<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number. 333-64745
----------------
PENHALL INTERNATIONAL CORP.
(Exact Name of registrant as specified in its charter)
ARIZONA 86-0634394
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS AND TITLE OF SHARES OUTSTANDING AS OF
CAPITAL STOCK FEBRUARY 7, 2000
------------- ----------------
Common Stock, $.01 Par Value 1,004,923
================================================================================
<PAGE> 2
PENHALL INTERNATIONAL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1999......................... 3
Condensed Consolidated Statements of Operations
for the three and six month periods ended
December 31, 1998 and 1999........................................ 4
Condensed Consolidated Statements of Cash Flows
for the six month periods ended
December 31, 1998 and 1999........................................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk................................................. 21
Part II - Other Information
Items 1-5 are not applicable
Item 6. Exhibits and Reports on Form 8-K..................................... 22
a) Exhibits
27. Financial Data Schedule..................................... 24
b) Reports on Form 8-K
None
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL INFORMATION
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 3,085,000 $ 1,970,000
Receivables:
Contract and trade receivables ..................................... 27,808,000 29,848,000
Contract retentions ................................................ 4,957,000 5,494,000
------------- -------------
32,765,000 35,342,000
Less allowance for doubtful receivables ............................ 1,277,000 1,994,000
------------- -------------
Net receivables ........................................... 31,488,000 33,348,000
Costs and estimated earnings in excess of
billings on uncompleted contracts .......................................... 3,154,000 2,086,000
Deferred tax assets ........................................................... 3,663,000 3,663,000
Inventories ................................................................... 1,316,000 1,924,000
Prepaid expenses and other current assets ..................................... 580,000 946,000
------------- -------------
Total current assets ...................................... 43,286,000 43,937,000
Property, plant and equipment, at cost:
Land .......................................................................... 5,229,000 5,229,000
Buildings and leasehold improvements .......................................... 7,472,000 7,700,000
Construction and other equipment .............................................. 85,931,000 94,937,000
------------- -------------
98,632,000 107,866,000
Less accumulated depreciation and amortization ................................ 43,035,000 48,752,000
------------- -------------
Net property, plant and equipment ......................... 55,597,000 59,114,000
Goodwill, net of accumulated amortization ....................................... 8,255,000 7,911,000
Debt issuance costs, net of accumulated amortization ............................ 5,824,000 5,389,000
Other assets, net ............................................................... 1,201,000 988,000
------------- -------------
$ 114,163,000 $ 117,339,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt ........................................ $ 3,274,000 $ 5,430,000
Trade accounts payable ........................................................ 8,908,000 7,694,000
Accrued liabilities ........................................................... 12,735,000 13,672,000
Income taxes payable .......................................................... -- 2,480,000
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................................... 1,050,000 1,086,000
------------- -------------
Total current liabilities ................................. 25,967,000 30,362,000
Long-term debt, excluding current installments .................................. 27,437,000 21,548,000
Senior notes .................................................................... 100,000,000 100,000,000
Deferred tax liabilities ........................................................ 4,993,000 4,993,000
Senior Exchangeable Preferred Stock, redemption
value $11,597,000 at December 31, 1999
Authorized, issued and outstanding 10,000
shares at June 30, 1999 and December 31, 1999 .............................. 10,999,000 11,597,000
Series A Preferred Stock, redemption value
$12,527,000 at December 31, 1999
Authorized 25,000 shares; issued and
outstanding 10,428 shares at June 30, 1999
and December 31, 1999 ...................................................... 11,732,000 12,527,000
Stockholders' deficit:
Series B Preferred Stock, par value $.01 per share
Authorized 50,000 shares; issued and outstanding 18,556 shares
at June 30, 1999 and 19,006 shares at December 31, 1999.............. ...... 20,880,000 22,808,000
Common stock, $.01 par value. Authorized
5,000,000 shares; issued and outstanding 994,477 shares at
June 30, 1999 and 1,010,937 shares at December 31, 1999
including 6,014 shares held in treasury..................................... 10,000 10,000
Additional paid-in capital .................................................... 985,000 1,473,000
Treasury common stock, at cost, 6,014 shares .................................. -- (13,000)
Accumulated deficit ........................................................... (88,840,000) (87,966,000)
------------- -------------
Total stockholders' deficit ............................... (66,965,000) (63,688,000)
Commitments and contingencies .................................................
