Allowance for doubtful receivables....................... $ 444,000 $ 408,000 $ 424,000
Accrued compensation..................................... 1,013,000 731,000 --
Other.................................................... 598,000 788,000 1,131,000
------------- ------------- -------------
Total deferred tax assets............................ 2,055,000 1,927,000 1,555,000
------------- ------------- -------------
Deferred tax liabilities:
Depreciation............................................. (3,392,000) (4,545,000) (4,684,000)
Other.................................................... (100,000) (100,000) (100,000)
------------- ------------- -------------
Total deferred tax liabilities....................... (3,492,000) (4,645,000) (4,784,000)
------------- ------------- -------------
Net deferred tax liability........................... $ (1,437,000) $ (2,718,000) $(3,229,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
Deferred income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
-------------------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Allowance for doubtful receivables............ $ (135,000) $ 90,000 $ 36,000 $ 2,000 $ (16,000)
Other......................................... 284,000 (756,000) (190,000) (131,000) (343,000)
Depreciation.................................. 692,000 860,000 1,153,000 170,000 139,000
Accrued compensation.......................... (199,000) (526,000) 282,000 (154,000) 731,000
----------- ----------- ------------ ----------- ------------
$ 642,000 $ (332,000) $ 1,281,000 $ (113,000) $ 511,000
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
</TABLE>
F-19
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(6) INCOME TAXES (CONTINUED)
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% to earnings (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------------------- ---------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit)....................... $2,932,000 $3,353,000 $1,779,000 $1,202,000 $(2,897,000)
Increase (decrease) in taxes
resulting from:
State income tax expense, net of
Federal income tax
deduction..................... 529,000 605,000 367,000 246,000 (156,000)
Nondeductible portion of stock-
based compensation............ 138,000 299,000 221,000 (64,000) --
Nondeductible reorganization
costs......................... -- -- -- -- 1,267,000
Other, net...................... (61,000) 150,000 164,000 12,000 65,000
--------- --------- --------- --------- ----------
$3,538,000 $4,407,000 $2,531,000 $1,395,000 $(1,721,000)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
(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 1996, 1997, and
1998 aggregated $1,380,000, $1,605,000 and $1,772,000, respectively and for the
three-month periods ended Septembernb]30, 1997 and 1998 aggregated $510,000
(unaudited) and $520,000 (unaudited), 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 also may 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 1% of labor is 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 the plan were $106,000, $152,000 and $161,000 related to
the plan for the years ended June 30, 1996, 1997 and 1998, respectively and
$39,000 (unaudited) and $54,000 (unaudited) for the three-month periods ended
September 30, 1997 and 1998, respectively.
F-20
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(8) STOCK COMPENSATION PLANS
EMPLOYEE STOCK PURCHASE PLANS--The Company had established employee stock
purchase plans referred to as "stock buy-out agreements". 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.
The stock buy-out agreements 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 the stock buy-out agreements were
654,720 and 792,000 at June 30, 1997 and 1998, respectively. The contingent
repurchase price of all these shares were $10,606,000 and $13,328,000 at June
30, 1997 and 1998, respectively.
Compensation expense related to the stock purchase plans amounted to
$519,000, $1,643,000 and $994,000 for the years ended June 30, 1996, 1997 and
1998, respectively and $87,000 (unaudited) and $8,942,000 (unaudited) for the
three-month periods ended September 30, 1997 and 1998, respectively. The accrued
compensation related to the stock buy-out agreements entered into subsequent to
January 28, 1988 is reflected as accrued compensation in the accompanying
consolidated balance sheets at June 30, 1997 and 1998.
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 $302,000, $369,000 and $(314,000)
for the years ended June 30, 1996, 1997 and 1998, respectively and $128,000
(unaudited) and $0 (unaudited) for the three-month periods ended September 30,
1997 and 1998, respectively. The accrued compensation related to the stock
option plan is reflected as accrued compensation in the accompanying
consolidated balance sheets at June 30, 1997 and 1998.
Stock options outstanding were 145,200 and 0 at June 30, 1997 and 1998,
respectively. There was no stock option activity during the years ended June 30,
1996 and 1997. All 145,200 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 is included in general and
administrative expenses for the year ended June 30, 1998.
F-21
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(8) STOCK COMPENSATION PLANS (CONTINUED)
STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization Mergers, the Third Party, 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 a formula 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 a formula 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.
On August 4, 1998, the Recapitalizaiton 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 (unaudited) which is included in general and
administrative expenses for the three month period ended September 30, 1998.
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.
Shares outstanding that are subject to the buy-out provisions of the
Stockholders Agreement are 370,085 shares of Common Stock and 8,556 shares of
Series B Preferred Stock at September 30, 1998.
F-22
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(8) STOCK COMPENSATION PLANS (CONTINUED)
Compensation expense related to the formula buy-out provisions of the
Stockholders Agreement amounted to $73,000 (unaudited) for the three month
period ended September 30, 1998.
(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 therefor, 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
therefor, 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
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.
F-23
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(9) REDEEMABLE PREFERRED STOCK (CONTINUED)
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Penhall International Corp., holders of Senior Exchangeable
Preferred Stock shall be entitled to be paid out of the assets of Penhall
International Corp. available for distribution to its stockholders an amount in
cash equal to the Senior Exchangeable Preferred Liquidation Preference per
share, plus an amount equal to a prorated dividend from the last dividend
payment date to the date fixed for liquidation, dissolution or winding up,
before any distribution is made on any shares of Senior Exchangeable Junior
Stock. If such available assets are insufficient to pay the holders of the
outstanding shares of Senior Exchangeable Preferred Stock in full, such assets,
or the proceeds thereof, shall be distributed ratably among such holders. Except
as otherwise required by law, the holders of Senior Exchangeable Preferred Stock
have no voting rights and are not be 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 therefor, 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 therefor, 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
F-24
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(9) REDEEMABLE PREFERRED STOCK (CONTINUED)
such holders. Except as otherwise required by law, the holders of Series A
Preferred Stock have no voting rights and are not be entitled to any notice of
meeting of stockholders.
(10) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company and its subsidiaries lease various properties and equipment
under long-term agreements which expire at varying dates through 2002. Certain
of these leases provide for renegotiation of annual rentals at specified dates.
Rent expense was $452,000, $452,000 and $561,000 for the years ended June 30,
1996, 1997 and 1998, respectively and $118,000 (unaudited) and $158,000
(unaudited) for the three-month periods ended September 30, 1997 and 1998,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30: JUNE 30, 1998 SEPTEMBER 30, 1998
- --------------------------------------- --------------- ------------------
<S> <C> <C>
(UNAUDITED)
1999................................... $ 515,000 $ 505,000
2000................................... 530,000 523,000
2001................................... 471,000 460,000
2002................................... 381,000 332,000
2003................................... 185,000 157,000
Thereafter............................. 114,000 88,000
--------------- ------------------
$ 2,196,000 $ 2,065,000
--------------- ------------------
--------------- ------------------
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash accounts, and contract and trade receivables.
CASH
At June 30, 1997, 1998 and September 30, 1998, the Company has approximately
$676,000, $234,000 and $1,992,000 (unaudited) on deposit at one financial
institution.
ENVIRONMENTAL REMEDIATION COSTS
The Company is currently in the process of complying with upcoming
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, which must be met by December 22,
1998. The Company believes that the costs to address any associated
contamination would not reasonably be expected to exceed $170,000. The total
estimated aggregate cost of $72,000, principally related to the upgrade or
removal of the underground storage tanks, is expected to be paid in 1999 and has
been accrued for at June 30, 1998. The cost estimate is based on the proposals
from outside environmental engineering
F-25
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
companies and from historical costs incurred and represents Management's best
estimate of the cost. The estimate of costs and their timing of payment could
change as a result of unforeseen circumstances existing at the site.
LETTERS OF CREDIT
The Company has an existing standby letter of credit with a financial
institution in the amount of $450,000 for the benefit of a certain customer of
the Company. The standby letter of credit expires on March 1, 1999 and there is
no outstanding balance at June 30, 1998. The Company obtained a new standby
letter of credit in the aggregate amount of $2,000,000 on July 2, 1998 which
expires on December 31, 1998.
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 that the outcome of these
proceedings will not have a material effect on the Company's consolidated
financial statements taken as a whole.
(11) RELATED PARTY TRANSACTIONS AND NOTES PAYABLE TO STOCKHOLDERS
During December 1995, the Company purchased from its majority stockholder
facilities previously leased under a noncancelable operating arrangement. These
facilities were purchased for $2,200,000, with an initial payment of $700,000
and a note payable issued in the amount of $1,500,000. All unpaid principal and
interest was paid October 1, 1997.
In July 1994, the Company repurchased 51,987 shares from a stockholder for a
$590,000 promissory note. The note bears interest at 8.0% and is payable in
monthly principal and interest installments of $8,333. All unpaid principal and
interest is due October 2002.
In December 1997, the Company repurchased 7,107 shares from a stockholder
with a $111,000 promissory note. The note bears interest at 8.0% and is payable
in monthly principal and interest installments of $8,333. All unpaid principal
and interest is due January 1999.
F-26
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- SEPTEMBER 30,
1997 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Costs incurred on uncompleted contracts................... $ 15,043,000 $ 24,533,000 $ 29,156,000
Estimated earnings to date................................ 5,849,000 3,279,000 5,578,000
------------- ------------- -------------
20,892,000 27,812,000 34,734,000
Less billings to date..................................... 20,431,000 27,501,000 34,995,000
------------- ------------- -------------
$ 461,000 $ 311,000 $ (261,000)
------------- ------------- -------------
------------- ------------- -------------
Included in accompanying consolidated balance sheets under
the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 668,000 $ 976,000 $ 670,000
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (207,000) (665,000) (931,000)
------------- ------------- -------------
$ 461,000 $ 311,000 $ (261,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(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 in the statements of financial condition, 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.
F-27
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at June 30, 1997 and 1998 and at
September 30, 1998 (unaudited).
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1997 1998 SEPTEMBER 30, 1998
-------------------------- -------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Financial assets:
Cash...................... $ 676,000 $ 676,000 $ 234,000 $ 234,000 $ 1,992,000 $ 1,992,000
Net receivables........... 23,746,000 23,746,000 29,312,000 29,312,000 35,017,000 35,017,000
Financial liabilities:
Current installments of
long-term debt.......... 185,000 185,000 2,034,000 2,034,000 1,846,000 1,846,000
Current installments of
notes payable to
stockholders............ 819,000 819,000 131,000 131,000 -- --
Trade accounts payable.... 4,233,000 4,233,000 7,532,000 7,532,000 7,663,000 7,663,000
Long-term debt............ 12,756,000 12,758,000 16,125,000 16,123,000 23,202,000 23,101,000
Senior Notes.............. -- -- -- -- 100,000,000 90,037,000
Notes payable to
stockholders............ 351,000 351,000 274,000 274,000 357,000 357,000
</TABLE>
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, net receivables, current installments of long-term debt, current
installments of notes payable to stockholders, and trade accounts payables:
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Long-term debt, Senior Notes and notes payable to stockholders: The fair
value of the Company's long-term debt, Senior Notes and notes payable to
stockholders 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 of comparable
maturities 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. 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 bears 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,
F-28
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
(14) HIGHWAY SERVICES ACQUISITION (CONTINUED)
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 provides that certain stockholders of HSI purchase 3,147
of the Company's common stock for $1,000,000.
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 1997 and 1998, after giving affect
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.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED JUNE 30,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Revenues......................................................................... $ 114,238,000 $ 114,706,000
-------------- --------------
-------------- --------------
Net earnings..................................................................... $ 7,061,000 $ 3,701,000
-------------- --------------
-------------- --------------
Earnings per share:
Basic.......................................................................... 1.67 .87
Diluted........................................................................ 1.64 .85
Weighted average number of shares outstanding:
Basic.......................................................................... 4,232,585 4,277,888
Diluted........................................................................ 4,305,607 4,355,303
</TABLE>
(15) SUBSEQUENT EVENTS (UNAUDITED)
The Company completed the following acquisitions which were accounted for as
purchases:
On October 16, 1998, the Company purchased certain assets of Daley
Concrete Cutting, a division of U.S. Rentals for $3,743,000 cash.
On November 13, 1998, the Company purchased Lipscomb Concrete Cutting
for $4,252,000. The purchase price included a cash payment of $3,376,000 and
a seller carryback note of $876,000 at 6% interest, all due and payable
November 1, 1999.
F-29
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998
(UNAUDITED)
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.
The condensed consolidating financial information presents condensed
financial statements as of June 30, 1997 and 1998 and for the years ended June
30, 1996, 1997 and 1998 and the three-month period ended September 30, 1997 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 September 30, 1998 and for the three-month period
ended September 30, 1998 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.
F-30
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables, net................ $ 3,365,000 $ 429,000 $ 19,952,000 $ -- $ 23,746,000
Inventories..................... 129,000 -- 937,000 -- 1,066,000
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... -- -- 668,000 -- 668,000
Intercompany assets............. (20,000) 9,190,000 32,000 (9,202,000) --
Other current assets............ 412,000 371,000 1,550,000 -- 2,333,000
------------- ------------- ------------- -------------- -------------
Total current assets.......... 3,886,000 9,990,000 23,139,000 (9,202,000) 27,813,000
Net property, plant and
equipment....................... 5,191,000 8,503,000 26,967,000 -- 40,661,000
Other assets, net................. 842,000 477,000 40,000 -- 1,359,000
Investment in subsidiaries........ -- 38,088,000 -- (38,088,000) --
------------- ------------- ------------- -------------- -------------
$ 9,919,000 $ 57,058,000 $ 50,146,000 $ (47,290,000) $ 69,833,000
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
Liabilities and Stockholders'
Equity:
Current installments of long-term
debt and notes payable to
stockholders.................... $ 185,000 $ 819,000 $ -- $ -- $ 1,004,000
Trade accounts payable............ 755,000 84,000 3,394,000 -- 4,233,000
Accrued liabilities............... 1,602,000 266,000 3,056,000 -- 4,924,000
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... -- -- 207,000 -- 207,000
Intercompany liabilities.......... 1,204,000 7,000 7,991,000 (9,202,000) --
------------- ------------- ------------- -------------- -------------
Total current liabilities..... 3,746,000 1,176,000 14,648,000 (9,202,000) 10,368,000
Long-term debt, excluding current
portion......................... 372,000 12,735,000 -- -- 13,107,000
Deferred tax liabilities.......... 549,000 (732,000) 2,662,000 -- 2,479,000
Accrued Compensation.............. -- 4,626,000 -- -- 4,626,000
Stockholders' equity................ 5,252,000 39,253,000 32,836,000 (38,088,000) 39,253,000
------------- ------------- ------------- -------------- -------------
$ 9,919,000 $ 57,058,000 $ 50,146,000 $ (47,290,000) $ 69,833,000
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
</TABLE>
F-31
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables, net................ $ 4,648,000 $ 2,399,000 $ 22,265,000 $ -- $ 29,312,000
Inventories..................... 169,000 -- 1,289,000 -- 1,458,000
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 174,000 -- 802,000 -- 976,000
Intercompany assets............. 2,518,000 16,075,000 8,946,000 (27,539,000) --
Other current assets............ 309,000 700,000 786,000 -- 1,795,000
------------- ------------- ------------- -------------- -------------
Total current assets.......... 7,818,000 19,174,000 34,088,000 (27,539,000) 33,541,000
Net property, plant and
equipment....................... 4,729,000 8,844,000 31,434,000 -- 45,007,000
Other assets, net................. 561,000 1,006,000 8,208,000 -- 9,775,000
Investment in subsidiaries........ -- 44,525,000 -- (44,525,000) --
------------- ------------- ------------- -------------- -------------
$ 13,108,000 $ 73,549,000 $ 73,730,000 $ (72,064,000) $ 88,323,000
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
Liabilities and Stockholders'
Equity:
Current installments of long-term
debt and notes payable to
Stockholders.................... $ 185,000 $ 132,000 $ 1,848,000 $ -- $ 2,165,000
Trade accounts payable............ 844,000 7,000 6,681,000 -- 7,532,000
Accrued liabilities............... 961,000 4,243,000 3,837,000 -- 9,041,000
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 147,000 -- 518,000 -- 665,000
Intercompany liabilities.......... 3,306,000 6,834,000 17,399,000 (27,539,000) --
------------- ------------- ------------- -------------- -------------
Total current liabilities..... 5,443,000 11,216,000 30,283,000 (27,539,000) 19,403,000
Long-term debt, excluding current
portion......................... 196,000 14,356,000 1,847,000 -- 16,399,000
Deferred tax liabilities.......... 581,000 (935,000) 3,963,000 -- 3,609,000
Accrued Compensation.............. -- 5,306,000 -- -- 5,306,000
Stockholders' equity.............. 6,888,000 43,606,000 37,637,000 (44,525,000) 43,606,000
------------- ------------- ------------- -------------- -------------
$ 13,108,000 $ 73,549,000 $ 73,730,000 $ (72,064,000) $ 88,323,000
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
</TABLE>
F-32
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables, net................... $ 9,552,000 $ -- $ 25,465,000 $ -- $ 35,017,000
Inventories........................ 146,000 -- 1,619,000 -- 1,765,000
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ 119,000 -- 551,000 -- 670,000
Intercompany assets................ 48,217,000 19,491,000 8,738,000 (76,446,000) --
Other current assets............... (152,000) 1,715,000 2,443,000 -- 4,006,000
------------- ------------- ------------ ------------- -------------
Total current assets............. 57,882,000 21,206,000 38,816,000 (76,446,000) 41,458,000
Net property, plant and equipment.... 5,121,000 9,473,000 31,335,000 -- 45,929,000
Other assets, net.................... 6,332,000 (3,000) 8,078,000 -- 14,407,000
Investment in parent................. -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries........... 17,275,000 -- -- (17,275,000) --
------------- ------------- ------------ ------------- -------------
$ 86,610,000 $ 34,677,000 $ 78,229,000 $ 97,722,000 $ 101,794,000
------------- ------------- ------------ ------------- -------------
------------- ------------- ------------ ------------- -------------
Liabilities and Stockholders' Equity
(Deficit)
Current installments of long-term
debt and notes payable to
stockholders....................... $ 185,000 $ 112,000 $ 1,796,000 $ -- $ 2,093,000
Trade accounts payable............... 515,000 77,000 7,071,000 -- 7,663,000
Accrued liabilities.................. 2,915,000 -- 5,564,000 -- 8,479,000
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 58,000 -- 873,000 -- 931,000
Intercompany liabilities............. 3,274,000 56,849,000 16,323,000 (76,446,000) --
------------- ------------- ------------ ------------- -------------
Total current liabilities........ 6,947,000 57,038,000 31,627,000 (76,446,000) 19,166,000
Long-term debt, excluding current
portion............................ 20,196,000 1,220,000 1,896,000 -- 23,312,000
Senior Notes......................... 100,000,000 -- -- -- 100,000,000
Deferred tax liabilities............. 573,000 (266,000) 4,116,000 -- 4,423,000
Accrued Compensation................. 73,000 -- -- -- 73,000
Senior Exchangable Preferred Stock..... 10,167,000 -- -- -- 10,167,000
Series A Preferred Stock............... 10,655,000 -- -- -- 10,655,000
Stockholders' equity (deficit)......... (62,001,000) (23,315,000) 40,590,000 (21,276,000) (66,002,000)
------------- ------------- ------------ ------------- -------------
$ 86,610,000 $ 34,677,000 $ 78,229,000 $ (97,722,000) $ 101,794,000
------------- ------------- ------------ ------------- -------------
------------- ------------- ------------ ------------- -------------
</TABLE>
F-33
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 14,918,000 $ 2,424,000 $ 59,881,000 $ (2,328,000) $ 74,895,000
Cost of revenues....................... 9,886,000 7,000 41,307,000 -- 51,200,000
------------- ------------ ------------- ------------- -------------
Gross profit......................... 5,032,000 2,417,000 18,574,000 (2,328,000) 23,695,000
General and administrative expenses.... 2,550,000 3,294,000 11,090,000 (1,778,000) 15,156,000
Other operating income, net............ 75,000 132,000 660,000 -- 867,000
Equity earnings in subsidiaries........ -- 6,113,000 -- (6,113,000) --
------------- ------------ ------------- ------------- -------------
Earnings before interest expense and
income taxes....................... 2,557,000 5,368,000 8,144,000 (6,663,000) 9,406,000
Interest expense....................... 132,000 738,000 463,000 (550,000) 783,000
------------- ------------ ------------- ------------- -------------
Earnings before income taxes......... 2,425,000 4,630,000 7,681,000 (6,113,000) 8,623,000
Income taxes........................... 989,000 (455,000) 3,004,000 -- 3,538,000
------------- ------------ ------------- ------------- -------------
Net earnings........................... $ 1,436,000 $ 5,085,000 $ 4,677,000 $ (6,113,000) $ 5,085,000
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
</TABLE>
F-34
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 16,544,000 $ 2,879,000 $ 78,748,000 $ (2,873,000) $ 95,298,000
Cost of revenues..................... 11,567,000 48,000 56,926,000 -- 68,541,000
------------- ------------- ------------- ------------- -------------
Gross profit....................... 4,977,000 2,831,000 21,822,000 (2,873,000) 26,757,000
General and administrative
expenses........................... 3,221,000 4,227,000 11,627,000 (2,122,000) 16,953,000
Other operating income, net.......... 125,000 0 746,000 0 871,000
Equity earnings in subsidiaries...... -- 7,025,000 -- (7,025,000) --
------------- ------------- ------------- ------------- -------------
Earnings before interest expense
and income taxes................. 1,881,000 5,629,000 10,941,000 (7,776,000) 10,675,000
Interest expense..................... 220,000 751,000 591,000 (751,000) 811,000
------------- ------------- ------------- ------------- -------------
Earnings before income taxes....... 1,661,000 4,878,000 10,350,000 (7,025,000) 9,864,000
Income taxes......................... 676,000 (579,000) 4,310,000 -- 4,407,000
------------- ------------- ------------- ------------- -------------
Net earnings......................... $ 985,000 $ 5,457,000 $ 6,040,000 $ (7,025,000) $ 5,457,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-35
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
--------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
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 4,652,000 13,718,000 (2,294,000) 19,880,000
Other compensation.................. -- 3,271,000 -- -- 3,271,000
Other operating income, net......... 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 taxes........................ 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
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
</TABLE>
F-36
<PAGE>
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $5,295,000 $ 811,000 $ 23,056,000 $ (811,000) $ 28,351,000
Cost of revenues........................ 3,488,000 12,000 16,515,000 -- 20,015,000
------------ ------------ ------------- ------------- -------------
Gross profit.......................... 1,807,000 799,000 6,541,000 (811,000) 8,336,000
General and administrative expenses..... 995,000 753,000 3,503,000 (548,000) 4,703,000
Other operating income, net............. 34,000 3,000 116,000 -- 153,000
Equity earnings in subsidiaries......... -- 2,199,000 -- (2,199,000) --
------------ ------------ ------------- ------------- -------------
Earnings before interest expense and
income taxes........................ 846,000 2,248,000 3,154,000 (2,462,000) 3,786,000
Interest expense........................ 76,000 259,000 178,000 (263,000) 250,000
------------ ------------ ------------- ------------- -------------
Earnings before income taxes.......... 770,000 1,989,000 2,976,000 (2,199,000) 3,536,000
Income taxes............................ 315,000 (152,000) 1,232,000 -- 1,395,000
------------ ------------ ------------- ------------- -------------
Net earnings............................ $ 455,000 $ 2,141,000 $ 1,744,000 $ (2,199,000) $ 2,141,000
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
F-37
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 5,905,000 $ 294,000 $ 33,008,000 $ (294,000) $ 38,913,000
Cost of revenues...................... 3,569,000 5,000 24,294,000 -- 27,868,000
------------- -------------- ------------- ------------ -------------
Gross profit........................ 2,336,000 289,000 8,714,000 (294,000) 11,045,000
General and administrative expenses... 1,099,000 12,142,000 4,287,000 (317,000) 17,211,000
Other operating income, net........... 29,000 801,000 130,000 (700,000) 260,000
Equity earnings in subsidiaries....... (5,224,000) -- -- 5,224,000 --
------------- -------------- ------------- ------------ -------------
Earnings (loss) before interest
expense and income taxes.......... (3,958,000) (11,052,000) 4,557,000 4,547,000 (5,906,000)
Interest expense...................... 2,331,000 155,000 107,000 23,000 2,616,000
------------- -------------- ------------- ------------ -------------
Earnings (loss) before income
taxes............................. (6,289,000) (11,207,000) 4,450,000 4,524,000 (8,522,000)
Income taxes.......................... (188,000) (3,030,000) 1,497,000 -- (1,721,000)
------------- -------------- ------------- ------------ -------------
Net earnings (loss)................... $ (6,101,000) $ (8,177,000) $ 2,953,000 $ 4,524,000 $ (6,801,000)
------------- -------------- ------------- ------------ -------------
------------- -------------- ------------- ------------ -------------
</TABLE>
F-38
<PAGE>
JOHN A. KNUTSON & CO., PLLP
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
Highway Services, Inc.
We have audited the accompanying statements of income, retained earnings, and
cash flows of Highway Services, Inc. for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Highway
Services, Inc. for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
JOHN A. KNUTSON & CO., PLLP
/s/ John A. Knutson & Co., PLLP
Certified Public Accountants
January 29, 1998
Minneapolis, Minnesota
F-39
<PAGE>
HIGHWAY SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE FOR THE THREE
ENDED MONTH PERIOD MONTH PERIOD
DECEMBER 31, ENDED MARCH ENDED MARCH
1997 31, 1997 31, 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Contract income..................................................... $ 19,693,559 $ 2,722,826 $ 1,402,182
Contract costs...................................................... 15,062,354 2,415,860 772,225
------------- ------------- -------------
Gross profit.................................................. 4,631,205 306,966 629,957
Operating expenses
Equipment (Note 4)................................................ 537,534 192,373 288,155
General and administrative........................................ 1,467,427 230,889 236,695
Interest, net..................................................... 54,281 18,325 4,317
------------- ------------- -------------
2,059,242 441,587 529,167
------------- ------------- -------------
Net income (loss)............................................. 2,571,963 (134,621) 100,790
Retained earnings
Beginning of year................................................. 2,465,831 2,465,831 3,408,794
Dividends declared and paid....................................... (1,629,000) -- (1,889,846)
------------- ------------- -------------
End of year....................................................... $ 3,408,794 $ 2,331,210 $ 1,619,738
------------- ------------- -------------
------------- ------------- -------------
Net earnings (loss) per common share.......................... $ 1,420.97 $ (74.38) $ 55.68
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
F-40
<PAGE>
HIGHWAY SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED FOR THE THREE MONTH FOR THE THREE MONTH
DECEMBER 31, PERIOD ENDED MARCH PERIOD ENDED MARCH
1997 31, 1997 31, 1998
------------ ------------------- -------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income............................................. $2,571,963 $ (134,621) $ 100,790
Adjustments to reconcile net income to net cash flows
from operating activities
Depreciation......................................... 416,678 104,169 121,033
Gain on sale of equipment............................ (20,790) -- (3,064)
Cash value increase in excess of premiums............ (23,762) 5,836 25
(Increase) decrease in assets
Accounts receivable................................ (452,892) (1,892,764) 660,232
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 110,169 110,169 --
Inventories........................................ 214,856 206,632 (42,065)
Prepaid expenses................................... (52,442) (46,718) 29,025
Refundable taxes................................... (6,280) -- 6,280
Increase (decrease) in liabilities
Accounts payable................................... 231,002 685,511 (411,189)
Accrued expenses................................... (128,614) (111,898) (98,059)
------------ ------------------- -------------------
Net cash provided by operating activities........ 2,859,888 (1,073,684) 363,008
------------ ------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of equipment........................ 73,640 -- 12,939
Expenditures for property and equipment................ (387,284) (131,564) (32,337)
Deposit on computer equipment.......................... 14,225 14,225 --
Life insurance premiums paid........................... (23,799) (16,036) (7,800)
------------ ------------------- -------------------
Net cash (used) in investing activities.......... (323,218) (133,375) (27,198)
Cash flows from financing activities:
Principal payments on long-term debt................... (257,062) 937,589 807,769
Principal payments on capitalized lease obligation..... (25,694) -- --
Distributions to stockholders.......................... (1,629,000) -- (1,889,846)
------------ ------------------- -------------------
Net cash (used) in financing activities.......... (1,911,756) 937,589 (1,082,077)
------------ ------------------- -------------------
Net increase (decrease) in cash and cash
equivalents.................................... 624,914 (269,470) (746,267)
Cash and cash equivalents
Beginning of period.................................... 259,540 259,540 884,454
------------ ------------------- -------------------
End of period.......................................... $ 884,454 $ (9,930) $ 138,187
------------ ------------------- -------------------
------------ ------------------- -------------------
</TABLE>
See Notes to Financial Statements.
SUPPLEMENTAL DISCLOSURES
See Note 7
F-41
<PAGE>
HIGHWAY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Highway Services, Inc., incorporated on March 15, 1968, is a contractor
specializing in grinding, sawing, and repairing concrete highways throughout the
United States.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE AND COST RECOGNITION
The Company reports revenue from construction contracts on the percentage of
completion method for both financial and income tax reporting. Percentage of
completion is measured by the percentage of total costs incurred to date
compared to estimated total costs for each contract. Contract costs include
material, labor and benefits, subcontractors, equipment overhead, and other
direct costs. Provision for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Revisions in cost and profit
estimates are reflected in the accounting period when the facts which require
the revision become known.
UNAUDITED INTERIM STATEMENTS:
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited. In the opinion of Management all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
financial statements have been included. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the Company's
future results of operations for the full year ending December 31, 1998.
PROPERTY AND DEPRECIATION
Property and equipment are carried at cost. Maintenance and repairs are
charged to operations and additions or improvements are capitalized. Items of
property sold, retired, or otherwise disposed of are removed from the asset and
accumulated depreciation accounts and any gains or losses thereon are reflected
in operations.
Depreciation is computed using straight-line and accelerated methods over
the following estimated service lives:
<TABLE>
<CAPTION>
TYPE OF ASSET LIVES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Construction equipment....................................................... 5 to 7 Years
Equipment capitalized under lease............................................ 5 Years
Trucks, trailers, and autos.................................................. 7 Years
Shop and office equipment.................................................... 5 to 12 Years
Building..................................................................... 39 Years
</TABLE>
2. RETIREMENT PLANS
PROFIT SHARING PLAN
In 1994 the Company adopted an employee retirement savings plan under
Internal Revenue Code Section 401(k). Full-time employees with at least one year
of service may enter the plan and elect to defer
F-42
<PAGE>
HIGHWAY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. RETIREMENT PLANS (CONTINUED)
up to 15% of their salaries. Discretionary employer matching contributions are
determined periodically by the Company's board of directors. For the year ended
December 31, 1997, and the three month periods ended March 31, 1997 and 1998,
the Company matched 40% of employee elective deferrals. Total employer matching
contributions were $79,717, $9,085 (unaudited) and $8,195 (unaudited) for the
years ended December 31, 1997 and the three month periods ended March 31, 1997
and 1998, respectively.
MULTI-EMPLOYER PENSION PLANS
The Company contributes to union-sponsored multi-employer retirement plans
in accordance with negotiated union contracts. The plans cover all union
employees, which represent substantially all of the Company's employees.
Contributions, based on varying rates for the hours worked by the employees,
totaled $170,986, $51,884 (unaudited) and $28,354 (unaudited) for the year ended
December 31, 1997 and the three month periods ended March 31, 1997 and 1998,
respectively.
Government regulations significantly increase pension responsibilities for
participating employers. Under these regulations (the Multi-Employer Pension
Plan Amendments Act of 1980) if a plan terminates or the employer withdraws, the
Company could be subject to a substantial "withdrawal liability". The most
current financial information available from the plan which covers most of the
Company employees states that as of December 31, 1996 (the date of the latest
actuarial valuation) the unfunded value of vested benefits was $0. The Company
does not anticipate withdrawal from the plans, nor is the Company aware of any
unexpected plan terminations.
3. PROVISION FOR INCOME TAXES
The Company has elected to be taxed as an S corporation, whereby all taxable
income flows through to the stockholders. Therefore, no provision for federal
income taxes has been made.
Taxes currently payable occur for those states which charge minimum fees for
S corporations.
In the future, if the Company elects to be taxed as a C corporation,
deferred income taxes would be set-up for the cumulative difference between
financial statement and income tax depreciation methods. As of December 31, 1997
the cumulative difference between depreciation methods was approximately
$693,000, on which deferred income taxes would be approximately $277,000.
4. EQUIPMENT EXPENSE
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Depreciation................................................. $ 416,678 $ 104,876 $ 114,224
Repairs...................................................... 807,286 156,096 146,384
Labor and fringes............................................ 266,473 60,168 77,686
Equipment rent............................................... (13,940) 0 0
Licenses and fees............................................ 46,914 32,200 44,941
Gain on sale of equipment.................................... (20,790) 0 (3,064)
------------ ------------ ------------
1,502,621 353,340 380,171
Equipment costs charged to contracts......................... (965,087) (160,967) (92,016)
------------ ------------ ------------
$ 537,534 $ 192,373 $ 288,155
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-43
<PAGE>
HIGHWAY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS AND LEASES
The Company leases its building from R & B Properties, a partnership related
to Highway Services, Inc. through common ownership.
The building lease has a one year term ending February 1, 1998, with a base
rent of $2,800 per month. This is a triple net lease requiring the Company to
pay all taxes, insurance, and maintenance costs. Rent expense, including real
estate taxes was $48,156, $6,663 (unaudited) and $8,954 (unaudited) for the year
ended December 31, 1997 and three month periods ended March 31, 1997 and 1998,
respectively.
Future minimum annual lease payments required for years ending December 31
are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 36,254
1999............................................................... 38,050
2000............................................................... 39,942
2001............................................................... 42,025
2002............................................................... 3,517
</TABLE>
6. JOINT VENTURE
On November 19, 1996, the Company entered into a joint venture agreement
with Penhall Company of California. The joint venture has signed a subcontract
with Granite Construction to grind existing concrete pavement in the State of
California for approximately $2,600,000. The Company's portion of the work,
approximately $1,300,000 or 50% of the subcontract, was accounted for as a
separate job with Granite Construction and was completed during 1997.
7. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Supplemental cash flow information and schedules of non-cash investing and
financing activities:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31 ENDED ENDED
1997 MARCH 31, 1997 MARCH 31, 1998
------------ -------------- --------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Interest paid............................................ $ 79,792 $ 18,325 $ 12,625
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
F-44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information......................... iv
Summary....................................... 1
Risk Factors.................................. 17
The Transactions.............................. 25
Use of Proceeds............................... 26
Capitalization................................ 27
Unaudited Pro Forma Condensed Consolidated
Financial Statements........................ 28
Selected Historical Consolidated Financial
Data........................................ 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 36
The Exchange Offer............................ 42
Industry Overview............................. 48
Business...................................... 49
Management.................................... 61
Ownership of Capital Stock.................... 64
Certain Relationships and Related
Transactions................................ 69
Description of Certain Indebtedness........... 70
Description of the Notes...................... 72
Book-Entry; Delivery and Form................. 101
Federal Income Tax Consequences............... 103
Plan of Distribution.......................... 104
Legal Matters................................. 106
Experts....................................... 106
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THE
ORIGINAL DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS
$100,000,000
[LOGO]
PENHALL INTERNATIONAL CORP.
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2006
FOR ALL OUTSTANDING
12% SENIOR NOTES DUE 2006
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 10-851 of the Arizona Business Corporation Act provides that an
Arizona corporation may indemnify an individual made a party to a proceeding
because he is or was a director against liability incurred in the proceeding if
the individual (1) conducted himself in good faith; (2) reasonably believed (i)
in the case of conduct in his official capacity with the corporation, that his
conduct was in its best interests; and (ii) in all other cases, that his conduct
was at least not opposed to its best interests; and (3) in the case of any
criminal proceedings, he had no reasonable cause to believe his conduct was
unlawful. A corporation may indemnify a director in these circumstances only
upon specific authorization by the board of directors (or in certain
circumstances, a committee thereof) special legal counsel or by shareholders as
provided in Section 10-855. Section 10-852 of the Arizona Business Corporation
Act provides that an Arizona corporation must indemnify a director who was
wholly successful, on the merits or otherwise, in the defense of any proceeding
to which he was a party because he is or was a director of the corporation
against reasonable expenses incurred by him in connection with the proceeding,
unless the articles of incorporation provide otherwise.
The Articles of Incorporation of the Company provide that a director of the
Company shall be entitled to the benefits of all limitations on the liability of
directors generally that are available under the Arizona Business Corporation
Act, except liability for: (i) the amount of a financial benefit received by a
director to which the director is not entitled; (ii) an intentional infliction
of harm on the corporation or the shareholders; (ii) a violation Section 10-833
of the Arizona Business Corporation Act; or (iv) an intentional violation of
criminal law.
The Bylaws of the Company provide that the Company shall, to the full extent
permitted by the laws of the State of Arizona, indemnify all directors and
officers whom it has the power to indemnify pursuant thereto.
The foregoing summary of the Arizona Business Corporation Act, of the
Company's Articles of Incorporation and of the Company's Bylaws is qualified in
its entirety by reference to the relevant provisions of the Arizona Business
Corporation Act and by reference to the relevant provisions of the Company's
Articles of Incorporation (filed as Exhibit 3.1) and the relevant provisions of
the Company's Bylaws (filed as Exhibit 3.2).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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.)*
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Moss Adams LLP
23.4 Consent of John A. Knutson & Co., PLLP
24 Power of Attorney*
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
</TABLE>
- ------------------------
* Previously filed.
** To be supplied by amendment.
(b) Financial Statement Schedules:
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
II-3
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
PENHALL INTERNATIONAL CORP.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Anaheim, State of California, on the 2nd day of
December, 1998.
<TABLE>
<S> <C> <C>
PENHALL INTERNATIONAL CORP.
By: /s/ JOHN T. SAWYER
-----------------------------------------
John T. Sawyer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 2, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board,
/s/ JOHN T. SAWYER President and Chief
- ------------------------------ Executive Officer
John T. Sawyer (Principal Executive
Officer)
Vice President-Finance and
/s/ MARTIN W. HOUGE Chief Financial Officer
- ------------------------------ (Principal Accounting
Martin W. Houge Officer)
*
- ------------------------------ Director
Bruce C. Bruckmann
*
- ------------------------------ Director
Harold O. Rosser II
</TABLE>
<TABLE>
<S> <C>
/s/ JOHN T. SAWYER
----------------------------------
John T. Sawyer
*By: ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
SIGNATURES
PENHALL RENTAL CORP.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Anaheim, State of California, on the 2nd day of
December, 1998.
<TABLE>
<S> <C> <C>
PENHALL RENTAL CORP.
By: /s/ JOHN T. SAWYER
-----------------------------------------
John T. Sawyer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 2, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board
(Sole Director),
/s/ JOHN T. SAWYER President and Chief
- ------------------------------ Executive Officer
John T. Sawyer (Principal Executive
Officer)
Vice President-Finance,
/s/ MARTIN W. HOUGE Chief Financial Officer
- ------------------------------ and Secretary (Principal
Martin W. Houge Accounting Officer)
</TABLE>
II-6
<PAGE>
SIGNATURES
PENHALL COMPANY
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Anaheim, State of California, on the 2nd day of
December, 1998.
<TABLE>
<S> <C> <C>
PENHALL COMPANY
By: /s/ JOHN T. SAWYER
-----------------------------------------
John T. Sawyer
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 2, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board
(Sole Director),
/s/ JOHN T. SAWYER President and Chief
- ------------------------------ Executive Officer
John T. Sawyer (Principal Executive
Officer)
Vice President-Finance,
/s/ MARTIN W. HOUGE Chief Financial Officer
- ------------------------------ and Secretary (Principal
Martin W. Houge Accounting Officer)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
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*
10.6 Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
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)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Moss Adams LLP
23.4 Consent of John A. Knutson & Co., PLLP
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
</TABLE>
- ------------------------
* Previously filed.
** To be supplied by amendment.
<PAGE>
Exhibit 2
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
among
BRUCKMANN, ROSSER, SHERRILL & CO., L.P.,
PENHALL ACQUISITION CORP.,
PENHALL RENTAL CORP. (F/K/A
PENHALL INTERNATIONAL, INC.),
PHOENIX CONCRETE CUTTING, INC.
and
THE STOCKHOLDERS OF
PENHALL RENTAL CORP.
Dated as of August 3, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER .........................................................................................3
1.1 Exchange of Penhall Shares; the PCC Merger.........................................................3
1.2. Transactions at Closing...........................................................................4
1.3. Terms of the Merger...............................................................................5
1.4. Closing Date, Time and Place......................................................................6
1.5. Waiver............................................................................................7
1.6. Payment of Seller Consideration and Merger Consideration; Surrender of Stock......................7
1.7. No Further Ownership Rights in Existing Company Stock.............................................9
1.8. Termination of Exchange Fund......................................................................9
1.9. Lost, Stolen or Destroyed Certificates............................................................9
1.10. Closing Balance Sheet; Closing Date Indebtedness Amount; Adjustment to Seller
Consideration...................................................................................9
1.11. Adjustment of Seller Consideration for Certain Company Acquisitions.............................12
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE COMPANY....................................13
2.1. Organization and Standing........................................................................13
2.2. Capitalization...................................................................................14
2.3. Authorization; Binding Agreement.................................................................15
2.4. Conflicts, Consents and Approvals................................................................15
2.5. Litigation.......................................................................................16
2.6. Financial Statements.............................................................................16
2.7. No Brokers or Finders............................................................................17
2.8. Taxes............................................................................................17
2.9. Absence of Undisclosed or Contingent Liabilities.................................................18
2.10. Property........................................................................................19
2.11. Insurance.......................................................................................21
2.12. Environmental Matters...........................................................................22
2.13. Intellectual Property...........................................................................23
2.14. Permits.........................................................................................24
2.15. Compliance with Laws............................................................................24
2.16. Labor Matters...................................................................................25
2.17. Absence of Changes..............................................................................25
2.18. Transactions with Affiliates....................................................................27
2.19. Contracts and Commitments.......................................................................27
2.20. Benefit Plans...................................................................................29
2.21. Absence of Questionable Payments................................................................32
2.22. Books and Records...............................................................................32
2.23. Disclosure......................................................................................32
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE III SEVERAL REPRESENTATIONS AND WARRANTIES OF THE SELLERS...........................................32
3.1. Ownership of Shares..............................................................................32
3.2. Authorization; Binding Agreement.................................................................33
3.3. Conflicts, Consents and Approvals................................................................33
3.4. No Brokers or Finders............................................................................34
3.5 Investment Intent.................................................................................34
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BRS AND NEWCO..................................................34
4.1. Organization.....................................................................................34
4.2. Authorization; Binding Agreement.................................................................34
4.3. Conflicts, Consents and Approvals................................................................35
4.4. Litigation.......................................................................................36
4.5. Financing........................................................................................36
4.6. No Brokers or Finders............................................................................36
4.7 Investment........................................................................................36
ARTICLE V CERTAIN COVENANTS................................................................................36
5.1. Conduct of the Company's Business................................................................36
5.2. Notices Prior to Closing.........................................................................37
5.3. Access and Information...........................................................................38
5.4. Public Announcements.............................................................................38
5.5. Hart-Scott-Rodino Act............................................................................38
5.6. Further Assurances...............................................................................38
5.7. Transfer of Certain Assets.......................................................................39
5.8. Voting, Shareholders Agreement and Other Matters.................................................39
5.9. Competition......................................................................................40
5.10. Consents........................................................................................41
5.11. Best Efforts....................................................................................41
5.12. Employees.......................................................................................41
5.13. Financing.......................................................................................41
5.14. Estoppel Certificates...........................................................................42
5.15. Title Insurance.................................................................................42
5.16. Surveys.........................................................................................43
5.17. FIRPTA..........................................................................................43
5.18. Zoning Letters..................................................................................43
5.19. Exceptions That Will Not Exist At Closing.......................................................43
5.20. Termination of Certain Promotional Activities...................................................44
5.21. Release of Stulls from Fidelity Agreement.......................................................44
ARTICLE VI CONDITIONS.......................................................................................44
6.1. Conditions Precedent to Each Party's Obligations.................................................44
6.2. Conditions Precedent to BRS' and Newco's Obligations............................................44
6.3. Conditions Precedent to the Sellers' Obligations.................................................46
</TABLE>
ii
<TABLE>
<PAGE>
<S> <C> <C>
6.4. Up-Dating of Disclosure Schedules................................................................48
ARTICLE VII TERMINATION AND ABANDONMENT....................................................................48
7.1. Termination......................................................................................48
7.2. Effect of Termination............................................................................49
ARTICLE VIII INDEMNIFICATION................................................................................49
8.1. The Sellers' Obligation to Indemnify.............................................................49
8.2. The Surviving Corporation's Obligations to Indemnify.............................................50
8.3. Notice and Opportunity to Defend.................................................................51
8.4. Procedure for Claims by Parties..................................................................52
8.5. Limitations on Indemnification...................................................................53
8.6. Insurance and Tax Effect.........................................................................57
8.7. Survival of Representations and Warranties.......................................................57
ARTICLE IX APPOINTMENT OF SELLER REPRESENTATIVE............................................................58
9.1 Appointment of the Seller Representative; Enforcement of Rights, Benefits and Remedies............58
ARTICLE X MISCELLANEOUS....................................................................................60
10.1. Amendment and Modification......................................................................60
10.2. Waiver of Compliance; Consents.................................................................60
10.3. Notices.........................................................................................60
10.4. Assignment; No Third Party Beneficiaries........................................................61
10.5. Expenses........................................................................................61
10.6. Governing Law...................................................................................62
10.7. Counterparts....................................................................................62
10.8. Entire Agreement................................................................................62
10.9. Arbitration.....................................................................................62
10.10. Severability...................................................................................64
10.11. Arm Length Contract............................................................................64
10.12. Headings; Interpretative Provisions............................................................64
10.13. Time is of the Essence.........................................................................65
10.14. Golden Parachute Approval Requirement..........................................................65
10.15. Date of Representations and Warranties.........................................................65
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A - Restated Charter of Penhall
Exhibit B - Restated Charter of PCC
Exhibit C Intentionally Omitted
Exhibit D - Form of PCC Plan of PCC Merger
Exhibit E - Plan of Merger, together with Officer's Certificates
Exhibit F - Form of Securities Holders Agreement
Exhibit G - Form of Opinion of Counsel to the Seller and the Company
Exhibit H- Compensation, Tax Consistency and Indemnification Agreement
Exhibit I Employment Agreement for John Sawyer
Exhibit J Employment Agreement for Other Management
Exhibit K - Form of Mutual Release and Satisfaction of the Seller and Affiliates
Exhibit L - Form of Opinion of Counsel to Newco
Exhibit M - Form of Mutual Release and Satisfaction of the Company and Subsidiaries
Exhibit N - Form of Statement of Designation of Senior Exchangeable Preferred Stock
</TABLE>
iv
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 1.10 Closing Balance Sheet; Closing Date Indebtedness Amount; Adjustment
to Seller Consideration
Schedule 1.11 Acquisition Candidates
Schedule 2.1(b) Articles of Incorporation and Bylaws of the Company
Schedule 2.2(b) Subsidiaries
Schedule 2.2(c) Agreements Relating to the Company Stock
Schedule 2.4 Conflicts, Consents and Approvals
Schedule 2.5 Litigation
Schedule 2.6(a) Financial Statements
Schedule 2.6(b) Exceptions to Financial Statements
Schedule 2.8 Tax Matters
Schedule 2.9 Undisclosed or Contingent Liabilities
Schedule 2.10(a) Personal Property
Schedule 2.10(c) Owned Real Property/Tenant Leases/Landlord Leases
Schedule 2.10(d) Title Exceptions - Owned Real Property
Schedule 2.10(e) Title Exceptions - Leasehold Estates (Subsidiaries)
Schedule 2.10(f) Title Exceptions - Leasehold Estates (The Company)
Schedule 2.10(h) Exceptions to Exclusive Possession, Rent Payments, and
Tenant Improvement Work
Schedule 2.10(i) Real Property Casualties and Defaults
Schedule 2.10(k) Matters Impairing Use of Property and Operations
Schedule 2.11(a) Insurance
Schedule 2.11(b) Bonding Arrangements
Schedule 2.12(a) Environmental Matters
Schedule 2.12(b) Hazardous Substances
Schedule 2.12(c) Underground Tanks
Schedule 2.13 Intellectual Property
Schedule 2.14 Permits
Schedule 2.15 Compliance with Laws
Schedule 2.16 Labor Matters
Schedule 2.17 Changes Since June 30, 1997
Schedule 2.18 Transactions with Affiliates
Schedule 2.19 Contracts and Commitments
Schedule 2.20(a) Benefit Plans
Schedule 2.20(c) Benefit Plan Exceptions
Schedule 3.1(a) Ownership of Shares
Schedule 3.1(b) Seller Stock Agreement
Schedule 3.3 Conflicts, Consents and Approvals of Sellers
Schedule 4.3 Conflicts, Consents and Approvals of Newco and BRS
Schedule 4.6 Brokers or Finders
Schedule 5.7 Transfer of Certain Assets
Schedule 5.8 Voting, Shareholders Agreement and Other Matters
Schedule 5.9 Competition
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Schedule 6.2 (j) Employment Agreements
Schedule 6.2(l) Closing Approvals and Consents
</TABLE>
DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
A and B Stockholders..............................................................................................7
AAA..............................................................................................................62
ABCA..............................................................................................................4
Accounting Referee...............................................................................................11
Acquisition Candidates...........................................................................................12
Adjustment Amount................................................................................................10
affiliate........................................................................................................27
Agreement.........................................................................................................4
Applicable Accounting Principles.................................................................................10
Arbiter..........................................................................................................63
Asserted Liability...............................................................................................51
associate........................................................................................................26
Audited Financial Statements.....................................................................................16
Basket...........................................................................................................53
Benefit Plans....................................................................................................29
BRS...............................................................................................................4
BRS Purchase Shares...............................................................................................4
Cash Merger Consideration.........................................................................................6
CERCLA...........................................................................................................23
CGCL..............................................................................................................7
Claim Response...................................................................................................52
Claims Notice....................................................................................................51
Class A Common Stock..............................................................................................3
Class B Common Stock..............................................................................................3
Class B Merger Consideration......................................................................................6
Class B Purchase Price............................................................................................4
Class C Common Stock..............................................................................................3
Closing...........................................................................................................6
Closing Date......................................................................................................6
Closing Date Balance Sheet.......................................................................................10
Closing Date Indebtedness Amount.................................................................................10
Closing Price....................................................................................................55
Code.............................................................................................................18
Common Stock......................................................................................................5
Company.......................................................................................................4, 17
Company Accountants..............................................................................................10
Company Indemnified Party........................................................................................49
Company's knowledge..............................................................................................64
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Compensation Agreement...........................................................................................45
Competitive Business.............................................................................................40
Constituent Corporations..........................................................................................5
Contracts........................................................................................................27
Current Market Price.........................................................................................55, 56
Defaulting Seller................................................................................................54
Disputing Parties................................................................................................62
DOJ..............................................................................................................38
EBITDA...........................................................................................................13
Effective Time....................................................................................................5
Eligible Assets..................................................................................................55
Employment Agreements............................................................................................45
Environmental Laws...............................................................................................23
Environmental Permits............................................................................................23
ERISA............................................................................................................31
ERISA Affiliate..................................................................................................31
Exceptions That Will Not Exist At Closing........................................................................19
Exchange..........................................................................................................3
Exchange Agent....................................................................................................7
Exchange Agent Agreement..........................................................................................7
Exchange Fund.....................................................................................................9
Existing Company Stock............................................................................................2
Fidelity.........................................................................................................57
Fidelity Agreement...............................................................................................57
Final Adjustment Amount..........................................................................................11
Final Indebtedness Amount........................................................................................11
Financial Statements.............................................................................................17
Financing........................................................................................................42
FTC..............................................................................................................38
GAAP.............................................................................................................16
Hazardous Substance..............................................................................................23
Historical EBITDA................................................................................................13
HSI...............................................................................................................2
HSR Act..........................................................................................................38
Indemnified Parties..............................................................................................50
Indemnifying Party...............................................................................................51
Intellectual Property............................................................................................23
Interim Balance Sheet............................................................................................18
Interim Balance Sheet Date.......................................................................................18
Interim Financial Statements.....................................................................................17
IRS..............................................................................................................29
Labor Agreement..................................................................................................25
Landlord Leases..................................................................................................19
Leased Real Property.............................................................................................19
Leasehold Estates................................................................................................20
</TABLE>
vii
<PAGE>
<TABLE>
<S> <C>
Leases...........................................................................................................19
Liens............................................................................................................14
Litigation Conditions............................................................................................51
Losses...........................................................................................................49
Management.......................................................................................................23
Management Stockholders...........................................................................................4
material.........................................................................................................27
Material Adverse Change..........................................................................................54
Material Adverse Effect......................................................................................14, 54
Measurement Date.................................................................................................13
Merger............................................................................................................2
Merger Consideration..............................................................................................6
Multiemployer Plan...............................................................................................29
NCCF.............................................................................................................54
Net Loss.........................................................................................................57
Newco.............................................................................................................4
Newco Breach.....................................................................................................49
Newco Common Stock................................................................................................2
Non-Defaulting Seller............................................................................................54
Non-Management Stockholders.......................................................................................4
Owned Real Property..............................................................................................19
PCC...............................................................................................................4
PCC Merger........................................................................................................4
PCC Merger Sub....................................................................................................4
PCC Plan of Merger................................................................................................4
Peerless L/C.....................................................................................................10
Penhall Class A Common Stock......................................................................................3
Penhall Class B Common Stock......................................................................................3
Penhall International Corp.....................................................................................5, 6
Pension Plan.....................................................................................................30
Permits..........................................................................................................24
Permitted Exceptions.............................................................................................20
Permitted Leasehold Property Exceptions..........................................................................20
person...........................................................................................................14
Personal Property................................................................................................19
Plan of Merger....................................................................................................4
Pledge Agreement.................................................................................................55
Pro Rata Share...................................................................................................12
Proposed Acquisition.............................................................................................12
Real Property....................................................................................................19
Recapitalization..................................................................................................2
Release..........................................................................................................23
Remediation Costs................................................................................................50
Response Period..................................................................................................52
Restated Penhall Charter..........................................................................................3
</TABLE>
viii
<PAGE>
<TABLE>
<S> <C>
Review Period....................................................................................................10
Rogers Fee.......................................................................................................62
Schedules B......................................................................................................20
Securities Act...................................................................................................14
Securities Holders Agreement......................................................................................5
Seller Breach....................................................................................................48
Seller Consideration..............................................................................................6
Seller Indemnified Party.........................................................................................50
Sellers...........................................................................................................4
Senior Exchangeable Preferred Stock...............................................................................5
Senior Management................................................................................................64
Series A Preferred Stock..........................................................................................5
Series B Preferred Stock..........................................................................................5
Shareholders Agreements..........................................................................................39
Shareholders' Valuation Benefit..................................................................................13
Stock Option Plan................................................................................................45
Stull Children...................................................................................................40
Stull Indemnification Payments...................................................................................57
Stulls...........................................................................................................57
Subsidiaries.....................................................................................................14
Subsidiary...................................................................................................14, 17
Surveys..........................................................................................................43
Surviving Corporation.............................................................................................4
Tax..............................................................................................................17
Tax Returns......................................................................................................17
Taxes............................................................................................................17
Tenant Leases....................................................................................................19
Territory........................................................................................................40
Title Policies...................................................................................................42
Transfer.........................................................................................................39
Valuation Benefit................................................................................................13
Wooditch Shares..................................................................................................39
Zoning Letters...................................................................................................43
</TABLE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS IS AN AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as
of August 3, 1998 (the "Agreement"), by and among Bruckmann, Rosser, Sherrill &
Co., L.P., a Delaware limited partnership ("BRS"), Penhall Acquisition Corp., an
Arizona corporation ("Newco"), Penhall Rental Corp., a California corporation
formerly known as Penhall International, Inc. (the "Company"), Phoenix Concrete
Cutting, Inc., an Arizona corporation ("PCC"), the stockholders of the Company
identified on the signature pages hereto as the "Management Stockholders" (the
"Management Stockholders") and the stockholders of the Company identified on the
signature pages hereto as the "Non-Management Stockholders" (the
1
<PAGE>
"Non-Management Stockholders" and, together with the Management Stockholders,
the "Sellers").
