-----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, LlSlVOKdZfWL9XcmgXMkM0WH7017Vnyqt3USjGekYE2DQAayqOHIrYZTewAQyNQa OKWN5Ht9MRIgPg7RCE/Urw== 0001047469-98-042796.txt : 19981204 0001047469-98-042796.hdr.sgml : 19981204 ACCESSION NUMBER: 0001047469-98-042796 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19981202 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: S-4/A SEC ACT: SEC FILE NUMBER: 333-64745 FILM NUMBER: 98763082 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENHALL RENTAL CORP CENTRAL INDEX KEY: 0001070773 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330286366 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-64745-01 FILM NUMBER: 98763083 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENHALL CO CENTRAL INDEX KEY: 0001070774 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330349226 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-64745-02 FILM NUMBER: 98763084 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 S-4/A 1 FORM S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1998 REGISTRATION NO. 333-64745 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- PENHALL INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) ARIZONA 7353 86-0634394 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
-------------------------- 1801 PENHALL WAY P.O. BOX 4609 ANAHEIM, CALIFORNIA 92803 (714) 772-6450 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ SEE TABLE OF ADDITIONAL REGISTRANTS BELOW -------------------------- MARTIN W. HOUGE VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER PENHALL INTERNATIONAL CORP. 1801 PENHALL WAY, P.O. BOX 4609 ANAHEIM, CALIFORNIA 92803 (714) 772-6450 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ WITH COPIES TO: BRUCE B. WOOD, ESQ. DECHERT PRICE & RHOADS 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10112 (212) 698-3500 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2) 12% Senior Notes due 2006.................. $100,000,000 100% $100,000,000 $29,500 Guarantees of Senior Notes................. $100,000,000 -- -- None
(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the registration fee. (2) Previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PENHALL INTERNATIONAL CORP. TABLE OF ADDITIONAL REGISTRANTS
STATE OR OTHER IRS JURISDICTION PRIMARY STANDARD EMPLOYER OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NAME INCORPORATION CODE NUMBER NUMBER - ------------------------------------------------------------ ------------- ------------------------- ------------- Penhall Rental Corp......................................... California 7353 33-0286366 Penhall Company............................................. California 7353 33-0349226
The address, including zip code and telephone number, including area code, for each of the additional registrants' principal executive offices is 1801 Penhall Way, P.O. Box 4609, Anaheim, California 92803, (714) 772-6450. SUBJECT TO COMPLETION, DATED DECEMBER 2, 1998 THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. THESE SECURITIES MAY NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. PROSPECTUS OFFER TO EXCHANGE 12% SENIOR NOTES DUE 2006 FOR ALL OUTSTANDING 12% SENIOR NOTES DUE 2006 OF PENHALL INTERNATIONAL CORP. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 199 , UNLESS EXTENDED ------------------------ Penhall International Corp., an Arizona corporation formerly known as Phoenix Concrete Cutting, Inc. (the "Company"), hereby offers to exchange an aggregate principal amount of up to $100,000,000 of its 12% Senior Notes due 2006 (the "New Notes") for a like principal amount of its 12% Senior Notes due 2006 (the "Existing Notes") outstanding on the date hereof upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying letter of transmittal (the "Letter of Transmittal" and, together with this Prospectus, the "Exchange Offer"). The New Notes and the Existing Notes are hereinafter collectively referred to as the "Notes." The terms of the New Notes are identical in all material respects to those of the Existing Notes, except for certain transfer restrictions and registration rights relating to the Existing Notes. The New Notes will be issued pursuant to, and be entitled to the benefits of, the Indenture (as defined) governing the Existing Notes. The New Notes will bear interest from and including the date of consummation of the Exchange Offer. Interest on the New Notes will be payable semi-annually on February 1 and August 1 of each year, commencing February 1, 1999. Additionally, interest on the New Notes will accrue from the last interest payment date on which interest was paid on the Existing Notes surrendered in exchange therefor or, if no interest has been paid on the Existing Notes, from the date of original issue of the Existing Notes. Holders whose Existing Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Existing Notes. The New Notes will mature on August 1, 2006. The New Notes will be redeemable, in whole or in part, at the option of the Company on or after August 1, 2003 at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to August 1, 2001, the Company, at its option, may redeem, with the net cash proceeds of one or more Public Equity Offerings (as defined) by the Company, up to 30% of the aggregate principal amount of the Notes, at a redemption price equal to 112% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; PROVIDED that at least 70% of the aggregate principal amount of the Notes remains outstanding immediately following such redemption. Upon a Change of Control (as defined), each holder of New Notes will have the right, subject to certain conditions, to require the Company to repurchase such holder's New Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. There can be no assurance, however, that the Company will have available funds sufficient to purchase the New Notes upon a Change of Control. In addition, the Company will be obligated to offer to repurchase the New Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase in the event of certain Asset Sales (as defined). See "Description of the Notes." (CONTINUED ON FOLLOWING PAGE) ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT HOLDERS OF EXISTING NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Prospectus is , 1998. The New Notes will be general unsecured senior obligations of the Company and will rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes will be effectively subordinated in right of payment to all secured indebtedness of the Company, including indebtedness incurred under the New Credit Facility (as defined), to the extent of the assets securing such indebtedness. The New Notes will be fully and unconditionally guaranteed (the "Guarantees") on a senior basis, jointly and severally, by Penhall Rental Corp. and Penhall Company (the "Guarantors") and by any Restricted Subsidiary (as defined), other than a Foreign Subsidiary (as defined), having total assets with a book value in excess of $500,000 that in the future executes and delivers to the Trustee (as defined) a supplemental indenture in which such Restricted Subsidiary agrees to unconditionally guarantee all of the Company's obligations under the New Notes and the Indenture. See "Description of the Notes--Certain Covenants--Additional Subsidiary Guarantees." The Guarantees will be general unsecured obligations of the Guarantors and will rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Guarantors. The Guarantees will be effectively subordinated in right of payment to all secured indebtedness of the Guarantors to the extent of the assets securing such indebtedness. As of September 30, 1998, the Company had approximately $121.1 million of indebtedness outstanding (including $20.8 million of secured indebtedness outstanding pursuant to the New Credit Facility but exclusive of $29.2 million of unused commitments thereunder), and the Guarantors had approximately $4.3 million of indebtedness outstanding (including $3.9 million of secured indebtedness but exclusive of the guarantees by the Guarantors of the Company's obligations under the Notes and the New Credit Facility). See "Description of Certain Indebtedness." The Indenture permits the Company and the Guarantors to incur additional indebtedness (including secured indebtedness) subject to certain restrictions. See "Description of the Notes." The Existing Notes were issued by Penhall Acquisition Corp., an Arizona corporation (the "Issuer") formed by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") to effect a recapitalization (the "Recapitalization") of Penhall International, Inc., a California corporation and former corporate parent of the Company ("PII"). As part of the Recapitalization, a series of mergers (the "Mergers") were consummated pursuant to which the Company became the corporate parent of PII, BRS acquired an interest in the Company and the Company became the successor obligor on the Existing Notes. Immediately following consummation of the Transactions (as defined), PII changed its name to "Penhall Rental Corp." and the Company changed its name from "Phoenix Concrete Cutting, Inc." to "Penhall International Corp." The New Notes are being offered hereunder in order to satisfy certain obligations of the Company and the Guarantors contained in the Registration Rights Agreement dated August 4, 1998 (the "Registration Rights Agreement") by and among the Issuer, the Company, the Guarantors, BT Alex. Brown Incorporated ("BTAB") and Credit Suisse First Boston (collectively with BTAB, the "Initial Purchasers") with respect to the initial sale of the Existing Notes. The Company will not receive any proceeds from the Exchange Offer. The Company will pay all the expenses incident to the Exchange Offer. Tenders of Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date (as defined) for the Exchange Offer. In the event the Company terminates the Exchange Offer and does not accept for exchange any Existing Notes with respect to the Exchange Offer, the Company will promptly return such Existing Notes to the holders thereof. See "The Exchange Offer." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivery of a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Existing Notes ii where such Existing Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Prior to the Exchange Offer, there has been no public market for the Existing Notes. If a market for the New Notes should develop, such New Notes could trade at a discount from their principal amount. The Company currently does not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. There can be no assurance that an active public market for the New Notes will develop. The Exchange Offer is not conditioned upon any minimum principal amount of Existing Notes being tendered for exchange pursuant to the Exchange Offer. iii AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement," which term shall encompass all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the New Notes being offered hereby. This Prospectus does not contain all the information set forth in the Exchange Offer Registration Statement. For further information with respect to the Company and the Exchange Offer, reference is made to the Exchange Offer Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Exchange Offer Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is not currently subject to the periodic reporting and other information requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, it will furnish to the holders of the Notes and to the extent permitted by applicable law or regulation, file with the Commission following the consummation of the Exchange Offer (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company was required to file such Forms, including for each a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's independent auditors and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. All reports filed with the Commission will be available on the Commission's web site at http:\\www.sec.gov. