-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FWYELU0z6XP5kjAjppaPYerNQi9H8IyIZFfmJ3iYzpf9mmuZPtu7h1thUAztzxuW 4s9r4RLv388jvARFaYuUzA== 0000892569-99-001488.txt : 19990518 0000892569-99-001488.hdr.sgml : 19990518 ACCESSION NUMBER: 0000892569-99-001488 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENHALL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001070772 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS EQUIPMENT RENTAL & LEASING [7350] IRS NUMBER: 860634394 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-64745 FILM NUMBER: 99628237 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 10-Q 1 FORM 10-Q QUARTER ENDED MARCH 31, 1999 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 March 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 MAY 10, 1999 ---------------------------- ------------------------ Common Stock, $.01 Par Value 994,477 ================================================================================ 2 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Item 1. Financial Information
JUNE 30, MARCH 31, 1998 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ................................................... $ 234,000 $ 2,891,000 Receivables: Contract and trade receivables ................................... 23,454,000 25,913,000 Contract retentions .............................................. 4,454,000 5,121,000 Income taxes receivable .......................................... 2,399,000 4,429,000 ------------- ------------- 30,307,000 35,463,000 Less allowance for doubtful receivables .......................... 995,000 1,259,000 ------------- ------------- Net receivables ......................................... 29,312,000 34,204,000 Costs and estimated earnings in excess of billings on uncompleted contracts . 976,000 178,000 Deferred tax assets ......................................................... 891,000 1,194,000 Inventories ................................................................. 1,458,000 1,904,000 Prepaid expenses and other current assets ................................... 670,000 955,000 ------------- ------------- Total current assets .................................... 33,541,000 41,326,000 Property, plant and equipment, at cost: Land ........................................................................ 4,538,000 5,231,000 Buildings and leasehold improvements ........................................ 7,715,000 7,373,000 Construction and other equipment ............................................ 67,934,000 80,986,000 ------------- ------------- 80,187,000 93,590,000 Less accumulated depreciation and amortization .............................. 35,180,000 40,849,000 ------------- ------------- Net property, plant and equipment ....................... 45,007,000 52,741,000 Goodwill, net of accumulated amortization ..................................... 8,649,000 8,271,000 Debt issuance costs, net of accumulated amortization .......................... 719,000 6,062,000 Other assets, net ............................................................. 407,000 1,359,000 ------------- ------------- $ 88,323,000 $ 109,759,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of long-term debt ...................................... $ 2,034,000 $ 2,860,000 Current installments of notes payable to stockholders....................... 131,000 -- Trade accounts payable ...................................................... 7,532,000 8,087,000 Accrued liabilities ......................................................... 9,041,000 9,735,000 Billings in excess of costs and estimated earnings on uncompleted contracts . 665,000 224,000 ------------- ------------- Total current liabilities ............................... 19,403,000 20,906,000 Long-term debt, excluding current portion ..................................... 16,125,000 29,823,000 Notes payable to stockholders, excluding current portion ...................... 274,000 -- Senior notes .................................................................. -- 100,000,000 Deferred tax liabilities ...................................................... 3,609,000 4,572,000 Accrued compensation .......................................................... 5,306,000 -- Senior Exchangeable Preferred Stock, redemption value $10,715,000. Authorized, issued and outstanding 10,000 shares ........................................ -- 10,715,000 Series A Preferred Stock, redemption value $11,358,000. Authorized 25,000 shares; issued and outstanding 10,428 shares ................................ -- 11,358,000 Stockholders' equity (deficit): Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,572 shares ...................................... -- 20,229,000 Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 4,452,264 and 995,000 shares at June 30, 1998 and March 31, 1999, respectively .............................................. 42,000 10,000 Additional paid-in capital .................................................. 14,498,000 985,000 Retained earnings (accumulated deficit) ..................................... 29,066,000 (88,839,000) ------------- ------------- Total stockholders' equity (deficit) .................... 43,606,000 (67,615,000) Commitments and contingencies ................................................. Subsequent events ............................................................. ------------- ------------- $ 88,323,000 $ 109,759,000 ============= =============
See accompanying notes to condensed consolidated financial statements. 2 3 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTH PERIODS NINE MONTH PERIODS ENDED MARCH 31, ENDED MARCH 31, -------------------------------- ------------------------------- 1998 1999 1998 1999 ------------- ------------- ------------- ------------- Revenues ......................................... $ 19,731,000 $ 30,899,000 $ 71,818,000 $ 102,896,000 Cost of revenues ................................. 14,281,000 21,670,000 50,874,000 72,266,000 ------------- ------------- ------------- ------------- Gross profit ................................... 5,450,000 9,229,000 20,944,000 30,630,000 General and administrative expenses .............. 4,154,000 6,468,000 13,965,000 29,964,000 Other operating income (expense), net ............ (271,000) 427,000 416,000 867,000 ------------- ------------- ------------- ------------- Earnings before interest expense and income taxes ................................. 1,025,000 3,188,000 7,395,000 1,533,000 Interest expense ................................. 208,000 3,954,000 697,000 10,486,000 ------------- ------------- ------------- ------------- Earnings (loss) before income taxes ............ 817,000 (766,000) 6,698,000 (8,953,000) Income taxes ..................................... 395,000 (138,000) 2,978,000 (1,791,000) ------------- ------------- ------------- ------------- Net earnings (loss) .............................. 422,000 (628,000) 3,720,000 (7,162,000) ------------- ------------- ------------- ------------- Accretion of preferred stock to redemption value . -- (632,000) -- (1,645,000) Accrual of cumulative dividends on preferred stock -- (638,000) -- (1,657,000) ------------- ------------- ------------- ------------- Net earnings (loss) available to common Stockholders ................................... $ 422,000 $ (1,898,000) $ 3,720,000 $ (10,464,000) ============= ============= ============= ============= Earnings (loss) per share: Basic .......................................... $ 0.10 $ (1.91) $ 0.87 $ (7.35) Diluted ........................................ $ 0.10 $ (1.91) $ 0.85 $ (7.35) Number of shares used in per share computations: Basic .......................................... 4,273,833 995,000 4,278,579 1,424,004 Diluted ........................................ 4,353,012 995,000 4,357,758 1,424,004