Background
A. The Company has issued and outstanding 421,615 shares of
Common Stock, without par value ("Existing Company Stock"), all of which are
owned of record by the Sellers, including 13,750 shares of Existing Company
Stock issued upon exercise of options to acquire Existing Company Stock and
3,146 shares of Existing Company Stock issued to certain Management
Stockholders who are shareholders of Highway Services, Inc. ("HSI") in
connection with the Company's acquisition of substantially all of the assets
of HSI.
B. Prior to the Closing referred to herein, all of the issued and
outstanding shares of Existing Company Stock will be exchanged for shares of
Penhall Class A Common Stock and Penhall Class B Common Stock (each as
hereafter defined) as provided herein.
C. Prior to the Closing, a newly formed subsidiary of PCC will
have merged with and into the Company, as a result of which (i) the Company
will become a wholly owned subsidiary of PCC and (ii) each holder of shares
of Penhall Class A Common Stock and Penhall Class B Common Stock will receive
an equal amount of shares of Class A Common Stock and Class B Common Stock
(each as hereafter defined), respectively, of PCC.
D. Newco's authorized stock consists solely of 100 shares of
Common Stock, par value $.01 per share ("Newco Common Stock"). BRS owns one
(1) share of Newco Common Stock, which presently comprises the sole issued
and outstanding share of capital stock of Newco.
E. The Boards of Directors of the Company and PCC deem it
advisable and in the best interests of the Company and PCC and their
stockholders, and the Board of Directors of Newco deems it advisable and in
the best interests of Newco and its stockholder, to adopt a plan of
recapitalization of PCC (the "Recapitalization") pursuant to which, among
other things, (i) Newco will merge with and into PCC (the "Merger") on the
terms and conditions set forth in this Agreement, with PCC continuing as the
surviving corporation of such Merger, and (ii) BRS will purchase certain
securities of PCC as the surviving corporation in the Merger, all on the
terms and conditions set forth herein.
F. It is intended that these transactions be recorded as a
recapitalization for financial reporting purposes.
G. As to certain Management Stockholders and BRS, it is intended
that certain of these transactions constitute and be treated as transfers of
property to a corporation controlled by the transferors under Section 351 of
the Code (as hereafter defined), and comparable provisions of state tax law.
H. The parties hereto executed that certain Agreement and Plan of
Merger, dated as of June 30, 1998 (the "Original Agreement"), and wish to
amend and restate such agreement as set forth herein.
2
<PAGE>
Terms
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, and agreements, and upon the terms and subject to the
conditions hereinafter set forth, and intending to be legally bound hereby, the
parties do hereby agree as follows:
ARTICLE I
THE MERGER
1.1. Exchange of Company Shares; the PCC Merger. Prior to the Closing,
the Company, PCC and the Sellers shall have taken the following actions:
(a) the Articles of Incorporation of the Company shall have been
amended and restated substantially in the form attached hereto as Exhibit A (the
"Restated Penhall Charter") to authorize 2,000,000 shares of Existing Company
Stock, without par value, 2,000,000 shares of Class A Common Stock, without par
value (the "Penhall Class A Common Stock"), and 1,000,000 shares of Class B
Common Stock, without par value (the "Penhall Class B Common Stock") of the
Company;
(b) the Articles of Incorporation of PCC shall have been amended
substantially in the form attached hereto as Exhibit B to authorize 1,000,000
shares of Common Stock, without par value, 2,000,000 shares of Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), 1,000,000 shares
of Class B Common Stock, par value $.01 per share (the "Class B Common Stock")
and 1,000,000 shares of Class C Common Stock, par value $.01 per share (the
"Class C Common Stock");
(c) the Company shall have caused all of the Options to be fully
vested and the Sellers holding such Options shall have exercised all of the
Options for shares of Existing Company Stock;
(d) all of the outstanding shares of Existing Company Stock
shall have been exchanged for shares of Penhall Class A Common Stock and Penhall
Class B Common Stock. Accordingly, the Company and each Seller hereby agree
that, prior to the Closing, (i) the Company will issue to each Seller the number
of shares of Penhall Class A Common Stock and Penhall Class B Common Stock set
forth under such Seller's name on Schedule 3.1(a) hereto in exchange for all of
the shares of Existing Company Stock owned by such Seller and set forth under
such Seller's name on Schedule 3.1(a) hereto, and (ii) each Seller will accept
such Penhall Class A Common Stock and Penhall Class B Common Stock in full
redemption and discharge of all of the shares of Existing Company Stock owned by
such Seller (the "Exchange"). Pursuant to the Exchange, each Seller shall
forward certificate(s) evidencing the Existing Company Stock to be exchanged,
together with duly executed stock powers therefor, and, upon filing the Restated
Penhall Charter with the Secretary of State of the State of California, the
Company will forward to such Seller either (x) the certificates representing the
shares of Penhall Class A Common Stock and Penhall Class B Common Stock to be
issued to such Seller or (y) if the Exchange fails to be consummated, a
notification to that effect together with the certificate(s) evidencing shares
of
3
<PAGE>
Existing Company Stock previously delivered to the Company by such Stockholder.
Immediately following the Exchange and giving effect thereto, the Company shall
have issued and outstanding 365,199 shares of Penhall Class A Common Stock and
56,416 shares of Penhall Class B Common Stock, all of which shall be owned by
the Sellers as set forth in Schedule 3.1(a) hereto;
(e) PCC shall have declared and paid a dividend of $3,600,000 to
the Company, which dividend may be in the form of one or more of assumptions of
liability, cash or other assets;
(f) PCC shall have formed a new subsidiary under the laws of the
State of California ("PCC Merger Sub"). PCC Merger Sub shall have been merged
with and into the Company (the "PCC Merger") pursuant to a Plan of Merger
substantially in the form of Exhibit D hereto (the "PCC Plan of Merger"), as a
result of which: (i) each share of common stock of PCC Merger Sub issued and
outstanding shall be converted into 1 share of Existing Company Common Stock,
which will represent all of the issued and outstanding shares of the Company and
(ii) each holder of shares of Penhall Class A Common Stock and Penhall Class B
Common Stock will receive an equal number of shares of Class A Common Stock and
Class B Common Stock, respectively. Pursuant to the PCC Plan of Merger, at the
effective time of the PCC Merger, the Company will exchange all of the shares of
PCC stock held by the Company for 12,386 shares of Class C Common Stock;
(g) Immediately following the Exchange and the PCC Merger, and
giving effect thereto, PCC shall have issued and outstanding 365,199 shares of
Class A Common Stock and 56,416 shares of Class B Common Stock, all of which
shall be owned beneficially and of record by the Sellers in the amounts and as
set forth in Schedule 3.1(a) hereto, and 12,386 shares of Class C Common Stock,
all of which shall be owned beneficially by the Company.
1.2. Transactions at Closing. The following transactions, which
together shall constitute the Recapitalization, shall be consummated at the
Closing on the Closing Date in the following order and each transaction shall be
conditioned upon the occurrence of the other transactions:
(a) each Management Stockholder shall sell, and BRS shall
purchase, all of the outstanding shares of Class B Common Stock set forth
opposite such Management Stockholder's name and designated as "BRS Purchase
Shares" on Schedule 3.1(a) hereto at a purchase price of $322.94 per share (such
per share consideration multiplied by the total number of shares of Class B
Common Stock being referred to herein as the "Class B Purchase Price");
(b) Newco shall obtain the proceeds of the Financing (as
hereafter defined);
(c) upon the terms and subject to the conditions contained in
Section 1.3 hereof and elsewhere in this Agreement, at the Effective Time (as
defined below), Newco shall be merged with and into PCC in accordance with this
Agreement, the Articles of Amendment and Merger attached hereto as Exhibit E
(the "Plan of Merger") and the applicable provisions of the Arizona Business
Corporation Act (the "ABCA"), the separate existence of Newco shall cease, and
PCC shall continue as the surviving corporation (the "Surviving Corporation")
and continue
4
<PAGE>
its corporate existence under the laws of the State of Arizona. Pursuant to the
Plan of Merger, the Articles of Incorporation of PCC shall be amended to change
the corporate name of PCC to "Penhall International Corp.";
(d) the Surviving Corporation shall pay the Cash Merger
Consideration (as hereafter defined);
(e) BRS, the Management Stockholders and the Surviving
Corporation shall enter into a Securities Holders Agreement (the "Securities
Holders Agreement") substantially in the form attached hereto as Exhibit F; and
(f) the Surviving Corporation shall sell, and BRS shall
purchase, 299,477.35 shares of Common Stock of the Surviving Corporation at a
purchase price of $1.00 per share and 10,427.78 shares of Series A Preferred
Stock of the Surviving Corporation at a purchase price of $1,000 per share.
1.3. Terms of the Merger. (a) Effective Time. At the Closing, the
parties hereto shall cause the Merger to be consummated by the execution and
filing of the Plan of Merger (and any other appropriate documents, such as
Officer's Certificates) with the Arizona Corporation Commission of the State of
Arizona containing or referencing a copy of this Agreement and shall make all
other filings or recordings required in accordance with the ABCA. The Plan of
Merger shall provide that the Merger shall become effective immediately upon the
filing of the Plan of Merger. The time when the Merger shall become effective is
hereinafter referred to as the "Effective Time."
(b) Effect of Merger. At the Effective Time, the effect of the
Merger will be as provided by the ABCA. Without limiting the foregoing, at the
Effective Time, the Surviving Corporation shall thereupon and thereafter possess
all the rights, privileges, immunities, powers and franchises, of a public as
well as of a private nature, of each of Newco and PCC (the "Constituent
Corporations"); and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all other choses in
action, and all and every other interest, of or belonging to or due to each of
the Constituent Corporations shall be taken and deemed to be transferred to and
vested in the Surviving Corporation without further act or deed; and the title
to any real estate, or any estate or interest therein, vested in either of the
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger.
(c) Articles of Incorporation, Bylaws, Directors and Officers of
Surviving Corporation. At the Effective Time, the Articles of Incorporation of
PCC in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
therein and by law, except that such Articles of Incorporation shall be amended
and restated as provided in the Plan of Merger to, among other things: (i)
authorize 5,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), 25,000 shares of Series A Preferred Stock, par value $.01 per
share (the "Series A Preferred Stock"), 50,000 shares of Series B Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), and 10,000
shares of 10.5% Senior Exchangeable Preferred Stock, par value $.01 per share
(the "Senior Exchangeable Preferred Stock"), of the Surviving
5
<PAGE>
Corporation and (ii) to change the corporate name of the Surviving Corporation
to "Penhall International Corp." At the Effective Time, the Bylaws of Newco in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided therein and by law.
The directors of Newco immediately prior to the Effective Time shall be the
directors of the Surviving Corporation, and the officers of PCC immediately
prior to the Effective Time shall be the officers of the Surviving Corporation,
in each case until their successors are duly elected or appointed and qualified
or as otherwise provided in the Bylaws of the Surviving Corporation or by law.
(d) Conversion of Shares.
(i) Conversion of Class A Common Stock. Each share of Class
A Common Stock issued and outstanding immediately prior to the Effective Time
shall be cancelled and extinguished and converted into the right to receive an
amount in cash, without interest, equal to the quotient of $117,937,365 (the
"Cash Merger Consideration" and, together with the Class B Purchase Price, the
"Seller Consideration") divided by the total number of shares of Class A Common
Stock issued and outstanding immediately prior to the Effective Time. The
National Christian Charitable Foundation, Inc. (the "NCCF") agrees, however,
that it may receive up to $10,000,000 of Cash Merger Consideration in the form
of an equal amount in aggregate initial liquidation preference amount of the
Senior Exchangeable Preferred Stock;
(ii) Conversion of Class B Common Stock. Each share of Class
B Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into 10.56 shares of Common Stock and 0.325 shares of Series
B Preferred Stock of the Surviving Corporation (the "Class B Merger
Consideration" and, together with the Cash Merger Consideration, the "Merger
Consideration").
(iii) Conversion of Class C Common Stock. Each share of
Class C Common Stock issued and outstanding immediately prior to the Effective
Time shall be converted into 0.323 shares of Series B Preferred Stock of the
Surviving Corporation.
(iv) Cancellation of Treasury Stock. Each share of Class A
Common Stock or Class B Common Stock then held in the treasury of PCC, shall be
cancelled and retired without any conversion thereof and no payment of any
consideration therefor and thereafter will cease to exist.
(v) Capital Stock of Newco. Each share of Newco Common
Stock issued and outstanding immediately prior to the Effective Time shall be
cancelled without any conversion thereof or payment of any consideration
therefor and thereafter will cease to exist.
1.4. Closing Date, Time and Place. Unless this Agreement has been
terminated pursuant to Section 7.1 hereof, the consummation of the Merger (the
"Closing") shall take place on the third business day after all of the
conditions to closing set forth in Article VI are fulfilled or waived, or such
other date and at such other time as the Company and Newco may agree in writing
(the "Closing Date"). The Closing shall take place at 10:00 a.m. local time at
the offices
6
<PAGE>
of Dechert Price & Rhoads, 30 Rockefeller Plaza, New York, New York or at such
other location as the parties shall mutually agree.
1.5. Waiver. Each Seller (on behalf of itself and its affiliates)
hereby waives any and all rights held by it or its affiliates to demand payment
for fair value of any capital stock of the Company or PCC under Chapter 13 of
the California General Corporation Law ("CGCL"), Chapter 13 of the ABCA,
respectively, or similar provisions of applicable law in connection with the
Merger and the other transactions contemplated hereby in respect of any capital
stock of the Company or PCC now or hereafter owned by such Seller or its
affiliates.
1.6. Payment of Seller Consideration and Merger Consideration;
Surrender of Stock. (a) Upon delivery to BRS of certificates evidencing the
shares of Class B Common Stock representing the BRS Purchase Shares, BRS will
deliver to the holders of the BRS Purchase Shares the Class B Purchase Price to
be received by such holders pursuant to Section 1.2(a) at the Closing by wire
transfer of immediately available funds to one or more accounts designated in
writing by the Seller Representative (as defined below) not less than one (1)
business day prior to Closing.
(b) Prior to the Effective Time, Newco shall designate one or
more reputable banks or trust companies (the "Exchange Agent") to act at the
Surviving Corporation's sole expense as agent for the holders of Class A Common
Stock and Class B Common Stock immediately prior to the Effective Time (the "A
and B Stockholders") pursuant to the terms of an exchange agent agreement in the
form and substance reasonably satisfactory to Newco and the Seller
Representative (the "Exchange Agent Agreement"), to receive the Cash Merger
Consideration or Class B Merger Consideration to be delivered to such A and B
Stockholders pursuant to Section 1.3(d). Alternatively, Newco may designate the
Surviving Corporation to act as the Exchange Agent in accordance with this
Section 1.6. At or immediately following the Effective Time, Newco shall deposit
or cause to be deposited with the Exchange Agent in trust for the benefit of the
A and B Stockholders, the Merger Consideration to which the A and B Stockholders
shall become entitled pursuant to Section 1.3(d).
(c) With respect to holders of record of the Class A Common
Stock and Class B Common Stock who shall have given written notice to Newco at
least one (1) Business Day prior to the Effective Time of, in the case of
holders of Class A Common Stock, wire instructions for payment of the Cash
Merger Consideration or, in the case of holders of the Class B Common Stock,
instructions for registration of shares constituting the Class B Merger
Consideration, the Exchange Agent shall deliver to such holders at the Closing,
upon surrender at the Closing to the Exchange Agent of such certificates that
evidenced the shares of Class A Common Stock or Class B Common Stock, the Merger
Consideration payable in respect of the shares of Class A Common Stock or Class
B Common Stock represented by such certificates in accordance with the
instructions for such payment or delivery provided by such holder, and such
certificates shall be cancelled forthwith.
(d) With respect to holders of record of the Class A Common
Stock and Class B Common Stock who shall not have given proper written notice
and received payment in accordance with subparagraph (c) above, promptly after
the Effective Time, the Exchange Agent
7
<PAGE>
shall mail to each person who was, at the Effective Time, a holder of record of
Class A Common Stock or Class B Common Stock entitled to receive the Merger
Consideration pursuant to Section 1.3(d), a form (mutually agreed to prior to
the Effective Time by Newco and the Company) of letter of transmittal and
instructions for use in effecting the surrender of the certificates that, at the
Effective Time, shall have evidenced any of such shares of Class A Common Stock
or Class B Common Stock to be exchanged pursuant to the Merger. Upon surrender
to the Exchange Agent of such certificates that evidenced the shares of Class A
Common Stock or Class B Common Stock to be exchanged pursuant to the Merger,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
requested, the Exchange Agent shall promptly deliver to the persons entitled
thereto the Merger Consideration payable in respect of such shares of Class A
Common Stock or Class B Common Stock represented by such certificates, and such
certificates shall forthwith be cancelled. Until so surrendered and exchanged,
each such certificate evidencing such shares of Class A Common Stock or Class B
Common Stock shall, after the Effective Time, be deemed to evidence only the
right to receive the Merger Consideration to which such holder is entitled
pursuant to Section 1.3(d).
(e) If payment of the Merger Consideration in respect of
cancelled shares of Class A Common Stock or Class B Common Stock is to be made
to a person other than the Seller in whose name a surrendered certificate or
instrument is registered, it shall be a condition to such delivery or payment
that (i) the certificate or instrument so surrendered shall be properly endorsed
or shall be otherwise in proper form for transfer, (ii) the Seller requesting
such delivery or payment shall have paid any transfer and other taxes required
by reason of such delivery or payment in a name other than that of the
registered holder of the certificate or instrument surrendered or shall have
established to the reasonable satisfaction of the Surviving Corporation or the
Exchange Agent that such tax either has been paid or is not payable, and (iii)
the Seller requesting such delivery or payment shall have provided security
reasonably satisfactory to BRS and the Seller Representative for such Seller's
indemnification obligations under this Agreement.
(f) At the Effective Time, the stock transfer books of the
Company shall be closed and there shall be no further registration of transfers
of shares of Class A Common Stock, Class B Common Stock, Class C Common Stock,
Penhall Class A Common Stock, Penhall Class B Common Stock or any Existing
Company Stock thereafter on the records of the Company. From and after the
Effective Time, the holders of certificates evidencing ownership of shares of
Class A Common Stock, Class B Common Stock, Class C Common Stock, Penhall Class
A Common Stock, Penhall Class B Common Stock or any Existing Company Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such shares except as otherwise provided herein or by
law. If, after the Effective Time, shares of Class A Common Stock, Class B
Common Stock, Class C Common Stock, Penhall Class A Common Stock, Penhall Class
B Common Stock or Existing Company Stock are duly presented to the Surviving
Corporation for any reason, they will be cancelled and exchanged as provided in
this Article I. No interest shall be paid or accrue on any portion of the Merger
Consideration, except that dividends shall accrue with respect to Series A
Preferred Stock and Series B Preferred Stock in accordance with the terms of
such stock.
8
<PAGE>
(g) Notwithstanding anything to the contrary in this Section
1.6, none of the Surviving Corporation or any party hereto shall be liable to a
holder of shares of Class A Common Stock, Class B Common Stock or any Existing
Company Stock for any amount properly paid to a public official pursuant to any
applicable property, escheat or similar law. If any certificates representing
shares of Class A Common Stock, Class B Common Stock or any Existing Company
Stock shall not have been surrendered prior to two years after the Effective
Time (or immediately prior to such earlier date on which any cash or other
property in respect of such certificate would otherwise escheat to or become the
property of any Authority (as defined in Section 2.14)), any such cash or other
distributions in respect of such certificates shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
1.7. No Further Ownership Rights in Existing Company Stock. The
issuance or payment of the Merger Consideration pursuant to this Article I will
be in full satisfaction of all rights pertaining to the Class A Common Stock,
Class B Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock
or any Existing Company Stock surrendered in exchange therefor.
1.8. Termination of Exchange Fund. Any portion of the Merger
Consideration deposited with the Exchange Agent pursuant to Section 1.6 (the
"Exchange Fund") which remains undistributed to the holders of the certificates
representing shares of Class A Common Stock, Class B Common Stock, Penhall Class
A Common Stock, Penhall Class B Common Stock or Existing Company Stock for six
months after the Effective Time shall be delivered to the Surviving Corporation,
upon demand, and any holders of shares of Class A Common Stock, Class B Common
Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or Existing
Company Stock prior to the Merger who have not theretofore complied with this
Article I shall thereafter look only to the Surviving Corporation and only as
general creditors thereof for payment of their claim for cash or other property,
if any.
1.9. Lost, Stolen or Destroyed Certificates. In the event certificates
representing any shares of Class A Common Stock, Class B Common Stock, Penhall
Class A Common Stock, Penhall Class B Common Stock or Existing Company Stock
have been lost, stolen or destroyed and the holder thereof is unable to obtain a
new certificate by reason of the fact that there can be no further registration
of transfers of such certificates on the records of the Surviving Corporation
pursuant to Section 1.6, the Exchange Agent will issue or pay in exchange
therefor, upon receipt of an affidavit by the holder thereof stating that such
certificates have been lost, stolen or destroyed, the portion of the Merger
Consideration to which the holder is entitled under Section 1.3; provided,
however, that the Surviving Corporation may, in its discretion and as a
condition precedent to the issuance or payment thereof, require the holder to
agree to indemnify, or if such indemnity is deemed inadequate in Surviving
Corporation's reasonable discretion, to deliver a bond in such sum as it may
reasonably direct as indemnity, against any claim that may be made against the
Surviving Corporation, Newco or the Exchange Agent with respect to such
certificates alleged to have been lost, stolen or destroyed.
1.10. Closing Balance Sheet; Closing Date Indebtedness Amount;
Adjustment to Seller Consideration. (a) As promptly as practicable, but not
later than one hundred twenty (120)
9
<PAGE>
days after the Closing Date, the Surviving Corporation will cause to be prepared
and delivered to the Seller Representative (i) a balance sheet (the "Closing
Date Balance Sheet") of the Company and its Subsidiaries, together with an
unqualified report thereon by KPMG Peat Marwick LLP (the "Company Accountants"),
and (ii) a statement based on such Closing Date Balance Sheet setting forth in
detail a calculation of the Closing Date Indebtedness Amount (as hereafter
defined) and the Adjustment Amount (as hereinafter defined), determined in
accordance with the Applicable Accounting Principles (as hereafter defined) and
this Agreement. For this purpose, (i) "Closing Date Indebtedness Amount" shall
mean an amount equal to all indebtedness (including principal, accrued interest
and any applicable premiums) of the Company or its Subsidiaries to any Seller or
former stockholder of the Company and to Bank of America (consisting in each
case of short- and long-term notes payable), all similar indebtedness of the
Company or its Subsidiaries for borrowed money (excluding borrowings under life
insurance policies payable from the cash surrender value of such policies), and
all amounts drawn under the $2 million dollar letter of credit posted in favor
of Peerless Insurance Company (or any substitute letter of credit) (the
"Peerless L/C"), in each case as of immediately prior to the Closing, whether or
not such indebtedness shall have been repaid or refinanced in connection with
the Closing; (ii) "Adjustment Amount" means the amount, if any, by which (i) the
difference between (x) the Closing Date Indebtedness Amount minus (y) the amount
of the proceeds from the Closing Date Indebtedness Amount used to fund additions
to working capital of the Company and property, plant and equipment of the
Company necessary to support continued growth in the Company's business
(including without limitation all monies used to pay for Proposed Acquisitions
(as defined in Section 1.11(a) below) but excluding all amounts drawn under the
Peerless L/C) or to fund the employee bonuses, employee loans, tax payments and
other items set forth in Schedule 1.10 exceeds (ii) $10,000,000; and (iii)
"Applicable Accounting Principles" means GAAP (as defined in Section 2.6)
applied in a manner consistent with the Audited Financial Statements (as defined
in Section 2.6), except that all amounts, irrespective of size, quantity or
nature shall be considered material.
(b) After delivery of its calculation of the Closing Date
Indebtedness Amount, the Surviving Corporation shall make available to the
Seller Representative all books, records, work papers, personnel and other
materials and sources used by the Surviving Corporation and the Company's
Accountants to prepare the Surviving Corporation's calculation of the Closing
Date Indebtedness Amount and the Adjustment Amount. The Seller Representative
may dispute any items or amounts reflected on the Closing Date Balance Sheet or
in the Closing Date Indebtedness Amount and the Adjustment Amount calculations
on the basis that such items or amounts were not presented in accordance with
the Applicable Accounting Principles or this Agreement (or on the basis of math,
entry or other errors); provided, however, that the Seller Representative shall
notify the Surviving Corporation in writing of each disputed item or amount
within thirty (30) days of the Seller Representative's receipt of the Closing
Date Balance Sheet and statement of the Closing Date Indebtedness Amount and the
Adjustment Amount (such thirty (30) day period hereinafter referred to as the
"Review Period"). Any such notice of disagreement shall specify those items or
amounts as to which the Seller disagrees (and shall include the Seller
Representative's calculation of the Closing Date Indebtedness Amount and the
Adjustment Amount), and the Sellers and the Seller Representative shall be
deemed to have agreed with all
10
<PAGE>
other items and amounts included in the calculation of the Closing Date
Indebtedness Amount and the Adjustment Amount delivered pursuant to Section
1.10(a).
(c) If a notice of disagreement shall be duly given pursuant to
Section 1.10(b), the Surviving Corporation and the Seller Representative shall,
during the fifteen (15) business days following receipt of such notice, use
their reasonable best efforts to reach agreement on the disputed items or
amounts in order to determine the Closing Date Indebtedness Amount and the
Adjustment Amount. If, during such period, the Surviving Corporation and the
Seller Representative are unable to reach such agreement, they shall promptly
thereafter cause a nationally recognized firm of independent accountants chosen
and mutually accepted by the parties, or, if no such agreement is reached within
five (5) business days after the end of such period, the firm of Arthur Andersen
LLP (the "Accounting Referee"), to review this Agreement and the disputed items
or amounts for the purpose of calculating the Closing Date Indebtedness Amount
and the Adjustment Amount. In making such calculation, the Accounting Referee
shall consider only those items or amounts in the Surviving Corporation's
calculation of the Closing Date Indebtedness Amount and the Adjustment Amount as
to which the Seller Representative has disagreed. The Accounting Referee shall
deliver to the Surviving Corporation and the Seller Representative, as promptly
as practicable but in no event later than thirty (30) days after retention of
the Accounting Referee by the Surviving Corporation and the Seller
Representative, a report setting forth such calculations. Such report shall be
final and binding upon the Surviving Corporation and the Sellers and shall
constitute an arbitral award upon which a judgment may be entered in any court
having jurisdiction thereof. The cost of such review and report shall be borne
equally by the Surviving Corporation and the Sellers. The "Final Indebtedness
Amount" and the "Final Adjustment Amount" shall mean the Closing Date
Indebtedness Amount and the Adjustment Amount, respectively, (A) as shown in the
Surviving Corporation's calculation delivered pursuant to Section 1.10(a) if no
notice of disagreement with respect thereto is duly delivered pursuant to
Section 1.10(b) or (B) if such a notice of disagreement is delivered, as agreed
by the Surviving Corporation and the Seller Representative pursuant to this
Section 1.10(c) or in the absence of such agreement, as shown in the Accounting
Referee's calculation delivered pursuant to this Section 1.10(c).
(d) The Sellers and Surviving Corporation agree that they will,
and will cause their (and their affiliates') agents and representatives to,
cooperate and assist in the preparation of the Closing Date Balance Sheet and
the calculation of the Closing Date Indebtedness Amount and the Adjustment
Amount and in the conduct of the audits and reviews referred to in this Section
1.10, including the making available to the extent necessary of books, records,
work papers, and personnel.
(e) The Surviving Corporation shall be solely responsible for
the fees, costs and expenses due to the Company's Accountants in respect of the
preparation of the Closing Date Balance Sheet and of the calculation of the
Closing Date Indebtedness Amount and the Adjustment Amount pursuant to this
Section 1.10.
(f) Each of the Sellers shall pay to the Surviving Corporation
such Seller's pro rata share, based on his or its ownership interest in the
Company specified in Schedule 3.1(a)
11
<PAGE>
("Pro Rata Share"), of the Final Adjustment Amount, if any, with interest as
provided in paragraph (g) below.
(g) Any payments pursuant to paragraph (f) above shall be made
by wire transfer of immediately available funds within ten (10) days after the
Final Indebtedness Amount and the Final Adjustment Amount have been determined
to such account of the Surviving Corporation as may be designated by the
Surviving Corporation in writing (it being understood that if at the conclusion
of the Review Period, any portion of the Adjustment Amount is not in dispute,
such amount shall be paid within ten (10) business days after the conclusion of
the Review Period). The amount of any payment to be made pursuant to this
Section 1.10 shall bear interest from and including the Closing Date to but
excluding the date of payment at a rate per annum equal to the rate of interest
from time to time announced by Morgan Guaranty Trust Company of New York as its
Base Rate in New York City in effect from time to time during the period from
the Closing Date to the date of payment. Such interest shall be payable at the
same time as the payment to which it relates and shall be calculated daily on
the basis of a year of three hundred sixty-five (365) days and the actual number
of days elapsed.
1.11. Adjustment of Seller Consideration for Certain Company
Acquisitions. (a) With respect to any acquisition (a "Proposed Acquisition") of
any of the acquisition candidates identified on Schedule 1.11 hereto (the
"Acquisition Candidates") consummated by the Company or a Subsidiary of the
Company either prior to Closing or within one hundred twenty (120) days
following the Closing, the Sellers will be entitled to receive the Shareholders'
Valuation Benefit (as defined below) in accordance with the terms and conditions
of this Section 1.11.
(b) For each Proposed Acquisition consummated prior to Closing
(including the acquisition of HSI), the Merger Consideration and the Class B
Purchase Price shall be increased ratably by an amount equal to 50% of the
Shareholders' Valuation Benefit attributable to such Proposed Acquisition; and
the parties agree that the Merger Consideration reflects such amount
attributable to the acquisition of HSI. In the event that one or more Proposed
Acquisitions are consummated on or before the 120th day following the Closing,
the Sellers shall be entitled to receive, allocated among the Sellers according
to each Seller's respective interest in the total of the Merger Consideration
and the Class B Purchase Price as set forth in Schedule 3.1(a), an amount equal
to 50% of the Shareholders' Valuation Benefit attributable to each such Proposed
Acquisition. Payments pursuant to this paragraph (b) shall be made (i) at the
Closing and in the manner provided in the first sentence of this subparagraph
(b) with respect to any Proposed Acquisition consummated prior to the Closing
(it being acknowledged that the Class B Purchase Price and the Merger
Consideration specified in Sections 1.2(a) and 1.3(d) include such payments with
respect to HSI), and (ii) with respect to any Proposed Acquisition consummated
following the Closing, by wire transfer of immediately available funds within
ten (10) business days after the consummation of such Proposed Acquisition to a
single account for the benefit of the Sellers as may be designated by the Seller
Representative in writing.
(c) In the event that the EBITDA of an Acquisition Candidate
(acquired pursuant to a Proposed Acquisition for which payment or adjustment
shall have been made under paragraph (b) above) for the period ending on the
first anniversary of the Measurement Date (as defined below) of such Proposed
Acquisition shall equal or exceed 90% of such Acquisition
12
<PAGE>
Candidate's Historical EBITDA (as defined below), the Sellers shall be entitled
to receive from the Surviving Corporation, as an adjustment to the Seller
Consideration, an amount equal to the remaining 50% of the Shareholders'
Valuation Benefit for such Acquisition Candidate. EBITDA shall be calculated in
a manner consistent with the calculation of the Historical EBITDA of such
Acquisition Candidate. Any such payment pursuant to this paragraph (c) shall be
made by the Surviving Corporation by wire transfer of immediately available
funds within ten (10) business days after the first anniversary date of the
consummation of such Proposed Acquisition to a single account for the benefit of
the Sellers as may be designated by the Seller Representative in writing.
(d) For purposes of this Section 1.11:
(i) "Shareholders' Valuation Benefit" means an amount equal
to 50% of the Valuation Benefit (as defined below);
(ii) "Valuation Benefit" means an amount equal to the
positive difference, if any, of (x) the product of Historical EBITDA (as defined
below) of any Acquisition Candidate multiplied by six (6), less (y) the actual
purchase price (including the value of all assumed bank debt, purchase money
debt and other indebtedness for borrowed money and the estimated value of any
future payments and adjustments as the parties may agree) to be paid for such
Acquisition Candidate;
(iii) "Historical EBITDA" of any Acquisition Candidate means
normalized (i.e., after adjustments for non-recurring and similar items)
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the twelve month period ending on the Measurement Date of such Proposed
Acquisition, it being understood that the Surviving Corporation (or BRS in the
case of any Proposed Acquisition consummated prior to Closing) and the Seller
Representative shall use their respective best efforts to agree upon the
Historical EBITDA of an Acquisition Candidate prior to the date of consummation
of such Proposed Acquisition; provided that the parties agree that Historical
EBITDA of HSI shall equal $3,271,000; and
(iv) "Measurement Date" means, with respect to any Proposed
Acquisition that is consummated, the date that is the last day of the month
immediately preceding the month during which the closing of such Proposed
Acquisition occurs, except that if the closing occurs on the last day of a
month, the Measurement Date shall be the closing date.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS AND THE COMPANY
Subject to Section 10.15, each Seller and the Company hereby represent
and warrant jointly and severally to BRS and Newco as follows:
2.1. Organization and Standing. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and
13
<PAGE>
has all requisite corporate power and authority to own, lease and operate its
property and to conduct the business in which it is engaged as presently
conducted. The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where the character of the property
owned, leased or operated by it, or the conduct of its business, makes such
qualification necessary, except where the failure to be so duly qualified and in
good standing could not reasonably be expected to have a Material Adverse
Effect. As used herein, the term "Material Adverse Effect" means any change,
effect or circumstance that has or is reasonably likely to have, any material
adverse effect (i) on the assets, liabilities, operations, business, results of
operations or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole or (ii) on the ability of the Sellers or the
Company to consummate the transactions contemplated hereby or (iii) on the
ability of each of the Company and its Subsidiaries to continue to operate its
business immediately after the Closing in substantially the same manner as such
business is conducted prior to the Closing.
(b) Attached hereto as Schedule 2.1(b) are true and complete
copies of the current Articles of Incorporation and Bylaws of the Company, as in
effect on the date of this Agreement.
2.2. Capitalization. (a) The authorized capital stock of the Company
consists solely of 5,000,000 shares of Existing Company Stock, of which 421,615
shares are issued and outstanding and will be issued and outstanding immediately
prior to the filing of the Restated Penhall Charter. The Sellers are the sole
record owners of the Existing Company Stock. There are no other shares of
capital stock of the Company issued. All of the outstanding shares of the
Company's capital stock (i) are duly authorized, validly issued, fully paid and
nonassessable, (ii) have not been issued in violation of any preemptive rights
of stockholders and (iii) have been offered and sold pursuant to a valid
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), and otherwise in compliance with the Securities Act and the
rules and regulations thereunder.
(b) The Company has subsidiaries as set forth on Schedule 2.2(b)
(each, a "Subsidiary" and collectively, the "Subsidiaries"). Except for the
Subsidiaries, the Company does not own, and, except as set forth on Schedule
2.2(b), has not owned, directly or indirectly, beneficially or of record, or
have or, except as set forth on Schedule 2.2(b), had any operational control
over, or have any obligation to acquire, any capital stock or other equity
securities of any corporation, nor does the Company have any direct or indirect
equity or ownership investment, or any obligation to incur such investment, in
any person. As used herein, the term "person" means any individual, corporation,
partnership, limited liability company, joint venture, association, trust or
other entity or organization. Each issued and outstanding share of capital stock
or other equity security of the Subsidiaries (i) has been duly authorized and
validly issued, (ii) is fully paid and non-assessable, (iii) has not been issued
in violation of any preemptive rights of equityholders, and (iv) except as set
forth on Schedule 2.2(b) hereto and for the transactions set forth in Article I,
is owned, beneficially and of record by the Company, free and clear of any
claim, lien, security interest, mortgage, deed of trust, pledge, charge,
conditional sale or other title retention agreement, lease, preemptive right,
right of first refusal, option, restriction, tenancy, easement, license,
encroachment (from or onto any other property) or other encumbrance of any kind
(collectively, "Liens"). Except as set forth on Schedule 2.2(b), each Subsidiary
is a corporation
14
<PAGE>
duly organized, validly existing and in good standing under the laws of its
respective state of incorporation set forth on Schedule 2.2(b) hereto and has
full corporate power and authority to carry on its business as it is now being
conducted and to own, operate and lease its properties and assets; is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned, leased or operated
by it, or the conduct of its business, makes such qualification necessary,
except where the failure to be so duly qualified and in good standing could not
reasonably be expected to have a Material Adverse Effect. The copies of the
Articles of Incorporation and By-Laws of each Subsidiary heretofore delivered to
Newco are complete and correct copies of such instruments as presently in
effect.
(c) Except as set forth on Schedule 2.2(c) hereto, there are no
outstanding (i) securities of the Company or any Subsidiary convertible into or
exchangeable for shares of capital stock or equity securities of the Company or
any Subsidiary or (ii) options, warrants, calls or other rights to acquire from
the Company or any Subsidiary, or other obligations or understandings or
arrangements of the Company or any Subsidiary to issue, any capital stock,
equity securities or securities convertible into or exchangeable for capital
stock or equity securities of the Company or any Subsidiary. Except as set forth
on Schedule 2.2(c) hereto and for the transactions set forth in Article I, there
are no outstanding obligations of the Company or any Subsidiary to repurchase,
redeem or otherwise acquire any capital stock or equity securities of the
Company or any Subsidiary (or any of the other securities set forth in the
previous sentence). Except pursuant to this Agreement or as set forth on
Schedule 2.2(c) hereto, neither the Company nor any Subsidiary is a party to, or
bound by, any arrangement, agreement, instrument or order (i) relating to the
transfer of any capital stock or equity securities of the Company or any
Subsidiary, (ii) relating to the dividend or voting rights of any capital stock
or equity securities of the Company or any Subsidiary, or (iii) relating to
rights to registration under the Securities Act of any capital stock or equity
securities of the Company or any Subsidiary.
2.3. Authorization; Binding Agreement. The Company has full corporate
power and authority to execute and deliver this Agreement and each other
document or instrument contemplated hereby, to perform its obligations hereunder
and thereunder, and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by the Company of this Agreement and each
other document or instrument executed or to be executed by it in connection
herewith, and the consummation by the Company of the transactions contemplated
hereby and thereby, have been, or, with respect to the PCC Merger and the
Merger, will have been prior to Closing, duly and validly authorized by all
necessary corporate and shareholder action. This Agreement has been, and each
other document or instrument to be executed by the Company in connection
herewith will be, duly executed and delivered by the Company, and constitutes,
or will constitute, a legal, valid and binding obligation of the Company,
enforceable against the Company, in accordance with its terms.
2.4. Conflicts, Consents and Approvals. Except as set forth on Schedule
2.4 hereto, the execution and delivery by the Company of this Agreement and any
other documents or instruments contemplated hereby, the performance by the
Company of its obligations hereunder and thereunder, and the consummation of the
transactions contemplated hereby and thereby, do not and will not:
15
<PAGE>
(a) violate or conflict with or result in a breach of any
provision of the Articles of Incorporation or Bylaws of the Company or any
Subsidiary, as such instruments are currently in effect;
(b) subject to obtaining the consents and approvals specified in
Schedule 2.4, require any consent, approval or notice under, or conflict with,
or result in a violation or breach of, or constitute (with or without the giving
of notice or the lapse of time or both) a default (or give rise to any right of
termination, modification, cancellation or acceleration or result in the
creation or imposition of any Lien upon the property of the Company or a
Subsidiary) under, any of the terms, conditions or provisions of any (i) note,
bond, mortgage, indenture, license, lease, agreement or other document or
instrument or obligation to which the Company or a Subsidiary is a party, under
or pursuant to which any of its properties or assets are held, or by which any
portion of its properties or assets may be bound, or (ii) any permit, license,
approval, franchise or other governmental or regulatory authorization held or
used by or binding on the Company or any of the Subsidiaries, except for
conflicts, violations, breaches, defaults or other events that could not be
reasonably expected to have a Material Adverse Effect;
(c) violate or contravene any law, statute, rule or regulation,
or any order, writ, judgment, injunction, decree, determination or award
currently in effect, the violation or contravention of which could reasonably be
expected to have a Material Adverse Effect; or
(d) other than in respect of the HSR Act (as defined in Section
5.5), require any action, consent, approval or authorization of, or review by,
or declaration, registration or filing with, or notice to, any court,
arbitrator, governmental agency or other regulatory authority, or any stock
exchange or similar self-regulatory organization.
2.5. Litigation. Except as set forth on Schedule 2.5 hereto, (a) there
is no pending or, to the knowledge of the Company, threatened claim, arbitration
proceeding, action, suit, investigation or other proceeding against or involving
the Company or any Subsidiary, or any of the property or rights of the Company
or any Subsidiary, which has had or could reasonably be expected to have a
Material Adverse Effect and (b) neither the Company nor any Subsidiary is in
violation of or default under any order, judgment, writ, injunction or decree of
any court, arbitrator or Authority (as defined in Section 2.14). Any such order,
injunction or decree binding on the Company or any Subsidiary is disclosed in
Schedule 2.5.
2.6. Financial Statements. Attached hereto as Schedule 2.6(a) are
copies of the audited consolidated financial statements of the Company and its
Subsidiaries for the years ended, and as of, June 30, 1997, June 30, 1996 and
June 30, 1995, together with, in each case, the audit reports thereon of, for
the year ended and as of June 30, 1997, KPMG Peat Marwick LLP or, for the years
ended and as of June 30, 1996 and 1995, Moss Adams LLP (the "Audited Financial
Statements"). Except as set forth on Schedule 2.6(b) hereto, the Audited
Financial Statements are in accordance with the books and records of the Company
and its Subsidiaries, and fairly present in accordance with generally accepted
accounting principles ("GAAP") consistently applied the consolidated assets,
liabilities and financial position of the Company and its Subsidiaries, as at
the respective dates thereof, and the consolidated results of their operations
for the periods covered thereby. Also attached hereto as Schedule 2.6(a) is a
copy of the unaudited
16
<PAGE>
financial statements of the Company and its Subsidiaries for the nine month
period ended, and as of, March 31, 1998 (the "Interim Financial Statements" and,
together with the Audited Financial Statements, the "Financial Statements").
Except as set forth on Schedule 2.6(b), the Interim Financial Statements are in
accordance with the books and records of the Company and its Subsidiaries, and
fairly present in accordance with GAAP (for interim reporting) consistently
applied the consolidated assets, liabilities and financial position of the
Company and its Subsidiaries, as at the date thereof, and the consolidated
results of their operations for the period covered thereby (except in respect of
normal and recurring year end adjustments, none of which is material in amount).
The contingency, tax and other reserves reflected on the Financial Statements
are adequate, appropriate and reasonable in accordance with GAAP.
2.7. No Brokers or Finders. Except for William L. Rogers and his
affiliates, the fees related to which shall be borne as provided in Section
10.5, none of the Company, its Subsidiaries, affiliates, officers, directors or
employees, (a) has employed (or will employ) any broker or finder, or (b) has
incurred (or will incur) any liability for any brokerage fees, commissions or
finders' fees in connection with the transactions contemplated by this
Agreement.
2.8. Taxes. (a) For purposes of this Agreement:
(i) "Tax" or "Taxes" means all taxes, charges, fees, levies
or other assessments, including all net income, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits, alternative
minimum, license, withholding, employment, payroll, excise, estimated,
severance, stamp, occupation, real or personal property or other taxes, customs
duties, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any federal, state, local or foreign tax authority;
(ii) "Tax Returns" means all returns, reports, forms or other
information required to be filed with, or supplied to, any tax authority and all
information forms required to be supplied to third parties with respect to any
Taxes; and
(iii) For purposes of this Section 2.8 and Section 2.17(m)
hereof relating to Tax matters, "Company" and "Subsidiary" include any
predecessor entity to which the Company or a Subsidiary is a successor for Tax
purposes.
(b) Except as set forth in Schedule 2.8:
All Tax Returns (including consolidated, combined or unitary
federal and state Tax Returns which include or which should include the Company
or any Subsidiary) required to be filed by or on behalf of the Company or any
Subsidiary have been timely filed and each such Tax Return is materially
complete and accurate. All Taxes shown on such Tax Returns have been paid by or
on behalf of the Company and the Subsidiaries when due. The charges, accruals,
and reserves for unpaid Taxes that are reflected on the books of the Company and
each Subsidiary are adequate to cover such Taxes in accordance with GAAP.
Neither the Company nor any Subsidiary has filed a consent, election or
agreement under Section 341(f) of the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder
17
<PAGE>
(collectively, the "Code"). No Liens for Taxes have been filed with respect to
any property of the Company or any Subsidiary except for Taxes not yet due,
there is no unpaid assessment of Taxes against the Company or any Subsidiary, no
claims are being asserted with respect to any Taxes of the Company or any
Subsidiary and to the Company's knowledge no examination is being conducted or
is pending which could result in Taxes being owed by the Company or any
Subsidiary. Neither the Company nor any Subsidiary has been advised by any tax
authority that it has or may have an obligation to file Tax Returns in a
jurisdiction where the Company or Subsidiary has not filed or has ceased filing
Tax Returns. The Company and each Subsidiary have complied in all material
respects with applicable laws, rules and regulations relating to the payment and
withholding of Taxes and have withheld and properly remitted all Taxes required
to be withheld from the wages, salaries, payments or transfers of property to
employees and independent contractors. There are no effective waivers or
consents extending the statute of limitations with respect to Taxes for which
the Company or any Subsidiary could be liable. Neither the Company nor any
Subsidiary is a party to any agreement under which the Company or any Subsidiary
could be liable to indemnify another person for Taxes. Neither the Company nor
any Subsidiary is subject to any adjustment under Section 481 of the Code.
Neither the Company nor any Subsidiary is the subject of any private letter
ruling from, or closing agreement with any tax authority. Neither the Company
nor any Subsidiary owns an equity interest in any entity treated as a
partnership for federal income tax purposes. Neither the Company nor any
Subsidiary has ever been a member of an affiliated group that files or filed
consolidated federal income tax returns other than the affiliated group of which
the Company is the common parent.
(c) Neither the Company nor any Subsidiary has made, or is
obligated to make, any "excess parachute payment" within the meaning of Section
280G of the Code.
2.9. Absence of Undisclosed or Contingent Liabilities. Except as set
forth on Schedule 2.9 hereto and except as (and to the extent) accrued for in
the interim balance sheet, as of the date (the "Interim Balance Sheet Date") of
the balance sheet included in the Interim Financial Statements (the "Interim
Balance Sheet"), neither the Company nor any Subsidiary had any liability or
obligation, other than (i) executory obligations under contracts and other
contractual or employment arrangements not requiring disclosure in the Interim
Balance Sheet under GAAP and incurred in the ordinary course of business
consistent with past practice and (ii) liabilities and obligations arising from
normal year-end adjustments none of which, individually or in the aggregate,
would be material to the Company's financial position as reflected in the
Interim Financial Statements. Since the Interim Balance Sheet Date, neither the
Company nor any Subsidiary has become subject to any such liability or
obligation, other than (a) liabilities and obligations incurred in the ordinary
course of business consistent with past practice of a type reflected on the
Interim Balance Sheet which are not in an amount materially in excess of the
liabilities and obligations accrued for in the Interim Balance Sheet Date, (b)
executory obligations under contracts and other contractual or employment
arrangements not requiring disclosure in the Interim Balance Sheet under GAAP
and incurred in the ordinary course of business consistent with past practice
(c) liabilities and obligations arising from normal year-end adjustments none of
which, individually or in the aggregate, would be material to the Company's
financial position as reflected in the Interim Financial Statements and (d)
liabilities and obligations set forth on Schedule 2.9 hereto. Notwithstanding
the foregoing, no representations or warranties are given in this Section 2.9
with respect to liabilities or obligations arising from environmental matters or
18
<PAGE>
conditions, employee benefit plans or pursuant to ERISA, and Sections 2.12 and
2.20 shall contain the only representations and warranties with respect to such
items.
