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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number: [_________]
PENHALL INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Arizona 86-0634394
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1801 Penhall Way
Anaheim, California 92803
(Address of registrant's principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (714) 772-6450
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
As of June 30, 1999, there were 994,477 shares of the registrant's
common stock outstanding, all of which were owned by affiliates of the
registrant.
Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS
GENERAL
Penhall consists of Penhall International Corporation, an Arizona
Corporation, and two wholly-owned subsidiaries, Penhall Company and Penhall
Rental Corporation., both California Corporations (collectively the "Company" or
"Penhall"). Penhall was founded in 1957 and is one of the largest operated
equipment rental providers in the United States. Penhall differentiates itself
from other equipment rental companies by providing specialized services in
connection with infrastructure projects through renting equipment along with
skilled operators on an hourly or fixed-price quote basis ("Operated Equipment
Rental Services") to serve construction, industrial, manufacturing, governmental
and residential customers. In addition, Penhall complements its Operated
Equipment Rental Services by providing the same type of services on a
fixed-price contract basis for long-term projects. Penhall employs over 600
skilled operators and has 623 units in its diverse operated equipment rental
fleet, which includes a broad selection of equipment ranging from smaller items
such as diamond abrasive saws and coring units, to large equipment such as
backhoes, excavators, water trucks and concrete grinders. Penhall provides its
services from 32 locations in thirteen states, with a presence in some of the
fastest growing states in terms of construction spending and population growth,
including its primary market, California, as well as other strategic markets
including Arizona, Colorado, Nevada, Texas, Georgia, North and South Carolina
and Utah. Penhall has a diverse base of over 9,000 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.
Penhall has a reputation for high quality service which results in a high degree
of customer loyalty, and Management believes that a significant percent of its
revenues are derived through repeat business from existing customers. Penhall
has increased its revenues from $70.8 million in fiscal 1995 to $143.4 million
in fiscal 1999 through 1) increased rental fleet utilization, and 2) increasing
its rental equipment fleet.
Through its skilled operators and equipment rental fleet, Penhall
performs new construction, rehabilitation and demolition services in connection
with infrastructure projects. For short duration assignments, typically lasting
from several hours to a few weeks, Penhall generally provides Operated Equipment
Rental Services on an hourly or fixed-price quote basis. Services provided in
this manner include specialized work such as highway and airport runway grooving
and asphalt cutting, as well as demolition work such as concrete breaking,
removal and recycling. For longer duration projects, which may last from a few
days to several years, Penhall provides services on a fixed-price contractual
basis. Services provided in this manner include work for highway, airport and
building general contractors, federal, state and municipal agencies and for
property owners. A majority of fixed-price contract revenues are derived from
long-term highway projects, which have an average contract length of
approximately ten months. Penhall strives to maximize utilization of its
operated equipment rental fleet and uses its fixed-price contract services to
(i) market its Operated Equipment Rental Services, (ii) increase utilization of
its operated equipment rental fleet and (iii) differentiate it from other
equipment rental competitors. As part of a fixed-price contract project, Penhall
is responsible for completion of an entire job or project, and typically employs
its Operated Equipment Rental Services. On average, approximately 20% to 30% of
Operated Equipment Rental Services revenues are generated from fixed-price
contracts.
The operated equipment rental industry is a specialized niche segment of
the highly fragmented United States equipment rental industry. There are an
estimated 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,
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comprehensive supply of equipment, enabling such customers to benefit from the
economic advantages and convenience of rental. The Highway Transportation Bill
was approved by the President of the United States in June, 1998, which calls
for approximately a 44% increase in national spending on highways and mass
transit from current levels over the next five years and approximately a 58%
increase in Penhall markets overall on a non-weighted average basis.
THE REORGANIZATION
Penhall International, Inc., a California corporation ("PII") which,
prior to the consummation of the Transactions (as defined below) conducted all
its operations through Phoenix Concrete Cutting, Inc., an Arizona corporation
(the "Company"), and the Penhall Company, a California corporation ("PenCo"). As
of June 30, 1998, PII, the stockholders of PII, the Company, and Penhall
Acquisition Corp., an Arizona Corporation (the "Issuer" or "PAC"), entered into
an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, the Company formed PCC Merger Sub, a California corporation and
wholly-owned subsidiary ("PCC Merger Sub"), which on August 4, 1998, was merged
with and into PII (the "Reorganization Merger"), with the result that (i) PII
continued as the surviving corporation, (ii) each stockholder of PII had his or
her common equity in PII converted into common equity in the Company, (iii) PII
received common equity in the Company approximately equal in value to the value
of its common equity in the Company immediately prior to the consummation of the
Reorganization Merger and (iv) the Company received common equity in PII such
that the Company became the corporate parent of and owns all the outstanding
capital stock of PII (which continues to hold all the outstanding capital stock
of PenCo. Pursuant to the Merger Agreement, immediately following the
Reorganization Merger, the Issuer merged with and into the Company (the
"Recapitalization Merger" and, together with the Reorganization Merger, the
"Mergers"), with the Company continuing as the surviving corporation (the
"Surviving Corporation"). Prior to or simultaneously with the consummation of
the Recapitalization Merger, the Issuer entered into a new senior secured credit
facility (the "New Credit Facility") providing for $20.0 million of Term Loans
(as defined therein) and up to $30.0 million of Revolving Loans (as defined
therein), and all indebtedness of PII except $3.7 million of notes payable was
repaid (the "Refinancing"). Following the consummation of the Mergers, the
Company changed its corporate name to "Penhall International Corp." and PII
changed its corporate name to "Penhall Rental Corp."
The aggregate consideration paid upon consummation of the
Recapitalization Merger (the "Merger Consideration") was approximately $136.2
million. Pursuant to the Merger Agreement, (i) certain management stockholders
of PII (the "Existing Management Stockholders") agreed to convert a portion of
the common equity in the Company received by them pursuant to the Reorganization
Merger into $8.7 million of common and preferred equity of the Surviving
Corporation (the "Equity Rollover"), (ii) the National Christian Charitable
Foundation, Inc., a foundation formed by the Company's former majority
shareholder received $10.0 million of preferred equity of the Surviving
Corporation in lieu of $10.0 million of cash Merger Consideration otherwise
payable to it in the Recapitalization Merger, and (iii) BRS and certain persons
affiliated with BRS (together with BRS, the "BRS Entities") and the New
Management Stockholders (consisting of certain existing management and certain
new management shareholders) purchased $21.1 million and $0.2 million,
respectively, of common and preferred equity of the Surviving Corporation (the
"Equity Contribution" and, together with the Mergers, the Refinancing and the
Equity Rollover, the "Recapitalization"). Following the consummation of the
Recapitalization, the BRS Entities held approximately 62.5% of the Common stock,
par value $.01 per share, of the Surviving Corporation ("Common stock"), 100.0%
of the Series A Preferred stock, par value $.01 per share, of the Surviving
Corporation ("Series A Preferred stock") and 43.3% of the Series B Preferred
stock, par value $.01 per share, of the Surviving Corporation ("Series B
Preferred stock"), the Management Stockholders held approximately 37.5% of the
Common stock and 38.6% of the Series B Preferred stock, the Foundation held 100%
of the Senior Exchangeable Preferred stock and PII held approximately 18.1% of
the Series B Preferred stock.
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In connection with the Recapitalization the Issuer issued $100,000,000
of 12% Senior Notes due 2006 (the "Existing Notes"). As part of the
Recapitalization, the Company became the successor obligor under the Exiting
Notes. In order to satisfy certain obligations of the Company and the Guarantors
(consisting of the Company's wholly-owned subsidiaries) contained in the
Registration Rights Agreement, dated August 4, 1998 (the "Registration Rights
Agreement") by and among the Issuer, the Company, the Guarantors, BT Alex. Brown
Incorporated ("BTAB") and Credit Suisse First Boston (collectively with BTAB,
the "Initial Purchasers") with respect to the initial sale of the Existing
Notes, the Company offered to exchange an aggregate principal amount of up to
$100,000,000 of its 12% Senior Notes due 2006 (the "New Notes") for a like
principal amount of the Existing Notes outstanding in December 1998. The New
Notes and the Existing Notes are hereinafter collectively referred to as the
"Notes." The terms of the New Notes are identical in all material respects to
those of the Existing Notes, except for certain transfer restrictions and
registration rights relating to the Existing Notes. The New Notes were issued
pursuant to, and are entitled to the benefits of, the Indenture (as defined)
governing the Existing Notes.
The foregoing transactions, the application of the proceeds therefrom
and the payment of related fees and expenses, are collectively referred to
herein as the "Transactions."
Penhall was obligated to make approximately $3 million of tax gross-up
payments to certain members of Management on or before September 15, 1998. The
Company made such payments out of working capital on September 15, 1998. During
the fiscal years ended June 30, 1998 and 1999, Penhall realized tax benefits of
approximately $3 million in the form of reduced tax payment obligations or
refunds of tax overpayments as a result of deductions for certain of such tax
gross-up payments and deductions with respect to employee stock options.
RECENT DEVELOPMENTS
Acquisition of HSI. In April 1998, Penhall 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"). Penhall 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 provides Penhall 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 Penhall's markets, over the next five years and is aimed at
financing the repair and new construction of roads, mass transit, bridges, bike
paths, bus garages and other infrastructure in the United States. Approximately
80% of the 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 Penhall's
markets, and Management believes that the Transportation Bill represents a
significant growth opportunity for the Penhall.
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EQUIPMENT RENTAL FLEET
Penhall owns and operates a well-maintained fleet of 623 units of
operated equipment, including excavators, stompers, backhoes, compressors,
"bobcats," crushing equipment, saws, drills and grinding and grooving equipment.
Penhall also carries state-of-the-art manually-operated and remote-controlled
breakers, which provide access to contaminated, hazardous or limited access
areas and which have been used for hazardous projects such as the demolition of
decommissioned nuclear power plants. The Company employs skilled operators,
including trainees, for each piece of equipment it operates. The following table
is a summary of Penhall's operated equipment rental fleet as of June 30, 1999:
<TABLE>
<CAPTION>
DESCRIPTION QUANTITY
----------- --------
<S> <C>
Diamonds 332
Compressors 92
Excavators 31
Grinders 16
Backhoes 38
Bobcats 46
Tankers 23
Stompers 9
Loaders 4
Miscellaneous 32
--------
Total Units 623
========
</TABLE>
In addition to its 623-unit operated equipment rental fleet, Penhall
maintains an inventory of approximately 417 Bare Equipment Rentals which are
rented out on an hourly, daily, weekly or monthly basis without skilled
operators. Bare Equipment Rentals include personnel lifts, forklifts, front-end
loaders and light towers. Each Penhall location has it's own shop and repair and
maintenance staff that routinely maintains and repairs the equipment rental
fleet.
SERVICES
Penhall, through its operated equipment rental fleet and skilled
operators, serves its customer base in a wide variety of infrastructure
projects, including new construction, rehabilitation and demolition projects,
and provides specialized services such as highway and airport runway grooving,
asphalt cutting, concrete coring and demolition work. These services are
available singly but are more commonly provided by Penhall in conjunction with
other services necessary to their application to a particular project, including
breaking, excavating, removing and recycling of construction materials. Penhall
also provides services in connection with earthquake retrofit projects,
particularly in California, which include retrofitting of highways, buildings,
bridges and tunnels in order to bring them in compliance with more stringent
earthquake safety laws. Moreover, as a result of the HSI Acquisition in April
1998, the Company is the largest provider of grinding services in the United
States.
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Specialty Services:
- Cutting. Cutting is the use of diamond abrasive saws to cut
concrete and asphalt. This service is frequently utilized in new
construction to provide rectangular openings in walls or floors,
and is generally more efficient than framing and forming the
opening while the concrete is being poured. Flat sawing also is
commonly used in modifying existing structures and road
rehabilitation.
- Coring. Coring is the use of rotary drills to create holes
ranging from less than one inch to 42 inches in diameter. This
service is most frequently utilized both in new construction and
in retrofit of existing facilities to create spaces needed for
installation of ventilation ducts, conduits, electrical and
other cables, and mechanical passageways. Coring is also used in
the Company's earthquake retrofit projects.
- Grinding. Grinding is the use of diamond abrasive grinders to
mill away excess material as necessary to attain a uniform,
level finish on flat surfaces, such as highways, airport runways
and industrial floors. Grinding is also utilized as a
maintenance process to extend the useful life of highways by
evening the wear patterns caused by years of heavy traffic, to
prevent cracking and subsequent failure of the surface.
- Grooving. Grooving is the use of diamond abrasive groove cutting
machines to provide safety grooving of flat services. This
service is commonly provided in connection with the construction
or modification of highways and airport runways and provides for
better tire traction on these surfaces.
- Sawing and Sealing. Sawing and sealing is the cutting of
concrete and the introduction of high-strength epoxy cement and
sealant into cracks or spaces to avoid water intrusion into the
surface and to provide additional structural strength.
Other Services:
- Breaking. Breaking is the use of manually-operated or, in
hostile environments, remotely-controlled high-energy hydraulic
breaking equipment to remove concrete. This service was most
visibly utilized by Penhall in the removal of large sections of
the Nimitz Freeway in Oakland, California, following the 1989
earthquake, and in the removal of damaged freeway bridges and
overpasses in southern California following the 1994 earthquake.
Breaking equipment is more commonly used in less dramatic
settings, such as interior renovation of industrial buildings to
adapt them to a new use, and in removal of existing structures
in preparation for redevelopment of the real estate has designed
and used remotely-controlled breakers for modification and
removal of facilities contaminated with radioactive material,
such as nuclear power stations and development laboratories.
Penhall is currently providing breaking services in connection
with a large-scale project in Salt Lake City which calls for the
breaking and removal of approximately 115 highway overpasses on
U.S. Interstate 15 in order to widen the Interstate in
preparation for the 2002 Olympic Games.
- Clearing and Removal. Clearing and removal is the use of
excavators and other heavy-duty equipment to remove broken
concrete and other material from a site to a point of recycling
or disposal.
- 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.
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- Compaction. Compaction is the preparation of subsoil base and
fill materials to a specification suitable for new construction
on the site. Compaction services typically are provided together
with removal services in the site preparation process for new
construction or redevelopment.
OPERATIONS
Penhall provides the rental of operator assisted equipment through (i)
Operated Equipment Rental Services, performed on an hourly as well as a
fixed-price quote basis, and (ii) fixed-price contracts, in which Penhall is
responsible for the completion of a particular project.
Penhall's Operated Equipment Rental Services involve short duration
assignments lasting from several hours to a few weeks and typically generate
revenues of less than $7,500. Services provided on this basis include
specialized work such as highway and airport runway grooving, asphalt cutting,
and demolition work such as concrete breaking, removal, and recycling. Although
all lines of equipment are rented for these types of projects, a given project
will typically use only one piece of equipment. Operated Equipment Rental
Services are typically provided on an hourly basis or for a project with
pre-determined specifications, and Penhall quotes a bid to perform and invoice
the customer for the project.
Penhall's services are made available to customers through its 32
regional locations. Penhall maintains a basic equipment rental fleet and
operators at each of its 32 locations. If necessary, equipment can be shipped
from any of Penhall's locations to projects at remote sites. Rental fees for
Penhall's equipment range from $90 to $400 per hour and encompass both the
equipment and the operator's time.