See accompanying notes to condensed consolidated financial statements. 3 4 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTH PERIODS ENDED MARCH 31, ----------------------------------- 1998 1999 ------------- ------------- Cash flows from operating activities: Net earnings (loss) ............................................................. $ 3,720,000 $ (7,162,000) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................................................ 6,397,000 8,374,000 Amortization of debt issuance costs .......................................... -- 592,000 Provision for doubtful accounts .............................................. (3,000) 264,000 Provision for deferred taxes ................................................. (18,000) 511,000 Gains on sale of assets ...................................................... (103,000) (335,000) Changes in assets and liabilities, net of effects of acquisitions Receivables ............................................................... 1,612,000 (3,704,000) Inventories, prepaid expenses and other assets ............................ (589,000) (68,000) Costs and estimated earnings in excess of billings on uncompleted contracts (229,000) 798,000 Trade accounts payable and accrued liabilities ............................ (54,000) (1,450,000) Billings in excess of costs and estimated earnings on uncompleted contracts 853,000 (441,000) Accrued compensation ...................................................... 1,476,000 (5,233,000) ------------- ------------- Net cash provided by (used in) operating activities ................... 13,062,000 (7,854,000) ------------- ------------- Cash flows from investing activities: Proceeds from sale of assets .................................................... 924,000 723,000 Capital expenditures ............................................................ (10,013,000) (10,421,000) Acquisitions of Daley Concrete Cutting and Lipscomb Concrete Cutting, net of cash acquired ........................................ -- (6,724,000) ------------- ------------- Net cash used in investing activities ................................. (9,089,000) (16,422,000) ------------- ------------- Cash flows from financing activities: Borrowings under long-term debt ................................................. 17,681,000 38,795,000 Repayments of long-term debt .................................................... (21,518,000) (25,447,000) Paydown on notes payable to stockholders ........................................ (750,000) (405,000) Book overdraft .................................................................. -- 1,912,000 Borrowings on Senior Notes ...................................................... -- 100,000,000 Debt issuance costs ............................................................. -- (5,935,000) Proceeds from issuance of common stock .......................................... -- 399,000 Repurchase of common stock ...................................................... (56,000) (93,050,000) Issuance of Series A Preferred Stock ............................................ -- 10,428,000 Issuance of Series B Preferred Stock ............................................ -- 236,000 ------------- ------------- Net cash provided by (used in) financing activities ................... (4,643,000) 26,933,000 ------------- ------------- Net increase (decrease) in cash and cash equivalents .................. (670,000) 2,657,000 Cash and cash equivalents at beginning of period .................................. 676,000 234,000 ------------- ------------- Cash and cash equivalents at end of period ........................................ $ 6,000 $ 2,891,000 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes .................................................................... $ 2,552,000 $ -- ============= ============= Interest ........................................................................ $ 764,000 $ 7,564,000 ============= ============= Supplemental disclosure of noncash investing and financing activities: Borrowings related to the acquisition of assets ................................... $ 1,554,000 $ 876,000 ============= ============= Issuance of Senior Exchangeable Preferred Stock in connection with the Recapitalization Mergers ........................................................ -- $ 10,000,000 ============= ============= Accretion of Preferred Stock to redemption value .................................. -- $ 1,645,000 ============= ============= Accrual of cumulative dividends on preferred stock ................................ -- $ 1,657,000 ============= ============= Issuance of Series B Preferred Stock .............................................. -- $ 18,335,000 ============= =============
The fair value of the Daley Concrete Cutting and Lipscomb Concrete Cutting net assets at their dates of acquisition in fiscal 1999 was $3.4 million and $3.9 million, respectively. Goodwill of $300,000 was recorded in connection with the acquisitions. See accompanying notes to condensed consolidated financial statements. 4 5 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 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 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. 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 three and nine month periods ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. 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 Registration statement on Form S-4 as of and for the year ended June 30, 1998. 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. The Company has granted certain options which have been treated as potentially dilutive common shares for purposes of calculating diluted earnings (loss) per share. Dilutive earnings (loss) per share reflects the potential dilution that could share in the earnings of the Company. Such shares are not included when there is a loss as the effect would be anti-dilutive. All common shares included in the condensed 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. 5 6 The following table sets forth the calculation of diluted earnings (loss) per share for the three and nine month periods ended March 31, 1999 and 1998:
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED MARCH 31, MARCH 31, (UNAUDITED) (UNAUDITED) -------------------------------- -------------------------------- 1998 1999 1998 1999 ------------ ------------ ------------ ------------ Net earnings (loss) available to common shareholders ................................... $ 422,000 $ (1,898,000) $ 3,720,000 $(10,464,000) ============ ============ ============ ============ Weighted average shares - basic ................ 4,273,833 995,000 4,278,579 1,424,004 Plus incremental shares from assumed conversion of stock options ............................... 79,179 -- 79,179 -- ------------ ------------ ------------ ------------ Weighted average shares - dilutive ............. 4,353,012 995,000 4,357,758 1,424,004 ============ ============ ============ ============ Diluted earnings (loss) per share ............. $ .10 $ (1.91) $ .85 $ (7.35) ============ ============ ============ ============
There are no stock options outstanding at March 31, 1999. CASH EQUIVALENTS All highly liquid debt instruments with original maturities with three months or less are considered to be cash equivalents. RECLASSIFICATIONS Certain reclassifications have been made to prior years' balances to conform to the current presentation. (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 March 31, 1999 the Company was in compliance with all such covenants. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, MARCH 31, 1998 1999 ----------- ----------- The Company had a secured bank line of credit with the Company's principal bank for working capital purposes which was repaid in full on August 4, 1998 ...... 13,860,000 -- Note payable secured by certain equipment, bearing interest at 6.0%; payable in annual principal and interest installments of $208,000; all unpaid principal and interest due June 4, 2000 ................................................ 381,000 381,000 Note payable secured by property in Austin, Texas, bearing interest at 10.0%; payable in monthly principal and interest installments of $1,815; all unpaid principal and interest due November 1, 2021 .................................. 197,000 195,000 Note payable secured by certain equipment, bearing interest at 5.51%; payable in two installments of principal and interest of $2,000,000 due on April 29, 1999 and 2000 ................................................................ 3,692,000 3,692,000 Note payable, bearing interest at 6.00%; payable on November 1, 1999 ............ -- 876,000 $20,000,000 Term Loan secured by certain assets of the Company; principal payments of $750,000 per quarter commencing September 15, 2000 through June 15, 2001, $1,250,000 per quarter through June 15, 2002 and $1,500,000 per quarter through June 15, 2004. The Company may elect to maintain the Term Loan as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or the current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. All unpaid principal and interest is due June 15, 2004 .................................. -- 20,000,000 Revolving Loan in the maximum credit amount of $30,000,000 secured by certain assets of the Company. The Company may elect to maintain the Revolving Loan as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or the then current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. All unpaid principal and interest is due June 15, 2004 ......................................................... -- 7,500,000 Other ........................................................................... 29,000 39,000 ----------- ----------- 18,159,000 32,683,000 Less current installments of long-term debt ..................................... 2,034,000 2,860,000 ----------- ----------- Long-term debt, excluding current installments .................................. $16,125,000 $29,823,000 =========== ===========
The weighted average interest rate for the borrowings under the revolving credit agreement was 7.21% at March 31, 1999. The interest rate on the $20,000,000 term loan was 7.25% at March 31, 1999. 6 7 (3) 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. In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of senior exchangeable preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the senior exchangeable preferred liquidation preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of senior exchangeable junior stock. If such available assets are insufficient to pay the holders of the outstanding shares of senior exchangeable preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of senior exchangeable preferred stock have no voting rights and are not be entitled to any notice of meeting of stockholders. SERIES A PREFERRED STOCK Penhall International Corp. has designated 25,000 shares of Preferred Stock as Series A Preferred Stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Series A Preferred Stock ranks senior to the Common Stock and on a parity with the Series B Preferred Stock. Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Series A Preferred Stock at a rate per annum equal to 13% of the Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Series A Preferred Stock ("Junior Stock") with respect to the same dividend period. All dividends shall be cumulative without interest, 7 8 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 be entitled to any notice of meeting of stockholders. (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) ACQUISITIONS On April 29, 1998, Penhall Company, a wholly owned subsidiary of the Company, purchased substantially all of the assets of Highway Services, Inc. for approximately $9,654,000 plus the assumption of approximately $1,324,000 of liabilities. Penhall Company paid approximately $5,962,000 in cash, with the remainder payable in equal installments in April 1999 and 2000 pursuant to a $3,692,000 secured promissory note, which bears interest at 5.51% per annum. HSI is based in Minnesota and operates in approximately 25 states and is a national provider of construction services including grinding, grooving, sawing, sealing and pavement replacement. The acquisition has been accounted for by the purchase method and accordingly, the results of operations of HSI have been included in the Company's consolidated financial statements since April 29, 1998. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $8,291,000 has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. The purchase agreement also provides that certain stockholders of HSI purchase 3,147 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 for the nine months ended March 31, 1998, as if the acquisition had occurred as of the beginning of that period, after giving affect to certain adjustments, including amortization of goodwill and increased interest expense on debt related to the acquisition. 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 period.
