-----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, L93tNLBBsOL0mMb4Ju7+RixGhDCEK1HnPtG8c1Jeyz1FMXrFoKFvq4EP0XKBu3LB SACcA6/OqwlaJ0YTIsQEZw== 0000892569-02-000327.txt : 20020414 0000892569-02-000327.hdr.sgml : 20020414 ACCESSION NUMBER: 0000892569-02-000327 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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: 1934 Act SEC FILE NUMBER: 333-64745 FILM NUMBER: 02547745 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 10-Q 1 a79205e10-q.txt FORM 10-Q QUARTER ENDED DECEMBER 31,2001 ================================================================================ 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, 2001 [ ] 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 14, 2002 ------------- ----------------- Common Stock, $.01 Par Value 986,746 ================================================================================ PENHALL INTERNATIONAL CORP. INDEX
T Page No. -------- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2001.. 3 Condensed Consolidated Statements of Operations for the three and six month periods ended December 31, 2000 and 2001...................................... 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended December 31, 2000 and 2001.................................................... 5 Notes to Condensed Consolidated Financial Statements............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 16 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) Reports on Form 8-K None
2 ITEM 1. FINANCIAL INFORMATION PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents .................................................... $ 1,030,000 $ 1,134,000 Receivables: Contract and trade receivables .................................... 35,257,000 30,367,000 Contract retentions due upon completion and acceptance of the work ..................................................... 5,328,000 5,654,000 Income taxes ...................................................... 1,084,000 655,000 ------------ ------------ 41,669,000 36,676,000 Less allowance for doubtful receivables ........................... 1,763,000 1,787,000 ------------ ------------ Net receivables .......................................... 39,906,000 34,889,000 Costs and estimated earnings in excess of billings on uncompleted contracts .................................................................. 1,856,000 1,369,000 Deferred tax assets .......................................................... 2,329,000 2,329,000 Inventories .................................................................. 2,273,000 2,123,000 Prepaid expenses and other current assets .................................... 1,417,000 1,699,000 ------------ ------------ Total current assets ..................................... 48,811,000 43,543,000 Property, plant and equipment, at cost: Land ......................................................................... 5,004,000 5,004,000 Buildings and leasehold improvements ......................................... 9,417,000 9,493,000 Construction and other equipment ............................................. 115,670,000 118,191,000 ------------ ------------ 130,091,000 132,688,000 Less accumulated depreciation and amortization ............................... 63,888,000 68,494,000 ------------ ------------ Net property, plant and equipment ........................ 66,203,000 64,194,000 Goodwill, net of accumulated amortization ...................................... 7,263,000 6,973,000 Debt issuance costs, net of accumulated amortization ........................... 4,062,000 3,619,000 Other assets, net .............................................................. 623,000 221,000 ------------ ------------ $126,962,000 $118,550,000 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current installments of long-term debt ....................................... $ 6,436,000 $ 6,842,000 Trade accounts payable ....................................................... 9,976,000 6,201,000 Accrued liabilities .......................................................... 15,061,000 13,761,000 Billings in excess of costs and estimated earnings on uncompleted contracts .................................................................. 1,688,000 693,000 ------------ ------------ Total current liabilities ................................ 33,161,000 27,497,000 Long-term debt, excluding current installments ................................. 18,772,000 14,014,000 Senior notes ................................................................... 100,000,000 100,000,000 Deferred tax liabilities ....................................................... 7,312,000 7,312,000 Senior Exchangeable Preferred Stock, redemption value $13,573,000 and $14,310,000 at June 30, 2001 and December 31, 2001, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2001 and December 31, 2001 .......................................... 13,573,000 14,310,000 Series A Preferred Stock, redemption value $15,219,000 and $16,251,000 at June 30, 2001 and December 31, 2001, respectively Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2001 and December 31, 2001 .......................................... 15,219,000 16,251,000 Stockholders' deficit: Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,701 shares at June 30, 2001 and 18,803 shares at December 31, 2001 ................................ 