Penhall solicits and receives business over the telephone, by facsimile,
by written purchase order or through Penhall Group salesmen. Each day Penhall's
dispatcher at each location is responsible for the allocation of resources to
meet the customer's service and timing requirements. The dispatcher matches all
of the work requests for that day to available equipment and operators. Each of
Penhall's skilled operators has an expertise with a particular piece of
equipment. Depending on the requirements for that day, an operator may be
assigned from one to four jobs on a given day. An operator's time is allocated
by job through job tickets, which generate both payroll and customer billing
data.
Historically, Penhall has rented its equipment only in conjunction with
the services of a Penhall employee as the operator. Recently, however, Penhall
has started operating rental yards and offering Bare Equipment Rentals, or
renting equipment without operators. To date, such Bare Equipment Rentals have
not constituted a material part of Penhall's revenues
Contract pricing utilizes the same equipment and services provided
through its Operated Equipment Rental Services; however, these services involve
longer duration assignments lasting from a few days to several years and may
generates revenues of between $7,500 and $10,000,000. Services provided on this
basis include work for highway, airport and building general contractors,
federal, state and municipal agencies and for property owners. Fixed-price
contract projects typically use multiple types of equipment concurrently and
require a Penhall supervisor to coordinate the safe and efficient function of
Penhall's workmen and equipment. For fixed-price contract projects, Penhall
typically employs the use of its Operated Equipment Rental Services as well as
outside rental equipment and sub-contractors. Although Penhall has obtained
contractor's licenses in approximately 13 states (not including 22 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.
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The majority of Penhall's fixed-price contracts are obtained through
competitive bidding for general contractors. Penhall determines whether to bid
on a project primarily on the basis of the type of work involved. Other factors,
including the time of the project, Penhall's ongoing project schedule and any
particular risks involved also affect Penhall's determination whether to bid on
a project. In preparing a bid, Penhall's estimators analyze material, labor and
all other cost components of the proposed project. Penhall also will make its
own determination of the quantity of items needed for the project and assess any
special risks involved. Penhall must specify in its bid a fixed-price per unit
within the range of the estimated quantity to be provided under the contract.
Generally, within this range, no adjustments in unit prices are made and Penhall
is committed to provide the items at the fixed unit prices specified in its bid,
and any unforeseen increase in the cost of the items over the prices bid is
borne by the Penhall Group. Penhall has not borne a significant amount of cost
increases in connection with its fixed-price contracting services.
Penhall sometimes contracts directly with federal, state or local
governments or agencies, and in addition some of its work performed for general
contractors may relate to a general or prime contract with a governmental
entity. Generally the contracting agency reserves the right to terminate the
contract with the general contractor, without cause, for its own convenience. In
that event, Penhall generally is entitled to be paid its costs for the work
performed to the date of termination. Penhall has not historically experienced
any material contract cancellations.
SALES AND MARKETING
Penhall maintains a sales and estimating force of approximately 100
people, with at least two salespersons based at each of Penhall's operating
locations calling on both new and existing customers. These salespeople provide
estimates and prepare bids for projects. Management believes that its
fixed-price contract services serve as a unique marketing tool for its Operated
Equipment Rental Services and help to increase the utilization of Penhall's
operated equipment rental fleet. Penhall also regularly participates in industry
trade shows and conferences, and advertises in trade journals.
PURCHASING AND SUPPLIERS
Penhall's size, status in the industry and relationships enable it to
purchase equipment directly from manufacturers at prices and on terms that
Penhall believes to be more favorable than are available to its smaller
competitors. Penhall's procurement of equipment for its rental fleet is
generally coordinated through its headquarters in Anaheim, California, while
smaller inventory items are typically purchased at the divisional level.
Penhall's suppliers must meet specified standards of quality and experience, and
include well-known equipment manufacturers such as Caterpillar, John Deere,
Ingersoll-Rand, Kenworth, General Motors Company and Ford Motor Company. The
favorable pricing, service, training and information that Penhall receives from
its suppliers represent what Penhall believes to be a significant competitive
advantage. Management continually analyzes the effectiveness, quality and
profitability of Penhall's equipment and addresses equipment procurement issues.
Penhall maintains no long-term supply or purchasing contracts and believes that
it could readily replace any of its existing suppliers if it were no longer
advantageous to purchase equipment from such suppliers.
CUSTOMERS
Most of Penhall's customers consist of highway, airport and building
general contractors and subcontractors, and federal, state and municipal
agencies in various construction, industrial, manufacturing, governmental and
residential markets. Some of Penhall's major customers include the California
Department of
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Transportation, Wasatch Constructors, Turner Construction, San Diego Gas &
Electric, Morrison Knudsen and Koll Construction Company. During fiscal 1999,
Penhall served over 9,000 customers and, with the exception of the California
Department of Transportation, no one customer has accounted for more than 5% of
Penhall's revenues in any of the past five fiscal years. Management believes
that a significant percent of Penhall's revenues represented repeat business
from existing customers.
COMPETITION
The operated equipment rental industry is a specialized niche of the
overall equipment rental industry and is highly competitive. Penhall's
competitors include large national rental companies, regional companies, smaller
independent businesses and equipment vendors which sell and rent equipment to
customers. The industry is also highly fragmented, and primarily consists of
many relatively small, independent businesses typically serving discrete local
markets within 30 to 50 miles of the equipment rental location, with few
multi-location regional or national operators. Traditionally, large Operated
Equipment Rental Services companies have focused their operations on providing a
broad array of services to relatively large customers, primarily in medium to
large metropolitan markets, while generally serving smaller markets through
delivery from distant major markets.
Competitive factors in the operated equipment rental industry include
breadth of product lines, the availability of equipment and skilled operators,
the condition of equipment, service, name recognition, proximity to customers
and price. Penhall believes that it is able to successfully compete in the
markets that it serves because of its reputation and large fleet of equipment.
In addition, certain of the services provided by the Penhall, such as diamond
saw cutting services, are highly specialized and therefore not widely available;
the market for these services therefore tends to be somewhat less competitive.
Management does not believe that Penhall faces any significant competitor on a
national scale, as the operated equipment rental industry is characterized
primarily by local providers offering a limited array of services.
Management believes the operated equipment rental industry benefits from
the trend among businesses to outsource non-core operations to reduce capital
investment, convert costs from fixed to variable and minimize the downtime,
maintenance, repair and storage associated with equipment ownership. Customers
are increasingly using Operated Equipment Rental Services companies to provide a
comprehensive supply of equipment and operators.
Penhall's fixed-price contract projects are obtained through competitive
bidding. In many cases, a performance bond is required by a customer before a
contract is awarded. Penhall believes that its bonding capacity is a competitive
advantage over smaller, less financially stable competitors. Moreover, Penhall
believes that it is able to compete effectively for fixed-price contract jobs
because of its extensive resources and relationships with general contractors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Penhall currently holds a United States trademark and service mark with
respect to the "Penhall" name and logo, which it believes are of particular
importance to Penhall's business. Except with respect to the "Penhall" name and
logo, Penhall is not dependent on any intellectual property rights.
MANAGEMENT INFORMATION SYSTEM
Penhall utilizes a state-of-the-art management information system, which
was implemented at the beginning of fiscal 1997 and gives management the ability
to analyze 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
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decisions. In addition, the system provides information with respect to contract
work in progress, which is used by project managers and contract division
management to monitor the status of jobs in progress.
RADIO COMMUNICATIONS
Penhall licenses from Motorola and, in one case, from an individual, the
right to operate and install certain radio repeater equipment at a number of
sites in the State of California. This equipment allows Penhall and its
operators in the field to communicate with each other by radio.
In connection with the radio communications referred to above, Penhall
holds several licenses from the Federal Communications Commission ("FCC") that
allow it to broadcast over certain designated radio frequencies. These licenses
may not be assigned without the FCC's consent. The Mergers constituted an
assignment for purposes of the FCC licenses and Penhall has received the FCC's
consent to continue to use the FCC licenses during the pendency of its
application for such consent.
LABOR RELATIONS
As of June 30, 1999, Penhall had approximately 1,100 full-time
employees. The Company also hires, on an as-needed basis, hourly equipment
operators when work in progress necessitates additional operators.
Approximately 400 of Penhall's employees are represented by various
labor unions. The Company's unionized work force is divided into approximately
16 certified or lawfully recognized bargaining units.
Two of the Company's bargaining unit agreements expired in June 1999.
These agreements are being negotiated and the union and the Company have agreed
to abide by the terms of the expired agreements on a month-to-month basis. Of
the remaining collective bargaining agreements, three expire in June 2000, three
expire in April 2001, one expires in May 2001 and the rest expire thereafter.
There are currently no unfair labor practice charges pending against
Penhall either before the National Labor Relations' Board or the courts.
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ITEM 2. PROPERTIES
Penhall is headquartered in Anaheim, California. As of June 30, 1999
Penhall owned or leased 32 facilities which are used for equipment yards and
accompanying office space. The following table sets forth the location and
square footage of each of such facilities.
<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
Rialto, California(1)......................................... 6,000
Santa Clara, California(1).................................... 9,950
Irvine, California(1)......................................... 9,500
Bakersfield, California(1).................................... 4,000
Burbank, California........................................... 6,200
Phoenix, Arizona.............................................. 12,900
Austin, Texas................................................. 6,100
Grapevine, Texas(1)........................................... 11,000
Denver, Colorado.............................................. 15,100
Austell, Georgia(1)........................................... 8,000
Las Vegas, Nevada(1).......................................... 4,000
Portland, Oregon(1)........................................... 24,000
Salt Lake City, Utah(1)....................................... 10,500
Rogers, Minnesota(1).......................................... 11,000
Birmingham, Alabama(1)........................................ 2,000
Mobile, Alabama(1)............................................ 5,000
Golden Valley, Minnesota(1)................................... 24,000
Superior, Wisconsin(1)........................................ 4,000
Morrisville, North Carolina(1)................................ 15,000
Charlotte, North Carolina(1).................................. 6,000
Greensboro, North Carolina(1)................................. 5,000
Wilmington, North Carolina(1)................................. 2,000
Greenville, South Carolina(1)................................. 3,500
Columbia, South Carolina(1)................................... 3,500
Charleston, South Carolina(1)................................. 6,500
College Park, Georgia(1)...................................... 5,000
</TABLE>
(1) Leased property.
11
<PAGE> 12
Penhall presently leases twenty-two sites in eleven states
(collectively, the "Leased Sites"). The average remaining term of the leases
under which the Leased Sites are held (collectively, the "Real Property Leases")
is approximately 5 years (assuming the exercise of all option periods). The Real
Property Leases for the following three Leased Sites have remaining terms of
less than three years: (i) Las Vegas, Nevada- monthly tenancy; (ii) Bakersfield,
California - May 30, 2000; and (iii) Austell, Georgia - January 31, 2001.
Penhall 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 Penhall currently occupies has expired and Penhall is
leasing the property on a month-to-month basis. Once it constructs the new
facility, Penhall's operations in Las Vegas will be transferred and the current
month-to-month lease will be terminated.
ITEM 3. LEGAL PROCEEDINGS
Penhall is from time to time involved in legal proceedings arising in
the ordinary course of business. Penhall believes there is no outstanding
litigation, which could have a material impact on its financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common equity is not publicly traded and, accordingly, an
established market does not exist for such common equity. The Company did not
pay any dividends in fiscal 1998 or 1999. The Indenture contains covenants that
restrict, among other things, the ability of the Company to incur additional
indebtedness, pay dividends or make certain other Restricted Payments (as
defined therein), enter into transactions with affiliates, allow its
subsidiaries to make certain payments, create liens, make certain asset
dispositions and merge or consolidate with, or transfer substantially all of
it's assets to another person, or engage in certain change of control
transactions. As part of the Recapitalization, the Issuer issued the Existing
Notes in accordance with Rule 144A of the Securities Act of 1933, as amended. As
part of the Recapitalization, the Company became the successor obligor under the
Existing Notes. See "Business -- the Reorganization".
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ............................................. $ 70,839 $ 74,895 $ 95,298 $ 101,170 $ 143,446
Cost of revenues ..................................... 50,142 51,200 68,541 72,395 101,389
--------- --------- --------- --------- ---------
Gross profit ......................................... 20,697 23,695 26,757 28,775 42,057
General and administrative expenses .................. 12,989 15,156 16,953 18,673 32,570
Reorganization expenses .............................. -- -- -- 1,207 3,501
Other compensation ................................... -- -- -- 3,271 --
Other operating income, net .......................... 1,025 867 871 644 1,121
--------- --------- --------- --------- ---------
Earnings before interest expense and income taxes ... 8,733 9,406 10,675 6,268 7,107
Interest expense ..................................... 418 783 811 1,036 14,334
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes .................. 8,315 8,623 9,864 5,232 (7,227)
Income tax expense (benefit) ......................... 3,455 3,538 4,407 2,531 (1,388)
--------- --------- --------- --------- ---------
Net earnings (loss) .................................. 4,860 5,085 5,457 2,701 (5,839)
Accretion of preferred stock to redemption value ..... -- -- -- -- (2,304)
Accrual of cumulative dividends on preferred stock ... -- -- -- -- (2,323)
--------- --------- --------- --------- ---------
Net earnings (loss) available to common stockholders.. $ 4,860 $ 5,085 $ 5,457 $2,70l $ (10,466)
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Basic ............................................. $ 1.20 $ 1.25 $ 1.29 $ .63 $ (8.16)
Diluted ........................................... 1.18 1.24 1.27 .62 $ (8.16)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ............................................. 4,059,940 4,054,596 4,232,585 4,277,888 1,282,996
Diluted ........................................... 4,103,806 4,114,398 4,305,608 4,355,303 1,282,996
OTHER DATA:
Adjusted EBITDA(1) ................................... $ 13,638 $ 15,644 $ 19,565 $ 20,931 $ 31,129
Adjusted EBITDA margin(2) ............................ 19.3% 20.9% 20.5% 20.7% 21.7%
Net cash provided by operating activities ............ $ 9,120 $ 10,686 $ 8,562 $ 16,628 $ 126
Net cash used in investing activities ................ $ (11,168) $ (10,522) $ (15,086) $ (17,047) $ (21,801)
Net cash provided by (used in) financing activities .. $ 270 $ 735 $ 6,263 $ (23) $ 24,526
Depreciation and amortization ........................ $ 4,168 $ 5,417 $ 6,878 $ 8,870 $ 11,652
Capital expenditures ................................. $ 11,834 $ 11,511 $ 16,089 $ 12,287 $ 15,069
Units of operated equipment rentals at end of period.. 335 369 420 497 623
Number of locations at end of period ................. 15 16 21 22 32
Ratio of earnings to fixed charges(3) ................ 14.3x 10.4x 11.4x 5.3x .5x
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END:
Total assets ......................................... $ 45,473 $ 53,378 $ 69,833 $ 88,323 $ 114,163
Long-term obligations, including current maturities .. 6,781 8,981 14,111 18,564 130,711
Stockholders' equity (deficit) ....................... 26,912 32,032 39,253 43,606 (66,965)
</TABLE>
13
<PAGE> 14
(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 generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
The following chart depicts the components of Adjusted EBITDA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net earnings (loss) ............. $ 4,860 $ 5,085 $ 5,457 $ 2,701 $ (5,839)
Interest expense ................ 418 783 811 1,036 14,334
Income tax expense (benefit) .... 3,455 3,538 4,407 2,531 (1,388)
Depreciation and amortization ... 4,168 5,417 6,878 8,870 11,652
Stock related compensation
expense ....................... 737 821 2,012 1,315 8,869
Reorganization costs ............ -- -- -- 1,207 3,501
Other compensation .............. -- -- -- 3,271 --
------- ------- ------- ------- --------
Adjusted EBITDA $13,638 $15,644 $19,565 $20,931 $ 31,129
======= ======= ======= ======= ========
</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 issuance costs and the interest portion of the Company's rent
expense.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the results of operations and financial
condition of Penhall should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, included in
Part II of this report.