NINE MONTHS ENDED MARCH 31, 1998 ----------- Revenues............................................ $83,599,000 Net earnings........................................ $ 4,359,000 Earnings per share: Basic............................................ 1.02 Diluted.......................................... 1.00 Weighted average number of shares outstanding: Basic............................................ 4,278,579 Diluted.......................................... 4,357,750
On October 16, 1998, the Company purchased certain assets of Daley Concrete Cutting, a division of U. S. Rentals, for $3,743,000 in cash. Daley Concrete Cutting has four offices, three located in South Carolina and one in metropolitan Atlanta. On November 13, 1998, the Company purchased Lipscomb Concrete Cutting for $4,252,000 of which $3,376,000 was cash and $876,000 was in the form of a note due November 1, 1999, bearing interest at 6%. Both of these acquisitions are being accounted for as purchases and accordingly, the result of operations of the acquired companies are included from the date of acquisition. (6) SUBSEQUENT EVENTS On April 2, 1999, Penhall Company acquired the assets of Diamond Concrete Services for approximately $400,000 in cash. Diamond Concrete Services operates out of offices in Birmingham and Mobile, Alabama and is a provider of rental equipment used for concrete sawing and drilling. Additionally, Penhall Company has agreed to purchase substantially all of the equipment and inventory of Prospect Drilling and Sawing for approximately $1.9 million. The acquisition is expected to be complete in early June 1999. Prospect Drilling and Sawing operates out of offices in Minnesota and Wisconsin and performs concrete demolition services including drilling, wall sawing, concrete removal, flat sawing and concrete patching. Both acquisitions will be accounted for using the purchase method of accounting. 8 9 (7) CONDENSED CONSOLIDATING 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 three month and nine month periods ended March 31, 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 March 31, 1999 and for the three month and nine month periods ended March 31, 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. 9 10 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 1998 ------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Receivables, net ......... $ 4,648,000 $ 2,399,000 $ 22,265,000 $ 29,312,000 Inventories .............. 169,000 -- 1,289,000 1,458,000 Costs and estimated earnings in excess of billings on uncompleted contracts ............... 174,000 -- 802,000 976,000 Intercompany assets ...... 2,518,000 16,075,000 8,946,000 $(27,539,000) -- Other current assets ..... 309,000 700,000 786,000 1,795,000 ------------ ------------ ------------ ------------ ------------ Total current assets .. 7,818,000 19,174,000 34,088,000 (27,539,000) 33,541,000 Net property, plant and equipment ............... 4,729,000 8,844,000 31,434,000 45,007,000 Other assets, net ........ 561,000 1,006,000 8,208,000 9,775,000 Investment in subsidiaries -- 44,525,000 -- (44,525,000) -- ------------ ------------ ------------ ------------ ------------ $ 13,108,000 $ 73,549,000 $ 73,730,000 $(72,064,000) $ 88,323,000 ============ ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current installments of long-term debt and notes payable to stockholders . $ 185,000 $ 132,000 $ 1,848,000 $ 2,165,000 Trade accounts payable ... 844,000 7,000 6,681,000 7,532,000 Accrued liabilities ...... 961,000 4,243,000 3,837,000 9,041,000 Billings in excess of costs and estimated earnings on uncompleted contracts ............... 147,000 518,000 665,000 Intercompany liabilities . 3,306,000 6,834,000 17,399,000 $(27,539,000) -- ------------ ------------ ------------ ------------ ------------ Total current liabilities ......... 5,443,000 11,216,000 30,283,000 (27,539,000) 19,403,000 Long-term debt, excluding current portion ......... 196,000 14,356,000 1,847,000 16,399,000 Deferred tax liabilities . 581,000 (935,000) 3,963,000 3,609,000 Accrued compensation ..... -- 5,306,000 -- 5,306,000 Stockholders' equity ..... 6,888,000 43,606,000 37,637,000 (44,525,000) 43,606,000 ------------ ------------ ------------ ------------ ------------ $ 13,108,000 $ 73,549,000 $ 73,730,000 $(72,064,000) $ 88,323,000 ============ ============ ============ ============ ============
10 11 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
MARCH 31, 1999 ----------------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------ ------------ ASSETS Current assets: Receivables, net .......... $ 4,462,000 $ 18,000 $ 29,724,000 $ 34,204,000 Inventories ............... -- -- 1,904,000 1,904,000 Costs and estimated earnings in excess of billings on uncompleted contracts ................ -- -- 178,000 178,000 Intercompany assets ....... 56,171,000 20,939,000 9,635,000 $ (86,745,000) -- Other current assets ...... 178,000 2,820,000 2,042,000 5,040,000 ------------- ------------- ------------- ------------- ------------- Total current assets ... 60,811,000 23,777,000 43,483,000 (86,745,000) 41,326,000 Net property, plant and equipment ................ -- 9,280,000 43,461,000 52,741,000 Other assets, net ......... 5,841,000 -- 9,851,000 15,692,000 Investment in parent ...... -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries 22,178,000 -- -- (22,178,000) -- ------------- ------------- ------------- ------------- ------------- $ 88,830,000 $ 37,058,000 $ 96,795,000 $(112,924,000) $ 109,759,000 ============= ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current installments of long-term debt and notes payable to stockholders .. $ -- $ 2,000 $ 2,858,000 $ 2,860,000 Trade accounts payable .... -- (338,000) 8,425,000 8,087,000 Accrued liabilities ....... 