<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
REGISTRATION NO. 333-64745
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
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 18, 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 8,869
Reorganization costs...................... -- -- 1,207 -- 3,164
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 6,129
Interest expense............................................... 14,323 3,803
Net earnings (loss)............................................ (962) 1,396
Accretion of preferred stock to redemption value............... (2,554) (687)
Accrual of cumulative dividends on preferred stock............. (2,577) (697)
Net earnings (loss) available to common stockholders........... (6,093) 12
EARNINGS (LOSS) PER SHARE:
Basic.......................................................... $ (6.12) $ .01
Diluted........................................................ $ (6.12) $ .01
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) $ 1,396
Interest expense.................................. 14,323 3,803
Income taxes...................................... (640) 930
Depreciation and amortization..................... 10,699 2,575
Stock related compensation expense................ 1,315 --
------- -------
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, and has developed 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 has identified and taken measures to correct potential failures in
those systems, including a recent upgrade of the hardware and software
components of its information technology system. The Penhall Group is currently
conducting the testing phase of its plan to determine whether the corrective
measures which have been taken are adequate. The Penhall Group has not incurred
significant costs to date in connection with the Year 2000 issue and expects to
be Year 2000 ready by June 30, 1999 without incurring significant additional
costs. However, delays in the implementation of Year 2000 solutions, or the
failure of the Penhall Group's information technology or embedded technology
systems to operate properly in the Year 2000, could have a material adverse
effect on the Penhall Group's business, results of operations or financial
condition. 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 expects to have these contingency plans in place by June
30, 1999.
Although 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, the Penhall Group does
not believe it has a material relationship with any one third party that would
have a significant impact on the Penhall Group if that third party was not Year
2000 ready.
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 $ (3,166)(b) 5,176
(8,869)(i)
Other operating income................................................. 260 260
------------ ----------- -----------
Earnings (loss) before interest expense and income taxes............. (5,906) 12,035 6,129
Interest expense....................................................... 2,616 1,187(d) 3,803
------------ ----------- -----------
Earnings (loss) before income taxes.................................. (8,522) 10,848 2,326
Income tax expense (benefit)........................................... (1,721) (897)(e) 930
3,548(i)
------------ ----------- -----------
Net earnings (loss).................................................. (6,801) 8,197 1,396
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) $ 7,596 $ 12
------------ ----------- -----------
------------ ----------- -----------
Earnings (loss) per share:
Basic................................................................ $ (3.32) $ .01
Diluted.............................................................. $ (3.32) $ .01
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) (3,164)
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) $ (3,166)
------------- -------
------------- -------
</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 $ 6,129
Depreciation and amortization................................................. 10,699 2,575
Stock-based compensation expense.............................................. 1,315 --
------------- ------
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 8,869
Reorganization costs........... -- -- -- -- 1,207 -- 3,164
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, and has developed 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 has identified and taken measures to correct potential failures in
those systems, including a recent upgrade of the hardware and software
components of its information technology system. The Penhall Group is currently
conducting the testing phase of its plan to determine whether the corrective
measures which have been taken are adequate. The Penhall Group has not incurred
significant costs to date in connection with the Year 2000 issue and expects to
be Year 2000 ready by June 30, 1999 without incurring significant additional
costs. However, delays in the implementation of Year 2000 solutions, or the
failure of the Penhall Group's information technology or embedded technology
systems to operate properly in the Year 2000, could have a material adverse
effect on the Penhall Group's business, results of operations or financial
condition. 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 expects to have these contingency plans in place by June
30, 1999.
Although 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, the Penhall Group does
not believe it has a material relationship with any one third party that would
have a significant impact on the Penhall Group if that third party was not Year
2000 ready.
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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
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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
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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
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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:
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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
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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.
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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.
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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.
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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
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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")
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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.
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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.
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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
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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.
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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
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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
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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,
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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
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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"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.
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"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.
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"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;
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(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
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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;
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(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
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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
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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
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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.
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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.
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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).
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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
It is more likely than not that the exchange of Existing Notes pursuant to
the Exchange Offer will 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.
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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.
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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.