------------- -------------
$ 114,163,000 $ 117,339,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS SIX MONTH PERIODS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................................. $ 33,084,000 $ 40,768,000 $ 71,997,000 $ 90,625,000
Cost of revenues ......................................... 22,728,000 27,556,000 50,596,000 61,399,000
------------ ------------ ------------ ------------
Gross profit ........................................... 10,356,000 13,212,000 21,401,000 29,226,000
General and administrative expenses ...................... 6,284,000 7,055,000 23,496,000 15,632,000
Other operating income, net .............................. 179,000 267,000 440,000 568,000
------------ ------------ ------------ ------------
Earnings (loss) before interest expense and income
taxes ................................................ 4,251,000 6,424,000 (1,655,000) 14,162,000
Interest expense ......................................... 3,916,000 3,960,000 6,532,000 7,912,000
------------ ------------ ------------ ------------
Earnings (loss) before income taxes .................... 335,000 2,464,000 (8,187,000) 6,250,000
Income tax expense (benefit) ............................. 68,000 929,000 (1,653,000) 2,563,000
------------ ------------ ------------ ------------
Net earnings (loss) ...................................... 267,000 1,535,000 (6,534,000) 3,687,000
------------ ------------ ------------ ------------
Accretion of preferred stock to redemption value ......... (618,000) (707,000) (1,013,000) (1,393,000)
Accrual of cumulative dividends on preferred stock ....... (631,000) (727,000) (1,019,000) (1,420,000)
------------ ------------ ------------ ------------
Net earnings (loss) available to common stockholders ..... $ (982,000) $ 101,000 $ (8,566,000) $ 874,000
============ ============ ============ ============
Earnings (loss) per share:
Basic and diluted ...................................... $ (.99) $ .10 $ (5.24) $ .88
Weighted average number of shares outstanding:
Basic and diluted ...................................... 995,000 999,319 1,633,842 996,898
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS
ENDED DECEMBER 31,
----------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ........................................................... $ (6,534,000) $ 3,687,000
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................................. 5,317,000 7,073,000
Amortization of debt issuance costs ........................................ 312,000 442,000
Provision for doubtful accounts ............................................ 40,000 717,000
Provision for deferred taxes ............................................... 511,000 --
Gain on sale of assets ..................................................... (46,000) (97,000)
Changes in assets and liabilities:
Receivables ............................................................... (6,178,000) (2,577,000)
Inventories, prepaid expenses and other assets ............................ (576,000) (989,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts ......................................... 715,000 1,068,000
Trade accounts payable, accrued liabilities and income taxes payable ...... 897,000 (339,000)
Billings in excess of costs and estimated
earnings on uncompleted contracts ......................................... (465,000) 36,000
Accrued compensation ...................................................... (5,306,000) --
------------- -------------
Net cash provided by (used in) operating activities ................... (11,313,000) 9,021,000
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets .................................................. 203,000 317,000
Capital expenditures .......................................................... (7,630,000) (7,708,000)
Acquisitions of companies, net of cash acquired ............................... (6,724,000) --
------------- -------------
Net cash used in investing activities ................................. (14,151,000) (7,391,000)
------------- -------------
Cash flows from financing activities:
Borrowings under long-term debt ............................................... 30,494,000 11,600,000
Repayments of long-term debt .................................................. (19,127,000) (17,863,000)
Paydown on notes payable to stockholders ...................................... (85,000) --
Book overdraft ................................................................ 2,709,000 2,542,000
Borrowings on Senior Notes .................................................... 100,000,000 --
Debt issuance costs ........................................................... (5,907,000) (7,000)
Proceeds from issuance of common stock ........................................ 399,000 488,000
Repurchase of common stock and Series B preferred stock ....................... (93,050,000) (28,000)
Issuance of Series A preferred stock .......................................... 10,427,000 --
Issuance of Series B preferred stock .......................................... 237,000 523,000
------------- -------------
Net cash provided by (used in) financing activities ................... 26,097,000 (2,745,000)
------------- -------------
Net increase (decrease) in cash ....................................... 633,000 (1,115,000)
Cash at beginning of period ..................................................... 234,000 3,085,000
------------- -------------
Cash at end of period ........................................................... $ 867,000 $ 1,970,000
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes .............................................................. $ -- $ 185,000
============= =============
Interest .................................................................. $ 983,000 $ 8,008,000
============= =============
Supplemental disclosure of noncash investing and financing activities:
Borrowings related to capital leases and equipment financing agreements ...... $ 875,000 $ 2,530,000
============= =============
Issuance of Senior Exchangeable Preferred Stock in connection with
the Recapitalization Mergers ............................................... $ 10,000,000 $ --
============= =============
Accretion of preferred stock to redemption value ............................. $ 1,013,000 $ 1,393,000
============= =============
Accrual of cumulative dividends on preferred stock ........................... $ 1,019,000 $ 1,420,000
============= =============
Issuance of Series B preferred stock ......................................... $ 18,335,000 $ --
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
Penhall International, Inc. ("PII") was founded in 1957 and was
incorporated in the state of California on April 19, 1988. On August 4, 1998,
$100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall
Acquisition Corp., an Arizona corporation formed by an unrelated third party
(the Third Party) to effect the recapitalization of PII. As part of the
recapitalization, a series of mergers (the Recapitalization Mergers) were
consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned
subsidiary of PII, became the corporate parent of PII, the Third Party acquired
a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting,
Inc. became the successor obligor of the Senior Notes. Following the
consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc.
changed its name to Penhall International Corp., and PII changed its name to
Penhall Rental Corp.
Under generally accepted accounting principles, the Recapitalization
Mergers were accounted for as a leveraged recapitalization transaction in a
manner similar to a pooling-of-interests. Under this method, the transfer of
the controlling interest in PII to the Third-Party did not change the accounting
basis of the assets and liabilities in PII's separate stand-alone financial
statements.