2,298,000 21,000 7,416,000 9,735,000 Billings in excess of costs and estimated earnings on uncompleted contracts ................ -- -- 224,000 224,000 Intercompany liabilities .. -- 60,311,000 26,434,000 (86,745,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities .......... 2,298,000 59,996,000 45,357,000 (86,745,000) 20,906,000 Long-term debt, excluding current portion .......... 27,500,000 214,000 2,109,000 29,823,000 Senior Notes .............. 100,000,000 -- -- 100,000,000 Deferred tax liabilities .. 573,000 (267,000) 4,266,000 4,572,000 Accrued Compensation ...... -- -- -- -- Senior Exchangeable Preferred Stock ......... 10,715,000 -- -- 10,715,000 Series A Preferred Stock .. 11,358,000 -- -- 11,358,000 Stockholders' equity (deficit) ............... (63,614,000) (22,885,000) 45,063,000 (26,179,000) (67,615,000) ------------- ------------- ------------- ------------- ------------- $ 88,830,000 $ 37,058,000 $ 96,795,000 $(112,924,000) $ 109,759,000 ============= ============= ============= ============= =============
11 12 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTH PERIOD ENDED MARCH 31, 1998 ----------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ ------------ Revenues..................... $ 4,199,000 $ 749,000 $ 15,532,000 $ (749,000) $ 19,731,000 Cost of revenues............. 2,851,000 (71,000) 11,501,000 14,281,000 ------------ ------------ ------------ ------------ ------------ Gross profit............... 1,348,000 820,000 4,031,000 (749,000) 5,450,000 General and administrative expenses................... 863,000 1,290,000 2,549,000 (548,000) 4,154,000 Other operating income, net.. 10,000 1,000 (282,000) (271,000) Equity earnings in subsidiaries................ -- 1,007,000 -- (1,007,000) -- ------------ ------------ ------------ ------------ ------------ Earnings before interest expense and income taxes.. 495,000 538,000 1,200,000 (1,208,000) 1,025,000 Interest expense............. 60,000 210,000 139,000 (201,000) 208,000 ------------ ------------ ------------ ------------ ------------ Earnings before income taxes..................... 435,000 328,000 1,061,000 (1,007,000) 817,000 Income taxes................. 174,000 (94,000) 315,000 395,000 ------------ ------------ ------------ ------------ ------------ Net earnings................. $ 261,000 $ 422,000 $ 746,000 $ (1,007,000) $ 422,000 ============ ============ ============ ============ ============
12 13 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTH PERIOD ENDED MARCH 31, 1999 ----------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ ------------ Revenues..................... $ -- $ 316,000 $ 30,899,000 $ (316,000) $ 30,899,000 Cost of revenues............. (2,000) -- 21,672,000 21,670,000 ------------ ------------ ------------ ------------ ------------ Gross profit............... 2,000 316,000 9,227,000 (316,000) 9,229,000 General and administrative expenses................... 274,000 (32,000) 6,543,000 (317,000) 6,468,000 Other operating income, net.. -- 216,000 211,000 427,000 Equity earnings in subsidiaries................ 1,616,000 -- -- (1,616,000) -- ------------ ------------ ------------ ------------ ------------ Earnings before interest expense and income taxes.. 1,344,000 564,000 2,895,000 (1,615,000) 3,188,000 Interest expense............. 3,782,000 2,000 170,000 -- 3,954,000 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes.............. (2,438,000) 562,000 2,725,000 (1,615,000) (766,000) Income taxes................. (1,810,000) 159,000 1,513,000 (138,000) ------------ ------------ ------------ ------------ ------------ Net earnings................. $ (628,000) $ 403,000 $ 1,212,000 $ (1,615,000) $ (628,000) ============ ============ ============ ============ ============
13 14 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTH PERIOD ENDED MARCH 31, 1998 ---------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ ------------ Revenues .................. $ 14,408,000 $ 2,349,000 $ 57,410,000 $ (2,349,000) $ 71,818,000 Cost of revenues .......... 9,760,000 (48,000) 41,162,000 50,874,000 ------------ ------------ ------------ ------------ ------------ Gross profit ............ 4,648,000 2,397,000 16,248,000 (2,349,000) 20,944,000 General and administrative expenses ................ 2,837,000 3,021,000 9,773,000 (1,666,000) 13,965,000 Other operating income, net 143,000 5,000 268,000 416,000 Equity earnings in subsidiaries ............. -- 4,864,000 -- (4,864,000) -- ------------ ------------ ------------ ------------ ------------ Earnings before interest expense and income taxes 1,954,000 4,245,000 6,743,000 (5,547,000) 7,395,000 Interest expense .......... 207,000 683,000 490,000 (683,000) 697,000 ------------ ------------ ------------ ------------ ------------ Earnings before income taxes .................. 1,747,000 3,562,000 6,253,000 (4,864,000) 6,698,000 Income taxes .............. 725,000 (158,000) 2,411,000 2,978,000 ------------ ------------ ------------ ------------ ------------ Net earnings .............. $ 1,022,000 $ 3,720,000 $ 3,842,000 $ (4,864,000) $ 3,720,000 ============ ============ ============ ============ ============