27,273,000 29,271,000 Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,017,480 at June 30, 2001 and 1,021,127 shares at December 31, 2001, including 34,173 and 34,381 shares held in treasury at June 30, 2001 and December 31, 2001, respectively .............. 10,000 10,000 Additional paid-in capital ................................................... 1,831,000 2,044,000 Treasury stock, at cost, 34,173 common shares at June 30, 2001 and 34,381 common shares at December 31, 2001 .................................. (288,000) (299,000) Accumulated deficit .......................................................... (89,901,000) (91,860,000) ------------ ------------ Total stockholders' deficit .............................. (61,075,000) (60,834,000) -- -- ------------ ------------ Commitments and contingencies................................................. $126,962,000 $118,550,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS SIX MONTH PERIODS ENDED DECEMBER 31, ENDED DECEMBER 31, ---------------------------- ---------------------------- 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Revenues ........................................... $ 41,565,000 $ 37,674,000 $ 94,911,000 $ 86,831,000 Cost of revenues ................................... 29,119,000 27,768,000 65,914,000 62,321,000 ------------ ------------ ------------ ------------ Gross profit ..................................... 12,446,000 9,906,000 28,997,000 24,510,000 General and administrative expenses ................ 7,273,000 6,895,000 14,874,000 14,949,000 Other operating income, net ........................ 356,000 274,000 787,000 556,000 ------------ ------------ ------------ ------------ Earnings before interest expense and income taxes 5,529,000 3,285,000 14,910,000 10,117,000 Interest expense ................................... 3,821,000 3,579,000 7,678,000 7,307,000 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes .............. 1,708,000 (294,000) 7,232,000 2,810,000 Income tax expense (benefit) ....................... 701,000 (123,000) 2,966,000 1,150,000 ------------ ------------ ------------ ------------ Net earnings (loss) ................................ 1,007,000 (171,000) 4,266,000 1,660,000 Accretion of preferred stock to redemption value ... (797,000) (897,000) (1,570,000) (1,769,000) Accrual of cumulative dividends on preferred stock . (844,000) (942,000) (1,656,000) (1,850,000) ------------ ------------ ------------ ------------ Net earnings (loss) available to common stockholders $ (634,000) $ (2,010,000) $ 1,040,000 $ (1,959,000) ============ ============ ============ ============ Earnings (loss) per share basic and diluted ................................ $ (.62) $ (2.04) $ 1.03 $ (1.99) Weighted average number of shares outstanding basic and diluted ................................ 1,016,400 985,079 1,014,457 984,193
See accompanying notes to condensed consolidated financial statements. 4 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTH PERIODS ENDED DECEMBER 31, ---------------------------- 2000 2001 ------------ ------------ Cash flows provided by operating activities: Net earnings ....................................................... $ 4,266,000 $ 1,660,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ................................... 7,901,000 8,386,000 Amortization of debt issuance costs ............................. 442,000 443,000 Provision for doubtful accounts ................................. 403,000 145,000 Gain on sale of assets .......................................... (219,000) (92,000) Changes in assets and liabilities, net of effects of acquisition in 2000: Receivables ..................................................... 434,000 4,872,000 Inventories, prepaid expenses and other assets .................. (236,000) (132,000) Costs and estimated earnings in excess of billings on uncompleted contracts ....................................... 3,668,000 487,000 Trade accounts payable and accrued liabilities .................. (5,795,000) (6,716,000) Billings in excess of costs and estimated earnings on uncompleted contracts ....................................... (1,910,000) (995,000) ------------ ------------ Net cash provided by operating activities ................ 8,954,000 8,058,000 ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets ....................................... 635,000 223,000 Capital expenditures ............................................... (9,493,000) (5,704,000) Acquisition of assets .............................................. (317,000) -- ------------ ------------ Net cash used in investing activities .................... (9,175,000) (5,481,000) ------------ ------------ Cash flows from financing activities: Borrowings under long-term debt .................................... 25,494,000 42,806,000 Repayments of long-term debt ....................................... (27,516,000) (47,458,000) Book overdraft ..................................................... 567,000 1,829,000 Proceeds from issuance of common stock ............................. 309,000 213,000 Repurchase of common stock and Series B preferred stock ............ -- (21,000) Issuance of Series B preferred stock ............................... 187,000 158,000 ------------ ------------ Net cash used in financing activities .................... (959,000) (2,473,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents ..... (1,180,000) 104,000 Cash and cash equivalents at beginning of period ................... 