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Notes or beneficial owner of the Notes, in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," ANTICIPATES," "INTENDS," "EXPECT," "SHOULD," "MAY," "WILL," "CONTINUE" AND "ESTIMATE," AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH DOMESTIC AND FOREIGN; INDUSTRY AND MARKET CAPACITY; DEMOGRAPHIC CHANGES; EXISTING GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; LIABILITY AND OTHER CLAIMS ASSERTED AGAINST THE COMPANY; COMPETITION; THE LOSS OF ANY SIGNIFICANT CUSTOMERS; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS; THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; THE SIGNIFICANT INDEBTEDNESS OF THE COMPANY AFTER THE TRANSACTIONS CONTEMPLATED HEREBY; THE AVAILABILITY AND TERMS OF CAPITAL TO FUND THE EXPANSION OF THE COMPANY'S BUSINESS; AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS. CERTAIN OF THESE FACTORS ARE DISCUSSED IN MORE DETAIL ELSEWHERE IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, UNDER THE CAPTIONS "SUMMARY," "RISK FACTORS," "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS. iv SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO (I) THE "ISSUER" ARE TO PENHALL ACQUISITION CORP., AN ARIZONA CORPORATION, (II) "PENHALL GROUP" ARE TO PENHALL INTERNATIONAL, INC., A CALIFORNIA CORPORATION, AND EACH OF ITS SUBSIDIARIES FOR PERIODS PRIOR TO THE TRANSACTIONS (AS DEFINED) AND TO PENHALL INTERNATIONAL CORP., AN ARIZONA CORPORATION, AND ITS DIRECT AND INDIRECT SUBSIDIARIES FROM AND AFTER THE TRANSACTIONS, AFTER GIVING EFFECT THERETO, (III) "MANAGEMENT" ARE TO THE EXECUTIVE OFFICERS IDENTIFIED UNDER "MANAGEMENT--DIRECTORS AND EXECUTIVE OFFICERS" AND (IV) "FISCAL YEARS" ARE TO THE FISCAL YEARS OF PENHALL INTERNATIONAL, INC., WHICH END ON JUNE 30. AS USED HEREIN, THE TERMS "ADJUSTED EBITDA" AND "ADJUSTED EBITDA MARGIN" HAVE THE MEANINGS SET FORTH IN NOTES 1 AND 2, RESPECTIVELY, TO THE TABLE SET FORTH UNDER "--SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION." INFORMATION PROVIDED HEREIN ON A "PRO FORMA BASIS" FOR ANY PERIOD OR AS OF ANY DATE GIVES EFFECT TO THE HSI ACQUISITION (AS DEFINED) AND THE TRANSACTIONS IN THE MANNER DESCRIBED UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS." CERTAIN MARKET DATA USED IN THIS PROSPECTUS REFLECT MANAGEMENT ESTIMATES; WHILE SUCH ESTIMATES ARE BELIEVED BY MANAGEMENT TO BE RELIABLE, NO ASSURANCE CAN BE GIVEN THAT SUCH DATA IS ACCURATE IN ALL MATERIAL RESPECTS. THE PENHALL GROUP The Penhall Group, founded in 1957, is one of the largest operated equipment rental providers in the United States. The Penhall Group differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators on an hourly or fixed-price quote basis ("Operated Equipment Rental Services") to serve construction, industrial, manufacturing, governmental and residential customers. In addition, the Penhall Group complements its Operated Equipment Rental Services by providing services on a fixed-price contract basis for long-term projects. The Penhall Group employs over 517 skilled operators and has approximately 513 units in its diverse operated equipment rental fleet, which includes a broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units, to large equipment such as backhoes, excavators, water trucks, and concrete grinders. The Penhall Group provides its services from 22 locations in nine states, with a presence in some of the fastest growing states in terms of construction spending and population growth, including its primary market, California, as well as other strategic markets including Arizona, Colorado, Nevada, Texas, Georgia and Utah (collectively, the "Markets"). The Penhall Group has a diverse base of over 6,800 customers. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of its total revenue in any of the past five fiscal years. The Penhall Group has a reputation for high quality service which results in a high degree of customer loyalty and, based on the last fiscal quarter, Management believes that on average in excess of 95% of its revenues are derived through repeat business from existing customers. The Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993 to 20.7% in fiscal 1998 due to Management's focus on (i) maximizing high-margin Operated Equipment Rental Services revenues through increased equipment rental fleet utilization, (ii) controlling overhead and (iii) successfully integrating acquisitions and start-up locations. During that same period, revenues and Adjusted EBITDA grew at a compound annual growth rate ("CAGR") of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7 million and $24.7 million, respectively, during fiscal 1998 and approximately $38.9 million and $8.7 million, respectively, during the three months ended September 30, 1998. The Penhall Group had a net loss of approximately $1.0 million on a Pro Forma Basis during fiscal 1998 and net earnings of approximately $1.4 million on a Pro Forma Basis during the three months ended September 30, 1998. 1 Through its skilled operators and equipment rental fleet, the Penhall Group performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, the Penhall Group generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. Operated Equipment Rental Services represented approximately three quarters of total revenues for fiscal 1998. For longer duration projects, which may last from a few days to several years, the Penhall Group provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of fixed-price contract revenues are derived from long-term highway projects which have an average contract length of approximately ten months. The Penhall Group strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, the Penhall Group is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 20% to 30% of Operated Equipment Rental Services revenues are generated from fixed-price contracts. Revenues generated by Penhall's contract divisions, excluding services performed by the equipment rental divisions on long-term contracts, represent approximately 23.5% of the total revenues for fiscal 1998. The operated equipment rental industry ("Operated Equipment Rental Industry") is a specialized niche segment of the highly fragmented United States equipment rental industry. There are an estimated 17,000 equipment rental companies in the United States, and no single company represented more than 2% of total market revenues in 1996. According to industry sources, the United States equipment rental industry grew from approximately $600 million in revenues in 1982 to an estimated $18 billion in 1997, representing a CAGR of 23.7%. Management believes that the Operated Equipment Rental Industry has grown at a similar rate during this period. This growth has been driven primarily by construction spending and continued outsourcing of equipment needs by construction and industrial companies. While customers traditionally have rented equipment for specific purposes such as supplementing capacity during peak periods and in connection with special projects, customers are increasingly looking to rental operators to provide an ongoing, comprehensive supply of equipment, enabling such customers to benefit from the economic advantages and convenience of rental. Also, according to industry sources, for the six months ended January 31, 1998, construction spending in the Penhall Group's Markets grew by an average of 12.3%, significantly outperforming the 8% growth of United States construction spending, primarily due to strong regional economies, favorable demographics and growing levels of construction activity present in these Markets. In addition, Management believes the Operated Equipment Rental Industry will continue to grow significantly as, according to the United States Department of Transportation, 59% of the nation's major roads are in poor or mediocre condition and 31% of the nation's bridges are structurally deficient and/or functionally obsolete. Also, the Transportation Bill (as defined) recently approved by the President of the United States calls for approximately a 44% increase in national spending on highways and mass transit from current levels over the next six years and approximately a 58% increase in the Penhall Group's Markets overall on a non-weighted average basis. The mailing address and telephone number of the principal executive offices of Penhall International Corp., Penhall Rental Corp. and Penhall Company is 1801 Penhall Way, P.O. Box 4609, Anaheim, California 92803, (714) 772-6450. COMPETITIVE STRENGTHS Management believes that the following strengths will provide the Penhall Group with significant competitive advantages and the opportunity to achieve continued growth and increased profitability: 2 DIVERSIFIED REVENUE BASE. The Penhall Group has a diverse revenue base resulting from (i) a broad base of over 6,800 customers, (ii) serving a broad array of end-user markets, and (iii) offering a variety of services. Management believes that the Penhall Group's diverse revenue base, along with the portion of its business derived from customers that have fixed spending budgets, help insulate it from economic downturns. The Penhall Group derives its revenues from a diverse group of customers consisting of highway, airport and building general contractors, and federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of the Penhall Group's total revenue in any of the past five fiscal years. A significant portion of the Penhall Group's revenues are generated from federal, state and municipal agencies, which typically invest in infrastructure projects based on a fixed budget for a certain time period, as opposed to discretionary spending tied to economic cycles. The Penhall Group also offers a broad array of services ranging from the rental of a single unit to contracting for an entire job, and its specialized services are concentrated in both new construction as well as rehabilitation and maintenance of existing infrastructure, which serves to mitigate the effects of cycles within the construction industry. Within its array of services, the Penhall Group's fixed-price contracts complement its Operated Equipment Rental Services and serve to diversify the Penhall Group's revenue base, increase utilization of its operated equipment rental fleet, and differentiate it from other equipment rental competitors. BROAD, MODERN OPERATED EQUIPMENT RENTAL FLEET. Management believes that the Penhall Group has one of the most modern, diversified and well-maintained operated equipment rental fleets in the United States and believes that the quality and breadth of its fleet differentiates the Penhall Group from other local operators. The Penhall Group has invested over $57.5 million in new equipment over the past five fiscal years, during which period the Penhall Group's operated equipment rental fleet grew from 298 to approximately 497 units of equipment. The units in the Penhall Group's operated equipment rental fleet have an average age of approximately four and a half years and an average useful life of approximately nine years. The Penhall Group conducts a preventative maintenance program which increases fleet utilization, extends the useful life of the equipment and generally results in higher resale values. WELL-POSITIONED FOR GROWTH. Management believes that the Penhall Group is well-positioned for continued growth, primarily due to (i) its presence in high-growth Markets, (ii) its leadership position in the growing Operated Equipment Rental Industry, especially with respect to services for highway projects, and (iii) acquisition opportunities resulting from the fragmented nature of the Operated Equipment Rental Industry. In fiscal 1997, construction spending in the Penhall Group's Markets significantly outperformed the national growth rate of 8%. Management expects construction growth in the Markets to continue to outpace national growth due to strong local economies, favorable demographics and increased spending under the new Transportation Bill. In addition, Management believes that based on the number of grinder units in its operated equipment rental fleet, the Penhall Group is the largest provider of grinding services in the United States, maintaining a market share of over 40% of the national grinding market and approximately 80% of the grinding market in California. As a market leader, the Penhall Group is well-positioned to benefit from highway spending, which will increase from current levels by approximately 44% nationally, and approximately 58% in the Penhall Group's Markets overall on a non-weighted average basis, under the new Transportation Bill. Finally, Management believes that the financial resources available to the Penhall Group following consummation of the Transactions, along with the fragmented nature of the Operated Equipment Rental Industry, will enable the Penhall Group to take advantage of strategic acquisition opportunities in both existing and new markets. The Penhall Group has benefited from having the majority of its operations located in some of the fastest growing states in terms of construction spending and population growth. The following table shows construction spending and population growth statistics, two widely used indicators of activity in the Operated Equipment Rental Industry, in the Penhall Group's Markets as compared to national levels: 3