On October 1, 1998 all of the operating assets and liabilities of
Penhall International Corp. were transferred to Penhall Company. As a result,
all of the operating divisions of the Company are owned by Penhall Company.
The accompanying unaudited condensed consolidated financial statements
of Penhall International Corp. ("Penhall" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Results of operations for the six month period ended December 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2000. The unaudited condensed consolidated financial statements
included herein should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto included in the Form
10-K for the year ended June 30, 1999.
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.
All common shares included in the condensed consolidated financial
statements and earnings (loss) per share calculations for the six month period
ended December 31, 1998 have been restated to reflect a 10.56 to one common
stock split effected as part of the Recapitalization Mergers.
6
<PAGE> 7
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
(2) SENIOR NOTES AND LONG-TERM DEBT
SENIOR NOTES
On August 4, 1998, in connection with the Recapitalization Mergers, the
Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned
subsidiaries of Penhall International Corp. Interest at 12% is payable
semiannually in arrears 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. As of
December 31, 1999 the Company was in compliance with all such covenants.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
----------- -----------
<S> <C> <C>
Note payable secured by certain equipment,
bearing interest at 5.51%; payable on April 29, 2000 ............... $ 1,896,000 $ 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 1,081,000
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 December 31, 1999 was 8.25% ............. 6,500,000 1,500,000
$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
December 31, 1999 was 8.19% ........................................ 20,000,000 20,000,000
Various capital leases and equipment financing agreements
due through November 2001 with interest rates ranging
from 0% to .12% annually ........................................... -- 1,998,000
Other ................................................................... 1,287,000 503,000
----------- -----------
30,711,000 26,978,000
Less current installments of long-term debt ............................. 3,274,000 5,430,000
----------- -----------
Long-term debt, excluding current installments .......................... $27,437,000 $21,548,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
(3) STOCK INCENTIVE PLAN
On October 7, 1999, the Company's Board of Directors approved a Stock
Incentive Plan (the "Plan") under which employees, officers, directors or
consultants ("Eligible Participants") may be granted stock options and
restricted stock awards. The Board authorized the sale of up to 50,000 shares
of common stock and 2,500 shares of Series B Preferred Stock under the Plan.
The exercise price for stock options or restricted stock awards shall not be
less than the Fair Market Value (as defined) of the stock on the grant date
subject to restrictions and conditions, including the Company's option to
repurchase, as determined by the administrator at the time of the grant. The
term of each stock option shall be fixed, and not exceeding 10 years from the
grant date of the stock option. In addition, stock options may be subject to
specific vesting and acceleration provisions as determined by the administrator
at or after the grant date. As of December 31, 1999, the Company issued 15,937
shares of common stock for a purchase price of $488,000 and 464 shares of
Series B Preferred Stock for a purchase price of $523,000 to Eligible
Participants under the Plan. No stock options were granted, issued or
outstanding as of the same date.
(4) COMMITMENTS AND CONTINGENCIES
LITIGATION
There are various lawsuits and claims pending against and claims being
pursued by the Company and its subsidiaries arising out of the normal course of
business. It is management's present opinion that the outcome of these
proceedings will not have a material effect on the Company's consolidated
financial statements taken as a whole.
(5) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following consolidating financial information is presented for
purposes of complying with the reporting requirements of the Guarantor
Subsidiaries, (Penhall Rental Corp. and Penhall Company). Separate financial
statements and other disclosures with respect to the Guarantor Subsidiaries are
not presented because the Company believes that such financial statements and
other information would not provide additional information that is material to
investors.
The condensed consolidating financial information presents condensed
financial statements as of June 30, 1999 and December 31, 1999 and for the three
and six month periods ended December 31, 1998 and 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.