2.10. Property. (a) Except as set forth on Schedule 2.10(a) hereto, the
Company, or if so designated in Schedule 2.10(a), a Subsidiary, has (and will
continue to have immediately after the Closing) good and valid title to all
assets and properties the Company and the Subsidiaries purport to own (other
than the Real Property, as hereinafter defined), tangible and intangible, in
each case free and clear of any Liens, except for inventories and other assets
disposed of by the Company or any Subsidiary prior to the Closing in the
ordinary course of business consistent with past practice and except for Liens
for taxes not yet due and payable (collectively, the "Personal Property").
(b) Except as set forth in Schedule 2.10(a) hereto, all of the
assets, tangible and intangible, used in the operation of the business of the
Company and the Subsidiaries as of the Interim Balance Sheet Date were owned,
leased or licensed by the Company and the Subsidiaries or, with respect to
intellectual property, in the public domain.
(c) Attached hereto as Schedule 2.10(c) is a list of (i) all of
the owned real property of the Company and the Subsidiaries (collectively, the
"Owned Real Property"), (ii) all leases, assignments of leases, subleases,
licenses, rights of use or occupancy and other written agreements pursuant to
which the Company or the Subsidiaries lease, sublease, use or occupy real
property (other than Job Sites (as defined below) used or occupied)
(collectively, the "Tenant Leases"), and (iii) all leases, assignments of
leases, subleases, rights of occupancy and other written agreements pursuant to
which the Company or any of the Subsidiaries lease, have assigned leasehold
estates, subleased or otherwise let to any person any Real Property (as
hereinafter defined) or any portion of or interest therein (the "Landlord
Leases"). The interests of the Company and the Subsidiaries in the Real Property
constitute the only interests in real property required to be owned by the
Company or the Subsidiaries in order that the Company and the Subsidiaries may
conduct their business as presently conducted, except for job sites owned or
leased by customers of either the Company or any of its Subsidiaries ("Job
Sites").
As used in this Agreement, the following terms have the following
meanings:
(i) "Exceptions That Will Not Exist At Closing" means those
matters disclosed on Schedules B which are also separately listed on Schedule
2.10(d) under the heading Exceptions That Will Not Exist At Closing.
(ii) "Leased Real Property" means, collectively, all the
leasehold estates demised under the Tenant Leases.
(iii) "Leases" means, collectively, the Tenant Leases and the
Landlord Leases.
(iv) "Real Property" means, collectively, the Owned Real
Property and the Leased Real Property.
19
<PAGE>
(v) "Schedules B" means, collectively, Schedule B to each of
the title insurance policies listed on Schedule 2.10(d), copies of which
schedules are attached hereto as Exhibit A to Schedule 2.10(d).
(d) Except as set forth on Schedule 2.10(d) hereto, the Company
or, if so designated in Schedule 2.10(d), a Subsidiary, has (and will continue
to have immediately after the Closing) good and marketable, indefeasible fee
simple title to the Owned Real Property free and clear of any and all Liens and
title defects, except for (x) matters listed on Schedules B, (y) minor
imperfections of title, conditions, encroachments, easements, covenants or
restrictions, if any, none of which is substantial in amount and none of which,
individually or in the aggregate, materially detracts from the value of the
affected property or impairs the use of the affected property in the manner such
property is currently being used or impairs the conduct of the Company's or any
Subsidiary's business, and (z) Liens for real estate Taxes and assessments not
yet delinquent (all of the items described in (x), (y) and (z), collectively,
the "Permitted Fee Property Exceptions").
(e) On and as of the Closing Date, all of the Real Property
shall be free and clear of and none of the Real Property shall be subject to any
of the Exceptions That Will Not Exist At Closing, other than the Exceptions that
Will Not Exist At Closing applicable to the properties located at 13750 Catalina
Street in San Leandro, California and 3845 Imperial Avenue in San Diego,
California (the "Continuing Exceptions").
(f) Except as set forth on Schedule 2.10(f) hereto, the Company
or, if so designated in Schedule 2.10(f), a Subsidiary, has (and will continue
to have immediately after the Closing) good and valid (i) title to the leasehold
estates conveyed under the Leases (the "Leasehold Estates"), and (ii) leasehold
title to the Leased Real Property free and clear of any Liens and title defects,
except for (x) matters set forth on Schedule 2.10(f), (y) minor imperfections of
title, conditions, encroachments, easements, covenants or restrictions, if any,
none of which is substantial in amount and none of which, individually or in the
aggregate, materially detracts from the value of the affected property or
impairs the use of the affected property in the manner such property is
currently being used or impairs the conduct of the Company's or any Subsidiary's
business, and (z) Liens for real estate Taxes and assessments not yet delinquent
(all of the items described in (x), (y) and (z), collectively, the "Permitted
Leasehold Property Exceptions," and together with the Permitted Fee Property
Exceptions, the "Permitted Exceptions"). Nothing in this representation and
warranty shall be deemed a representation or warranty with respect to the fee
interests encumbered by any of the Tenant Leases.
(g) The Company has delivered to Newco complete and correct
copies of all existing title insurance policies in the Company's or any
Subsidiary's possession and all surveys possessed by the Company or a Subsidiary
with respect to any of the Real Property.
(h) Except as set forth in Schedule 2.10(h), the Company is in
actual, exclusive possession of all of the Real Property, other than Real
Property that is the subject of a Landlord Lease, if any. Except as set forth in
Schedule 2.10(h), the basic rent and all additional rent payable under the
Leases have been paid to date and not more than one month in advance. All tenant
improvement work and all other work required to be performed under any of the
Leases by the
20
<PAGE>
landlords thereunder or by the Company or any Subsidiary has been performed,
and, to the extent that the Company or a Subsidiary is responsible for payment
of such work, has been fully paid for, whether directly to the contractor
performing such work or to such landlord as reimbursement therefor, except for
items which the Company or any Subsidiary is disputing in good faith (which
items are fully reserved for in the Interim Balance Sheet. Except as set forth
on Schedule 2.10(h), there are no brokerage commissions or finder's fees due
from any Seller or the Company or any Subsidiary which are unpaid with regard to
any of the Leases or which will become due at any time in the future with regard
to the Leases.
(i) Except as set forth on Schedule 2.10(i) hereto, there have
been no casualties which are reasonably likely to result in the termination of
any of the Leases or the exercise of any buy-out provision contained in any of
the Leases relative to damage by casualty.
(j) To the Company's knowledge, there is not currently (i) any
pending or threatened condemnation action, eminent domain proceeding or other
litigation, action or proceeding concerning any of the Real Property, or (ii)
any pending or threatened investigation by any governmental authority which
relates to the ownership, maintenance, use or operation of any of the Real
Property. The Sellers have caused the Company and the Subsidiaries to deliver to
Newco complete and correct copies of all written notices and other
correspondence received by the Company or any Subsidiary within the past two (2)
years with respect to any of the matters set forth in the immediately preceding
clauses (i) and (ii). All of the buildings and other improvements upon the Real
Property are operational and do not require material repair and are in a state
of repair suitable for the continued operation of the business conducted thereon
without material repair. The water, gas, electricity and other utilities serving
each parcel of the Real Property are currently adequate to service the normal
operation by the Company or its Subsidiary, as the case may be, of such parcel
as currently conducted. Each parcel of the Real Property has physical access to
public right of ways sufficient for the conduct of the business as presently
conducted on such parcel.
(k) None of the matters listed on Schedule 2.10(k), individually
or in the aggregate: (i) materially impairs, or grants rights which if exercised
would materially impair the use of the affected property, including, without
limitation, any improvements thereon, in the manner such property is currently
being used, or (2) materially adversely affects or grants rights which if
exercised would materially adversely affect the operations of the Company and
the Subsidiaries or the results thereof, in either case taken as a whole.
2.11. Insurance. Attached hereto as Schedule 2.11(a) is a list of the
insurance with respect to the business carried on by the Company and its
Subsidiaries. Such insurance is in effect and will be kept in effect up to the
Closing. Except as set forth on Schedule 2.11(a), (i) all of the Company's
liability insurance policies are on an "occurrence," as opposed to "claims
made," basis, (ii) none of the premiums under such policies are subject to
retroactive adjustment as a result of loss experience under such policies, and
(iii) the coverage provided by the Company's liability insurance policies for
any injuries or offenses that have occurred prior to the Closing will not in any
way be affected by, or terminate or lapse by reason of, the transactions
contemplated hereby. Attached hereto as Schedule 2.11(b) are true and complete
lists of all open surety,
21
<PAGE>
bonding or similar arrangements for the Company or any Subsidiary, prepared by
the Company's brokers of surety and bonding arrangements.
2.12. Environmental Matters. (a) Except as set forth in Schedule
2.12(a), neither the Company nor any of its Subsidiaries has received from any
governmental authority or other person any requests for information, notices of
claim, complaint, order, assessment, demand or other written notification that
the Company or any of its Subsidiaries are, may be or will be potentially
responsible with respect to any investigation, clean-up or other liabilities or
responsibilities arising from or related to the presence, Release or threat of
Release of Hazardous Substances at any sites, and to the knowledge of the
Company, the Sellers have received no such notice, nor does the Company have
knowledge of any legitimate basis upon which such request, notice, demand or
claim would be sent.
(b) Except as set forth in Schedule 2.12(b), to the knowledge of
the Company, no Hazardous Substances have been Managed or Released or threatened
to be Released at, on, about, under, from or onto any Real Property now owned,
operated or leased by the Company or any Subsidiary or in connection with the
conduct of the business of the Company and the Subsidiaries (as presently
conducted) at such Real Property, except for such Management or Releases the
consequences of which could not reasonably be expected to have a Material
Adverse Effect.
(c) Except as set forth in Schedule 2.12(c), no Real Property
owned or leased by the Company or any Subsidiary contains underground tanks,
active or abandoned. Except as set forth on Schedule 2.12(c), none of the
foregoing is required to be upgraded, retrofitted or replaced within the next
one (1) year pursuant to 40 CFR Part 280 or under any analogous state or local
Environmental Laws regulating underground storage tanks.
(d) The Company and each Subsidiary have obtained all
Environmental Permits, all such Environmental Permits are in full force and
effect and the Company and each Subsidiary are in compliance with all terms and
conditions of the Environmental Permits except where the failure to so obtain or
comply could not reasonably be expected to have a Material Adverse Effect. The
Company and each Subsidiary have made or will make before the Closing timely
application for renewals of all such Environmental Permits for which
Environmental Laws require that applications must be filed on or before the
Closing to maintain the Environmental Permits in full force and effect. If any
Environmental Permits are required to be transferred, or any notifications are
required to be made so that the Surviving Corporation can operate the Company
and its Subsidiaries after the Closing in the manner they were operated prior to
Closing, the Company and the Subsidiaries will prepare and file all required
applications therefor. BRS and Newco shall use their reasonable efforts to
cooperate with the Company and the Subsidiaries as to the foregoing.
(e) Each of the Company and its Subsidiaries and the operations
of its businesses are in compliance with all Environmental Laws except where the
failure to so comply could not reasonably be expected to have a Material Adverse
Effect.
22
<PAGE>
(f) As used herein, "CERCLA" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
"Environmental Laws" means the common law and all applicable federal, state and
local laws relating to pollution or protection of human health or the
environment including, laws, statutes, ordinances, rules, regulations, orders,
codes and notices as adopted or issued as of the date of this Agreement relating
to the Management or Release or threatened Release of Hazardous Substances into
the environment (including without limitation ambient air, surface water, ground
water, land surface or subsurface strata). "Environmental Permits" means all
permits, approvals, certificates, registrations, licenses and other
authorizations which are required under Environmental Laws. "Hazardous
Substance" means any hazardous or toxic substance or waste, pollutant or
contaminant including petroleum products, asbestos, PCBs and radioactive
materials. "Management" (and its correlative terms) means the generation,
possession, manufacture, processing, distribution, use, treatment, storage,
disposal, transport, recycling or handling of Hazardous Substances. "Release"
means any spill, leak, discharge, disposal, pumping, pouring, emitting,
emptying, injecting, leaching, dumping or allowing to escape or presence of any
Hazardous Substance.
2.13. Intellectual Property. (a) Attached hereto as Schedule 2.13 is a
correct list of all material trademarks, service marks, and registrations and
applications for trademarks, service marks and trade names, copyrights
registrations, and patents and patent applications owned or used by the Company
or a Subsidiary, and all licenses pertaining thereto. The items listed in
Schedule 2.13, together with any material trade secrets (including without
limitation, proprietary inventions, technology, know-how, customer or product
information, designs, and technical information to the extent they are trade
secrets) owned or used by the Company or any Subsidiary are referred to as the
"Intellectual Property". All of the trademarks, service marks and trade names
listed in Schedule 2.13 are currently being used by the Company or a Subsidiary
in its business except as otherwise explicitly indicated in such Schedule.
Except as set forth on Schedule 2.13 hereto, to the Company's knowledge, the
Company and the Subsidiaries have adequate and sufficient rights, whether
registered or unregistered, to use such Intellectual Property as currently used
in their respective businesses, free and clear of any Lien or competing rights
or interests of others which would preclude or otherwise impair the use by the
Company or any Subsidiary, as the case may be.
(b) The Company or a Subsidiary solely and exclusively owns all
right, title and interest in and to the Intellectual Property, except as set
forth on Schedule 2.13. The operation of the Company's and its Subsidiaries'
business does not, to the Company's knowledge, infringe on the patents,
trademarks, service marks, trade names, trade dress, copyrights, trade secrets
or other intellectual property rights of any third party. Except as set forth on
Schedule 2.13, to the Company's knowledge, no claims have been asserted by any
person in respect of the use of any Intellectual Property by the Company or a
Subsidiary.
(c) Except as set forth on Schedule 2.13, all of the patents,
trademark and service mark registrations, and copyright registrations listed on
Schedule 2.13 are valid and in full force, are held of record in the name of the
Company or a Subsidiary, are not, to the Company's knowledge, the subject of any
cancellation, reexamination opposition, extension of time to oppose,
interference, rejection, refusal to register or any other proceeding challenging
their extent or validity. With respect to the Intellectual Property, the Company
or a Subsidiary is the assignee
23
<PAGE>
in all patent applications, and the Company or a Subsidiary is the applicant of
record for all applications for trademark, service mark, and copyright
registration. No patents are held in the names of individual inventors. No
order, holding, decision or judgment has been rendered by any governmental
authority, and no agreement, consent or stipulation exists, which would limit
the Company's or any Subsidiary's use of any Intellectual Property or any
advertising or promotional claim or campaign. Except as set forth on Schedule
2.13, to the Company's knowledge, neither the Company nor its Subsidiaries have
given any indemnification against infringement of patent, trademark, copyright
or other intellectual property rights as to any equipment, materials, products,
services or supplies.
(d) Other than as set forth on Schedule 2.13, neither the
Company nor any Subsidiary has asserted any claim of infringement, dilution,
unfair competition, misappropriation or misuse against any person with respect
to the Intellectual Property within the past three years. To the Company's
knowledge, no person is infringing, diluting, unfairly competing with or
misappropriating the rights of the Company or any Subsidiary with respect to the
Intellectual Property.
2.14. Permits. Except as set forth on Schedule 2.14 and except where
the Company's failure to own a Permit could not reasonably be expected to have a
Material Adverse Effect, the Company has obtained all certificates, permits,
franchises, licenses and authorizations ("Permits") required for the operation
of the Company's business as currently conducted by any governmental or
quasi-governmental authority having jurisdiction over the Company, its
properties or business or the Subsidiaries or their properties or business. All
such Permits are in full force and effect. The Company or any Subsidiary is not
in default (or non-compliance) under any Permit, except where a default could
not reasonably be expected to have a Material Adverse Effect. No modification,
suspension or cancellation of any Permit, or any proceeding relating thereto, is
pending or, to the knowledge of the Company, threatened with respect to any
Permit. No written notice has been received by the Company or the Subsidiaries
with respect to any failure by the Company or any Subsidiary to have any Permit
nor of any asserted present or past failure by the Company or any Subsidiary to
comply with any Permit or its terms, in each case, where such failure could
reasonably be expected to have a Material Adverse Effect.
2.15. Compliance with Laws. Except as set forth in Schedule 2.15
hereto, the operations of the Company and each of its Subsidiaries have been
conducted in compliance in all material respects with applicable laws,
regulations and other requirements of all Authorities having jurisdiction
over the Company or any Subsidiary or any of their respective businesses or
operations, including without limitation such laws, regulations and
requirements relating to employment and employment practices, terms and
conditions of employment and wages and hours, rental of vehicles, machinery
and equipment, contracting and subcontracting, antitrust, consumer
protection, immigration, health, occupational safety and health, plant
closing, pension, building, zoning, subdivision matters, and securities,
except in each case where a failure to comply could not reasonably be
expected to have a Material Adverse Effect and except for laws, regulations
or requirements relating to Hazardous Substances. During the past three
years, neither the Company nor any Subsidiary has received any notification
of any asserted present or past failure by the Company or any Subsidiary to
comply with any laws, rules or regulations, except where an asserted present
or past failure to comply could not reasonably be expected to
24
<PAGE>
have a Material Adverse Effect and except for laws, regulations or
requirements relating to Hazardous Substances.
2.16. Labor Matters. (a) Except as set forth in Schedule 2.16, (i)
neither the Company nor any Subsidiary is party to or bound by any agreement
with any labor organization, including any collective bargaining or similar
agreement ("Labor Agreement"), (ii) there is no labor strike, dispute, slowdown
or stoppage pending or, to the knowledge of the Company, threatened against or
affecting the Company or any Subsidiary, and (iii) neither the Company nor any
Subsidiary has experienced any material work stoppage, strike, slowdown, or
union organizational efforts since January 1, 1995. The Company has delivered
all Labor Agreements of the Company and its Subsidiaries to BRS.
(b) Except as set forth in Schedule 2.16, neither the Company
nor any Subsidiary has had asserted against it any worker's compensation claim
which could reasonably be expected to have a Material Adverse Effect.
2.17. Absence of Changes. Except as and to the extent set forth on
Schedule 2.17, since June 30 1997, there has not been any Material Adverse
Effect or any change or occurrence which could reasonably be expected to have a
Material Adverse Effect. Without limiting the foregoing, except as and to the
extent set forth in Schedule 2.17 or pursuant to the transactions set forth in
Article I or the covenants set forth in Article V, since June 30, 1997 to the
date of this Agreement, neither the Company nor any Subsidiary has:
(a) Increased, or experienced any change in any assumptions
underlying or methods of calculating, any bad debt, contingency, tax or other
reserves or changed its accounting practices, methods or assumptions (including
changes in estimates or valuation methods);
(b) Changed the manner or timing of collecting accounts
receivable or satisfying accounts payable;
(c) Entered into any lease or sublease of real property or
assignment of any leasehold estate or exercised any purchase options or rights
of first refusal contained in any of the Leases, or terminated, surrendered,
cancelled or assigned any of its properties demised under the Leases, or any
part thereof;
(d) Permitted or allowed any of its Owned Real Property or
Leased Real Property, or assets (real, personal or mixed, tangible or
intangible) to be subjected to any Lien, except for Permitted Exceptions;
(e) Executed or consummated any contract or agreement for the
purchase or sale of any real property or otherwise purchased or conveyed any
real property or any interest therein;
(f) Written down the value of any assets except in accordance
with the Company's historical depreciation policy as reflected in the Audited
Financial Statements, consistently applied in accordance with past practice
(including write-downs by reason of shrinkage or mark-down);
25
<PAGE>
(g) Cancelled any debts or waived any claims or rights involving
more than $50,000;
(h) Sold, transferred, or otherwise disposed of any of its Owned
Real Property, or any interest therein, or its other properties or assets (real,
personal or mixed, tangible or intangible), except for (i) inventory (and
dispositions of used equipment previously held for rental or for use in the
Company's subcontracting businesses) in the ordinary course of business
consistent with past practice, (ii) dispositions of excess, unnecessary or
obsolete furniture, fixtures and equipment which are not material in the
aggregate, or (iii) asset dispositions for consideration of less than $100,000
in the aggregate;
(i) Granted any increase in the compensation of officers or
employees (including any such increase pursuant to any bonus, pension, profit
sharing or other plan or commitment) or any increases in the compensation
payable or to become payable to any officer or employee, except for normal
increases granted in the ordinary course of business consistent with past
practices, or entered into or amended any employment, consulting or similar
agreement or made any agreement or commitment to pay any severance or similar
compensation;
(j) Made any single capital expenditure or commitment in excess
of $50,000 for additions to property, plant, equipment or intangible capital
assets or made aggregate capital expenditures and commitments in excess of
$100,000 for additions to property, plant, equipment or intangible capital
assets;
(k) Made any distribution, in cash or otherwise, to any Seller
(except for payments of salaries and bonuses to officers and employees
consistent with the terms of existing employment agreements or arrangements and
past practice and loans or payments prior to June 30, 1998 in respect of vesting
of restricted stock in 1997 and the exercise of options), or declared, paid or
set aside for payment any dividend or other distribution in respect of its
capital stock or redeemed, purchased or otherwise acquired, or offered, sold or
issued, directly or indirectly, any shares of capital stock or other securities
of the Company (including options, warrants or rights to acquire securities), or
merged or consolidated with any person or effected any share exchange,
reclassification or subdivision of any of its capital stock or adopted any plan
of liquidation or dissolution or other reorganization, or acquired the stock,
assets or business of any other person;
(l) Paid, distributed, loaned or advanced any amount to, or
sold, transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement with
any Seller, any affiliate of a Seller, officers or directors of either the
Company or any Subsidiary, or any affiliate or "associate" (as defined in Rule
405 under the Securities Act) of any officers or directors of either the Company
or any Subsidiary (except in each case for payments of salaries and bonuses to
officers and employees consistent with the terms of existing employment
agreements or arrangements and past practice and loans or payments prior to June
30, 1998 in respect of vesting of restricted stock in 1997 and the exercise of
options);
(m) Made or revoked any election for Tax purposes (or had any
election made or revoked on its behalf) or changed a method of accounting for
Tax purposes; or
26
<PAGE>
(n) Agreed, whether in writing or otherwise, to take any action
described in this Section.
2.18. Transactions with Affiliates. Except as set forth on Schedule
2.18 hereto, neither any Seller nor (to the Company's knowledge) any affiliate,
as defined in Rule 405 under the Securities Act ("affiliate"), of a Seller
(other than the Company and the Subsidiaries) nor any of the Company's officers,
directors or employees or (to the Company's knowledge) any of their associates,
has any interest, directly or indirectly, in any lease, Lien, contract, license,
loan or other agreement or commitment to which the Company or any Subsidiary is
a party, or any property or asset used or owned by, or any interest in any
supplier or customer of, the Company or any Subsidiary. Except as set forth on
Schedule 2.18 hereto, neither the Company nor any Subsidiary is indebted,
directly or indirectly, to (a) any Seller or (to the Company's knowledge) any
affiliate of a Seller or (b) any officer, director or employee of the Company or
any Subsidiary for any liability or obligation, whether arising by reason of
stock ownership, oral or written agreement or understanding or otherwise.
Schedule 2.18 is a complete and accurate list of all employees of the Company
and each Subsidiary owing more than $2,000 (except in respect of advances for
business expenses, none of which exceeds $5,000 or $50,000 in the aggregate) in
principal to the Company or any Subsidiary, setting forth the amounts owed, the
applicable interest rates, a description of the security and the maturity dates
of all such debts.
2.19. Contracts and Commitments. Schedule 2.19 hereto contains a
complete, current and correct list of all material contracts, commitments,
obligations or agreements of each of the Company and the Subsidiaries, and all
amendments thereto, whether written or oral, including the Leases (the
"Contracts"). For purposes of this Section 2.19 a contract which is "material"
shall include any single contract, whether written or oral:
(a) where any party thereto is obligated to make annual payments
aggregating more than $200,000;
(b) which constitutes a consulting or similar agreement having a
term greater than twelve (12) months or which constitutes an employment
agreement or an agreement which calls for severance payments;
(c) where any party thereto is obligated to make annual payments
aggregating more than $100,000 and either (i) the term of such contract will not
expire of its own accord within twelve (12) months of the date hereof, or (ii)
such contract is not subject to cancellation by the Company or a Subsidiary, as
the case may be, on not more than thirty (30) days notice without material
penalty;
(d) which constitutes an agreement by the Company or any
Subsidiary to pay a former employee compensation (including any bonus but
excluding any benefits made available to Company employees generally) at the
annual rate of more than $50,000;
(e) which constitutes an agreement that restricts the Company or
any Subsidiary from carrying out its business anywhere in the world or from
competing with any other person or which is a confidentiality or non-disclosure
agreement restrictive of the Company;
27
<PAGE>
(f) which constitutes an agreement by the Company or any
Subsidiary with any affiliate (other than the Company or any Subsidiary);
(g) which constitutes a franchising, partnership, joint venture
or similar agreement;
(h) which is a lease, purchase and sale agreement,
subordination, nondisturbance and attornment agreement or other agreement
relating to real property, including the Leases and any and all subordination,
nondisturbance and attornment agreements or similar agreements relating to any
of the Leases or to any of the Real Property;
(i) which relates to indebtedness or indemnification or any
guarantee of the Company or a Subsidiary (including any letter of credit) or
which grants any Lien on any assets, rights or properties of the Company or a
Subsidiary, or which is a tax sharing or similar agreement;
(j) which deals with any environmental investigations,
remediations or similar matters;
(k) which deals with any bonding or surety agencies or relates
to bonding capacity;
(l) which is a license or similar agreement for Intellectual
Property, whether as licensee or licensor; and
(m) where the consequences of a breach or default thereunder, or
the termination, expiration or cancellation thereof, could reasonably be
expected to result in a Material Adverse Effect.
True, correct and complete copies of all written Contracts described in Schedule
2.19 have been delivered to Newco, together with a complete written description
of any oral Contract. Each of the Contracts is in full force and effect and
constitutes the legal, valid, binding and enforceable obligations of the Company
or Subsidiary, as applicable, and, to the Company's knowledge, the other parties
thereto in accordance with its terms. Except as set forth on Schedule 2.19 and
except for breaches or defaults that could not reasonably be expected to have a
Material Adverse Effect, neither the Company nor any Subsidiary is in default
under or has breached any of the Contracts and no act or omission has occurred
which, with notice or lapse of time or both, would constitute a breach or
default under any term or provision of any such Contract. To the knowledge of
the Company, no other party is in breach or default under any of such Contracts,
and no act or omission has occurred by any other party thereto which, with
notice or lapse of time or both, would constitute such a breach or default under
any term or provision thereof. Subject to receipt of the consents set forth in
Schedule 2.4, the Contracts will remain in full force and effect (without any
breach or default or modification thereunder, or event which could give rise to
breach, default or modification) for the benefit of the Company, the
Subsidiaries and the Surviving Corporation following the Closing.
28
<PAGE>
2.20. Benefit Plans. (a) Set forth on Schedule 2.20(a) is a true and
complete list of each (i) "employee benefit plan," as defined in Section 3(3) of
ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA
(a "Multiemployer Plan")), (ii) other pension, retirement, supplemental
retirement, deferred compensation, excess benefit, profit sharing, bonus,
incentive, stock purchase, stock ownership, stock option, stock appreciation
right, employment, severance, salary continuation, termination,
change-of-control, health, life, disability, group insurance, vacation, holiday
and fringe benefit plan, program, contract, or arrangement maintained,
contributed to, or required to be contributed to, by the Company or any ERISA
Affiliate for the benefit of any employee, former employee, director, officer or
independent contractor of the Company or a Subsidiary or under which the Company
or any ERISA Affiliate has any liability with respect to any employee, former
employee, director, officer or independent contractor of the Company or
Subsidiary (the "Benefit Plans").
(b) As applicable with respect to each Benefit Plan (other than
a Multiemployer Plan), the Company has made available to Newco true and complete
copies of (i) each Benefit Plan, including all amendments thereto, and in the
case of an unwritten Benefit Plan, a written description thereof, (ii) all trust
documents, investment management contracts, custodial agreements and insurance
contracts relating thereto, (iii) the current summary plan description and each
summary of material modifications thereto, (iv) the three most recent annual
reports (Form 5500 and all schedules thereto) filed with the Internal Revenue
Service ("IRS"), (v) the most recent IRS determination letter and each currently
pending application to the IRS for a determination letter, (vi) the three most
recent summary annual reports, actuarial reports, financial statements and
trustee reports and (vii) all records, notices and filings concerning IRS or
Department of Labor audits or investigations, "prohibited transactions" within
the meaning of Section 406 of ERISA or Section 4975 of the Code and "reportable
events" within the meaning of Section 4043 of ERISA. The Company has made a
written request to the sponsoring union of each Multiemployer Plan for true and
complete copies of the three most recent annual reports (Form 5500 and all
schedules thereto) filed with the IRS, and statements or computations regarding
potential withdrawal liability, if any. The Company made available to Newco true
and complete copies of such information and documentation outlined in the
previous sentence with respect to such Multiemployer Plans that the Company has
in its possession on or prior to the date hereof and the Closing Date, as
applicable.
(c) Except as otherwise disclosed with particularity on Schedule
2.20(c):
(i) There has been no failure by the Company or any ERISA
Affiliate to comply with the provisions of ERISA and the Code applicable to the
Benefit Plans (other than a Multiemployer Plan), which failure could reasonably
be expected to have a Material Adverse Effect. There has been no failure by any
Benefit Plan (other than a Multiemployer Plan) to be maintained, operated and
administered in compliance with its terms and any related documents or
agreements and the applicable provisions of ERISA and the Code, which failure
could reasonably be expected to have a Material Adverse Effect.
(ii) There has been no failure by any Benefit Plans (other
than a Multiemployer Plan) which are "employee pension benefit plans" within the
meaning of Section 3(2) of ERISA and which are intended to meet the
qualification requirements of Section 401(a) of
29
<PAGE>
the Code (each a "Pension Plan") to meet the requirements for such qualification
or by their related trusts to meet the requirements for exemption from taxation
under Section 501(a) of the Code, which failure could reasonably be expected to
have a Material Adverse Effect.
(iii) All Pension Plans (other than a Multiemployer Plan)
have received determination letters from the IRS to the effect that such Pension
Plans are qualified and their related trusts are exempt from federal income
taxes and no determination letter with respect to any Pension Plan has been
revoked nor, to the knowledge of the Company is there any reason for such
revocation, nor has any Pension Plan been amended since the date of its most
recent determination letter in any respect which would adversely affect its
qualification.
(iv) No Benefit Plan (other than a Multiemployer Plan) is
now or at any time has been subject to Part 3, Subtitle B of Title I of ERISA or
Title IV of ERISA. All contributions to, and payments from, any Benefit Plan
which may have been required in accordance with the terms of such Benefit Plan
or any related document have been timely made. All such contributions to, and
payments from, any Benefit Plan, except those to be made from a trust, qualified
under Section 401(a) of the Code, for any period ending before the Closing Date
that are not yet, but will be, required, are properly accrued and reflected on
the Interim Balance Sheet.
(v) Neither the Company nor any ERISA Affiliate has ever
contributed to, or been required to contribute to any Multiemployer Plan .
Neither the Company nor any ERISA Affiliate has any liability (contingent or
otherwise) relating to the withdrawal or partial withdrawal from a Multiemployer
Plan. All required contributions, withdrawal liability payments or other
payments of any type that the Company or any ERISA Affiliate have been obligated
to make to any Multiemployer Plan have been duly and timely made. Any withdrawal
liability incurred with respect to any Multiemployer Plan has been fully paid as
of the date hereof. Neither the Company nor any ERISA affiliate has undertaken
any course of action that could reasonably be expected to lead to a complete or
partial withdrawal from any Multiemployer Plan. To the knowledge of the Company,
no Multiemployer Plan is in "reorganization" within the meaning of Section 4241
of ERISA nor has notice been received by the Company or any ERISA Affiliate that
any such Multiemployer Plan will be placed in "reorganization."
(vi) To the knowledge of the Company, there are no pending
audits or investigations by any governmental agency involving the Benefit Plans,
and no threatened or pending claims (except for individual claims for benefits
payable in the normal operation of the Benefit Plans), suits or proceedings
involving any Benefit Plan, any fiduciary thereof or service provider thereto,
nor to the knowledge of the Company is there any basis for any such claim, suit
or proceeding.
(vii) Neither the Company, any ERISA Affiliate, nor to the
knowledge of the Company, any fiduciary, trustee or administrator of any Benefit
Plan, has engaged in or, in connection with the transactions contemplated by
this Agreement, will engage in any transaction with respect to any Benefit Plan
which would subject any such Benefit Plan, the Company, any ERISA Affiliate,
Newco or the Surviving Corporation to a tax, penalty or liability for a
"prohibited transaction" under Section 406 of ERISA or Section 4975 of the Code.
None of the
30
<PAGE>
assets of any Benefit Plan (other than a Multiemployer Plan) is invested in any
property constituting "employer real property" or an "employer security," within
the meaning of Section 407 of ERISA.
(viii) All insurance premiums with respect to any insurance
policy related to a Benefit Plan (other than a Multiemployer Plan) for any
period up to and including the Closing Date shall have been paid, or accrued and
booked on or before the Closing Date, and, with respect to any such insurance
policy or premium payment obligation, neither the Company nor any ERISA
Affiliate shall be subject to a retroactive rate adjustment, loss sharing
arrangement or other actual or contingent liability.
(ix) There has been no failure by any Benefit Plan that is a
"group health plan" within the meaning of Section 607 of ERISA and that is
subject to Section 4980B of the Code to comply with the continuation coverage
requirements of the Code and ERISA, which failure could reasonably be expected
to have a Material Adverse Effect.
(x) No Benefit Plan provides benefits, including, without
limitation, death or medical benefits, beyond termination of service or
retirement other than (A) coverage mandated by law, (B) death or retirement
benefits under a Benefit Plan qualified under Section 401(a) of the Code or (C)
coverage mandated by the terms of any collective bargaining agreement; provided,
however, that neither the Company nor any ERISA Affiliate will be required,
whether pursuant to the terms of any collective bargaining agreement or
otherwise, to make any contributions or payments to the applicable health or
welfare plan or fund with respect to any period after the termination of the
collective bargaining relationship between the applicable union and the Company
or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has made a
written or oral representation to any current or former employee promising or
guaranteeing any employer paid continuation of medical, dental, life or
disability coverage for any period of time beyond retirement or termination of
employment.
(xi) The Sellers' and the Company's execution of, and
performance of the transactions contemplated by, this Agreement will not
constitute an event under any Benefit Plan that will result in any payment
(whether as severance pay or otherwise), acceleration, vesting or increase in
benefits with respect to any employee.
(xii) All of the employees whose primary responsibility
relate to the business of the Company and the Subsidiaries are employed by the
Company and the Subsidiaries and no such individual is employed by any other
ERISA Affiliate.
(d) As used herein, the capitalized terms below have the
following meanings:
(i) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
(ii) "ERISA Affiliate" means (i) any corporation included
with the Company in a controlled group of corporations within the meaning of
Section 414(b) of the Code; (ii) any trade or business (whether or not
incorporated) which is under common control with the
31
<PAGE>
Company within the meaning of Section 414(c) of the Code; (iii) any member of an
affiliated service group of which the Company is a member within the meaning of
Section 414(m) of the Code; or (iv) any other person or entity treated as an
affiliate of the Company under Section 414(o) of the Code.
2.21. Absence of Questionable Payments. Neither the Company nor any
Subsidiary, nor, to the knowledge of the Company, any of their respective
directors, officers, agents, employees or other person acting on their behalf,
has used any corporate or other funds for unlawful contributions, payments,
gifts, or entertainment, or made any unlawful expenditures relating to political
activity to government officials or others or established or maintained any
unlawful or unrecorded funds. Neither the Company nor any Subsidiary, nor, to
the knowledge of the Company, any of their respective directors, officers,
agents, employee or other persons acting on their behalf, has accepted or
received any unlawful contributions, payments, gifts, or expenditures.
2.22. Books and Records. The Company has maintained complete, current
and correct copies of: (a) the Articles of Incorporation and Bylaws and other
organizational documents of the Company and each of its Subsidiaries and all
amendments thereto; (b) the stock records of the Company and each Subsidiary;
and (c) the minutes and other records of the meetings and other proceedings of
the stockholders and directors of the Company and each Subsidiary.
2.23. Disclosure. No representation or warranty made by the Sellers or
the Company in this Agreement or any disclosure schedule or certificate or other
agreement delivered hereunder contains any untrue statement of a material fact
or omits any material fact necessary to make the statements contained herein or
therein not misleading.
ARTICLE III
SEVERAL REPRESENTATIONS AND
WARRANTIES OF THE SELLERS
Subject to Section 10.15, each Seller hereby represents and warrants
severally to BRS and Newco as follows:
3.1. Ownership of Shares. (a) Except as set forth on Schedule 3.1(a)
hereto, (i) such Seller is the sole record and beneficial owner of the shares of
Existing Company Stock set forth opposite such Seller's name on Schedule 3.1(a)
hereto, free and clear of any Liens, and (ii) at and as of the Closing, such
Seller will be the sole record and beneficial owner of the shares of Class A
Common Stock or Class B Common Stock set forth opposite such Seller's name on
Schedule 3.1(a) hereto, free and clear of any Lien. Subject to the conditions
set forth herein, at the Closing, such Seller will transfer and deliver to BRS
good and valid title to the BRS Purchase Shares (if any) set forth opposite such
Seller's name on Schedule 3.1(a) hereto, free and clear of any Lien.
(b) Except pursuant to this Agreement or as set forth on
Schedule 3.1(b) hereto, neither such Seller nor any of its affiliates is a party
to, or bound by, any arrangement,
32
<PAGE>
agreement, instrument or order (i) relating to the transfer of any capital stock
or equity securities of the Company or any Subsidiary, (ii) relating to the
dividend or voting rights of any capital stock or equity securities of the
Company or any Subsidiary, or (iii) relating to rights to registration under the
Securities Act of any capital stock or equity securities of the Company or any
Subsidiary.
3.2. Authorization; Binding Agreement. Such Seller has full corporate,
trust, limited liability company or partnership power and authority (or, if such
Seller is a natural person, individual capacity) to execute and deliver this
Agreement and each other document or instrument contemplated hereby, to perform
its obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by such Seller (if
such Seller is a corporation or other entity) of this Agreement and each other
document or instrument executed or to be executed by it in connection herewith,
and the consummation by it of the transactions contemplated hereby and thereby,
have been duly and validly authorized by all necessary corporate, trust,
partnership or other organizational action. This Agreement has been, and each
other document or instrument to be executed by such Seller in connection
herewith will be, duly executed and delivered by such Seller, and constitutes,
or will constitute, a legal, valid and binding obligation of such Seller,
enforceable against such Seller, in accordance with its terms.
3.3. Conflicts, Consents and Approvals. Except as set forth on Schedule
3.3 hereto, the execution and delivery by such Seller of this Agreement and any
other documents or instruments contemplated hereby, the performance by such
Seller of its obligations hereunder and thereunder, and the consummation by such
Seller of the transactions contemplated hereby and thereby, do not and will not:
(a) if such Seller is a corporation or other entity, violate or
conflict with or result in a breach of any provision of the Articles of
Incorporation or Bylaws (or similar documents) of such Seller, as such
instruments are currently in effect;
(b) subject to obtaining the consents and approvals specified in
Schedule 3.3, require any consent, approval or notice under, or conflict with,
or result in a violation or breach of, or constitute (with or without the giving
of notice or the lapse of time or both) a default (or give rise to any right of
termination, modification, cancellation or acceleration or result in the
creation or imposition of any Lien upon the property of such Seller, the Company
or a Subsidiary) under, any of the terms, conditions or provisions of any (i)
note, bond, mortgage, indenture, license, lease, agreement or other document or
instrument or obligation to which such Seller is a party, under or pursuant to
which any of its properties or assets are held, or by which any portion of its
properties or assets may be bound, or (ii) any permit, license, approval,
franchise or other governmental or regulatory authorization held or used by or
binding on such Seller;
(c) violate or contravene any law, statute, rule or regulation,
or any order, writ, judgment, injunction, decree, determination or award
currently in effect and applicable to such Seller; or
33
<PAGE>
(d) other than in respect of the HSR Act (as defined in Section
5.5), require any action, consent, approval or authorization of, or review by,
or declaration, registration or filing with, or notice to, any court,
arbitrator, governmental agency or other regulatory authority, or any stock
exchange or similar self-regulatory organization.
3.4. No Brokers or Finders. Except as contemplated by Section 10.5 with
respect to the fees of William L. Rogers and his affiliates, such Seller and its
affiliates (excluding the Company and the other Sellers) (a) have not employed
(and will not employ) any broker or finder, and (b) have not incurred (and will
not incur) any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated by this Agreement.
3.5. Investment Intent. The shares of Penhall Class A Common Stock,
Penhall Class B Common Stock, Class A Common Stock, Class B Common Stock, Common
Stock, Series B Preferred Stock or Senior Exchangeable Preferred Stock to be
acquired by such Seller pursuant to this Agreement are being acquired for such
Seller's own account and (except for Seller's BRS Purchase Shares) not with a
view to or for sale in connection with any distribution thereof. Each Seller
acknowledges that none of the Penhall Class A Common Stock, Penhall Class B
Common Stock, Class A Common Stock, Class B Common Stock, Common Stock, Series B
Preferred Stock or Senior Exchangeable Preferred Stock has been registered under
the Securities Act of 1933, as amended, or any state securities laws, and that
each certificate representing the Penhall Class A Common Stock, Penhall Class B
Common Stock, Class A Common Stock, Class B Common Stock, Common Stock, Series B
Preferred Stock or Senior Exchangeable Preferred Stock shall bear a legend
setting forth or referring to the restrictions contained in this Agreement and
to such other restrictions as may be required by applicable law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BRS AND NEWCO
Subject to Section 10.15, BRS and Newco hereby represent and warrant,
jointly and severally, to the Sellers as follows:
4.1. Organization. (a) Newco is a corporation duly incorporated,
validly existing, and in good standing under the laws of the jurisdiction of its
formation, and has all requisite power and authority to carry on its business as
it is now being conducted.
(b) BRS is a limited partnership duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
formation, and has all requisite power and authority to carry on its business as
it is now being conducted.
4.2. Authorization; Binding Agreement. (a) Newco has full corporate
power and authority to execute and deliver this Agreement and each other
document or instrument contemplated hereby, to perform its obligations hereunder
and thereunder, and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by Newco of this Agreement and each other
document or instrument executed or to be executed by it in connection
34
<PAGE>
herewith, and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate
action. This Agreement has been, and each other document or instrument to be
executed by Newco in connection herewith will be, duly executed and delivered by
Newco, and constitutes, or will constitute, legal, valid and binding obligations
of Newco, enforceable against Newco in accordance with their terms.
(b) BRS has full partnership power and partnership authority to
execute and deliver this Agreement and each other document or instrument
contemplated hereby and to which it is party, to perform its obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery by BRS of this Agreement and each other
document or instrument executed or to be executed by it in connection herewith,
and the consummation of the transactions contemplated hereby and thereby, have
been duly and validly authorized by all necessary corporate or partnership
action. This Agreement has been, and each other document or instrument to be
executed by BRS in connection herewith will be, duly executed and delivered by
BRS, and constitutes, or will constitute, legal, valid and binding obligations
of BRS, enforceable against BRS in accordance with their terms .
4.3. Conflicts, Consents and Approvals. Except as set forth in Schedule
4.3, the execution and delivery by Newco and BRS of this Agreement and any other
documents or instruments contemplated hereby, the performance by Newco and BRS
of their respective obligations hereunder and thereunder, and the consummation
by Newco and BRS of the transactions contemplated hereby and thereby, do not and
will not:
(a) violate or conflict with or result in a breach of any
provision of the Articles of Incorporation or Bylaws of Newco or the partnership
agreement of BRS;
(b) require any consent, approval or notice under, or conflict
with, or result in a violation or breach of, or constitute (with or without the
giving of notice or the lapse of time or both) a default (or give rise to any
right of termination, modification, cancellation or acceleration or result in
the creation or imposition of any Lien upon the property of Newco or BRS) under,
any of the terms, conditions or provisions of any (i) note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which Newco
or BRS is a party, under or pursuant to which any of their respective properties
or assets are held or by which any portion of their respective properties or
assets may be bound, or (ii) any permit, license, approval, franchise or other
governmental or regulatory authorization held or used by or binding on Newco or
BRS, except for conflicts, violations, breaches, defaults or other events that
could not reasonably be expected to have a material adverse effect on the
assets, liabilities, operations, business, results of operations or condition
(financial or otherwise) of Newco or BRS or on the ability of Newco or BRS to
consummate the transactions contemplated hereby;
(c) violate or contravene any law, statute, rule or regulation,
or any order, writ, judgment, injunction, decree, determination or award
currently in effect; or
(d) require any action, consent, approval or authorization of,
or review by, or declaration, registration or filing with, or notice to, any
court, arbitrator, governmental agency or other regulatory authority.
35
<PAGE>
4.4. Litigation. There is no claim, action, suit, investigation or
proceeding pending or, to the knowledge of Newco or BRS, threatened against or
involving Newco or BRS, or any of their respective properties or rights, which,
if adversely determined, could reasonably be expected to have a material adverse
effect on the ability of Newco or BRS to perform their respective obligations
hereunder.
4.5. Financing. Newco has received and delivered to the Company true
and correct copies of (i) letter(s) from Bankers Trust Corporation and CS First
Boston Corporation regarding high yield debt financing in the amount of
$100,000,000 and (ii) a letter from Bank of America regarding senior bank
financing in the amount of $60,000,000. The letters referred to in clauses (i)
and (ii) above are collectively referred to as the "Financing Letters." The
Financing Letters have been accepted by Newco and BRS and are in full force and
effect.
4.6. No Brokers or Finders. Except as set forth in Schedule 4.6,
neither Newco nor BRS, nor any of their respective affiliates, nor any of their
respective officers, directors, or employees, (a) has employed (or will employ)
any broker or finder, or (b) has incurred (or will incur) any liability for any
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated by this Agreement.
4.7. Investment. BRS is acquiring the BRS Purchase Shares for its own
account and not with a view to any resale or distribution of such stock in
violation of the Securities Act of 1933, as amended, or any other applicable
laws of the United States or any state therein. By reason of BRS's business or
financial experience, it has the capacity to protect its interests in connection
with the transactions contemplated by this Agreement.
ARTICLE V
CERTAIN COVENANTS
5.1. Conduct of the Company's Business. (a) Except as contemplated by
this Agreement, during the period from the date of this Agreement to the Closing
Date, the Company and its Subsidiaries shall, and the Sellers shall cause the
Company and the Subsidiaries to, conduct the operations of the Company and the
Subsidiaries in the ordinary course of business and consistent with past
practice, and shall use commercially reasonable efforts to preserve intact their
business organization, keep available the services of their officers and key
employees, and maintain satisfactory relationships with material customers,
suppliers, contractors, distributors, licensors, licensees and others having
business relationships with the Company. During the period from the date of this
Agreement to the Closing Date, neither the Company, any Subsidiary nor any
Seller will take any action reasonably within their control, or omit to take any
action reasonably within their control, which would cause any of the
representations and warranties in Article II and Article III hereof to become
untrue in any material respect.
(b) Without limiting the foregoing, during the period from the
date of this Agreement to the Closing Date, neither the Company nor any
Subsidiary shall, and the Sellers shall cause the Company and the Subsidiaries
not to, take any of the actions specified in Section
36
<PAGE>
2.17 without the prior written consent of Newco, except the Company and the
Subsidiaries may consummate the acquisition of HSI.
5.2. Notices Prior to Closing. (a) Prior to the Closing, the Company
shall give prompt notice to Newco of:
(i) any breach or default by the Company of any of its
representations, warranties, covenants or agreements hereunder or under any
document or instrument contemplated hereby;
(ii) any notice or other communication to the Company from
any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement;
(iii) any notice or other communication to the Company from
any Authority in connection with the transactions contemplated by this
Agreement;
(iv) any materially adverse change in the assets,
liabilities, operations, business, results of operations or financial condition
of the Company and its Subsidiaries, taken as a whole; and
(v) any claim, action, or proceeding against the Company or
a Subsidiary which could reasonably be expected to have a Material Adverse
Effect.
(b) Prior to the Closing, each Seller shall give prompt notice
to Newco of:
(i) any breach or default by such Seller or any of such
Sellers' representations or warranties set forth in Article III, or such
Seller's covenants or agreements hereunder or under any document or instrument
contemplated hereby;
(ii) any notice or other communication to such Seller from
any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement.
(iii) any notice or other communication to such Seller from
any Authority in connection with the transactions contemplated by this
Agreement; and
(iv) any claim, action, or proceeding against such Seller
which could reasonably be expected to have a Material Adverse Effect.
(c) Prior to the Closing, BRS and Newco shall give prompt notice
to the Sellers of:
(i) any breach or default by BRS or Newco of any of its
representations, warranties, covenants or agreements hereunder or under any
document or instrument contemplated hereby;
37
<PAGE>
(ii) any notice or other communication to BRS or Newco from
any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement;
(iii) any notice or other communication to BRS or Newco from
any Authority in connection with the transactions contemplated by this
Agreement; and
(iv) any claim, action, or proceeding which could reasonably
be expected to materially adversely affect the ability of BRS or Newco to
consummate the transactions contemplated hereby.
5.3. Access and Information. Prior to the Closing Date, the Company and
the Subsidiaries will give Newco (and any lender providing financing in
connection with the transactions contemplated hereby) and their authorized
representatives (including without limitation accountants, environmental
auditors, surveyors and legal counsel) access at all reasonable times during
business hours, upon reasonable notice, to all of the offices, warehouses and
other facilities of the Company and the Subsidiaries, to all contracts,
agreements, commitments, books and records of the Company and the Subsidiaries
and to the officers and key employees (including auditors) of the Company and
the Subsidiaries.
5.4. Public Announcements. From the date of this Agreement until
Closing, BRS and Newco, on the one hand, and the Sellers, the Company and the
Subsidiaries, on the other hand, shall not, and shall cause their affiliates not
to, issue or cause the publication of any press release or any other public
announcements with respect to this Agreement or the transactions contemplated
hereby without the prior written consent of the other party, except (subject to
the other party's right to review and consult in the formulation of the
published material) as required by applicable law and as is customary in
connection with the transactions contemplated by the Financing. The provisions
of this Section 5.4 shall survive any termination of this Agreement pursuant to
Section 7.1.
5.5. Hart-Scott-Rodino Act. As soon as practicable after the date of
this Agreement, Newco, the Sellers and the Company, in cooperation with each
other, shall file (or cause to be filed) with each of the United States
Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") any
reports or notifications that may be required to be filed by them under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), in connection with the transactions contemplated by this Agreement, and
shall use their respective reasonable best efforts to obtain early termination
of all waiting periods under the HSR Act. All fees due from any party to the FTC
or DOJ under the HSR Act in connection with the filing of any of those reports
or notifications shall be shared equally by the Company and BRS (subject to
Section 10.5 hereof).
5.6. Further Assurances. The Sellers, the Company and the Subsidiaries,
on the one hand, and BRS and Newco, on the other hand, agree that subsequent to
the Closing Date, at the request of the other party, they will execute and
deliver, or cause to be executed and delivered, to the other party such further
instruments and take such other reasonable actions as may be necessary to carry
out the transactions contemplated by this Agreement (which, except as
38
<PAGE>
otherwise provided herein, shall not include any obligation of any party to make
payments or incur financial obligations).