2,109,000 1,030,000 ------------ ------------ Cash and cash equivalents at end of period ......................... $ 929,000 $ 1,134,000 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes ................................................... $ 1,878,000 $ 721,000 ============ ============ Interest ....................................................... $ 7,133,000 $ 6,829,000 ============ ============ Supplemental disclosure of noncash investing and financing activities: Accrued liabilities related to the acquisition of assets .......... $ 440,000 $ -- ============ ============ Borrowings related to the acquisition of assets ................... $ 339,000 $ -- ============ ============ Borrowings related to capital leases and equipment financing agreements ..................................................... $ 768,000 $ 300,000 ============ ============ Accretion of preferred stock to redemption value .................. $ 1,570,000 $ 1,769,000 ============ ============ Accrual of cumulative dividends on preferred stock ................ $ 1,656,000 $ 1,850,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 5 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) (1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 the Third-Party did not change the accounting basis of the assets and liabilities in PII's separate stand-alone financial statements. 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, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. 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, 2001. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential dilutive securities. There were no potential dilutive securities for the periods presented. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its consolidated financial statements: Revenue Recognition on Long-Term Construction Contracts Income from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage of completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which percentage of completion is determined based on costs to date as compared to total estimated costs at completion. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts, which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed. 6 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) (2) 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, based in part upon the advise of legal counsel, that the outcome of these proceedings will not have a material effect on the Company's consolidated financial statements taken as a whole. (3) 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, 2001 and December 31, 2001 and for the three and six month periods ended December 31, 2000 and 2001 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. 7 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001 --------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Assets Current assets: Receivables, net ........................ $ 1,082,000 $ -- $ 38,824,000 $ -- $ 39,906,000 Inventories ............................. -- -- 2,273,000 -- 2,273,000 Costs and estimated earnings in excess of billings on uncompleted contracts .... -- -- 1,856,000 -- 1,856,000 Intercompany assets ..................... 29,006,000 -- -- (29,006,000) -- Other current assets .................... 112,000 966,000 3,698,000 -- 4,776,000 ------------- ------------- ------------- ------------- ------------- Total current assets ................. 30,200,000 966,000 46,651,000 (29,006,000) 48,811,000 Intercompany assets ........................ 10,000,000 -- -- (10,000,000) -- Net property, plant and equipment .......... -- 9,424,000 56,779,000 -- 66,203,000 Other assets, net .......................... 4,062,000 -- 7,886,000 -- 11,948,000 Investment in parent ....................... -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries ................. 55,992,000 -- -- (55,992,000) -- ------------- ------------- ------------- ------------- ------------- $ 100,254,000 $ 14,391,000 $ 111,316,000 $ (98,999,000) $ 126,962,000 ============= ============= ============= ============= ============= Liabilities and Stockholders' Equity (Deficit) Current installments of long-term debt ..... $ 5,173,000 $ 10,000 $ 1,253,000 $ -- $ 6,436,000 Trade accounts payable ..................... 3,000 -- 9,973,000 -- 9,976,000 Accrued liabilities ........................ 5,295,000 (20,000) 9,786,000 -- 15,061,000 Income taxes payable ....................... -- -- -- -- -- Billings in excess of costs and estimated earnings on uncompleted contracts ....... -- -- 1,688,000 -- 1,688,000 Intercompany liabilities ................... -- 28,346,000 660,000 (29,006,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities ............ 10,471,000 28,336,000 23,360,000 (29,006,000) 33,161,000 Intercompany liabilities ................... -- -- 10,000,000 (10,000,000) -- Long-term debt, excluding current installments .................... 18,066,000 186,000 520,000 -- 18,772,000 Senior notes ............................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities ................... -- (143,000) 7,455,000 -- 7,312,000 Senior Exchangeable Preferred stock ........ 13,573,000 -- -- -- 13,573,000 Series A Preferred stock ................... 15,219,000 -- -- -- 15,219,000 Stockholders' equity (deficit) ............. (57,075,000) (13,988,000) 69,981,000 (59,993,000) (61,075,000) ------------- ------------- ------------- ------------- ------------- $ 100,254,000 $ 14,391,000 $ 111,316,000 $ (98,999,000) $ 126,962,000 ============= ============= ============= ============= =============