INCREASE IN % OF FISCAL 1998 PENHALL CONSTRUCTION POPULATION PROJECTED INCREASE IN MARKETS GROUP REVENUES SPENDING(1) GROWTH(2) HIGHWAY SPENDING(3) - ----------------------------- ------------------------- --------------- --------------- ----------------------- Arizona...................... 8.7% 10.1% 2.7% 59.5% California................... 70.8 19.5 1.3 45.6 Colorado..................... 3.4 4.0 2.0 52.3 Georgia...................... 2.9 5.3 2.0 69.7 Nevada....................... 4.3 19.5 4.8 61.8 Texas........................ 3.8 19.4 2.0 60.7 Utah......................... 1.6 8.6 2.1 57.8 Other........................ 4.5 Non-weighted average for the Markets.......... 12.3% 2.4% 58.2% National average........... 8.0% 0.9% 44.1%
- ------------------------ (1) Year-over-year growth for six months ended January 31, 1998. (2) Year-over-year growth for year ended December 31, 1997. (3) Represents the projected percentage increase in aggregate highway spending under the Transportation Bill for the period between 1998-2003 as compared to the aggregate highway spending for the period between the 1992-1997. STRONG REPUTATION AND SUPERIOR CUSTOMER SERVICE. Over its 40-year history, the Penhall Group has built a reputation for high quality service, encompassing (i) responsiveness to customer requirements, (ii) quality and availability of equipment, (iii) experienced operators, and (iv) reliability of service. As a result of its focus on customer service, the Penhall Group has developed many long-term relationships, and based on the last fiscal quarter, Management believes that on average in excess of 95% of its revenues are derived through repeat business from existing customers. In addition, the Penhall Group's skilled operators contribute to its superior customer service as they are trained to specialize in the operation of particular types of equipment and provide effective and efficient on-site services to complement the Penhall Group's modern equipment rental fleet. EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Management has an average of approximately 19 years of industry experience and 17 years of experience with the Penhall Group. The Penhall Group's senior and regional managers have successfully developed and implemented equipment rental fleet management and financial strategies which have enabled the Penhall Group to become one of the largest operators in its Markets. Upon consummation of the Transactions, the Management Stockholders (as defined) held approximately 37.5% of the common equity of the Company. GROWTH STRATEGY Management has implemented a business strategy which is designed to enhance the Penhall Group's position as one of the leading Operated Equipment Rental Services companies in its Markets and to capitalize on opportunities to enter new markets through a combination of acquisitions and start-up operations. The Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993 to 20.7% in fiscal 1998, and during the same period revenues and Adjusted EBITDA grew at a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7 million and $24.7 million, respectively, during fiscal 1998 and approximately $38.9 million and $8.7 million, respectively, during the three months ended September 30, 1998. The Penhall Group had a net loss of approximately $1.0 million on a Pro Forma Basis during fiscal 1998 and net earnings of approximately $1.4 million on a Pro Forma Basis during the three months ended September 30, 1998. The Penhall Group believes that the following key elements of its on-going strategy will provide it with the opportunity to continue to achieve growth and increased profitability: EXPAND GEOGRAPHIC PRESENCE. Management intends to continue to expand the Penhall Group's geographic presence through both acquisitions and start-up operations. Since 1994, the Penhall Group has effected six strategic acquisitions and plans to continue to opportunistically target acquisition candidates 4 that (i) have a strong local market share and participate in a high-growth market, and (ii) are led by an experienced management team that will continue to manage the acquired business. Acquisitions enable the Penhall Group to (i) enter new markets and increase geographic diversity, (ii) realize synergies by leveraging its expertise in operated equipment rental fleet management, and (iii) expand its operated equipment rental fleet and range of services. Management believes that the equipment rental industry offers substantial consolidation opportunities for large equipment rental providers such as the Penhall Group. Relative to smaller companies with only one or two rental locations, multi-regional operators such as the Penhall Group benefit from a number of competitive advantages, including access to capital, the ability to offer a broader range of modern, high-quality equipment, standardized management information systems, volume purchasing discounts and the ability to service larger, multi-regional accounts. Management also plans to selectively enter new markets which have favorable growth dynamics through start-up operations. The Penhall Group's decision to open a start-up location is based upon its review of demographic information, business growth projections and the level of existing competition. The Penhall Group opened three start-up locations in fiscal 1997, the benefits of which have not yet been fully realized. Based on the Penhall Group's historical experience, a new location tends to realize significant increases in revenues, cash flow and profitability during the first two years of operation as the Penhall Group builds a diverse operated equipment rental fleet and contributes skilled management. EXPAND OPERATED EQUIPMENT RENTAL FLEET AND INCREASE RANGE OF SERVICES OFFERED. Management intends to continue to grow the Penhall Group's business in both new and existing markets through further expansion of its operated equipment rental fleet and services provided to its customers. Management plans to expand the Penhall Group's operated equipment rental fleet by (i) adding new units to existing equipment lines as utilization increases, and (ii) expanding into new equipment lines which complement an existing Penhall Group service. In addition, Management intends to further increase utilization through the introduction of new services. To that end, the Penhall Group has recently started offering non-operated equipment rentals ("Bare Equipment Rentals") to its customers in Southern California and expects to introduce this service to other markets. Management believes that this strategy will help continue to increase profitability and enable the Penhall Group to attract new business as a single source supplier for its customers. RECENT DEVELOPMENTS ACQUISITION OF HSI. In April 1998, Penhall Company, a California corporation and a wholly-owned subsidiary of PII ("PenCo"), purchased substantially all of the assets of Highway Services, Inc. ("HSI") for approximately $9.7 million plus the assumption of approximately $1.3 million of liabilities (the "HSI Acquisition"). PenCo paid approximately $6.0 million of the purchase price in cash, with the remainder payable in equal installments in April 1999 and 2000 pursuant to a $3.7 million secured promissory note which bears interest at 5.5% per annum. In connection with the HSI Acquisition, certain stockholders of HSI purchased $1.0 million of PII's common stock. Based in Minnesota, HSI operates in approximately 25 states and is a national provider of construction services including grinding, grooving, sawing, sealing and pavement replacement. The HSI Acquisition has combined two of the largest grinding operations in the United States, and will provide the Penhall Group with a strong platform for growth in the Mid-West and the South. THE TRANSPORTATION BILL. On June 9, 1998, the President of the United States approved the approximately $216.0 billion transportation bill (the "Transportation Bill") which will increase spending by approximately 44% from current levels nationally, and approximately 58% overall on a non-weighted average basis in the Penhall Group's Markets, over the next six years and is aimed at financing the repair and new construction of roads, mass transit, bridges, bike paths, bus garages and other infrastructure in the United States. Approximately 80% of the proposed funding has been designated for maintenance and new construction of highways. Approximately 24% of total United States highway spending appropriated by the Transportation Bill will be allocated to the Penhall Group's Markets, and Management believes that the Transportation Bill represents a significant growth opportunity for the Penhall Group. 5 THE TRANSACTIONS PII is a California corporation which, prior to the consummation of the Transactions, conducted all its operations through the Company, an Arizona corporation, and PenCo, a California corporation. As of June 30, 1998, PII, the stockholders of PII, the Company, BRS and the Issuer entered into an Agreement and Plan of Merger (as amended pursuant to letter agreements executed in connection therewith, the "Merger Agreement"). Pursuant to the Merger Agreement, a newly formed, wholly-owned subsidiary of the Company ("Phoenix Merger Sub") was merged with and into PII (the "Reorganization Merger"), with the result that (i) PII continued as the surviving corporation, (ii) each stockholder of PII had his or her common equity in PII converted into common equity in the Company, (iii) PII received common equity in the Company approximately equal in value to the value of its common equity in the Company immediately prior to the consummation of the Reorganization Merger and (iv) the Company received common equity in PII such that the Company became the corporate parent of and obtained ownership of all the outstanding capital stock of PII (which continued to hold all the outstanding capital stock of PenCo). In accordance with the Merger Agreement, immediately following the Reorganization Merger the Issuer was merged with and into the Company (the "Recapitalization Merger" and, together with the Reorganization Merger, the "Mergers"), with the Company continuing as the surviving corporation (the "Surviving Corporation"). Prior to or simultaneously with the consummation of the Recapitalization Merger, the Issuer entered into a new senior secured credit facility (the "New Credit Facility") providing for $20.0 million of Term Loans (as defined) and up to $30.0 million of Revolving Loans (as defined), and all indebtedness of the Penhall Group except $4.7 million of notes payable was repaid (the "Refinancing"). Following the consummation of the Mergers, the Company changed its corporate name to "Penhall International Corp." and PII changed its corporate name to "Penhall Rental Corp." CORPORATE STRUCTURE PRIOR TO THE TRANSACTIONS [LOGO] EXISTING CORPORATE STRUCTURE [LOGO] - ------------------------ (1) Corporate name was changed from "Phoenix Concrete Cutting, Inc." to "Penhall International Corp." (2) Corporate name was changed from "Penhall International, Inc." to "Penhall Rental Corp." 6 The aggregate consideration paid upon consummation of the Recapitalization Merger (the "Merger Consideration") was approximately $136.2 million. Pursuant to the Merger Agreement, (i) certain management stockholders of PII (the "Existing Management Stockholders") converted a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation (the "Equity Rollover"), (ii) the National Christian Charitable Foundation, Inc., an existing stockholder of PII (the "Foundation"), received $10.0 million of preferred equity of the Surviving Corporation in lieu of $10.0 million of cash Merger Consideration otherwise payable to it in the Recapitalization Merger and (iii) BRS and certain persons affiliated with BRS (together with BRS, the "BRS Entities"), and certain members of PII management other than the Existing Management Stockholders (the "New Management Stockholders" and, together with the Existing Management Stockholders, the "Management Stockholders"), purchased $21.1 million and $0.2 million, respectively, of common and preferred equity of the Surviving Corporation for an aggregate of $21.3 million (the "Equity Contribution" and, together with the Mergers, the Refinancing, the Equity Rollover and the issuance of preferred equity of the Surviving Corporation to the Foundation, the "Recapitalization"). Following the consummation of the Recapitalization, the BRS Entities held approximately 62.5% of the Common Stock, par value $.01 per share, of the Surviving Corporation ("Common Stock"), 100.0% of the Series A Preferred Stock, par value $.01 per share, of the Surviving Corporation ("Series A Preferred Stock") and 43.3% of the Series B Preferred Stock, par value $.01 per share, of the Surviving Corporation ("Series B Preferred Stock"); the Management Stockholders held approximately 37.5% of the Common Stock and 38.6% of the Series B Preferred Stock; the Foundation held 100% of the 10.5% Senior Exchangeable Preferred Stock, par value $.01 per share, of the Surviving Corporation ("Senior Exchangeable Preferred Stock"); and PII held approximately 18.1% of the Series B Preferred Stock. The foregoing transactions, together with the issuance of the Notes, the application of the proceeds therefrom and the payment of related fees and expenses, are collectively referred to herein as the "Transactions." See "The Transactions." The Company will not receive any proceeds from the Exchange Offer. The following table sets forth the sources and uses of funds in connection with the Recapitalization. To reflect the conversion by the Existing Management Stockholders of a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation and the receipt by the Foundation of $10.0 million of Senior Exchangeable Preferred Stock in lieu of $10.0 million of cash Merger Consideration otherwise payable to if in the Recapitalization Merger, the table includes each of the Equity Rollover and the issuance of Senior Exchangeable Preferred Stock as both a source and a use of funds. 7
AMOUNT (IN MILLIONS) ----------- SOURCES OF FUNDS: Term Loans(1).................................................................... $ 20.0 Senior Notes..................................................................... 100.0 Equity Rollover.................................................................. 8.7 Senior Exchangeable Preferred Stock.............................................. 10.0 Equity Contribution.............................................................. 21.3 Working capital.................................................................. 1.0 ----------- Total sources.............................................................. $ 161.0 ----------- ----------- USES OF FUNDS: Cash portion of Merger Consideration(2).......................................... $ 117.5 Equity Rollover.................................................................. 8.7 Senior Exchangeable Preferred Stock.............................................. 10.0 Refinancing of existing indebtedness(3).......................................... 14.5 Fees and expenses................................................................ 10.3 ----------- Total uses................................................................. $ 161.0 ----------- -----------
- ------------------------ (1) The New Credit Facility entered into in connection with the Recapitalization provides for $20.0 million of Term Loans and up to $30.0 million of Revolving Loans. See "Description of Certain Indebtedness--New Credit Facility." Term Loans in an aggregate principal amount of $20.0 million were drawn on the closing date of the New Credit Facility in connection with the Recapitalization. (2) The $117.5 million cash portion of the Merger Consideration is net of the $8.7 million Equity Rollover and the issuance of $10.0 million of Senior Exchangeable Preferred Stock. See "The Transactions." (3) The outstanding indebtedness which was repaid pursuant to the Refinancing consisted of $14.5 million of revolving loans (including approximately $6.3 million of revolving loans used to finance the HSI Acquisition and repay certain notes payable assumed in connection with the HSI Acquisition). 8 THE EXCHANGE OFFER SECURITIES OFFERED........................... Up to $100,000,000 aggregate principal amount of 12% Senior Notes due 2006. The terms of the New Notes and Existing Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Existing Notes. THE EXCHANGE OFFER........................... The New Notes are being offered in exchange for a like principal amount of Existing Notes. Existing Notes may be exchanged only in integral multiples of $1,000. The issuance of the New Notes is intended to satisfy obligations of the Company contained in the Registration Rights Agreement. EXPIRATION DATE; WITHDRAWAL OF TENDER........ The Exchange Offer will expire at 5:00 p.m., New York City time, on , 199 , or such later date and time to which it may be extended by the Company. The tender of Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Existing Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. ACCRUED INTEREST ON THE NEW NOTES AND THE EXISTING NOTES............................. The New Notes will bear interest from and including the date of consumation of the Exchange Offer. Additionally, interest on the New Notes will accrue from the last interest payment date on which interest was paid on the Existing Notes surrendered in exchange therefor or, if no interest has been paid on the Existing Notes, from the date of original issue of the Existing Notes. Holders whose Existing Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Existing Notes. CERTAIN CONDITIONS TO THE EXCHANGE OFFER..... The Company's obligation to accept for exchange, or to issue New Notes in exchange for, any Existing Notes is subject to certain customary conditions relating to compliance with any applicable law and any applicable interpretation by the staff of the Commission, which may be waived by the Company in its reasonable discretion. The Company currently expects that each of the conditions will be satisfied and that no waivers will be necessary. See "The Exchange Offer--Certain Conditions to the Exchange Offer."
9 PROCEDURES FOR TENDERING EXISTING NOTES...... Each holder of Existing Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Existing Notes and any other required documentation, to the Exchange Agent (as defined) at the address set forth herein. See "The Exchange Offer--Procedures for Tendering Existing Notes." USE OF PROCEEDS.............................. The Company will not receive any proceeds from the Exchange Offer. EXCHANGE AGENT............................... United States Trust Company of New York (the "Exchange Agent") is serving as the Exchange Agent in connection with the Exchange Offer. FEDERAL INCOME TAX CONSEQUENCES.............. The exchange of Notes pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations."
CONSEQUENCES OF EXCHANGING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER Based on certain interpretive letters issued by the staff of the Commission to third parties in unrelated transactions, the Company is of the view that holders of Existing Notes (other than any holder who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who exchange their Existing Notes for New Notes pursuant to the Exchange Offer generally may offer such New Notes for resale, resell such New Notes and otherwise transfer such New Notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided such New Notes are acquired in the ordinary course of the holders' business and such holders have no arrangement with any person to participate in a distribution of such New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Existing Notes must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or in compliance with an available exemption from registration or qualification. The Company has agreed, pursuant to the Registration Rights Agreement and subject to certain specified limitations therein, to register or qualify the New Notes for offer or sale under the securities or blue sky laws of such jurisdictions as any holder of the Notes reasonably requests in writing. If a holder of Existing Notes does not exchange such Existing Notes for New Notes pursuant to the Exchange Offer, such Existing Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Existing Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Holders of Existing Notes do not have any appraisal or dissenters' rights under the Arizona Business Corporation Act in connection with the Exchange Offer. See "The Exchange Offer--Consequences of Failure to Exchange; Resales of New Notes." The Existing Notes are currently eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") market. Following commencement of the Exchange Offer but prior to its consummation, the Existing Notes may continue to be traded in the PORTAL market. Following consummation of the Exchange Offer, the New Notes will not be eligible for PORTAL trading. 10 THE NEW NOTES The terms of the New Notes are identical in all material respects to the Existing Notes, except for certain transfer restrictions and registration rights relating to the Existing Notes. SECURITIES OFFERED........................... $100,000,000 aggregate principal amount of 12% Senior Notes due 2006. MATURITY DATE................................ August 1, 2006. INTEREST PAYMENT DATES....................... February 1 and August 1 of each year, commencing February 1, 1999. RANKING...................................... The New Notes will be general unsecured senior obligations of the Company and will rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes will be effectively subordinated in right of payment to all secured indebtedness of the Company, including indebtedness incurred under the New Credit Facility, to the extent of the assets securing such indebtedness. As of September 30, 1998, the Company had approximately $121.1 million of indebtedness outstanding (including $20.8 million of secured indebtedness outstanding pursuant to the New Credit Facility but exclusive of $29.2 million of unused commitments thereunder). The Indenture permits the Company to incur additional indebtedness (including secured indebtedness) subject to certain restrictions. See "Description of the Notes." GUARANTEES................................... The Guarantors will fully and unconditionally guarantee, on a senior basis, jointly and severally, the full and prompt performance of the Company's obligations under the Indenture and the Notes. The Guarantees will be general unsecured obligations of the Guarantors and will rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Guarantors. The Guarantees will be effectively subordinated in right of payment to all secured indebtedness of the Guarantors to the extent of the assets securing such indebtedness. As of September 30, 1998, the Guarantors had approximately $4.3 million of indebtedness outstanding (including $3.9 million of secured indebtedness but exclusive of guarantees by the Guarantors of the Company's obligations under the Notes and the New Credit Facility). The Indenture permits the Guarantors to incur additional indebtedness (including secured indebtedness) subject to certain restrictions. See "Description of the Notes."