5.7. Transfer of Certain Assets. (a) Prior to or simultaneous with the
Closing, the Company will transfer and assign to Roger C. Stull, without
representation, warranty or recourse, all of its right, title and interest in
and to (i) all of the shares of capital stock of The Wooditch Group held by the
Company (the "Wooditch Shares"), and (ii) the six automobiles identified on
Schedule 5.7 hereto. Roger C. Stull shall indemnify, defend and hold harmless
the Company Indemnified Parties (as hereafter defined) from and against any and
all Losses (as hereafter defined) in respect of (i) Taxes attributable to the
transfer of the Wooditch Shares and the automobiles identified on Schedule 5.7
and (ii) the ownership and use of the automobiles identified on Schedule 5.7
following such transfer.
(b) It is acknowledged that Roger C. Stull and Ann R. Stull own
the following life insurance policies, which are subject to split dollar
understandings and Assignments of Life Insurance Policies as Collateral with the
Company: (i) Northwestern Mutual, Nos. 7228156, 7494474 and 9161473 (Roger C.
Stull, insured); and Northwestern, Mutual Nos. 7555323 and 9372584 (Ann R.
Stull, insured). As of the Closing, (A) the Company and the Stulls will
terminate their split dollar understandings and the Assignments of Life
Insurance Policy as Collateral, (B) the Company will relinquish any and all
claims against the Stulls for reimbursement of premiums paid by the Company on
the policies (C) the Stulls will relinquish any and all claims against the
Company arising out of borrowings by the Company against the policies, and (D)
the Stulls will own the policies free and clear of any claims by the Company.
5.8. Voting, Shareholders Agreement and Other Matters. (a) Each of the
Sellers hereby consents to the execution and delivery by the Sellers and the
Company of this Agreement and the performance of the transactions contemplated
hereby, including, without limitation, to the extent such execution, delivery or
performance conflict with the provisions of the Shareholders Agreements (as
defined below). On or prior to the Closing Date, each of the Sellers and the
Company shall terminate the agreements identified under the heading "Stock
Buy-Out Agreements" on Schedule 2.2(c) hereto (the "Shareholders Agreements").
(b) Other than pursuant to the Exchange and in accordance with
Article I hereto, each Seller hereby agrees not to Transfer (as hereafter
defined) any shares of Existing Company Stock, Penhall Class A Common Stock,
Penhall Class B Common Stock, Class A Common Stock or Class B Common Stock from
the date of this Agreement. As used herein, "Transfer" means the making of any
sale, exchange, assignment, hypothecation, gift, security interest, pledge or
other encumbrance, or any contract therefor, any voting trust or other agreement
or arrangement with respect to the transfer of voting rights (including any
proxy or similar arrangement (whether or not revocable)) or any other beneficial
interest in any of the Existing Company Stock, Penhall Class A Common Stock,
Penhall Class B Common Stock, Class A Common Stock or Class B Common Stock, the
creation of any other claim thereto or any other transfer or disposition
whatsoever, whether voluntary or involuntary, affecting the right, title,
interest or possession in or to such Existing Company Stock, Penhall Class A
Common Stock, Penhall Class B Common Stock, Class A Common Stock or Class B
Common Stock.
39
<PAGE>
(c) Each of the Management Stockholders agrees to execute and
deliver at the Closing a Securities Holders Agreement substantially in the form
attached hereto as Exhibit F.
(d) Each Seller, by executing and delivering this Agreement,
hereby authorizes, approves and consents to, as a stockholder of the Company and
PCC, and in the manner provided under Section 603 of the CGCL and Section 704 of
the ABCA, (i) the execution, delivery and performance by the Company and PCC and
their Subsidiaries of this Agreement and the transactions contemplated hereby
(including, without limitation, the transactions contemplated by the
Compensation Agreement (as defined in Section 6.2(i)), and (ii) officers of the
Company and PCC executing and delivering such agreements, documents,
assignments, certificates and other instruments and taking such other action as
they may deem necessary, advisable, convenient or proper in connection with this
Agreement and the transactions contemplated hereby. Each Seller will take all
additional required or appropriate actions, as directors and/or stockholders, to
vote for, consent to, approve, adopt and otherwise effect the Merger and the
other transactions contemplated hereby.
5.9. Competition. (a) Following the Closing, each Seller set forth on
Schedule 5.9 hereto, on behalf of itself and its affiliates, agrees that, for
the period specified opposite such Seller's name on Schedule 5.9 hereto, neither
it nor its affiliates shall, without the prior written consent of the Surviving
Corporation, directly or indirectly, as owner, partner, agent, employee,
consultant or otherwise, (i) engage in any business in the Territory (as defined
below) which provides services or sells or leases products similar or equivalent
to the products or services provided or sold immediately after the Closing by
the Company and the Subsidiaries (a "Competitive Business") or (ii) solicit,
attempt to solicit for employment or otherwise engage the services of, or become
associated in any Competitive Business with, any person who was an employee,
officer or director of the Company or the Subsidiaries at any time during the
twelve (12) months preceding the date of this Agreement. Without limiting the
generality of the foregoing, following the Closing, Roger C. Stull, on behalf of
himself and his affiliates, agrees that, for the period specified opposite Mr.
Stull's name on Schedule 5.9 hereto, neither he nor his affiliates shall,
without the prior written consent of the Surviving Corporation, directly or
indirectly, as owner, partner, agent, employee, consultant or otherwise, assist
or promote in any manner Gregory J. Stull, Kimberlie R. McTavish, Christine
Marie Kiser or Nicole Lynn Stull (the "Stull Children") in engaging in any
activity prohibited by the foregoing sentence, it being understood and agreed
that if any of the Stull Children engages in any activity described in this
Section 5.9(a) during the period specified opposite Roger C. Stull's name on
Schedule 5.9 hereto, then there shall be a rebuttable presumption that Roger C.
Stull assisted or promoted such activity. For purposes of this Agreement,
"Territory" shall mean each and every county located in the states of
California, Arizona, Nevada, Minnesota, Alabama, Arkansas, Colorado, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New
Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia,
Washington, West Virginia, Wisconsin, Wyoming, and all other counties of other
states of the United States or foreign jurisdictions in which the Company has
conducted business, or during the period applicable to any Seller, shall have
conducted business. None of the foregoing shall (i) prevent any Seller from
owning up to 5% of the outstanding equity of a publicly-traded company or from
making indirect investments through an investment
40
<PAGE>
partnership or other investment entity in any corporation, partnership, limited
liability company or other person or entity, (ii) prevent Roger C. Stull from
participating in charitable, business or trade associations, or in the auto
racing industry in any respect, or (iii) be construed as being binding in any
way on the Stull Children or on William L. Rogers or his affiliates (other than
an affiliate who is a Seller listed in Schedule 5.9).
(b) The parties agree that to the extent any provision or
portion of Section 5.9(a) shall be held, found or deemed to be unreasonable,
unlawful or unenforceable by a court of competent jurisdiction, then any such
provision or portion thereof shall be deemed to be modified to the extent
necessary in order than any such provision or portion thereof shall be legally
enforceable to the fullest extent permitted by applicable law; and the parties
do further agree that any court of competent jurisdiction shall, and the parties
hereto do hereby expressly authorize, require and empower any court of competent
jurisdiction to, enforce any such provision or portion thereof in order that any
such provision or portion thereof shall be enforced to the fullest extent
permitted by applicable law.
(c) As the violation by a Seller or its affiliates of the
provisions of this Section 5.9 would cause irreparable injury to the Surviving
Corporation, and there is no adequate remedy at law for such violation, the
Surviving Corporation shall, notwithstanding anything to the contrary herein,
have the right in addition to any other remedies available, at law or in equity,
to seek to enjoin such Seller or its affiliates in a court of equity from
violating such provisions. Each Seller, on behalf of itself and its affiliates,
hereby waives any and all defenses it may have on the ground of lack of
jurisdiction or competence of the court to grant an injunction or other
equitable relief, or otherwise. The existence of this right shall not preclude
any other rights and remedies at law or in equity which the Surviving
Corporation may have. The prevailing party in any enforcement action or court
proceeding under this Section 5.9 shall be entitled to the extent permitted by
law to reimbursement from the other party for all of the prevailing party's
costs, expenses and attorneys' fees.
5.10. Consents. Following the execution and delivery of this Agreement,
the Company shall use commercially reasonable efforts to obtain the consents
required from the relevant parties pursuant to the contracts (including the
Leases) set forth on Schedule 2.4 (it being understood that neither the Company
nor any Seller shall be required to execute any guaranty, incur any other
obligation or pay any money to any third party or commence any legal,
administrative or other proceeding).
5.11. Best Efforts. Each of the parties hereto will use its reasonable
best efforts to cause the conditions to Closing set forth herein to be satisfied
as soon as reasonably practicable.
5.12. Employees. The Company, the Sellers, BRS and Newco shall use
their reasonable best efforts to cooperate with one another in making any
required communications with current or former employees regarding the
transactions contemplated by this Agreement and any employee benefit plans or
other benefit arrangements.
5.13. Financing. BRS and Newco will use their commercially reasonable
efforts to obtain for the Company the debt financing required to effect the
transactions contemplated by this
41
<PAGE>
Agreement and to pay related fees and expenses on terms and conditions
reasonably satisfactory to Newco (the "Financing").
5.14. Estoppel Certificates. The Company and the Subsidiaries shall use
their commercially reasonable efforts to obtain on or prior to the Closing Date,
landlord's estoppel certificates in form and substance reasonably acceptable to
Newco and dated a date occurring not more than twenty (30) days prior to the
Closing Date from each of the lessors under all of the Leases (collectively, the
"Estoppel Certificates"). No Estoppel Certificate shall be conditioned upon any
increase in rental or other payment, a reduced term or any other change in the
terms and provisions of the subject lease.
5.15. Title Insurance. The Company and the Subsidiaries shall use their
commercially reasonable efforts to obtain, at their sole expense, good and
valid, irrevocable ALTA or CLTA title insurance binders or commitments
(collectively, the "Title Commitments," and each a "Title Commitment"), in final
form, from one or more title insurance companies reasonably acceptable to Newco
(collectively, the "Title Company"), irrevocably committing the Title Company
(subject only to the satisfaction of any industry standard requirements
contained in the Title Commitment and reasonably acceptable to Newco) to
issuing: (i) date down endorsements to, in form and substance acceptable to
Newco or, at the Company's election, reissuances of, with effective dates of the
Closing Date (collectively, the "Date Down Endorsements"), existing policies
held on the date hereof by the Company or the Subsidiary owning the covered
parcel of Real Property in amounts substantially the same as those of the
existing policies or in such higher amounts as may be required by any lender
providing financing in connection with the transactions contemplated hereby and
otherwise in form and substance acceptable to Newco, or (ii) with respect to
parcels of Owned Real Property not covered by the preceding clause (i), ALTA or,
with respect to all Owned Real Property located in California, CLTA form of
title insurance policies insuring good, valid, indefeasible fee simple title to
each parcel of the Owned Real Property in the Company in the respective amounts
listed on Schedule 2.11(a), where applicable, or in amounts substantially the
same as those of the existing policies or in such higher amounts as may be
required by any lender providing financing in connection with the transactions
contemplated hereby, in any case subject to no Liens or exceptions to title
other than the following (collectively, the "Permitted Title Exceptions"): (x)
matters listed on Schedules B, except, subject to the last sentence of Section
5.19, for the Exceptions That Will Not Exist At Closing, (y) minor imperfections
of title, conditions, encroachments, easements, covenants or restrictions, if
any, none of which is substantial in amount and none of which, individually or
in the aggregate, materially detracts from the value of the affected property or
impairs the use of the affected property in the manner such property is
currently being used or impairs the conduct of the Company's or any Subsidiary's
business, and (z) Liens for real estate Taxes and assessments not yet due and
payable, (collectively the "Title Policies"). Newco agrees that the issuers of
the existing policies are acceptable and that First American Title Insurance
Company shall be an acceptable issuer of any new title policy. Each of the Title
Commitments shall be effective as of a date occurring not earlier than the date
of the Original Agreement and the effective dates of each of them shall be
brought down to the time of the Closing. Each such Title Commitment shall
include such endorsements thereto as may reasonably be requested by Newco,
provided that Newco shall bear the cost of any such endorsements. On or prior to
the Closing Date, the Company and the Subsidiaries shall execute and deliver, or
cause to be executed and delivered, to the Title Company any affidavits
reasonably
42
<PAGE>
requested by the Title Company in connection with the issuance of the Title
Commitments, the Title Policies or the Date Down Endorsements in form and
substance as required hereunder. The Company shall pay at Closing all premiums
and other fees, costs and expenses necessary for the issuance of the Title
Policies and Date Down Endorsements.
5.16. Surveys. If any lender providing financing in connection with the
transactions contemplated hereby requires surveys of any of the Owned Real
Property or requires title insurance upon such Owned Real Property of a nature
or extent that a survey thereof is, for practical purposes, required, then, with
respect to all of those parcels for which surveys are so required, the Company
and the Subsidiaries shall use their commercially reasonable efforts to obtain,
at their sole expense, no later than fifteen (15) days prior to Closing,
as-built surveys of each parcel of the Owned Real Estate (the "Surveys") in
accordance with the 1992 minimum standard detail requirements for ALTA/ACSM Land
Title Surveys, including, to the extent required by such lender or for the
issuance of such title insurance, Table A items 2,3,4,6,7,8,9,10,11 and 13 and
with the Accuracy Standards (as adopted by ALTA and ACSM) of an Urban Survey,
dated after April 20, 1998, and showing, without limiting the foregoing, with
respect to each parcel of the Owned Real Estate, all easements and other
appurtenances and all easements and other encumbrances burdening such parcel.
Each Survey shall be certified to such lender, the Company, Newco, the Title
Company and any other person reasonably requested by Newco and shall comply with
any requirements imposed by the Title Company as a condition to the removal of
any survey exception from the general exceptions to the Title Policy covering
the Owned Real Property shown on the property surveyed.
5.17. FIRPTA. Either (a) on or before the Closing Date, the Company and
PCC shall issue to Newco and BRS a certificate in compliance with U.S. Treasury
Regulation Section 1.1445-2(c)(3) certifying that the shares of Class A Common
Stock and the BRS Purchase Shares are not a U.S. real property interest or (b)
each Seller shall issue to Newco and BRS a certificate in compliance with U.S.
Treasury Regulation Section 1.1445-2(b)(2) certifying that such Seller is not a
foreign person.
5.18. Zoning Letters. The Company and the Subsidiaries shall, at the
request of BRS or Newco, reasonably cooperate with Newco in obtaining building
code and zoning code compliance letters stating that each parcel of Real
Property complies with the building and zoning codes applicable thereto and
otherwise in form and substance satisfactory to Newco from the governmental
authorities having jurisdiction over such matters with respect to such parcel of
Real Property for which BRS or Newco requests such letters (collectively, the
"Zoning Letters").
5.19. Exceptions That Will Not Exist At Closing. Immediately upon its
execution of this Agreement, the Company and the Subsidiaries shall use their
commercially reasonable efforts to have satisfied or discharged of record all of
the Exceptions That Will Not Exist At Closing. Notwithstanding the foregoing,
the parties hereto acknowledge and agree that (a) the Continuing Exceptions will
still exist at Closing, (b) after the Closing, the Sellers shall use their
reasonable best efforts (and the Surviving Corporation shall reasonably
cooperate with the Sellers) to have the Continuing Exceptions satisfied or
discharged, and (c) the Sellers shall indemnify, defend and hold harmless the
Company Indemnified Parties from and against any and all losses that may arise
43
<PAGE>
from a failure of the Sellers to have satisfied or discharged after the Closing
the Continuing Exceptions.
5.20. Termination of Certain Promotional Activities. The parties
acknowledge that the Company and the Subsidiaries have received from the auto
racing teams managed by Roger C. Stull advertising and promotional benefits. The
parties agree that, immediately after the Closing, the Surviving Corporation and
its subsidiaries shall have no obligation to sponsor and make any payments for
such racing teams, shall cease to receive such advertising and promotional
benefits, and shall have no continuing rights to sponsor such auto racing teams.
5.21. Release of Stulls from Fidelity Agreement. Following the Closing,
the Surviving Corporation shall use its reasonable best efforts to cause Roger
C. Stull and Ann R. Stull to be released at the earliest practicable date
following the Closing, through the procurement of bonds from other issuers to
replace the bonds previously issued by Fidelity and Deposit Company of Maryland
or through other means, from all obligations and liability under the Fidelity
Agreement (as defined in Section 8.5(1)), provided that the Surviving
Corporation shall not be required to make out of pocket expenditures of more
than $150,000 in connection with such efforts.
ARTICLE VI
CONDITIONS
6.1. Conditions Precedent to Each Party's Obligations. The respective
obligations of each party to consummate the transactions contemplated hereby
shall be subject to fulfillment (or written waiver) of each of the following
conditions:
(a) no order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been enacted, entered, promulgated or
enforced by any court, governmental authority or regulatory body which
restrains, prohibits or prevents the consummation of the transactions
contemplated hereby; and
(b) any waiting period applicable to the transactions
contemplated hereby under the HSR Act shall have been terminated or expired.
6.2. Conditions Precedent to BRS' and Newco's Obligations. BRS' and
Newco's obligation to consummate the transactions contemplated hereby shall be
subject to the fulfillment of each of the following additional conditions, any
one or more of which may be waived in writing by BRS and Newco:
(a) each of the Sellers and the Company shall have performed in
all material respects its obligations under this Agreement required to be
performed on or prior to the Closing Date pursuant to the terms hereof;
(b) the representations and warranties of the Sellers and the
Company contained in this Agreement that are not qualified by materiality shall
be true and correct in all material respects, and the representations and
warranties of the Sellers and the Company set forth in this Agreement that are
qualified by materiality shall be true and correct, as of the time
44
<PAGE>
immediately prior to the consummation of the Exchange (irrespective of any
notice delivered to Newco after the date hereof), with the same force and effect
as though such representations and warranties had been made as of the time
immediately prior to the consummation of the Exchange;
(c) there shall not have occurred after the date hereof any
material adverse change in the assets, liabilities, operations, business,
results of operations or financial condition of the Company and its Subsidiaries
taken as a whole;
(d) Newco shall have received a certificate of the Seller
Representative on behalf of the Sellers, dated the Closing Date, certifying to
the fulfillment of the conditions set forth in clauses (a), (b) and (c) above;
(e) Newco shall have received a certificate, dated the Closing
Date, duly executed by the Secretary or an Assistant Secretary of the Company
certifying as to: (i) the attached copy of the resolutions of the Board of
Directors (or a duly authorized committee or officer) of the Company authorizing
and approving the execution, delivery and performance of, and the consummation
of the transactions contemplated by, this Agreement and any other documents or
instruments contemplated hereby, and stating that the resolutions thereby
certified have not been amended, modified, revoked or rescinded; and (ii) the
incumbency, authority and specimen signature of each officer of the Company
executing this Agreement or any other document or instrument contemplated
hereby;
(f) Newco shall have received a certificate of the Company's
organization, valid existence and good standing as a domestic corporation in the
state of its incorporation as of a date no more than five (5) days prior to the
Closing Date;
(g) Newco shall have received from counsel for the Company and
for the Sellers an opinion dated the Closing Date in the form attached hereto as
Exhibit G and from counsel for the Management Stockholders an opinion in form
and substance reasonably satisfactory to Newco;
(h) Each of Management Stockholders shall have validly executed
and delivered the Securities Holders Agreement referred to in Section 5.8;
(i) On or prior to June 30, 1998, each of the Management
Stockholders, Floyd E. Skor, Charles D. Steichen and the Company shall have
validly executed and delivered the Compensation, Tax Consistency and
Indemnification Agreement substantially in the form attached hereto as Exhibit H
(the "Compensation Agreement");
(j) Each of the persons designated on Schedule 6.2(j) shall have
validly executed and delivered the Employment Agreements substantially in the
forms attached hereto as Exhibits I and J (the "Employment Agreements");
(k) The Surviving Corporation shall have adopted a stock-based
management incentive plan covering 5% of the Surviving Corporation's common
equity (the "Stock Option Plan");
45
<PAGE>
(l) The Company shall have received (and furnished to Newco
evidence thereof reasonably satisfactory to Newco) all of the approvals and
consents from third parties and Authorities designated on Schedule 6.2(l) (and
such approvals and consents shall not have expired or been withdrawn as of the
Closing Date);
(m) Newco shall have received the proceeds of the Financing on
terms reasonably acceptable to Newco;
(n) Each Seller, on behalf of itself and its affiliates (other
than the Company and the Subsidiaries) (i) shall have executed and delivered to
the Company and the Subsidiaries and the Surviving Corporation a Mutual Release
and Satisfaction in the form of Exhibit K hereto, and (ii) shall have executed
and delivered to the Company and the Subsidiaries and the Surviving Corporation
all documents necessary to release or terminate any Liens in favor of such
Seller or its affiliates (other than the Company and the Subsidiaries) on the
assets, properties or rights of the Company and the Subsidiaries and the
Surviving Corporation and (iii) shall have terminated the Shareholders
Agreements;
(o) Newco and the Company and any lender providing financing to
the transactions contemplated hereby, shall have received such Title
Commitments, Title Policies, Surveys and Estoppel Certificates as shall be
required by such lender in order to provide such financing;
(p) On or before the Closing Date, Newco shall have received
evidence reasonably satisfactory to it that the Exceptions That Will Not Exist
At Closing (other than the Continuing Exceptions) have been satisfied or
discharged and no longer encumber or otherwise affect any of the Real Property;
(q) The Company and the Sellers shall have delivered updated
disclosure Schedules, if any, pursuant to Section 6.4; and
(r) The Sellers shall have caused the shareholder approval to be
made in accordance with Section 10.14.
6.3. Conditions Precedent to the Sellers' Obligations. The Sellers' and
the Company's obligation to consummate the transactions contemplated hereby
shall be subject to the fulfillment of each of the following additional
conditions, any one or more of which may be waived in writing by the Seller
Representative and the Company:
(a) Each of BRS and Newco shall have performed in all material
respects its obligations under this Agreement required to be performed on or
prior to the Closing Date pursuant to the terms hereof;
(b) the representations and warranties of each of BRS and Newco
contained in this Agreement that are not qualified by materiality shall be true
and correct in all material respects, and the representations and warranties of
BRS and Newco set forth in this Agreement that are qualified by materiality
shall be true and correct, on and as of the Closing Date (irrespective of any
notice delivered to the Sellers or the Company after the date hereof) with the
46
<PAGE>
same force and effect as though such representations and warranties had been
made on and as of the Closing Date;
(c) the Sellers and the Company shall have received a
certificate of an officer of BRS and Newco, dated the Closing Date, on behalf of
Newco, certifying to the fulfillment of the conditions set forth in clauses (a)
and (b) above;
(d) the Sellers and the Company shall have received a
certificate, dated the Closing Date, duly executed by an officer of Newco
certifying as to: (i) the attached copy of the resolutions of Newco authorizing
and approving the execution, delivery and performance of, and the consummation
of the transactions contemplated by, this Agreement and any other documents or
instruments contemplated hereby, and stating that the resolutions thereby
certified have not been amended, modified, revoked or rescinded; and (ii) the
incumbency, authority and specimen signature of each officer of Newco executing
this Agreement or any other document or instrument contemplated hereby;
(e) the Sellers and the Company shall have received a
certificate, dated the Closing Date, duly executed by an authorized person of
BRS certifying as to: (i) the attached copy of the resolutions of BRS
authorizing and approving the execution, delivery and performance of, and the
consummation of the transactions contemplated by, this Agreement and any other
documents or instruments contemplated hereby, and stating that the resolutions
thereby certified have not been amended, modified, revoked or rescinded; and
(ii) the incumbency, authority and specimen signature of each authorized person
of BRS executing this Agreement or any other document or instrument contemplated
hereby;
(f) the Sellers and the Company shall have received from counsel
for Newco an opinion dated the Closing Date in the form of Exhibit L;
(g) BRS and the Surviving Corporation shall have validly
executed and delivered the Securities Holders Agreement referred to in Section
5.8;
(h) On or prior to June 30, 1998, the Company shall have validly
executed and delivered the Compensation Agreement;
(i) The Surviving Corporation shall have validly executed and
delivered the Employment Agreements;
(j) The Surviving Corporation shall have adopted the Stock
Option Plan;
(k) the Company and the Subsidiaries shall have executed and
delivered to the Sellers a Mutual Release and Satisfaction in the form of
Exhibit M hereto; and
(l) BRS and Newco shall have furnished to the Sellers and the
Company evidence reasonably satisfactory to the Seller Representative and the
Company that the purchasers of the senior subordinated notes in the Financing
and Newco's and the Surviving Corporation's other lenders (including all bank
lenders) have consented to the payment of the Cash Merger Consideration, it
being understood that incorporation of the language provided by Sellers prior to
47
<PAGE>
the date hereof for inclusion in the indenture for the senior subordinated notes
and the loan agreements with bank lenders to Newco and the Surviving Corporation
shall constitute conclusively such satisfactory evidence.
6.4. Up-Dating of Disclosure Schedules. Prior to the Closing, the
Company and the Sellers may deliver to Newco and BRS revised disclosure
Schedules modifying or qualifying the representations and warranties of the
Sellers and the Company under Articles II and III hereof with respect to any
matter or event that causes an inaccuracy or breach of a representation or
warranty and that first arises prior to the Closing Date (whether before or
after the date of this Agreement), except for matters or events of which any
Seller (solely with respect to such Seller's representations and warranties in
Article III) or the Company (solely with respect to the Company's and the
Sellers' representations and warranties in Article II) had knowledge as of the
date of this Agreement; provided, that the Company also may add matters or
events to the revised disclosure Schedules of which Floyd E. Skor, but no other
person listed in Section 10.12(c), had knowledge as of the date of this
Agreement. Such revised disclosure Schedules shall be deemed to have modified
the representations and warranties made by the Sellers and the Company as of the
date of the Original Agreement and to be made as of the time immediately prior
to the consummation of the Exchange and to have superseded any similarly
numbered Schedule delivered to Newco and BRS on the date hereof. The foregoing,
however, shall not affect the condition to the Closing obligations of BRS and
Newco contained in Section 6.2(b) as such condition relates to such
representations and warranties prior to giving effect to the delivery of such
revised Schedules. In the event that the condition to the Closing obligations of
BRS and Newco set forth in Section 6.2(b), as such condition relates to
representations and warranties, shall not have been satisfied, but would be
satisfied after giving effect to the delivery of revised disclosure Schedules
under this Section 6.4, then, subject to Section 8.5(j), the sole remedy of
Newco and BRS in respect of the failure of such condition shall be to elect not
to consummate the transactions contemplated by this Agreement.
ARTICLE VII
TERMINATION AND ABANDONMENT
7.1. Termination. Except with respect to provisions that expressly
survive the termination of this Agreement, this Agreement may be terminated:
(a) by mutual written agreement of BRS, Newco, the Company and
the Sellers;
(b) by BRS or Newco (provided BRS or Newco is not in material
breach of this Agreement), by written notice to the parties hereto, at any time
if (i) the representations and warranties of a Seller or the Company in this
Agreement were incorrect in any material respect when made or at any time
thereafter, or (ii) any of the Sellers or the Company is in breach in any
material respect of any of its covenants or agreements in this Agreement (each,
a "Seller Breach"), and, in either of such cases, such Seller Breach continues
uncured for ten (10) days after written notice thereof by BRS or Newco;
provided, however, if such Seller or the Company (as the case may be) commences
to effect a cure within the foregoing ten-day period, such person shall be
permitted such additional time as may be reasonable (based on the nature of the
Seller
48
<PAGE>
Breach, the possibility for cure, and the effect of delay on the party seeking
termination) to cure so long as such person diligently continues to seek to
effect a cure;
(c) by the Sellers (provided no Seller is in material breach of
this Agreement), by written notice to the parties hereto, at any time if (i) the
representations and warranties of BRS or Newco in this Agreement were incorrect
in any material respect when made or at any time thereafter, or (ii) BRS or
Newco is in breach in any material respect of any of its covenants or agreements
in this Agreement (each, a "Newco Breach"), and, in either of such cases, such
Newco Breach continues uncured for ten (10) days after written notice thereof by
the Sellers; provided, however, if BRS or Newco (as the case may be) commences
to effect a cure within the foregoing ten-day period, such entity shall be
permitted such additional time as may be reasonable (based on the nature of the
Newco Breach, the possibility for cure, and the effect of delay on the party
seeking termination) to cure so long as such entity diligently continues to seek
to effect a cure;
(d) by BRS, Newco or the Sellers, if a court of competent
jurisdiction or governmental or regulatory body shall have issued an order,
decree or ruling, or taken any other action, restraining, enjoining or otherwise
prohibiting the Closing of the transactions contemplated hereby and such order,
decree, ruling or other action shall have become final and non-appealable; or
(e) by BRS, Newco, the Company or the Sellers, if the Closing
shall not have occurred by August 31, 1998; provided, however, that at the time
of any such termination, the terminating party is not in willful and material
breach of any of its representations, warranties, covenants or obligations
hereunder.
7.2. Effect of Termination. If this Agreement is terminated as provided
herein, no party shall have any liability or further obligation to any other
party under the terms of this Agreement or otherwise; provided that if such
termination shall result from the willful breach by the non-terminating party of
any representation or warranty, or the failure of the non-terminating party to
perform a covenant of this Agreement, such party shall be fully liable for any
and all damages incurred or suffered by the other parties as a result of such
failure. The provisions of Section 10.5 shall survive any termination of this
Agreement pursuant to Section 7.1.
ARTICLE VIII
INDEMNIFICATION
8.1. The Sellers' Obligations to Indemnify. Subject to the limitations
and procedures contained in this Article VIII, from and after the Closing, the
Sellers, jointly and severally, shall indemnify, defend and hold harmless Newco,
BRS, the Surviving Corporation and each of their affiliates, and their
respective directors, officers, employees and representatives (each, a "Company
Indemnified Party"; provided that such term shall not include any Seller
regardless of their affiliation with the Surviving Corporation), from and
against any and all claims, losses, settlements, fines, liabilities, damages,
deficiencies, costs or expenses (including interest, penalties and reasonable
attorneys' fees and disbursements) (collectively, "Losses") suffered, sustained,
49
<PAGE>
incurred or required to be paid by any such Company Indemnified Party due to,
based upon, arising out of or otherwise in respect of (i) any inaccuracy in, or
any breach of, any representation or warranty of the Sellers or of the Company
contained in this Agreement (or any schedule hereto or any certificate or other
agreement delivered on behalf of Sellers hereunder), determined without regard
to any materiality, Material Adverse Effect, Material Adverse Change,
substantial compliance or similar exception or qualification contained in or
otherwise applicable to such representation or warranty; provided that, the
indemnification obligation of the Sellers with respect to the representations
and warranties contained in Article III hereof shall be several and not joint as
to each Seller, (ii) any breach of any covenant or agreement of the Sellers or
the Company contained in this Agreement, (iii) any Loss, whether disclosed or
undisclosed and whether existing prior to, on or after the Closing (other than
on account of defaults, violations or breaches arising from actions first
occurring after the Closing by the Surviving Corporation or any of its
subsidiaries under any obligations assumed by it or them in connection with the
transactions contemplated hereby), arising from or relating to any sold or
discontinued business or operation of the Company or any Subsidiary (or any
respective predecessor) or any business or activity conducted by the Company or
any Subsidiary (or any respective predecessor) other than the businesses and
activities conducted by the Company and its Subsidiaries on or after the date of
the Original Agreement, (iv) the enforcement by any Company Indemnified Party of
its rights under this Agreement, (v) any Loss, whether disclosed or undisclosed,
arising from or relating to (A) environmental conditions first occurring,
existing or arising prior to the Closing due to, based upon, arising out of or
otherwise in respect of a Release or threat of Release of Hazardous Substances
at any property owned or leased by the Company or the Subsidiaries prior to the
date of the Original Agreement (but not on the date thereof) (whether into the
air, soil, ground or surface waters on or off-site), (B) the off-site
transportation, storage, treatment, recycling, disposal or spill of Hazardous
Substances (but excluding crushed concrete, concrete slurry, asphalt, rebar and
associated materials that are generated in the ordinary course of operations of
the Company or the Subsidiaries) generated or caused by the Company or the
Subsidiaries, prior to the Closing, or (C) any investigation, remediation or
other response costs ("Remediation Costs") associated with any environmental
conditions identified in connection with the removal or upgrading of any
existing underground storage tanks identified on Schedule 2.12(c) (except for
the cost of removing, upgrading or installing such tanks) not meeting the
December 1998 RCRA technical requirements for such tanks except for conditions
resulting from Releases occurring after the Closing; provided, however, that
with respect to Sections 8.1(v)(A) and (B) above, Sellers shall only be
responsible for such Losses which, individually or in the aggregate but
collectively for such Sections, exceed $50,000, and provided further that with
respect to Section 8.1(v)(C) above, the Surviving Corporation shall be
responsible for the first $100,000 of such Remediation Costs, Sellers shall be
responsible for the next $100,000 of Remediation Costs, and the parties shall
share equally all such Remediation Costs in excess of $200,000.
8.2. The Surviving Corporation's Obligations to Indemnify. Subject to
the limitations and procedures contained in this Article VIII, from and after
the Closing, the Surviving Corporation shall indemnify, defend and hold harmless
each Seller and its affiliates, and their respective directors, officers,
employees and representatives (each, a "Seller Indemnified Party" and, together
with the Company Indemnified Parties, the "Indemnified Parties"), from and
against any and all Losses suffered, sustained, incurred or required to be paid
by any such Seller
50
<PAGE>
Indemnified Party due to, based upon, arising out of or otherwise in respect of
(i) any inaccuracy in, or breach of, any representation or warranty of BRS or
Newco contained in this Agreement (or any certificate or other agreement
delivered by Newco hereunder), (ii) any breach of any covenant or agreement of
the Surviving Corporation, BRS or Newco contained in this Agreement and (iii)
the enforcement by any Seller Indemnified Party of its rights under this
Agreement.
8.3. Notice and Opportunity to Defend. The obligations and liabilities
of any party hereto against which indemnification is sought hereunder with
respect to claims resulting from the assertion of liability by third parties
shall be subject to this Section 8.3.
(a) Promptly after receipt by any Indemnified Party of notice of
any demand or claim or the commencement (or threatened commencement) of any
action, proceeding or investigation (an "Asserted Liability") that could
reasonably be expected to result in a Loss, the Indemnified Party shall give
notice thereof (a "Claims Notice") to any other party obligated to provide
indemnification pursuant to Section 8.1 or 8.2 (each, an "Indemnifying Party").
Each Claims Notice shall describe the Asserted Liability in reasonable detail,
and shall indicate the amount (estimated, if necessary) of the Loss that has
been or may be suffered by the Indemnified Party. The rights of any Indemnified
Party to be indemnified hereunder shall not be adversely affected by its failure
to give, or its failure to timely give, a Claims Notice with respect thereto
unless, and if so, only to the extent that, the Indemnifying Party is materially
prejudiced thereby.
(b) The Indemnifying Party may elect to compromise or defend, at
its own expense and by its own counsel, any Asserted Liability if (i) the claim
involves (and continues to involve) solely monetary damages and the Indemnifying
Party's assumption of the defense or settlement of such claim will not have a
material adverse effect on the Indemnified Party's business, (ii) the
Indemnifying Party states in writing to the Indemnified Party the Indemnifying
Party's good faith belief (based on the facts then known by the Indemnifying
Party) that, as between the two, the Indemnifying Party is solely obligated to
satisfy and discharge the claim, and (iii) the Indemnifying Party makes
reasonably adequate provision to satisfy the Indemnified Party of the
Indemnifying Party's ability to satisfy and discharge the claim (the foregoing
collectively, the "Litigation Conditions"); provided, however, that if the
parties in any action shall include both an Indemnifying Party and an
Indemnified Party, and the Indemnified Party shall have received written advice
of counsel that counsel selected by the Indemnifying Party has a conflict of
interest under applicable standards of professional responsibility because of
the availability of different or additional defenses to the Indemnified Party,
the Indemnified Party shall have the right to select one separate counsel to
participate in the defense of such action on its behalf, at the expense of the
Indemnifying Party; and provided further, however, that the Indemnifying Party
shall forfeit the right to control the defense or settlement of any such claim
if, at any time after assuming the defense or settlement thereof, the
Indemnifying Party no longer satisfies the Litigation Conditions. Subject to the
foregoing, if the Indemnifying Party elects to compromise or defend such
Asserted Liability, it shall within thirty (30) days (or sooner, if the nature
of the Asserted Liability so requires) notify the Indemnified Party of its
intent to do so, and the Indemnified Party shall cooperate, at the expense of
the Indemnifying Party, in the compromise of, or defense against, such Asserted
Liability. If the Indemnifying Party elects not to compromise or defend (or, as
provided below, discontinues its defense of) the Asserted Liability, fails to
notify the Indemnified Party of its election as herein provided, or fails to
satisfy the Litigation Conditions, the
51
<PAGE>
Indemnified Party may pay, compromise or defend such Asserted Liability. Either
of the Indemnified Party or the Indemnifying Party may participate, at its own
expense (except as provided in the first sentence of this subparagraph (b)), in
the defense of an Asserted Liability being controlled by the other party.
Notwithstanding the foregoing, if, subsequent to the Indemnifying Party's
satisfaction of the Litigation Conditions and election to compromise or defend
an Asserted Liability, the Indemnifying Party can demonstrate to the reasonable
satisfaction of the Indemnified Party, based on facts not available to the
Indemnifying Party at the time of the original satisfaction of the Litigation
Conditions, that the Indemnifying Party is not obligated to satisfy or discharge
such claim, then Indemnifying Party may elect to discontinue the defense or
settlement of the Asserted Liability and the Indemnified Party may elect to
assume the defense or settlement of the Asserted Liability at the Indemnified
Party's expense. If the Indemnifying Party chooses to defend any claim, the
Indemnified Party shall, subject to receipt of a reasonable confidentiality
agreement, make available to the Indemnifying Party any books, records or other
documents within its control, and the reasonable assistance of its employees,
for which the Indemnifying Party shall be obliged to reimburse the Indemnified
Party the reasonable out-of-pocket expenses of making them available. If the
Indemnifying Party elects to discontinue the defense or settlement of an
Asserted Liability and the Indemnified Party elects to assume such defense or
settlement, the Indemnifying Party shall, subject to the receipt of a reasonable
confidentiality agreement, make available to the Indemnified Party any books,
records or other documents within its control, and shall provide to the
Indemnified Party the work product of the litigation or proceeding related to
such defense or settlement (except for books, records, documents and work
product (or portions thereof) relating solely to the Indemnifying Party's
liability for the relevant claim and the provision of which, based on opinion of
counsel, would prejudice the Indemnifying Party's defense of any action by the
Indemnified Party under this Article VIII).
(c) The Indemnifying Party and the Indemnified Party shall use
commercially reasonable efforts to cooperate in determining the validity of any
third party claim for any Loss for which a claim for indemnification may be made
hereunder. Each party shall use commercially reasonable efforts to minimize all
Losses.
8.4. Procedure for Claims by Parties. In the event that any party
incurs or suffers any Losses with respect to which indemnification may be sought
by such party pursuant to this Article VIII (other than in respect of third
party claims), the Indemnified Party must assert the claim by a Claims Notice to
the Indemnifying Party. The Claims Notice must state the nature and basis of the
claim in reasonable detail based on the information available to the Indemnified
Party. Each Indemnifying Party to whom a Claims Notice is given shall respond to
any Indemnified Party that has given a Claims Notice (a "Claim Response") within
thirty (30) days (the "Response Period") after the date that the Claims Notice
is given. Any Claim Response shall specify whether or not the Indemnifying Party
given the Claim Response disputes the claim described in the Claims Notice. If
any Indemnifying Party fails to give a Claim Response within the Response
Period, such Indemnifying Party shall be deemed not to dispute the claim
described in the related Claims Notice. If any Indemnifying Party elects not to
dispute a claim described in a Claims Notice, whether by failing to give a
timely Claim Response or otherwise, then the amount of such claim shall be
conclusively deemed to be an obligation of such Indemnifying Party, unless the
amount of the Loss actually suffered by the Indemnified Party differs from the
amount of the claim (whether
52
<PAGE>
by change of circumstance, mistake or fraud of the Indemnified Party or
otherwise). If any Indemnifying Party shall be obligated to indemnify an
Indemnified Party hereunder, such Indemnifying Party shall pay to such
Indemnified Party the amount to which such Indemnified Party shall be entitled
within thirty (30) days after the last day of the applicable Response Period or,
if the Claims Notice relates to Losses that have not been liquidated as of the
date of the Claims Notice, the date on which all or any part of such Losses
shall have become liquidated and determined. If there shall be a dispute as to
the amount or manner of indemnification under this Agreement, the Indemnifying
Party and the Indemnified Party shall seek to resolve such dispute through
negotiations and, if such dispute is not resolved within twenty (20) days, the
Indemnified Party may submit such dispute to arbitration pursuant to Section
10.9. If any Indemnifying Party fails to pay all or any part of any
indemnification obligation on or before the later to occur of (y) thirty (30)
days after the last day of the applicable Response Period, and (z) if the Claims
Notice relates to Losses that have not been liquidated as of the date of the
Claims Notice, the date on which all or any part of such Losses shall have
become liquidated and determined, then the Indemnifying Party shall also be
obligated to pay to the Indemnified Party interest on the unpaid amount for each
day during which the obligation remains unpaid at an annual rate established in
the manner described in Section 1.10(g).
8.5. Limitations on Indemnification. The indemnification provided for
in Sections 8.1 and 8.2 shall be subject to the following limitations:
(a) The Sellers shall not be obligated to pay any
indemnification amounts for Losses pursuant to Section 8.1(i) until the
aggregate amount of all Losses pursuant thereto exceeds an amount equal to
$3,000,000 (the "Basket"), whereupon the Company Indemnified Parties shall be
entitled to indemnification under Section 8.1(i) for all such Losses in excess
of such amount, up to a maximum amount equal to $50,000,000, subject to
paragraph (d) below. In addition, no claim shall be made for Losses with respect
to any breach of a representation or warranty under Section 8.1(i) unless the
claim for Losses with respect to such breach reasonably could be expected to
exceed $50,000; provided, however, that any breaches arising out of a series of
related events or the same set of operative facts shall be treated as a single
claim for purposes of this paragraph (a).
(b) No claims for indemnification in respect of Sections 8.1(i)
or 8.2(i) shall be made after the date on which the applicable representation or
warranty upon which such claim was based ceases to survive pursuant to Section
8.7; provided that the expiration of any representation or warranty under
Section 8.7 shall not affect any claim made pursuant to a Claims Notice
delivered prior to the date of such expiration.
(c) The limitations on the indemnification obligations set forth
in this Section 8.5 shall not apply to any covenants of the Sellers (or any
other party) in this Agreement (including covenants in Article II and Article
III, except to the extent that any representations or warranties are contained
within such covenants). In addition, notwithstanding the provisions of paragraph
(a) above, the limitations on the indemnification obligations of Sellers set
forth in paragraph (a) above shall not apply to breaches of the representations
and warranties made in Sections 2.1 (other than the second sentence of Section
2.1(a)), 2.2 (other than in Section 2.2(b)
53
<PAGE>
with respect to the qualification or licensing of the Subsidiaries as foreign
corporations), 2.3, 3.1 and 3.2.
(d) Notwithstanding anything to the contrary set forth herein,
no limitation or condition of liability or indemnity applicable to any Seller
shall apply to any breach of a representation or warranty if such representation
or warranty was made with actual knowledge by such Seller that it (i) contained
an untrue statement of a material fact or (ii) omitted to state a material fact
necessary to make the statements contained therein not misleading. For purposes
of calculating the amount of Losses incurred arising out of or relating to any
breach of a representation or warranty by any Seller, the references to
"Material Adverse Effect" or "Material Adverse Change" or other materiality
qualifications (or correlative terms), including as expressed in accounting
concepts such as GAAP, shall be disregarded.
(e) The Company Indemnified Parties may seek recovery against
any Seller for any Loss for which the Sellers are jointly and severally liable
hereunder, except that (i) in any action (including any arbitration pursuant to
Section 10.9) to recover such Loss, the appropriate Company Indemnified Parties
may not proceed against any Seller unless (subject to jurisdictional, venue or
other procedural limitations) it also proceeds against each of the Roger C.
Stull and Ann R. Stull Trust, the NCCF, John Sawyer, J&J Investments, LLC, the
Repchinuck Revocable Trust, C. George Bush and Bruce Varney; (ii) the Servants'
Trust shall not be liable for any portion of the Pro Rata Share of the Roger C.
Stull and Ann R. Stull Trust, the Gregory J. Stull Family Trust, the Kevin C.
McTavish Family Trust, the Christine Marie Stull Family Trust or Nicole Lynn
Stull of such Loss, and J&J Investments, LLC shall not be liable for any portion
of the Pro Rata Share of John Sawyer of such Loss; (iii) the Management
Stockholders, Floyd E. Skor, the Charles D. Steichen and Martha L. Steichen
Trust, as a group shall not be liable for more than their aggregate Pro Rata
Share of such Loss; (iv) B-R Investors/Penhall I, L.P. shall not be liable for
more than its Pro Rata Share of such Loss; (v) the liability of each Management
Stockholder (other than John Sawyer, J&J Investments, LLC, the Repchinuck
Revocable Trust, C. George Bush and Bruce Varney) shall be limited to his or its
Eligible Assets (as defined in Section 8.5(g)); and (vi) no Non-Defaulting
Seller (as defined in Section 8.5 (f)) who is a Non-Management Stockholder, and
none of John Sawyer, J&J Investments, LLC, the Repchinuck Revocable Trust, C.
George Bush or Bruce Varney, shall be liable for any Management Stockholder's
Pro Rata Share of such Loss until the appropriate Company Indemnified Parties
have attempted in good faith, through appropriate judicial or other proceedings,
to recover indemnification payments from such Management Stockholder under
Section 8.1 for the full amount of such Management Stockholder's Eligible
Assets.
(f) The Sellers agree among themselves that each Seller shall
pay such Seller's Pro Rata Share of any Loss, other than a Loss arising out of a
breach of a representation or warranty by another Seller under Article III or a
breach of a covenant by another Seller for which the breaching Seller is solely
liable hereunder; provided, however, subject to the limitations of Section
8.5(e), if any Seller (a "Defaulting Seller") fails to pay any or all of his or
its Pro Rata Share of such Loss, each remaining Seller (a "Non-Defaulting
Seller") shall also pay a fraction of the shortfall of such Loss equal to such
Non-Defaulting Seller's Pro Rata Share divided by the aggregate Pro Rata Share
of all Non-Defaulting Sellers. Each Defaulting Seller shall indemnify, defend
and hold harmless the Non-Defaulting Sellers from any Losses incurred by the
Non-
54
<PAGE>
Defaulting Sellers that are caused by the failure of such Defaulting Seller to
pay such Defaulting Seller's Pro Rata Share of any Losses to the extent required
herein. Each Seller acknowledges it is his or its intent, as a material part of
the consideration for the execution of this Agreement, that each Seller shall be
liable to pay such Seller's Pro Rata Share of any Losses to the extent provided
herein. At the Closing, each Management Stockholder shall grant a security
interest in the shares of the Surviving Corporation stock received as Merger
Consideration, and the proceeds thereof, to the Surviving Corporation in respect
of such Management Stockholder's obligations under this Article VIII by
executing a pledge agreement containing terms and conditions reasonably
satisfactory to the Surviving Corporation (including without limitation the full
subordination of such pledge to the Surviving Corporation's rights under the
Securities Holders Agreement) (the "Pledge Agreement").
(g) Each Management Stockholder may, at his or its option,
satisfy any indemnification obligation under Section 8.1 by payment of cash or
by delivery to the Surviving Corporation of shares of stock of the Surviving
Corporation, which shares shall have a Current Market Value determined in
accordance with Section 8.5(h); provided, however, that if any Management
Stockholder elects to satisfy such indemnification obligation by payment of
cash, such Management Stockholder must make such election irrevocably by written
notice to the Surviving Corporation before the commencement of any determination
of Fair Market Value under Section 8.5(h), of which commencement the Surviving
Corporation will give ten (10) days prior notice. Other than pursuant to the
Securities Holders Agreement, but subject to the terms of the Pledge Agreement,
no cash shall be paid to a Management Stockholder upon the occurrence of any
event requiring the redemption from such Management Stockholder of shares of
Surviving Corporation stock received as Merger Consideration, and, other than
pursuant to the Securities Holders Agreement, but subject to the terms of the
Pledge Agreement, no Management Stockholder shall otherwise be permitted to
transfer any shares of Surviving Corporation stock received as Merger
Consideration or receive cash or other property in respect of such shares,
unless such Management Stockholder first provides security reasonably
satisfactory to BRS and the Seller Representative for such Management
Stockholder's indemnification obligations under this Agreement in the full
amount of his or its Eligible Assets. For purposes of this Agreement, a
Management Stockholder's "Eligible Assets" shall include (i) all shares of stock
of the Surviving Corporation received by such Management Stockholder as Merger
Consideration, (ii) all cash and other property received by such Management
Stockholder in connection with any transfer or redemption of such shares, and
(iii) all cash and other property (including other securities of the Surviving
Corporation or any other entity) received by such Management Stockholder in
respect of such shares, whether by way of dividend, merger, reorganization,
recapitalization, or otherwise.
(h) For purposes of this Agreement, "Current Market Price" on
any date shall mean, with respect to any security, if such security is publicly
traded in the United States, the average of the daily Closing Prices for the ten
(10) consecutive trading days ending on the date immediately prior to the date
as of which the Current Market Price is to be determined, or, if such day is not
a trading date, the trading day immediately preceding such date. The "Closing
Price" for each day shall be the average of the closing bid and asked price for
such security on the NASDAQ National Market System, or, if not then traded
thereon, the last reported sale price regular way or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
price regular way on the principal stock exchange on which such security is
55
<PAGE>
then listed or traded, or, if not then listed or traded on any such exchange,
the mean of the closing bid and asked prices on an automated quotation system as
furnished by any New York Stock Exchange member firm selected from time to time
by the Surviving Corporation for that purpose. Except as set forth in the
preceding sentence, with respect to any security that is not publicly traded in
the United States, "Current Market Price" on any date shall mean the fair market
value of such security on such date as determined by mutual agreement of BRS,
John Sawyer and the Seller Representative, or, if they are unable to agree, by
an independent appraiser selected by the Surviving Corporation and reasonably
acceptable to John Sawyer and the Seller Representative. The costs of any such
appraiser shall be paid by the Surviving Corporation.
(i) The parties further agree that the NCCF may, at its option,
satisfy any indemnification obligation under Section 8.1 by payment of cash or
by delivery to the Surviving Corporation of shares of Senior Exchangeable
Preferred Stock in an aggregate Liquidation Preference (as defined in the
statement of designation thereof attached hereto as Exhibit N), plus accrued but
unpaid dividends thereon, equal to the amount of such indemnification obligation
or Junior Subordinated Notes, for which shares of the Senior Exchangeable
Preferred Stock are exchangeable, in an aggregate principal amount, plus accrued
but unpaid interest thereon, equal to the amount of such indemnification
obligation. This Section 8.5(i), however, shall not limit in any other way the
NCCF's indemnification obligations under Article VIII, including without
limitation the obligation to satisfy indemnification obligations in cash in the
event that the NCCF no longer shall hold any shares of the Senior Exchangeable
Preferred Stock or any such Junior Subordinated Notes.