8
<PAGE> 9
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL 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 ......................... $ -- $ 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
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>
9
<PAGE> 10
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Receivables, net ........................ $ -- $ -- $ 33,348,000 $ -- $ 33,348,000
Inventories ............................. -- -- 1,924,000 -- 1,924,000
Costs and estimated earnings in excess of
billings on uncompleted contracts .... -- -- 2,086,000 -- 2,086,000
Intercompany assets ..................... 56,464,000 -- -- (56,464,000) --
Other current assets .................... 3,770,000 1,670,000 2,273,000 (1,134,000) 6,579,000
------------- ------------- ------------- ------------- -------------
Total current assets ................. 60,234,000 1,670,000 39,631,000 (57,598,000) 43,937,000
Net property, plant and equipment ....... -- 8,962,000 50,152,000 -- 59,114,000
Other assets, net ....................... 5,389,000 -- 8,899,000 -- 14,288,000
Investment in parent .................... -- 4,001,000 -- (4,001,000) --
Investment in subsidiaries .............. 34,306,000 -- -- (34,306,000) --
------------- ------------- ------------- ------------- -------------
$ 99,929,000 $ 14,633,000 $ 98,682,000 $ (95,905,000) $ 117,339,000
============= ============= ============= ============= =============
Liabilities and Stockholders'
Equity (Deficit)
Current installments of long-term debt .. $ 1,500,000 $ 3,000 $ 3,927,000 $ -- $ 5,430,000
Trade accounts payable .................. -- 2,000 7,692,000 -- 7,694,000
Accrued liabilities ..................... 5,070,000 -- 8,602,000 -- 13,672,000
Income taxes payable .................... 8,922,000 -- -- (6,442,000) 2,480,000
Billings in excess of costs and estimated
earnings on uncompleted contracts .... -- -- 1,086,000 -- 1,086,000
Intercompany liabilities ................ -- 41,210,000 15,254,000 (56,464,000) --
------------- ------------- ------------- ------------- -------------
Total current liabilities ............ 15,492,000 41,215,000 36,561,000 (62,906,000) 30,362,000
Long-term debt, excluding
current installments ................. 20,000,000 204,000 1,344,000 -- 21,548,000
Senior notes ............................ 100,000,000 -- -- -- 100,000,000
Deferred tax liabilities ................ -- (5,405,000) 5,090,000 5,308,000 4,993,000
Senior Exchangeable Preferred Stock ..... 11,597,000 -- -- -- 11,597,000
Series A Preferred Stock ................ 12,527,000 -- -- -- 12,527,000
Stockholders' equity (deficit) ............ (59,687,000) (21,381,000) 55,687,000 (38,307,000) (63,688,000)
------------- ------------- ------------- ------------- -------------
$ 99,929,000 $ 14,633,000 $ 98,682,000 $ (95,905,000) $ 117,339,000
============= ============= ============= ============= =============
</TABLE>
10
<PAGE> 11
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues ........................... $ -- $ 317,000 $33,084,000 $ (317,000) $33,084,000
Cost of revenues ................... 2,000 -- 22,726,000 -- 22,728,000
----------- ----------- ----------- ----------- -----------
Gross profit (loss) .............. (2,000) 317,000 10,358,000 (317,000) 10,356,000
General and administrative
expenses ........................ 35,000 220,000 6,346,000 (317,000) 6,284,000
Other operating income, net ........ -- (58,000) 237,000 -- 179,000
Equity earnings in subsidiaries ... 3,286,000 -- -- (3,286,000) --
----------- ----------- ----------- ----------- -----------
Earnings (loss) before interest
expense and income taxes ....... 3,249,000 39,000 4,249,000 (3,286,000) 4,251,000
Interest expense ................... 3,735,000 9,000 172,000 -- 3,916,000
----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes ................... (486,000) 30,000 4,077,000 (3,286,000) 335,000
Income tax expense (benefit) ....... (753,000) 6,000 815,000 -- 68,000
----------- ----------- ----------- ----------- -----------
Net earnings (loss) ................ $ 267,000 $ 24,000 $ 3,262,000 $(3,286,000) $ 267,000
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ -- $ 319,000 $40,768,000 $ (319,000) $40,768,000
Cost of revenues ................ -- -- 27,556,000 -- 27,556,000
----------- ----------- ----------- ----------- -----------
Gross profit .................. -- 319,000 13,212,000 (319,000) 13,212,000
General and administrative
expenses .................... 149,000 110,000 7,115,000 (319,000) 7,055,000
Other operating income, net ..... 27,000 -- 240,000 -- 267,000
Equity earnings in subsidiaries.. 3,859,000 -- -- (3,859,000) --
----------- ----------- ----------- ----------- -----------
Earnings before interest
expense and income taxes ... 3,737,000 209,000 6,337,000 (3,859,000) 6,424,000
Interest expense ................ 3,815,000 27,000 118,000 -- 3,960,000
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes ...................... (78,000) 182,000 6,219,000 (3,859,000) 2,464,000
Income tax expense (benefit) .... (1,613,000) 75,000 2,467,000 -- 929,000
----------- ----------- ----------- ----------- -----------
Net earnings .................... $ 1,535,000 $ 107,000 $ 3,752,000 $(3,859,000) $ 1,535,000
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 5,905,000 $ 611,000 $ 66,092,000 $ (611,000) $ 71,997,000
Cost of revenues ................ 3,571,000 5,000 47,020,000 -- 50,596,000
------------ ------------ ------------ ------------ ------------
Gross profit .................. 2,334,000 606,000 19,072,000 (611,000) 21,401,000
General and administrative
expenses .................... 1,134,000 12,362,000 10,634,000 (634,000) 23,496,000
Other operating income, net ..... 29,000 743,000 368,000 (700,000) 440,000
Equity earnings (loss) in
subsidiaries ................ (1,938,000) -- -- 1,938,000 --
------------ ------------ ------------ ------------ ------------
Earnings (loss) before interest
expense and income taxes ... (709,000) (11,013,000) 8,806,000 1,261,000 (1,655,000)