11 OPTIONAL REDEMPTION.......................... The New Notes will be redeemable, in whole or in part, at the option of the Company on or after August 1, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to August 1, 2001, the Company, at its option, may redeem up to 30% of the aggregate principal amount of the New Notes with the net cash proceeds of one or more Public Equity Offerings (as defined) of the Company, at a redemption price equal to 112% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption; PROVIDED that at least 70% of the aggregate principal amount of New Notes originally issued remains outstanding immediately following such redemption. See "Description of the Notes-- Redemption." CHANGE OF CONTROL............................ Upon a Change of Control, each holder of the New Notes will have the right, subject to certain conditions, to require the Company to repurchase such holder's New Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. There can be no assurance, however, that the Company will have available funds sufficient to purchase the New Notes upon a Change of Control. See "Description of Notes." CERTAIN COVENANTS............................ The Indenture governing the New Notes (the "Indenture") contains certain covenants that limit the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional indebtedness, pay dividends or make investments and certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, the Company will be obligated to offer to repurchase the New Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase in the event of certain Asset Sales (as defined). See "Description of the Notes--Certain Covenants."
For additional information regarding the New Notes, see "Description of the Notes." RISK FACTORS Holders of Existing Notes should carefully consider the specific matters set forth under "Risk Factors," as well as the other information and data included in this Prospectus, in connection with the Exchange Offer. 12 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The following table sets forth summary historical consolidated financial information of the Company for the three fiscal years ended June 30, 1998 and for the three months ended September 30, 1997 and 1998. The consolidated statement of operations data for the three years ended June 30, 1998 and the consolidated balance sheet data as of June 30, 1997 and 1998 was derived from the audited consolidated financial statements of the Company included elsewhere herein. The consolidated balance sheet data as of June 30, 1996 was derived from audited consolidated financial statements of the Company. The consolidated statement of operations data for the three months ended September 30, 1997 and 1998 and the consolidated balance sheet data as of September 30, 1998 was derived from the unaudited consolidated financial statements of the Company included elsewhere herein which, in the opinion of Management, include all adjustments necessary for a fair presentation of the financial condition and results of operations of the Company for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. The other data presented below was derived from Company prepared schedules. This table is qualified in its entirety by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the related notes thereto, included elsewhere herein.
FISCAL YEAR THREE MONTHS ENDED JUNE 30, ENDED SEPTEMBER 30, ----------------------------------- ---------------------- 1996 1997 1998 1997 1998 ---------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues........................................... $ 74,895 $ 95,298 $ 101,170 $ 28,351 $ 38,913 Gross profit....................................... 23,695 26,757 28,775 8,336 11,045 General and administrative expenses................ 15,156 16,953 19,880 4,703 17,211 Other compensation................................. -- -- 3,271 -- -- Earnings (loss) before interest expense and income taxes............................................ 9,406 10,675 6,268 3,786 (5,906) Interest expense................................... 783 811 1,036 250 2,616 Net earnings (loss)................................ 5,085 5,457 2,701 2,141 (6,801) Accretion of preferred stock to redemption value... -- -- -- -- (395) Accrual of cumulative dividends on preferred stock............................................ -- -- -- -- (388) Net earnings (loss) available to common stockholders..................................... 5,085 5,457 2,701 2,141 (7,584) EARNINGS (LOSS) PER SHARE: Basic.............................................. $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32) Diluted............................................ 1.24 1.27 .62 .49 (3.32) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic.............................................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725 Diluted............................................ 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725 OTHER DATA: Adjusted EBITDA (1)................................ $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615 Adjusted EBITDA margin (2)......................... 20.9% 20.5% 20.7% 21.3% 22.1% Net cash provided by (used in) operating activities....................................... $ 10,686 $ 8,562 $ 16,628 $ 4,940 $ (14,675) Net cash used in investing activities.............. $ (10,522) $ (15,086) $ (17,047) $ (3,455) $ (3,216) Net cash provided by (used in) financing activities....................................... $ 735 $ 6,263 $ (23) $ (1,292) $ 19,649 Depreciation and amortization...................... $ 5,417 $ 6,878 $ 8,870 $ 2,045 $ 2,488 Capital expenditures............................... $ 11,511 $ 16,089 $ 12,287 $ 3,588 $ 3,337 Units of operated equipment rentals at end of period........................................... 369 420 497 432 513 Number of operating locations at end of period..... 16 21 22 21 22 CONSOLIDATED BALANCE SHEET DATA AT PERIOD END: Total assets....................................... $ 53,378 $ 69,833 $ 88,323 $ 78,374 $ 101,794 Long-term obligations, including current maturities....................................... 8,981 14,111 18,564 12,819 125,405 Stockholders' equity (deficit)..................... 32,032 39,253 43,606 41,394 (66,002)
13 - ------------------------ (1) Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude stock-related compensation expense, reorganization costs and other compensation (for discussion of stock-related compensation expense and reorganization costs and other compensation, see notes 8 and 1, respectively, to the Company's consolidated financial statements). Adjusted EBITDA is presented because Management believes it provides useful information regarding a company's ability to incur and/or service debt. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles ("GAAP") or as a measure of a company's profitability or liquidity. The following chart depicts the components of Adjusted EBITDA:
THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------- -------------------- 1996 1997 1998 1997 1998 --------- --------- --------- --------- --------- Net earnings (loss)....................... $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (6,801) Interest expense.......................... 783 811 1,036 250 2,616 Income taxes.............................. 3,538 4,407 2,531 1,395 (1,721) Depreciation and amortization............. 5,417 6,878 8,870 2,045 2,488 Stock related compensation expense........ 821 2,012 1,315 215 8,942 Reorganization costs...................... -- -- 1,207 -- 3,091 Other compensation........................ -- -- 3,271 -- -- --------- --------- --------- --------- --------- Adjusted EBITDA....................... $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues. 14 SUMMARY UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA The following table sets forth summary unaudited consolidated pro forma financial data of the Company for the fiscal year ended June 30, 1998 and for the three months ended September 30, 1998. The summary unaudited consolidated pro forma financial data is based on the historical consolidated financial statements of the Company and the historical financial statements of HSI, and gives effect to the HSI Acquisition and the Transactions in the manner described under "Unaudited Pro Forma Condensed Consolidated Financial Statements." The summary unaudited consolidated pro forma financial data is presented for informational purposes only and is not necessarily indicative of the results of operations of the Company had the HSI Acquisition and the Transactions actually occurred on the indicated date or been in effect for the periods presented and does not purport to be indicative of the results of operations of the Company for any future period. The summary unaudited consolidated pro forma financial data is qualified in its entirety by reference to, and should be read in conjunction with, "Unaudited Pro Forma Condensed Consolidated Financial Statements," the consolidated financial statements of the Company and the financial statements of HSI, including the related notes thereto, included elsewhere herein.