GENERAL
Penhall was founded in 1957 in Anaheim, California with one piece of
equipment, and today is one of the largest Operated Equipment Rental Services
companies in the United States. Penhall differentiates itself from other
equipment rental companies by providing specialized services in connection with
infrastructure projects through renting equipment along with skilled operators
to serve customers in the construction, industrial, manufacturing, governmental
and residential markets. In addition, Penhall complements its Operated Equipment
Rental Services with fixed-price contracts, which serve to market its Operated
Equipment Rental Services business and increase
14
<PAGE> 15
utilization of its operated equipment rental fleet. Penhall provides its
services from 32 locations in thirteen states, with a presence in some of the
fastest growing states in terms of construction spending and population growth.
From fiscal 1995 to fiscal 1999, revenue and Adjusted EBITDA have grown
at a CAGR of 19.3% and 22.9%, respectively, due primarily to Management's
successful implementation of a strategy focused on (i) maximizing high-margin
Operated Equipment Rental Services revenues through increased equipment rental
fleet utilization, (ii) controlling overhead and (iii) successfully integrating
Penhall's acquisitions and start-up locations.
The operated equipment rental industry is a specialized niche of the
highly fragmented United States equipment rental industry, in which there are
approximately 17,000 companies. Penhall has taken advantage of consolidation
opportunities by acquiring small companies in targeted markets as well as by
establishing new offices in those markets. Since 1994, Penhall has effected
seven strategic acquisitions, including Concrete Coring Company, an Austin-based
company acquired in 1995, Zig Zag Company, a Denver-based firm acquired in 1996,
Metro Concrete Cutting, an Atlanta-based company acquired in 1996, HSI, a
Minnesota-based firm acquired in April 1998, Daley Concrete Cutting, a South
Carolina-based division of U.S. Rentals acquired in October 1998, Lipscomb
Concrete Cutting, a North Carolina-based company acquired in November 1998 and
Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999.
During the same period, Penhall established operations in four new markets by
opening offices in Las Vegas, Salt Lake City, Portland and Dallas.
Penhall derives its revenues primarily from services provided for
infrastructure related jobs. Penhall's Operated Equipment Rental Services are
provided primarily under hourly rentals, which are complemented by long-term
fixed-price contracts. During fiscal 1999, approximately 51% of Penhall's
revenues were derived from highway-related projects, approximately 24% of
revenues were generated from building-related projects and the remainder of
revenues were generated from airport, residential and other projects. The
following table shows the breakdown of the components of revenue for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
$ % of Total $ % of Total $ % of Total
-------- ---------- -------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Hourly Service Rentals ............. $ 69,510 72.9% $ 77,445 76.5% $ 98,834 68.9%
Long Term Service Contracts(1) ..... 25,788 27.1 23,725 23.5 44,612 31.1
-------- ----- -------- ----- -------- -----
Total Revenues . ................. $ 95,298 100.0% $101,170 100.0% $143,446 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
(1) Excludes services performed by the operated equipment rental divisions
on long-term contracts.
Revenue growth is influenced by infrastructure change, including new
construction, modification, and regulatory changes. Penhall's revenues are also
impacted positively after the occurrence of natural disasters, such as the 1989
and 1994 earthquakes in Northern and Southern California. Other factors that
influence Penhall's operations are demand for operated rental equipment, the
amount and quality of equipment available for rent, rental rates and general
economic conditions. Historically, revenues have been seasonal, as weather
conditions in the spring and summer months result in stronger performance in the
first and fourth fiscal quarters than in the second and third fiscal quarters.
The principal components of Penhall's operating costs include the cost
of labor, equipment rental fleet maintenance costs including parts and service,
equipment rental fleet depreciation, insurance and other direct operating costs.
Given the varied, and in some cases specialized, nature of its rental equipment,
Penhall utilizes a
15
<PAGE> 16
range of periods over which it depreciates its equipment on a straight line
basis. On average, Penhall depreciates its equipment over an estimated useful
life of six years with a 10% residual value.
Penhall invests in and maintains a large and versatile fleet of rental
equipment ranging from relatively small items such as diamond abrasive saws and
coring units to larger equipment, including backhoes, excavators, water trucks
and concrete grinders. Used equipment is sometimes sold in the ordinary course
of business, and gains and losses on sales of assets are recognized in "Other
Operating Income" in Penhall's consolidated statements of earnings. In fiscal
1997, 1998 and 1999, gains and losses on sales of assets from such equipment
sales were $258,000, $203,000, and $420,000, respectively.
The following table shows the number of units in Penhall's operated
equipment rental fleet for the following periods:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Beginning of Period ............... 369 420 497
# Units Purchased ................. 75 99 185
# Units Disposed .................. 24 22 59
--- --- ---
End of Period ..................... 420 497 623
=== === ===
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Revenues. Revenues for fiscal 1999 were $143.4 million, compared to revenues of
$101.2 million for the prior year, an increase of $42.2 million or 41.7%. The
increase was due primarily to the inclusion of a full year of operations of
Highway Services, Inc. in fiscal 1999 (HSI was acquired in April 1998) and to
the acquisitions of Daley Concrete Cutting in October 1998, Lipscomb Concrete
Cutting in November 1998, Diamond Concrete Services in April 1999 and Prospect
Drilling and Sawing in June 1999. In addition, construction markets remained
strong in fiscal 1999 in the areas which the Company serves.
Penhall operated through thirty-two locations in thirteen states at June
30, 1999, compared to twenty-two locations in nine states at June 30, 1998. At
June 30, 1999, Penhall's operating fleet consisted of 623 units compared to 497
units at June 30, 1998, an increase of 25.4%.
Gross Profit. For fiscal year 1999, gross profit was $42.1 million compared to
gross profit of $28.8 million for fiscal year 1998, an increase of $13.3
million, or 46.2%. As a percent of revenue, gross profit was 29.3% in fiscal
year 1999 compared to 28.4% in fiscal year 1998. The increase in gross profit in
1999 was due primarily to the increase in revenues in fiscal 1999. The increase
in gross profit as a percent of revenues in fiscal 1999 was due to better
utilization of the equipment rental fleet in fiscal 1999, partially offset by a
higher portion of the Company's revenues derived from contract revenues in
fiscal 1999. Gross profit margins for contract services are generally lower than
gross profit margins for operated equipment rental services revenues.
General and Administrative Expenses. General and administrative expenses were
$32.6 million in fiscal year 1999 compared to $18.7 million in fiscal year 1998.
As a percent of revenues, general and administrative expenses were 22.7% in
fiscal 1999 compared to 18.5% in fiscal 1998. Included in general and
administrative expenses is $8.9 million in fiscal 1999 and $1.0 million in
fiscal 1998 of compensation expense related to the Company's Employee
16
<PAGE> 17
Stock Purchase Plans. Without the compensation expense, general and
administrative expenses were $23.7 million, or 16.5% of revenues in fiscal 1999
compared to $17.7 million, or 17.5% of revenues in fiscal 1998.
The increase in general and administrative expenses (net of stock
related compensation expense) in fiscal 1999 was the result of the increased
revenues and number of operating locations compared to fiscal 1998. The
reduction in general and administrative expenses as a percent of revenues
occurred because some of these types of expenses remain somewhat constant, and
do not increase or decrease in proportion to increases or decreases in revenues.
The increase in stock related compensation expense in fiscal 1999 was
the result of the Transactions in August 1998.
Reorganization Expenses. Reorganization expenses, consisting primarily of
closing fees and legal expenses, were $3.5 million in fiscal 1999 compared to
$1.2 million in fiscal 1998. These expenses were associated with the
reorganization of the Company which occurred in August 1998 and are
non-recurring expenses.
Other Operating Income, Net. Other operating income, net, consists primarily of
gains and losses on the sale of fixed assets, interest income, and discounts
earned. The increase in fiscal 1999 compared to fiscal 1998 was due to higher
levels of operations in fiscal 1999, producing greater gains on the sale of
fixed assets and higher discounts earned.
Interest Expense. Interest expense was $14.3 million in fiscal 1999 compared to
interest expense of $1.0 million in fiscal 1998. The increase was due to
additional debt incurred by the Company as part of the Transactions. This
additional debt consists of $100.0 million of Senior Notes and the New Credit
Facility (see Liquidity and Capital Resources below).
Income Tax Expense (Benefit). The Company recorded an income tax benefit of
$1,388,000, or 19% of loss before income taxes in the fiscal year ended June 30,
1999, compared to a provision of $2,531,000, or 48% of earnings before income
taxes in the prior year. The lower tax benefit in fiscal 1999 is attributable to
certain reorganization costs related to the Transactions which are not
deductible for tax purposes.
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.
Penhall operated through 22 locations in nine states at June 30, 1998,
compared to 21 locations in eight states at June 30, 1997. Penhall 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 was $28.8 million in fiscal 1998, an increase of $2.0
million, or 7.5%, compared to gross profit of $26.8 million in fiscal 1997.
Gross profit as a percentage of revenues increased from 28.1% in fiscal 1997, to
28.4% in fiscal 1998. The 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 gross margins for Operated Equipment Rental
Services revenues.
17
<PAGE> 18
General and Administrative Expenses. General and administrative expenses for
fiscal 1998 were $18.7 million, an increase of $1.7 million, or 10.1%, compared
to general and administrative expenses of $17.0 million in fiscal 1997. General
and administrative expenses as a percentage of revenues increased from 17.8% for
fiscal 1997, to 18.5% for fiscal 1998. This increase in general and
administrative expenses as a percentage of revenues was primarily attributable
to increases in payroll and payroll related expenses, offset by a reduction in
stock compensation expense.
Reorganization Expense. Reorganization expenses, consisting primarily of legal
expenses, were $1.2 million in fiscal year 1998; no reorganization expenses were
incurred in fiscal 1997. These expenses were incurred in connection with the
reorganization of the Company which was completed in August, 1998.
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.
Other Operating Income, Net. Other operating income, net, consists primarily of
gains and losses on the sale of fixed assets, interest income and discounts
earned. The decrease in fiscal 1998 compared to fiscal 1997 was due to a lower
level of discounts earned in 1998.
Interest Expense. Interest expense was slightly higher in fiscal 1998 at $1.0
million compared to fiscal 1997 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.
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the Company's principal uses of liquidity will be
to fund working capital, meet debt service requirements and finance the
Company's strategy of pursuing strategic acquisitions and expanding through
internal growth. The Company's principal sources of liquidity are expected to be
cash flow from operations and borrowings under the New Credit Facility. The New
Credit Facility consists of two facilities: (i) a six-year senior secured term
loan facility in an aggregate principal amount equal to $20.0 million (the "Term
Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate
principal amount not to exceed $30.0 million (the "Revolving Credit Facility").
The Company drew $20.0 million of loans under the Term Loan Facility ("Term
Loans") on the closing date of the New Credit Facility in connection with the
Recapitalization. The Term Loans amortize on a quarterly basis commencing in
September 2000 and are payable in installments under a schedule set forth in the
New Credit Facility. Advances made under the Revolving Credit Facility
("Revolving Loans") are due and payable in full on June 15, 2004. The Term Loans
and the Revolving Loans are subject to mandatory prepayments and reductions in
the event of certain extraordinary transactions or issuances of debt and equity
by the Company or any subsidiary of the Company that guarantees amounts under
the New Credit Facility. Such loans are also required to be prepaid with 75% of
the Excess Cash Flow (as such term is defined in the New Credit Facility) of the
Company or, if the Company's Leverage Ratio (as such term is defined in the New
Credit Facility) is less than 4.75 to 1.0, 50% of such Excess Cash Flow.
Cash provided by operating activities during fiscal 1997, 1998 and 1999
was $8.6 million, $16.6 million and $.1 million, respectively. In fiscal 1999,
the Company's net loss and increases in accounts receivable, costs and estimated
earnings in excess of billings on uncompleted contracts, and a decrease in
accrued compensation, which were partially offset by increased depreciation and
amortization expense and increases in accounts payable, resulted in net cash
provided of $.1 million. In fiscal 1998, higher depreciation, deferred taxes and
higher accrued liabilities due to the Transactions accounted for the improved
cash from operations compared to 1997.
18
<PAGE> 19
Management estimates that Penhall's annual capital expenditures will be
approximately $20.0 million for fiscal 2000, including replacement and
maintenance of equipment, purchases of new equipment, and purchases of real
property.
Net cash used in investing activities during fiscal 1997, 1998 and 1999
was $15.1 million, $17.0 million and $21.8 million, respectively. Such cash was
primarily used for capital expenditures of $16.1 million in fiscal 1997, $12.3
million in fiscal 1998, and $15.1 million in fiscal 1999. In fiscal 1999, $7.7
million of cash was used for the acquisitions of Daley Concrete Cutting,
Lipscomb Concrete Cutting, Diamond Concrete Services and Prospect Drilling and
Sawing. In fiscal 1998 cash used in investing activities included $5.9 million
related to the acquisition of Highway Services, Inc.
Net cash provided by (used in) financing activities during fiscal 1997,
1998 and 1999 was $6.3 million, $0.0 million and $24.5 million, respectively.
Cash provided by financing activities of Penhall in fiscal 1999 are primarily
the result of the Transactions associated with the Reorganization in August
1998.
Historically, Penhall has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As a
result of the Transactions, however, the Company has substantial indebtedness
and debt service obligations. As of June 30, 1999, the Company and its
subsidiaries had approximately $130.7 million of total indebtedness outstanding
(including the Notes) and a stockholders' deficit of approximately $67.0
million. As of June 30, 1999 approximately $20.0 million of additional borrowing
was available under the Company's New Credit Facility.
RECENT DEVELOPMENTS
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. Penhall 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. Penhall 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.
Penhall's basic business is to provide operator assisted equipment for
rental. As such, management believes the Company's main exposure to Year 2000
(Y2K) issues is to the telephone and radio communication systems needed to take
orders for rental, and for certain larger pieces of equipment (excavators, back
hoes, etc.) which have some level of computer operating controls.
The Company's information technology systems include it's accounting
systems, billing, accounts payable, and equipment utilization reports. The
Company has completed testing of all information technology systems, and
believes the systems are Y2K compliant. In addition, major vendors for the
Company's computer hardware, software and data communications network have
informed the Company that their products are Y2K compliant.