8 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001 --------------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Assets Current assets: Receivables, net ........................ $ 653,000 $ -- $ 34,236,000 $ -- $ 34,889,000 Inventories ............................. -- -- 2,123,000 -- 2,123,000 Costs and estimated earnings in excess of billings on uncompleted contracts ..... -- -- 1,369,000 -- 1,369,000 Intercompany assets ..................... 24,684,000 -- -- (24,684,000) -- Other current assets .................... 204,000 1,050,000 3,908,000 -- 5,162,000 ------------- ------------- ------------- ------------- ------------- Total current assets ................. 25,541,000 1,050,000 41,636,000 (24,684,000) 43,543,000 Intercompany assets ........................ 6,934,000 -- -- (6,934,000) -- Net property, plant and equipment .......... -- 9,248,000 54,946,000 -- 64,194,000 Other assets, net .......................... 3,619,000 -- 7,194,000 -- 10,813,000 Investment in parent ....................... -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries ................. 62,027,000 -- -- (62,027,000) -- ------------- ------------- ------------- ------------- ------------- $ 98,121,000 $ 14,299,000 $ 103,776,000 $ (97,646,000) $ 118,550,000 ============= ============= ============= ============= ============= Liabilities and Stockholders' Equity (Deficit) Current installments of long-term debt ..... $ 5,649,000 $ 3,000 $ 1,190,000 $ -- $ 6,842,000 Trade accounts payable ..................... 4,000 -- 6,197,000 -- 6,201,000 Accrued liabilities ........................ 5,290,000 (19,000) 8,490,000 -- 13,761,000 Income taxes payable ....................... -- -- -- -- -- Billings in excess of costs and estimated earnings on uncompleted contracts ....... -- -- 693,000 -- 693,000 Intercompany liabilities ................... -- 24,684,000 -- (24,684,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities ............ 10,943,000 24,668,000 16,570,000 (24,684,000) 27,497,000 Intercompany liabilities ................... -- -- 6,934,000 (6,934,000) -- Long-term debt, excluding current installments .................... 13,450,000 185,000 379,000 -- 14,014,000 Senior notes ............................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities ................... -- (143,000) 7,455,000 -- 7,312,000 Senior Exchangeable Preferred stock ........ 14,310,000 -- -- -- 14,310,000 Series A Preferred stock ................... 16,251,000 -- -- -- 16,251,000 Stockholders' equity (deficit) ............. (56,833,000) (10,411,000) 72,438,000 (66,028,000) (60,834,000) ------------- ------------- ------------- ------------- ------------- $ 98,121,000 $ 14,299,000 $ 103,776,000 $ (97,646,000) $ 118,550,000 ============= ============= ============= ============= =============
9 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTH PERIOD ENDED DECEMBER 31, 2000 ------------------------------------------------------------------------ PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ----------- ----------- ------------ ------------ Revenues ...................... $ -- $ 380,000 $41,565,000 $ (380,000) $41,565,000 Cost of revenues .............. -- -- 29,119,000 -- 29,119,000 ----------- ----------- ----------- ----------- ----------- Gross profit ................ -- 380,000 12,446,000 (380,000) 12,446,000 General and administrative expenses ................... 99,000 120,000 7,434,000 (380,000) 7,273,000 Other operating income, net ... 1,000 -- 355,000 -- 356,000 Equity earnings in subsidiaries 3,287,000 -- -- (3,287,000) -- ----------- ----------- ----------- ----------- ----------- Earnings before interest expense and income taxes .. 3,189,000 260,000 5,367,000 (3,287,000) 5,529,000 Interest expense .............. 3,766,000 -- 55,000 -- 3,821,000 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes ..................... (577,000) 260,000 5,312,000 (3,287,000) 1,708,000 Income tax expense (benefit) .. (1,584,000) 107,000 2,178,000 -- 701,000 ----------- ----------- ----------- ----------- ----------- Net earnings .................. $ 1,007,000 $ 153,000 $ 3,134,000 $(3,287,000) $ 1,007,000 =========== =========== =========== =========== ===========
10 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTH PERIOD ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Revenues ....................... $ -- $ 2,808,000 $ 39,157,000 $ (4,291,000) $ 37,674,000 Cost of revenues ............... -- -- 28,001,000 (233,000) 27,768,000 ------------ ------------ ------------ ------------ ------------ Gross profit ................. -- 2,808,000 11,156,000 (4,058,000) 9,906,000 General and administrative expenses ..................... 88,000 98,000 8,435,000 (1,726,000) 6,895,000 Royalties ...................... -- -- 2,332,000 (2,332,000) -- Other operating income, net .... 2,000 -- 272,000 -- 274,000 Equity earnings in subsidiaries 1,965,000 -- -- (1,965,000) -- ------------ ------------ ------------ ------------ ------------ Earnings before interest expense and income taxes ... 1,879,000 2,710,000 661,000 (1,965,000) 3,285,000 Interest expense ............... 3,538,000 5,000 36,000 -- 3,579,000 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes ................ (1,659,000) 2,705,000 625,000 (1,965,000) (294,000) Income tax expense (benefit) ... (1,488,000) 1,109,000 256,000 -- (123,000) ------------ ------------ ------------ ------------ ------------ Net earnings (loss) ............ $ (171,000) $ 1,596,000 $ 369,000 $ (1,965,000) $ (171,000) ============ ============ ============ ============ ============