FISCAL YEAR ENDED THREE MONTHS ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 -------------------- ------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues....................................................... $ 114,706 $ 38,913 Gross profit................................................... 32,526 11,045 General and administrative expenses............................ 20,449 5,249 Earnings before interest expense and income taxes.............. 12,721 6,056 Interest expense............................................... 14,323 3,803 Net earnings (loss)............................................ (962) 1,352 Accretion of preferred stock to redemption value............... (2,554) (687) Accrual of cumulative dividends on preferred stock............. (2,577) (697) Net loss available to common stockholders...................... (6,093) (32) LOSS PER SHARE: Basic.......................................................... $ (6.12) $ (.03) Diluted........................................................ $ (6.12) $ (.03) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic.......................................................... 995,000 995,000 Diluted........................................................ 995,000 995,000 OTHER DATA: Adjusted EBITDA (1)............................................ $ 24,735 $ 8,704 Adjusted EBITDA margin (2)..................................... 21.6% 22.4% Depreciation and amortization.................................. $ 10,699 $ 2,575 Capital expenditures........................................... $ 12,287 $ 3,337 Units of operated equipment rentals at end of period........... 497 513 Number of operating locations at end of period................. 22 22 Ratio of Total Debt to Adjusted EBITDA......................... 5.0x 3.6x Ratio of Adjusted EBITDA to Interest Expense................... 1.7x 2.3x
- ------------------------ (1) Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude stock-related compensation expense and reorganization costs and other compensation (for discussion of stock-related compensation expense and reorganization costs and other compensation, see notes 8 and 1, respectively, to the Company's consolidated financial statements). Adjusted EBITDA is presented because Management believes it provides useful information regarding a company's ability to incur and/or service debt. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of a company's profitability or liquidity. 15 The following chart depicts the components of Adjusted EBITDA:
FISCAL YEAR ENDED JUNE 30, THREE MONTHS ENDED 1998 SEPTEMBER 30, 1998 ---------------- ------------------- Net earnings (loss)............................... $ (962) $ 1,352 Interest expense.................................. 14,323 3,803 Income taxes...................................... (640) 901 Depreciation and amortization..................... 10,699 2,575 Stock related compensation expense................ 1,315 73 ------- ------- Pro Forma Adjusted EBITDA....................... $ 24,735 $ 8,704 ------- ------- ------- -------
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues. 16 RISK FACTORS HOLDERS OF EXISTING NOTES SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS, IN CONNECTION WITH THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE GENERALLY APPLICABLE TO THE EXISTING NOTES AS WELL AS THE NEW NOTES. SUBSTANTIAL LEVERAGE AND DEBT SERVICE The Company has substantial indebtedness and debt service obligations. See "Description of Certain Indebtedness--New Credit Facility" and "Description of the Notes." As of September 30, 1998, the Company and its subsidiaries had approximately $125.4 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $66.0 million. The Company would also have had borrowing availability under the New Credit Facility of $29.2 million, subject to the borrowing conditions contained therein. On a Pro Forma Basis, the Company's earnings were insufficent to cover its fixed charges by approximately $7.9 million during fiscal 1998 and approximately $9.7 million during the three months ended September 30, 1998. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on indebtedness; (iii) the agreements governing the Company's long-term indebtedness will contain restrictive financial and operating covenants that could limit the Company's ability to compete and expand; (iv) the Company's leverage may make it more vulnerable to industry-related or general economic downturns and may limit its ability to withstand competitive pressures; and (v) certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company to the risk of increased interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's ability to meet its debt service obligations and to reduce or refinance its total debt (including the Notes) will depend upon its future operating performance, which, in turn, is subject to general economic conditions and to financial, business and other factors affecting the Company, many of which are beyond its control. There can be no assurance that the Company's business will generate sufficient cash flow for the Company to meet its debt service obligations. If the Company is unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt (including the Notes) or obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt, the restrictions on the Company's ability to incur additional debt under the New Credit Facility and the Indenture, and the fact that substantially all of the Company's assets will be pledged to secure obligations under the New Credit Facility. RANKING; ASSET ENCUMBRANCE The Notes are general unsecured senior obligations of the Company and rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Notes are fully and unconditionally guaranteed on a senior basis, jointly and severally, by the Guarantors. The Guarantees are general unsecured obligations of the Guarantors and rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Guarantors. However, the Notes are effectively subordinated in right of payment to all secured indebtedness of the Company and the Guarantees are effectively subordinated in right of payment to all secured indebtedness of the Guarantors, in each case to the extent of the assets securing such indebtedness. 17 As of September 30, 1998, the Company had approximately $121.1 million of indebtedness outstanding (including $20.8 million of secured indebtedness outstanding pursuant to the New Credit Facililty but exclusive of $29.2 million of unused commitments thereunder), and the Guarantors had approximately $4.3 million of indebtedness outstanding (including $3.9 million of secured indebtedness but exclusive of the guarantees by the Guarantors of the Company's obligations under the Notes and the New Credit Facility). The Indenture permits the Company and the Guarantors to incur additional indebtedness (including secured indebtedness) subject to certain restrictions. See "Description of the Notes." In the event of a default on such secured indebtedness (or other secured indebtedness incurred by the Company), or a bankruptcy, liquidation or reorganization of the Company and its subsidiaries, the assets secured by such indebtedness will be available to satisfy obligations with respect to such secured indebtedness before any payment therefrom will be made on the Notes. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS The Indenture contains covenants that restrict, among other things, the ability of the Company to: incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined therein), enter into transactions with affiliates, allow its subsidiaries to make certain payments, create certain liens, make certain asset dispositions and merge or consolidate with, or transfer substantially all of its assets to, another person, or engage in certain change of control transactions. See "Description of the Notes--Certain Covenants." If the Company fails to comply with these covenants, it would be in default under the Indenture and the principal and accrued interest on the Notes would become due and payable. In addition, the New Credit Facility contains other and more restrictive covenants and prohibits the Company from prepaying certain of its indebtedness, including the Notes. Under the New Credit Facility, the Company is required to maintain specified financial ratios, including maintaining specified Interest Coverage Ratios, Fixed Charge Coverage Ratios and Leverage Ratios (each as defined in the New Credit Facility). The failure by the Company to maintain such financial ratios or to comply with the restrictions contained in the New Credit Facility or the Indenture could result in a default thereunder, which in turn could cause such indebtedness (and by reason of cross-default provisions, other indebtedness) to become immediately due and payable. No assurance can be given that the Company's future operating results will be sufficient to enable compliance with such covenants, or in the event of a default, to remedy such default. If the Company is unable to pay amounts due under the New Credit Facility, the lenders thereunder could proceed against the collateral granted to them to secure that indebtedness. There can be no assurance that the Company's assets would be sufficient to repay in full such indebtedness or the Company's other indebtedness, including the Notes. See "Description of Certain Indebtedness--New Credit Facility" and "Description of the Notes--Certain Covenants." RISKS INHERENT IN GROWTH STRATEGY The Penhall Group has recently accelerated its growth, expanding its operated equipment rental fleet at existing locations, adding three new locations during fiscal 1997 and consummating the HSI Acquisition in April 1998. The Penhall Group intends to continue this rapid growth by expanding its operated equipment rental fleet at existing locations, continuing to make acquisitions and opening several new locations each year. There can be no assurance that the Penhall Group will be able to identify acquisition candidates and attractive new locations or obtain financing for acquisitions and internal expansion on satisfactory terms, or at all. The Penhall Group's growth strategy presents the risks inherent in assessing the value, strengths and weaknesses of growth opportunities, in evaluating the costs and uncertain returns of expanding its operations, and in integrating acquisitions with existing operations. The Penhall Group expects that its growth strategy will affect short-term cash flow and net income as the Penhall Group increases the amount of its indebtedness and incurs expenses to expand its operated equipment rental fleet, make acquisitions and open new locations. There can be no assurance that the Penhall Group will successfully expand, that any acquired businesses will be successfully integrated into its operations or that any expansion will result in profitability. 18 The integration of the administrative, finance and other operations of HSI and other acquired businesses, the coordination of their respective sales and marketing organizations with those of the Penhall Group and the implementation of appropriate operational, financial and management systems and controls may require significant financial resources and substantial attention from Management, and will result in the diversion of such resources and attention from the Penhall Group's existing businesses. Any inability of the Penhall Group to integrate the operations of such businesses successfully in a timely and efficient manner could adversely affect the its financial condition and results of operations. In addition, the Penhall Group's future growth will place significant demands on Management and its operational, financial and marketing resources. In connection with acquisitions and the start-up of new locations, the Penhall Group anticipates experiencing growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations. The Penhall Group believes this growth will increase the operating complexity of the Penhall Group and the level of responsibility exercised by both existing and new management personnel. To manage this expected growth, the Penhall Group intends to invest further in its operating and financial systems and to continue to expand, train and manage its employee base. There can be no assurance that the Penhall Group will be able to attract and retain qualified management and employees or that the its current operating and financial systems and controls will be adequate as the Penhall Group grows or that any steps taken to improve such systems and controls will be successful. See "Business--Growth Strategy." COMPETITION The equipment rental industry is highly competitive. The Penhall Group's competitors include large national rental companies, regional companies, smaller independent businesses and equipment vendors which both sell and rent equipment to customers. Some of the Penhall Group's competitors are more geographically diverse, have greater name recognition than the Penhall Group, have greater financial and other resources available to them and may be substantially less leveraged than the Penhall Group. There can be no assurance that the Penhall Group will not encounter increased competition from existing competitors or new market entrants, such as manufacturers of heavy equipment, that may be significantly larger and have greater financial and marketing resources than the Penhall Group. If