The Company's non-information technology systems include primarily
rental location alarm systems, gasoline pumps, radios, telephones and certain
types of heavy equipment. The Company is currently conducting a review for Y2K
compliance for the major non-information technology systems, which it expects to
complete by October 15, 1999. This review includes determining if respective
vendors of the non-information technology systems are also Y2K compliant.
19
<PAGE> 20
The Company has spent less than $50,000 as of June 30, 1999, including
the cost of outside consultants, to conduct the Y2K compliance reviews and
tests. The Company does not expect to incur additional substantial costs to
complete its Y2K reviews and remediation, if required.
The primary operational risk to the Company is that communication
systems on which the Company relies will not function properly, or that certain
heavy equipment will not function properly, after December 31, 1999. The primary
information technology risk is that accounting data, including billing customers
and paying vendors, will not function properly via computer after December 31,
1999. The Company believes it has adequate contingency plans to mitigate the
aforementioned potential Y2K related problems. The Company does not believe
potential Y2K problems would have a significant, long-term negative effect on
its operations or information technology.
Although Penhall is uncertain as to the extent its customers may be
affected by Year 2000 issues that require commitment of significant resources
and may cause disruptions in its customers' businesses, Penhall does not believe
it has a material relationship with any one third party that would have a
significant impact on Penhall if that third party was not Year 2000 ready.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company is exposed to interest rate changes primarily as a result of
its notes payable, including Senior Notes, Term Loan and Revolving Loan which
are used to maintain liquidity and fund capital expenditures and expansion of
the Company's operations. The Company's interest rate risk management objective
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve its objectives the Company
borrows primarily at fixed rates and has the ability to choose interest rates
under the Term Loan and Revolving Loan. The Company does not enter into
derivative or interest rate transactions for speculative purposes.
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
------------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
----- ----- ----- ----- ----- --------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt.............. 0 0 0 0 0 $100,000 $100,000 $96,900
Average interest rate........ 12%
Variable rate LIBOR debt(1).. 3,300 3,300 5,400 6,000 12,500 200 30,700 30,700
Current interest rate(1)..... 7.25%
</TABLE>
- -------------
(1) The Company has different interest rate options for its variable rate debt.
See note 5 in the consolidated financial statements for additional
information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company filed as part of
this report on Form 10-K are listed in Item 14(a).
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Penhall International Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Penhall
International Corp. (Note 1) and subsidiaries ("the Company") as of June 30,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended June 30, 1999. 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
September 10, 1999
Orange County, California
21
<PAGE> 22
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ..................................................... $ 234,000 $ 3,085,000
------------ ------------
Receivables:
Contract and trade receivables ....................... 23,454,000 27,808,000
Contract retentions, due upon completion and
acceptance of work (note 2) ...................... 4,454,000 4,957,000
Income taxes receivable .............................. 2,399,000 --
------------ ------------
30,307,000 32,765,000
Less allowance for doubtful receivables (note 2) ..... 995,000 1,277,000
------------ ------------
Net receivables ............................... 29,312,000 31,488,000
------------ ------------
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 12) ............... 976,000 3,154,000
Deferred tax assets (note 6) ............................. 891,000 3,663,000
Inventories .............................................. 1,458,000 1,316,000
Prepaid expenses and other current assets ................ 670,000 580,000
------------ ------------
Total current assets .......................... 33,541,000 43,286,000
------------ ------------
Property, plant and equipment, at cost:
Land ..................................................... 4,538,000 5,229,000
Buildings and leasehold improvements ..................... 7,715,000 7,472,000
Construction and other equipment ......................... 67,934,000 85,931,000
------------ ------------
80,187,000 98,632,000
Less accumulated depreciation and amortization ........... 35,180,000 43,035,000
------------ ------------
Net property, plant and equipment ............. 45,007,000 55,597,000
Goodwill, net of accumulated amortization of $471,000
and $1,175,000 at June 30, 1998 and 1999,
respectively (notes 14 and 15) ........................... 8,649,000 8,255,000
Debt issuance costs net of accumulated amortization
of $0 and $811,000 at June 30, 1998 and 1999,
respectively (note 5 ) ................................... 719,000 5,824,000
Other assets, net (note 3) ................................... 407,000 1,201,000
------------ ------------
$ 88,323,000 $114,163,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt (note 5) ..................... $ 2,034,000 $ 3,274,000
Current installments of notes payable to stockholders (note 11) ..... 131,000 --
Trade accounts payable .............................................. 7,532,000 8,908,000
Accrued liabilities (note 4) ........................................ 9,041,000 12,735,000
Billings in excess of costs and estimated
earnings on uncompleted contracts (note 12) ..................... 665,000 1,050,000
------------- -------------
Total current liabilities ................................ 19,403,000 25,967,000
------------- -------------
Long-term debt, excluding current installments (note 5) ................. 16,125,000 27,437,000
Notes payable to stockholders, excluding current
installments (note 11) .......................................... 274,000 --
Senior Notes (note 5) ................................................... -- 100,000,000
Deferred tax liabilities (note 6) ....................................... 3,609,000 4,993,000
Accrued compensation (note 8) ........................................... 5,306,000 --
Senior Exchangeable Preferred stock, redemption
value $10,999,000. Authorized, issued and
outstanding 10,000 shares (note 9) .................................. -- 10,999,000
Series A Preferred stock, redemption value $11,732,000
Authorized 25,000 shares; issued and
outstanding 10,428 shares (note 9) .................................. -- 11,732,000
Stockholders' equity (deficit):
Series B Preferred stock, par value $.01 per share
Authorized 50,000 shares; issued and outstanding
0 and 18,556 shares at June 30, 1998 and
June 30, 1999, respectively (note 9) ............................ -- 20,880,000
Common stock, $.01 par value. Authorized 5,000,000
shares; issued and outstanding 4,452,264 and 994,477
shares at June 30, 1998 and June 30, 1999, respectively ......... 42,000 10,000
Additional paid-in capital ......................................... 14,498,000 985,000
Retained earnings (accumulated deficit) ............................ 29,066,000 (88,840,000)
------------- -------------
Total stockholders' equity (deficit) ..................... 43,606,000 (66,965,000)
Commitments and contingencies (notes 7, 8 and 10) .......................
------------- -------------
$ 88,323,000 $ 114,163,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ................................................. $ 95,298,000 $ 101,170,000 $ 143,446,000
Cost of revenues ......................................... 68,541,000 72,395,000 101,389,000
------------- ------------- -------------
Gross profit .......................................... 26,757,000 28,775,000 42,057,000
General and administrative expenses (note 8) ............. 16,953,000 18,673,000 32,570,000
Reorganization expenses .................................. -- 1,207,000 3,501,000
Other compensation ....................................... -- 3,271,000 --
Other operating income, net .............................. 871,000 644,000 1,121,000
------------- ------------- -------------
Earnings before interest expense and income taxes ..... 10,675,000 6,268,000 7,107,000
Interest expense ......................................... 811,000 1,036,000 14,334,000
------------- ------------- -------------
Earnings (loss) before income taxes ................... 9,864,000 5,232,000 (7,227,000)
Income tax expense (benefit) (note 6) .................... 4,407,000 2,531,000 (1,388,000)
------------- ------------- -------------
Net earnings (loss) ...................................... 5,457,000 2,701,000 (5,839,000)
Accretion of preferred stock to redemption value ......... -- -- (2,304,000)
Accrual of cumulative dividends
on preferred stock .................................... -- -- (2,323,000)
------------- ------------- -------------
Net earnings (loss) available to common stockholders ..... $ 5,457,000 $ 2,701,000 $ (10,466,000)
============= ============= =============
Earnings (loss) per share:
Basic ................................................. $ 1.29 $ .63 $ (8.16)
Diluted ............................................... $ 1.27 $ .62 $ (8.16)
Weighted average number of shares outstanding:
Basic ................................................. 4,232,585 4,277,888 1,282,996
Diluted ............................................... 4,305,608 4,355,303 1,282,996
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES B PREFERRED STOCK COMMON STOCK
--------------------------------- -------------
SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING
------------- ------------- -------------
<S> <C> <C> <C>
Balance at June 30, 1996 ................ -- $ -- 4,060,193
Issuance of shares....................... -- -- 220,746
Net earnings............................. -- -- --
Balance at June 30, 1997 ................ -- -- 4,280,939
Issuance of shares....................... -- -- 33,232
Exercise of stock options................ -- -- 145,200
Repurchase of shares..................... -- -- (7,107)
Net earnings............................. -- -- --
Balance at June 30, 1998 ................ -- -- 4,452,264
Repurchase of shares..................... -- -- (3,856,501)
Shares issued............................ 18,572 18,572,000 399,237
Accretion of redeemable preferred stock . -- -- --
Accrual of cumulative dividends.......... -- 2,323,000 --
Repurchase of shares..................... (16) (15,000) (523)
Net loss................................. -- -- --
------- ------------- ----------
Balance at June 30, 1999................. 18,556 $ 20,880,000 994,477
======= ============= ==========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
--------------
RETAINED EARNINGS TOTAL
ADDITIONAL (ACCUMULATED STOCKHOLDERS'
AMOUNT PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ................ $ 38,000 $ 11,086,000 $ 20,908,000 $ 32,032,000
Issuance of shares....................... 2,000 1,762,000 -- 1,764,000
Net earnings............................. -- -- 5,457,000 5,457,000
Balance at June 30, 1997 ................ 40,000 12,848,000 26,365,000 39,253,000
Issuance of shares....................... -- 1,000,000 -- 1,000,000
Exercise of stock options................ 2,000 706,000 -- 708,000
Repurchase of shares..................... -- (56,000) -- (56,000)
Net earnings............................. -- -- 2,701,000 2,701,000
Balance at June 30, 1998 ................ 42,000 14,498,000 29,066,000 43,606,000
Repurchase of shares..................... (36,000) (13,908,000) (107,440,000) (121,384,000)
Shares issued............................ 4,000 395,000 -- 18,971,000
Accretion of redeemable preferred stock.. -- -- (2,304,000) (2,304,000)
Accrual of cumulative dividends.......... -- -- (2,323,000) --
Repurchase of shares..................... -- -- -- (15,000)
Net loss................................. -- -- (5,839,000) (5,839,000)
------------- ------------- ------------- -------------
Balance at June 30, 1999................. $ 10,000 $ 985,000 $ (88,840,000) $ (66,965,000)
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) .................................. $ 5,457,000 $ 2,701,000 $ (5,839,000)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization ................... 6,878,000 8,870,000 11,652,000
Amortization of debt issuance costs ............. -- -- 811,000
Provision for doubtful accounts ................. (94,000) (115,000) 282,000
Provision for deferred taxes .................... (332,000) 1,281,000 (1,388,000)
Compensation expense related to
exercise of stock options .................. -- 579,000 --
Gains on sale of assets ......................... (258,000) (203,000) (420,000)
Changes in assets and liabilities
net of effects of acquisitions ................ -- -- --
Receivables ................................... (6,427,000) (4,710,000) (1,114,000)
Inventories, prepaid expenses
and other assets ............................ (662,000) 295,000 1,275,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts ....................... 212,000 (308,000) (2,178,000)
Trade accounts payable
and accrued liabilities ..................... 2,248,000 7,100,000 1,966,000
Billings in excess of costs
and estimated earnings on
uncompleted contracts ....................... (472,000) 458,000 385,000
Accrued compensation .......................... 2,012,000 680,000 (5,306,000)
------------- ------------- -------------
Net cash provided by operating activities ... $ 8,562,000 $ 16,628,000 $ 126,000
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets .................. $ 1,003,000 $ 1,122,000 $ 968,000
Capital expenditures .......................... (16,089,000) (12,287,000) (15,069,000)
Acquisition of companies.,
net of cash acquired ........................ -- (5,882,000) (7,700,000)
------------- ------------- -------------
Net cash used in investing activities ....... $ (15,086,000) $ (17,047,000) $ (21,801,000)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under long-term debt ............... $ 31,744,000 $ 30,341,000 $ 45,945,000
Repayments of long-term debt .................. (26,495,000) (29,824,000) (35,582,000)
Paydown on notes payable
to stockholders ............................. (750,000) (765,000) (405,000)
Book overdraft ................................ -- -- 2,471,000
Borrowings on Senior Notes .................... -- -- 100,000,000
Debt issuance costs ........................... -- (719,000) (5,916,000)
Proceeds from issuance of common stock ........ 1,764,000 1,000,000 399,000
</TABLE>
26
<PAGE> 27
PENHALL INTERNATIONAL, CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Repurchase of common stock ................. $ -- $ (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 ............ 6,263,000 (23,000) 24,526,000
----------- ----------- ------------
Net increase (decrease) in cash ... (261,000) (442,000) 2,851,000
Cash at beginning of year .................. 937,000 676,000 234,000
----------- ----------- ------------
Cash at end of year ........................ $ 676,000 $ 234,000 $ 3,085,000
=========== =========== ============
</TABLE>
See note 17 for supplementary cash flow information.
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY'S ACTIVITIES AND OPERATING CYCLE
Penhall International, Inc. ("PII") was founded in 1957 and was incorporated in
the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of
12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an
Arizona corporation formed by an unrelated third party (the Third Party) to
effect the recapitalization of PII. As part of the recapitalization, a series of
mergers (the Recapitalization Mergers) were consummated pursuant to which
Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the
corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix
Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor
obligor of the Senior Notes. Following the consummation of the Recapitalization
Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall
International Corp., and PII changed its name to Penhall Rental Corp. Under
generally accepted accounting principles, the recapitalization mergers were
accounted for as a leveraged recapitalization transaction in a manner similar to
a pooling-of-interests. Under this method, the transfer of controlling interest
in PII to a new investor did not change the accounting basis of the assets and
liabilities in PII's separate stand-alone financial statements.
In connection with the recapitalization mergers, PII on June 30, 1998 entered
into a certain Compensation Tax Consistency and Indemnification Agreement (the
Agreement) with certain members of management. Under the Agreement, PII was
obligated to make approximately $3,000,000 of tax gross-up payments to certain
members of management. Such expense is included in the statement of operations
for the year ended June 30, 1998 as other compensation. For the years ended June
30, 1997, 1998 and 1999, $0, $1,207,000 and $3,501,000, respectively, is
included in reorganization expenses for the costs associated with the
recapitalization mergers.
Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental
Corp. and Penhall Company (collectively, "the Company" or "Penhall") serves
customers in the industrial, construction, governmental, and residential
markets, primarily through the performance of new construction, rehabilitation,
and demolition services in connection with infrastructure projects. The
Company's revenues are generated through equipment rentals, both short-term and
longer term under fixed price agreements. The length of the fixed price
agreements (contracts) varies, but typically range from one to 12 months. In
accordance with the operating cycle concept, the Company classifies all
contract-related assets and liabilities as current items. The Company's base of
operations includes among others, the states of California, Arizona, Colorado,
Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally,
through its purchase in April of 1998 of Highway Services, Inc. (see note 14),
the Company's operations were expanded to include the mid-western states of the
United States and some provinces of Canada. The Company's operations are
primarily conducted through Penhall International Corp. and its wholly owned
subsidiary, Penhall Company.