14 15 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTH PERIOD ENDED MARCH 31, 1999 --------------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Revenues ................... $ 5,905,000 $ 927,000 $ 96,991,000 $ (927,000) $ 102,896,000 Cost of revenues ........... 3,569,000 5,000 68,692,000 72,266,000 ------------- ------------- ------------- ------------- ------------- Gross profit ............. 2,336,000 922,000 28,299,000 (927,000) 30,630,000 General and administrative expenses .................. 1,408,000 12,330,000 17,177,000 (951,000) 29,964,000 Other operating income, net 29,000 959,000 579,000 (700,000) 867,000 Equity earnings (loss) in subsidiaries .............. (322,000) -- -- 322,000 -- ------------- ------------- ------------- ------------- ------------- Earnings (loss) before interest expense and income taxes ............ 635,000 (10,449,000) 11,701,000 (354,000) 1,533,000 Interest expense ........... 9,848,000 166,000 449,000 23,000 10,486,000 ------------- ------------- ------------- ------------- ------------- Earnings (loss) before income taxes ........... (9,213,000) (10,615,000) 11,252,000 (377,000) (8,953,000) Income taxes ............... (2,751,000) (2,865,000) 3,825,000 -- (1,791,000) ------------- ------------- ------------- ------------- ------------- Net earnings (loss) ........ $ (6,462,000) $ (7,750,000) $ 7,427,000 $ (377,000) $ (7,162,000) ============= ============= ============= ============= =============
15 16 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
NINE MONTH PERIOD ENDED MARCH 31, 1999 --------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities ............ ($ 12,023,000) ($ 13,830,000) $ 18,699,000 ($ 700,000) ($ 7,854,000) ------------- ------------- ------------- ------------- ------------- Cash flows from investing activities: Proceeds from sale of assets ... 82,000 360,000 281,000 723,000 Capital expenditures ........... (848,000) (923,000) (8,650,000) (10,421,000) Acquisitions of Daley Concrete Cutting and Lipscomb Concrete Cutting, net of cash acquired .. (6,724,000) (6,724,000) ------------- ------------- ------------- ------------- ------------- Net cash used in investing activities .... (766,000) (563,000) (15,093,000) -- (16,422,000) ------------- ------------- ------------- ------------- ------------- Cash flows from financing activities: Due to (from) affiliates ....... (26,210,000) 31,113,000 (4,903,000) -- Book overdraft ................. (346,000) 2,258,000 1,912,000 Borrowings under long-term debt 36,050,000 2,754,000 38,795,000 Repayments of long-term debt ... (8,550,000) (16,611,000) (286,000) (25,447,000) Paydown on notes payable to stockholders .................. (405,000) (405,000) Borrowings on Senior Notes ..... 100,000,000 100,000,000 Debt issuance costs ............ (5,714,000) (221,000) (5,935,000) 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 ......................... 10,428,000 10,428,000 Issuance of Series B Preferred Stock ......................... 236,000 236,000 ------------- ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities .............. 12,889,000 16,496,000 (3,152,000) 700,000 26,933,000 ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents ............. 100,000 2,103,000 454,000 -- 2,657,000 Cash and cash equivalents at beginning of period ............. (100,000) 542,000 (208,000) 234,000 ------------- ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period ....................... $ -- $ 2,645,000 $ 246,000 $ -- $ 2,891,000 ============= ============= ============= ============= =============
16 17 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
NINE MONTH PERIOD ENDED MARCH 31, 1998 ------------------------------------------------------------------------------------ PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities $ 704,000 $ 2,068,000 $ 10,290,000 $ 13,062,000 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets . 67,000 86,000 771,000 924,000 Capital expenditures (1,015,000) (714,000) (8,284,000) (10,013,000) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (948,000) (628,000) (7,513,000) -- (9,089,000) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Due to (from) affiliates 244,000 3,059,000 (3,303,000) -- Borrowings under long-term debt 17,681,000 17,681,000 Repayments of long-term debt . (21,518,000) (21,518,000) Paydown on notes payable to stockholders (750,000) (750,000) Repurchase of common stock (56,000) (56,000) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 244,000 (1,584,000) (3,303,000) -- (4,643,000) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents -- (144,000) (526,000) -- (670,000) Cash and cash equivalents at beginning of period -- 150,000 526,000 676,000 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ -- $ 6,000 $ -- $ -- $ 6,000 ============ ============ ============ ============ ============
17 18 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 Penhall's 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 Registration Statement on Form S-4, as amended, 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 30 locations in eleven 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 seven 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, HSI, 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 and Diamond Drilling, an Alabama-based company acquired in April 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 53% of Penhall's revenues are derived from highway-related projects, approximately 29% of revenues are generated from building-related projects and the remainder of revenues is generated from airport, residential and other projects. Revenue growth is influenced by infrastructure change, including new construction, modification, 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 18 19 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenues. Revenues for the three months ended March 31, 1999 ("Interim 1999") were $30.9 million, an increase of $11.2 million or 56.6% over the three months