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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 8,552,000
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 19,239,000
----------- ----------- -------------
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 --
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 (358,000)
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 (5,306,000)
----------- ----------- ----------- ---------- -----------
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
$3,164,000 (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............................... -- 905,000 149,000
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 $ 8,552,000
------------ ------------ -------------
------------ ------------ -------------
</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 $8,869,000 (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 its original issuance price, and the grant of a
right of first refusal in favor of Penhall International Corp. in the event a
management stockholder elects to transfer such Common Stock or Series B
Preferred Stock. Under the Stockholders Agreement, a management stockholder has
the right, subject to the restrictions set forth in agreements relating to
indebtedness of the Company, to require Penhall International Corp. to purchase
certain Common Stock and Series B Preferred Stock of the Company held by such
management stockholder upon termination of such management stockholder's
employment on or prior to the later of the fifth anniversary of the consummation
of the Recapitalization Mergers and the 180th day following an Initial Public
Offering, at its original issuance price. "Initial Public Offering" means the
sale by the Company in an underwritten public offering made pursuant to an
effective registration statement under the Securities Act of Common Stock for
gross offering proceeds of at least $30 million. The Stockholders Agreement also
contains certain provisions that provide the management stockholders with a
termination benefit upon termination of employment without cause, death or
disability. The amount of the termination benefit is based upon the book value
of the Common Stock and Series B Preferred Stock, as defined in the Stockholders
Agreement. However, if Penhall International Corp. does not meet certain EBITDA
growth criteria, the amount that a management stockholder will receive for
outstanding Common Stock or Series B Preferred Stock under any form of
termination is the lower of the original issuance price or book value.
On August 4, 1998, the 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
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 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.
(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
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)
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.
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
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)
International Corp. available for distribution to its stockholders an amount in
cash equal to the Liquidation Preference per share, plus an amount equal to a
prorated dividend from the last dividend payment date to the date fixed for
liquidation, dissolution or winding up, before any distribution is made on any
shares of Junior Stock. If such available assets are insufficient to pay the
holders of the outstanding shares of Series A Preferred Stock in full, such
assets, or the proceeds thereof, shall be distributed ratably among such
holders. Except as otherwise required by law, the holders of Series A Preferred
Stock have no voting rights and are not 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,
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)
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 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.................. 2,988,000 -- 5,564,000 -- 8,552,000
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........ 7,020,000 57,038,000 31,627,000 (76,446,000) 19,239,000
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
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.
(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 offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
II-3
<PAGE>
(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. 2 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 18th 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. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 18, 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. 2 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 18th 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. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 18, 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. 2 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 18th 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. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on December 18, 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.
<PAGE>
Exhibit 5
DECHERT PRICE & RHOADS
30 Rockefeller Plaza
New York, New York 10112
December 18, 1998
Penhall International Corp.
1801 Penhall Way
P.O. Box 4609
Anaheim, California 92803
Re: Penhall International Corp.
12% Senior Notes due 2006
Dear Sirs:
We have acted as counsel for Penhall International Corp., an
Arizona corporation (the "Company"), and the subsidiaries of the Company listed
on Schedule A hereto (the "Guarantors"), in connection with the filing by the
Company and the Guarantors of a Registration Statement on Form S-4, Registration
No. 333-64745 (the "Registration Statement"), with the Securities and Exchange
Commission for the purpose of registering up to $100 million aggregate principal
amount of the Company's 12% Senior Notes due 2006 (the "New Notes") under the
Securities Act of 1933, as amended (the "Act"). The New Notes are to be issued
in exchange for an equal aggregate principal amount of the Company's outstanding
12% Senior Notes due 2006 (the "Existing Notes"), are to be guaranteed on a
senior basis (the "Guarantees") by each of the Guarantors and are to be issued
pursuant to the terms of the indenture between Penhall Acquisition Corp. and
United States Trust Company of New York, as trustee (the "Trustee"), filed as
Exhibit 4.1 to the Registration Statement as supplemented by the First
Supplemental Indenture dated August 4, 1998 among the Company, the Guarantors
and the Trustee filed as Exhibit 4.2 to the Registration Statement
(collectively, the "Indenture"). The Indenture is to be qualified under the
Trust Indenture Act of 1939, as amended (the "TIA").
In connection with the foregoing, we have reviewed such
records, documents, agreements and certificates, and examined such questions of
law, as we have considered necessary or appropriate for the purpose of this
opinion. In making our examination of records, documents, agreements and
certificates, we have assumed the authenticity of the same, the
<PAGE>
Penhall International Corp.
December 18, 1998
Page 2
correctness of the information contained therein, the genuineness of all
signatures, the authority of all persons entering and maintaining records or
executing documents, agreements and certificates (other than persons executing
documents, agreements and certificates on behalf of the Company and the
Guarantors), and the conformity to authentic originals of all items submitted to
us as copies (whether certified, conformed, photostatic or by other electronic
means) of records, documents, agreements or certificates. In rendering our
opinion we have relied as to factual matters upon certificates of public
officials and certificates and representations of officers of the Company and
the Guarantors.
We have assumed that the Indenture has been duly authorized,
executed and delivered by the Trustee and constitutes a legal, valid and binding
agreement of the Trustee. In addition, we have assumed that there will be no
changes in applicable law between the date of this opinion and the date of
issuance and delivery of the New Notes.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. The New Notes have been duly authorized by the Company and,
when the Registration Statement has been declared effective, when the Indenture
has been duly qualified under the TIA, when the New Notes have been duly
executed by the Company and when the New Notes have been duly authenticated by
the Trustee in accordance with the terms of the Indenture and issued and
delivered against exchange of the Existing Notes in accordance with the terms
set forth in the prospectus which is included in the Registration Statement, the
New Notes will be valid and binding obligations of the Company.