28
<PAGE> 29
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Penhall
International Corp. and its wholly owned subsidiaries: Penhall Rental Corp. and
Penhall Company. Although the Recapitalization Mergers did not take place until
August 4, 1998, since the Recapitalization Mergers were accounted for in a
manner similar to a pooling of interests, there was no impact on Penhall
consolidated financial statements as of June 30, 1998 and for the three-year
period ended June 30, 1999. 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 at completion. If estimated total costs on any contract
indicate a loss, the Company provides currently for the total loss anticipated
on the contract. For long-term contracts, which extend beyond fiscal year ends,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which facts requiring the revision become
known. All remaining revenue and costs are recognized as work is performed.
Contract costs include all direct material, equipment rentals, labor and
subcontract costs and those indirect costs related to contract performance, such
as indirect labor, tools, supplies, repairs and depreciation. General and
administrative costs are charged to expense as incurred.
The asset "costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed. The
liability "billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
Income from claims for additional contract compensation is recorded upon
settlement of the disputed amount.
INVENTORIES
Inventories, which consist primarily of diamond cutting blades and blade fuel,
are stated at cost. Cost is determined using the purchase price of the assets
and is expensed based on usage.
PROPERTY, PLANT AND EQUIPMENT
The Company and its subsidiaries provide for depreciation of property, plant and
equipment based on the estimated useful lives of the assets, using the
straight-line method and a residual value of 10% as follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements 15 to 39 years
Construction and other 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.
29
<PAGE> 30
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
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.
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 $171,000, $272,000 and $700,000 for the years ended June
30, 1997, 1998 and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the asset
to future net cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit 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.
30
<PAGE> 31
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
ENVIRONMENTAL REMEDIATION COSTS
Losses associated with environmental remediation obligations are accrued for
when such losses are probable and reasonably estimable. Such accruals are
adjusted as further information develops or circumstances change. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value.
STOCK-BASED COMPENSATION
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. Diluted earnings (loss) per share is
calculated by dividing net earnings (loss) available to common stockholders by
the weighted average number of common shares outstanding during the period plus
the impact of assumed potential diluted securities. The dilutive effect of
outstanding options is reflected in diluted earnings per share by application of
the treasury stock method.
All common shares included in the consolidated financial statements and earnings
(loss) per share calculations have been restated to reflect a 10.56 to one
common stock split effected as part of the Recapitalization Mergers.
The following table sets forth the calculation of diluted earnings (loss) per
share for each fiscal year in the three-year period ended June 30, 1999:
31
<PAGE> 32
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Diluted earnings (loss) per share calculation
Net earnings (loss) available to
common stockholders ........................ $ 5,457,000 $ 2,701,000 $(10,466,000)
============ ============ ============
Weighted average shares - basic .............. 4,232,585 4,277,888 1,282,996
Plus-incremental shares from
assumed conversion of stock options ........ 73,023 77,415 --
------------ ------------ ------------
Weighted average shares - diluted . .......... 4,305,608 4,355,303 1,282,996
============ ============ ============
Diluted earnings (loss) per share ............... $ 1.27 $ .62 $ (8.16)
============ ============ ============
</TABLE>
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which established new rules for the reporting and display of comprehensive
income and its components. Comprehensive income equals net income for each of
the years in the three year period ended June 30, 1999.
SEGMENT INFORMATION
The Company's only line of business is the rental of operator assisted equipment
for use in infrastructure projects. This equipment is rented on an hourly basis
(Service) and on a longer-term, fixed price basis (Contract). In fiscal 1999,
approximately 69% of revenues were generated from hourly rentals (service), and
approximately 31% of revenues were generated from longer-term fixed price
agreements (contracts). The Company does not account for, or manage, the hourly
or fixed-price rentals in a separate manner. On average approximately 20% to 30%
of service revenues are generated from contracts.
The Company has begun a non-operated assisted rental business (bare rentals).
These operations are insignificant to the consolidated operations for each of
the fiscal years ended June 30, 1997, 1998 and 1999.
The California Department of Transportation accounted for approximately 18%,
10%, and 7% of consolidated revenues of the Company for the years ended June 30,
1997, 1998 and 1999, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's balances to conform to
the current presentation.
32
<PAGE> 33
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(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,
1998 1999
---------- ----------
<S> <C> <C>
Years ending June 30:
1999 .............................. $ 445,000 $ --
2000 .............................. 1,782,000 3,115,000
2001 .............................. 1,336,000 1,612,000
2002 .............................. 891,000 230,000
---------- ----------
$4,454,000 $4,957,000
========== ==========
</TABLE>
Transactions in the allowance for doubtful receivables are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year . ........ $ 1,335,000 $ 1,110,000 $ 995,000
Provision for doubtful accounts ..... (94,000) 14,000 554,000
Accounts charged off ................ (131,000) (129,000) (272,000)
----------- ----------- -----------
Balance, end of year ................ $ 1,110,000 $ 995,000 $ 1,277,000
=========== =========== ===========
</TABLE>
(3) OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
Cash surrender value on officers' life
insurance policies........................ $ 574,000 $ --
Loans on officers' life insurance policies... (449,000) --
Covenants not to compete..................... 288,000 1,599,000
Accumulated amortization..................... (146,000) (462,000)
Other........................................ 140,000 64,000
----------- -----------
$ 407,000 $ 1,201,000
=========== ===========
</TABLE>
The covenants not to compete are amortized over the life of the agreements.
Amortization expense related to the covenants not to compete amounted to
$107,000, $94,000 and $314,000 for the years ended June 30, 1997, 1998 and 1999,
respectively.
33
<PAGE> 34
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(4) ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
Union benefits ............................. $ 700,000 $ 863,000
Accrued bonuses ............................ 807,000 2,015,000
Accrued debt issuance costs ................ 351,000 --
Accrued merger costs ....................... 905,000 --
Accrued tax gross-up payments (note 1) ..... 2,936,000 --
Accrued interest ........................... -- 5,211,000
Accrued insurance .......................... 618,000 602,000
Accrued vacation ........................... 320,000 358,000
Accrued payroll ............................ 1,521,000 2,726,000
Other ...................................... 883,000 960,000
----------- -----------
$ 9,041,000 $12,735,000
=========== ===========
</TABLE>
(5) SENIOR NOTES AND LONG-TERM DEBT
SENIOR NOTES
On August 4, 1998, in connection with the Recapitalization Mergers, the Company
issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries
of Penhall International Corp. Interest at 12% is payable semiannually in
arrears beginning February 1, 1999; all unpaid principal and interest is due
August 1, 2006. In addition, the Senior Notes are redeemable at the Company's
option, in whole at any time or in part from time to time, on or after August 1,
2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes
contain certain financial and non-financial covenants. The Company was in
compliance with all such covenants at June 30, 1999.
34
<PAGE> 35
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
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%. Interest was payable monthly and principal was due upon
maturity on October 31, 1999. Repaid in full on August 4, 1998 ............................ $13,860,000 $ --
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 1,896,000
Note payable secured by certain equipment, stated interest of 0%, imputed
interest at 9.25% which resulted in a discount of $200,000; payable
$400,000 due June 1, 2000 and 2001, and $428,000 due June 1, 2002 ......................... -- 1,028,000
Note payable secured by certain equipment bearing interest at 6.0%; all
unpaid principal and interest due November 1, 1999 ........................................ -- 876,000
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. The effective interest rate at
June 30, 1999 was 7.25% ................................................................... -- 6,500,000
$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. The effective
interest rate at June 30, 1999 was 7.25% .................................................. -- 20,000,000
Other ........................................................................................ 607,000 411,000
----------- -----------
............................................................................................. 18,159,000 30,711,000
Less current installments of long-term debt .................................................. 2,034,000 3,274,000
----------- -----------
Long-term debt, excluding current installments ............................................... $16,125,000 $27,437,000
=========== ===========
</TABLE>
35
<PAGE> 36
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
As part of the Revolving Loan, the Company has a Swingline Loan in the maximum
credit amount of $2,500,000 secured by certain assets of the Company; interest
accrues quarterly at 1.25% plus the higher of the Federal Funds Effective Rate
(as defined) or then current prime rate and is payable in quarterly
installments. All unpaid principal and interest is due June 10, 2004.
The Term Loan, Revolving Loan, and Swingline Loan (the "Credit Facility")
contain certain financial and non-financial covenants, including working
capital, net worth, and debt to equity ratios. The Company was in compliance
with, or had obtained waivers for, all covenants and ratios at June 30, 1999.
Additionally, under the terms of the Credit Facility, the Company had pledged
all of the assets of its wholly owned subsidiaries.
The Company had unused and available amounts under its Credit Facility in the
amount of $20,000,000 at June 30, 1999.
Annual maturities of long-term debt for the next five years for the periods
ended June 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
1999 .............................. $ 2,034,000 $ --
2000 .............................. 15,919,000 3,274,000
2001 .............................. 10,000 3,357,000
2002 .............................. 10,000 5,394,000
2003 .............................. 3,000 6,003,000
2004 .............................. -- 12,504,000
Thereafter ........................ 183,000 179,000
----------- -----------
$18,159,000 $30,711,000
=========== ===========
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) is comprised of the following components
for each fiscal year ended June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal ......................... $ 3,674,000 $ 918,000 $ --
State ........................... 1,065,000 332,000 --
----------- ----------- -----------
4,739,000 1,250,000 --
----------- ----------- -----------
Deferred tax expense (benefit):
Federal ......................... (252,000) 1,062,000 (630,000)
State ........................... (80,000) 219,000 (758,000)
----------- ----------- -----------
(332,000) 1,281,000 (1,388,000)
----------- ----------- -----------
$ 4,407,000 $ 2,531,000 $(1,388,000)
=========== =========== ===========
</TABLE>
36
<PAGE> 37
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
As of June 30, 1998 and 1999, the Company has a current net deferred tax asset
of $891,000 and $3,663,000, respectively, and a net noncurrent deferred tax
liability of $3,609,000 and $4,993,000, respectively.
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful receivables ......... $ 408,000 $ 509,000
Accruals not currently deductible .......... 140,000 803,000
Accrued compensation ....................... 731,000 --
Net operating loss carryforwards ........... -- 2,213,000
Other ...................................... 648,000 280,000
----------- -----------
Total deferred tax assets .............. $ 1,927,000 $ 3,805,000
=========== ===========
Deferred tax liabilities:
Depreciation ............................... $(4,545,000) $(4,970,000)
Other .................................... (100,000) (165,000)
----------- -----------
Total deferred tax liabilities ..... (4,645,000) (5,135,000)
----------- -----------
Net deferred tax liability ......... $(2,718,000) $(1,330,000)
=========== ===========
</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.
At June 30, 1999, the Company had federal net operating loss ("NOL")
carryforwards arising primarily from interest expense on the Senior Notes
incurred in connection with the recapitalization mergers. These NOL
carryforwards are available to offset future taxable income of $5,940,000,
subject to alternative minimum tax limitations. These NOL carryforwards expire
in fiscal year 2019.
Deferred income tax expense (benefit) consists of the following for each fiscal
year ended June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful receivables .............. $ 90,000 $ 36,000 $ (101,000)
Accruals not currently deductible and other ..... (756,000) (190,000) (230,000)
Depreciation .................................... 860,000 1,153,000 425,000
Accrued compensation ............................ (526,000) 282,000 731,000
Net operating loss carryforwards ................ -- -- (2,213,000)
----------- ----------- -----------
$ (332,000) $ 1,281,000 ($1,388,000)
=========== =========== ===========
</TABLE>
37
<PAGE> 38
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
Income tax expense (benefit) for each fiscal year ended June 30 differed from
the amounts computed by applying the U.S. Federal income tax rate of 34% to
earnings (loss) before income taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............ $ 3,353,000 $ 1,779,000 $(2,457,000)
Increase (decrease) in taxes resulting from:
State income tax expense, net of
Federal income tax deduction .................... 605,000 367,000 (500,000)
Nondeductible portion of stock-based compensation ... 299,000 221,000 --
Nondeductible reorganization costs .................. -- -- 1,009,000
Other, net .......................................... 150,000 164,000 560,000
----------- ----------- -----------
$ 4,407,000 $ 2,531,000 $(1,388,000)
=========== =========== ===========
</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 1997, 1998 and
1999 aggregated $1,605,000, $1,772,000 and $2,597,000 respectively. In the event
of the Company's partial or total withdrawal from such plans, it may be liable
for its share of any unfunded vested benefits thereunder. The Company 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 10% of the Company's employees are covered by a
collective bargaining agreement that will expire within one year.
The Company sponsors a defined contribution 401(k) plan. Subject to
certain terms and conditions of the plan, substantially all of the Company's
non-union employees are eligible to participate in the plan. The Company may,
but is not required to, make matching contributions to the plan each year, which
are allocated to each participant's account in proportion to the amount that he
or she has contributed to the plan during the applicable plan year. All Company
and employee contributions to the plan plus the earnings thereon are 100%
vested. Costs incurred under the plan were $152,000, $161,000 and $316,000
related to the plan for the years ended June 30, 1997, 1998 and 1999,
respectively.
38
<PAGE> 39
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(8) STOCK COMPENSATION PLANS
Employee Stock Purchase Plans - The Company had established employee
stock purchase plans. Selected employees were allowed to purchase shares at
prices that were determined based on a book value formula. The Company
guaranteed to repurchase the shares upon certain events or termination of the
employee. The repurchase price that was paid by the Company was determined based
on a book value formula that included increased multiples at dates specified in
the agreements.
The stock buy-out plans entered into subsequent to January 28, 1988 gave
rise to compensation expense that was accrued over the vesting period based on
the difference of the original purchase price and the buy-out price of the
shares.
Shares outstanding that were subject to stock buy-outs were 792,000 at
June 30, 1998. The contingent repurchase price of all these shares was
$13,328,000 at June 30, 1998.
Compensation expense related to the stock purchase plans amounted to
$1,643,000, $994,000 and $8,869,000 for the years ended June 30, 1997, 1998 and
1999, respectively. The accrued compensation related to stock buy-outs entered
into subsequent to January 28, 1988 was reflected as accrued compensation in the
accompanying consolidated balance sheet at June 30, 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 $369,000, $(314,000) and $0 for
the years ended June 30, 1997, 1998 and 1999, respectively. The accrued
compensation related to the stock option plan was reflected as accrued
compensation in the accompanying consolidated balance sheet at June 30, 1998.
No stock options were outstanding June 30, 1998 and 1999, respectively.
There was no stock option activity during the year ended June 30, 1999. All
stock options were exercised on June 30, 1998. The Company forgave the exercise
price of $4.88 for 118,800 stock options exercised and the resulting
compensation expense of $579,000 was included in general and administrative
expenses for the year ended June 30, 1998.
39
<PAGE> 40
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization Mergers, an affiliate, the management
stockholders and Penhall International Corp. entered into a Securities Holders
Agreement (the "Stockholders Agreement") containing certain agreements among
such stockholders with respect to the capital stock and corporate governance of
the Company and its subsidiaries.