11 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTH PERIOD ENDED DECEMBER 31, 2000 ----------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ----------- ----------- ------------ ----------- Revenues ....................... $ -- $ 767,000 $94,911,000 $ (767,000) $94,911,000 Cost of revenues ............... -- -- 65,914,000 -- 65,914,000 ----------- ----------- ----------- ----------- ----------- Gross profit ................. -- 767,000 28,997,000 (767,000) 28,997,000 General and administrative expenses ..................... 209,000 238,000 15,194,000 (767,000) 14,874,000 Other operating income, net .... 5,000 -- 782,000 -- 787,000 Equity earnings in subsidiaries 8,853,000 -- -- (8,853,000) -- ----------- ----------- ----------- ----------- ----------- Earnings before interest expense and income taxes ... 8,649,000 529,000 14,585,000 (8,853,000) 14,910,000 Interest expense ............... 7,570,000 -- 108,000 -- 7,678,000 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes ...................... 1,079,000 529,000 14,477,000 (8,853,000) 7,232,000 Income tax expense (benefit) ... (3,187,000) 217,000 5,936,000 -- 2,966,000 ----------- ----------- ----------- ----------- ----------- Net earnings ................... $ 4,266,000 $ 312,000 $ 8,541,000 $(8,853,000) $ 4,266,000 =========== =========== =========== =========== ===========
12 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTH PERIOD ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ----------- ----------- ------------ ------------ Revenues ........................ $ -- $ 6,264,000 $90,145,000 $(9,578,000) $86,831,000 Cost of revenues ................ -- -- 62,554,000 (233,000) 62,321,000 ----------- ----------- ----------- ----------- ----------- Gross profit ................... -- 6,264,000 27,591,000 (9,345,000) 24,510,000 General and administrative expenses .................... 188,000 191,000 18,507,000 (3,937,000) 14,949,000 Royalties ....................... -- -- 5,408,000 (5,408,000) -- Other operating income, net ..... 2,000 -- 554,000 -- 556,000 Equity earnings in subsidiaries . 6,034,000 -- -- (6,034,000) -- ----------- ----------- ----------- ----------- ----------- Earnings before interest expense and income taxes .... 5,848,000 6,073,000 4,230,000 (6,034,000) 10,117,000 Interest expense ................ 7,231,000 10,000 66,000 -- 7,307,000 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes ....................... (1,383,000) 6,063,000 4,164,000 (6,034,000) 2,810,000 Income tax expense (benefit) .... (3,043,000) 2,486,000 1,707,000 -- 1,150,000 ----------- ----------- ----------- ----------- ----------- Net earnings .................... $ 1,660,000 $ 3,577,000 $ 2,457,000 $(6,034,000) $ 1,660,000 =========== =========== =========== =========== ===========
13 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTH PERIOD ENDED DECEMBER 31, 2000 -------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ ------------- Net cash provided by (used in) operating activities .................. $ (2,986,000) $ 512,000 $ 11,428,000 $ -- $ 8,954,000 ------------ ------------ ------------ ---------- ------------ Cash flows from investing activities: Proceeds from sale of assets ........... -- -- 635,000 -- 635,000 Capital expenditures ................... -- (1,176,000) (8,317,000) -- (9,493,000) Acquisition of assets .................. -- -- (317,000) -- (317,000) ------------ ------------ ------------ ---------- ------------ Net cash used in investing activities ......... -- (1,176,000) (7,999,000) -- (9,175,000) ------------ ------------ ------------ ---------- ------------ Cash flows from financing activities: Due to (from) affiliates ............... 3,740,000 231,000 (3,971,000) -- -- Borrowings under long-term debt ........ 25,494,000 -- -- -- 25,494,000 Repayments of long-term debt ........... (26,844,000) (8,000) (664,000) -- (27,516,000) Book overdraft ......................... -- -- 567,000 -- 567,000 Proceeds from issuance of common stock . 309,000 -- -- -- 309,000 Issuance of Series B preferred stock ... 187,000 -- -- -- 187,000 ------------ ------------ ------------ ---------- ------------ Net cash provided by (used in) financing activities ......... 2,886,000 223,000 (4,068,000) -- (959,000) ------------ ------------ ------------ ---------- ------------ Net decrease in cash and cash equivalents ......... (100,000) (441,000) (639,000) -- (1,180,000) Cash and cash equivalents at beginning of period ................. 100,000 1,370,000 639,000 -- 2,109,000 ------------ ------------ ------------ ---------- ------------ Cash and cash equivalents at end of period ....................... $ -- $ 929,000 $ -- $ -- $ 929,000 ============ ============ ============ ========== ============