existing or future competitors reduce prices to gain or retain market share and the Penhall Group must also reduce prices to remain competitive, the Penhall Group's operating results could be adversely affected. Additionally, existing or future competitors may seek to compete with the Penhall Group for start-up locations or acquisition candidates, which may have the effect of increasing acquisition prices and reducing the number of suitable acquisition candidates or expansion locations. See "Business--Competition." GOVERNMENTAL REGULATION The operations of the Penhall Group are subject to certain federal, state and local laws and regulations concerning labor relations, wage rates, equal opportunity employment and affirmative action. While compliance with such laws and regulations has not adversely affected the Penhall Group's operations in the past, there can be no assurance that these requirements will not change or that future compliance will not adversely affect the Penhall Group's operations. The Penhall Group's facilities and operations are also subject to certain federal, state and local laws and regulations relating to environmental protection and occupational health and safety, including those governing wastewater discharges, the treatment, storage and disposal of solid and hazardous wastes and materials, and the remediation of contamination associated with the release of hazardous substances. The Penhall Group believes that it is in material compliance with such requirements. The Penhall Group operates at a number of locations at which petroleum products are stored in underground tanks. The Penhall Group is currently in the process of complying with up-coming regulatory obligations to upgrade or close underground storage tanks under the Resource Conservation and Recovery Act of 1980, as amended ("RCRA"), including all applicable requirements of state regulatory agencies, which must be met by December 22, 1998. The Penhall Group believes that the costs associated with the storage tank 19 upgrades or closures (including the cost to address any associated contamination) would not reasonably be expected to exceed $170,000. Certain of the Penhall Group's present and former facilities and operations at off-site construction sites have used substances and generated or disposed of wastes which may include material which is or may be considered hazardous or are otherwise regulated by environmental laws, and the Penhall Group may incur liability in connection therewith. Moreover, there can be no assurance that environmental and safety requirements will not become more stringent or be interpreted and applied more stringently in the future. Such future changes or interpretations, or the identification of adverse environmental conditions currently unknown to the Penhall Group, could result in additional environmental compliance or remediation costs to the Penhall Group. Such compliance and remediation costs could be material to the Penhall Group's financial condition or results of operations. See "Business--Governmental Regulation." SENSITIVITY TO GENERAL ECONOMIC CONDITIONS; SEASONALITY A majority of the Penhall Group's revenues are derived from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions, such as the construction industry. In addition, because the Penhall Group conducts its operations in a variety of geographic markets, it is subject to economic conditions in each such geographic market. In fiscal 1998, the Penhall Group derived 70.8% and 8.7% of its revenues from customers located in California and Arizona, respectively, and therefore the Penhall Group's operations are particularly affected by the economic conditions in such states. Although the Penhall Group believes that its operating strategy may help to mitigate the effects of economic downturns, general economic conditions or localized downturns in markets where the Penhall Group has operations, including any downturns in the construction industry, could have a material adverse effect on the Penhall Group's financial condition and results of operations. Equipment rental businesses often experience a slowdown in demand during the winter months when adverse weather conditions affect construction activity. To date, seasonal demand fluctuations have not materially affected the Penhall Group's operating results. However, as the Penhall Group expands geographically, seasonal demand fluctuations may lower operating results, particularly in the second and third fiscal quarters. INSURANCE AND BONDING The Penhall Group's business exposes it to possible claims for property damage and personal injury or death resulting from the use of equipment rented by the Penhall Group and from injuries caused in motor vehicle accidents in which Penhall Group delivery and service personnel are involved. In addition, in the course of providing its operated equipment rental services, the Penhall Group places its employees at the worksites of other companies. An attendant risk of such activity includes possible claims for property damage caused by the activities of such employees, in addition to possible claims for theft of property, discrimination, harassment and other criminal or tort claims. While the Penhall Group has not historically experienced any material claims of these types, there can be no assurance that the Penhall Group will not experience such claims in the future. The Penhall Group maintains general liability and excess liability insurance for all of its operations (including the activities of its employees at the worksites of other companies), as well as an equipment floater covering contractors' equipment. Workers' compensation insurance is maintained in amounts consistent with industry practices. Although Management believes that the Penhall Group's insurance programs are sufficient to cover existing and future claims, there can be no assurance that existing or future claims will not exceed the level of the Penhall Group's insurance or that such insurance will continue to be available on economically reasonable terms, or at all. The Penhall Group is required under the terms of approximately 15% of its subcontracts to provide surety bonds to ensure that such contracts will be completed in accordance with their terms and conditions. The Penhall Group recently retained a new surety for the writing of all of its surety bonds. The Penhall Group believes that there are a number of other companies providing similar services that would be 20 available to the Penhall Group in the event that such surety becomes unable or unwilling to continue to meet the Penhall Group's surety bond needs. In the short term, however, the loss of such surety's services could have a material adverse effect on the Penhall Group and its operations. DEPENDENCE ON KEY PERSONNEL The Penhall Group's success depends to a significant degree upon the continued contributions of Management, certain of whom would be difficult to replace. The loss of the services of certain of these executives could have an adverse effect on the Penhall Group. There can be no assurance that the services of such personnel will continue to be available to the Penhall Group. See "Management." LABOR RELATIONS Approximately 376 of the Penhall Group's employees are represented by various labor unions. These unionized employees are organized into 16 certified or lawfully recognized bargaining units several of which are represented by the same local union. Although the Penhall Group considers its employee relations generally to be good, a prolonged work stoppage or strike by union employees could have a material adverse effect on the business and operations of the Penhall Group. In addition, there can be no assurance that upon the expiration of existing collective bargaining agreements new agreements will be reached without union action or that any such new agreements will be on terms satisfactory to the Penhall Group. One collective bargaining agreement expired in May 1998, and the Penhall Group and the union have agreed to abide by the terms of the expired agreement on a month-to-month basis while the multi- employer association attempts to negotiate a successor agreement. Although the Penhall Group is currently negotiating a successor agreement, there can be no assurance that the Penhall Group will be able to successfully negotiate a new agreement or that the terms of any such new agreement will not have an adverse effect on the Penhall Group's results of operations. Moreover, the ability of the Penhall Group to implement its growth strategy may be adversely affected by the unavailability of qualified and skilled workers. See "Business--Labor Relations." MULTI-EMPLOYER PENSION PLANS The Penhall Group's collective bargaining agreements provide for Penhall's participation in multi-employer pension plans. In the event of the Penhall Group's partial or total withdrawal from such plans, it may be liable for its share of any unfunded vested benefits thereunder. The Penhall Group also may be assessed for its share of any unfunded vested benefits resulting from partial or total withdrawal from such plans and any non-payment by other employer participants. FRAUDULENT CONVEYANCE CONSIDERATIONS; AVOIDANCE OF GUARANTEES Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the Notes or any Guarantee in favor of other existing or future creditors of the Company or a Guarantor. The Company believes that the indebtedness represented by the Existing Notes was incurred for proper purposes and in good faith, and that based on asset valuations and other financial information, the Company was, at the time it issued the Existing Notes, solvent, will have sufficient capital for carrying on its business and will be able to pay its debts as they mature. Notwithstanding the Company's belief, if a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that, at the time of the incurrence of the indebtedness represented by the Existing Notes, either (i) the Company incurred such indebtedness with the intent of hindering, delaying or defrauding creditors, or (ii) the Company received less than a reasonably equivalent value or fair consideration for incurring such indebtedness and the Company (a) was insolvent or rendered insolvent by reason of the incurrence of such indebtedness, (b) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property 21 remaining with the Company after giving effect to the incurrence of such indebtedness constituted an unreasonably small amount of capital or (c) intended to incur, or believed that it would incur, debts beyond its ability to pay as they matured, such court could avoid the Company's obligations under the Notes and direct the repayment of any amounts paid thereunder to a fund for the benefit of the Company's creditors, or take other action detrimental to the holders of the Notes. Such other action could include subordinating the Notes to claims of existing or future creditors of the Company. Similarly, indebtedness under the Guarantees also may be subject to review under relevant federal and state fraudulent conveyance and similar laws in a bankruptcy or reorganization of a Guarantor or in a lawsuit brought by or on behalf of creditors of a Guarantor under the same standards described above. Pursuant to the terms of the Guarantees, the liability of each Guarantor is limited to the maximum amount of indebtedness permitted to be incurred in compliance with fraudulent conveyance or similar laws. To the extent any Guarantee was avoided as a fraudulent conveyance, limited as described above or held unenforceable for any other reason, holders of the Notes would, to such extent, cease to have a claim in respect to such Guarantee and, to such extent, would be creditors solely of the Company and any Guarantor whose Guarantee was not avoided, limited or held unenforceable. In such event, the claims of the holders of the Notes with respect to an avoided, limited or unenforceable Guarantee would be subject to the prior payment of all liabilities of such Guarantor. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of Notes. VOTING CONTROL OF THE COMPANY Following consummation of the Transactions, the BRS Entities held approximately 62.5% of the outstanding voting stock of the Company. Accordingly, the BRS Entities have the ability to elect the entire Board of Directors of the Company and, in general, to determine the outcome of any other matter submitted to the stockholders for approval, including the power to determine the outcome of all corporate transactions, such as mergers, consolidations and the sale of all or substantially all of the assets of the Company. Circumstances may occur in which the interests of the BRS Entities could be in conflict with the interests of the holders of the Notes. For example, the BRS Entities may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of Notes. See "Ownership of Capital Stock." POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL The Indenture provides that, upon the occurrence of a Change of Control (as defined therein), the Company will be required to make an offer to purchase all of the Notes issued and then outstanding under the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages (if any) thereon to the date of purchase. Any Change of Control under the Indenture would constitute a default under the New Credit Facility and may result in a default under other indebtedness of the Company that may be incurred in the future. Therefore, upon the occurrence of a Change of Control, the lenders under the New Credit Facility would have the right to accelerate the Company's obligations under the New Credit Facility and the holders of the Notes would have the right to require the Company to purchase their Notes. The New Credit Facility prohibits the purchase of outstanding Notes prior to repayment of borrowings under the New Credit Facility and the exercise by the holders of their right to require the Company to repurchase the Notes will cause an Event of Default under the New Credit Facility. If a Change of Control were to occur, it is unlikely that the Company would be able to repay all of its obligations under the New Credit Facility and the Notes, unless it could obtain alternate financing. There can be no assurance that the Company would be able to obtain any such financing on commercially reasonable terms, or at all, and consequently no assurance can be given that the Company would be able to purchase any of the Notes tendered pursuant to such an offer. 