Interest expense ................ 6,066,000 164,000 279,000 23,000 6,532,000
------------ ------------ ------------ ------------ ------------
Earnings (loss) before
income taxes ................ (6,775,000) (11,177,000) 8,527,000 1,238,000 (8,187,000)
Income tax expense (benefit) .... (941,000) (3,024,000) 2,312,000 -- (1,653,000)
------------ ------------ ------------ ------------ ------------
Net earnings (loss) ............. $ (5,834,000) $ (8,153,000) $ 6,215,000 $ 1,238,000 $ (6,534,000)
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 14
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
PENHALL PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ -- $ 638,000 $90,625,000 $ (638,000) $90,625,000
Cost of revenues ................ -- -- 61,399,000 -- 61,399,000
----------- ----------- ----------- ----------- -----------
Gross profit .................. -- 638,000 29,226,000 (638,000) 29,226,000
General and administrative
expenses .................... 271,000 231,000 15,768,000 (638,000) 15,632,000
Other operating income, net ..... 44,000 -- 524,000 -- 568,000
Equity earnings in subsidiaries.. 8,318,000 -- -- (8,318,000) --
----------- ----------- ----------- ----------- -----------
Earnings before interest
expense and income taxes ... 8,091,000 407,000 13,982,000 (8,318,000) 14,162,000
Interest expense ................ 7,621,000 27,000 264,000 -- 7,912,000
----------- ----------- ----------- ----------- -----------
Earnings before income taxes... 470,000 380,000 13,718,000 (8,318,000) 6,250,000
Income tax expense (benefit) .... (3,217,000) 156,000 5,624,000 -- 2,563,000
----------- ----------- ----------- ----------- -----------
Net earnings .................... $ 3,687,000 $ 224,000 $ 8,094,000 $(8,318,000) $ 3,687,000
=========== =========== =========== =========== ===========
</TABLE>
14
<PAGE> 15
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED DECEMBER 31, 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 ................. $ (8,085,000) $ (13,117,000) $ 10,589,000 $ (700,000) $ (11,313,000)
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets .......... 11,000 58,000 134,000 -- 203,000
Capital expenditures .................. (848,000) (921,000) (5,861,000) -- (7,630,000)
Acquisitions of companies, net
of cash acquired .................. -- -- (6,724,000) -- (6,724,000)
------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities ......................... (837,000) (863,000) (12,451,000) -- (14,151,000)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Due to (from) affiliates .............. (28,088,000) 27,647,000 441,000 -- --
Borrowings under long-term debt ....... 27,750,000 2,744,000 -- -- 30,494,000
Repayments of long-term debt .......... (2,250,000) (16,610,000) (267,000) -- (19,127,000)
Paydown on notes payable to
stockholders ....................... -- (85,000) -- -- (85,000)
Borrowings on Senior Notes ............ 100,000,000 -- -- -- 100,000,000
Book overdraft ........................ -- -- 2,709,000 -- 2,709,000
Debt issuance costs ................... (5,703,000) -- (204,000) -- (5,907,000)
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 ......... 9,022,000 13,696,000 2,679,000 700,000 26,097,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash . 100,000 (284,000) 817,000 -- 633,000
Cash at beginning of period ............. (100,000) 542,000 (208,000) -- 234,000
------------- ------------- ------------- ------------- -------------
Cash at end of period ................... $ -- $ 258,000 $ 609,000 $ -- $ 867,000
============= ============= ============= ============= =============
</TABLE>
15
<PAGE> 16
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------------
PENHALL
INTERNATIONAL RENTAL PENHALL
CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities .................. $ (2,084,000) $ 275,000 $ 10,830,000 $ -- $ 9,021,000
------------ ------------ ------------ ------------- ------------
Cash flows from investing
activities:
Proceeds from sale of assets ........... -- -- 317,000 -- 317,000
Capital expenditures ................... -- (5,000) (7,703,000) -- (7,708,000)
------------ ------------ ------------ ------------- ------------
Net cash used in
investing activities .......... -- (5,000) (7,386,000) -- (7,391,000)
------------ ------------ ------------ ------------- ------------
Cash flows from financing
activities:
Due to (from) affiliates ............... 6,108,000 (451,000) (5,657,000) -- --
Borrowings under long-term debt ........ 11,600,000 -- -- -- 11,600,000
Repayments of long-term debt ........... (16,600,000) (8,000) (1,255,000) -- (17,863,000)
Book overdraft ......................... -- -- 2,542,000 -- 2,542,000
Debt issuance costs .................... (7,000) -- -- -- (7,000)
Proceeds from issuance of common stock.. 488,000 -- -- -- 488,000
Repurchase of common stock and
Series B preferred stock ............. (28,000) -- -- -- (28,000)
Issuance of Series B preferred stock ... 523,000 -- -- -- 523,000
------------ ------------ ------------ ------------- ------------
Net cash provided by (used in)
financing activities ........... 2,084,000 (459,000) (4,370,000) -- (2,745,000)
------------ ------------ ------------ ------------- ------------
Net decrease in cash ............. -- (189,000) (926,000) -- (1,115,000)
Cash at beginning of period .............. -- 1,853,000 1,232,000 -- 3,085,000
------------ ------------ ------------ ------------- ------------
Cash at end of period .................... $ -- $ 1,664,000 $ 306,000 $ -- $ 1,970,000
============ ============ ============ ============= ============
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of Penhall International Corp. (Penhall) should be read in conjunction
with the unaudited condensed consolidated financial statements and footnotes
thereto included in this quarterly report on Form 10-Q and the Company's audited
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K, filed with the Securities and Exchange Commission.