The Stockholders Agreement contains certain provisions, which, with
certain exceptions, restrict the ability of the management stockholders from
transferring any common stock or Series B preferred stock except pursuant to the
terms of the Stockholders Agreement. If the Board of Directors of Penhall
International Corp. and holders of at least a majority of the common stock of
Penhall International Corp. then outstanding shall approve the sale of Penhall
International Corp. or any of its subsidiaries to an unaffiliated third person
(an "Approved Sale"), each stockholder of the Company shall consent to, vote for
and raise no objections against, and waive dissenters and appraisal rights (if
any) with respect to, the Approved Sale and, if such sale shall include the sale
of capital stock, each stockholder shall sell such stockholder's capital stock
on the terms and conditions approved by the Board of Directors of Penhall
International Corp. and the holders of a majority of the common stock of Penhall
International Corp. then outstanding. The Stockholders Agreement also provides
for certain additional restrictions on transfer of Penhall International Corp.'s
common stock and Series B preferred stock by the management stockholders,
including the right of Penhall International Corp. to purchase certain common
stock and Series B preferred stock of Penhall International Corp. held by a
management stockholder upon termination of such management stockholder's
employment on or prior to the later of the fifth anniversary of the consummation
of the Recapitalization Mergers and the 180th day following an Initial Public
Offering (as defined below), at its original issuance price, and the grant of a
right of first refusal in favor of Penhall International Corp. in the event a
management stockholder elects to transfer such common stock or Series B
preferred stock. Under the Stockholders Agreement, a management stockholder has
the right, subject to the restrictions set forth in agreements relating to
indebtedness of the Company, to require Penhall International Corp. to purchase
certain common stock and Series B preferred stock of the Company held by such
management stockholder upon termination of such management stockholder's
employment on or prior to the later of the fifth anniversary of the consummation
of the Recapitalization Mergers and the 180th day following an Initial Public
Offering, at its original issuance price. "Initial Public Offering" means the
sale by the Company in an underwritten public offering made pursuant to an
effective registration statement under the Securities Act of common stock for
gross offering proceeds of at least $30 million. The Stockholders Agreement also
contains certain provisions that provide the management stockholders with a
termination benefit upon termination of employment without cause, death or
disability. The amount of the termination benefit is based upon the book value
of the common stock and Series B preferred stock, as defined in the Stockholders
Agreement. However, if Penhall International Corp. does not meet certain EBITDA
growth criteria, the amount that a management stockholder will receive for
outstanding common stock or Series B preferred stock under any form of
termination is the lower of the original issuance price or book value.
On August 4, 1998, the Recapitalization Mergers caused the stock buy-out
agreements to be terminated and replaced by the terms of the Stockholders
Agreement. The Recapitalization Mergers established a new cost basis for the
stock under the stock buy-out agreements which resulted in stock-based
compensation expense of $8,869,000 which is included in general and
administrative expenses for the year ended June 30, 1999. Management
shareholders rolled over certain shares in the Recapitalization Mergers at a new
cost basis resulting in the reduction of the remaining accrued compensation
recorded under the stock buy-out agreements as an equity contribution.
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 June 30, 1999.
40
<PAGE> 41
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(9) REDEEMABLE PREFERRED STOCK
SENIOR EXCHANGEABLE PREFERRED STOCK
As of August 4, 1998 and in connection with the Recapitalization Mergers,
Penhall International Corp. is authorized to issue up to 250,000 shares of
preferred stock, par value $.01 per share ("Preferred stock"), of which 10,000
shares have been designated as Senior Exchangeable Preferred stock. With respect
to dividend rights and rights on liquidation, winding up and dissolution of
Penhall International Corp., the Senior Exchangeable Preferred stock ranks
senior to the Common stock, the Series A preferred stock and the Series B
Preferred stock. Holders of Senior Exchangeable Preferred stock are entitled to
receive, when, as and if declared by the Board of Directors of Penhall
International Corp., out of funds legally available for payment thereof, cash
dividends on each share of Senior Exchangeable Preferred stock at a rate per
annum equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference
(as defined below) of such share before any dividends are declared and paid, or
set apart for payment, on any shares of capital stock junior to the Senior
Exchangeable Preferred stock ("Senior Exchangeable Junior Stock") with respect
to the same dividend period. All dividends shall be cumulative without interest,
whether or not earned or declared. "Senior Exchangeable Preferred Liquidation
Preference" means, on any specific date, with respect to each share of Senior
Exchangeable Preferred stock, the sum of (i) $1,000 per share plus (ii) the
accumulated unpaid dividends with respect to such share.
Penhall International Corp. may, at its option, redeem at any time, from
any source of funds legally available therefor, in whole or in part, any or all
of the shares of Senior Exchangeable Preferred stock, at a redemption price per
share equal to 100% of the then effective Senior Exchangeable Preferred
Liquidation Preference per share, plus an amount equal to a prorated dividend
for the period from the dividend payment date immediately prior to the
redemption date to the redemption date. On February 1, 2007, Penhall
International Corp. shall redeem, from any source of funds legally available
therefor, all of the then outstanding shares of Senior Exchangeable Preferred
stock at a redemption price per share equal to 100% of the then effective Senior
Exchangeable Preferred Liquidation Preference per share, plus an amount equal to
a prorated dividend for the period from the dividend payment date immediately
prior to the redemption date to the redemption date.
The Senior Exchangeable Preferred stock is exchangeable by Penhall
International Corp. at any time and from time to time for junior subordinated
notes (the "Junior Subordinated Notes") in an amount equal to the Senior
Exchangeable Preferred Liquidation Preference plus an amount equal to a prorated
dividend for the period from the dividend payment date immediately prior to the
exchange date to the exchange date. The Junior Subordinated Notes will pay
interest from the date of exchange at the rate of 10.5% per annum in cash;
provided, however, that Penhall International Corp. shall be prohibited from
paying interest on the Junior Subordinated Notes in cash for so long as the
Notes shall remain outstanding. In such event, interest shall be deemed to be
paid by such amount being added to the outstanding principal amount of the
Junior Subordinated Notes and shall accrue interest as a portion of the
principal amount of the Junior Subordinated Notes to the maximum extent
permitted by law. If issued, the Junior Subordinated Notes will mature on
February 1, 2007.
41
<PAGE> 42
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
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 referred stock in full, such assets,
or the proceeds thereof, shall be distributed ratably among such holders. Except
as otherwise required by law, the holders of Senior Exchangeable preferred stock
have no voting rights and are not entitled to any notice of meeting of
stockholders.
SERIES A PREFERRED STOCK
Penhall International Corp. has designated 25,000 shares of preferred
stock as Series A preferred stock. With respect to dividend rights and rights on
liquidation, winding up and dissolution of Penhall International Corp., the
Series A preferred stock ranks senior to the common stock and on a parity with
the Series B preferred stock. Holders of Series A preferred stock are entitled
to receive, when, as and if declared by the Board of Directors of Penhall
International Corp., out of funds legally available for payment thereof, cash
dividends on each share of Series A preferred stock at a rate per annum equal to
13% of the Liquidation Preference (as defined below) of such share before any
dividends are declared and paid, or set apart for payment, on any shares of
capital stock junior to the Series A preferred stock ("Junior Stock") with
respect to the same dividend period. All dividends shall be cumulative without
interest, whether or not earned or declared. "Liquidation Preference" means, on
any specific date, with respect to each share of Series A preferred stock, the
sum of (i) $1,000 per share plus (ii) the accumulated dividends with respect to
such share.
Penhall International Corp. may, at its option, redeem at any time, from
any source of funds legally available therefor, in whole or in part, any or all
of the shares of Series A preferred stock, at a redemption price per share equal
to 100% of the then effective Liquidation Preference per share, plus an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date. On August 1,
2007, Penhall International Corp. shall redeem, from any source of funds legally
available therefor, all of the then outstanding shares of Series A preferred
stock at a redemption price per share equal to 100% of the then effective
Liquidation Preference per share, plus an amount equal to a prorated dividend
for the period from the dividend payment date immediately prior to the
redemption date to the redemption date.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Penhall International Corp., holders of Series A preferred stock
shall be entitled to be paid out of the assets of Penhall International Corp.
available for distribution to its stockholders an amount in cash equal to the
Liquidation Preference per share, plus an amount equal to a prorated dividend
from the last dividend payment date to the date fixed for liquidation,
dissolution or winding up, before any distribution is made on any shares of
junior stock. If such available assets are insufficient to pay the holders of
the outstanding shares of Series A preferred stock in full, such assets, or the
proceeds thereof, shall be distributed ratably among such holders. Except as
otherwise required by law, the holders of Series A preferred stock have no
voting rights and are not entitled to any notice of meeting of stockholders.
SERIES B PREFERRED STOCK
The Company has designated 50,000 shares of preferred stock as Series B
preferred stock. The preferences and relative, participating, optional and other
special rights and qualifications, limitations and restrictions (including,
without limitation, dividend rights and rights on liquidation, winding up and
dissolution of the Company) of the Series B preferred stock are identical to
those of the Series A preferred stock, except that the Series B preferred stock
is not subject to any mandatory or optional redemption by the Company.
42
<PAGE> 43
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(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 2004. Certain
of these leases provide for renegotiations of annual rentals at specified dates.
Rent expense was $452,000, $561,000 and $821,000 for the years ended June 30,
1997, 1998 and 1999 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, 1999
- --------------------- -------------
<S> <C>
2000 .................................... $1,260,000
2001 .................................... 841,000
2002 .................................... 704,000
2003 .................................... 454,000
2004 .................................... 276,000
- ----- ----------
$3,535,000
==========
</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, 1998 and 1999, the Company had approximately $234,000 and
$1,205,000, respectively, on deposit at one financial institution. At June 30,
1999 the Company also had approximately $1,853,000 on deposit at a second
financial institution.
ENVIRONMENTAL REMEDIATION COSTS
During fiscal 1999, the Company was required to comply with regulatory
obligations to upgrade or close underground storage tanks under the Resource
Conservation and Recovery Act of 1980, including all applicable requirements of
state regulatory agencies by December 22, 1998. The Company complied with all
regulatory obligations in a timely manner. As of June 30, 1998, the Company
estimated the cost of compliance to be $72,000, which amount was accrued at June
30, 1998. Actual cost of compliance was approximately $100,000.
43
<PAGE> 44
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
LETTERS OF CREDIT
As of June 30, 1999, the Company has outstanding standby letters of
credit of $3,450,000 with a financial institution for the benefit of certain
customers of the Company. The standby letters of credit, which reduce the amount
of borrowing available under the Company's New Credit Facility (see Note 5),
expire as follows:
<TABLE>
<S> <C>
$ 450,000 March 1, 2000
1,000,000 August 21, 2000
2,000,000 December 21, 1999
-----------
$ 3,450,000
===========
</TABLE>
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.
CERTAIN FEES PAYABLE TO BRS; BRS MANAGEMENT AGREEMENT
Upon consummation of the Transactions, the Company paid the Third Party
a closing fee of $2.0 million (the "Closing Fee"). In addition, the Company
entered into a management services agreement (the "Management Agreement") with
the Third Party pursuant to which the Third Party will be paid $300,000 per year
for certain management, business and organizational strategy, and merchant and
investment banking services rendered to the Company. The Closing Fee and the
fees payable pursuant to the Management Agreement were negotiated on an
arm's-length basis by representatives of the Third Party and the Company. The
amount of the annual management fee may be increased under certain circumstances
based upon performance or other criteria to be established by the Board of
Directors of the Company.
(11) RELATED PARTY TRANSACTIONS AND NOTES PAYABLE TO STOCKHOLDERS
In December 1997, the Company repurchased 7,107 shares from a
stockholder with a $111,000 promissory note. The note bore interest at 8.0% and
was payable in monthly principal and interest installments of $8,333. All unpaid
principal and interest was paid in January 1999.
44
<PAGE> 45
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts ............ $ 24,533,000 $ 30,160,000
Estimated earnings to date ......................... 3,279,000 6,471,000
------------ ------------
27,812,000 36,631,000
Less billings to date .............................. 27,501,000 34,527,000
------------ ------------
$ 311,000 $ 2,104,000
============ ============
Included in accompanying consolidated balance
sheets under the following captions:
Costs and estimated earnings in excess of ..... $ 976,000 $ 3,154,000
billings on uncompleted contracts
Billings in excess of costs and estimated
earnings on uncompleted contracts ........... (665,000) (1,050,000)
------------ ------------
$ 311,000 $ 2,104,000
============ ============
</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 on the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
45
<PAGE> 46
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 1998 and 1999.
<TABLE>
<CAPTION>
1998 1999
-------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash ................................. $ 234,000 $ 234,000 $ 3,085,000 $ 3,085,000
Net receivables ...................... 29,312,000 29,312,000 31,488,000 31,488,000
Financial liabilities:
Current installments of
long-term debt ................. 2,034,000 2,034,000 3,274,000 3,274,000
Current installments of
notes payable to stockholders ...... 131,000 131,000 -- --
Trade accounts payable ............... 7,532,000 7,532,000 8,908,000 8,908,000
Long-term debt, excluding current
installments ....................... 16,125,000 16,123,000 27,437,000 27,437,000
Senior Notes ......................... -- -- 100,000,000 96,900,000
Notes payable to stockholders,
excluding current installments ..... 274,000 274,000 -- --
</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, excluding current installments, 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.
(HSI) for approximately $9,654,000 plus the assumption of approximately
$1,324,000 of liabilities. Penhall Company paid approximately $5,962,000 in
cash, with the remainder payable in equal installments in April 1999 and 2000
pursuant to a $3,692,000 secured promissory note, which 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,
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
46
<PAGE> 47
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
included in the Company's consolidated financial statements since April 29,
1998. The excess of the purchase price over the fair value of the net
identifiable assets acquired of approximately $8,291,000 has been recorded as
goodwill and is being amortized on a straight-line basis over 15 years. The
purchase agreement also required certain stockholders of HSI to purchase 3,147
shares of the Company's common stock for $1,000,000.
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 effect
to certain adjustments, including amortization of goodwill, increased interest
expense on debt related to the acquisition, and related income taxes. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and HSI constituted a single
entity during such periods.
<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) ACQUISITIONS
The Company completed the following acquisitions during fiscal 1999,
which were accounted for as purchases:
In October 1998, the Company purchased certain assets of Daley Concrete
Cutting, a division of U.S. Rentals for $3,743,000 cash. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
$300,000 has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years.
In November 1998, the Company purchased Lipscomb Concrete Cutting for
$4,251,000. The purchase price included a cash payment of $3,376,000 and a
seller unsecured carryback note of $876,000 at 6% interest, all due and payable
November 1, 1999, subject to certain conditions.
In April 1999, the Company purchased certain assets of Diamond Concrete
Services for $388,000 cash.
In June 1999, the Company purchased certain assets of Prospect Drilling
and Sawing for $1,528,000. The purchase price included a cash payment of
$500,000, and a seller unsecured carryback note of $1,028,000 at 9.25% interest,
due in three annual installments through June 2002.
Pro-forma information has not been presented since the results of these
operations did not have a significant effect on Penhall's consolidated
operations.
47
<PAGE> 48
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1998 AND 1999
(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, 1998 and for the years ended June 30, 1997,
and 1998 of:
a) Penhall Rental Corp. on a parent company only basis ("Parent")
(carrying its investments in the subsidiaries under the equity
method),
b) the Subsidiaries (Penhall International Corp. and Penhall
Company),
c) elimination entries necessary to consolidate the parent company
and its subsidiaries, and
d) the Company on a consolidated basis.
The condensed consolidating financial information presents condensed
financial statements as of and for the year ended June 30, 1999 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.