(j) Each Seller agrees that neither it nor any of the other
Sellers is a necessary or indispensable party for any action (including an
arbitration pursuant to Section 10.9) for the purpose of determining whether the
Company Indemnified Parties are entitled to indemnification for any Losses
pursuant to this Agreement, hereby waives, to the fullest extent permitted by
law, any requirement that the Company Indemnified Parties join such Seller in,
or provide such Seller with notice of, any such action and hereby agrees not to
file a motion to dismiss, vacate, stay or transfer such action by reason of a
Company Indemnified Party's failure to join any Seller as a party to such
action. Notwithstanding the foregoing, the Company Indemnified Parties (i) shall
give notice of such action to the Seller Representative and the Sellers to the
extent required by the other provisions of this Agreement, (ii) shall name in
such action the persons specified in clause (i) of Section 8.5(e), and (iii)
shall not oppose the joinder of any of the Sellers, if not named as a party in
any such action brought by any Company Indemnified Party against one or more of
the Sellers pursuant to this Agreement, as a party to such action, upon any of
such Sellers' written request; provided, however, any failure of the Company
Indemnified Parties to give notice of any such action to any of the Sellers
(other than the Seller Representative) or of any of the Sellers to actually
receive such notice shall not affect the validity of the agreements and waivers
of each Seller set forth in the first sentence of this Section 8.5(i). Each
Seller also agrees that service of process or any other legal process for any
action brought by the Company Indemnified Parties pursuant to this Agreement may
be made as set forth in Section 9.1(b) of this Agreement. Each Seller agrees
that any of the other Sellers may join or be joined in any such action in which
such Seller has been named as an Indemnifying Party by the Company Indemnified
Parties, or in which such Seller has joined in the action.
56
<PAGE>
(k) Notwithstanding anything in this Agreement to the contrary,
none of the Sellers shall have any liability on account of a breach or
inaccuracy in a representation or warranty pursuant to Section 8.1(i), to the
extent that (A) the matter or event which causes the inaccuracy or breach first
arose prior to the Closing Date (either before or after the date of this
Agreement), (B) neither any Seller nor the Company had knowledge of such matter
or event as of the date of the Original Agreement, (C) such matter or event is
disclosed to BRS and Newco in the revised disclosure Schedules delivered
pursuant to Section 6.4 and (D) BRS and Newco shall have elected to proceed with
the Closing.
(l) The parties agree that: (i) in the event that the Roger C.
Stull and Ann R. Stull Trust, the Servants' Trust or the NCCF shall be obligated
to make any indemnification payments under this Article VIII ("Stull
Indemnification Payments"), such Stull Indemnification Payments shall not be
payable until the sooner of such time as (x) Roger C. Stull and Ann R. Stull
shall have been released from their obligations under that certain Agreement of
Indemnity, dated January 7, 1991 (the "Fidelity Agreement"), among Roger C.
Stull, Ann R. Stull, Penhall, Penhall Company, PCC, Penhall Environmental
Services and Fidelity and Deposit Company of Maryland ("Fidelity") and (y) all
of the bonding obligations of Fidelity that are the subject of the Fidelity
Agreement shall have expired or have been terminated, and no interest shall
accrue with respect to such Stull Indemnification Payments prior to such time,
provided, that no such deferral of the Stull Indemnification Payments shall
result in an increase in the amounts payable by any other Seller under this
Article VIII; (b) the Roger C. Stull and Ann R. Stull Trust shall be entitled to
offset any amounts actually paid by Roger C. Stull and Ann R. Stull (together
with their affiliates, the "Stulls") from and after the Closing under the
Fidelity Agreement against any Stull Indemnification Payments required to be
made by it; and (c) the Surviving Corporation will indemnify, defend and hold
harmless the Stulls from and against any Losses incurred by them under the
Fidelity Agreement.
8.6. Insurance and Tax Effect. (a) Any payments made pursuant to the
provisions of this Article VIII shall be treated as an adjustment to the total
consideration payable to the Sellers under this Agreement.
(b) The amount of any Loss for which indemnification is provided
under any of Sections 8.1 or 8.2 shall be net of any amounts (net of the costs
of recovery of such amounts) recovered by the Indemnified Party under insurance
policies with respect to such Loss (collectively, a "Net Loss").
(c) The amount of any Loss shall be (i) increased to take
account of the net Tax cost (if any) actually incurred by the Indemnified Party
arising from the receipt of indemnity payments hereunder (grossed up for such
increase) and (ii) reduced to take account of any net Tax benefit (if any)
actually realized by the Indemnified Party arising from the incurrence or
payment of any such Net Loss.
8.7. Survival of Representations and Warranties. The provisions set
forth in Section 10.5 of this Agreement shall expressly survive the termination
or abandonment of this Agreement. All covenants and agreements contained in this
Agreement shall survive the Closing Date in perpetuity and shall remain in full
force and effect in accordance with their terms. The
57
<PAGE>
representations and warranties set forth in Articles II, III and IV of this
Agreement (and any Schedule thereto) shall survive the Closing Date for a period
of eighteen (18) months, except (a) the representations in Section 2.8 (and any
Schedules thereto) shall survive until the date which is 60 days after the
expiration of the statute of limitations applicable to such matters, (b) the
representations and warranties in Sections 2.12 and 2.20 (and any Schedules
thereto) shall survive the Closing Date for a period of five (5) years, (c) the
representations and warranties in Sections 2.1 - 2.4, Article III and Sections
4.1 and 4.2 (and any Schedules thereto) shall survive the Closing Date in
perpetuity, and (d) the foregoing time limitations shall not apply to any claims
which have been the subject of a Claims Notice prior to expiration of the
applicable time period. Subject to Section 8.5(j), no right of indemnification
hereunder shall be limited by reason of any investigation or audit conducted
before or after the Closing or the knowledge of any party of any breach of a
representation, warranty, covenant or agreement by the other party at any time,
or the decision of any party to complete the Closing.
ARTICLE IX
APPOINTMENT OF SELLER REPRESENTATIVE
9.1 Appointment of the Seller Representative; Enforcement of Rights,
Benefits and Remedies. (a) Each Seller hereby irrevocably constitutes and
appoints Roger C. Stull as the Seller Representative for the purpose of
performing and consummating the transactions contemplated by this Agreement. The
appointment of Roger C. Stull as the Seller Representative is coupled with an
interest and all authority hereby conferred shall be irrevocable and shall not
be terminated by any or all of the Sellers without the consent of Newco (or,
after the Closing, the Surviving Corporation), which consent may be withheld for
any reason, and the Seller Representative is hereby authorized and directed to
perform and consummate all of the transactions contemplated by this Agreement.
Not by way of limiting the authority of the Seller Representative, each and all
of the Sellers, for themselves and their respective heirs, executors,
administrators, successors and assigns, hereby authorize the Seller
Representative to:
(i) waive any provision of this Agreement which the Seller
Representative deems necessary or desirable;
(ii) execute and deliver on their behalf all documents and
instruments which may be executed and delivered pursuant to this Agreement,
including without limitation the shares of Existing Company Stock, Penhall Class
A Common Stock, Penhall Class B Common Stock, Class A Common Stock, Class B
Common Stock or Class C Common Stock and the stock powers with respect thereto;
(iii) make and receive notices and other communications
pursuant to this Agreement and service of process in any legal action or other
proceeding arising out of or related to this Agreement or any of the
transactions hereunder;
(iv) settle any dispute, claim, action, suit or proceeding
arising out of or related to this Agreement or any of the transactions
hereunder;
58
<PAGE>
(v) receive and distribute the Seller Consideration and
adjustments thereto;
(vi) appoint or provide for successor agents; and
(vii) pay expenses incurred or which may be incurred by or
on behalf of the Sellers in connection with this Agreement.
In the event of the inability, failure or refusal of Roger C. Stull to act as
the Seller Representative, or in the event of the death of Roger C. Stull or any
successor, the Sellers promptly shall appoint one of the Sellers as their agent
for purposes of this Article IX by action of Sellers who held a majority in
interest of the shares of Existing Company Stock. Failing such an appointment
within thirty (30) days of such inability, failure, refusal or death, Newco (or,
after the Closing, the Surviving Corporation) may, by written notice to the
Sellers at the last address of the Sellers applicable for purposes of Section
10.3 hereof, designate one of the Sellers as the Seller Representative.
(b) Any claim, action, suit, or other proceeding, whether in law
or equity, to enforce any right, benefit or remedy granted to the Sellers under
this Agreement may be asserted, brought, prosecuted or maintained only by the
Seller Representative. Any claim, action, suit or other proceeding, whether in
law or equity, to enforce any right, benefit or remedy granted under this
Agreement, including without limitation any right of indemnification provided in
Article VIII hereof, may be asserted, brought, prosecuted or maintained by a
Company Indemnified Party against the Sellers or the Seller Representative by
service or process on the Seller Representative and without the necessity of
serving process on, or otherwise joining or naming as a defendant in such claim,
action, suit or other proceeding, any Seller. With respect to any matter
contemplated by this Article IX, the Sellers shall be bound by any determination
in favor of or against the Seller Representative or the terms of any settlement
or release to which the Seller Representative shall become a party.
(c) The Seller Representative shall not be liable to any Seller
for any acts or omissions of the Seller Representative in connection with his
duties and obligations hereunder, except in the case of the Seller
Representative's gross negligence or willful misconduct. The Sellers (excluding
the Seller Representative and his affiliates), jointly and severally, agree to
indemnify and hold the Seller Representative harmless as to any liability (other
than on account of his respective indemnification obligations under Article
VIII) incurred by him to any person by reason of his having accepted the same or
in carrying out any of the terms hereof, and to reimburse the Seller
Representative for all of his costs and expenses, including, among other things,
reasonable attorneys' fees and costs, incurred by reason of any matter as to
which an indemnity is paid under this Section 9.1(c); provided, however, that no
indemnity need be paid in the case of the Seller Representative's gross
negligence or willful misconduct.
59
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1. Amendment and Modification. This Agreement may be amended,
modified supplemented or altered only by a written agreement signed by the
parties hereto at any time prior to the Closing with respect to any of the terms
contained herein.
10.2. Waiver of Compliance; Consents. Any failure of a party to comply
with any obligation, covenant, agreement or condition herein may be waived, but
only if such waiver is in writing and is signed by the party against whom the
waiver is to be effective. Such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
10.2.
10.3. Notices. All notices and other communications hereunder shall be
in writing (including by telecopy) and shall be deemed to have been duly given
when delivered in person (including by overnight courier), when telecopied (with
confirmation of transmission having been received) or three (3) days after being
mailed by registered or certified mail (postage prepaid, return receipt
requested), in each case to the respective parties at the following addresses
(or at such other address for a party as shall be specified by like notice).
(a) if to Newco or BRS:
Penhall Acquisition Corp.
c/o Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street
New York, New York 10022
Attn: Mr. Harold O. Rosser II
Facsimile No.: (212) 521-3707
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19102
Attn: G. Daniel O'Donnell, Esq.
Facsimile No.: (215) 994-2222
60
<PAGE>
(b) if to the Sellers:
Roger C. Stull
1440 Vista Del Mar
Fullerton, California 92631
Facsimile No.: (714) 871-0490
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Attn: Milton B. Hyman, Esq.
Facsimile No.: (310) 203-7199
(c) If to the Company or PCC:
Penhall International, Inc.
1801 Penhall Way
Anaheim, California 92803
Attn: Roger C. Stull
Facsimile No.: (714) 999-2493
10.4. Assignment; No Third Party Beneficiaries. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
may be assigned by any of the parties hereto without the prior written consent
of the other parties hereto; provided that the Company or the Surviving
Corporation may assign its rights and obligations to any lender providing
financing in connection with the transactions contemplated hereby (or in
connection with any sale by the Surviving Corporation of its business or any
part thereof); provided that no such assignment shall relieve BRS or the
Surviving Corporation of its obligations under this Agreement. The affiliates,
directors, officers, employees and representatives of BRS, Newco and the
Surviving Corporation are intended third party beneficiaries of Section 8.1 of
this Agreement. The affiliates, directors, officers, employees and
representatives of the Sellers are intended third party beneficiaries of Section
8.2 of this Agreement. Nothing else contained in this Agreement is intended to
confer upon any person (including, without limitation, any employees) other than
the parties hereto and their respective successors and permitted assigns, and
rights or remedies hereunder.
10.5. Expenses. Except as otherwise expressly provided herein, each of
the parties hereto will bear its own expenses in connection with the
negotiation, preparation, execution and delivery of this Agreement and the
documents and instruments contemplated hereby and in connection with the
transactions contemplated hereby and thereby, including all fees and
disbursements of counsel, accountants, appraisers and other advisors retained by
such party;
61
<PAGE>
provided, however, that if the transactions contemplated by this Agreement are
consummated, (i) Roger C. Stull will pay a portion of the fees payable to
William L. Rogers and his affiliates (the "Rogers Fee") in an amount equal to
the product of the Rogers Fees multiplied by the Non-Management Stockolders'
(excluding Floyd E. Skor, B-R Investors/Penhall I, L.P. and the Charles D.
Steichen and Martha L. Steichen Trust) pre-Closing ownership percentage of
Existing Company Stock (without giving effect to the transactions under the
Exchange) and (ii) except as provided in the immediately preceding clause (i),
the Surviving Corporation shall bear the expenses of the Sellers, BRS and Newco
in addition to its own expenses. In addition, the financial cost to BRS of the
dilution from certain of the Surviving Corporation's post-Closing management
stock arrangements, in the aggregate amount of $995,922, shall be borne
one-third by the Roger C. Stull and Ann R. Stull Trust, one-third by BRS and
one-third by the Management Stockholders. The Roger C. Stull and Ann R. Stull
Trust's share of such cost, $331,974, shall be subtracted from the Cash Merger
Consideration payable to it at Closing in full satisfaction of its obligations
under the preceding sentence.
10.6. Governing Law. This agreement, and all agreements, documents and
instruments delivered pursuant to hereto incorporated herein, unless otherwise
expressly provided therein, shall be governed by, and construed in accordance
with, the substantive laws of the State of California applicable to agreements
made and to be performed entirely within such state, without reference to the
conflicts of laws rules of such state.
10.7. Counterparts. This Agreement may be executed by the parties
hereto individually or in any combination, in one or more counterparts, each of
which shall be deemed an original and all of which shall together constitute one
and the same instrument.
10.8. Entire Agreement. This Agreement, including the documents and
instruments referred to herein or contemplated hereby, embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter hereof. There are no restriction, promises, representations, warranties,
covenants or undertakings, other than those expressly set forth or referred to
herein. Except for that certain Letter Agreement (regarding confidentiality)
dated March 13, 1998 between the Company and BRS, this Agreement supersedes all
prior agreements and understandings between the parties with respect to the
subject matter hereof.
10.9. Arbitration. (a) If any dispute or controversy shall arise among
the parties hereto as to any matter arising out of or in connection with this
Agreement, the parties shall attempt in good faith to resolve such controversy
by mutual agreement. If such dispute or controversy cannot be so resolved, it
shall be resolved solely in accordance with the provisions of this Section 10.9.
(b) Any dispute, controversy or claim between or among the
parties to this Agreement (the "Disputing Parties") arising out of or related to
this Agreement, or the breach thereof, shall be settled by a single arbitrator
by arbitration, conducted in the State of California, in accordance with the
Commercial Rules of the American Arbitration Association (the "AAA"). Such
arbitration shall be administered by the AAA only if one (or more) of the
Disputing Parties requests such administration. Arbitration shall be the
exclusive remedy for determining any such
62
<PAGE>
dispute, regardless of its nature. Unless mutually agreed by the parties
otherwise, any arbitration shall take place in the City of Los Angeles,
California.
(c) The arbitrator shall be selected by the Disputing Parties
within fifteen (15) days after demand for arbitration is made by a Disputing
Party. If the Disputing Parties are unable to agree on an arbitrator within such
period, then each Disputing Party shall select one arbitrator, and each such
arbitrator shall select a third arbitrator and the dispute shall be settled by
the panel consisting of such three arbitrators (such panel, or the single
arbitrator agreed to by both parties, as the case may be, being hereinafter
referred to as the "Arbiter"). Each arbitrator shall be an attorney licensed in
the State of California and shall possess substantive legal experience with
respect to the principal issues on dispute.
(d) This agreement to resolve any disputes by binding
arbitration shall extend to claims against any parent, subsidiary or affiliate
of each party, and when acting within such capacity, any officer, director,
shareholder, employee or agent of each party, or of any of the above, and shall
apply as well to claims arising out of state and federal statutes and local
ordinances as well as to claims arising under the common law. In the event of a
dispute subject to this paragraph the Disputing Parties shall be entitled to
reasonable discovery subject to the discretion of the Arbiter. The remedial
authority of the Arbiter shall be the same as, but no greater than, would be the
remedial power of a court having jurisdiction over the parties and their
dispute. In the event of a conflict between the Commercial Rules of the AAA and
these procedures, the provisions of these procedures shall govern.
(e) Except as may otherwise be agreed to in writing by the
Disputing Parties or as ordered by the Arbiter upon substantial justification,
the hearings of the dispute shall be held and concluded within ninety (90) days
of submission of the dispute to arbitration. The Arbiter shall render its final
award within thirty (30) days following closing of the record. The Arbiter shall
state the factual and legal basis for the award. The decision of the Arbiter
shall be final and binding, and no appeal shall be permitted therefrom. Final
judgment may be entered upon such an award in any State or Federal court having
the arbitration jurisdiction thereof, but entry of such judgment shall not be
required to make such award effective.
(f) Any filing or administration fees shall be borne initially
by the Disputing Party requesting administration by the AAA. If more than one
Disputing Party requests such administration, the fees shall be borne initially
by the party incurring such fees as provided by the rules of the AAA. The
initial fees and costs of the Arbiter shall be borne equally between the
Disputing Parties. The prevailing party in such arbitration, as determined by
the Arbiter, and in any enforcement or other court proceedings, shall be
entitled to the extent permitted by law, to reimbursement from the other party
for all of the prevailing party's costs (including but not limited to the
Arbiter's compensation), expenses, and attorneys' fees.
(g) Nothing in this Section 10.9 shall limit any right that any
party may otherwise have to seek to obtain (i) preliminary injunctive relief in
order to preserve the status quo pending the disposition of any such arbitration
proceeding or (ii) temporary or permanent injunctive relief from any breach of
any provision of this Agreement.
63
<PAGE>
10.10. Severability. If any provision or provisions of this Agreement
or of any of the documents or instruments delivered pursuant hereto, or any
portion of any provision hereof or thereof, shall be deemed invalid or
unenforceable pursuant to a final determination of any court of competent
jurisdiction or as a result of future legislative action, such determination or
action shall be construed so as not to affect the validity or enforceability
hereof or thereof and shall not affect the validity or effect of any other
portion hereof or thereof.
10.11. Arm Length Contract. This Agreement has been negotiated "at arms
length" by the parties, each represented by counsel of its choice and each
having an equal opportunity to participate in the drafting of the provisions
hereof. Accordingly, in construing the provisions of this Agreement no party
shall be presumed or deemed to be the "drafter" or "preparer" of the same.
10.12. Headings; Interpretative Provisions. (a) The headings of the
various Articles and Sections of this Agreement have been inserted for the
purpose of convenience of reference only, and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
(b) When reference is made in this Agreement to an Article or
Section or Schedule, such reference shall be to an Article, Section or Schedule
of this Agreement unless otherwise indicated. Whenever the words "included",
"includes" or "including" (or any other tense or variation of the word
"include") are used in this Agreement, they shall be deemed to be followed by
the words "without limitation". As used in this Agreement, the auxiliary verbs
"will" and "shall" are mandatory, and the auxiliary verb "may" is permissive
(and, by extension, is prohibitive when used negatively, as a denial of
permission). All accounting terms used but not otherwise defined in this
Agreement shall have the meanings determined by GAAP. The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. The definitions contained in this Agreement are applicable to
the singular as well as to the plural forms of such terms and to the masculine
as well as to the feminine and neuter genders of such term. Any agreement,
instrument or statute defined or referred to herein or in any document or
instrument that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes.
(c) Whenever a representation or warranty is stated to be based
on the "knowledge of the Company", the "Company's knowledge" or a similar
qualification, such phrase refers to whether any of the Company's Senior
Management (as hereafter defined) has actual knowledge, after due inquiry, of
the matters involved. For purposes of this Agreement, the Company's "Senior
Management" consists of C. George Bush, Martin Houge, David S. Neal, Robert
Norling, Renee O'Brien, Bruce Repchinuck, John Sawyer, Floyd Skor, Charles D.
Steichen, Roger C. Stull and Bruce Varney.
(d) Any matter disclosed by the Company or the Sellers to BRS
and Newco in any disclosure Schedule shall be deemed to be disclosed with
respect to any other Schedule so
64
<PAGE>
long as the relevance of the matter to such other Schedule is readily apparent
from the disclosure of the matter that appears in the Schedule where it is
disclosed.
(e) Reasonable or Best Efforts. Whenever a covenant requires a
party to use its "best efforts," "reasonable efforts," "reasonable best efforts"
or "commercially reasonable efforts" to do something or cause something to
occur, such party shall be deemed to have performed such covenant if it used the
requisite efforts regardless of whether such efforts were successful.
10.13. Time is of the Essence. Time is of the essence in the
performance of this Agreement.
10.14. Golden Parachute Approval Requirement. Prior to execution of the
Compensation Agreement, the Sellers shall have caused the shareholder approval
requirements set forth in Section 280G(b)(5) of the Code to be satisfied with
respect to all payments incident to the transactions under the Compensation
Agreement to any "disqualified individual" as defined in Section 280G(c) of the
Code.
10.15. Date of Representations and Warranties and Covenant Obligations.
Notwithstanding anything in this Agreement to the contrary, but without limiting
the conditions set forth in Sections 6.2(b) and 6.3(b), the representations and
warranties of the parties to this Agreement set forth in Articles II, III and IV
shall be deemed to have been given, and the Schedules to this Agreement
prepared, as of the date of the Original Agreement. No failure of a
representation or warranty herein to be true and correct as of the date of this
Agreement shall constitute a breach of this Agreement unless such failure
constituted a breach of the Original Agreement as of the date of the Original
Agreement. In addition, the covenants and agreements set forth in Article V
shall be deemed to have been made as of the date of the Original Agreement.
Without limiting the foregoing the terms "as of the date hereof," "as of the
date of this Agreement," "current," "currently" and other terms referring to a
specific date, as used in Articles II, III, IV and V hereof, shall refer to the
date of the Original Agreement.
65
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date first above written.
PENHALL ACQUISITION CORP.
By /s/ Harold O. Rosser II
------------------------------------
Name: Harold O. Rosser II
Title: President
BRUCKMANN, ROSSER, SHERRILL & CO., L.P.
By: BRS Partners, Limited Partnership,
the general partner
By: BRSE Associates, Inc., its general partner
By: /s/ Harold O. Rosser II
------------------------------------
Name: Harold O. Rosser II
Title: Managing Director
PENHALL RENTAL CORP. (F/K/A
PENHALL INTERNATIONAL, INC.)
By /s/ Roger C. Stull
------------------------------------
Name: Roger C. Stull
Title: President
PHOENIX CONCRETE CUTTING, INC.
By /s/ C. George Bush
------------------------------------
Name: C. George Bush
Title: President
66
<PAGE>
MANAGEMENT STOCKHOLDERS
/s/ Gary T. Bush
------------------------------------
Gary T. Bush
/s/ C. George Bush
------------------------------------
C. George Bush
/s/ Scott E. Campbell
------------------------------------
Scott E. Campbell
/s/ David A. Ellison
------------------------------------
David A. Ellison
/s/ Alfred R. Fenton
------------------------------------
Alfred R. Fenton
/s/ Vincent M. Gutierrez
------------------------------------
Vincent M. Gutierrez
/s/ Lawrence E. Henkels
------------------------------------
Lawrence E. Henkels
/s/ David P. Henning
------------------------------------
David P. Henning
/s/ Jack S. Hobbs
------------------------------------
Jack S. Hobbs
/s/ Richard M. Lawler
------------------------------------
Richard M. Lawler
/s/ Alan G. Lowry
------------------------------------
Alan G. Lowry
67
<PAGE>
/s/ Randel E. Mathews
------------------------------------
Randel E. Mathews
/s/ Leif McAfee
------------------------------------
Leif McAfee
/s/ Joseph P. Morello
------------------------------------
Joseph P. Morello
/s/ David S. Neal
------------------------------------
David S. Neal
NORLING LIVING TRUST
DATED OCTOBER 5, 1995
By: /s/ Robert C. Norling
---------------------------------
Robert C. Norling
Its: Trustee
By: /s/ Karen D. Norling
---------------------------------
Karen D. Norling
Its: Trustee
/s/ Richard S. Reel
------------------------------------
Richard S. Reel
MICHAEL BRUCE REPCHINUCK
REVOCABLE TRUST
By: /s/ Michael Bruce Repchinuck
---------------------------------
Michael Bruce Repchinuck
Its: Trustee
68
<PAGE>
/s/ John T. Sawyer
------------------------------------
John T. Sawyer
J&J INVESTMENTS, LLC,
a Nevada limited liability company
By: /s/ Brian Sweeney
---------------------------------
Brian Sweeney
Its: General Manager
/s/ Kevin Sheridan
------------------------------------
Kevin Sheridan
/s/ Bruce F. Varney
------------------------------------
Bruce F. Varney
NON-MANAGEMENT STOCKHOLDERS
/s/ Roger C. Stull
------------------------------------
Roger C. Stull
NATIONAL CHRISTIAN CHARITABLE
FOUNDATION, INC.
By: /s/ Terrill A. Parker
---------------------------------
Terrill A. Parker
General Counsel
THE SERVANTS' CHARITABLE TRUST,
a 501(c)(3) Charitable Trust
By: /s/ Roger C. Stull
---------------------------------
Roger C. Stull
Trustee
69
<PAGE>
ROGER C. STULL and ANN R. STULL, TRUSTEES
UNDER DECLARATION DATED JANUARY 19, 1984
By: /s/ Roger C. Stull
---------------------------------
Roger C. Stull
Trustee
B-R INVESTORS/PENHALL I, L.P., a California limited
partnership
By: B-R Investors, Inc., a California corporation,
its general partner
By: /s/ William L. Rogers
---------------------------------
William L. Rogers
President
/s/ Floyd E. Skor
---------------------------------
Floyd E. Skor
CHARLES D. STEICHEN AND MARTHA L.
STEICHEN TRUST dated September 21, 1989
By: /s/ Charles D. Steichen
---------------------------------
Charles D. Steichen
Trustee
70
<PAGE>
Exhibit 10.9
PENHALL INTERNATIONAL, INC.
AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT SHARING (401(k)) PLAN
AND TRUST AGREEMENT
WHEREAS, PENHALL COMPANY, a California corporation, heretofore
established the PENHALL COMPANY AMENDED PROFIT SHARING PLAN (hereinafter
referred to as the "Plan") and, in connection therewith, established a trust
fund (hereinafter referred to as the "Trust"), by executing a plan and a trust
instrument (hereinafter referred to as the "Agreements");
WHEREAS, PENHALL INTERNATIONAL, INC., a California corporation
(hereinafter referred to as the "Sponsoring Company"), subsequently assumed
sponsorship of the Plan and now maintains the Trust; and
WHEREAS, the Sponsoring Company desires to amend and restate
the Agreement to include certain of the provi sions now required to be included
in the Plan as a result of the enactment of new laws and to enable certain
Affiliated Companies (as hereinafter defined) to adopt the Plan and to make
contributions to the Trust;
NOW, THEREFORE, the Sponsoring Company hereby amends the Plan
to read as hereinafter set forth, effective July 1, 1989:
<PAGE>
ARTICLE I
PURPOSE OF PLAN AND TRUST; DEFINITIONS
1.1 - Purpose.
This Plan and Trust, which shall be known as the PEN HALL
INTERNATIONAL, INC. AND AFFILIATED COMPANIES Employees' Profit Sharing (401(k))
Plan and Trust, are designed and intended to qualify as a qualified plan and
trust under the applicable provisions of the Code.
1.2 - Definitions.
(a) "Accounts" means the accounts established and maintained for the
Participants pursuant to the provisions hereof.
(b) "Accrued Benefit" means the sum of the balances of a Participant's
Company Contributions and Matching Contribu
tions Accounts.
(c) "Act" means the Employee Retirement Income Security Act of 1974,
as modified by any subsequent amend ments thereto.
(d) "Adjustment Factor" means the cost of living ad justment factor
prescribed by the Secretary of the Treasury pursuant to the provisions of
Section 415(d) of the Code for years beginning after December 31, 1987.
(e) "Adopting Company" means the Sponsoring Company and each
Affiliated Company which has adopted the Plan.
(f) "Affiliated Company" means any corporation which, together with
the Sponsoring Company, constitutes an Af filiated Service Group, a controlled
group of corporations as defined in Section 414(b) of the Code as modified by
Section 415(h) of the Code, a trade or business, (whether incorporated or not)
which, together therewith, are under common control as defined in Section 414(c)
of the Code as modified by Section 415(h) of the Code, and any other entity
required to be aggregated with the Sponsoring Company pursuant to regulations
under Section 414(o) of the Code.
(g) "Affiliated Service Group" means:
(1) A group of organizations consisting of a Service Organization
(the "First organization") and one or more of the following:
(A) Any Service Organization which:
(i) is a shareholder or partner in the first
organization, and
(ii) regularly performs services for the first
organization or is regularly associated
with the first
<PAGE>
organization in performing services for third
persons, and
(B) Any other organization if:
(i) a significant portion of the business of such
organization is the performance of services (for the
first organization, for organizations described in
subpart (A) above, or for both) of a type
historically performed in such service field by
employees, and
(ii) Ten Percent (10%) or more of the interest in such
organization is held by persons who are officers,
highly compensated employees, or owners of the first
organization or an organization described in subpart
(A) above.
(2) A group of organizations consisting of:
(A) An organization or group of "related organizations" which
is performing, on a regular and con tinuing basis,
management functions for one organization or group of
"related organizations," and
(B) The organization or group of "related organizations"
described in subpart (A) above for which such functions
are performed.
As used hereinabove, the term "related or ganizations" shall be
deemed to have the same meaning as the term "related persons"
as used in Section 103(b)(6)(C) of the Code.
(h) "Anniversary Date" means the last day of each Plan Year.
(i) "Annuity Starting Date" means the first day of the first period
for which an amount is payable if distribution of a Participant's benefit is to
be made in the form of an annuity or as of which all events must occur to
entitle a Participant or his Beneficiary to distribution of his benefit if
distribution thereof is not to be made in the form of an annuity.
(j) "Beneficiary" means the person last designated by a Participant
pursuant to the provisions of Section 2.3 to receive the benefits, if any,
payable in the event of his death.
(k) "Calendar Year Elective Deferral Dollar Limitation" means Seven
Thousand Dollars ($7,000), as adjusted by the Adjustment Factor.
<PAGE>
(l) "Code" means the Internal Revenue Code of 1986, as modified by any
subsequent amendments thereto.
(m) "Committee" means the Committee established by an Adopting Company
pursuant to the provisions of Article VII hereof, and, unless otherwise
indicated, with respect to a particular Participant, the Committee of the
Adopting Com pany by which such Participant is employed.
(n) "Company Contributions Account" means the account established and
maintained for each Participant to which any Salary Reduction Contributions made
to the Plan on his behalf are credited.
(o) "Compensation" means:
(1) For purposes of computing the limitations on benefits and
contributions under Section 415 of the Code, an Employee's
wages, salary, fees for professional services and other
amounts paid to or accrued for such Employee for personal
services actually rendered for an Adopting Company for any
Plan limitation year prior to July 1, 1991, and paid to or
made available to such Employee for personal services actually
rendered for the Company for any Plan limitation year
beginning after June 30, 1991, specifically including but not
limited to (A) commissions, (B) compensation based on a
percentage of profits, (C) commissions payable with respect to
insurance premiums, (D) tips, (E) bonuses, (F) in the case of
any Self-Employed Individual, earned income, as defined in
Section 402(c)(2) of the Code, (G) earned income from sources
outside of the United States, (H) amounts described in
Sections 104(a)(3), 105(a) and 105(h) of the Code to the
extent includable in gross income, (I) amounts described in
Section 105(d) of the Code, (J) amounts paid or reimbursed by
an Adopting Company for moving expenses to the extent not
deductible under Section 217 of the Code, (K) the value of any
nonqualified stock option includable in gross income for the
year during which such option is granted, (L) any amount
includable in gross income as a result of making an election
described in Section 83(b) of the Code and (M) reimbursements
or other expense allowances under a nonaccountable plan (as
described in Treasury Regulation Section 1.62-2(c)), but shall
not include (A) any contributions made to any deferred
compensation plan which are not includable in gross income for
the year in which contributed, (B) any contributions made to a
simplified employee pension plan to the extent deductible by
the Employee, (C) any distributions made under any deferred
compensation plan, (D) any amount includable in gross income
as a result of the exercise of a nonqualified stock option or
the lapse of restrictions on any restricted stock or property
which renders such
<PAGE>
stock or property freely transferable or no longer subject to
any substantial risk or forfeiture, (E) any amount includable
in gross income as a result of the exercise of any qualified
stock option, (F) any other amounts accorded special tax
favored treatment, such as premiums for group term life
insurance to the extent not includable in gross income, or
(G) any contributions made towards the purchase of an annuity
contract described in Section 403(b) of the Code, whether or
not made pursuant to a salary reduction agreement.
(2) For purposes of computing benefits here under or
contributions to the Plan, Compensa tion as defined in
subsection (1) hereinabove, except that (A) items (H) through
(L), inclusive, described as specifically included in such
definition and (B) the amount or cost of any other welfare
benefit provided or paid for by an Adopting Company shall be
excluded.
(3) For purposes of identifying Highly Com pensated Employees,
Compensation as defined in subsection (1) hereinabove but
without regard to the provisions of Sections 125, 402(a)(8),
402(h)(1)(B) and 403 of the Code.
(4) For Plan Years beginning after 1988, Compensation shall
not exceed the "Compensation Limit." The "Compensation Limit"
means $200,000, modified by the Adjustment Factor for years
after 1989. Modifications in effect on January 1 of any
calendar year shall be effective for Plan Years beginning in
such calendar year and the first adjustment to the $200,000
limitation is effective on January 1, 1990. If the Plan
determines Compensation on a period of time that contains
fewer that 12 calendar months, then the applicable
Compensation Limit shall be an amount equal to the
Compensation Limit for the calendar year in which the compen
sation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12. In
applying the Compensation Limit, the rules of Section
414(q)(6) of the Code shall apply, except that the term Family
Member shall include only the Participant's spouse and lineal
descendants under age 19 as of the close of the applicable
year. If as a result of the application of such rules the
Compensation Limit is exceeded, then the Compensation Limit
shall be prorated among the affected individuals in proportion
to each such individual's Compensation prior to the
application of this Compensation Limit. Notwithstanding any
other provision of the Plan, the Compensation Limit shall not
apply for any purpose prior to the Plan Year beginning in
1989.
<PAGE>
(p) "Contract" means any individual or group annuity contract issued
by an Insurer and acquired by the Trustee for the benefit of one or more of the
Participants.
(q) "Date of Employment" means the first day upon which an Eligible
Employee is credited with an Hour of Service.
(r) "Date of Re-employment" means the first day upon which a Former
Participant is again credited with an Hour of Service.
(s) "Effective Date" means July 1, 1973, as to PENHALL INTERNATIONAL,
INC., July 1, 1989, as to each Affiliated Company which adopts the Plan
concurrently herewith and the date specified as such in the Joinder Agreement
whereby any other Affiliated Company subsequently adopts the Plan as to such
other Affiliated Company.
(t) "Eligibility Computation Period" means the twelve (12) consecutive
month period beginning with a Participant's Date of Employment or Date of
Re-employment.
(u) "Eligible Employee" means each Employee of an Adopting Company
other than Employees who are included in a unit of Employees covered by an
agreement which the Secretary of Labor finds to be a collective bargaining
agreement between employee representatives and an Adopting Company, if there is
evidence that retirement benefits were the subject of good faith bargaining
between such employee representatives and such Adopting Company or Companies.
(v) "Employee" means any person who is employed by an Adopting
Company, including Leased Employees.
(w) "Entry Date" means, as to each Adopting Company, each July 1st and
January 1st after the Effective Date of the Plan as to such Adopting Company.
(x) "Family Member" means the spouse, lineal ancestors, lineal
descendants and spouses of any lineal ancestors or descendants of (i) a Five
Percent Owner or (ii) a Highly Compensated Employee who is among the Ten (10)
Highly Compensated Employees receiving the greatest amount of Compensation
during any Plan Year.
(y) "Fiduciary" means any person who (i) exercises any discretionary
authority or control with respect to the man agement of the Plan or control with
respect to the manage ment or disposition of the assets thereof, (ii) renders
any investment advice for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of the Plan, or has any discretionary
authority or responsibility to do so, or (iii) has any discretionary authority
or responsibility in the administration of the Plan, including any other persons
(other than Trustees) designated by any Named Fiduciary to carry out fiduciary
responsibilities, except to the extent otherwise provided by the Act.
<PAGE>
(z) "Former Participant" means a Participant who has separated from
the service of an Adopting Company and incur red one or more One Year Breaks In
Service.
(aa) "Highly Compensated Employee" means highly compensated active
Employees and highly compensated former Employees.
A highly compensated active Employee includes any Employee who
performs service for an Affiliated Company during the determination year and
who, during the look-back year: (i) received Compensation from an Affiliated
Company in excess of $75,000 (as adjusted by the Adjustment Factor); (ii)
received Compensation from an Affiliated Company in excess of $50,000 (as
adjusted by the Adjustment Factor) and was a member of the Top-Paid Group of
Employees for such year; or (iii) was an officer of an Affiliated Company and
received Compensation during such year that is greater than 50 percent of the
dollar limitation in effect under Section 415(b)(1)(A) of the Code.
The term Highly Compensated Employee also includes: (i)
Employees who are both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year" and the
Employee is one of the 100 Employees who received the most Compensation from an
Affiliated Company during the determination year; and (ii) Employees who are 5
percent owners at any time during the look-back year or the determination year.
If no officer has satisfied the Compensation requirement of
(iii) above during either a determination year or a look back year, the highest
paid officer for such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan
Year. The look-back year shall be the twelve-month period immediately preceding
the determination year.
A highly compensated former Employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for an Affiliated Company during the
determination year, and was a highly compensated active Employee for either the
separation year or any determination year ending on or after the Employee's 55th
birthday.
If an Employee is, during a determination year or look-back
year, a Family Member of either a 5 percent owner who is an active or former
Employee or a Highly Compensated Employee who is one of the 10 most Highly
Compensated Employees ranked on the basis of Compensation paid by an Affiliated
Company during such year, then the Family Member and the 5 percent owner or
top-ten Highly Compensated Employee shall be treated as a single Employee
receiving Compensation and Plan contributions equal to the sum of such
Compensation and Contributions of the Family Member and 5 percent owner or
top-ten Highly Compensated Employee.
The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of Employees in
<PAGE>
the Top-Paid Group of Employees, the top 100 Employees, the number of Employees
treated as officers and the Compensation that is considered, will be made in
accordance with Section 414(q) of the Code and the regulations thereunder.
(bb) "Hour of Service" means each hour for which (i) an Employee is
paid or entitled to payment for the performance of duties for an Affiliated
Company, (ii) an Employee is paid or entitled to payment for the non-performance
of duties for an Affiliated Company, and (iii) back pay, irrespective of
mitigation of damages, is either awarded or agreed to by an Affiliated Company.
However, an Employee shall not be credited with Hours of Service under both
clause (iii) and (i) or (ii) of the foregoing sentence. Hours of Service for the
non-performance of duties shall be credited in accordance with Department of
Labor Regulation Section 2530.200b-2(b) and Hours of Service in general shall be
credited to the applicable computation period in accordance with Department of
Labor Regulation Section 2530.200b-2(c).
(cc) "Inactive Participant" means any Employee or Former Employee who
has ceased to be a Participant but for whose benefit an Account is maintained
under the Plan.
(dd) "Insurer" means any legal reserve life insurance company
authorized to do business in the state of California selected by the Sponsoring
Company's Committee from time to time to issue any Contract acquired hereunder.
(ee) "Investment Manager" means any Fiduciary other than a trustee or
Named Fiduciary (i) who has the power to manage, acquire or dispose of any asset
of the Plan; (ii) who is (a) registered as an investment adviser under the
Investment Advisers Act of 1940; (b) is a bank, as defined in such Act; or (c)
is an insurance company qualified to perform the services described in clause
(i) hereof under the laws of more than one state of the United States; and (iii)
has acknowledged in writing that he is a Fiduciary with respect to the Plan.
(ff) "Joinder Agreement" means the separate document by which an
Affiliated Company other than one which is a sig natory hereto on the date of
the execution hereof subse quently adopts the Plan and specifies the Effective
Date of the Plan as to such Affiliated Company.
(gg) "Key Employee" means each Employee, Former Employee or Beneficiary
thereof who, at any time during the current Plan Year or any of the four (4)
immediately preced ing Plan Years, is or was (i) an Officer of an Adopting
Company who has received annual Compensation greater than One Hundred Fifty
Percent (150%) of the amount specified in Section 415(c)(1)(A) of the Code, as
<PAGE>
adjusted by the Adjustment Factor, for any of such Years beginning prior to
January 1, 1987, or Fifty Percent (50%) of the amount specified in Section
415(b)(1)(A) of the Code, as adjusted by the Adjustment Factor, for any of such
Years beginning after December 31, 1986, (ii) among the ten (10) Employees
owning or considered to own (within the meaning of Section 318 of the Code, as
modified by Section 416 of the Code) the largest interests in an Adopting
Company and who has received annual Compensation greater than the amount
specified in Section 415(c)(1)(A) of the Code, as adjusted by the Adjustment
Factor, for any of such Years, (iii) an Employee owning or considered to own
Five Percent (5%) or more of an Adopting Company ("Five Percent Owner"), or (iv)
an Employee owning or considered to own One Percent (1%) or more of an Adopting
Company and receiving more than One Hundred Fifty Thousand Dollars
($150,000.00), as adjusted by the Adjustment Factor, of annual Compensation
therefrom. Notwithstanding the foregoing, no more than Fifty (50) Employees or,
if less, the greater of (i) three (3) or (ii) Ten Percent (10%) of the Employees
of an Adopting Company excluding any Employees described in Section 414(q)(8) of
the Code, shall be treated as officers; for the purposes of determining
ownership under clauses (iii) and (iv), the provisions of Section 414(b), (c)
and (m) of the Code shall not apply; and, for purposes of clause (ii), if two
(2) Employees own or are considered to own equal percentages of an Adopting
Company, the Employee who has received the grea ter amount of Compensation shall
be considered to own a lar ger interest such Adopting Company. Annual
Compensation means Compensation as defined herein, but including amounts
contributed by the Adopting Company pursuant to a salary reduction agreement
which are excludable from the Employee's gross income under Section 125, Section
402(a)(8), Section 402(h) or Section 403(b) of the Code.
(hh) "Leased Employee" means any person other than an Employee who has
performed services for an Adopting Company or for an Adopting Company and a
party determined to be a "related person" pursuant to the provisions of Section
414(n)(6) of the Code ("recipient") on a substantially full time basis for a
period of at least one (1) year and such services are of a type historically
performed by employees in the business field of the recipient pursuant to an
agreement between the recipient and any other person ("leasing organization").
However, any contributions made or benefits provided by the leasing organization
which are attributable to the services performed for the recipient shall be
deemed to have been made or provided by the recipient. Notwithstanding the
foregoing, a person who would otherwise be deemed to be a Leased Employee shall
not be deemed to be an Employee if (1) such person is a participant in a money
purchase pension plan providing for (A) a nonintegrated employer contribution of
at least ten percent (10%) of compensation, as defined in SEction 415(c)(3) of
the Code, but including any amounts contributed pursuant to a salary reduction
agreement which are excludible from such employee's gross income under the
provisions of Section 125, 402(a)(8), 402(h) or 403(b) of the Code, (B)
immediate participation and (C) full and immediate vesting and (2) Leased
Employees do not constitute more than twenty percent (20%) of the recipient's
nonhighly compensated workforce.
(ii) "Matching Contributions Account" means the account established and
maintained for each Participant to which any Matching Company Contribution made
to the Plan on his behalf is credited.
(jj) "Maternity or Paternity Absence" means any period of time during
which an Eligible Employee or Participant is absent from work by reason of
pregnancy, the birth of a child thereto or adoption of a child thereby or for
the purpose of caring for such child for a period beginning immediately
following such birth or adoption.
<PAGE>
(kk) "Named Fiduciary" means the Fiduciary or Fiducia ries named herein
who jointly or severally have the authority to control and manage the operation
and adminis tration of the Plan.
(ll) "Net Profit" means the amount of the taxable income of an Adopting
Company for Federal Income Tax pur poses for any Plan Year before any deduction
for any con tribution to be made to the Plan.
(mm) Non-Highly Compensated Employee means an Employee who is neither
a Highly-Compensated Employee nor a Family Member thereof.
(nn) "Non-Key Employee" means each Participant who is not a Key
Employee.
(oo) "Normal Retirement Age" means age sixty-five (65).
(pp) "Normal Retirement Date" means the first day of the first month
following the date upon which a Participant attains his Normal Retirement Age.
(qq) "One Year Break In Service" means each Vesting and Eligibility
Computation Period during which an Eligible Em ployee or Participant is not
credited with more than Five Hundred (500) Hours of Service. However, subject to
the conditions hereinafter set forth, for Plan Years beginning after August 23,
1984, an Eligible Employee or Participant shall be credited with the number of
Hours of Service with which he or she would have been credited but for any
absence from work constituting a Maternity or Paternity Absence or, if the
number of such hours may not be determined, with eight (8) Hours of Service for
each day of such absence. In general, any Hours of Service with which an
Eligible Employee or Participant is so credited shall be credited only to the
Eligibility or Vesting Computation Period during which such absence begins and
only if he or she would otherwise incur a One Year Break In Service during such
Period. However, if an Eligible Employee or Participant would not otherwise
incur a One Year Break In Service during the Eligibility or Vesting Computation
Period during which such Maternity or Paternity Absence begins, such Hours of
Service shall be credited to the immediately succeeding Eligibility or Vesting
Computation Period. Notwithstanding anything herein to the contrary, in no event
shall any Eli gible Employee or Participant be credited with more than Five
Hundred and One (501) Hours of Service in such Eligi bility or Vesting
Computation Period as a result of the foregoing provisions or with any such
Hours of Service un less he or she provides such information as may be reason
ably required to establish that such absence constitutes a Maternity or
Paternity Absence and the number of days of such absence qualifying as such on a
timely basis.
(rr) "Owner-Employee" means the owner of the entire interest in an
unincorporated trade or business or a partner who owns more than Ten Percent
(10%) of either the capital interest or profits interest in a partnership and,
to the extent provided in applicable regulations, an individual who has been an
Owner-Employee.
<PAGE>
(ss) "Participant" means an Eligible Employee of an Adopting Company
who has satisfied the requirements for par ticipation in the Plan.
(tt) "Party-In-Interest" means any person described in Section 3(14) of
the Act, which description includes but is not limited to any Fiduciary, any
person (including legal counsel) providing services to the Plan, an Adopting
Company and the Employees thereof.
(uu) "Plan" means the Employees' Profit Sharing (401(k)) Plan
established by this Agreement and all subse quent amendments thereof.
(vv) "Plan Year" means the twelve (12) consecutive month period
beginning on each July 1st and ending June 30.
(ww) "Self-Employed Individual" means, with respect to any taxable
year, an individual who has earned income for such Year and, to the extent
provided in applicable regula tions, includes any individual who would be
self-employed but for the fact that his or her trade or business did not have
any net profits for such year and any individual who has been a Self-Employed
Individual for any prior taxable year.
(xx) "Service Organization" shall mean an organization the principal
purposes of which is the performance of ser vices.
(yy) "Sponsoring Company" means PENHALL INTERNATIONAL, INC., a
California corporation.
(zz) "Top Heavy" means that the aggregate of the balan ces of the
Company Contributions Accounts of all Key Em ployees of all Adopting Companies
hereunder, including (i) any amounts distributed to any Participants, Former
Participants or Beneficiaries thereof during the five (5) Plan Years ending on
the immediately preceding Anniversary Date or, if the first Plan Year begins
after December 31, 1983, as of the Anniversary Date thereof, and (ii) any
contribution not actually made as of the Anniversary Date which is required to
be taken into account on that date under Section 416 of the Code and the
regulations thereunder, but excluding (i) any Rollover Contribution or similar
transfer initiated by an Eligible Employee or a Participant, made after December
31, 1983, and to a plan maintained by an employer other than an Adopting Company
or required to be aggregated with such Adopting Company pursuant to the
provisions of Section 414(b), (c) or (m) of the Code, (ii) the value of the
Company Contributions Account of each then Non-Key Employee of all Adopting Com
panies who was previously a Key Employee and (iii) for Plan Years beginning
after December 31, 1984, the value of the Company Contributions Account of any
individual who has not performed any services for an Adopting Company or any
other employer described in clause (i) hereinbefore at any time during the five
(5) Plan Years ending on such Anniversary Date, exceeds Sixty Percent (60%) of
the aggregate of the balances of the Company Contributions Accounts of all Par
ticipants (with the same inclusions and exclusions) as of such Anniversary Date.
Moreover, the Plan shall be aggre gated with each other plan maintained by an
Adopting Company in which a Key Employee participates or which enables the Plan
to meet the requirements of Section 401(a)(4) or 410 of the Code and may be
aggregated with any
<PAGE>
other plan main tained by an Adopting Company with which the Plan need not be so
aggregated but which meets the requirements of said Sections of the Code when
considered together therewith.
(aaa) "Top Heavy Compensation" means the maximum amount of the
Compensation of a Participant who is employed by an Adopting Company which may
be taken into account dur ing any Plan Year the Plan is Top Heavy with respect
to such Adopting Company for purposes of determining the amount of deductible
contributions hereto (currently Two Hundred Thousand Dollars ($200,000)), as
adjusted by the Adjustment Factor.
(bbb) "Top-paid Group of Employees" means the Employees who, when
ranked on the basis of Compensation, constitute the Twenty Percent (20%) of the
Employees receiving the greatest Compensation for the Plan Year; provided,
however, that Employees who (i) have not completed six (6) months of service,
(ii) normally work less than Seventeen and One-half (17-1/2) hours per week,
(iii) normally work less than six (6) months during the year, (iv) have not
attained the age of twenty-one (21) years, (v) except to the extent provided in
regulations, are Employees who are included in a unit of Employees covered by an
agreement which the Secretary of Labor finds to be a collective bargaining
agreement between employee representatives and an Adopting Company, if there is
evidence that retirement benefits were the subject of good faith bargaining
between such employee representatives and such Adopting Company or Companies, or
(vi) are non-resident aliens as defined in Section 414(q)(8)(F) of the Code
shall be excluded for purposes of determining the number of such Employees.
(ccc) "Trust" means the trust established and maintained pursuant to
the provisions of this Agreement.
(ddd) "Trust Fund" means the assets held by the Trustee hereof for and
on behalf of the Plan and the Participants.
(eee) "Trustee" means the person, persons or other en tities designated
by the Sponsoring Company as the Trustee hereof and initially means Roger C.
Stull.
(fff) "Year of Service" for eligibility purposes means each Eligibility
Computation Period during which an Eligible Employee is credited with at least
One Thousand (1,000) Hours of Service and for benefit accrual purposes means
each Plan Year during which a Participant is credited with at least One Thousand
(1,000) Hours of Service. In determining the number of Years of Service with
which an Eligible Employee or Participant is credited for eligibility and
benefit accrual purposes, service with both the Sponsoring Company and any
Adopting Company shall be taken into consideration and service with any
predecessor to the Spon soring Company or an Adopting Company shall be taken
into consideration if the Plan was established or maintained by such
predecessor.
<PAGE>
ARTICLE II
PARTICIPATION
2.1 - Commencement of Participation.
Each Eligible Employee shall commence participation on the Entry Date
coinciding with or immediately following the later of (a) the last day of his
first Eligibility Compu tation Period for which he is credited with a Year of
Service for eligibility purposes or (b) the date upon which he attains the age
of twenty-one (21) years.
2.2 - Certification By Adopting Company.