GENERAL
Penhall was founded in 1957 in Anaheim, California with one piece of
equipment, and today is one of the largest Operated Equipment Rental Services
companies in the United States. Penhall differentiates itself from other
equipment rental companies by providing specialized services in connection with
infrastructure projects through renting equipment along with skilled operators
to serve customers in the construction, industrial, manufacturing, governmental
and residential markets. In addition, Penhall complements its Operated Equipment
Rental Services with fixed-price contracts, which serve to market its operated
equipment rental services business and increase utilization of its operated
equipment rental fleet. Penhall provides its services from 33 locations in
twelve states, with a presence in some of the fastest growing states in terms of
construction spending and population growth.
The operated equipment rental industry is a specialized niche of the
highly fragmented United States equipment rental industry, in which there are
approximately 17,000 companies. Penhall has taken advantage of consolidation
opportunities by acquiring small companies in targeted markets as well as by
establishing new offices in those markets. Since 1994, Penhall has effected
eight strategic acquisitions, including Concrete Coring Company, an Austin-based
company acquired in 1995, Zig Zag Company, a Denver-based company acquired in
1996, Metro Concrete Cutting, an Atlanta-based company acquired in 1996, Highway
Services, a Minnesota-based company acquired in April 1998, Daley Concrete
Cutting, a South Carolina-based division of U.S. Rentals acquired in October
1998, Lipscomb Concrete Cutting, a North Carolina-based company acquired in
November 1998, Diamond Concrete Services, an Alabama-based company acquired in
April 1999, and Prospect Drilling and Sawing, a Minneapolis-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
complemented by long-term fixed-price contracts. Approximately 51% of Penhall's
revenues are derived from highway-related projects, approximately 24% of
revenues are generated from building-related projects and the remainder of
revenues is generated from airport, residential and other projects. The
following table shows the breakdown of the components of revenue for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------------------ ------------------------------------------
1998 1999 1998 1999
-------------------- ------------------- -------------------- -------------------
$ % OF TOTAL $ % OF TOTAL $ % OF TOTAL $ % OF TOTAL
------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operated Equipment
Rental Services .......... $25,598 77.4% $29,273 71.8% $49,929 69.3% $61,925 68.3%
Contract Services (1) ...... 7,486 22.6% 11,495 28.2% 22,068 30.7% 28,700 31.7%
------- ----- ------- ----- ------- ----- ------- -----
Total Revenues ........... $33,084 100.0% $40,768 100.0% $71,997 100.0% $90,625 100.0%
------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
- --------------
(1) Contract services revenues exclude services performed by the operated
equipment rental divisions on long-term contracts.
Revenue growth is influenced by infrastructure change, including new
construction, modification and natural disasters, such as the 1989 and 1994
earthquakes in Northern and Southern California. Other factors that influence
Penhall's operations are demand for operated rental equipment, the amount and
quality of equipment available for rent, rental rates and general economic
conditions. Historically, revenues have been seasonal, as weather conditions in
the spring and summer months result in stronger performance in the first and
fourth fiscal quarters than in the second and third fiscal quarters.
17
<PAGE> 18
The principal components of Penhall's operating costs include the cost
of labor, equipment rental fleet maintenance costs including parts and service,
equipment rental fleet depreciation, insurance and other direct operating costs.
Given the varied, and in some cases specialized, nature of its rental equipment,
Penhall utilizes a range of periods over which it depreciates its equipment on a
straight-line basis. On average, Penhall depreciates its equipment over an
estimated useful life of six years with a 10% residual value.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 Compared to Three Months Ended December
31, 1998
Revenues. Revenues for the three months ended December 31, 1999
("Interim 2000") were $40.8 million, an increase of $7.7 million or 23.2% over
the three months ended December 31, 1998 ("Interim 1999"). The increase was due
primarily to the acquisitions of Daley Concrete Cutting, Lipscomb Concrete
Cutting, Diamond Concrete Services and Prospect Drilling and Sawing which added
$5.6 million of revenues in Interim 2000 compared to $2.5 million in Interim
1999. In addition, construction markets remained strong in Interim 2000 in the
areas the Company serves.
Gross Profit. Gross profit totaled $13.2 million in Interim 2000, an
increase of $2.9 million or 27.6% from Interim 1999. Gross profit as a
percentage of revenues increased from 31.3% in Interim 1999 to 32.4% in Interim
2000. The increase in gross profit was due primarily to the increase in revenues
in Interim 2000. The increase in gross profit as a percentage of revenues was
due to better utilization of the equipment rental fleet in Interim 2000.