14 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTH PERIOD ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ ------------ Net cash provided by operating activities ................. $ 2,437,000 $ 3,753,000 $ 7,902,000 $ (6,034,000) $ 8,058,000 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets .......... -- -- 223,000 -- 223,000 Capital expenditures .................. -- -- (5,704,000) -- (5,704,000) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities ........ -- -- (5,481,000) -- (5,481,000) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Due to (from) affiliates .............. 1,354,000 (3,662,000) (3,726,000) 6,034,000 -- Borrowings under long-term debt ....... 42,750,000 -- 56,000 -- 42,806,000 Repayments of long-term debt .......... (46,890,000) (8,000) (560,000) -- (47,458,000) Book overdraft ........................ -- -- 1,829,000 -- 1,829,000 Proceeds from issuance of common stock 213,000 -- -- -- 213,000 Repurchase of common stock and Series B preferred stock ............ (21,000) -- -- -- (21,000) Issuance of Series B preferred stock .. 158,000 -- -- -- 158,000 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ........ (2,436,000) (3,670,000) (2,401,000) 6,034,000 (2,473,000) ------------ ------------ ------------ ------------ ------------ Net increase in cash and cash equivalents ........ 1,000 83,000 20,000 -- 104,000 Cash and cash equivalents at beginning of period ................ -- 921,000 109,000 -- 1,030,000 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period ...................... $ 1,000 $ 1,004,000 $ 129,000 $ -- $ 1,134,000 ============ ============ ============ ============ ============
15 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 thirty nine locations in seventeen 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 nine strategic acquisitions, including: 1. Concrete Coring Company, an Austin-based company acquired in 1995, 2. Zig Zag Company, a Denver-based firm acquired in 1996, 3. Metro Concrete Cutting, an Atlanta-based company acquired in 1996, 4. HSI, a Minnesota-based firm acquired in April 1998, 5. Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998, 6. Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998, 7. Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999, 8. Advance Concrete Sawing and Drilling, Inc., a Bakersfield, California-based company acquired in September 2000 and 9. H&P Sawing and Drilling, A Kansas City, Missouri-based Company acquired in March 2001. During the same period, Penhall established operations in ten new markets by opening offices in Las Vegas, Salt Lake City, Portland, Dallas, Richmond, Fresno, Buffalo, Reno, Seattle and Cleveland. 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. Penhall's revenues are derived from highway-related projects, building-related projects, airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated: 16
THREE MONTH PERIODS ENDED DECEMBER 31, SIX MONTH PERIODS ENDED DECEMBER 31, --------------------------------------- --------------------------------------- 2001 2000 2001 2000 ------------------ ----------------- ----------------- ----------------- % OF % OF % OF % OF $ TOTAL $ TOTAL $ TOTAL $ TOTAL ------- ----- ------- ----- ------- ----- ------- ----- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Operated Equipment Rental Services $28,521 75.7% $31,995 77.0% $63,679 73.3% $67,438 71.1% Contract Services (1) ............ 9,153 24.3% 9,570 23.0% 23,152 26.7% 27,473 28.9% ------- ----- ------- ----- ------- ----- ------- ----- Total Revenues ............... $37,674 100.0% $41,565 100.0% $86,831 100.0% $94,911 100.0% ======= ===== ======= ===== ======= ===== ======= =====
- ---------- (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. 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its consolidated financial statements: Revenue Recognition on Long-Term Construction Contracts Income from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage of completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which percentage of completion is determined based on costs to date as compared to total estimated costs at completion. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts, which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed. The Company is not a party to any off-balance sheet arrangements, and does not engage in trading activities involving non-exchange traded contracts, and is not a party to any transactions with any persons or activities that derive benefits from their non-independent relations with the Company. RESULTS OF OPERATIONS Six Months Ended December 31, 2001 Compared to Six months Ended December 31, 2000 Revenues. Revenues for the six months ended December 31, 2001 ("Interim 2002") were $86.8 million, a decrease of $8.1 million or 8.5% over the six months ended December 31, 2000 ("Interim 2001"). Lower revenues in Interim 2002 were primarily a result of a weaker economy and increased competition. Gross Profit. Gross profit totaled $24.5 million in Interim 2002, a decrease of $4.5 million or 15.5% from Interim 2001. Gross profit as a percentage of revenues decreased from 30.6% in Interim 2001 to 28.2% in Interim 2002. The decrease in gross profit from Interim 2001 to Interim 2002 is primarily attributable to decreased revenue, increased competition, and an increase of $1.1 million in insurance costs during Interim 2002. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs and a decrease in equipment utilization. General and Administrative Expenses. General and administrative expenses were $14.9 million in Interim 2002 compared to $14.9 million in Interim 2001. As a percent of revenues, general and administrative expenses were 17.2% in Interim 2002 compared to 15.7% in Interim 2001. The increase in general and administrative expenses as a percentage of revenues during Interim 2002 is attributable to the fixed nature of these types of expenses and an increase in salaries and related expenses for new offices that was offset by a general decrease in salaries in all divisions due to staff reductions in response to the weakening economy. Interest Expense. Interest expense was $7.3 million in Interim 2002 compared to interest expense of $7.7 million in Interim 2001. The decrease in interest expense is attributable to lower interest rates and lower borrowings by the Company in Interim 2002. 