Within thirty (30) days after each Entry Date, each Adopting Company
shall notify the Sponsoring Company's Com mittee, in writing, of the Eligible
Employees employed thereby who have become eligible to participate in the Plan
as of such Entry Date. Such notification shall be in such form and contain such
information as the Sponsoring Company's Committee may specify and, except in the
case of a possible mistake, need not be questioned by such Committee.
2.3 - Enrollment of Participant and Designation of Beneficiary.
Each Eligible Employee shall, upon notification that he has become a
Participant hereunder, designate a Bene ficiary, in writing, on a form provided
by and filed with the Sponsoring Company's Committee. An unmarried Participant
may, from time to time, change his Beneficiary without the consent of such
Beneficiary by filing a new written designation with the Sponsoring Company's
Committee. A married Participant may, from time to time, change his Beneficiary
by filing a new written designation with the Sponsoring Company's Committee but,
if such Participant desires to designate a party other than his spouse as a
Beneficiary of all or any portion of the amount payable from the Plan upon his
death, only with the written consent of his spouse. Any such written consent by
a Participant's spouse shall be witnessed by a Notary Public unless it is
established to the satisfaction of such Committee that such consent is not
required as a result of a prior written con sent or cannot be obtained because
such Participant is not married, because his spouse cannot be located or because
of such other circumstances as may be prescribed in any regula tions promulgated
under Section 417 of the Code. The Sponsoring Company's Committee, the Adopting
Company by which such Participant is employed and the Trustee may rely upon the
last designation so filed for purposes of making distribution of any amount
payable hereunder as the result of a Participant's death.
2.4 - Duration of Participation.
A Participant shall continue to participate during his subsequent
employment with any Adopting Company until the date he separates from the
service thereof for any reason ("Separation Date").
2.5 - Retirement.
<PAGE>
A Participant shall retire on his Normal Retirement Date unless he
elects to continue in the employ of an Adopt ing Company beyond such date with
the approval thereof.
2.6 - Reparticipation By Former Participant.
A Former Participant shall again become a Participant on his
subsequent Date of Re-employment.
2.7 - Ineligible Employees.
An Employee who is not an Eligible Employee shall be come a
Participant on the Entry Date coinciding with or next following the date such
Employee first meets the re quirements specified in Section 2.1. A Participant
who loses his status as an Eligible Employee and subsequently regains such
status shall again become a Participant on the date he regains status as an
Eligible Employee.
<PAGE>
ARTICLE III
COMPANY CONTRIBUTIONS
3.1 - Obligation.
Prior to the execution hereof, the Sponsoring Company has paid to the
Trustee the sum of at least One Hundred Dol lars ($100.00) as its initial
contribution to the Trust and each Adopting Company shall, subject to its rights
under Article X, make additional contributions for each Plan Year of the amount
determined under Section 3.2.
3.2 - Adopting Company Contributions.
Each Plan Year, each Adopting Company shall make a contribution to the
Plan on behalf of each Participant em ployed thereby who has elected to have his
Compensation re duced pursuant to the provisions of Section 4.1 hereof of the
amount equal to the sum of (a) such Participant's Salary Reduction Amount (the
"Salary Reduction Contribution") and (b) may, but shall not be required to, make
an additional contribution (the "Matching Contribution"), whether or not such
Adopting Company has current or accumulated Net Profits for such Year. The
Salary Reduction Contribution, if any, made on behalf of each Participant shall
be credited to his Company Contributions Account. Notwithstanding the foregoing,
the Plan is designed and intended to qualify as a profit sharing plan for
purposes of Section 401(a), 402 and 417 of the Code.
3.3 - Limitations on Contributions.
The total amount of the contribution made to the Plan by any Adopting
Company for any Plan Year shall not exceed Fifteen Percent (15%) of the Net
Compensation of all Participants employed thereby for such Year. Moreover, the
Net Compensation of each Participant taken into account for purposes of the
computing the foregoing limitation shall not exceed Two Hundred Thousand Dollars
($200,000), as adjusted by the Adjustment Factor.
3.4 - Payment of Contributions.
Each Adopting Company shall deliver its Salary Reduc tion
Contributions to the Trustee at such time or times as may be convenient for such
Adopting Company but in any case within forty-five (45) days of the date any
such amounts are deducted from the Compensation of the Participants employed
thereby. In addition, each Adopting Company shall deliver any Matching
Contributions made thereby for any Plan Year to the Trustee but may do so on any
date or dates selected by such Company so long as all of such contributions are
so delivered to the Trustee within the time permitted by the Code to obtain a
Federal income tax deduction for such Year. Any amount delivered to the Trustee
after the last day of any Plan Year but within such time shall be treated as a
contribution on account of such Year and as if delivered on the last day thereof
provided such amount has either been designated as a contribution on account of
or is claimed as a deduction for such Year.
<PAGE>
ARTICLE IV
PARTICIPANTS' SALARY REDUCTIONS
4.1 - Salary Reductions.
Subject to the provisions hereinafter set forth in this Article IV,
each Participant shall elect to have his Compensation for each Plan Year (or, if
such Participant's Entry Date is any day other than the first day of a Plan
Year, initially for the period beginning with his Entry Date and ending with the
following Anniversary Date, and thereaf ter, for each Plan Year) reduced by such
amount as he may select ("Salary Reduction Amount").
4.2 - Specification of Salary Reduction Amount.
(a) Each Participant shall specify his Salary Reduction Amount in a
written election delivered to the Adopting Company by which he is employed
during the first Salary Reduction Election Period beginning immediately prior to
his Entry Date. The term "Salary Reduction Election Period" means each thirty
(30) day period ending on each May 1st or December 1st subsequent to the
Effective Date.
(b) Each Participant shall specify his Salary Reduction Amount in the
form of a percentage, in increments of one percent (1%), or, with the approval
of the Adopting Company by which he is employed in accordance with a uniform and
non-discriminatory policy, of a fixed dollar amount, of his Compensation for
each regular payroll period.
4.3 - Modification of Salary Reduction Amount.
A Participant may modify his Salary Reduction Amount only during a
subsequent Salary Reduction Election Period or during such other periods as the
Sponsoring Company, in ac cordance with a uniform and non-discriminatory policy,
may specify from time to time. Any such modification shall be effective as of
the first day of the first regular payroll period beginning at least fifteen
(15) days after the date upon which written notice of such modification is
delivered by the Participant to the payroll or accounting department of the
Adopting Company by which he is employed.
4.4 - Revocation of Salary Reduction Election.
A Participant may revoke his election to have his Com pensation
reduced at any time but shall not thereafter be entitled to make any subsequent
election to again reduce his Compensation until the next succeeding Salary
Reduction Election Period. Any such revocation shall be effective as of the
first day of the first regular payroll period begin ning at least fifteen (15)
days after the date upon which written notice of such revocation is delivered to
the payroll or accounting department of the Adopting Company by which he is
employed.
<PAGE>
4.5 - Limitations on Salary Reduction Amounts.
(a) The Salary Reduction Amount of each Participant who is a Highly
Compensated Employee, when expressed as a percentage of his Net Compensation,
shall not exceed Twelve Percent (12%) for any Plan Year, the Salary Reduction
Amount of each Participant who is a Non-Highly Compensated Employee, when
expressed as a percentage of his Net Compen sation, shall not exceed Seventeen
and Sixty Five One Hundredths Percent (17.65%) of his Net Compensation for any
Plan Year and, in the case of any Participant, shall not exceed the Calendar
Year Elective Deferral Dollar Limitation, whether he is a Highly Compensated
Employee or a Non-Highly Compensated Employee.
(b) Notwithstanding anything herein to the contrary, each Adopting
Company shall have the right and shall be re quired to limit the Salary
Reduction Amount of each Parti cipant employed thereby who is a Highly
Compensated Employee to the extent necessary to assure that the Average Actual
Deferral Percentage for the Highly Compensated Employees ("High Average Actual
Deferral Percentage") for each Plan Year, after giving effect to the provisions
of Section 5.1 for such Year, will not exceed the higher of the following two
percentages ("Percentage Limitations"):
(1) The percentage which is one and one-quarter (1 1/4) times
the Average Actual Deferral Percentage for all Participants who are not
Highly Compensated Employees ("Low Average Actual Deferral
Percentage"); or
(2) The percentage which is two (2) times the Low Average
Actual Deferral Percentage; provided such percentage does not exceed
the Low Average Actual Deferral Percentage by more than
two (2) percentage points.
(c) The term "Average Actual Deferral Percentage" means the average of
the Actual Deferral Percentages of the relevant group of Participants; the term
"Actual Deferral Percentage" means for a specified group of Participants for a
Plan Year, the average of the ratios (calculated separately for each Participant
in such group) of (1) the amount of Salary Deferral Contributions actually paid
over to the Trust on behalf of such Participant for the Plan Year to (2) the
Participant's Compensation for such Plan Year. Salary Deferral Contributions on
behalf of any Participant shall include Excess Deferrals of Highly Compensated
Employees, but exclude Excess Deferrals of Non-highly Compensated Employees that
arise solely from Salary Deferral Contributions made under the Plan or plans of
an Adopting Company. For purposes of computing Actual Deferral Percentages, an
Employee who would be a Participant but for the failure to make Salary Deferral
Contributions shall be treated as a Participant on whose behalf no Salary
Deferral Contributions are made.
4.6 - Distribution of Excess Contributions.
<PAGE>
(a) "Excess contributions" means, with respect to any Plan Year, the
excess of:
(1) The aggregate amount of Salary Deferral Contributions
actually taken into account in computing the Actual Deferral Percentage
of Highly Compensated Employees for such Plan Year; over
(2) The maximum amount of such amounts permitted by the Actual
Deferral Percentage test (determined by reducing contributions made on
behalf of Highly Compensated Employees in order of the Actual Deferral
Percentage, beginning with the highest of such percentages).
(b) Notwithstanding any other provision of this Plan, excess
contributions, plus any income and minus any loss allocable thereto, shall be
distributed no later than the last day of each Plan Year to Participants to
whose Accounts such excess contributions were allocated for the preceding Plan
Year. If such excess amounts are distributed more than 2-1/2 months after the
last day of the Plan Year in which such excess amounts arose, a ten (10) percent
excise tax will be imposed on the Adopting Company with respect to such amounts.
Such distributions shall be made to Highly Compensated Employees on the basis of
the respective portions of the excess contributions attributable to each such
Employee. Excess contributions shall be allocated to Participants who are
subject to the Family Member aggregation rules of Section 414(q)(6) of the Code
in proportion to the Salary Deferral Contributions of each Family Member that is
combined to determine the combined Actual Deferral Percentage. Excess
contributions shall be treated as Annual Additions under the Plan.
(c) Excess contributions shall be adjusted for any income or loss up to
the date of distribution. The income or loss allocable to excess contributions
is the sum of: (1) income or loss allocable to the Participant's Company
Contributions Account for the Plan Year multiplied by a fraction, the numerator
of which is such Participant's excess contributions for the year and the
denominator of which is the Participant's Company Contributions Account without
regard to any income or loss occurring during such Plan Year; and (2) ten
percent of the amount determined under (1) multiplied by the number of whole
calendar months between the end of the Plan Year and the date of distribution,
counting the month of distribution if distribution occurs after the 15th day of
such month.
4.7 - Additional Rules.
(a) The Actual Deferral Percentage for any Participant who is a Highly
Compensated Employee for the Plan Year and who is eligible to have Salary
Deferral Contributions allocated to his Accounts under two or more arrangements
described in Section 401(k) of the Code that are maintained by an Adopting
Company or any Affiliated Company, shall be determined as if such Salary
Deferral Contributions were made under a single arrangement. If a Highly
Compensated Employee participates in two or more cash or deferred arrangements
that have different Plan Years, all cash or deferred arrangements ending with or
within the same
<PAGE>
calendar year shall be treated as a single arrangement. Notwithstanding the
foregoing, certain plans shall be treated as separate if mandatorily
disaggregated under the regulations of Code Section 401(k).
(b) In the event that this Plan satisfies the requirements of Sections
401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
sections of the Code only if aggregated with this Plan, then this Section shall
be applied by determining the Actual Deferral Percentage of Employees as if all
such plans were a single plan. For Plan Years beginning after December 31, 1989,
plans may be aggregated in order to satisfy Section 401(k) of the Code only if
they have the same Plan Year.
(c) Each Adopting Company shall maintain records sufficient to
demonstrate satisfaction of the Actual Deferral Percentage test.
(d) The determination and treatment of the Actual Deferral Percentage
amounts of any Participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
(e) The Compensation and Salary Deferral Contributions of an individual
who is a 5 percent owner as determined under Section 416(i) of the Code or one
of the ten most highly-paid Highly Compensated Employees shall include the
Salary Deferral Contributions of Family Members of such individual. Such Family
Members shall be disregarded as separate Employees in determining the Actual
Deferral Percentage both for Participants who are Nonhighly Compensated
Employees and for Participants who are Highly Compensated Employees.
(f) Salary Deferral Contributions must be deposited into the Trust
before the last day of the twelve-month period immediately following the Plan
Year to which contributions relate in order to be considered in calculating the
Actual Deferral Percentage. 4.8 - Excess Deferrals.
On or before March 1 of any year, each Participant may advise the
Sponsoring Company's Committee of the amount by which the aggregate of all
elective deferrals he has made during the immediately preceding calendar year to
all plans described in Sections 401(k), 403(b) and 408(k) of the Code exceeds
the Calendar Year Elective Deferral Dollar Limitation, if any ("Excess
Deferrals") and the amount, if any, of such Excess Deferrals which he desires to
be deemed to have been made to this Plan. If a Participant designates any
portion of the Salary Deferral Contribution contributed to this Plan on his
behalf as an Excess Deferral, the Committee shall direct the Trustee to
distribute such amount, together with any income attributable thereto, to such
Participant on or before the following April 15th. The income or loss allocable
to Excess Deferrals is the sum of: (1) income or loss allocable to the
Participant's Company Contributions Account for the preceding calendar year
multiplied by a fraction, the numerator of which is such Participant's Excess
Deferrals for such year and the denominator is the Participant's account balance
attributable to Salary Deferral Contributions without regard to any income or
loss occurring during such year; and (2) ten percent of the amount determined
under (1) multiplied
<PAGE>
by the number of whole calendar months between the end of such year and the date
of distribution, counting the month of distribution if distribution occurs after
the 15th day of such month.
<PAGE>
ARTICLE V
MATCHING CONTRIBUTIONS
5.1 - Allocation of Matching Contributions.
(a) Any contribution made by an Adopting Company for a Plan Year shall
first be allocated to the Matching Contribu tions Accounts of those Participants
employed thereby who have been credited with a Year of Service for such Year as
follows:
(1) For the Plan Year ending June 30, 1990, if the High
Average Actual Deferral Percentage for such Plan Year would exceed the
higher of the two Percentage Limitations described in Section 4.5(b),
the portion of such Adopting Company's contribution for such Year which
equals the smal lest aggregate amount which, when allocated to the
Matching Contributions Accounts of those Partici pants employed thereby
who are Non-Highly Compensated Employees in the same ratios which each
such Participant's Salary Reduction Contribution for such Year bears to
the aggregate of the Salary Reductions Contributions of all of such
Participants and included as constituting Salary Reduction
Contributions of such Participants in computing the Low Average Actual
Deferral Percentage, will result in the High Ave rage Actual Deferral
Percentage meeting one of such Percentage Limitations shall be
allocated to the Matching Company Contributions Accounts of such
Participants who are Non-Highly Compensated Employees. By so providing,
each Adopting Company intends that any amount allocated to the Matching
Contributions Account of a Participant who is a Non-Highly Compensated
Employee pursuant to the provisions of this Section 5.1(a)(1)
constitute a qualified nonelective contribution. Accordingly, all of
such amounts shall be deemed to constitute Salary Reduction
Contributions for purposes hereof.
(2) For Plan Years beginning after June 30, 30, 1990, the
portion of such Adopting Company's contribution which equals the
aggregate amount which, when allocated to the Matching Contributions
Account of each Participant employed thereby on the basis of One Dollar
($1.00) for each One Dollar ($1.00) of such Participant's Sal ary
Reduction Contribution for such Year up to but not exceeding Two
Hundred Dollars ($200.00), or such other amount as the Sponsoring
Company may specify for such Plan Year (the "Dollar For Dollar Match
Limit"), shall be allocated to each such Participant's Matching
Contributions Account. All of such amounts shall be deemed to
constitute Salary Reduction Contributions for all purposes hereof other
than the provisions of Section 5.1(a)(4); thereafter, for succeeding
Plan Years beginning after June 30, 1991, the portion of such Adopting
Company's contribution which equals the aggregate amount which, when
allocated to the Matching
<PAGE>
Contributions Account of each Participant employed thereby on the basis
of Fifty Cents ($0.50) for each One Dollar ($1.00) of such
Participant's Salary Reduction Contribution for such Year up to but not
to exceed Four Hundred Dollars ($400.00), or such other amount as the
Sponsoring Company may specify for such Plan Year (the "50% Match
Limit"), shall be allocated to each such Participant's Matching
Contributions Account. All of such amounts shall be deemed to
constitute Salary Reduction Contributions for all purposes hereof other
than the provisions of Section 5.1(a)(4).
(4) For Plan Years beginning after June 30, 1990, if the High
Average Actual Deferral Per centage for such Plan Year would exceed the
higher of the two Percentage Limitations described in Section 4.5(b),
the portion of such Adopting Company's contribution for such Year which
equals the smallest aggregate amount which, when allocated to the
Matching Contributions Accounts of those Participants employed thereby
who are Non-Highly Compensated Employees in the same ratios which each
such Participant's Salary Reduction Contribution for such Year bears to
the aggregate of the Salary Reductions Contributions of all of such
Participants and included as constituting Salary Reduction
Contributions of such Participants in computing the Low Average Actual
Deferral Percentage, will result in the High Average Actual Deferral
Percentage meeting one of such Percentage Limitations shall be
allocated to the Matching Company Contributions Accounts of such
Participants who are Non-Highly Compensated Employees. By so providing,
each Adopting Company intends that any amount allocated to the Matching
Contributions Account of a Participant who is a Non-Highly Compensated
Employee pursuant to the provisions of this Section 5.1(a)(3)
constitute a qualified nonelective contribution. Accordingly, all of
such amounts shall be deemed to constitute Salary Reduction
Contributions for purposes hereof.
(5) If the contribution made by an Adopting Company for the
Plan Year ending June 30, 1990, exceeds the amount, if any, required to
be allocated to the Matching Contributions Accounts of Participants who
are Non-Highly Compensated Employees pursuant to the provisions of
Section 5.1(a)(1), or, for Plan Years beginning after June 30, 1990,
the amount, if any, required to be allocated to the Matching
Contributions accounts of Participants who are Non-Highly Compensated
Employees pursuant to the provisions of Section 5.1(a)(3), the balance
of such Adopting Company's contributions for such Year shall be
allocated to the Matching Contributions Accounts of those Participants
employed thereby who have been credited with a Year of Service for such
Year in the same ratios that each such Participant's Salary Reduction
Contribution for such Year bears to the Salary Reduction Contributions
of all Participants employed thereby for such Year; provided,
<PAGE>
however, that the Salary Reduction Contribution for such Year of each
Participant who is a Non-Highly Compensated Employee shall be deemed to
include the amount, if any, required to be allocated to the Matching
Contribution Account of such Participant pursuant to the provisions of
Section 5.1(a)(1) or 5.1(a)(3), as the case may be. By so providing,
each Adopting Company intends to comply with the provisions of Section
401(m)(3) of the Code.
(b) Notwithstanding the provisions of subsection (a) hereinabove, if
an Adopting Company does not maintain a qualified defined benefit retirement
plan, or does maintain such a plan but each Non-Key Employee thereof does not ac
crue the minimum benefit thereunder required by Section 416 of the Code, such
Adopting Company's contribution, if any, for any Plan Year beginning after
December 31, 1983 for which this Plan is Top Heavy as to such Adopting Company
shall be allocated on the basis of the Top Heavy Compensa tion of each
Participant therein and in such manner as may be prescribed by the Code or any
pertinent regulations pro mulgated thereunder as will result in each Non-Key
Employee who is a Participant therein receiving an allocation here under of the
amount which, when added to the amount allocat ed to his Company Contribution
Account under any other qualified defined contribution retirement plan
maintained by such Adopting Company for such Year, will at least equal the
lesser of (i) Three Percent (3%) of his Top Heavy Compensa tion, (ii) the
highest percentage computed by dividing the amount of the Company contributions
so allocated to the Ac counts of each Key-Employee who is a Participant therein
by his Top Heavy Compensation, or (iii) the amount otherwise required after any
credit against or reduction of the mini mum amounts described in clauses (i) or
(ii) allowable for benefits accrued under any such defined benefit plan. How
ever, if such Adopting Company maintains any other qualified defined benefit
retirement plan and this Plan is aggregated therewith for purposes of meeting
the requirements of Sec tion 401(a)(4) or 410 of the Code, the minimum amount
des cribed in clause (ii) of the preceding sentence shall not be applicable.
Further, if such Adopting Company maintains any other qualified defined benefit
plan for purposes of provid ing the additional benefits permissible by Section
415 of the Code, and each Non-Key Employee does not accrue the minimum benefit
thereunder required by Section 416 of the Code, the percentage set forth in
clause (i) hereinabove shall be deemed to be Four Percent (4%). For purposes of
the foregoing, the term Non-Key Employee shall include each Non-Key Employee who
must be considered to be a Participant to satisfy the coverage requirements of
Section 410(b) of the Code in accordance with Section 401(a)(5) of the Code,
whether or not he has been credited with One Thousand (1,000) Hours of Service,
declined to make mandatory contri butions to the Plan or has been excluded from
the Plan be cause his Compensation is less than a stated amount set forth in the
Plan.
(c) The Annual Additions to a Participant's Accounts (including the
additions to his accounts under any other qualified defined contribution
retirement plan to which an Affiliated Company contributes on his behalf) during
any Plan Year shall not exceed the lesser of (i) the greater of (A) Thirty
Thousand Dollars ($30,000) or (B) one quarter (1/4) of the Defined Benefit
Dollar Limit (as defined in Section 5.2(a)(3)), or (ii) Twenty-Five Percent
(25%) of his Compensation during
<PAGE>
such Plan Year. If a short limitation year is created because of an amendment
changing the limitation year to a different 12-consecutive month period, the
maximum permissible amount will not exceed the defined contribution dollar
limitation multiplied by the following fraction:
Number of months in the short limitation year: 12
The term "Annual Additions" means the sum of:
(1) each Affiliated Company's contributions;
(2) the Participant's voluntary contributions for such period;
and
(3) any amounts contributed by an Affiliated Company and
allocated to any individual medical account which is part of any
pension or annuity plan, including the Plan, maintained by such Company
and any amounts contributed by such Company and allocated to a separate
account main tained by such Company in connection with a funded welfare
benefit plan from which medical or life insurance benefits are provided
for a Key Employee employed thereby after retirement.
If the Annual Additions to a Participant's Accounts for any Year would exceed
the limitation described hereinabove, the amount by which such Annual Additions
so exceed such limita tion ("Excess Annual Additions") shall be credited to a
suspense account, such suspense account shall be adjusted as of the immediately
following Anniversary Date to reflect the increase or decrease in the fair
market value of the Trust Fund attributable thereto (including gains and other
income or losses thereof as of such Anniversary Date and shall then be allocated
or reallocated to the Company Contributions Accounts of all Participants
employed by the Adopting Company making the contributions resulting in such
Excess Annual Additions who have been credited with a Year of Service for
benefit accrual purposes as of such Anniversary Date in the same ratios that
each such Participant's Compen sation for the Plan Year ending with such
Anniversary Date bears to the total Compensation of all of such Participants for
such Plan Year before allocation of any contributions made to the Plan for such
Plan Year by such Adopting Company. Moreover, if the Plan is terminated, the
balance then credited to the suspense account and not previously reallocated to
the Participant's Company Contributions and Matching Contributions Accounts
shall revert to the appropriate Adopting Company, notwithstanding any provision
hereof to the contrary.
5.2 - Additional Limitations in the Event of Adopting Company Defined Benefit
Pension Plan.
(a) If an Affiliated Company has established or establishes and
maintains a qualified defined benefit pen sion plan, the sum of the Defined
Benefit Fraction and the Defined Contribution Fraction for each Participant
therein for any Plan Year shall not exceed 1.0.
<PAGE>
(1) The Defined Benefit Fraction for each Participant for any
Year is a fraction, the numerator of which is the Participant's
projected annual benefit under such defined benefit pension plan and
the denominator of which is the lesser of (i) the product of 1.25
multiplied by the Defined Benefit Dollar Limit for such Year or (ii)
the product of 1.4 multiplied by his Defined Benefit Compensation
Limit.
Nothwithstanding the above, at the election of the
Committee, if the Participant was a Participant as of the first day of
the first limitation year beginning after December 31, 1986, in one or
more defined benefit plans maintained by an Affiliated Company which
were in existence on May 6, 1986, the denominator of this fraction will
not be less than 125 percent of the sum of the annual benefits under
such plans which the Participant had accrued as of the close of the
last limitation year beginning before January 1, 1987, disregarding any
changes in the terms and conditions of the Plan after May 5, 1986. The
preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Section
415 for all limitation years beginning before January 1, 1987.
(2) The Defined Contribution Fraction for each Participant for
any Year is a fraction, the numerator of which is the sum of the Annual
Addi tions to his account for such Year and the denomi nator of which
is the lesser of (i) the product of (A) 1.25 and (B) Thirty Thousand
Dollars ($30,000), as adjusted by the Adjustment Factor, or (ii) the
product of (A) 1.4 and (B) Twenty-five Percent (25%) of his
Compensation for such Year. Notwithstanding the foregoing, at the
election of the plan administrator, the amount taken into account for
purposes of computing the denominator of the Defined Contribution
Fraction of any Par ticipant for all Years ending before January 1,
1983 shall be equal to the product of (i) the amount determined as the
denominator of the Defined Contribution Fraction for the Year ending in
1982 multiplied by (ii) a fraction the numer ator of which is the
lesser of (a) $51,875 or (b) the product of 1.4 multiplied by
Twenty-five Percent (25%) of his Net Compensation for the Year ending
in 1981, and the denominator of which is the lesser of (a) $41,500 or
(b) Twenty-five Percent (25%) of his Net Compensation for the Year
ending in 1981.
Notwithstanding the foregoing, at the election of the
Committee, if the Employee was a Participant as of the end of the first
day of the first limitation year beginning after December 31, 1986, in
one or more defined contribution plans maintained by an Affiliated
Company which were in existence on May 6, 1986, the numerator of this
fraction will be adjusted if the sum of this fraction and the defined
benefit fraction would otherwise exceed 1.0 under the terms of this
Plan. Under the adjustment, an
<PAGE>
amount equal to the product of (1) the excess of the sum of the
fractions over 1.0 times (2) the denominator of this fraction, will be
permanently subtracted from the numerator of this fraction. The
adjustment is calculated using the fractions as they would be computed
as of the end of the last limitation year beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the
Plan made after May 5, 1986, but using the Section 415 limitation
applicable to the first limitation year beginning on or after January
1, 1987. The annual addition for any limitation year beginning before
January 1, 1987, shall not be recomputed to treat all employee
contributions as annual additions.
(3) The Defined Benefit Dollar Limit for any Year is the
projected annual benefit provided for a Participant by an Adopting
Company's contribu tions to any defined benefit pension plan estab
lished and maintained by such Adopting Company, expressed as a benefit
payable annually in the form of a straight life annuity with no
ancillary benefits which does not exceed the lesser of (i) Ninety
Thousand Dollars ($90,000), as adjusted by the Adjustment Factor, or
(ii) One Hundred Percent (100%) of his Compensation averaged over his
high Three (3) years; provided, however, that both such limits shall be
reduced by One-tenth (1/10th) (i) for Plan years beginning before
January 1, 1987, for each Year of Service for benefit accrual pur poses
or (ii) for Plan Years beginning before December 31, 1986, for each
year of participation in the plan less than Ten (10) which such Partici
pant will have at his Normal Retirement Date. In addition, the Defined
Benefit Dollar Limit shall be further adjusted in accordance with any
regulations promulgated under Section 415 of the Code, as follows:
(a) If payment of a Participant's re tirement income
benefit under such defined benefit pension plan would begin before the
age used as retirement age under Section 216(1) of the Social Security
Act without regard to the age increase factor and as if the early
retirement age under said section of the Social Security Act were
sixty-two (62) (the "Social Security Retirement Age") to the equivalent
of an annual retirement income benefit of the Defined Benefit Dollar
Limit beginning at the Social Security Retirement Age.
(b) For Plan Years beginning before January 1, 1987,
if payment of a Participant's retirement income benefit would begin
before age Fifty-five (55), to the equivalent of an annual retirement
income benefit of Seventy-Five Thousand Dollars ($75,000) beginning age
Fifty-five (55); or
(c) For Plan Years beginning before January 1, 1987,
if payment of such benefit would begin after age Sixty-five (65), or,
for Plan Years beginning after December 31, 1986, the Social Security
Retirement Age, to the
<PAGE>
equivalent of an annual retirement income benefit of the Defined
Benefit Dollar Limit beginning at age Sixty-five (65) or the Social
Security Retirement age, as the case may be.
In making the adjustments described in sub-subsec tions (a) and (b)
above, the interest rate assump tion shall be no less than the greater
of Five Percent (5%) or such other rate as may be specified in the
plan, and in making the adjustment described in subsubsection (c)
above, the interest rate assumption shall be no greater than the lesser
of Five Percent (5%) or such other rate as may be specified in such
plan. Moreover, the accrued benefit of each Non Key Employee shall be
computed (i) under the method, if any, which is applied uniformly to
all defined pension plan maintained by the Company for purposes of
computing accrued benefits or (ii) as if such benefit accrued at a rate
which is not more rapid than the slowest rate at which benefits may be
accrued pursuant to the fractional rule described in Section
411(b)(1)(C) of the Code.
5.3 - Annual Valuation.
On each Anniversary Date, each Participant's Accounts, including the
Accounts of Inactive Participants, shall be adjusted to reflect the net increase
or decrease in the fair market value of the assets constituting the Trust Fund
since the preceding Anniversary Date. Any such increase or de crease
attributable to (a) assets which have been acquired at the direction of
Participants shall be allocated solely to the Accounts to which such assets are
credited, (b) any Contract shall be deemed to have been credited to the Ac
counts of the Participants for whom held and (c) the assets not described in the
preceding clauses (a) and (b) shall be apportioned among the Participant's
Accounts in the same ratios which the fair market value of each of such Accounts
attributable to such assets bore to the aggregate fair market value of such
assets or the proceeds or avails of which assets were used to acquire such
assets as of the preceding Anniversary Date. Moreover, any expenses incurred in
connection with the acquisition or disposition of assets which have been
acquired at the direction of Participants, including any additional
administration expenses incurred in connection therewith, shall be charged
solely to the Accounts to which such Assets are allocated and if any Contracts
constitute part for the Trust Fund, the interest of each Participant therein
shall be deemed to have been allocated to the appropriate Accounts thereof. No
Adopting Company, any member of the Committee established thereby or Trustee
warrant, guarantee or represent in any manner or to any extent that the value of
a Participant's Accounts will at any time equal or exceed the total amount
previously contributed thereto by any Adopting Company, any Participant or both.
5.4 - Interim Valuations.
The fair market value of the assets, other than assets acquired at the
direction of Participants and interests in Contracts, allocated to the Accounts
of a Participant whose participation hereunder ceases as
<PAGE>
of a date other than an Anniversary Date shall not be revalued as of such date
unless a substantial change in the fair market value of such assets has
occurred. In any such case, the Committee shall cause the Trustee to determine
the fair market value of the assets constituting the Trust Fund, other than
assets acquired at the direction of Participants and interests in any Contracts,
as of the last day of the calendar month immediately preceding the month during
which such Participant's participation hereunder ceases, divide such fair market
value by the fair market value of such assets as of the preceding Anniversary
Date and multiply the result thereof by the portion of the values of the
Participant's Accounts attributable thereto as of the immediately preceding
Anniversary Date. All such interim valuations shall be made in a uniform and
nondiscriminatory manner.
<PAGE>
ARTICLE VI
BENEFITS
6.1 - Vesting of Company Contributions.
Each Participant shall have a nonforfeitable vested interest in the
balances credited to his Company Contribu tions and Matching Contributions
Accounts, which balances shall be determined, at any point in time, after any
adjust ments required to be made pursuant to the provisions of Article V.
6.2 - Changes in Vesting Schedule.
Notwithstanding anything herein to the contrary, each Participant who
has been credited with three (3) or more Years of Service for vesting purposes
as of the date any modification of the schedule used to determine such Partici
pant's vested percentage in his Accrued Benefit becomes effective shall have the
right to elect, during the period beginning with the effective date of such
modification and ending on the later of (a) the date which is sixty (60) days
after such date or (b) the date which is sixty (60) days after the date upon
which such Participant is provided with written notice of such modification, to
elect to have his vested percentage in his Accrued Benefit determined in
accordance with the schedule in effect prior to such modi fication.
6.3 - Amount Distributable.
A Participant shall be entitled to receive the amount equal to the
balances of his Company Contributions and Matching Contributions Accounts,
adjusted in accordance with the provisions of Section 5.3, and further adjusted,
if required, in accordance with the provisions of Section 5.4 ("Distributable
Amount").
6.4 - Events Entitling Participant of Beneficiary to Distribution.
Except as provided in Section 6.9, a Participant or his Beneficiary
shall only be entitled to distribution of his, or in the case of a Beneficiary,
such Participant's Distributable Amount as a result of his attainment of his
Normal Retirement Age, becoming disabled within the meaning of Section 5.1(b) or
termination of employment with all Adopting Companies or, in the case of a
Beneficiary of a Participant whose participation hereunder ceases as a result of
his death, the Participant's death, termination of the Plan without the
establishment of a successor plan (other than an employee stock ownership plan
under Code Section 4975(e) or a simplified employee pension under Code Section
408(k))or the occurrence of any other event prescribed in Section 401(k)(2)(B)
of the Code, subject to the provisions of Section 6.8.
6.5 - Distribution of Benefits.
(a) When a Participant becomes entitled to receive distribution of his
Distributable Amount, the Sponsoring Company's Committee shall,
<PAGE>
upon computing the amount thereof, authorize and direct the Trustee to make
distribution of such benefit in a lump sum; provided, however, that if the
amount thereof exceeds Three Thousand Five Hundred Dollars ($3,500), the written
consent of both such Participant and his spouse, if any, shall be required
within the 90-day period ending on the Annuity Starting Date. Further, if such
sum is less than Thirty Five Hundred Dollars ($3,500) but distribution thereof
is to be made after the Participant's Annuity Starting Date, the written consent
of the Participant and his spouse, if any, or if the Participant has died, of
his surviving spouse, shall be required.
(b) The Sponsoring Company's Committee shall notify the Participant and
the Participant's spouse of the right to defer any distribution of the
Participant's Distributable Amount. Such notification shall include a general
description of the material features, and an explanation of the relative values
of the optional forms of benefit available under the Plan in a manner that would
satisfy the notice requirements of Section 417(a)(3), and shall be provided no
less than 30 days and no more than 90 days prior to the Annuity Starting Date.
Neither the consent of the Participant nor the Participant's spouse shall be
required to the extent that a distribution is required to satisfy Section
401(a)(9) or Section 415 of the Code.
6.6 - Form of Distribution.
The assets or interests therein allocated to a Par ticipant's Company
Contributions and Matching Contributions Accounts shall be distributed in kind
or, if so requested by such Participant or his Beneficiary, in writing, or if re
quired by the Insurer issuing any Contract, be converted to cash and the cash so
realized distributed.
6.7 - Commencement of Benefits.
(a) If the participation of a Participant terminates for any reason
other than death, disability or retirement on or after attaining Normal
Retirement Age, distribution of his Distributable Amount shall be made on or
after, but not more than Sixty (60) days after, the Anniversary Date of the Plan
Year during which such Former Participant attains his Normal Retirement Age.
However, the Sponsoring Company's Committee may, in accordance with a uniform
and nondiscriminatory policy, but shall not be required to, authorize
distribution of such Participant's Accrued Benefit prior to such Anniversary
Date.
(b) If the participation of a Participant terminates as a result of
death, disability or retirement on or after attaining his Normal Retirement Age,
distribution of his Accrued Benefit shall be made at such time as the Sponsoring
Company's Committee may, in accordance with a uniform and nondiscriminatory
policy, determine but in no event after whichever of the dates specified
hereinafter is applicable. If the participation of a Participant terminates as a
result of his death and such Participant is survived by his spouse, such
Participant's spouse shall have the right to require that distribution of his
Distributable Amount begin within a reasonable time following the Participant's
death.
<PAGE>
(c) If a Participant dies after the date his participation terminates
but prior to the date distribution of his Distributable Amount is made,
distribution of such Distributable Amount shall be made within Five (5) years
after the date of his death.
(d) Notwithstanding anything herein to the contrary, distribution of
the Distributable Amount of each Participant hereunder shall be made not later
than the Sixtieth (60th) day after the latest of the close of the Plan Year in
which:
(1) such Participant attains his Normal Retirement Age; or
(2) such Participant terminates his employ ment with all
Adopting Companies;
unless he elects otherwise but in any case on or before April 1st of the
calendar year following the later of the calendar year during which the
Participant attains the age of Seventy and One-half (70 1/2) years.
(e) If the Sponsoring Company's Committee contemplates directing the
Trustee to distribute an amount which has become payable hereunder as a result
of the death of a Par ticipant to the person or persons specified in a
beneficiary designation from on file therewith but any dispute arises regarding
the validity thereof, such Committee may direct the Trustee to interplead such
amount with any court of competent jurisdiction. Any and all costs incurred in
connection with so doing shall be charged against the amount so interpleaded.
(f) If the Distributable Amount of a Participant or his Beneficiary
cannot be distributed thereto because the Sponsoring Company's Committee cannot
locate such Partici pant or Beneficiary after making a reasonable effort to do
so, such Committee may authorize and direct the Trustee to deposit such Amount
in a segregated interest bearing account until such Participant or Beneficiary
is located. If such Participant or Beneficiary cannot be located within one (1)
year of the date as of which written notice of the availability of such Amount
has been deposited in the U.S. Postal service, postage prepaid, certified return
receipt requested and addressed to the Participant or Beneficiary at the last
known address to such Committee, such Committee may treat such amount as an
offset against the amount of the Salary Reduction Contribution or Matching
Contribution otherwise required to be made by the Adopting Company by which such
Participant was employed for the Plan Year with or within which such one (1)
year period expires. However, if the Participant or Beneficiary entitled to
receive such Amount subsequently files a claim therefor, such Amount shall be
reinstated.
(g) If a Participant has failed to provide the Committee with a valid
and effective Beneficiary designation, the Committee may direct that any amount
which becomes payable as a result of such Participant's death be paid to such
Participant's surviving spouse or, if such Participant is not survived by a
spouse, to such Participant's issue who have survived him, or, if such
Participant is not survived by a spouse or by any issue, to the personal
representative of his estate.
<PAGE>
(h) For purposes of the foregoing, any amount paid to a child
of a Participant shall be deemed to have been paid to such Participant's spouse
if such amount would have been paid to such Participant's spouse if such child
had attained the age of majority at the time payment thereof was made.
(i) If a Participant, Former Participant, the Beneficiary
thereof or any other party who is entitled to receive payments made hereunder
is declared incompetent by a court of competent jurisdiction or is otherwise
under any legal disability, the Trustee may make payment of all or any
portions of any of such payments to which such recipient is entitled to the
guardian, conservator or other judicially appointed fiduciary of such
person's estate. Moreover, if the Committee determines that a Participant,
Former Participant, the Beneficiary thereof or any other party entitled to
receive payments made hereunder is unable to manage his or her own financial
affairs, the Committee may direct the Trustee to make any payments which
would otherwise be made to such person hereunder to the legal representative
thereof or, if such person does not have a legal representative, to a
relative or friend or on behalf of such person.
6.8 - Loans to Participants.
The Sponsoring Company's Committee is specifically authorized to
establish and administer a Participant loan program. Moreover, such Committee is
further authorized to develop the procedures and guidelines to be followed in
granting Participant loans made on or after October 18, 1989. Such procedures
and guidelines shall be set forth in a written addendum to the Plan and Trust
Agreement and to the summary plan description provided to the Participants
hereunder, and shall include but not be limited to the following:
(a) A statement declaring that such Committee is authorized to
administer the loan program.
(b) A description of the procedures to be followed in applying
for a Participant loan.
(c) A description of the basis upon which applications for
loans will be approved or denied.
(d) A description of the limitations, if any, imposed on the
types and amounts of loans available. However, in no event shall a loan
in excess of Ten Thousand ($10,000.00) be made to a Participant or
beneficiary if the amount exceeds the lesser of (1) Fifty Thousand
Dollars ($50,000.00), reduced by the excess, if any, of the highest
outstanding balance of all loans made to such Participant or
beneficiary during the one (1) year period ending on the day preceding
the date such loan is made or (2) one-half (1/2) of the balance
credited to the Company Contributions Account of the Participant or
beneficiary to whom such loan is made, unless he acknowledges in
writing that he understands that any loan in excess of such limitation
may be treated as a premature loan distribution subject to the
penalties imposed
<PAGE>
by Section 72(p) of the Code. Moreover, no such loan of any amount
shall be made to any Participant if such loan would constitute a
transaction subject to the tax imposed by Section 4975 of the Code and
no loan in excess of one-half (1/2) of the balance credited to the
Company Contributions Account of a Participant or beneficiary shall be
made to such Participant or beneficiary on or after October 18, 1989,
if the only security for such loan is such balance.
(e) A description of the method by which the rate of interest
to be charged will be determined.
(f) A description of the types of assets other than or in
addition to the balance credited to the Company Contributions Account
of the Par ticipant or beneficiary to whom such loan is to be made
which may constitute collateral for such loan.
(g) A description of the event or occurrence which will
constitute a default and the action which may be taken to preserve Plan
assets in the event of any such default.
(h) All such loans shall, at the direction of the Sponsoring
Company's Committee, be available to all Participants and beneficiaries
on a uniform and non-discriminatory basis (but considering the
credit-worthiness of each such Participant or beneficiary), bear a
reasonable rate of interest and be adequately secured. Moreover, if the
balance of credited to a Participant's Company Contributions Account
constitutes all or any portion of the security for a loan made pursuant
to the provisions of this Section 6.8, such Participant and his spouse,
if any, shall consent, in writing, to the making of such loan, the use
of such balance as security for such loan and the possible reduction of
such balance which may subsequently occur as a result thereof within
the Ninety (90) day period immediately preceding the date such loan is
made or the date such balance is pledged as security therefor. Any such
written consent shall be witnessed by a member of the Committee or
Notary Public unless it is established to the satisfaction of such
Committee member that such consent cannot be obtained because the
Participant is not married, his spouse cannot be located or because of
such other circumstances as may be prescribed in any regulations
promulgated under Section 417 of the Code.
(i) Except in the case of a "home loan," each such loan shall,
by its terms, be repaid within five (5) years and be repaid in
substantially equal installments, payable at least quarterly, of
principal and interest. A "home loan" is any loan used to acquire any
dwelling unit which within a reasonable time is to be used (determined
at the time the loan is made) as the principal residence of the
Participant.
(j) For purposes of subparagraph (a) above, the current
outstanding balances of all loans made to a
<PAGE>
Participant from all qualified retirement plans of all Adopting
Companies and any Affiliated Companies shall be considered as one
having been made by this Plan.
6.9 - Hardship Distributions of Salary Reduction Contributions.
A Participant who incurs an immediate and heavy finan cial need
("Hardship") may request, in writing, that he be allowed to withdraw such
portion of the amount credited to his Company Contributions Account constituting
Salary Reduc tion Contributions (and any earnings credited to such Participant's
Account on such Salary Reduction Contributions as of June 30, 1989) as is
necessary to satisfy such Hardship. Any such request shall set forth all of the
facts and circumstances necessary to enable the Sponsoring Company's Committee
to make a determination as to (i) whether the financial need constitutes a
Hardship, (ii) the amount necessary to satisfy such Hardship and (iii) whether a
distribution of all or some portion of the balance credited to such
Participant's Company Contributions Account and constituting Salary Reduction
Contributions but not the earnings thereof is required to satisfy such hardship
in accordance with the following guidelines:
(a) Only amounts required to (1) pay medical expenses
described in Section 213(d) of the Code incurred by or necessary to
such Participant, his spouse or his dependents (as defined in Section
152 of the Code), (2) purchase a principal resi dence (excluding
mortgage payments), (3) pay tuition and related educational fees for
the next 12 months of post-secondary education for the Participant, his
spouse or any of his dependents, (4) prevent his eviction from his
principal residence or foreclosure on a mortgage on his principal
residence or (5) satisfy such other need as the Internal Revenue
Service may specify in regulations or other pronouncements issued
thereby shall constitute immediate and heavy financial needs.
(b) Any determination as to whether a dis tribution of all or
some portion of the balance of a Participant's Company Contributions
Account is necessary to enable a Participant to satisfy a Hardship
shall be based on all of the facts and circumstances, including but not
limited to whether alternate financial resources are reasonably
available. However, if a Participant represents, in writing, that the
Hardship will not or cannot be satisfied by (i) reimbursement or
compensation by insurance, (ii) reasonable liquidation of the
Participant's other assets, (iii) revocation of his election to reduce
his Compensation, or (iv) by other distributions or nontaxable (at the
time of the loan) loans from any other plan maintained by the Adopting
Company by which he is employed and in which the Participant is a
participant or by borrowing from a commercial source on then reasonable
commercial terms, and the Committee reasonably relies there on, a
distribution shall be deemed to be necessary to satisfy
<PAGE>
such Hardship provided the amount of such distribution does not exceed
the amount necessary to satisfy such Hardship, including amounts
necessary to pay any federal, state or local income taxes or penalties
reasonably anticipated to result from the distribution.
Any withdrawal made as a result of Hardship shall be effected as soon as
possible after approval of the request for a Hardship withdrawal.
Neither this Plan, nor any other plan maintained by an Affiliated
Company may permit an Employee who receives a Hardship Withdrawal to elect
Salary Deferral Contributions for the Employee's taxable year immediately
following the taxable year of the Hardship Withdrawal in excess of the Calendar
Year Elective Deferral Dollar Limitation for such taxable year less the amount
of such Employee's Salary Deferral Contribution for the taxable year of the
Hardship Withdrawal.
<PAGE>
ARTICLE VII
THE COMMITTEE
7.l - Members.
Each Adopting Company shall appoint a Committee of not less than one
(1) nor more than five (5) individuals, each of whom shall serve at the pleasure
of such Company. Any vacancy on such Committee shall be filled by the
appropriate Adopting Company as soon as is reasonably possible after such
vacancy occurs. However, the remaining members or member of such Committee shall
have full authority to act until such vacancy is so filled. Each Adopting
Company shall advise the Sponsoring Company's Committee, in writing, of the
names of the members of its Committee and, as changes in the membership thereof
occur, the names of any new members. The Committee is the Named Fiduciary and
Administrator of the plan of each Adopting Company required to be specified by
the Act.
7.2 - Committee Action.
Each Committee shall choose a secretary who shall keep the minutes of
the Committee's proceedings and all data, records and documents pertaining to
the Committee's adminis tration of the Plan with respect to the Participants
employed by the Adopting Company establishing such Commit tee. Each Committee
shall act by vote of a majority of its members and such action may be taken
either by a vote at a meeting or in writing without a meeting; provided,
however, that no member of such Committee who is also a Participant hereunder
shall vote or act upon any matter relating solely to himself unless such member
is the only member of such Committee. Each Committee may, by such majority
action, authorize its secretary or any one or more of its members to execute any
document or documents on behalf of such Commit tee, in which event such
Committee shall notify the Trustee in writing of such action and the name or
names of those so designated. The Trustee thereafter shall accept and rely
conclusively upon any direction or document executed by such secretary, member
or members as representing action duly taken by such Committee until such
Committee files a written revocation of such designation with the Trustee.
7.3 - Rights and Duties.
Each Committee shall have the duty to administer the Plan in
accordance with the provisions set forth herein and shall have all powers
necessary to do so, including but not limited to the following:
(a) To resolve all questions relating to the eligibility of
Employees to participate;
(b) To compute and certify to the Sponsoring Company's
Committee and the Trustee the amount and nature of benefits payable to
Participants or their Beneficiaries;
(c) To authorize all disbursements to be made by the Trustee
from the Trust;
<PAGE>
(d) To maintain all records necessary for the administration
of the Plan other than those maintained by each other Adopting Company
and the Trustee;
(e) To interpret the provisions of the Plan and to make and
publish such rules for the opera tion of the Plan as are not
inconsistent with the terms hereof; and
(f) Except to the extent an investment is to be made at the
direction of a Participant, to approve or disapprove investment changes
recom mended by the Trustee with respect to the assets of the Plan
acquired by contributions made by the Adopting Company.
Notwithstanding anything herein to the contrary, no Commit tee shall interpret
or operate the Plan in any manner which will cause discrimination in favor of
Employees who are officers, shareholders or highly compensated.
7.4 - Participant Direction of Investments.
(a) The Participants are specifically authorized to direct the manner
in which the amounts credited to their respective Company Contributions Accounts
are invested. Accordingly, the Sponsoring Company's Committee shall deter mine
the investment alternatives which are to be available ("Permitted Investments").
Such alternatives shall include but need not be limited to (1) investment by (A)
deposit in an interest bearing account with a bank, savings and loan association
or other similar financial institution, which account shall have a high degree
of liquidity and be fully insured against loss by the United States or an agency
thereof ("Savings Account") or (B) in a pooled investment fund, the assets of
which consist solely of cash and securi ties issued or guaranteed by the United
States or an agency thereof and the principal investment objectives of which
include a high level of current income consistent with the preservation of
capital and a high degree of liquidity and (2) three (3) or more groups of
diversified investments, at least one of which can reasonably be expected to
generate a high level of income while preserving capital in the long term, one
of which can be reasonably expected to generate capital appreciation and one of
which can be reasonably expected to generate a high level of current income
consistent with the preservation of capital and a high degree of liquidity so as
to afford each Participant with a reasonable opportunity to diversify the
investment of the amounts credited to his Accounts and thereby minimize the risk
of large losses. Moreover, such Committee shall be deemed to have intended to
provide each Participant with the opportunity to exercise control over the
assets allocated to the Accounts maintained hereunder for his benefit in a
manner and to the extent necessary to result in no other person who would
otherwise be a fiduciary with respect to the Plan being liable for any loss, or
with respect to any breach of part 4 of Title I of the Act, which is a direct
and necessary result of the exercise of control over such assets by such
Participant or his Beneficiary.
<PAGE>
(b) The Sponsoring Company's Committee shall also advise each
Participant and Beneficiary of the following procedures to be followed in
exercising control over the assets allocated to his Account:
(1) Each Participant or Beneficiary shall obtain a prospectus
and any other documents or other information relating to any investment
in which a Participant may invest required to be delivered to an
investor therein by law. Such Participant or Beneficiary shall also
represent and warrant that he has received such prospectus, other
documents or other information relating to such investment to such
Committee.
(2) Each Participant may, during such periods as such
Committee may specify from time to time, but at least annually, direct
that one or more assets constituting a Permitted Investment be
acquired.
(3) In no event shall the Trustee be required to acquire any
asset if any income generated thereby would be taxable to the Trust.
(c) If a Participant fails to advise whichever of the Sponsoring
Company's Committee or the Trustee is appropriate as to the manner in which all
or any portion of the amounts credited to his Accounts in cash are to be
invested, such Committee or the Trustee shall invest such amounts in one or more
Savings Accounts.
(d) Notwithstanding anything herein to the contrary, each Participant
may, subject to the terms and conditions or any Contract or any limitation to
which such Participant agreed at the time he directed that an asset be acquired,
instruct the Trustee or the Sponsoring Company's Committee to dispose of any
asset acquired at his direction and to purchase any other asset or interest
therein which constitutes a Permitted Investment.
7.5 - Information.