48
<PAGE> 49
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL 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 installments.. 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>
49
<PAGE> 50
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables, net ....................... $ -- $ -- $ 31,488,000 $ -- $ 31,488,000
Inventories ............................ -- -- 1,316,000 1,316,000
Costs and estimated earnings in
excess of billings on
uncompleted contracts ................ -- -- 3,154,000 3,154,000
Intercompany assets .................... 58,069,000 -- -- (58,069,000) --
Other current assets ................... 3,481,000 1,877,000 3,103,000 (1,133,000) 7,328,000
------------- ------------- ------------- ------------- -------------
Total current assets . ............... 61,550,000 1,877,000 39,061,000 (59,202,000) 43,286,000
Net property, plant and equipment ........ -- 9,171,000 46,426,000 55,597,000
Other assets, net ........................ 5,824,000 -- 9,456,000 15,280,000
Investment in parent ..................... -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries ............... 25,989,000 -- -- (25,989,000) --
------------- ------------- ------------- ------------- -------------
$ 93,363,000 $ 15,049,000 $ 94,943,000 $ (89,192,000) $ 114,163,000
============= ============= ============= ============= =============
Liabilities and Stockholders'
Equity (Deficit):
Current installments of long-term
debt and notes payable to stockholders.. $ -- $ 2,000 $ 3,272,000 $ $ 3,274,000
Trade accounts payable ................... -- 165,000 8,743,000 8,908,000
Accrued liabilities ...................... 5,158,000 -- 7,577,000 12,735,000
Billings in excess of costs and
estimated earnings on uncompleted
contracts .............................. -- -- 1,050,000 1,050,000
Intercompany liabilities ................. 1,939,000 41,679,000 20,893,000 (64,511,000) --
------------- ------------- ------------- ------------- -------------
Total current liabilities ............ 7,097,000 41,846,000 41,535,000 (64,511,000) 25,967,000
Long-term debt, excluding
current installments ................... 26,500,000 213,000 724,000 27,437,000
Senior notes ............................. 100,000,000 -- -- -- 100,000,000
Deferred tax liabilities . ............... -- (5,406,000) 5,090,000 5,309,000 4,993,000
Accrued Compensation ..................... -- -- -- --
Senior Exchangeable Preferred stock ...... 10,999,000 -- -- 10,999,000
Series A Preferred stock ................. 11,732,000 -- -- 11,732,000
Stockholders' equity (deficit) ........... (62,965,000) (21,604,000) 47,594,000 (29,990,000) (66,965,000)
------------- ------------- ------------- ------------- -------------
$ 93,363,000 $ 15,049,000 $ 94,943,000 $ (89,192,000) $ 114,163,000
============= ============= ============= ============= =============
</TABLE>
50
<PAGE> 51
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
---------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL 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 -- 746,000 -- 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 tax expense (benefit) .......... 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>
51
<PAGE> 52
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
-----------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL 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 3,445,000 13,718,000 (2,294,000) 18,673,000
Reorganization expenses .............. -- 1,207,000 -- -- 1,207,000
Other compensation ................... -- 3,271,000 -- -- 3,271,000
Other operating income, 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 tax expense (benefit) ......... 1,105,000 (1,855,000) 3,281,000 -- 2,531,000
----------- ----------- ----------- ----------- ------------
Net earnings ......................... $ 1,639,000 $ 2,701,000 $ 4,802,000 $(6,441,000) $ 2,701,000
=========== =========== =========== =========== ============
</TABLE>
52
<PAGE> 53
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
-----------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 5,904,000 $ 1,244,000 $ 137,542,000 $ (1,244,000) $ 143,446,000
Cost of revenues ................ 3,569,000 5,000 97,815,000 101,389,000
------------ ------------ ------------ ------------- ------------
Gross profit ................. 2,335,000 1,239,000 39,727,000 (1,244,000) 42,057,000
General and administrative
expenses ..................... 1,390,000 9,412,000 23,035,000 (1,267,000) 32,570,000
Reorganization expenses.......... -- 3,501,000 -- 3,501,000
Other operating income, net ..... 84,000 919,000 818,000 (700,000) 1,121,000
Equity earnings in subsidiaries.. 3,489,000 -- -- (3,489,000) --
------------ ------------ ------------ ------------- ------------
Earnings (loss) before
interest expense and income
taxes ...................... 4,518,000 (10,755,000) 17,510,000 (4,166,000) 7,107,000
Interest expense ................ 13,552,000 168,000 591,000 23,000 14,334,000
------------ ------------ ------------ ------------- ------------
Earnings (loss) before income
taxes ...................... (9,034,000) (10,923,000) 16,919,000 (4,189,000) (7,227,000)
Income tax expense (benefit) .... (3,895,000) (4,456,000) 6,963,000 -- (1,388,000)
------------ ------------ ------------ ------------- ------------
Net earnings (loss) ............. $ (5,139,000) $ (6,467,000) $ 9,956,000 $ (4,189,000) $ (5,839,000)
============ ============ ============ ============= ============
</TABLE>
53
<PAGE> 54
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30, 1997
---------------------------------------------------------------------------------------
PENHALL
INTERNATIONAL PENHALL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ................... $ 1,774,000 $ 703,000 $ 6,085,000 $ 8,562,000
------------- -------------- ------------- ------------- -------------
Cash flows from investing
activities:
Proceeds from sale of assets .......... 218,000 7,000 778,000 1,003,000
Capital expenditures .................. (1,619,000) (900,000) (13,570,000) (16,089,000)
------------- -------------- ------------- ------------- -------------
Net cash used in investing activities.. (1,401,000) (893,000) (12,792,000) (15,086,000)
------------- -------------- ------------- ------------- -------------
Cash flows from financing activities:
Due to (from) affiliates .............. (842,000) (5,929,000) 6,771,000 --
Borrowings under long-term debt ....... -- 31,744,000 -- 31,744,000
Repayments of long-term debt .......... -- (26,495,000) -- (26,495,000)
Paydown on notes payable to
stockholders ......................... -- (750,000) -- (750,000)
Proceeds from issuance of common
stock ................................ -- 1,764,000 -- 1,764,000
------------- -------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities .............. (842,000) 334,000 6,771,000 -- 6,263,000
------------- -------------- ------------- ------------- -------------
Net increase (decrease) in cash ...... (469,000) 144,000 64,000 (261,000)
Cash at beginning of year ............... 469,000 6,000 462,000 937,000
------------- -------------- ------------- ------------- -------------
Cash at end of year ..................... $ -- $ 150,000 $ 526,000 $ 676,000
============= ============== ============= ============= ==============
</TABLE>
54
<PAGE> 55
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
June 30, 1998 and 1999
Condensed Consolidating Statement Of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30, 1998
------------------------------------------------------------------------------------
Penhall Penhall
International Rental Penhall
Corp. Corp. Company Eliminations Consolidated
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ............... $ 1,547,000 $ (56,000) $ 15,137,000 $ 16,628,000
------------ ------------ ------------ ------------ ------------
Cash flows from investing
activities:
Proceeds from sale of assets ........ 113,000 1,000 1,008,000 1,122,000
Capital expenditures ................ (1,165,000) (781,000) (10,341,000) (12,287,000)
Acquisition of companies, net of
cash acquired ....................... -- -- (5,882,000) (5,882,000)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities ....... (1,052,000) (780,000) (15,215,000) (17,047,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Due to (from) affiliates .......... 299,000 (1,491,00) 1,192,000 --
Borrowings under long-term debt ... 29,708,000 633,000 30,341,000
Repayments of long-term debt ...... (175,000) (27,625,000) (2,024,000) (29,824,000)
Paydown on notes payable to
stockholders ..................... -- (765,000) -- (765,000)
Debt issuance costs ............... (719,000) -- -- (719,000)
Proceeds from issuance of common
stock ............................ -- 1,000,000 -- 1,000,000
Repurchase of common stock ........ -- (56,000) -- (56,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities ................. (595,000) 771,000 (199,000) (23,000)
------------ ------------ ------------ ------------ ------------
Net (decrease)
in cash .................... (100,000) (65,000) (277,000) (442,000)
Cash at beginning of year ........... -- 150,000 526,000 676,000
------------ ------------ ------------ ------------ ------------
Cash at end of year ................. $ (100,000) $ 85,000 $ 249,000 $ 234,000
============ ============ ============ ============ ============
</TABLE>
55
<PAGE> 56
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
June 30, 1998 and 1999
Condensed Consolidating Statement Of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30, 1999
-----------------------------------------------------------------------------------------
Penhall Penhall
International Rental Penhall
Corp. Corp. Company Eliminations Consolidated
-------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ................ $ (593,000) $ (16,821,000) $ 18,240,000 $ (700,000) $ 126,000
-------------- -------------- ------------- -------------- -------------
Cash flows from investing
activities:
Proceeds from sale of assets ........ 76,000 363,000 529,000 968,000
Capital expenditures ................ (865,000) (921,000) (13,283,000) (15,069,000)
Acquisitions of companies, net of
cash acquired ....................... -- -- (7,700,000) (7,700,000)
-------------- -------------- ------------- -------------- -------------
Net cash used in
investing activities ....... (789,000) (558,000) (20,454,000) -- (21,801,000)
-------------- -------------- ------------- -------------- -------------
Cash flows from financing activities:
Due to (from) affiliates ............ (36,415,000) 33,421,000 2,994,000 --
Book overdraft ...................... -- -- 2,471,000 2,471,000
Borrowings under long-term debt ..... 43,200,000 2,745,000 -- 45,945,000
Repayments of long-term debt ........ (16,700,000) (16,614,000) (2,268,000) (35,582,000)
Paydown on notes payable to
stockholders ..................... -- (405,000) -- (405,000)
Borrowings on Senior Notes .......... 100,000,000 -- -- 100,000,000
Debt issuance costs ................. (5,916,000) -- -- (5,916,000)
Dividends paid ...................... (700,000) -- -- 700,000 --
Proceeds from issuance of common
stock ............................... 399,000 -- -- 399,000
Repurchase of common stock .......... (93,050,000) -- -- (93,050,000)
Issuance of Series A Preferred
Stock ............................... 10,427,000 -- -- 10,427,000
Issuance of Series B Preferred
Stock ............................... 237,000 -- -- 237,000
-------------- -------------- ------------- -------------- -------------
Net cash provided by
financing
activities ................. 1,482,000 19,147,000 3,197,000 700,000 24,526,000
-------------- -------------- ------------- -------------- -------------
Net increase
in cash .................... 100,000 1,768,000 983,000 2,851,000
Cash at beginning of year ........... (100,000) 85,000 249,000 234,000
-------------- -------------- ------------- -------------- -------------
Cash at end of year ................. $ -- $ 1,853,000 $ 1,232,000 $ -- $ 3,085,000
============== ============== ============= ============== =============
</TABLE>
56
<PAGE> 57
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
June 30, 1998 and 1999
(17) SUPPLEMENTARY CASH FLOW INFORMATION
The following supplemental cash flow information is provided with
respect to interest and tax payments as well as certain non-cash investing and
financing activities:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid (received) during the year for:
Income taxes ...................................... $ 4,390,000 $ 2,730,000 $(2,294,000)
Interest .......................................... 746,000 1,085,000 8,334,000
=========== =========== ===========
Noncash investing and financing activities -
Borrowings related to the acquisition of assets .. $ 556,000 $ 3,692,000 $ 1,904,000
Exercise of stock options ........................ -- 708,000 --
Issuance of Senior Exchangeable Preferred Stock in
connection with the Recapitalization Mergers
-- -- 10,000,000
Accretion of preferred stock to redemption value . -- -- 2,304,000
Accrual of cumulative dividends on preferred stock -- -- 2,323,000
Issuance of Series B Preferred Stock ............. -- -- 18,336,000
</TABLE>
The fair value of Daley Concrete Cutting, Lipscomb Concrete Cutting, Diamond
Concrete Cutting and Prospect Drilling and Sawing net assets at the date of
acquisition was $3.4 million, $3.4 million, $.4 million and $.6 million,
respectively. Goodwill of $300,000 was recorded in connection with the
acquisitions.
The following table details the fiscal 1999 acquisitions:
<TABLE>
<S> <C>
Accounts receivable, net ......... $1,452,000
Inventory ........................ 317,000
Prepaid expenses ................. 507,000
Property, plant and equipment .... 6,725,000
Goodwill ......................... 300,000
Other assets ..................... 1,330,000
Trade accounts payable ........... 298,000
Accrued liabilities .............. 288,000
Amounts due to parent company, net 108,000
Long-term debt ................... 2,237,000
=========
</TABLE>
57
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company. Directors of the Company hold
their offices for a term of one year or until their successors are elected and
qualified; executive officers of the Company serve at the discretion of the
Board of Directors. For information concerning certain arrangements with respect
to the election of directors.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
John T. Sawyer........................... 55 Chairman of the Board of Directors, President
and Chief Executive Officer
Clark George Bush........................ 44 Vice President and Regional Manager, Southern
California Region
M. Bruce Repchinuck...................... 51 Vice President and Regional Manager,
Northwest Region
Bruce F. Varney.......................... 47 Vice President and Regional Manager,
Southwest Region
John T. 55 Vice President-Finance and Chief Financial
Vinke...................................... Officer
David S. Neal............................ 37 Regional Manager, Southern Region
Gary Aamold.............................. 49 Vice President and Regional Manager,
Highway Services Division
Bruce C. Bruckmann....................... 45 Director
Harold O. Rosser II...................... 50 Director
</TABLE>
John T. Sawyer, Chairman of the Board of Directors, President and Chief
Executive Officer, joined Penhall in 1978 as the Estimating Manager of the
Anaheim Division. In 1980, Mr. Sawyer was appointed Manager of Penhall's
National Contracting Division, and in 1984, he assumed the position of Vice
President and became responsible for managing all construction services
divisions. Mr. Sawyer has been President of Penhall since 1989.
Clark George Bush, Vice President and Regional Manager, Southern
California Region, joined Penhall in 1980 as an Estimator and Jobsite Manager
and became a Division Manager in 1984. Mr. Bush was promoted to Regional Manager
of Southern California in 1986. In 1990, Mr. Bush was appointed as President of
the Company, where he served until his recent appointment as Vice President of
Penhall with responsibility for the Southern California region.
M. Bruce Repchinuck, Vice President and Regional Manager, Northwest
Region, began his career with Penhall in 1975 and served in several capacities
before being named as Manager of the Oakland Division in 1980. In 1987, Mr.
Repchinuck was promoted to Regional Manager and in 1989 was named as Vice
President. Mr. Repchinuck currently serves as Regional Manager of the Northwest
region.
Bruce F. Varney, Vice President and Regional Manager, Southwest Region,
began his employment with Penhall in 1977, and in 1981 was named Manager of the
San Diego Division. From 1991 to 1993, Mr. Varney served as Regional Manager for
Southern California, and in 1993 he was appointed as Southwest Regional Manager.
In April 1998, Mr. Varney was promoted to Vice President.
58
<PAGE> 59
John T. Vinke, Vice President-Finance and Chief Financial Officer,
joined Penhall in July 1999 as Chief Financial Officer. From 1994 to 1999, Mr.