ended March 31, 1998 ("Interim 1998"). The growth in revenues is attributable to the acquisitions of HSI, Daley Concrete Cutting and Lipscomb Concrete Cutting, which added $5.7 million of revenues in Interim 1999, strength in the Company's operated equipment rental business in most of the markets it serves, and the adverse impact that weather conditions had on Interim 1998's revenues. The Company operated through 30 locations in eleven states at March 31, 1999, compared to 21 locations in eight states at March 31, 1998. The Company's equipment fleet grew from 490 to 644 or 31.4% during this period. Gross Profit. Gross profit totaled $9.2 million in Interim 1999, an increase of $3.8 million or 69.3% from Interim 1998. Gross profit as a percentage of revenues increased from 27.6% in Interim 1998 to 29.9% in Interim 1999. The increase in gross profit as percentage of revenues was primarily attributable to improved margins on contract services revenues and high equipment utilization in Interim 1999. General and Administrative Expenses. General and administrative expenses for Interim 1999 were $6.5 million, an increase of $2.3 million or 55.7% from Interim 1998. The increase in these costs was caused by general and administrative costs of HSI, Daley Concrete Cutting and Lipscomb concrete cutting, all of which were included in Interim 1999 but not in Interim 1998. After adjusting for the impact of these costs, general and administrative expenses were $5.7 million, a 37.2% increase from Interim 1998. The remaining increase is primarily attributable to higher bonus expense in Interim 1999 as compared to Interim 1998. Earnings Before Interest Expense and Income Taxes. Earnings before interest and income taxes increased $2.2 million or 211.0% from $1.0 million in Interim 1998 to $3.2 million in Interim 1999. This increase was primarily attributable to increased revenues and higher gross profit margin in Interim 1999 as compared to Interim 1998. Interest Expense. Interest expense in Interim 1999 was $4.0 million, an increase of $3.7 million over Interim 1998. The substantial increase in interest expense was directly attributable to the issuance of $100.0 million of Senior Notes, the incurrence of $20.0 million of Term Loans, and borrowings of $7.5 million under the revolving credit agreement. Income Taxes. The effective tax rate changed from 48.4% of earnings before income taxes in Interim 1998 to 18.0% of loss before income taxes in Interim 1999. The lower effective tax rate in Interim 1999 is primarily attributable to reorganization costs related to the Transactions, which are not deductible for tax purposes. NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998 Revenues. Revenues for the nine months ended March 31, 1999 (Interim 1999) were $102.9 million, an increase of $31.1 million, or 43.3%, over the nine months ended March 31, 1998 ( Interim 1998). The increase was primarily attributable to the acquisitions of HSI in April 1998, Daley Concrete Cutting in October 1998 and Lipscomb Concrete Cutting in November 1998 and general strength in the construction markets that the Company serves. The acquisitions contributed $18.3 million of that increase. Also contributing to the improvement was significantly better weather conditions in November through March of Interim 1999. Gross Profit. Gross profit totaled $30.6 million in Interim 1999, an increase of $9.7 million, or 46.2%, from Interim 1998. Gross profit as a percentage of revenues increased to 29.8% for Interim 1999, from 29.2% for Interim 1998. The increase in gross profit as a percentage of revenues was primarily attributable to higher equipment utilization in Interim 1999. 19 20 General and Administrative Expenses. General and administrative expenses for Interim 1999 were $30.0 million, an increase of $16.0 million, or 114.6%, over Interim 1998. General and administrative expenses as a percentage of revenues increased from 19.4% for Interim 1998, to 29.1% for Interim 1999. The substantial increase in these costs was caused by an increase of $8.9 million in stock compensation costs triggered by the Transactions and $3.2 million of costs incurred with respect to the Mergers. After adjusting for the impact of these unusual transaction related costs and the general and administrative costs associated with the HSI, Daley and Lipscomb acquisitions, general and administrative expenses were approximately $15.4 million, an increase of $1.4 million. Earnings before Interest Expense and Income Taxes. Earnings before interest and income taxes decreased from $7.4 million in Interim 1998 to $1.5 million in Interim 1999. The decrease in earnings before interest and income taxes during Interim 1999 was primarily attributable to the transaction costs discussed above. After adjusting for these transaction related costs earnings before interest and income taxes improved from $7.4 million in Interim 1998 to $13.6 million in Interim 1999, an increase of 83.9%. Interest Expense. Interest expense in Interim 1999 was $10.5 million, an increase of $9.8 million over Interim 1998. The substantial increase in interest expense was directly attributable to the issuance of $100.0 million of Senior Notes, the incurrence of $20.0 million of Term Loans, and borrowings of $7.5 million under the revolving credit agreement in connection with the Transactions. Income Taxes. The effective income tax rate decreased from 44.5% of earnings before income taxes for Interim 1998 to 20.0% of loss before income taxes for Interim 1999. The change in the effective tax rate was primarily attributable to approximately $1.3 million of reorganization costs