General and Administrative Expenses. General and administrative expenses
were $7.1 million in Interim 2000 compared to $6.3 million in Interim 1999. As a
percent of revenues, general and administrative expenses were 17.3% in Interim
2000 compared to 19.0% in Interim 1999. The decrease in general and
administrative expenses as a percent of revenues in Interim 2000 was
attributable to non-recurring expenses resulting from the Recapitalization
Mergers in Interim 1999.
The increase in general and administrative expenses in Interim 2000 was
the result of the increased revenues and number of operating locations compared
to Interim 1999. The remaining increase is attributable to higher bonus expense
and provision for doubtful accounts in Interim 2000 as compared to Interim 1999.
Interest Expense. Interest expense was $4.0 million in Interim 2000
compared to interest expense of $3.9 million in Interim 1999. The increase was
due to additional debt incurred by the Company and the increase in variable
interest rates.
Income Tax Expense (Benefit). The Company recorded an income tax
provision of $0.9 million, or 38% of earnings before income taxes in Interim
2000, compared to an income tax provision of $68,000, or 20% of earnings before
income taxes in Interim 1999. The lower effective tax rate in Interim 1999 is
attributable to certain reorganization costs related to the Transactions which
are not deductible for tax purposes.
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
Revenues. Revenues for the six months ended December 31, 1999 ("Interim
2000") were $90.6 million, an increase of $18.6 million or 25.9% over the six
months ended December 31, 1998 ("Interim 1999"). The increase was due primarily
to the acquisitions of Daley Concrete Cutting, Lipscomb Concrete Cutting,
Diamond Concrete Services and Prospect Drilling and Sawing which added $11.8
million of revenues in Interim 2000 compared to $2.5 million in Interim 1999. In
addition, construction markets remained strong in Interim 2000 in the areas the
Company serves.
The Company operated through 33 locations in twelve states at December
31, 1999, compared to 30 locations in eleven states at December 31, 1998. The
Company's equipment fleet grew from 559 to 657 or 17.5% during this period.
Gross Profit. Gross profit totaled $29.2 million in Interim 2000, an
increase of $7.8 million or 36.6% from Interim 1999. Gross profit as a
percentage of revenues increased from 29.7% in Interim 1999 to 32.2% in Interim
2000. The increase in gross profit was due primarily to the increase in revenues
in Interim 2000. The increase in gross profit as a percentage of revenues was
due to better utilization of the equipment rental fleet in Interim 2000.
18
<PAGE> 19
General and Administrative Expenses. General and administrative expenses
were $15.6 million in Interim 2000 compared to $23.5 million in Interim 1999. As
a percent of revenues, general and administrative expenses were 17.2% in Interim
2000 compared to 32.6% in Interim 1999. Included in general and administrative
expenses in Interim 1999 is $8.9 million of stock compensation expense related
to the Company's Employee Stock Purchase Plans, and $3.3 million in
reorganization costs, which consisted primarily of closing fees and legal
expenses. These expenses occurred as a result of the Recapitalization Mergers
and are non-recurring. Without the compensation expense and reorganization
expenses, general and administrative expenses were $11.3 million, or 15.7% of
revenues in Interim 1999.
The increase in general and administrative expenses (net of Interim 1999
stock related compensation expense and reorganization expenses) in Interim 2000
was the result of the increased revenues and number of operating locations
compared to Interim 1999. The remaining increase is attributable to higher bonus
expense, provision for doubtful accounts and legal fees in Interim 2000 as
compared to Interim 1999.
Interest Expense. Interest expense was $7.9 million in Interim 2000
compared to interest expense of $6.5 million in Interim 1999. The increase was
due to additional debt incurred by the Company as part of the Transactions in
August 1998, and the increase in variable interest rates. 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
provision of $2.6 million, or 41% of earnings before income taxes in Interim
2000, compared to an income tax benefit of $1.7 million, or 20% of loss before
income taxes in Interim 1999. The lower effective tax rate in Interim 1999 is
attributable to certain reorganization costs related to the Transactions which
are not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the Company's principal uses of liquidity will be
to fund working capital, meet debt service requirements and finance the
Company's pursuit of strategic acquisitions and expanding through internal
growth. The Company's principal sources of liquidity are expected to be cash
flow from operations and borrowings under the New Credit Facility. The New
Credit Facility consists of two facilities: (i) a six-year senior secured term
loan facility in an aggregate principal amount equal to $20.0 million (the "Term
Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate
principal amount not to exceed $30.0 million (the "Revolving Credit Facility").
The Company drew $20.0 million of loans under the Term Loan Facility ("Term
Loans") on the closing date of the New Credit Facility in connection with the
Recapitalization. The Term Loans amortize on a quarterly basis commencing in
September 2000 and are payable in installments under a schedule set forth in the
New Credit Facility. Advances made under the Revolving Credit Facility
("Revolving Loans") are due and payable in full on June 15, 2004. The Term Loans
and the Revolving Loans are subject to mandatory prepayments and reductions in
the event of certain extraordinary transactions or issuances of debt and equity
by the Company or any subsidiary of the Company that guarantees amounts under
the New Credit Facility. Such loans are also required to be prepaid with 75% of
the Excess Cash Flow (as such term is defined in the New Credit Facility) of the
Company or, if the Company's Leverage Ratio (as such term is defined in the New
Credit Facility) is less than 5.70 to 1.0, 50% of such Excess Cash Flow.