Vinke was Vice President-Finance and Chief Financial Officer for Special Devices
Incorporated. Mr. Vinke is a Certified Public Accountant.
David S. Neal, Regional Manager, Southern Region, joined Penhall in
1990. Mr. Neal served as an estimator and division manager prior to being named
Regional Manager in April 1998. Prior to joining Penhall, Mr. Neal held several
project management positions in the highway contracting industry.
Gary Aamold, Vice President and Regional Manager, Highway Services
Division, joined Penhall as a result of the HSI Acquisition in April 1998. Since
1989, Mr. Aamold has served in various managerial capacities for HSI.
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.
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.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued
for fiscal 1999 to the Chief Executive Officer of Penhall and to each of the
four other most highly compensated executive officers of Penhall. Upon
consummation of the Transactions, Roger C. Stull retired as Chief Executive
Officer of Penhall.
59
<PAGE> 60
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) COMPENSATION(3)
- --------------------------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
John T. Sawyer................................... $260,000 $167,025 $8,856 $4,785(4)
Chief Executive Officer-Penhall and President-PenCo
C. George Bush................................... 170,077 85,000 8,856 3,458(5)
Vice President-Penhall
M. Bruce Repchinuck.............................. 154,240 70,000 8,856 3,458(6)
Vice President-Penhall
Bruce F. Varney.................................. 144,798 107,772 8,856 4,131(7)
Vice President-Penhall
Gary L. Aamond................................... 103,846 49,000 - 7,477(8)
Vice President-Penhall
</TABLE>
- -----------
(1) Includes amounts contributed as salary deferral contributions in fiscal
1999 under the Penhall International, Inc. and Affiliated Companies
Employees' Profit Sharing (401(k)) Plan (the "Plan"), as follows:
$10,000 for Mr. Sawyer; $10,078 for Mr. Bush; $11,240 for Mr.
Repchinuck; $9,800 for Mr. Varney; and $2,000 for Mr. Aamold.
(2) Includes the amount attributable to the use of an automobile furnished
by Penhall.
(3) Includes Penhall matching contributions under the Plan, premiums for
group term and split-dollar life insurance, premiums for health care
insurance and long-term disability insurance premiums.
(4) Includes $910 of Penhall matching contributions under the Plan,
approximately $261 of premiums for group term life insurance,
approximately $3,184 of premiums for health care insurance and
approximately $430 for long-term disability insurance premiums.
(5) Includes $910 of Penhall matching contributions under the Plan,
approximately $324 of premiums for group term life insurance,
approximately $1,794 of premiums for health care insurance and
approximately $430 for long-term disability insurance premiums.
(6) Includes $910 of Penhall matching contributions under the Plan,
approximately $324 of premiums for group term life insurance,
approximately $1,794 of premiums for health care insurance and
approximately $430 for long-term disability insurance premiums.
(7) Includes $910 of Penhall matching contributions under the Plan,
approximately $324 of premiums for group term life insurance,
approximately $2,467 of premiums for health care insurance and
approximately $430 for long-term disability insurance premiums.
(8) Includes $210 of premiums for short-term disability insurance, $5,888 of
premiums for health care insurance and $1,379 of premiums for residual
income disability insurance.
60
<PAGE> 61
EMPLOYMENT AGREEMENTS
Upon consummation of the Transactions, the Company entered into a
five-year employment agreement with John T. Sawyer pursuant to which Mr. Sawyer
is employed as President and Chief Executive Officer of the Company; the Company
also entered into three-year employment agreements with Messrs. Bush and Varney
pursuant to which each of such executives is employed as a Vice President of the
Company. The agreements provide for a base salary (approximately $246,000 for
Mr. Sawyer, $134,000 for C. George Bush and $119,000 for Bruce F. Varney), which
will be subject to annual merit increases and an annual performance bonus. In
addition, the agreements provide for the receipt by the executives of standard
company benefits. The agreements are terminable by the Company with or without
cause. In the event an agreement is terminated without cause, the executive will
be entitled to continue to receive his base salary and, for certain executives,
bonus, and certain other benefits, for specified periods. Following any
termination of employment of an executive, it is expected that the executive
will be subject to a non-competition covenant with a duration of two years
pursuant to the terms of the Stockholders Agreement (as defined).
401(k) PLAN
Penhall sponsors the Penhall International, Inc. and Affiliated
Companies Employees' Profit Sharing (401(k)) Plan (the "Plan"), which is
intended to satisfy the tax qualification requirements of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain terms
and conditions of the Plan, substantially all of Penhall's non-union employees
are eligible to participate in the Plan. Eligible employees may contribute
between 1% and 15% of their compensation to the Plan on a pre-tax basis.
Penhall may, but is not required, to make matching contributions to the
Plan each year. Any matching contributions will be allocated to each
participant's account under the Plan proportionate to the amount that he or she
has contributed to the Plan during the applicable Plan year. All Penhall and
employee contributions to the Plan are allocated to a participant's individual
account. Penhall charged $161,000 and $316,000 to general and administrative
expense related to contributions to and expenses of the Plan for the year ended
June 30, 1998 and 1999, respectively.
All Penhall and employee contributions to the Plan plus the earnings
thereon are 100% vested. Employees may direct the investment of their accounts
to various investment funds. The Plan provides for hardship withdrawals and
loans to participants.
STOCK OPTION PLAN
In March 1993, Penhall adopted a stock option plan pursuant to which
certain key employees of Penhall were granted options to purchase up to 13,750
shares of Penhall's common stock at an exercise price equal to $51.49 per share.
All stock options had ten-year terms, and vested and became fully exercisable
five years following the date of grant. In connection with the provisions of the
Merger Agreement, on June 30, 1998 each holder of an option exercised all
options held by such holder and delivered a promissory note to Penhall in
payment of the exercise price therefor. Upon consummation of the Transactions,
Penhall forgave all but approximately $129,000 of the indebtedness represented
by such promissory notes.
61
<PAGE> 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to (i)
the beneficial ownership of the Common stock of the Company by each person or
entity who owns five percent or more thereof and (ii) the beneficial ownership
of each class of equity securities of the Company by each director of the
Company who is a shareholder, the Chief Executive Officer of the Company and the
other executive officers named in the "Summary Compensation Table" above who are
shareholders, and all directors and officers of the Company as a group. The
table also sets forth certain information with respect to the ownership of the
Senior Exchangeable Preferred stock, Series A Preferred stock and Series B
Preferred stock of the Company by BRS, the Foundation and Penhall. Unless
otherwise specified, all shares are directly held. Except as otherwise noted
below, the address of the following beneficial owners is 1801 Penhall Way,
Anaheim, CA 92803
<TABLE>
<CAPTION>
Name of Beneficial Owner Number and Percent of Shares
- ------------------------ --------------------------------------
Common Senior Exchangeable Series A Series B
Stock(1) Preferred stock Preferred stock Preferred stock
------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill &
Co., L.P.(2) ...................... 582,312/58.55% -- 9,717/93.18% 9,333/41.38%
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
The National Christian Charitable ...
Foundation Inc .................... 10,000/100.0% -- --
Penhall Rental Corp. (Penhall) ..... -- -- -- 4,000/17.73%
John T. Sawyer ...................... 110,113/11.07% -- -- 2,465/10.93%
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) ............... 624,915/62.84% -- 10,428/100.0% 10,016/44.40%
Harold O. Rosser II(4) .............. 624,915/62.84% -- 10,428/100.0% 10,016/44.40%
All directors and officers as a group
(9 persons) ......................... 878,978/88.39% -- 10,428/100.0% 15,433/68.42%
</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.
(2) (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.
62
<PAGE> 63
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTE PAYABLE TO ROGER STULL
In December 1995, Penhall purchased from Roger Stull (former majority
owner) certain facilities previously leased to Penhall for $2.2 million,
consisting of $700,000 in cash and a $1.5 million promissory note bearing
interest at the prime rate plus 0.25%. The promissory note was secured by a deed
of trust and was paid in equal quarterly installments of $375,000, the last of
which was made on October 1, 1997.
CERTAIN FEES PAYABLE TO BRS; BRS MANAGEMENT AGREEMENT
Upon consummation of the Transactions, the Company paid the Sponsor a
closing fee of $2.0 million (the "Closing Fee"). In addition, the Company
entered into a management services agreement (the "Management Agreement") with
the Sponsor pursuant to which the Sponsor will be paid $300,000 per year for
certain management, business and organizational strategy, and merchant and
investment banking services rendered to the Company. The Closing Fee and the
fees payable pursuant to the Management Agreement were negotiated on an
arm's-length basis by representatives of the Sponsor and the Company. The
amount of the annual management fee may be increased under certain
circumstances based upon performance or other criteria to be established by
the Board of Directors of the Company.
SPLIT-DOLLAR INSURANCE POLICIES
In addition to group term life insurance (prior to the Transaction),
Penhall maintained and paid the premiums on five split-dollar whole life
insurance policies on the lives of Mr. Roger C. Stull and his wife, Ann R.
Stull. Mr. Stull is the beneficiary under three of the policies and Mrs. Stull
is the beneficiary under two of the policies. The split-dollar insurance
provides death benefits equal to, in the aggregate, $1,762,216 for Mr. Stull and
$1,530,789 for Mrs. Stull. Since July 1, 1997, Penhall has paid premiums on the
policies in the aggregate amount of $20,173, net of premiums, which were paid by
borrowing against the policies. As of July 13, 1998, Penhall had borrowed a
total of $1,432,236 against the policies and the aggregate net cash surrender
value of the policies as of such date was $301,269.
Upon consummation of the Transactions, (i) Penhall and the Stulls
terminated their split-dollar insurance arrangement, (ii) Penhall relinquished
any and all claims against the Stulls for reimbursement of premiums paid by
Penhall on the policies, (iii) the Stulls relinquished any and all claims
against Penhall arising out of borrowings by Penhall against the policies, and
(iv) the Stulls obtained ownership of the policies free and clear of any claims
by Penhall.
TAX GROSS-UP PAYMENTS
Pursuant to the terms of a certain Compensation, Tax Consistency and
Indemnification Agreement executed on June 30, 1998, by and among Penhall and
certain members of Management (the "Compensation Agreement"), Penhall was
obligated to make approximately $3.0 million of tax gross-up payments on or
before September 15, 1998. John T. Sawyer, Vice President of Penhall and
President of PenCo, C. George Bush, Vice President of Penhall, M. Bruce
Repchinuck, Vice President of Penhall and Bruce F. Varney, Vice President of
Penhall, received approximately $1,007,511, $444,184, $322,443 and $312,411,
respectively, pursuant to the Compensation Agreement.
On September 15, 1998, Penhall made such payments out of working
capital. Penhall realized tax benefits of approximately $3.0 million in the form
of reduced tax payment obligations or refunds of tax overpayments as a result of
deductions for certain of such tax gross-up payments and deductions with respect
to employee stock options in fiscal years 1998 and 1999.
INDEBTEDNESS OF MANAGEMENT
On or about April 15, 1998, Penhall advanced approximately $205,862 to
John T. Sawyer, President of Penhall, to pay income taxes resulting from
compensation income recognized by Mr. Sawyer in calendar year 1997. Pursuant to
the Compensation Agreement, the amount advanced to Mr. Sawyer was offset against
certain supplemental cash compensation payments that Penhall made to Mr. Sawyer
on September 15, 1998.
63
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) LIST OF FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of the Company and
the Report of Independent Auditors set forth on pages 21 through 57 are
incorporated by reference into this item 14 of Form 10-K by item 8
hereof:
- Report of Independent Auditors
- Consolidated Balance Sheets as of June 30, 1998 and 1999.
- Consolidated Statements of Operations for the Years Ended June 30,
1997, 1998 and 1999.
- Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended June 30, 1997, 1998 and 1999.
- Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1998 and 1999.
- Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULE.
No financial statement schedules have been filed herewith since they are
either not required, are not applicable, or the required information is
shown in the consolidated financial statements or related notes.
(a)(3) Exhibits.
EXHIBIT DESCRIPTION
NO.
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)*
64
<PAGE> 65
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 (40 1 (k)) Plan*
10.10 Form of Penhall International Corp. 1998 Stock Option Plan*
12 Statement of Ratio of Earnings to Fixed Charges*
21 Subsidiaries of the Company
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)*
24 Power of Attorney*
25 Statement of Eligibility and Qualification, Form T- 1, of United
States Trust Company of New York, as Trustee under the Indenture
filed as Exhibit 4.1*
27 Financial Data Schedule
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
* Previously filed.
(B) REPORTS ON FORM 8-K
None
65
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PENHALL INTERNATIONAL CORP.
By: /s/ JOHN T. SAWYER
--------------------------------
John T. Sawyer
Chairman of the Board, President
and Chief Executive Officer
September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 27, 1999.
SIGNATURE TITLE
------------------------------- --------------------------------
Chairman of the Board, President
and Chief Executive Officer
/s/ JOHN T. SAWYER (Principal Executive Officer)
-------------------------------
John T. Sawyer
Vice President-Finance
and Chief Financial Officer
/s/ JOHN T. VINKE (Principal Accounting Officer)
-------------------------------
John T. Vinke
Director
-------------------------------
Bruce C. Bruckmann
Director
-------------------------------
Harold O. Rosser II
66
<PAGE> 67
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant has not sent the following to security holders: (i) any
annual report to security holders covering the registrant's last fiscal year; or
(ii) any proxy statements, forms of proxy or other proxy soliciting material
wither respect to any annual or other meeting of security holders.
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
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*
67
<PAGE> 68
10.7 Employment Agreement dated as of August 4, 1998, by and between the
Company and Vincent M. Gutierrez*
10.8 Employment Agreement dated as of August 4, 1998, by and between the
Company and Leif McAfee*
10.9 Penhall International, Inc. and Affiliated Companies Employees'
Profit Sharing (401 (k)) Plan*
10.10 Form of Penhall International Corp. 1998 Stock Option Plan*
12 Statement of Ratio of Earnings to Fixed Charges*
21 Subsidiaries of the Company
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)*
24 Power of Attorney (included on signature page)*
25 Statement of Eligibility and Qualification, Form T-1, of United
States Trust Company of New York, as Trustee under the Indenture
filed as Exhibit 4.1*
27 Financial Data Schedule
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
* Previously filed.
68
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction
- -------------------- --------------
Penhall Rental Corp. Arizona
Penhall Company California
69
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> $3,085,000
<SECURITIES> 0
<RECEIVABLES> 32,765,000
<ALLOWANCES> (1,277,000)
<INVENTORY> 1,316,000
<CURRENT-ASSETS> 43,286,000
<PP&E> 98,632,000
<DEPRECIATION> (43,035,000)
<TOTAL-ASSETS> 114,163,000
<CURRENT-LIABILITIES> 25,967,000
<BONDS> 0
22,731,000
20,880,000
<COMMON> 10,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 114,163,000
<SALES> $143,446,000
<TOTAL-REVENUES> 143,446,000
<CGS> 101,389,000
<TOTAL-COSTS> 138,581,000
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,334,000
<INCOME-PRETAX> (7,227,000)
<INCOME-TAX> 1,388,000
<INCOME-CONTINUING> (5,839,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,839,000)
<EPS-BASIC> $(8.16)
<EPS-DILUTED> $(8.16)
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