Each Adopting Company shall provide such information to its Committee
as such Committee may require to properly administer the Plan and to furnish the
Trustee with such information as may be pertinent to the Trustee's administra
tion of the Trust Fund on a timely basis.
7.6 - Compensation, Indemnity, and Liability.
Each Adopting Company shall pay all expenses incurred and shall
furnish such clerical and other services as are required by its Committee in
order to perform its duties hereunder. In addition, each Adopting Company hereby
prom ises to indemnify each member of its Committee against and hold each such
member harmless from any and all expenses or liabilities incurred or arising as
the result of his member ship on such Committee, except such expenses or
liabilities as may result from such member's wilful misconduct or gross
negligence.
<PAGE>
ARTICLE VIII
THE TRUSTEE
8.1 - Acceptance of Trust.
The Trustee, by execution hereof, acknowledges accep tance of the
trusteeship of this Trust, agrees to hold and administer the Trust Fund in
accordance with the terms of and provisions set forth herein and to otherwise
perform all of the obligations imposed thereon hereby.
8.2 - Single Fund.
The Trustee shall hold and administer the Trust Fund as a single fund.
However, the Trustee shall maintain adequate records so as to be able to
accurately identify the assets or interests therein acquired at the direction or
on behalf of each Participant in the Plan.
8.3 - Duty of Care.
The Trustee and each Fiduciary shall discharge its duties under the
Plan and Trust solely in the interests of the Participants and their
beneficiaries and with the care, skill, prudence and diligence under the
circumstances then prevailing which a prudent man, acting in a like capacity and
familiar with such matters, would use in the conduct of an enterprise of a like
character and with like aims and by diversifying the investments of the Plan and
Trust so as to minimize the risk of large losses unless under the circum stances
it is clearly prudent not to do so and except to the extent the Participants
direct the Trustee as to the manner in which the amounts credited to their
respective Company Contributions and Matching Contributions Accounts are in
vested.
8.4 - Trustee's Rights and Powers.
To carry out the purposes of this Trust, the Trustee, subject to any
limitations specified in the provisions of Sections 8.5 through 8.9 hereof,
inclusive, shall have the following rights and powers, in addition to any now or
here after conferred by law:
(a) To acquire any asset or interest therein, including any
real or personal property.
(b) To sell, assign or convey, at public or private sale, for
cash or on credit, exchange, partition, divide, subdivide, or grant
options upon any Trust asset or interest therein;
(c) To lease any Trust asset or interest therein for terms
within or beyond the term of this Trust for any purpose, including the
exploration for and removal of gas, oil or other minerals and to enter
into any pooling, uniti zation, repressurization, community or other
types of agreements relating to the development, operation and
conservation of mineral properties;
<PAGE>
(d) To maintain, repair, alter, develop or improve any Trust
asset and, pursuant thereto, to raze or demolish any structure
thereupon or portion thereof;
(e) To invest and reinvest the Trust Funds as provided by law,
from time to time existing, in any type of asset, including any
collective investment or common trust fund now or hereafter established
by, or stock of, any corporate Trustee hereof;
(f) To retain such portion of the Trust Fund in the form of
cash or other property unproductive of income without any liability for
income which might otherwise be derived therefrom as the Committee
determines is necessary or proper;
(g) To deposit cash in any bank or savings and loan
association up to such amounts as will be federally insured by the
appropriate governmental agencies;
(h) To participate or continue to participate in any business
or other enterprise and to effect incorporation, dissolution, or other
change in the form or organization of any business or enterprise held,
acquired or received;
(i) To participate in foreclosures, reor ganizations,
consolidations, mergers, liquidations, pooling agreements and voting
trusts, assent to corporate sales and other acts and, in connection
therewith, to deposit securities with and transfer title to any
protective or other committee upon such terms as the Trustee deems
advisable;
(j) To vote stock, give proxies, pay calls for assessments,
and purchase, sell or exercise stock subscription or conversion rights,
warrants, puts and calls;
(k) To hold securities, or other property in its own name or
in the name of its nominee, without disclosing any fiduciary
relationship;
(l) To advance money for the protection of the Trust, and for
all expenses, losses, and liabilities sustained in the administration
of the Trust or as a result of the holding or ownership of any Trust
assets, for which advances, and any interest thereon, the Trustee shall
have a lien on the Trust assets as against any Adopting Company,
Participant or beneficiary thereof;
(m) To borrow money for any Trust purpose, hypothecate or
encumber the Trust Fund or any portion thereof by mortgage, deed of
trust, pledge or otherwise and replace, renew and extend any
encumbrance thereon and pay loans or other obliga tions of the Trust;
<PAGE>
(n) To make loans or advances to any party, at reasonable
rates of interest and upon reasonable terms and conditions;
(o) To acquire and maintain insurance, in cluding liability
insurance, of such kind and in such amounts as is necessary to insure
the Trust assets against damage or loss;
(p) To institute, prosecute or defend any action or proceeding
with respect to the Trust and to contest, arbitrate, compromise,
adjust, settle, pay, release or abandon, in whole or in part, any
claims existing in favor of or against the Trust; and
(q) To employ such agents and advisors as may be reasonable
for the administration of the Trust Fund and to pay them reasonable
compensation for services rendered.
The enumeration of certain powers of the Trustee shall not limit its general
powers, the Trustee, subject always to the discharge of its fiduciary
obligations, being vested with and having all the rights, powers and privileges
which an absolute owner of the same property would have. However, all
investments of the Trust Fund shall be made in accordance with the provisions of
Section 2261 of the Cali fornia Civil Code and the Trustee shall be responsible
for compliance therewith except in the case of any investment made at the
direction of a Participant.
8.5 - Compliance with Directions Re: Management and Investment of Trust Fund.
Upon receipt of any directions from a Participant, the Trustee shall
comply therewith unless such compliance would be in violation of or contrary to
any laws or regulations governing the management and investment of the assets
hereof.
8.6 - Notices; Directions.
All notices or directions provided to the Trustee, whether by the
Sponsoring Company, its Committee or a Parti cipant shall be in writing and
signed by such person or persons as have been duly authorized to act on behalf
there of. However, delivery of any notice or direction to the Trustee by
photostatic teletransmission, telegram or other method by which a written
document results which contains duplicate or facsimile signatures shall be
deemed to fulfill the foregoing requirements unless and until the Trustee is
notified in writing by the appropriate party to the contrary. The Trustee may
rely upon any notices or direc tions received in such manner and shall not incur
any liability to any party for the consequences resulting from any unauthorized
use of such devices or methods of deliver ing notices or directions unless the
Trustee was aware that such use was unauthorized.
8.7 - Limitations on Trustee's Duties; Liability.
So long as an Adopting Company, its Committee, one or more Investment
Managers, Participants or any combination thereof are
<PAGE>
authorized to direct the management and invest ment of the Trust Fund or any
portion thereof, the Trustee, to the extent the Trustee does not have such
right:
(a) May, in the case of such authorization of any Investment
Manager or Managers, assume that the person or persons designated as
Investment Managers qualify as such and continue to be entitled to
manage and invest the Trust Fund (or such portion thereof) until such
time as the appropriate Adopting Company or its Committee, as the case
may be, notify the Trustee to the contrary.
(b) Shall have no duty to take any action with respect to the
management and investment of the Trust Fund or to review or make any
recommendations with respect thereto in the absence of, or to request,
any such directions. The Trustee may, however, in the absence of any
such directions, take such action as the Trustee deems appropriate and
advisable under the circumstances and shall not be subject to or incur
any liability to any party as the result thereof if such action is
taken in good faith.
(c) Shall have no duty or obligation to determine the
existence of any conversion, redemp tion, exchange, subscription or
other right which may relate to any security held as part of the Trust
Fund if notice of such right was given prior to the acquisition of such
security, or to exer cise any such right unless and until informed of
the existence thereof and directed to exercise such right by the
appropriate party within a reasonable time prior to the expiration of
such right.
(d) Shall not be liable in any manner to an Adopting Company,
its Committee, any Investment Manager, any Participant or any
beneficiary of any Participant for any losses or other unfavorable
results sustained by or incurred by the Trust Fund as the result of
complying with the directions provided thereby to the Trustee; provided
such compliance has not been in violation of or contrary to any
provision of any applicable law governing the management and investment
of the assets hereof.
(e) If the party having the right to manage and invest the
Trust Fund directs the Trustee to purchase any security issued by any
foreign government or agency thereof, or by any corporation domiciled
outside of the United States, the Trustee shall have no duty to take
any action necessary to comply with any laws, regulations or other
requirements imposed by the government or agency thereof issuing such
securities or whose laws, regulations or other re quirements govern
such corporation, including those applicable to the receipt of
dividends or interest paid with respect to such securities, unless and
until advised of such laws, regulations or other requirements by the
party directing the Trustee to make such purchase.
<PAGE>
8.8 - Records; Accounting.
The Trustee shall keep accurate and complete records of all
transactions made or entered into by the Trustee on behalf of the Trust which
each Committee shall have the right to examine at any time during the Trustee's
regular business hours. In addition, the Trustee shall, within ninety (90) days
of the close of each Plan Year, beginning with the first Plan Year ending after
the Effective Date, provide an annual statement of account to the Sponsoring
Company's Committee. Such statement of account shall set forth all receipts and
disbursements of the Trust during such year and contain a list of all of the
assets held by the Trust, the cost and fair market value thereof as of the end
of such year.
Unless the Trustee receives written notice of any error contained or
believed to be contained in such annual statement of account from the Sponsoring
Company's Committee within sixty (60) days of the date upon which such account
has been provided thereto, the Trustee may presume that such account has been
approved thereby. If any dispute arises between such Committee and the Trustee
with respect to any item contained in such annual statement of account and such
dispute cannot be otherwise resolved, the Trustee may elect to have its account
judicially settled.
8.9 - Valuation of Trust Fund.
The Trustee shall determine the fair market value of the Trust Fund,
based upon such information as the Trustee deems to be reliable, including but
not limited to infor mation contained in (i) newspapers of general circulation,
(ii) financial periodicals or publications generally relied upon by the public,
(iii) statistical or valuation service reports, and (iv) the records of any
securities exchanges, Investment Managers, brokerage firms or any combination
thereof. The fair market value of the Trust Fund attribut able to any Contract
shall be determined by the Insurer issuing such contract using such method as is
specified therein and the determination of such fair market value by such
Insurer in accordance therewith shall be binding upon the Trustee. Moreover, in
making any such determination, any and all expenses arising under any Contract
shall be charged to and deducted from the value of the Participants' Accounts
thereunder in accordance with the provisions specified in any such Contract.
<PAGE>
8.10 - Compensation.
Each Adopting Company promises and agrees to pay such reasonable
amounts of compensation for services rendered by the Trustee as may be agreed
upon from time to time promptly upon request therefor by the Trustee. Unless
otherwise specifically agreed upon in writing, the amount of the com pensation
to which the Trustee shall be entitled shall be determined in accordance with
the fee schedule regularly published by the Trustee, as in effect and applicable
at the time such compensation becomes payable, if any. Moreover, the Trustee
shall be entitled to reimbursement for any expenses incurred thereby in the
performance of its duties as Trustee, including reasonable fees for legal
counsel. The amount of any such compensation and reimbursable expenses shall be
chargeable to and constitute a lien on the Trust Fund until paid and the Trustee
is authorized to withdraw such amounts from the Trust Fund if such amounts are
not otherwise paid by the Sponsoring Company within sixty (60) days of the date
upon which a statement of the amount so due is presented to the Company.
8.11 - Third Persons.
No person dealing with the Trustee shall be required to make any
inquiry as to whether an Adopting Company, its Committee, any Investment Manager
or a Participant has in structed the Trustee to take or decline to take any
specific action, whether any action so taken or which the Trustee declines to
take has been authorized thereby or to see to the application of any moneys or
other property delivered to the Trustee. Further, any such person may rely upon
the signature of any single Trustee individually unless and until such person
has been provided with written notice that the signatures of all or a majority
of the persons acting as Trustee is required.
8.12 - Indemnification.
Each Adopting Company and its Committee jointly and severally promise
and agree to indemnify the Trustee against and hold the Trustee harmless from
all liabilities which may arise as the result of the lawful performance of its
duties under this Agreement. Further, the Trustee shall not be required to
perform any act or take any action for or on behalf of the Trust unless and
until the Trustee has been indemnified to its satisfaction, to the extent it
deems nec essary and as often as it may determine.
8.13 - Controversy Re: Trust Fund Assets.
If any controversy arises with respect to any asset of the Trust
Fund, the Trustee may retain possession of such asset pending resolution of such
controversy without liabi lity.
8.14 - Joinder of Parties.
Only the Trustee, the Committees and the Adopting Companies need be
joined as parties to any legal action or other proceeding affecting the Trust or
any asset of the Trust Fund. No Participant, any beneficiary of any Partici pant
or any other person having or claiming
<PAGE>
any right to or interest in any asset of the Trust Fund shall be entitled to any
notice of any such legal action or proceeding but any judgment entered in or
with respect to any such action or proceeding shall be binding upon all persons
having any in terest in or claim against the Plan or Trust.
8.15 - Consultation with Legal Counsel.
The Trustee may consult with or engage the services of such legal
counsel (including counsel for an Adopting Company) as the Trustee may select
and shall be not subject to any liability as the result of taking any action or
failing to take any action in good faith pursuant to the advice of such counsel.
8.16 - Prohibited Transactions.
(a) Except as provided in subsection (c) hereof, neither the Trustee
nor any Fiduciary shall cause the Plan to engage in a transaction if he knows or
should know that such transaction constitutes a direct or indirect:
(1) Sale or exchange, or leasing of any property between the
Plan and a Party-In-Interest; or
(2) Lending of money or extension of credit between the Plan
and Party-In-Interest other than as provided in Section 6.8; or
(3) Furnishing of goods, services or facili ties between the
Plan and a Party-In-Interest;
(4) Transfer to, or use by or for the benefit of a
Party-In-Interest, of any assets of the Plan; or
(5) Acquisition, on behalf of the Plan, of any qualifying
employer security or employer real property.
(b) Except as provided in subsection (c) of this Section 8.16, a
Fiduciary shall not:
(1) Deal with the assets of the Plan to his own interest or
for his own account;
(2) In his individual or any other capacity, act in any
transaction involving the Plan on behalf of a party or represent a
party whose interests are adverse to the interests of the Plan, its
Participants or their beneficiaries;
(3) Receive any consideration for his own personal account
from any party dealing with such Plan in connection with a transaction
involving the assets of the Plan; or
(4) Permit the indicia of ownership of any Trust asset to be
maintained at any location which is outside
<PAGE>
of the jurisdiction of the District Courts of the United States except
as otherwise authorized by the Secretary of Labor.
(c) The prohibited transaction rules set forth in this Section 8.16
shall not prevent a Fiduciary from:
(1) Receiving benefits from the Plan as a Participant or
beneficiary so long as the benefits are consistent with the terms of
the Plan as ap plied to all other Participants and beneficiaries;
(2) Receiving reasonable compensation for services to the Plan
unless such Fiduciary receives full-time pay from the Employer;
(3) Receiving reimbursement for expenses incurred;
(4) Serving as an officer, employee or agent of a
Party-In-Interest;
(5) Making payments to Parties-In-Interest for reasonable
compensation for office space and legal, accounting and other services
necessary to operate the Plan; or
(6) Taking other actions pursuant to specific instructions and
authorizations in the Plan governing document so far as consistent with
all other fiduciary rules of the Act.
8.17 - Liability Insurance.
The following parties may purchase and maintain liability insurance
under the following terms and condi tions:
(a) Each Committee, as an authorized expense of the Plan, to cover
liability or losses occurring by reason of the act or omission of
a Fiduciary; provided such insurance permits recourse by the Insurer
against the Fiduciary in the case of a breach of a fiduciary obligation
by such Fiduciary;
(b) A Fiduciary, to cover liability from and for his own account; or
(c) An Adopting Company, to cover potential liability of one or
more persons who serve in a fiduciary capacity with regard to the Plan.
8.18 - Prohibition Against Certain Persons Holding Certain Positions.
No person who has been convicted of, or has been imprisoned as a
result of his conviction of, robbery, brib ery, extortion, embezzlement, fraud,
grand larceny, burglary, arson, a felony violation of Federal or State law
involving substances defined in Section 102(6) of the Com prehensive Drug Abuse
Prevention and Control Act of 1970, murder, rape,
<PAGE>
kidnapping, perjury, assault with intent to kill, any crime described in Section
9(a)(1) of the Investment Company Act of 1940, a violation of any provision of
the Employee Retirement Income Security Act of 1974, a vio lation of Section 302
of the Labor-Management Relations Act, 1947, a violation of Chapter 63 of Title
18, United States Code, a violation of Section 874, 1026, 1503, 1505, 1506,
1510, 1951, or 1954 of Title 18, United States Code, a vio lation of the
Labor-Management Reporting and Disclosure Act of 1959, or conspiracy to commit
any such crimes or attempt to commit any such crimes, or a crime in which any of
the foregoing crimes is an element, within the preceding five (5) years shall
serve or be permitted to serve
(a) as an administrator, fiduciary, officer, trustee, custodian,
counsel, agent, or employee of any employee benefit plan; or
(b) as a consultant to any employee benefit plan.
8.19 - Bonding Requirements.
(a) Every Fiduciary of the Plan and every person who handles funds or
other property of the Plan shall be bonded as hereinafter set forth; provided,
however, that no such bond shall be required of a Fiduciary (or of any director,
officer, or employee of such Fiduciary) if such Fiduciary
(1) is a corporation organized and doing business under the
laws of the United States or of any State;
(2) is authorized under such laws to exercise trust powers or
to conduct an insurance business;
(3) is subject to supervision or examination by Federal or
State authority; and
(4) has at all times a combined capital and surplus in excess
of such minimum amount as may be established by regulations issued by
the Secretary of Labor, which amount shall be at least $1,000,000.
(b) The amount of such bond shall be fixed at the beginning of each
Plan Year. Such amount shall be not less than ten percent (10%) of the amount of
funds handled. In no event shall such bond be less than $1,000 nor more than
$500,000, except that the Secretary of Labor, after due no tice and opportunity
for hearing to all interested parties, may prescribe an amount in excess of
$500,000, subject to the ten percent (10%) limitation of the preceding sentence.
Such bond shall provide protection to the Plan against loss by reason of acts of
fraud or dishonesty on the part of the Plan official, directly or through
connivance with others.
<PAGE>
8.20 - Payment of Taxes.
If the Trustee becomes liable for the payment of any estate,
inheritance, income or other tax on behalf of a Participant or his Beneficiary,
the Trustee shall have the right to pay such tax from the portion of the Trust
Fund held for the benefit of such person and shall not incur any liability to
any person whose interest in the Trust Fund is reduced thereby. However, the
Trustee may require such re leases or other documents from such persons,
including the party to whom such payment is to be made, as the Trustee may deem
necessary or proper prior to making any such payment.
<PAGE>
ARTICLE IX
RESIGNATION AND REMOVAL OF TRUSTEE
9.1 - Resignation, Removal.
(a) Any Trustee, or if more than one person is acting as Trustee, any
one or more of such persons, may resign at any time by delivering written notice
of the intention to resign to the Sponsoring Company.
(b) The Sponsoring Company may remove any Trustee or, if more than one
person is acting as Trustee, any one or more of such persons, by delivering
written notice of such removal to such Trustee or person.
(c) The notice of such intent to resign or to remove any Trustee or
person acting as such shall specify the date as of which such resignation or
removal shall be effective, which date shall not be less than thirty (30) days
after the date upon which such notice is delivered unless the party to whom such
notice is required to be provided hereunder other wise agrees.
9.2 - Appointment of Successor Trustee.
Upon providing notice of the removal of any Trustee, receipt of any
notice of the intention of any Trustee or person or persons acting as such to
resign, or the death or other inability of any Trustee or person or persons
acting as such to so act, the Sponsoring Company shall promptly appoint one or
more individuals, any corporation authorized to accept trusts in the State of
California, or any combina tion thereof, as successor Trustee. However, any
remaining Trustee shall exercise all of the powers and discharge all of the
duties of the Trustee until such successor has been so appointed.
9.3 - Transfer of Rights.
Upon written notice of acceptance of any duly ap pointed successor
Trustee of the trusteeship hereof, the resigning or removed Trustee shall
transfer all right, title and interest in and to the Trust Fund to such
successor Trustee and shall perform such other acts and execute such documents
as may be necessary or proper to transfer all rights and privileges as trustee
hereof to such successor Trustee.
<PAGE>
ARTICLE X
AMENDMENT; TERMINATION
10.1 - Amendment.
The Sponsoring Company may, from time to time, amend this by
instrument in writing signed by a duly authorized representative thereof.
Thereupon, the provisions of such amendment shall be binding upon the Sponsoring
Company, each Adopting Company, each Committee, the Trustee and all of the
Participants in the Plan and their beneficiaries. Notwith standing the
foregoing, no such amendment shall:
(a) Cause any portion of the Trust Fund to be used for or
diverted to purposes other than for the exclusive benefit of the
Participants or their beneficiaries;
(b) Retroactively deprive any Participant or beneficiary of a
Participant of any benefit pre viously vested except to the extent
necessary to permit the Plan to meet or continue to meet the applicable
requirements of the Act or the Code or to assure the deductibility of
the contributions hereto by the Company for federal income tax pur
poses;
(c) Cause any prohibited discrimination in favor of any
Participant who is an officer, share holder or highly compensated
employee; or
(d) Increase the duties or responsibilities of the Trustee
without the written consent of the Trustee.
10.2 - Termination of Trust.
This Trust is irrevocable and the Sponsoring Company and each Adopting
Company anticipate that the Plan and Trust shall continue indefinitely. However,
neither the Sponsoring Company nor any Adopting Company has assumed or shall be
deemed to have assumed any obligation to continue the Plan and Trust.
Accordingly, the Sponsoring Company or any Adopting Company may, upon fifteen
(15) days written no tice to the Trustee, terminate the Plan, the Trust, or both
as to its Employees. Further, the Sponsoring Company or any Adopting Company may
reduce the benefits to be provided to Participants employed thereby under the
Plan prospectively at any time. However, in the event of any partial or total
complete termination of the Plan, the interest of each Participant shall
immediately become one hundred percent (100%) vested and nonforfeitable to the
extent then funded. There upon, the Trustee, after deducting or reserving the
amounts necessary to defray all expenses of the Plan and Trust, in cluding the
reasonable compensation of the Trustee and any anticipated costs of liquidating
or distributing the assets hereof, shall distribute any remaining balance of the
Trust Fund in accordance with the written instructions of the ap propriate
Committee, which instructions shall conform to the requirements of the Plan.
<PAGE>
ARTICLE XI
EMPLOYEE RIGHTS
11.1 - General Rights of Participants and Beneficiaries.
The Plan is established and the Trust Fund is held for the exclusive
purpose of providing benefits for Partici pants and their Beneficiaries. Such
benefits may be payable upon retirement, death, disability or termination of
employ ment with all Adopting Companies, subject to the specific provisions of
the Plan.
Every Participant and Beneficiary receiving benefits under the Plan
is entitled to receive, on a regular basis, a current, comprehensible and
detailed written account of his personal benefit status and of the relevant
terms of the Plan which provides these benefits.
11.2 - Regular Reports and Disclosure Requirements.
Every Participant covered under the Plan and every Beneficiary
receiving benefits under the Plan shall receive a summary plan description,
summary of the latest annual re port of the Plan, or such other information as
may be re quired to be furnished by law, under any of the following
circumstances:
(a) When the Plan is established, or any material modification
or amendment is proposed or adopted;
(b) Within ninety (90) days after he becomes a Participant or
begins to receive benefits under the Plan;
(c) Within two hundred and ten (210) days after the close of
the Plan's Fiscal Year.
11.3 - Information Generally Available.
The appropriate Committee shall make copies of the Plan description
and the latest annual report and any bar gaining agreement, trust agreement,
contract or other instruments under which the Plan was established or is
operated available for examination by any Plan Participant or Beneficiary in the
principal office of such Committee and such other locations as may be necessary
to make such infor mation reasonably accessible to all interested parties, and
subject to a reasonable charge to defray the cost of fur nishing such copies,
the appropriate Committee shall, upon written request of any Participant or
Beneficiary, furnish a copy of the latest updated summary plan description, and
the latest annual report, any terminal report, any bargaining agreement, trust
agreement, contracts, or other instruments under which this Plan is established
or operated to the par ty making such request.
11.4 - Special Disclosures.
<PAGE>
Upon written request to the appropriate Committee once during any
twelve (12) month period, a Participant or Beneficiary shall be furnished with a
written statement, based on the latest available information, of the total
benefits accrued, or the earliest date on which such bene fits will become
non-forfeitable.
Prior to the distribution of any benefits to which any Participant or
Beneficiary may be entitled, he must be provided with a written explanation of
the terms and condi tions of the various distribution options that are available
and must in turn, file a written election with the appropri ate Committee.
Upon termination of employment, an Employee who has been a
Participant in the Plan is entitled to a written explanation of and accounting
for any vested deferred bene fits which have accrued to his account and of any
applicable options regarding the disposition of those benefits. Such information
will also be provided to the Social Security Ad ministration by the Internal
Revenue Service on the basis of information required to be reported by the
Committee.
11.5 - Employee Right to Comment.
Pursuant to rights granted by the Act and the Reg ulations issued
pursuant to that authority, the Participants shall be advised with respect to,
and given an opportunity to comment on, the application of the Plan for a ruling
re garding:
(a) Initial qualification determination under the requirements
of the Internal Revenue Code;
(b) Any material amendment to the Plan;
(c) Any partial or complete termination of the Plan.
11.6 - Filing a Claim for Benefits.
A Participant or Beneficiary or the Adopting Company acting on his
behalf, shall notify the appropriate Committee of a claim of benefits under the
Plan. Such request may be in any form acceptable to such Committee and shall set
forth the basis of such claim and shall authorize such Committee to conduct such
examinations as may be necessary to determine the validity of the claim and to
take such steps as may be necessary to facilitate the payment of any benefits to
which the Participant or Beneficiary may be en titled under the terms of the
Plan.
11.7 - Denial of Claim.
Whenever a claim for benefits by any Participant or Beneficiary has
been denied, a written notice, prepared in a manner calculated to be understood
by the Participant, must be provided, setting forth the specific reasons for the
denial and explaining the procedure for an appeal and review of the decision by
the appropriate Committee.
11.8 - Remedies Available to Participants.
<PAGE>
A Participant or Beneficiary shall be entitled, either in his own
name or in conjunction with any other in terested parties, to bring such actions
in law or equity or to undertake such administrative actions or to seek such
relief as may be necessary or appropriate to compel the dis closure of any
required information, to enforce or protect his rights, to recover present
benefits under the Plan.
11.9 - Protection From Reprisal.
No Participant or Beneficiary may be discharged, fined, suspended,
expelled, disciplined, or otherwise dis criminated against for exercising any
right to which he is entitled or for cooperation with any inquiry or investiga
tion under the provisions of this Plan or any governing law or Regulations.
No person shall, directly or indirectly, through the use or
threatened use of fraud, force or violence, restrain, coerce or intimidate any
Participant or Beneficiary for the purpose of interfering with or preventing the
exercise of or enforcement of any right, remedy or claim to which he is entitled
under the terms of this Plan or any relevant law or Regulations.
11.10 - Mergers, Consolidations or Transfers.
In the case of any merger or consolidation with, or transfer of
assets or liability to, any other plan after the date of enactment of the Act,
each Participant in the Plan will (if the Plan is then terminated) receive a
benefit immediately after such merger, consolidation, or transfer which will be
equal to or greater than the benefit he would have been entitled to receive
immediately before such mer ger, consolidation, or transfer if the Plan then
terminated.
<PAGE>
ARTICLE XII
MISCELLANEOUS
12.1 - Contributions Not Recoverable.
After an initial determination by the Commissioner of the Internal
Revenue Service ("Commissioner") that the Trust is a "qualified" trust as
defined in Section 401 of the Code as to any Adopting Company, no portion of the
principal or income of the Trust shall be used for or diverted to any purpose
other than the exclusive benefit of the Participants employed thereby in the
Plan or their Beneficiaries. Not withstanding the foregoing, if the Commissioner
determines that the Trust is not a "qualified" trust as defined in Sec tion 401
of the Code as to any Adopting Company, such Company may recover its
contributions made hereto prior to such determination. Further, if an Adopting
Company con tributes an amount in excess of that required by reason of a mistake
of fact, the Trustee shall, upon written demand, distribute cash or property
having value equal to amount thereof within one (1) year of the date made.
However, the Trustee shall not distribute any cash or property represent ing
earnings attributable to such excess contribution and shall reduce the amount
otherwise so returned by the amount of any losses attributable thereto.
12.2 - Limitation on Participants' Rights.
No person shall be deemed to have acquired any right to be retained
in the employ of an Adopting Company or any interest in or claim against the
Plan or Trust as the result of becoming a Participant except as otherwise
provided here in. Each Adopting Company specifically reserves the right to
discharge any Employee without liability to such Company or for any claim
against the Plan or Trust, except to the extent otherwise provided in the Plan
or Trust. Further, any and all benefits to be provided under the Plan shall be
payable solely from assets of the Plan and no Adopting Company assumes any
responsibility for any act or failure to act of the Trustee with respect to the
assets of the Plan.
12.3 - Nonalienation.
No benefit under the Plan, whether payable from this Trust or
otherwise, may be anticipated, alienated, assigned, sold, pledged or encumbered
in any manner except to secure a loan made by the Plan to a Participant or
beneficiary thereof which is exempt from the tax imposed by Section 4975 of the
Code by reason of the provisions of Section 4975(d) thereof nor shall any such
benefit be subject to any claim of any creditor of any Participant or
beneficiary thereof, whether by way of attachment, garnishment or other legal
process; provided, however, that the foregoing shall not apply to the extent
required to allow payment of benefits hereunder in accordance with any domestic
relations order which is determined to be a "qualified domestic relations order"
within the meaning of Section 414(p) of the Code, or entered before January 1,
1985.
12.4 - Governing Law.
<PAGE>
This Plan and Trust shall be governed by and the terms and provisions
hereof construed under the applicable Federal law, but to the extent no Federal
law is applicable, by or under the laws of the State of California. If any
provision hereof is susceptible of more than one interpreta tion, such provision
shall be interpreted in the manner which results in the Plan and Trust being
deemed to be a qualified retirement plan and trust within the meaning of the
Code and the Act. If any provision of this Agreement is void, invalid or
unenforceable, the remaining provisions hereof shall continue to be of full
force and effect.
12.5 - Rule Against Perpetuities.
If the validity of the Trust depends upon compliance with the rule
against perpetuities, the Trust shall terminate within twenty-one (21) years of
the date of the death of the last to survive of the Participants in the Plan
living on the date of the execution hereof.
12.6 - Fiduciary Liability.
No provision of this Agreement shall be construed so as to relieve
any Fiduciary of the Plan or Trust, including the Trustee hereof, of any
liability except to the extent permissible by law.
12.7 - Headings Not Part of Agreement.
The headings and subheadings in this Agreement have been inserted for
the convenience of reference only and shall not be considered in the
construction hereof.
12.8 - Instrument in Counterparts.
This Agreement may be executed in several counter parts, each of
which shall be deemed an original but shall constitute but one and the same
instrument which may be suf ficiently evidenced by one such counterpart.
12.9 - Successors and Assigns.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their successors and assigns.
12.10 - Gender.
As used herein, the masculine, feminine and neuter and the singular
and plural shall each be deemed to include the others.
<PAGE>
IN WITNESS WHEREOF, the Sponsoring Company and a duly authorized
representative of each Affiliated Company which is adopting this Plan, have
executed this Agreement.
"SPONSORING COMPANY"
PENHALL INTERNATIONAL, INC.,
a California corporation
By /s/ Roger C. Stull
----------------------------
ROGER C. STULL, President
"ADOPTING COMPANIES"
PENHALL COMPANY, a California
corporation
By /s/ John T. Sawyer
----------------------------
John T. Sawyer, President
-----------------
PENHALL ENVIRONMENTAL
SERVICES,
a California corporation
By /s/ illegible
----------------------------
, President
-----------------
PHOENIX CONCRETE CUTTING, INC.,
an Arizona corporation
By /s/ C. George Bush
----------------------------
C. George Bush, President
-----------------
"TRUSTEE"
/s/ Roger C. Stull
------------------------------
ROGER C. STULL
<PAGE>
PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT-SHARING (401(k)) PLAN
AND TRUST AGREEMENT
<PAGE>
PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT-SHARING (401(k)) PLAN
AND TRUST AGREEMENT
Table of Contents
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
ARTICLE I PURPOSE OF PLAN AND TRUST; DEFINITIONS 1
ARTICLE II PARTICIPATION 17
ARTICLE III COMPANY CONTRIBUTIONS 19
ARTICLE IV PARTICIPANT'S SALARY REDUCTIONS 21
ARTICLE V MATCHING CONTRIBUTIONS 28
ARTICLE VI BENEFITS 38
ARTICLE VII THE COMMITTEE 47
ARTICLE VIII THE TRUSTEE 51
ARTICLE IX RESIGNATION AND REMOVAL OF TRUSTEE 63
ARTICLE X AMENDMENT; TERMINATION 64
ARTICLE XI EMPLOYEE RIGHTS 66
ARTICLE XII MISCELLANEOUS 70
</TABLE>
<PAGE>
AMENDMENT TO THE
PENHALL INTERNATIONAL, INC.
AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST
Pursuant to Article X of the PENHALL INTERNATIONAL, INC. AND AFFILIATED
COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST (the "Plan"), Penhall
International, Inc. amends the Plan as follows effective January 1, 1995.
1. Section 1.2(w) is deleted and the following inserted in its place:
"(w) "Entry Date" means each January 1, April 1, July 1 and
October 1. Plan participation commences on the Entry Date
following completion of the minimum age and service
requirements."
This Plan Amendment is executed this ___ day of ________________, 1995,
at Anaheim, California.
PENHALL INTERNATIONAL, INC.
By:
---------------------------
Robert C. Stull, President
<PAGE>
AMENDMENT TO THE
PENHALL INTERNATIONAL, INC.
AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT SHARING (401(k)) PLAN
AND TRUST AGREEMENT
Pursuant to Section 10.1 of the PENHALL INTERNATIONAL, INC. AND
AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT
(the "Plan"), PENHALL INTERNATIONAL, INC., a California corporation, the
Sponsoring Company, hereby amends the Plan in the following particulars only
effective on the date this Amendment is executed.
1. The following is added as a new Section 4.9:
"4.9 - Rollovers From Qualified Plans.
(a) With the consent of the Committee, the Trustee may receive
and hold an Eligible Employee's or Participant's qualifying
distribution from any other qualified retirement plan ("Rollover
Contribution"). The Trustee may accept such Rollover Contribution
directly from such other plan, from such Eligible Employee or
Participant within sixty (60) days of the receipt thereof by the
Eligible Employee or Participant, or from an individual retirement
account provided such individual retirement account contains no assets
other than those representing employer contributions, earnings thereon
and earnings on employee contributions thereto. Any such Rollover
Contributions shall be separately accounted for, nonforfeitable and
distributed with and in addition to any other benefit to which the
Participant effecting such contribution is entitled hereunder.
(b) Whenever a Participant elects to make Rollover
Contributions to this Plan as provided herein, the Committee shall
establish a separate Rollover Contribution Account to which such
Participant's Rollover Contributions shall be allocated when received
by the Trustee.
(c) A Participant may, upon thirty (30) days' written notice
to the Committee, withdraw any portion of his Rollover Contributions
Account; provided, however, that if such Participant is then married,
the written consent to such withdrawal by his spouse shall be required
as provided in Section 6.5(b). Any such written consent by a
Participant's spouse shall be witnessed by a Notary Public unless it is
established to the satisfaction of such Committee that such consent is
not required as a result of a prior written consent or cannot be
obtained because such Participant is not married, because his spouse
cannot be located or
<PAGE>
because of such other circumstances as may be prescribed in any
regulations promulgated under Section 417 of the Code."
2. Section 6.3 is deleted and the following inserted in its place:
"6.3 - Amount Distributable.
A Participant shall be entitled to receive the amount equal
to the balances of his Company Contributions Account, Matching
Contributions Account and Rollover Contributions Account, adjusted in
accordance with the provisions of Section 5.3, and further adjusted, if
required, in accordance with the provisions of Section 5.4
("Distributable Amount")."
3. The first clause of Section 6.4 is deleted and the following
inserted in its place:
"6.4 - Events Entitling Participant of Beneficiary to
Distribution.
Except as provided in Sections 6.9 and 4.9(c),"
This Plan Amendment is executed and effective this 21st day of
May, 1996.
PENHALL INTERNATIONAL, INC.
By: /s/ Roger C. Stull
--------------------------------------
Robert C. Stull, President
<PAGE>
AMENDMENT TO THE
PENHALL INTERNATIONAL, INC.
AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT SHARING (401(k)) PLAN
AND TRUST AGREEMENT
Pursuant to Section 10.1 of the PENHALL INTERNATIONAL, INC. AND
AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT
(the "Plan"), PENHALL INTERNATIONAL, INC., a California corporation, the
Sponsoring Company, hereby amends the Plan in the following particulars only,
effective as set forth below.
1. Section 5.1(a) is deleted and the following inserted in its place:
"5.1 - Allocation of Matching Contributions.
(a) Any contribution made by an Adopting Company for a Plan
Year shall first be allocated to the Matching Contributions Accounts of
those Participants (i) employed thereby who have been credited with a
Year of Service for such Year and (ii) who made Salary Reduction
Contributions for the Plan Year as follows:
(1) For Plan Years beginning after June 30, 1998, the
portion of such Adopting Company's contribution which equals
the aggregate amount which, when allocated to the Matching
Contributions Account of each Participant employed thereby on
the basis of Fifty Cents ($0.50) for each One Dollar ($1.00)
of such Participant's Sal ary Reduction Contribution for such
Year up to but not exceeding One Thousand Dollars ($1,000.00)
($0.50 x $1,000.00 = $500.00 maximum), or such other amount as
the Sponsoring Company may specify for such Plan Year, shall
be allocated to each such Participant's Matching Contributions
Account. All of such amounts shall be deemed to constitute
Salary Reduction Contributions for all purposes hereof other
than the provisions of Section 5.1(a)(5)
(2) Next, for Plan Years beginning after June 30,
1998, the portion of such Adopting Company's contribution
which equals the aggregate amount which, when allocated to the
Matching Contributions Account of each Participant employed
thereby on the basis of Thirty Cents ($0.30) for each
One Dollar ($1.00) of such Participant's Salary Reduction
Contribution for such Year exceeding One Thousand Dollars
($1,000.00) up to but not to exceed Three Thousand Dollars
($3,000.00) ($0.30 x $2,000.00 = $600.00 maximum),
<PAGE>
or such other amount as the Sponsoring Company may specify
for such Plan Year, shall be allocated to each such
Participant's Matching Contributions Account. All of such
amounts shall be deemed to constitute Salary Reduction
Contributions for all purposes hereof other than the
provisions of Section 5.1(a)(5).
(3) Next, for Plan Years beginning after June 30,
1998, the portion of Penhall Company's contribution which
equals the aggregate amount which, when allocated to the
Matching Contributions Account of each Participant employed by
Penhall Company dba Highway Services (and only that division
of the Sponsoring Company) on the basis of Thirty Cents
($0.30) for each One Dollar ($1.00) of such Participant's
Salary Reduction Contribution for such Year exceeding Three
Thousand Dollars ($3,000.00) up to but not to exceed Six
Thousand Dollars ($6,000.00) ($0.30 x $3,000.00 = $900.00
maximum), or such other amount as the Sponsoring Company may
specify for such Plan Year, shall be allocated to each such
Participant's Matching Contributions Account. All of such
amounts shall be deemed to constitute Salary Reduction
Contributions for all purposes hereof other than the
provisions of Section 5.1(a)(5).
(4) Next, for Plan Years beginning after June 30,
1998, if the High Average Actual Deferral Per centage for such
Plan Year would exceed the higher of the two Percentage
Limitations described in Section 4.5(b), the portion of such
Adopting Company's contribution for such Year which equals the
smallest aggregate amount which, when allocated to the
Matching Contributions Accounts of those Participants employed
thereby who are Non-Highly Compensated Employees in the same
ratios which each such Participant's Salary Reduction
Contribution for such Year bears to the aggregate of the
Salary Reductions Contributions of all of such Participants
and included as constituting Salary Reduction Contributions of
such Participants in computing the Low Average
Actual Deferral Percentage, will result in the High Average
Actual Deferral Percentage meeting one of such Percentage
Limitations shall be allocated to the Matching Company
Contributions Accounts of such Participants who are Non-Highly
Compensated Employees. By so providing, each Adopting Company
intends that any amount allocated to the Matching
Contributions Account of a Participant who is a Non-Highly
Compensated Employee pursuant to the provisions of this
Section 5.1(a)(4) constitute a qualified nonelective
contribution. Accordingly, all of such amounts shall be deemed
to constitute Salary Reduction Contributions for purposes
hereof.
<PAGE>
(5) Lastly, if the contribution made by an Adopting
Company for any Plan Year ending after June 30, 1998, exceeds
the amount, if any, required to be allocated to the Matching
Contributions Accounts of Participants pursuant to the
provisions of Sections 5.1(a)(1), 5.1(a)(2) and 5.1(a)(3),
plus the amount, if any, required to be allocated to the
Matching Contributions accounts of Participants who are
Non-Highly Compensated Employees pursuant to the provisions of
Section 5.1(a)(4), the balance of such Adopting Company's
contributions for such Year shall be allocated to the Matching
Contributions Accounts of all Participants employed thereby
who have been credited with a Year of Service for such Year in
the same ratios that each such Participant's Salary Reduction
Contribution for the Year bears to the Salary Reduction
Contributions of all Participants employed thereby for such
Year; pro vided, however, that the Salary Reduction
Contribution for such Year of each Participant who is a
Non-Highly Compensated Employee shall be deemed to include the
amount, if any, required to be allocated to the Matching
Contribution Account of such Participant pursuant to the
provisions of Section 5.1(a)(4). By so providing, each
Adopting Company intends to comply with the provisions of
Section 401(m)(3) of the Code."
2. Effective immediately, the following special provision shall apply:
"Special Eligibility and Vesting Rules for Penhall Company dba Highway
Services Employees.
Penhall Company is in the process of acquiring substantially
all of the assets of a company known as Highway Services, Inc., which
company will be operated by Penhall Company as one of its divisions, to
be known as 'Penhall Company dba Highway Services.' Effective upon the
closing of that acquisition:
(a) Any Employee hereafter employed by an Adopting Company
will be credited with past service credit for eligibility and vesting
purposes under this Plan with all service performed by that Employee
for Highway Services, Inc. prior to the acquisition, applying the rules
of this Plan as they related to crediting service;
(b) The term "Eligible Employee" includes Employees of Penhall
Company dba Highway Services (and only that division of the Sponsoring
Company) who are included in a unit of Employees covered by a
collective bargaining agreement between employee representatives and
Penhall Company; and
<PAGE>
(c) The Plan will have a special one-time Entry Date solely
for each Employee who was employed by Highway Services, Inc.
immediately prior to the closing of the acquisition, and who commences
employment with an Adopting Company during the period from the date of
closing of the acquisition through June 30, 1998. That Entry Date is
the Employee's Date of Employment (without taking into account
paragraph (a) above)."
This Plan Amendment is executed this 27th day of April, 1998.
PENHALL INTERNATIONAL, INC.
By: /s/ Roger C. Stull
-------------------------------------
Robert C. Stull, President
<PAGE>
AMENDMENT TO THE PENNHALL INTERNATIONAL, INC. AND
AFFILIATED COMPANIES EMPLOYEES' PROFIT-SHARING
(401k) PLAN AND TRUST AGREEMENT
(THE "PLAN")
Pursuant to Section 10.1 of the Plan, Pennhall International, Inc., as
Sponsoring Company under the Plan, hereby amends the Plan in the following
particulars only:
1. The following paragraph is added to Section 6.4.
"Notwithstanding Sections 6.4, 6.5, 6.6, and 6.7 herein,
benefits may be distributed to the "alternate payee" under a "qualified
domestic relations order" (as those terms are defined in Section 414(p)
of the Code) as required by such order, regardless of the age or
employment status of the Participant, provided that: (a) the form and
commencement of distribution is authorized under Sections 6.6 and 6.7,
assuming the alternate payee to be an unmarried Participant who has
terminated employment on the date of entry of the order; and (b)
subsequent distributions to persons other than the alternate payee,
with respect to the same Participant, shall be reduced if necessary to
prevent duplicate distributions with respect to the same benefit
amount."
IN WITNESS WHEREOF, the Sponsoring Company has executed this Plan
Amendment effective March 1, 1992.
"SPONSORING COMPANY"
PENNHALL INTERNATIONAL, INC., a
California corporation
By
------------------------------------
Roger C. Stull, President
<PAGE>
AMENDMENT TO THE
PENHALL INTERNATIONAL, INC.
AND AFFILIATED COMPANIES
EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST
Pursuant to Article X of the PENHALL INTERNATIONAL, INC. AND AFFILIATED
COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST (the "Plan"), Penhall
International, Inc. amends the Plan (as recently amended and restated) as
follows effective July 1, 1989.
1. The following is added to Section 4.5(c):
"Salary Reduction Contributions must relate to Compensation
that either would have been received by the Employee in the
Plan Year (but for the Salary Reduction Election) or is
attributable to services performed by the Employee in the Plan
Year and would have been received by the Employee within 2-1/2
months after the close of the Plan Year (but for the Salary
Reduction Election) in order to be considered in calculating
the Actual Deferral Percentage."
2. The following is added as Section 1.2(ggg):
"(ggg) 'Limitation Year' means the Plan Year."
3. The following sentence is added to Section 3.2:
"The Plan shall accept no transfer contributions."
4. The reference to Plan Section 5.1(a)(3) in Section 5.1(a)(4) is
changed to read "5.1(a)(4)." The two references to Plan Section 5.1(a)(3) in
Section 5.1(a)(5) are changed to read "5.1(a)(4)." There is no Plan Section
5.1(a)(3).
5. Section 4.7(f) is deleted and the following inserted in its place:
"(f) Salary Reduction Contributions will be taken into account
in computing Actual Deferral Percentages for a Plan Year only
if allocated to
<PAGE>
the Participant's Account as of a date within
such Plan Year. For this purpose, Salary Reduction
Contributions are considered allocated as of a
date within a Plan Year if the allocation is not contingent on
participation or performance of services after such date and
the Salary Reduction Contribution is actually paid to the
Trust no later than 12 months after the Plan Year to which
such Contribution relates."
6. The parenthetical at the end of Section 4.6(a)(2) is deleted and the
following inserted in its place:
"(determined in accordance with Section 4.6(d) below)."
7. The following is added as Section 4.6(d):
"(d) The amount of excess contributions for a
Highly Compensated Employee is determined as follows:
(1) First, the Actual Deferral Percentage of the
Highly Compensated Employee with the highest Actual
Deferral Percentage is reduced to the extent
necessary to satisfy the Actual Deferral Percentage
test or cause such Percentage to equal the Actual
Deferral Percentage of the Highly Compensated
Employee with the next highest Percentage.
(2) Second, this process is repeated until the Actual
Deferral Percentage test is
satisfied.
The amount of excess contributions for a Highly Compensated
Employee is then equal to the total Salary Reduction
Contributions and Matching Contributions taken into account
for the Actual Deferral Percentage test less the product of
such Employee's reduced Actual Deferral Percentage as
determined above and the Employee's Compensation.
Notwithstanding the foregoing, the amount of excess
contributions to be distributed shall be reduced by Excess
Deferrals previously distributed for the taxable year ending
in the same Plan Year, and Excess Deferrals to be distributed
for a
<PAGE>
taxable year will be reduced by excess contributions
previously distributed for the Plan Year beginning in such
taxable year."
This Plan Amendment is executed this 25th day of March, 1994, at
Anaheim, California.
PENHALL INTERNATIONAL, INC.
By: /s/ Roger C. Stull
---------------------------
Robert C. Stull, President
<PAGE>
PLAN AMENDMENT
The employer named below ("Employer") is the sponsor of the
tax-qualified retirement plan named below (the "Plan"). Employer hereby amends
the Plan by adding the following provisions effective as provided below.
1. The following is added effective January 1, 1994:
"OBRA '93 Annual Compensation Limit
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for
Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the "OBRA '93 Annual Compensation Limit." The "OBRA '93
Annual Compensation Limit" is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with Code Section
401(a)(17)(B). The cost-of-living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over which
Compensation is determined (the "determination period") beginning in
such calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 Annual Compensation Limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under Code Section 401(a)(17) shall mean
the OBRA '93 Annual Compensation Limit set forth in this provision.
If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current
Plan Year, the Compensation for that prior determination period is
subject to the OBRA '93 Annual Compensation Limit in effect for the
prior determination period. For this purpose, for determination periods
beginning before the first day of the first Plan Year beginning on or
after January 1, 1994, the OBRA '93 Annual Compensation Limit is
$150,000."
<PAGE>
2. The following is added effective January 1, 1993:
"Waiver of 30-Day Hold on Distributions
If a distribution is one to which Code Sections 401(a)(11) and 417 do
not apply, such distribution may commence less than 30 days after the
notice required under Regulation Section 1.411(a)-11(c) is given,
provided that:
(1) The Plan Administrator clearly informs the Participant
that the Participant has a right to a period of at least 30
days after receiving the notice to consider the decision of
whether or not to elect a distribution; and
(2) The Participant, after receiving such notice,
affirmatively elects a distribution."
Employer: Penhall International, Inc.
----------------------------
Plan: Penhall International, Inc. and
Affiliated Companies Employees'
Profit Sharing Plan (401(k)) Plan
--------------------------------
Date: April 5, 1993 By: /s/ Charles D. Steichen
------------- ------------------------------
Title: Vice President
---------------------------
<PAGE>
DIRECT ROLLOVER
PLAN AMENDMENT
The employer named below ("Employer") is the sponsor of the
tax-qualified retirement plan named below (the "Plan). Employer hereby amends
the Plan effective January 1, 1993, by adding the following provisions to comply
with Code Section 401(a)(31).
"DIRECT ROLLOVERS
Section A. These provisions apply to Plan distributions made on or
after January 1, 1993. Notwithstanding any provisions of the Plan to the
contrary that would otherwise limit a Distributee's election under these
provisions, a "Distributee" may elect, at the time and in the manner prescribed
by the Plan Administrator, to have any portion of an "Eligible Rollover
Distribution" paid directly to an "Eligible Retirement Plan" specified by the
Distributee in a "Direct Rollover."
Section B. "Eligible Rollover Distribution": An Eligible Rollover
Distribution is any distribution of all or any portion of the balance to the
credit of the Distributee, except that an Eligible Rollover Distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life expectancies)
of the Distributee and the Distributee's designated beneficiary, or for a
specified period of 10 years or more; any distribution to the extent such
distribution is required under Code Section 401(a)(9); and the portion of any
distribution that is not includible in gross income (determined without regard
to the exclusion for net unrealized appreciation with respect to employer
securities).
Section C. Eligible Retirement Plan: An Eligible Retirement Plan is
an individual retirement account described in Code Section 408(a), an individual
retirement annuity described in Code Section 408(b), an annuity plan described
in Code Section 403(a), or a qualified trust described in Code Section 401(a),
that accepts the Distributee's Eligible Rollover Distribution. However, in the
case of an Eligible Rollover Distribution to the
<PAGE>
surviving spouse, an Eligible Retirement Plan is an individual retirement
account or individual retirement annuity.
<PAGE>
Section D. Distributee: A Distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's surviving spouse and
the Employee's or former Employee's spouse or former spouse who is the alternate
payee under a Qualified Domestic Relations Order, as defined in Code Section
414(p), are Distributees with regard to the interest of the spouse or former
spouse.
Section E. Direct Rollover: A Direct Rollover is a payment by the Plan
to the Eligible Retirement Plan specified by the Distributee."