17 Income Tax Expense (Benefit). The Company recorded an income tax provision of $1.2 million, or 41% of earnings before income taxes in Interim 2002, compared to an income tax provision of $3.0 million, or 41% of earnings before income taxes in Interim 2001. The decrease in the tax provision is attributable to lower earnings before income tax in Interim 2002. Three months Ended December 31, 2001 Compared to Three months Ended December 31, 2000 Revenues. Revenues for the three months ended December 31, 2001 ("Interim 2002") were $37.7 million, a decrease of $3.9 million or 9.4% over the three months ended December 31, 2000 ("Interim 2001"). Lower revenues in Interim 2002 were primarily a result of a weaker economy and increased competition. Gross Profit. Gross profit totaled $9.9 million in Interim 2002, a decrease of $2.5 million or 20.4% from Interim 2001. Gross profit as a percentage of revenues decreased to 26.3% in Interim 2002 from 30.0% in Interim 2001. The decrease in gross profit is primarily attributable to decreased revenue and an increase in competition. The decrease in gross profit as a percentage of revenues was due primarily to increased competition and a decrease in utilization; particularly the Company's grinding and excavating equipment. General and Administrative Expenses. General and administrative expenses were $6.9 million in Interim 2002 compared to $7.3 million in Interim 2001, a decrease of $0.4 million. As a percent of revenues, general and administrative expenses were 18.3% in Interim 2002 compared to 17.5% in Interim 2001. The increase in general and administrative expenses as a percentage of revenues consists primarily of an increase in health insurance expense of $0.2 million, as well as an increase in salaries and related expenses for new offices that was offset by a general decrease in salaries in all divisions due to staff reductions in response to the weakening economy. Interest Expense. Interest expense was $3.6 million in Interim 2002 compared to interest expense of $3.8 million in Interim 2001. The decrease in interest expense is attributable to lower interest rates and lower borrowings in Interim 2002. Income Tax Expense (Benefit). The Company recorded an income tax benefit of $0.1 million, or 42% of loss before income taxes in Interim 2002 compared to an income tax provision of $0.7 million, or 41% of earnings before income taxes in Interim 2001. The tax benefit is attributable to a loss before income tax in Interim 2002. LIQUIDITY AND CAPITAL RESOURCES It is anticipated that the Company's principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company's strategy of pursuing strategic acquisitions and expanding through internal growth. The Company's principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility. The New Credit Facility consists of two facilities: (i) a six-year senior secured term loan facility in an aggregate principal amount equal to $20.0 million (the "Term Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate principal amount not to exceed $30.0 million (the "Revolving Credit Facility"). The Company drew $20.0 million of loans under the Term Loan Facility ("Term Loans") on the closing date of the New Credit Facility in connection with the Recapitalization. The Term Loans amortize on a quarterly basis commencing in September 2000 and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving Credit Facility ("Revolving Loans") are due and payable in full on June 15, 2004. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any subsidiary of the Company that guarantees amounts under the New Credit Facility. Such loans are also required to be prepaid with 75% of the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company's Leverage Ratio (as such term is defined in the New Credit Facility) is less than 5.25 to 1.0, 50% of such Excess Cash Flow. 18
------------------------------------------------------------------ SUMMARY CASH FLOW DATA FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 2001 ------------------------------------------------------------------ Cash and cash equivalents 929,000 1,134,000 ------------------------------------------------- --------------- Net cash provided by (used in): ------------------------------------------------- --------------- Operating activities 8,954,000 8,058,000 ------------------------------------------------- --------------- Investing activities (9,175,000) (5,481,000) ------------------------------------------------- --------------- Financing activities (959,000) (2,473,000) ------------------------------------------------- --------------- Capital expenditures (9,493,000) (5,704,000) ------------------------------------------------------------------