2. The Guarantees have been duly authorized by each of the
Guarantors and, when the Registration Statement has been declared effective,
when the Indenture has been duly qualified under the TIA, when the New Notes
have been duly executed by the Company, when the notation of the Guarantees on
the New Notes has been duly endorsed by each Guarantor and when the New Notes
have been duly authenticated by the Trustee in accordance with the terms of the
Indenture and issued and delivered against exchange of the Existing Notes in
accordance with the terms set forth in the prospectus which is included in the
Registration Statement, the Guarantees will be valid and binding obligations of
the Guarantors.
Our opinion is subject to (i) the effect of applicable
bankruptcy, reorganization, insolvency, moratorium, arrangement and other laws
affecting creditors' rights, including, without limitation, the effect of
statutory or other laws regarding fraudulent conveyances, fraudulent transfers
and preferential transfers and (ii) limitations imposed by general principles of
equity (regardless of whether considered in a proceeding at law or in equity).
This opinion is rendered to the Company in connection with the
filing of the Registration Statement and for no other purpose. We are members of
the Bar of the State of New York, and except as contemplated by the next
succeeding sentence we express no opinion as to
<PAGE>
Penhall International Corp.
December 18, 1998
Page 3
the laws of any jurisdiction other than the laws of the United States of America
and the State of New York. In rendering the opinions set forth above as to due
authorization of the New Notes and the Guarantees, we have relied, with your
approval, upon the opinions of Jennings, Strouss & Salmon, P.L.C. and Gibson,
Dunn & Crutcher LLP. Copies of all such opinions are attached hereto.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the prospectus which is included in the Registration
Statement. In giving the foregoing consent, we do not admit that we come within
the category of persons whose consent is required by the Act or the rules and
regulations promulgated thereunder.
Very truly yours,
/s/ DECHERT PRICE & RHOADS
<PAGE>
Schedule A
<TABLE>
<CAPTION>
Jurisdiction of
The Guarantors Incorporation
- --------------------------------------------------------------------------------
<S> <C>
Penhall Rental Corp. California
Penhall Company California
</TABLE>
<PAGE>
GIBSON DUNN & CRUTCHER LLP
333 South Grand Avenue
Los Angeles, California 90071
December 17, 1998
(212) 351-4000 C11533-00001
Penhall Rental Corp.
Penhall Company
1801 Penhall Way
Anaheim, CA 92803
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
Re: Penhall International Corp. -- 12% Senior Notes due 2006
--------------------------------------------------------
Ladies and Gentlemen:
We have acted as special California counsel for Penhall Rental Corp.
and Penhall Company (the "Guarantors"), each a California corporation and a
subsidiary of Penhall International Corp., an Arizona corporation (the
"Issuer"), in connection with the filing by the Issuer and the Guarantors of a
Registration Statement on Form S-4, Registration No. 333-64745 (the
"Registration Statement"), with the Securities and Exchange Commission for the
purpose of registering up to $100 million aggregate principal amount of the
Issuer's 12% Senior Notes due 2006 (the "New Notes") under the Securities Act of
1933, as amended. The New Notes are to be issued in exchange for an equal
aggregate principal amount of the Issuer's outstanding 12% Senior Notes due 2006
pursuant to the Registration Rights Agreement dated August 4, 1998 among Penhall
Acquisition Corp., an Arizona corporation and predecessor to the Issuer ("PAC"),
BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation, filed as
Exhibit 4.4 to the Registration Statement. The Issuer and the Guarantors
assumed all of the obligations of PAC under the Registration Rights Agreement
pursuant to the Assumption Agreement dated August 4, 1998 among the Issuer, the
Guarantors and United States Trust Company of New York, as trustee (the
"Trustee"), filed as Exhibit 4.3 to the Registration Statement. The New Notes
are to be issued pursuant to the terms of the Indenture dated as of August 1,
1998 (the "Indenture") among PAC and the Trustee, filed as Exhibit 4.1 to the
Registration Statement. The Issuer and the Guarantors assumed all of the
obligations of PAC under the Indenture pursuant to the First Supplemental
Indenture dated August 4, 1998 among the Issuer, the Guarantors and the
Trustee, filed as Exhibit 4.2 to the Registration Statement. The New Notes are
to be guaranteed by each of the Guarantors pursuant to a guarantee to be
endorsed on the New Notes in the form attached as Exhibit E to the Indenture
(the "Exchange Guarantees").
In our capacity as special counsel for the Guarantors, we have examined, in
connection with the opinions set forth herein, among other things, originals,
certified copies or copies otherwise identified to our satisfaction as being
true copies of the originals of such agreements, documents,
<PAGE>
Penhall Rental Corp.