Employer:
--------------------------
Plan:
------------------------------
Date: , 1993 By:
------------- --------------------------------
Title:
-----------------------------
<PAGE>
INTERIM PLAN AMENDMENT
The undersigned "Sponsoring Employer" of the "Employee Pension Benefit
Plan" set forth below (the "Plan") hereby amends the Plan effective for Plan
Years commencing on or after January 1, 1997 as follows:
1. WHEREAS: HR 3448, the Small Business Protection Act of 1996 (the '96
Act"), provides in general in Section 1404(b) that, except for five percent
owners, plan participants must begin to receive minimum required distributions
under Section 401(a)(9)(C) of the Internal Revenue Code of 1986 (the "Code") by
April 1 of the calendar year following the year in which the participant reaches
age 70-1/2 or, if later, the year in which the participant retires. The
Sponsoring Employer wishes to give Plan participants who (a) are not five
percent owners, (b) are currently employed by the Sponsoring Employer and (c)
are currently receiving minimum required distributions, the election to stop
receiving those distributions until otherwise required by law.
THE PLAN IS AMENDED AS FOLLOWS: "Notwithstanding anything in the Plan
to the contrary: (a) Participants who are not five percent owners (as defined in
Code Section 416) are not required to receive minimum required distributions
until April 1 of the calendar year following the later of (i) the calendar year
in which the participant attains age 70-1/2 or (ii) the calendar year in which
the employee retires. (b) Participants who (i) are not five percent owners (as
defined in Code Section 416), (ii) are currently employed by the Sponsoring
Employer and (iii) are currently receiving minimum required distributions, shall
have the right to elect to stop receiving those distributions until otherwise
required by law."
2. WHEREAS: Section 1431 of the '96 Act changes the definition of
"highly compensated employee." New Code Section 414(q)(1)(B)(2) allows the
employer to elect to limit the group of highly compensated employees (other than
five percent owners) to those in the top-paid group of employees for the
preceding year. The Sponsoring Employer wishes to make that election.
THE PLAN IS AMENDED AS FOLLOWS: "Beginning with the Plan Year
commencing on or after January 1, 1997, the Sponsoring Employer makes the
election set forth in Code Section 414(q)(1)(B)(2), electing to limit the group
of highly compensated employees (other than five percent
owners) to those in the top-paid group of employees for the
preceding year."
This Interim Plan Amendment is executed this 10th day of
February, 1997.
<PAGE>
Sponsoring Employer: /s/ Roger C. Stull
---------------------------------------------------------
Name of Employee Pension Benefit Plan: Penhall International, Inc. and
Affiliated Companies Employees' Profit
Sharing (401(k)) Plan and Trust
Agreement
----------------------------------------
<PAGE>
Exhibit 10.10
PENHALL INTERNATIONAL CORP.
1998 STOCK OPTION PLAN
Date Adopted: ____________, 1998
<PAGE>
PENHALL INTERNATIONAL CORP.
1998 STOCK-OPTION PLAN
1. Purpose of the Plan
The purpose of the Plan is to assist the Company in attracting
and retaining valued employees, non-employee directors and independent
contractors by offering them a greater stake in the Company's success and a
closer identity with it, and to encourage ownership of the Company's stock by
such employees, non-employee directors and independent contractors.
2. Definitions
2.1 "Board" means the Board of Directors of the
Company.
2.2 "Cause" means that Employee (i) has engaged
in misconduct involving dishonesty, theft, embezzlement or fraud with respect to
the Company, (ii) has been convicted of a felony, or (iii) refuses to perform
adequately any of his or her usual and ordinary duties for or on behalf of the
Company or those reasonably requested by the Company or the Board, provided that
the Company shall have given notice to the Employee of the nature of such
refusal and such refusal has not been cured within 5 days thereafter.
2.3 "Change in Control" shall mean a change in
control of the Company of a nature that would be required to be reported in
response to Item 1 of
<PAGE>
Form 8-K promulgated under the Exchange Act, provided, that, without limitation,
such a change in control shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other
than the Company or any "person" who on the date hereof is a director or officer
of the Company, is or becomes the "beneficial owner," (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the combined voting power of the Company's then
outstanding securities; or (ii) during any period of two consecutive years
during the term of this Plan, individuals who at the beginning of such period
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board, unless the election of each director who was
not a director at the beginning of such period has been approved in advance by
directors representing at least a majority of the directors then in office who
were members of the Incumbent Board or whose election was approved by the
Incumbent Board.
2.4 "Code" means the Internal Revenue Code of
1986, as amended.
2.5 "Common Stock" means the common stock of the
Company, par value $______ per share, or such other class or kind of shares or
other securities resulting from the application of Section 7.
- 3 -
<PAGE>
2.6 "Company" means Penhall International Corp.,
a ______________ corporation, or any successor corporation.
2.7 "Committee" means a committee composed of
members of the Board, designated by the Board to administer the Plan in
accordance with Section 4. After the Company becomes Publicly Traded, the
Committee shall have at least two members and each member of the Committee shall
be a non-employee director within the meaning of Rule 16b-3 under the Exchange
Act.
2.8 "Director" means a member of the Board who
is not an Employee.
2.9 "Employee" means an officer or other key
employee of the Company including a director who is such an
employee.
2.10 "Exchange Act" means the Securities
Exchange Act of 1934, as amended.
2.11 "Fair Market Value" means, on any given
date,
2.11.1 If the Common Stock is listed on an
established stock exchange or exchanges, the last reported
sale price per share on such date on the principal exchange on
which it is traded, or if no sale was made on such date on
such principal exchange, at the closing reported bid price on
such date on such exchange;
- 4 -
<PAGE>
2.11.2 If the Common Stock is not then listed on an
exchange, the last reported sale price per share on such date
reported by NASDAQ, or if sales are not reported by NASDAQ, or
no sale was made on such date, the average of the closing bid
and asked prices per share for the Common Stock in the
over-the-counter market as quoted on NASDAQ on such date;
2.11.3 If the Common Stock is not then listed on an
exchange or quoted on NASDAQ, the average of the reported
closing bid and asked prices on the most recent date the
Common Stock traded in the over-the-counter market; or
2.11.4 If the Common Stock is not then listed on an
exchange, quoted on NASDAQ or traded in the over-the-counter
market, the value ascribed to the shares of Common Stock by
the Committee based on a good faith attempt to value the
Common Stock.
2.12 "Holder" means an Employee, Director or
Independent Contractor to whom an Option is granted.
2.13 "Incentive Stock Option" means an Option
intended to meet the requirements of an incentive stock option as defined in
section 422 of the Code and designated as an Incentive Stock Option.
- 5 -
<PAGE>
2.14 "Independent Contractor" means an
individual other than an Employee who performs services for the
Company.
2.15 "Non-Qualified Stock Option" means an
Option not intended to be an Incentive Stock Option, and designated as a
Non-Qualified Stock Option.
2.16 "Option" means any stock option granted
from time to time under Section 6 of the Plan.
2.17 "Option Agreement" means an agreement
evidencing the grant of Options under this Plan by the Company to the Holder and
containing such terms as the Committee shall determine.
2.18 "Option Share" means any share of Common
Stock purchased upon the exercise of an Option.
2.19 "Permitted Transferee" means the spouse,
parents, siblings, children or grandchildren (in each case, natural or adopted)
of a Holder, any trust for his or her benefit or the benefit of his or her
spouse, parents, siblings, children or grandchildren (in each case, natural or
adopted), or any corporation or partnership in which the direct and beneficial
owner of all of the equity interest in such corporation or partnership is such
individual Holder or Permitted Transferee (or any trust for the benefit of such
persons).
- 6 -
<PAGE>
2.20 "Plan" means the Penhall International
Corp. 1998 Stock Option Plan herein set forth, as amended from
time to time.
2.21 "Publicly Traded" means the Company is
required to register shares of any class of common equity under Section 12 of
the Exchange Act.
2.22 "Retirement" means retirement from the
active employment of the Company pursuant to the relevant provisions of the
applicable pension plan to such Employee or as otherwise determined by the
Board.
2.23 "Ten Percent Shareholder" means a person
who on any given date owns, either directly or indirectly (taking into account
the attribution rules contained in section 424(d) of the Code), stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary of which the Company has a 50% or greater, direct or
indirect ownership.
3. Eligibility
Any Employee, Director or Independent Contractor is eligible
to receive an Option.
4. Administration and Implementation of Plan
4.1 The Plan shall be administered by the
Committee, which shall have full power to interpret and administer the Plan and
full authority to act in selecting the Employees, Directors and Independent
Contractors to whom Options will be
- 7 -
<PAGE>
granted, in determining the type and amount of Options to be granted to each
such Employee, Director or Independent Contractor, the terms and conditions of
Options granted under the Plan and the terms of agreements which will be entered
into with Holders.
4.2 The Committee's powers shall include, but
not be limited to, the power to determine whether, to what extent and under what
circumstances an Option may be exchanged for cash; to determine the effect, if
any, of a change in control of the Company upon outstanding Options; and to
grant Options (other than Incentive Stock Options) that are transferable by the
Holder.
4.3 The Committee shall have the power to adopt
regulations for carrying out the Plan and to make changes in such regulations as
it shall, from time to time, deem advisable. The Committee shall have the power
unilaterally and without approval of a Holder to amend an existing Option
Agreement in order to carry out the purposes of the Plan so long as such an
amendment does not, other than pursuant to a specific term of the Plan, take
away any benefit granted to a Holder by the Option Agreement and as long as the
amended Option Agreement comports with the terms of the Plan. Any interpretation
by the Committee of the terms and provisions of the Plan and the administration
thereof, and all action taken by the Committee, shall be final and binding on
Holders.
- 8 -
<PAGE>
5. Shares of Stock Subject to the Plan
5.1 Subject to adjustment as provided in Section
7, the total number of shares of Common Stock available for Options granted
under the Plan shall be ___________ shares. The maximum number of shares of
Common Stock for which any individual may be granted options in any calendar
year shall be __________.
5.2 Any shares issued by the Company through the
assumption or substitution of outstanding grants from an acquired company shall
not reduce the shares available for Options granted under the Plan. Any shares
issued hereunder may consist, in whole or in part, of authorized and unissued
shares or treasury shares. If any shares subject to any Option granted hereunder
are forfeited or such Option otherwise terminates without the issuance of such
shares or the payment of other consideration in lieu of such shares, the shares
subject to such Option, to the extent of any such forfeiture or termination,
shall again be available for Options under the Plan.
6. Options
Options give an Employee, a Director or an Independent
Contractor the right to purchase a specified number of shares of Common Stock
from the Company for a specified time period at a fixed price. The grant of
Options shall be subject to the following terms and conditions:
6.1 Option Grants: Options shall be granted to
an Employee, Director or Independent Contractor at the time and in the amount
determined by the
- 9 -
<PAGE>
Committee. Options shall be evidenced by Option Agreements. Such Option
Agreements shall conform to the requirements of the Plan, and may contain such
other provisions as the Committee shall deem advisable.
6.2 Option Price: The price per share at which
Common Stock may be purchased upon exercise of an Option shall be determined by
the Committee, but shall be not less than the Fair Market Value of a share of
Common Stock on the date of grant. In the case of any Incentive Stock Option
granted to a Ten Percent Shareholder, the option price per share shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
of grant.
6.3 Term of Options: The Option Agreements shall
specify when an Option may be exercisable and the terms and conditions
applicable thereto. The term of an Option shall in no event be greater than ten
years (five years in the case of an Incentive Stock Option granted to a Ten
Percent shareholder).
6.3.1 Vesting. Options granted under the
Plan may be subject to a vesting schedule set forth in the Option Agreement,
under which such Options cannot be exercised until they are vested, except as
provided in Section 6.3.2. However, Options shall vest at a rate of at least 25%
each year on the anniversary of the date the Options were granted, so that all
Options will be 100% vested no later than the fourth anniversary of their grant.
- 10 -
<PAGE>
6.3.2 Early Exercise. An Option Agreement
may allow a Holder to exercise an Option before the date on which the Option is
vested. Any Option Shares purchased through such an early exercise will be
subject to the Repurchase Rights described in Section 6.12 until the underlying
Options otherwise would have become vested.
6.4 Incentive Stock Options: Each provision of
the Plan and each Option Agreement relating to an Incentive Stock Option shall
be construed so that each Incentive Stock Option shall be an incentive stock
option as defined in section 422 of the Code, and any provisions of the Option
Agreement thereof that cannot be so construed shall be disregarded. In no event
may a Holder be granted an Incentive Stock Option which does not comply with the
limitations ($100,000 at the date hereof) imposed by Section 422(d) of the Code
on the dollar amount of such Options that may first be exercisable in any one
calendar year.
6.5 Restrictions on Transferability: No
Incentive Stock Option shall be transferable otherwise than by will or the laws
of descent and distribution and, during the lifetime of the Holder, shall be
exercisable only by the Holder. Upon the death of a Holder, the person to whom
the rights have passed by will or by the laws of descent and distribution may
exercise an Incentive Stock Option only in accordance with this Section 6.
- 11 -
<PAGE>
6.6 Payment of Option Price and Taxes:
6.6.1 Payment. The Option Price or, where
applicable, a portion thereof, shall be paid in full in cash or by certified or
bank cashiers check payable to the Company, or, subject to the approval of the
Committee and where provided in the applicable Option Agreement: (a) by
surrendering shares of the Company's Common Stock that have an aggregate Fair
Market Value equal to the aggregate Option Price and that have been held by
Holder for six months, (b) delivery of an irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the aggregate Option
Price or delivery of irrevocable instructions to a broker to deliver promptly to
the Company sufficient funds to pay the aggregate Option Price, (c) by having
the Company retain the number of Option Shares whose aggregate Fair Market Value
equals the aggregate Option Price or (d) any combination of the foregoing.
6.6.2 Taxes. Any taxes required to be
withheld by the Company upon exercise of an Option shall be paid in full in cash
or by certified or bank cashiers check payable to the Company, or, subject to
the approval of the Committee (and subject to such rules as the Committee may
adopt) and where provided in the applicable Option Agreement, by having the
Company retain the number of Option Shares whose aggregate Fair Market Value
equals the amount to be withheld in satisfaction of the applicable withholding
taxes.
- 12 -
<PAGE>
6.7 Termination by Death: If a Holder dies, any
Option granted to such Holder may thereafter be exercised (to the extent such
Option was exercisable at the time of death or on such accelerated basis as the
Committee may determine at or after grant) by, where appropriate, the Holder's
transferee or by the Holder's legal representative, for a period of three months
from the date of death or until the expiration of the stated term of the Option,
whichever period is shorter.
6.8 Termination by Reason of Retirement or
Disability: If a Holder's employment by the Company or service on the Board
terminates by reason of disability (as determined by the Committee) or
Retirement, any unexercised Option granted to the Holder may thereafter be
exercised by the Holder (or, where appropriate, the Holder's transferee or legal
representative), to the extent it was exercisable at the time of termination or
on such accelerated basis as the Committee may determine at or after grant, for
a period of three months from the date of such termination or until the
expiration of the stated term of the Option, whichever period is shorter. This
Section 6.8 shall not apply to any Option held by an Independent Contractor.
6.9 Other Termination: If a Holder's employment
by the Company or service on the Board terminates for any reason other than
death, disability or Retirement, all unexercised Options, to the extent they
were exercisable at the time of termination, may be exercised within the shorter
of 60 days following the Holder's termination or the remaining term of the
Option. Any such unexercised Options shall then terminate at the end of such
60-day period. All unexercised Options that are
- 13 -
<PAGE>
unexercisable at the time of the Holder's termination shall immediately
terminate on the date of the Holder's termination. This Section 6.9 shall not
apply to any Option held by an Independent Contractor.
6.10 Rights of First Refusal of Company. In the
event that any Holder of Option Shares receives a bona fide offer from a third
party to purchase a complete or partial interest in such Option Shares, and at
the time of that offer, the Option Shares are not Publicly Traded, the Holder
may not transfer the Option Shares unless otherwise permitted by the provisions
of the Plan and the Agreement, and without first offering to sell such Option
Shares to the Company or its designee pursuant to this Section 6.10.
6.10.1 The Holder shall deliver a written
notice (a "Sale Notice") to the Company describing in reasonable detail the
Option Shares, the name of the offeror, the purchase price offered and all other
material terms of the proposed transfer. The Sale Notice shall be delivered to
and received by the Company at least sixty (60) days prior to any such proposed
sale.
6.10.2 The Sale Notice shall constitute an
irrevocable offer by such Holder to sell the Option Shares described therein to
the Company or its designee in accordance with this Section 6.10.
6.10.3 Upon receipt of the Sale Notice, the
Company or its designee shall have the right and option to purchase the Option
Shares on the terms of
- 14 -
<PAGE>
the proposed transfer set forth in the Sale Notice, except for such terms as are
otherwise specified or permitted by this Section 6.10. Within 30 days after
receipt of the Sale Notice, the Company shall notify such Holder whether or not
it or its designee wishes to purchase the Option Shares. If the Company or its
designee elects to purchase the Option Shares, the closing of the purchase and
sale of the Option Shares shall be held at the place and on the date established
by the Company in its notice to the Holder in response to the Sale Notice, which
date shall be not more than 30 days from the date of the Company's notice,
unless the terms of the proposed transfer provide for a later closing date.
6.10.4 If neither the Company nor its
designee elects to purchase the Option Shares, the Holder may, subject to the
other provisions of the Plan and the Agreement, transfer the Option Shares to
the offeror specified in the Sale Notice at a price no less than the price
specified in the Sale Notice and on other terms no more favorable to the offeror
than specified in the Sale Notice during the 90-day period immediately following
the last date on which the Company could have elected to purchase the Option
Shares. Any such Option Shares not so transferred within such 90-day period will
be subject again to all of the provisions of this Section 6.10 upon subsequent
transfer.
6.11 Approved Sale of the Company. If the Board
and holders of a majority of the Common Stock (voting as a single class) then
outstanding approve the sale of the Company (whether by merger, consolidation,
sale of all or substantially all of
- 15 -
<PAGE>
the assets or outstanding shares of capital stock (an "Approved Sale"), and if
at that time the Common Stock is not Publicly Traded, the following restrictions
shall apply with respect to any Option Share:
6.11.1 each Holder shall consent to, vote for
and raise no objections with respect to the Approved Sale, and if the Approved
Sale is structured as a sale of stock, shall agree to sell all Option Shares
held by such Holder on the terms and conditions approved by the Board and the
holders of a majority of the Common Stock then outstanding.
6.11.2 Each Holder shall take all action
which is necessary or in the judgment of the Company advisable to facilitate or
consummate an Approved Sale. The obligations of a Holder with respect to an
Approved Sale of the Company are subject to the satisfaction of the following:
upon the consummation of the Approved Sale, either all of the holders of Common
Stock will receive the same form and amount of consideration per share of Common
Stock, or if any such holder of Common Stock is given an option as to the form
and amount of consideration to be received, such Holder will be given the same
option. Each Holder hereby appoints the Company as its or his true and lawful
proxy and attorney-in-fact, with full power of substitution and resubstitution,
to vote its or his Option Shares that are entitled to vote to effectuate the
provisions and intentions of this Section 6.11. The proxies and powers of
attorney granted under this Section 6.11 are hereby declared to be coupled with
an interest and shall be irrevocable.
- 16 -
<PAGE>
6.12 Repurchase Rights of Company. So long as
the Common Stock is not Publicly Traded:
6.12.1 If a Holder's employment or service
with the Company is terminated by the Company for Cause or by the Holder for any
reason whatsoever, and if such Holder has been previously granted an Option or
Options under the Plan, then any Option Shares that are held by such Holder
shall be subject to the right and option of the Company or its designee to
purchase in one or more transactions all or a portion of such Option Shares at
an aggregate price equal to the product of the number of such Option Shares and
the lower of the Fair Market Value (determined as of a date not more than 30
days prior to the date of the Company's notice called for by Section 6.12.3) and
the Option Price paid for such Option Shares, subject to the terms set forth in
Section 6.12.3.
6.12.2 If a Holder's employment or service
with the Company is terminated by the Company for other than Cause and if such
Holder has been previously granted Options under the Plan, then any Option
Shares that are held by such Holder shall be subject to the right and option of
the Company or its designee to purchase in one or more transactions all or a
portion of such Option Shares at an aggregate price equal to the product of the
number of such Option Shares and the Option Price paid for such Option Shares,
subject to the terms set forth in Section 6.12.3.
- 17 -
<PAGE>
6.12.3 In the event that the Company or its
designee should decide to exercise the right to purchase Option Shares, the
Company shall notify the Holder of the Company's or its designee's exercise of
such right, setting forth the purchase price determined by the Company as well
as the date and place of closing; provided, that the Company or its designee
shall provide such notification to Holder in writing within 60 days of
termination of Holder's employment or service with the Company. At the closing,
the Company or its designee, as the case may be, shall make available to the
Holder such purchase price, payable in cash or by check, and the Holder shall
deliver any such Option Shares immediately prior to such closing, whereupon the
purchase and sale pursuant to such right shall be deemed completed and the
Company or its designee, as the case may be, shall be deemed the sole registered
and beneficial owner of such Option Shares for all purposes.
7. Adjustments upon Changes in Capitalization
In the event of a reorganization, recapitalization, stock
split, spin-off, split-off, split-up, stock dividend, issuance of stock rights,
combination of shares, merger, consolidation or any other change in the
corporate structure of the Company affecting Common Stock, or any distribution
to stockholders other than a cash dividend, the Board shall make appropriate
adjustment in the number and kind of shares authorized by the Plan and any
adjustments to outstanding Options as it determines appropriate. No fractional
shares of Common Stock shall be issued pursuant to such an adjustment. The Fair
Market Value of any fractional shares resulting from adjustments pursuant to
- 18 -
<PAGE>
this Section shall, where appropriate, be paid in cash to the Holder.
8. Adjustments Upon Change in Control
In the event of a Change in Control pursuant to which another
person or entity acquires control of the Company (such other person or entity
being the "Successor"), at the discretion of the Company and by virtue of the
Change in Control:
(a) the Common Stock subject to the Plan shall
be converted into and replaced by shares of common voting stock of the
Successor, or such other class of securities having rights and preferences no
less favorable than the common voting stock of the Successor, and the number of
shares subject to an Option granted under the Plan and the purchase price per
share upon exercise of such Option shall be correspondingly adjusted so that, by
virtue of such Change in Control, the Holder of such Option shall have the right
to purchase that number of common voting stock of the Successor which has a Fair
Market Value equal to the Fair Market Value of the shares of Common Stock
subject to the Holder's Option, as of the date of such Change in Control, for a
purchase price per share which, when multiplied by the number of shares of
common voting stock of the Successor subject to the adjusted Option, shall equal
the aggregate exercise price at which the Holder would have received all of the
shares of Common Stock optioned to the Holder under the original Option; or
- 19 -
<PAGE>
(b) the Company may convert the Option into a
right in the Holder to realize the value of an Option (which value the Company
may in its discretion determine equals the excess of the Fair Market Value of
the consideration to be received as a result of the Change in Control had such
Option been exercised immediately prior thereto, over the option price of such
Option) in cash.
9. Effective Date, Termination and Amendment
The Plan shall become effective on _________, 1998, subject to
shareholder approval. The Plan shall remain in full force and effect until the
earlier of 10 years from the date of its adoption by the Board, or the date it
is terminated by the Board. The Board shall have the power to amend, suspend or
terminate the Plan at any time, provided that no such amendment shall be made
without shareholder approval to the extent such approval is required under
section 162(m) or section 422 of the Code.
Termination of the Plan pursuant to this Section 9 shall not
affect Options outstanding under the Plan at the time of termination.
10. Transferability
Except as provided below, Options may not be pledged, assigned
or transferred for any reason during the Holder's lifetime, and any attempt to
do so shall be void and the relevant Option shall be forfeited; provided,
however that Options
- 20 -
<PAGE>
(except incentive stock options) may be pledged, assigned or transferred (i) at
the discretion of the Committee, during the Holder's lifetime by the Holder to a
Permitted Transferee, (ii) at the discretion of the Committee, by a Permitted
Transferee to another Permitted Transferee or (iii) as otherwise permitted by
the Committee; provided, further, that any such transfer shall (i) not occur for
a period of at least six months after the Option is granted, and (ii) comply
with all terms and conditions established by the Committee and any term,
condition or restriction contained in the relevant Option Agreement.
11. General Provisions
11.1 Nothing contained in the Plan, or any Option
granted pursuant to the Plan, shall confer upon any Employee any right with
respect to continuance of employment by the Company, nor interfere in any way
with the right of the Company to terminate the employment of any Employee at any
time.
11.2 To the extent that federal laws do not
otherwise control, the Plan and all determinations made and actions taken
pursuant hereto shall be governed by the law of ____________ and construed
accordingly.
11.3 The Committee may amend any outstanding
Option to the extent it deems appropriate. Such amendment may be made by the
Committee without the consent of the Holder, except in the case of amendments
adverse to the Holder, in
- 21 -
<PAGE>
which case the Holder's consent is required to any such amendment, unless the
amendment is designed to conform the Option to the terms of the Plan.
- 22 -
<PAGE>
EXHIBIT 12
PENHALL INTERNATIONAL INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS SEPTEMBER 30,
------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes... $6,647,000 $8,315,000 $8,623,000 $ 9,864,000 $5,232,000 $3,536,000 $(8,522,000)
Fixed charges--interest expense....... $ 399,000 $ 623,000 $ 919,000 $ 947,000 $1,204,000 $ 285,000 $ 2,663,000
---------- ---------- ---------- ---------- ---------- ---------- -----------
$7,046,000 $8,938,000 $9,542,000 $10,811,000 $6,436,000 $3,621,000 $(5,859,000)
---------- ---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- ---------- -----------
Ratio of Earnings to Fixed Charges.... 17.7 to 1 14.3 to 1 10.4 to 1 11.4 to 1 5.3 to 1 13.4 to 1 -- (1)
</TABLE>
- ------------------------------
(1) The Company's earnings were insufficient to cover its fixed charges by
$8,522,000.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23.2
The Board of Directors
Penhall International Corp. and Subsidiaries:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
December 1, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT ACCOUNTANTS' CONSENT
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in the Prospectus, which is
a part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
Moss Adams LLP
/s/ Moss Adams LLP
Costa Mesa, California
December 1, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT ACCOUNTANTS' CONSENT
As independent public accountants, we hereby consent to the inclusion of our
audit report dated January 29, 1998 on the Highway Services, Inc. financial
statements as of December 31, 1997 and for the year then ended (and all
references to our firm) included in the Prospectus, which is a part of this
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ John A. Knutson & Co., PLLP
Certified Public Accountant
Minneapolis, Minnesota
December 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001070772
<NAME> PENHALL INTERNATIONAL CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,992
<SECURITIES> 0
<RECEIVABLES> 36,050
<ALLOWANCES> (1,033)
<INVENTORY> 1,765
<CURRENT-ASSETS> 41,458
<PP&E> 83,065
<DEPRECIATION> (37,136)
<TOTAL-ASSETS> 101,794
<CURRENT-LIABILITIES> 19,166
<BONDS> 125,405
20,822
18,960
<COMMON> 995
<OTHER-SE> (85,957)
<TOTAL-LIABILITY-AND-EQUITY> 101,794
<SALES> 0
<TOTAL-REVENUES> 38,913
<CGS> 0
<TOTAL-COSTS> 27,868
<OTHER-EXPENSES> 16,907
<LOSS-PROVISION> 44
<INTEREST-EXPENSE> 2,616
<INCOME-PRETAX> (8,522)
<INCOME-TAX> (1,721)
<INCOME-CONTINUING> (6,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,801)
<EPS-PRIMARY> (3.32)
<EPS-DILUTED> (3.32)
</TABLE>
<PAGE>
Exhibit 99.1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ___________,
1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF EXISTING NOTES MAY BE
WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE
PENHALL INTERNATIONAL CORP.
LETTER OF TRANSMITTAL
12% SENIOR NOTES DUE 2006
TO: UNITED STATED TRUST COMPANY OF NEW YORK
THE EXCHANGE AGENT
By Mail: By Hand before 4:30 p.m.:
United States Trust Company of New York United States Trust Company of
New York
P.O. Box 843 Cooper Station 111 Broadway
New York, New York 10276 New York, New York 10006
Attention: Corporate Trust Services Attention: Lower Level, Corporate
Trust Window
By Overnight Courier and by Hand after 4:30 p.m.: By Facsimile:
United States Trust Company of New York (212) 780-0592
770 Broadway, 13th Floor Attention: Customer Service
New York, New York 10003
Confirm by Telephone:
(800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CARE- FULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR EXISTING NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR
EXISTING NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
The undersigned acknowledges receipt of the Prospectus dated
________________, 1998 (the "Prospectus") of Penhall International Corp. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's Offer to Exchange (the "Exchange Offer")
$1,000 principal amount of its 12% Senior Notes due 2006 (the "New Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the Prospectus
is a part, for each $1,000 principal amount of its outstanding 12% Senior Notes
due 2006 (the "Existing Notes"), of which $100,000,000 principal amount is
outstanding, upon the terms and conditions set forth in the Prospectus and this
Letter of Transmittal. Other capitalized terms used but not defined herein have
the meaning given to them in the Prospectus.
For each Existing Note accepted for exchange, the holder of such
Existing Note will receive a New Note having a principal amount equal to that of
the surrendered Existing Note. Interest on the New Notes will accrue from the
last interest payment date on which interest was paid on the Existing Notes
surrendered in exchange therefor. Holders of Existing Notes accepted for
exchange will be deemed to have waived the right to receive any other payments
or accrued interest on the Existing Notes. The Company reserves the right, at
any time or from time to time, to extend the Exchange Offer at its discretion,
in which event the term "Expiration Date" shall mean the latest time and date to
which the Exchange Offer is extended. The Company shall notify holders of the
Existing Notes of any extension by means of a press release or other public
announcement prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
<PAGE>
This Letter of Transmittal is to be used by Holders if: (i)
certificates representing Existing Notes are to be physically delivered to the
Exchange Agent herewith by Holders; (ii) tender of Existing Notes is to be made
by book-entry transfer to the Exchange Agent's account at The Depository Trust
Company ("DTC"), pursuant to the procedures set forth in the Prospectus under
"The Exchange Offer - Procedures for Tendering Existing Notes" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Existing Notes or (iii) tender of Existing
Notes is to be made according to the guaranteed delivery procedures set forth in
the Prospectus under "The Exchange Offer - Guaranteed Delivery Procedures."
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "Holder" with respect to the Exchange Offer means any person:
(i) in whose name Existing Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Existing Notes are held of record by DTC (or
its nominee) who desires to deliver such Existing Notes by book-entry transfer
at DTC. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
Holders of Existing Notes that are tendering by book-entry transfer to
the Exchange Agent's account at DTC can execute the tender through the DTC
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible. DTC participants that are accepting the Exchange Offer must transmit
their acceptance to DTC, which will verify the acceptance and execute a
book-entry delivery to the Exchange Agent's DTC account. DTC will then send an
Agent's Message to the Exchange Agent for its acceptance. DTC participants may
also accept the Exchange Offer prior to the Expiration Date by submitting a
Notice of Guaranteed Delivery or Agent's Message relating thereto as described
herein under Instruction 1, "Guaranteed Delivery Procedures."
The instructions included with this Letter of Transmittal must be
followed. Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 11 herein.
<PAGE>
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR
EXISTING NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS
ENTIRETY. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF 12% SENIOR NOTES DUE 2006 (EXISTING NOTES)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate Principal Amount Principal Amount
Name(s) and Address(es) of Registered Holder(s) Certificate Represented by Tendered (If Less
(Please fill in, if blank) Number(s)* Certificate(s) Than All)**
- -----------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by Holders tendering by book-entry transfer.
** Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Existing Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount Represented by Certificate(s)." If the space
provided above is inadequate, list the certificate numbers and principal
amounts on a separate signed schedule and affix the list to this Letter of
Transmittal.
- --------------------------------------------------------------------------------
The minimum permitted tender is $1,000 in principal amount of Existing Notes.
All other tenders must be integral multiples of $1,000.
<PAGE>
- -------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, AND 6)
To be completed ONLY if certificates for New Notes issued in exchange,
or Existing Notes not tendered or not accepted for exchange, are to be issued
in the name of someone other than the undersigned or, if such Existing Notes
are being tendered by book-entry transfer, to someone other than DTC or to
another account maintained by DTC.
Issue certificate(s) to:
Name:
-------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
- -------------------------------------------------------------------------------
(Taxpayer Identification or Social Security No.)
DTC Acct. No.
------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Existing Notes in a principal
amount not tendered or not accepted for exchange, are to be sent to someone
other than the undersigned, or to the undersigned at an address other than
that shown above.
Mail certificate(s) to:
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
- -------------------------------------------------------------------------------
(Taxpayer Identification or Social Security No.)
- -------------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution:
----------------------------------------
DTC Book-Entry Account No.:
-------------------------------------------
Transaction Code No.:
-------------------------------------------------
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):
--------------------------------------
Window Ticket Number (if any):
----------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, PLEASE COMPLETE THE FOLLOWING:
Account Number: Transaction Code Number:
------------------- --------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND ARE RECEIVING NEW NOTES FOR
YOUR OWN ACCOUNT IN EXCHANGE FOR EXISTING NOTES THAT WERE ACQUIRED AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES.
Name:
-----------------------------------------------------------------
Address:
--------------------------------------------------------------
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of Existing Notes
indicated above. Subject to and effective upon the acceptance for exchange of
the principal amount of Existing Notes tendered in accordance with this Letter
of Transmittal, the undersigned sells, assigns and transfers to, or upon the
order of, the Company all right, title and interest in and to the Existing Notes
tendered hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company and as Trustee under the
Indenture for the Existing Notes and New Notes) with respect to the tendered
Existing Notes with full power of substitution to (i) deliver certificates for
such Existing Notes to the Company, or transfer ownership of such Existing Notes
on the account books maintained by DTC and deliver all accompanying evidence of
transfer and authenticity to, or upon the order of, the Company and (ii) present
such Existing Notes for transfer on the books of the Company and receive all
benefits and otherwise exercise all rights of beneficial ownership of such
Existing Notes, all in accordance with the terms and subject to the conditions
of the Exchange Offer. The power of attorney granted in this paragraph shall be
deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Existing Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, when the same are acquired by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Existing Notes tendered hereby will have been acquired in the ordinary
course of business of the Holder receiving such New Notes, whether or not such
person is the Holder, that neither the Holder nor any such other person has any
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the Holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company or
any of its subsidiaries.
The undersigned also acknowledges that this Exchange Offer is being
made in reliance on an interpretation by the staff of the Securities and
Exchange Commission (the "SEC") that the New Notes issued in exchange for the
Existing Notes pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof (other than any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangements or understandings with any person to participate in the
distribution of such New Notes. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intend to engage
in, a distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Existing Notes that were
acquired as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such New Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment, transfer and purchase of the Existing
Notes tendered hereby. All authority conferred or agreed to be conferred by this
Letter of Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns, trustees in bankruptcy or other legal
representatives of the undersigned. This tender may be withdrawn only in
accordance with the procedures set forth in "The Exchange Offer - Withdrawal
Rights" section of the Prospectus.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Existing Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
If any tendered Existing Notes are not accepted for exchange pursuant
to the Exchange Offer for any reason, certificates for any such unaccepted
Existing Notes will be returned (except as noted below with respect to tenders
through DTC), without expense, to the undersigned at the address shown below or
at such different address as may be indicated under "Special Delivery
Instructions" as promptly as practicable after the Expiration Date.
The undersigned understands that tenders of Existing Notes pursuant to
the procedures described under the caption "The Exchange Offer - Procedures for
Tendering Existing Notes" in the Prospectus and in the instructions
<PAGE>
hereto will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions,"
please issue the certificates representing the New Notes issued in exchange for
the Existing Notes accepted for exchange and return any Existing Notes not
tendered or not accepted for exchange in the name(s) of the undersigned (or in
either such event in the case of the Existing Notes tendered through DTC, by
credit to the undersigned's account at DTC). Similarly, unless otherwise
indicated under "Special Delivery Instructions," please send the certificates
representing the New Notes issued in exchange for the Existing Notes accepted
for exchange and any certificates for Existing Notes not tendered or not
accepted for exchange (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s), unless,
in either event, tender is being made through DTC. In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Existing Notes accepted for exchange and return any Existing
Notes not tendered or not accepted for exchange in the name(s) of, and send said
certificates to, the person(s) so indicated. The undersigned recognizes that the
Company has no obligation pursuant to the "Special Issuance Instructions" and
"Special Delivery Instructions" to transfer any Existing Notes from the name of
the registered Holder(s) thereof if the Company does not accept for exchange any
of the Existing Notes so tendered.
Holders of Existing Notes who wish to tender their Existing Notes and
(i) whose Existing Notes are not immediately available or (ii) who cannot
deliver their Existing Notes, this Letter of Transmittal or any other documents
required hereby to the Exchange Agent, or cannot complete the procedure for
book-entry transfer, prior to the Expiration Date, may tender their Existing
Notes according to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer - Guaranteed Delivery
Procedures." See Instruction 1 regarding the completion of the Letter of
Transmittal printed below.
<PAGE>
SIGNATURE PAGE
PLEASE SIGN HERE WHETHER OR NOT
EXISTING NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X , 1998
----------------------------------------------- ----------------------
Date
X , 1998
----------------------------------------------- ----------------------
Signature(s) of Registered Holder(s) Date
or Authorized Signatory
Area Code and Telephone Number:
-------------------------------------------------
The above lines must be signed by the registered Holder(s) of Existing
Notes as their name(s) appear(s) on the Existing Notes or, if the Existing Notes
are tendered by a participant in DTC, as such participant's name appears on a
security position listing as the owner of Existing Notes, or by a person or
persons authorized to become registered Holder(s) by a properly completed bond
power from the registered Holder(s), a copy of which must be transmitted with
this Letter of Transmittal. If Existing Notes to which this Letter of
Transmittal relates are held of record by two or more joint Holders, then all
such holders must sign this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person must
(i) set forth his or her full title below and (ii) unless waived by the Company,
submit evidence satisfactory to the Company of such person's authority to act.
See Instruction 4 regarding the completion of this Letter of Transmittal printed
below.
Name(s):
------------------------------------------------------------------------
(Please Print)
Capacity:
-----------------------------------------------------------------------
(Title)
Address:
------------------------------------------------------------------------
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution (if required by
Instruction 4):
-----------------------------------------------
(Authorized Signature)
-----------------------------------------------
(Title)
-----------------------------------------------
(Name of Firm)
Dated: , 1998
-------------------------------------------------
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Existing Notes;
Guaranteed Delivery Procedures. This Letter of Transmittal is to be completed by
Holders, either if certificates are to be forwarded herewith or if tenders are
to be made pursuant to the procedures for delivery by book-entry transfer set
forth in "The Exchange Offer - Book-Entry Transfer" section of the Prospectus.
Certificates for all physically tendered Existing Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile hereof) and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of the addresses set forth herein on or prior to the
Expiration Date, or the tendering Holder must comply with the guaranteed
delivery procedures set forth below. Existing Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
Holders whose certificates for Existing Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Existing Notes pursuant to the guaranteed delivery procedures set
forth in "The Exchange Offer - Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined in Instruction 4 below), (ii) prior to the
Expiration Date, the Exchange Agent must receive from such Eligible Institution
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery), substantially in the form provided by the Company, setting forth
the name and address of the Holder of Existing Notes and the amount of Existing
Notes tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange ("NYSE") trading days after the date
of execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Existing Notes, or a Book-Entry Confirmation, and any other
documents required by this Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Existing Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE EXISTING
NOTES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF EXISTING NOTES ARE SENT BY MAIL,
IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT THE DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
See "The Exchange Offer" section in the Prospectus.
2. Tender by Holder. Only a Holder of Existing Notes may tender such
Existing Notes in the Exchange Offer. Any beneficial holder of Existing Notes
who is not the registered Holder and who wishes to tender should arrange with
the registered Holder to execute and deliver this Letter of Transmittal on his
or her behalf or must, prior to completing and executing this Letter of
Transmittal and delivering his or her Existing Notes, either make appropriate
arrangements to register ownership of the Existing Notes in such holder's name
or obtain a properly completed bond power from the registered Holder.
3. Partial Tenders. Tenders of Existing Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Existing Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the fourth column of the box entitled "Description of 12%
Senior Notes due 2006 (Existing Notes)" above. The entire principal amount of
Existing Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated. If the entire principal amount of a
Holder's Existing Notes is not tendered, then Existing Notes for the principal
amount of Existing Notes not tendered and a certificate or certificates
representing New Notes issued in exchange for any Existing Notes accepted for
exchange will be sent to the Holder at his or her registered address (unless a
different address is provided in the appropriate box on this Letter of
Transmittal) promptly after the Existing Notes are accepted for exchange.
<PAGE>
4. Signatures on this Letter of Transmittal; Endorsements and Powers of
Attorney; Guarantee of Signatures. If this Letter of Transmittal is signed by
the registered Holder of the Existing Notes tendered hereby, the signature must
correspond exactly with the name as written on the face of the certificates
without any change whatsoever.
If any tendered Existing Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are different
registrations of certificates.
When this Letter of Transmittal is signed by the registered Holder(s)
of the Existing Notes specified herein and tendered hereby, no endorsements of
certificates or separate bond powers are required. If, however, the New Notes
are to be issued, or any Existing Notes not tendered or not accepted for
exchange are to be reissued, to a person or persons other than the registered
Holder(s), then endorsements of any certificate(s) transmitted hereby or
separate bond powers are required. Signatures on such certificate(s) or power(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered Holder(s) of any certificate(s) specified herein, such certificate(s)
must be endorsed or accompanied by appropriate bond powers or powers of
attorney, in each case signed exactly as the name or names on the registered
Holder(s) appear(s) on the certificate(s) and signatures on such certificate(s)
or power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates, bond powers or
powers of attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
Endorsements on certificates for Existing Notes or signatures on bond
powers or powers of attorney required by this Instruction 4 must be guaranteed
by a firm which is a participant in a recognized signature guarantee medallion
program (an "Eligible Institution").
Signatures on this Letter of Transmittal must be guaranteed by an
Eligible Institution unless the Existing Notes are tendered (i) by a registered
Holder of Existing Notes (which term, for purposes of the Exchange Offer,
includes any DTC participant whose name appears on a security position listing
as the Holder of such Existing Notes) who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on this
Letter of Transmittal, or (ii) for the account of an Eligible Institution.
5. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Existing Notes not tendered or not accepted for exchange are
to be issued or sent, if different from the name and address of the person
signing this Letter of Transmittal (or in the case of a tender of Existing Notes
through DTC, if different from DTC). In the case of issuance in a different
name, the taxpayer identification or social security number of the person named
must also be indicated. Holders tendering Existing Notes by book-entry transfer
may request that New Notes issued in exchange for Existing Notes accepted for
exchange or Existing Notes not tendered or accepted for exchange exchanged be
credited to such account maintained at DTC as such Holder may designate hereon.
If no such instructions are given, such New Notes or Existing Notes not
exchanged will be returned to the name and address of the person signing this
Letter of Transmittal.
6. Tax Identification Number. Federal income tax law requires that a
Holder whose Existing Notes are accepted for exchange must provide the Company
(as payer ) with his, her or its correct Taxpayer Identification Number ("TIN"),
which, in the case of an exchanging Holder who is an individual, is his or her
social security number. If the Company is not provided with the correct TIN or
an adequate basis for exemption, such Holder may be subject to a $50 penalty
imposed by the Internal Revenue Service (the "IRS"), and payments made with
respect to the New Notes or Exchange Offer may be subject to backup withholding
at a 31% rate. If withholding results in an overpayment of taxes, a refund may
be obtained. Exempt Holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the
<PAGE>
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9."
To prevent backup withholding, each exchanging Holder must provide his,
her or its correct TIN by completing the Substitute Form W-9 included below in
this Letter of Transmittal, certifying that the TIN provided is correct (or that
such Holder is awaiting a TIN) and that the Holder is exempt from backup
withholding because (i) the Holder has not been notified by the IRS that he, she
or it is subject to backup withholding as a result of a failure to report all
interest or dividends, or (ii) the IRS has notified the Holder that he, she or
it is no longer subject to backup withholding. In order to satisfy the Company
that a foreign individual qualifies as an exempt recipient, such Holder must
submit a statement signed under penalty of perjury attesting to such exempt
status. Such statements may be obtained from the Exchange Agent. If the Existing
Notes are in more than one name or are not in the name of the actual owner,
consult the substitute Form W-9 for information on which TIN to report. If you
do not provide your TIN to the Company within 60 days, backup withholding may
begin and continue until you furnish your TIN to the Company.
7. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Existing Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Existing Notes not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person(s) other than the registered Holder(s) of the
Existing Notes tendered hereby, or if tendered Existing Notes are registered in
the name of any person other than the person signing this Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of
Existing Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered Holder(s) or on any other
person(s)) will be payable by the tendering Holder(s). If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted herewith, the
amount of such transfer taxes will be billed directly to such tendering
Holder(s).
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Existing Notes listed in this Letter of
Transmittal.
8. Waiver of Conditions. The Company reserves the absolute right to
amend, waive or modify conditions to in the Exchange Offer in the case of any
Existing Notes tendered (and to refuse to do so).
9. No Conditional Transfers. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering Holders of Existing Notes, by
execution of this Letter of Transmittal, shall waive any right to receive notice
of the acceptance of their Existing Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Existing Notes, nor shall any of them incur any liability for failure
to give any such notice.
10. Mutilated, Lost, Stolen or Destroyed Existing Notes. Any tendering
Holder whose Existing Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at one of the addresses indicated herein for
further instructions.
11. Requests for Assistance or Additional Copies. Questions and
requests for assistance for additional copies of the Prospectus, this Letter of
Transmittal, the Notice of Guaranteed Delivery or the "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 may be
directed to the Exchange Agent at one of the addresses specified in the
Prospectus.
<PAGE>
(DO NOT WRITE IN THE SPACE BELOW)
Account Number: Transaction Code Number:
---------------- -----------------------
Certificate Existing Existing
Surrendered Notes Tendered Notes Accepted
--------------------- ----------------------- -------------------------
--------------------- ----------------------- -------------------------
--------------------- ----------------------- -------------------------
--------------------- ----------------------- -------------------------
Delivery Prepared by:
-----------------------------------------------------------
Checked by:
---------------------------------------------------------------------
Date:
---------------------------------------------------------------------------
<PAGE>
PAYER'S NAME: PENHALL INTERNATIONAL CORP.
- --------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9
Department of the
Treasury
Internal Revenue Service
Payer's Request for TIN
Name (if joint names, list first and circle the name of the person or entity
whose number you enter in Part 1 below. See instructions if your name has
changed.)
- --------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
City, state and ZIP code
--------------------------------------------------------
List account number(s) here (optional)
------------------------------------------
- --------------------------------------------------------------------------------
Part 1-PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER ("TIN") IN THE
BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW.
- --------------------------------------------------------------------------------
Social Security number
or TIN
---------------
- --------------------------------------------------------------------------------
Part 2-Check the box if you are not subject to backup withholding under the
provisions of section 3408(a)(1)(c) of the Internal Revenue Code because
(1) you have not been notified that you are subject to backup withholding
as a result of failure to report all interest or dividends or (2) the
Internal Revenue Service has notified you that you are no longer subject to
backup withholding / /.
- --------------------------------------------------------------------------------
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
Signature Date
------------------------- -----------------
- --------------------------------------------------------------------------------
Part 3 --
AWAITING TIN / /
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
12% SENIOR NOTES DUE 2006
OF
PENHALL INTERNATIONAL CORP.
As set forth in the Prospectus dated _____________, 1998 (the
"Prospectus") of Penhall International Corp. (the "Company") and in the
accompanying Letter of Transmittal (the "Letter of Transmittal"), this form or
one substantially equivalent hereto must be used to accept the Company's offer
to exchange (the "Exchange Offer") all of its outstanding 12% Senior Notes due
2006 (the "Existing Notes") for its 12% Senior Notes due 2006 which have been
registered under the Securities Act of 1933, as amended, if certificates for the
Existing Notes are not immediately available or if the Existing Notes, the
Letter of Transmittal or any other documents required thereby cannot be
delivered to the Exchange Agent, or the procedure for book-entry transfer cannot
be completed, prior to 5:00 P.M., New York City time, on the Expiration Date (as
defined below). This form may be delivered by an Eligible Institution by hand or
transmitted by facsimile transmission, overnight courier or mail to the Exchange
Agent as set forth below. Capitalized terms used but not defined herein have the
meaning given to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
_____________, 1998, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF EXISTING NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE
EXPIRATION DATE.
To: United States Trust Company of New York
The Exchange Agent
By Mail: By Hand before 4:30 p.m.:
United States Trust Company United States Trust Company of New York
of New York 111 Broadway
P.O. Box 843 Cooper Station New York, New York 10006
New York, New York 10276 Attention: Lower Level, Corporate
Attention: Corporate Trust Services Trust Window
By Facsimile:
By Overnight Courier and by Hand (212) 780-0592
after 4:30 p.m.: Attention: Customer Service
United States Trust Company
of New York Confirm by Telephone:
770 Broadway, 13th Floor (800) 548-6565
New York, New York 10003
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal to be used to tender Existing Notes is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the space provided therefor in the Letter of
Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and
subject to the conditions set forth in the Prospectus and the Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of
which are hereby acknowledged, ________________ (fill in number of Existing
Notes) Existing Notes pursuant to the guaranteed delivery procedures set
forth in the Prospectus and Instruction 1 of the Letter of Transmittal.
The undersigned understands that tenders of Existing Notes will be
accepted only in principal amounts equal to $1,000 or integral multiples
thereof. The undersigned understands that tenders of Existing Notes pursuant to
the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time, on
the Expiration Date.
All authority herein conferred or agreed to be conferred by this Notice
of Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and other
legal representatives of the undersigned.
NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW.
Certificate No(s). for Existing Notes Name(s) of Record Holder(s):
(if available):
_____________________________________ ____________________________
_____________________________________ ____________________________
PLEASE PRINT OR TYPE
Principal Amount of Existing Notes:
Address:
_____________________________________ _____________________________
_____________________________
If Existing Notes will be delivered Area code and
by book-entry transfer at the Tel. No._____________________
Depository Trust Company, Depository
Account No.:
_____________________________________
Signature(s):
_____________________________
_____________________________
Dated:_________________, 1998
<PAGE>
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Existing Notes exactly as its (their) name(s) appear(s) on the
certificate(s) for Existing Notes covered hereby or on a DTC security position
listing naming it (them) as the owner of such Existing Notes, or by person(s)
authorized to become registered holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person(s) must
provide the following information:
Please print name(s), title(s) and address(es)
Name(s): ______________________________________________________________________
Capacity(ies): ________________________________________________________________
Address(es): __________________________________________________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States or an "Eligible Guarantor Institution" as defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a)
represents that the tender of Existing Notes effected hereby complies with Rule
14e-4 under the Exchange Act and (b) guarantees to deliver to the Exchange Agent
a certificate or certificates representing the Existing Notes tendered hereby,
in proper form for transfer (or a confirmation of the book-entry transfer of
such Existing Notes into the Exchange Agent's account at DTC, pursuant to the
procedures for book-entry transfer set forth in the Prospectus), and a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) together with any required signatures and any other required documents,
at one of the Exchange Agent's addresses set forth above, within five New York
Stock Exchange trading days after the date of execution of this Notice of
Guaranteed Delivery.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND EXISTING NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE
TIME PERIOD SPECIFIED FORTH ABOVE AND THAT ANY FAILURE TO DO SO COULD RESULT IN
FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm:________________________ ____________________________________
Authorized Signatures
Address:_____________________________ Name:_______________________________
Please Print or Type
_____________________________________ Title:______________________________
Zip Code
Area Code
and Tel. No.:________________________ Date:__________________________, 1998
NOTE: DO NOT SEND EXISTING NOTES WITH THIS FORM; EXISTING NOTES SHOULD BE
SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE
EXCHANGE AGENT WITHIN THE TIME PERIOD SPECIFIED FORTH ABOVE.