related to the Transactions which are not deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the nine months ended March 31, 1998 was $13.1 million compared to a use of cash in operations of $7.9 million for the nine months ended March 31, 1999. For the nine months ended March 31, 1999, the significant use of cash from operations primarily arose from the stock compensation expense of $8.9 million, $3.2 million in costs incurred with respect to the Mergers, disbursement of certain tax gross up payments to shareholders totaling approximately $2.9 million and a substantial increase in accounts receivable during that period. Management estimates that the Penhall Group's annual capital expenditures will be approximately $15.0 million for fiscal 1999, including replacement of equipment and purchases of new equipment. Cash used in investing activities for the nine months ended March 31, 1998 was $9.1 million as compared to $16.4 million for the nine months ended March 31, 1999. Such cash was primarily used for capital expenditures of $10.0 million for the nine months ended March 31, 1998 and $10.4 million for the same period in fiscal 1999. Also, in the nine months ended March 31, 1999 cash used in investing activities includes $6.7 million related to the acquisition of Daley Concrete Cutting and Lipscomb Concrete Cutting. Net cash used in financing activities for the nine months ended March 31, 1998 was $4.6 million as compared to cash provided by financing activities of $26.9 million for the same period in fiscal 1999. Financing activities of the Penhall Group are primarily the result of the Transactions for the nine months ended March 31, 1999 and borrowings and repayments of long-term debt. Historically, the Penhall Group has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of March 31, 1999, the Company and its subsidiaries had approximately $132.7 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $67.6 million. 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 20 21 the closing date of the New Credit Facility in connection with the Recapitalization. As of March 31, 1999, $22.5 million of additional borrowings were available under the Revolving Credit Facility. 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 at maturity. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuance's 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. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on indebtedness; (iii) the agreements governing the Company's long-term indebtedness will contain restrictive financial and operating covenants that could limit the Company's ability to compete and expand; (iv) the Company's leverage may make it more vulnerable to industry-related or general economic downturns and may limit its ability to withstand competitive pressures; and (v) certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company to the risk of increased interest rates. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. (Statement) 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes new standards for reporting about operating segments in interim and annual financial statements. Statement 131 is effective for fiscal years beginning after December 15, 1997 and does not need to be implemented for interim periods in the initial year of application. The Company does not expect the adoption of Statement 131 to have a material effect on its financial position or results of operations. ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES 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.
YEARS ENDING JUNE 30, ----------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE ------- ------- ------- ------- ------- ---------- ------- ------- (IN THOUSANDS) Fixed rate debt ........... 0 0 0 0 0 100,000 100,000 98,000 Average interest rate ..... 12% Variable rate LIBOR debt(1) 0 1,500 4,000 5,500 6,000 10,500 27,500 25,500 Current interest rate(1) .. 7.23
- ---------- (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. 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 21 22 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 is currently conducting the testing phase of its plan to determine whether the corrective measures which have been taken are adequate. Penhall has not incurred significant costs to date in connection with the Year 2000 issue and expects to be Year 2000 ready by June 30, 1999 without incurring significant additional costs. However, delays in the implementation of Year 2000 solutions, or the failure of Penhall's information technology or embedded technology systems to operate properly in the Year 2000, could have a material adverse effect on Penhall's business, results of operations or financial condition. Contingency plans have not been developed for all mission critical information and embedded technologies in the event Year 2000 readiness is not met. Penhall expects to have these contingency plans in place by June 30, 1999. 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. Part II - Other Information Item 6. Exhibits and Reports on Form 8-K. 22 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/ Martin W. Houge ------------------------- Martin W. Houge Date: May 14, 1999 Chief Financial Officer 23 24 EXHIBIT INDEX EXHIBIT INDEX DESCRIPTION - ------- ----------- 27. Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUN-30-1999 MAR-31-1999 2,891 0 35,463 (1,259) 1,904 41,326 93,590 (40,849) 109,759 20,906 129,823 20,229 22,073 10,000 (87,854) 109,759 102,896 102,896 72,266 72,266 29,097 264 10,486 (8,953) (1,791) (7,162) 0 0 0 (7,162) (7.35) (7.35)
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