Penhall Company
Dechert Price & Rhoads
December 17, 1998
Page 2
corporate records, certificates of public officials and other instruments as we
have deemed necessary or advisable to enable us to render the opinions set forth
herein. As to certain factual matters, we have relied upon certificates of
officers of the Guarantors.
We have assumed with your permission that the signatures on all documents
examined by us are genuine, all individuals executing such documents had all
requisite legal capacity and competency and (except in the case of individuals
executing documents on behalf of either of the Guarantors) were duly authorized,
the documents submitted to us as originals are authentic, the documents
submitted to us as certified or reproduction copies conform to the originals and
the originals of the documents submitted to us as certified or reproduction
copies are authentic.
Based on the foregoing and in reliance thereon, and subject to the
assumptions, exceptions, qualifications and limitations set forth herein, we are
of the opinion that the Exchange Guarantees have been duly authorized by each of
the Guarantors.
The foregoing opinion is subject to the following exceptions,
qualifications and limitations:
A.We render no opinion herein as to matters involving the laws of any
jurisdiction other than the State of California. This opinion is limited to the
effect of the present state of the laws of the State of California and the facts
as they presently exist. We assume no obligation to revise or supplement this
opinion in the event of future changes in such laws or the interpretations
thereof or such facts.
The matters recited in the first paragraph of this letter are not intended
and shall not be construed to constitute an opinion of this Firm.
This opinion is rendered to you in connection with the filing of the
Registration Statement and for no other purpose. This opinion may not be relied
upon by any person other than you, or by you in any other context. This opinion
may not be quoted in whole or in part without the prior written consent of this
Firm.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
JRH, JPR, SBJ
<PAGE>
JENNINGS, STROUSS & SALMON, P.L.C.
One Renaissance Square
Two North Central Avenue
Phoenix, AZ 85004
December 17, 1998
Penhall International Corp.
1801 Penhall Way
P.O. Box 4609
Anaheim, CA 92803
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
RE: PENHALL INTERNATIONAL CORP. 12% SENIOR NOTES DUE 2006
Ladies and Gentlemen:
We have acted as special Arizona counsel to Penhall International Corp., an
Arizona corporation (formerly Phoenix Concrete Cutting, Inc.) (the "Company") in
connection with the filing by the Company of a Registration Statement on Form
S-4, Registration No. 333-64745 (the "Registration Statement") with the
Securities and Exchange Commission for the purpose of registering up to $100
million aggregate principal amount of the Company's 12% Senior Notes due 2006
(the "New Notes") under the Securities Act of 1933, as amended. The New Notes
are to be issued in exchange for an equal aggregate principal amount of the
Company's outstanding 12% Senior Notes due 2006 pursuant to the Registration
Rights Agreement dated August 4, 1998 among Penhall Acquisition Corp., an
Arizona corporation and predecessor to the Company, BT Alex. Brown Incorporated
and Credit Suisse First Boston Corporation. This opinion is being delivered to
you pursuant to your request. Except as otherwise defined herein, initially
capitalized terms used herein shall have the meanings ascribed to them in the
Registration Statement.
Based upon and subject to the qualifications set forth below, we are of the
opinion that the New Notes have been duly authorized by the Company.
In rendering the foregoing opinion we have assumed: the genuineness of all
signatures, including those not witnessed and/or facsimile copies thereof; the
authenticity of the documents submitted as originals; the conformity to
originals of documents submitted as copies; and the legal capacity, competency
and (except for individuals executing the documents on behalf of the Company)
the due authorization of all natural persons executing any documents.
<PAGE>
Dechert Price & Rhoads
December 17, 1998
Page 2
As special counsel to the Company, we have examined originals or copies of
such documents, certificates of public officials and other instruments as we
have deemed necessary for purposes of this opinion. Further, with your consent,
in rendering this opinion, as to factual matters, we have relied upon certain
certificates and resolutions of the Company. We are expressing no opinion to
the extent such opinion is dependent upon any instrument or document that we
have not reviewed.
Our opinion is limited to the laws of the State of Arizona and no opinion
is given with respect to the laws of the United States or of any jurisdiction
other than the State of Arizona. The opinion expressed herein is made as of and
based upon the law in effect on the date hereof and we do not undertake to
update this opinion with respect to any changes, legislative, judicial or
otherwise, of which we may later become aware.
This opinion is being furnished only to the addressees and is solely for
their benefit in connection with the filing of the Registration Statement and
for no other purpose. This opinion may not be relied upon, directly or
indirectly, for any other purpose, or by any other person, firm or corporation
for any purpose, without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ JENNINGS, STROUSS & SALMON, P.L.C.
<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 18, 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 18, 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 17, 1998