Cash provided by operating activities during Interim 2000 was $9.0
million compared to cash used in operating activities of $11.3 million during
Interim 1999. In Interim 2000, the Company's higher net earnings, increase in
provision for doubtful accounts, higher depreciation and amortization expense
offset by increases in accounts receivable, accounted for the improved cash from
operations compared to Interim 1999. In Interim 1999, the Company's net loss,
increase in accounts receivable and decrease in accrued compensation offset by
an increase in accounts payable and accrued liabilities and higher depreciation
and amortization expense resulted in a significant use of cash from operations
during that period.
Management estimates that the Company'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.
19
<PAGE> 20
Cash used in investing activities was $7.4 million in Interim 2000 as
compared to $14.2 million in Interim 1999. Such cash was used for capital
expenditures of $7.7 million in Interim 2000 and $7.6 million in Interim 1999.
In addition, cash of $6.7 million was used for the acquisition of Daley Concrete
Cutting and Lipscomb Concrete Cutting in Interim 1999.
Net cash used in financing activities in Interim 2000 was $2.7 million
as compared to net cash provided by financing activities of $26.1 million in
Interim 1999. In Interim 2000, the Company's financing activities are primarily
a result of borrowings and repayments of long-term debt, a book overdraft, and
issuance of additional common stock and Series B preferred stock. In Interim
1999, the Company's financing activities are primarily the result of the
Transactions associated with the Reorganization in August 1998.
Historically, the Company has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As a
result of the Transactions, however, the Company has substantial indebtedness
and debt service obligations. As of December 31, 1999, the Company and its
subsidiaries had approximately $127.0 million of total indebtedness outstanding
(including the Notes) and a stockholders' deficit of approximately $63.7
million. As of December 31, 1999 approximately $28.5 million of additional
borrowing was available under the Company's New Credit Facility.
YEAR 2000
The Year 2000 ("Y2K") issue was the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company established an informal Y2K task force, and developed a plan which
listed the milestones achieved and completed to become Y2K ready. A checklist of
potential failure sources was compiled and included both information technology
and embedded technology systems. The Company completed its assessment of its
information technology and embedded technology systems and identified and took
measures to correct potential failures in those systems.
The Company's basic business is to provide operator assisted equipment
for rental. As such, management believed the Company's main exposure to Y2K
issues were the telephone and radio communication systems needed to take orders
for rental, and 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 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 completed a review of Y2K compliance for
the major non-information technology systems. This review included determining
if respective vendors of the non-information technology systems are also Y2K
compliant.
The Company spent less than $50,000 as of December 31, 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 risks to the Company were the communication
systems on which the Company relies will not function properly, or that certain
heavy equipment would not function properly, after December 31, 1999. The
primary information technology risk was 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. To date, the Company has not
experienced any Y2K related problems.
20
<PAGE> 21
Although Penhall is uncertain as to the extent its customers may be
affected by Y2K 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 Y2K ready.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to interest rate changes primarily as a result of
its notes payable, including Senior Notes, Term Loan and Revolving Loan used to
maintain liquidity and fund capital expenditures and expansion of the Company's
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower 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 ENDED JUNE 30,
-----------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------ ------ ------ ------ ------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt ................ $3,914 $1,094 $ 535 $ 3 $ 4 $100,179 $105,729 $106,229
Average interest rate .......... 12.00%
Variable rate LIBOR debt (1) ... $ 0 $3,000 $5,000 $6,000 $7,500 $ 0 $ 21,500 $ 21,500
Current interest rate (1) ...... 8.19%
</TABLE>
(1) The Company has different interest rate options for its variable rate debt.
See Footnote 2 in the condensed consolidated financial statements for additional
information.
21
<PAGE> 22
PART II - OTHER INFORMATION
Items 1-5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penhall International Corp.
/s/ JOHN T. SAWYER
------------------------------------------
John T. Sawyer
Chairman of the Board, President and Chief
Executive Officer
Date: February 11, 2000
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit 27.1 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,970
<SECURITIES> 0
<RECEIVABLES> 35,342
<ALLOWANCES> (1,994)
<INVENTORY> 1,924
<CURRENT-ASSETS> 43,937
<PP&E> 107,866
<DEPRECIATION> (48,752)
<TOTAL-ASSETS> 117,339
<CURRENT-LIABILITIES> 30,362
<BONDS> 121,548
24,124
22,808
<COMMON> 10,000
<OTHER-SE> (86,508)
<TOTAL-LIABILITY-AND-EQUITY> 117,339
<SALES> 90,625
<TOTAL-REVENUES> 90,625
<CGS> 61,399
<TOTAL-COSTS> 61,399
<OTHER-EXPENSES> 15,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,912
<INCOME-PRETAX> 6,250
<INCOME-TAX> 2,563
<INCOME-CONTINUING> 3,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,687
<EPS-BASIC> .88
<EPS-DILUTED> .88
</TABLE>