Cash provided by operating activities decreased to $8.1 million in Interim 2002 from $9.0 million in Interim 2001. In Interim 2002, the Company's net earnings and depreciation plus a decrease in receivables less a decrease in trade accounts payable and accrued liabilities resulted in $8.1 million net cash provided by operating activities. In Interim 2001, the Company's net earnings and depreciation plus a reduction in costs and estimated earnings in excess of billings on uncompleted contracts, less reductions in accounts payable, accrued liabilities and billings in excess of costs and estimated earnings on uncompleted contracts resulted in $9.0 million net cash provided from operating activities. Net cash used in investing activities decreased $3.7 to $5.5 million in Interim 2002 from $9.2 million in Interim 2001. The reduction in net cash used in investing activities is primarily attributable to a decrease in capital expenditures of $3.8 million in Interim 2002 as compared to Interim 2001. Management estimates that the Company's annual capital expenditures will be approximately $13.0 million for fiscal 2002, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property. Net cash used by financing activities in Interim 2002 was $2.5 million as compared to $1.0 million in Interim 2001. In Interim 2002, the Company's financing activities are primarily a result of borrowings and repayments of long-term debt and a book overdraft. In Interim 2001, the Company's financing activities were also primarily the result of borrowings and repayments of long-term debt and a book overdraft. 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, 2001, the Company and its subsidiaries had approximately $120.9 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $60.8 million. As of December 31, 2001, approximately $22.2 million of additional borrowing was available under the Company's New Credit Facility. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which have been accounted for using the pooling-of-interests method, and Statement 142 effective July 1, 2002. Companies with fiscal year ends beginning after March 15, 2001, who have not yet issued financial statements for their first interim period may early adopt Statement 142. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. 19 Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. And finally, any unamortized negative goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. The Company will adopt Statement 142 in the first quarter of fiscal 2003. The adoption of Statement 142 may have a significant effect on the Company's results from operations. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these statements on the Company's consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. The Company anticipates unamortized Goodwill immediately prior to adoption of Statement 142 will be $6.7 million. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. SFAS No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset, i.e., the associated asset retirement costs, and to depreciate that cost over the life of the asset. The liability is increased at the end of each period to reflect the passage of time, i.e., accretion expense, and changes in the estimated future cash flows underlying the initial fair value measurement. We will adopt SFAS No. 143 for fiscal years beginning after June 15, 2002. This Statement is not expected to have a material impact on the Company's financial reporting and related disclosures. In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets. 20 The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001. Accordingly, the Company will adopt Statement 144 in the first quarter of fiscal 2003. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Management does not believe that the adoption of Statement 144 for assets held for sale or other disposal to have a material impact on the Company's financial statements. On July 18, 2001, the SEC issued interpretative guidance relating to the "Classification and Measurement of Redeemable Securities". This ruling requires, among other things, that preferred shares subject to redemption upon change in control be classified outside of permanent equity. In accordance with the required implementation of this new requirement, the company has evaluated the impact on the Series B Preferred Stock and determined that there is no impact on the classification of the Series B Preferred Stock. 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 it's 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. The table below presents the principal amounts of debt (excluding capital lease obligations of $507,000), weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31, 2001.
YEARS ENDED JUNE 30, -------------------------------------------------------- FAIR 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE -------- -------- -------- -------- -------- ---------- -------- -------- (IN THOUSANDS) Fixed rate debt ........... $ 702 $ 514 $ 4 $ 4 $100,004 $ 171 $101,399 $104,399(2) Average interest rate ..... 9.03% 9.43% 10.00% 10.00% 12.00% 10.00% 11.96% 11.96% Variable rate LIBOR debt (1) $ 2,500 $ 6,000 $ 10,450 $ 0 $ 0 $ 0 $ 18,950 $ 18,950 Weighted average current interest rate (1).......... 3.82%
- ----------- (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 (2) The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities. PART II - OTHER INFORMATION Items 1-5 are not applicable Item 6. Exhibits and Reports on Form 8-K. 22 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. Date: February 14, 2002 /s/ John T. Sawyer ---------------------------------------- John T. Sawyer Chairman of the Board, President and Chief Executive Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----