22 ABSENCE OF PUBLIC MARKET FOR THE NOTES The Existing Notes currently are eligible for trading in the PORTAL Market. The New Notes are new securities for which there is currently no established market. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. The Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes but that they are not obligated to do so and any such market making may be discontinued at any time. There can be no assurance as to the development of any market or the liquidity of any market that may develop for the New Notes. If an active public market does not develop, the market, price and liquidity of the New Notes may be adversely affected. Future trading prices of the New Notes will depend on prevailing interest rates, the market for similar securities and other factors, including general economic conditions and the financial condition and performance of the Company. Holders of the New Notes should be aware that they may be required to bear the financial risks of their investment for an indefinite period of time. See "Description of the Notes." YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Penhall Group has established an informal Year 2000 task force. The Penhall Group has a plan which lists the milestones achieved and yet to be completed to become Year 2000 ready. A checklist of potential failure sources has been compiled and includes both information technology and embedded technology systems. The Penhall Group has completed its assessment of its information technology and embedded technology systems and is in the testing phase of their plan. The Penhall Group expects to be Year 2000 ready by June 30, 1999. The Penhall Group does not believe it has a material relationship with any one third party that would have a significant impact to the Penhall Group if that third party was not Year 2000 ready. The Penhall Group recently upgraded their information technology system, both hardware and software, and feel those systems are Year 2000 ready. The Penhall Group does not anticipate significant additional costs to become Year 2000 ready. Delays in the implementation of the Year 2000 solutions or the failure of any critical technology components to operate properly in the Year 2000 could adversely affect the Penhall Group's operations. In addition, the Penhall Group is uncertain as to the extent its customers may be affected by Year 2000 issues that require commitment of significant resources and may cause disruptions in its customers' businesses. Contingency plans have not been developed for all mission critical information and embedded technologies in the event Year 2000 readiness is not met. The Penhall Group plans to have these contingency plans in place by June 30, 1999. FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus, including without limitation, statements containing the words "believes," anticipates," "intends," "expect," "should," "may," "will," "continue" and "estimate," and words of similar import, constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both domestic and foreign; industry and market capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, government regulations; liability and other claims asserted against the Company; competition; the loss of any significant customers; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company after the Transactions; the availability and terms of capital to fund the 23 expansion of the Company's business; and other factors referenced in this Prospectus. Certain of these factors are discussed in more detail elsewhere in this Prospectus, including, without limitation, under the captions "Summary," "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 24 THE TRANSACTIONS PII is a California corporation which, prior to the consummation of the Transactions, conducted all its operations through the Company and PenCo. As of June 30, 1998, PII, the stockholders of PII, the Company, BRS and the Issuer entered into the Merger Agreement, pursuant to which the following transactions (among others) were consummated: (i) PII and the Company amended their charters to authorize various new classes of capital stock necessary for the consummation of the Mergers; (ii) the stockholders of PII exchanged their common equity in PII for shares of the newly-authorized classes of common equity of PII; (iii) the Company formed Phoenix Merger Sub; (iv) Phoenix Merger Sub was merged with and into PII pursuant to the Reorganization Merger, with the result that (A) PII continued as the surviving corporation, (B) each stockholder of PII had his or her common equity in PII converted into common equity in the Company, (C) PII received common equity in the Company approximately equal in value to the value of its common equity in the Company immediately prior to the consummation of the Reorganization Merger and (D) the Company received common equity in PII such that the Company became the corporate parent of and obtained ownership of all the outstanding capital stock of PII (which continued to hold all the outstanding capital stock of PenCo); and (v) the Issuer was merged with and into the Company pursuant to the Recapitalization Merger, with the Company continuing as the Surviving Corporation. Prior to or simultaneously with the consummation of the Recapitalization Merger, the Issuer entered into the New Credit Facility providing for $20.0 million of Term Loans (as defined) and up to $30.0 million of Revolving Loans (as defined), and all indebtedness of the Penhall Group except $4.7 million of notes payable was repaid pursuant to the Refinancing. Following the consummation of the Mergers, the Company changed its corporate name to "Penhall International Corp." and PII changed its corporate name to "Penhall Rental Corp." The Merger Consideration paid upon consummation of the Recapitalization Merger was approximately $136.2 million. Pursuant to the Merger Agreement, (i) the Existing Management Stockholders converted a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation pursuant to the Equity Rollover, (ii) the Foundation received $10.0 million of preferred equity of the Surviving Corporation in lieu of $10.0 million of cash Merger Consideration otherwise payable to it in the Recapitalization Merger and (iii) the BRS Entities and the New Management Stockholders purchased $21.1 million and $0.2 million, respectively, of common and preferred equity of the Surviving Corporation pursuant to the Equity Contribution for an aggregate of $21.3 million. Following the consummation of the Recapitalization, the BRS Entities held approximately 62.5% of the Common Stock, 100.0% of the Series A Preferred Stock and 43.3% of the Series B Preferred Stock; the Management Stockholders held approximately 37.5% of the Common Stock and 38.6% of the Series B Preferred Stock; the Foundation held 100% of the Senior Exchangeable Preferred Stock; and PII held approximately 18.1% of the Series B Preferred Stock. PII was obligated to make approximately $3 million of tax gross-up payments to certain members of Management on or before September 15, 1998. The Company made such payments out of working capital on September 15, 1998. The Penhall Group expects that it will realize tax benefits of approximately $3 million in the form of reduced tax payment obligations or refunds of tax overpayments as a result of deductions for certain of such tax gross-up payments and deductions with respect to employee stock options. The Penhall Group has realized or anticipates it will realize these tax benefits during a four-month period that began June 15, 1998. In addition, the Company will be obligated to pay approximately $2.2 million to the current stockholders of PII within ten days following the first anniversary of the HSI Acquisition in the event that certain performance criteria concerning the business of HSI acquired by PenCo is satisfied. 25 USE OF PROCEEDS The Company will not receive any proceeds from the Exchange Offer. The following table sets forth the sources and uses of funds in connection with the Recapitalization. To reflect the conversion by the Existing Management Stockholders of a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation and the receipt by the Foundation of $10.0 million of Senior Exchangeable Preferred Stock in lieu of $10.0 million of cash Merger Consideration otherwise payable to it in the Recapitalization Merger, the table includes each of the Equity Rollover and the issuance of Senior Exchangeable Preferred Stock as both a source and a use of funds.
AMOUNT (IN MILLIONS) ----------- SOURCES OF FUNDS: Term Loans(1).................................................................... $ 20.0 Senior Notes..................................................................... 100.0 Equity Rollover.................................................................. 8.7 Senior Exchangeable Preferred Stock.............................................. 10.0 Equity Contribution.............................................................. 21.3 Working capital.................................................................. 1.0 ----------- Total sources.............................................................. $ 161.0 ----------- ----------- USES OF FUNDS: Cash portion of Merger Consideration(2).......................................... $ 117.5 Equity Rollover.................................................................. 8.7 Senior Exchangeable Preferred Stock.............................................. 10.0 Refinancing of existing indebtedness(3).......................................... 14.5 Fees and expenses................................................................ 10.3 ----------- Total uses................................................................. $ 161.0 ----------- -----------
- ------------------------ (1) The New Credit Facility entered into in connection with the Recapitalization provides for $20.0 million of Term Loans and up to $30.0 million of Revolving Loans. See "Description of Certain Indebtedness--New Credit Facility." Term Loans in an aggegate principal amount of $20.0 million were drawn on the closing date of the New Credit Facility in connection with the Recapitalization. (2) The $117.5 million cash portion of the Merger Consideration is net of the $8.7 million Equity Rollover and the issuance of $10.0 million of Senior Exchangeable Preferred Stock. See "The Transactions." (3) The outstanding indebtedness which was repaid pursuant to the Refinancing consisted of $14.5 million of revolving loans (including approximately $6.3 million of revolving loans used to finance the HSI Acquisition and repay certain notes payable assumed in connection with the HSI Acquisition) that were to mature on October 31, 1998. At June 30, 1998, the weighted average interest rate with respect to such indebtedness was approximately 7.55%. 26 CAPITALIZATION The following table sets forth, at September 30, 1998, the capitalization of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
AT SEPTEMBER 30, 1998 ---------------- (DOLLARS IN THOUSANDS) Long-term debt, including current portion: Notes payable................................................................................. $ 4,655 Term Loans.................................................................................... 20,750 Senior Notes.................................................................................. 100,000 -------- Total long-term debt........................................................................ 125,405 Mandatorily redeemable preferred stock: Senior Exchangeable Preferred Stock........................................................... 10,167 Series A Preferred Stock...................................................................... 10,655 Stockholders' equity (deficit).................................................................. (66,002) -------- Total capitalization.......................................................................... $ 80,225 -------- --------
27 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed consolidated statements of operations of the Company present pro forma information giving effect to the HSI Acquisition and the Transactions which are described in the accompanying notes to the unaudited pro forma condensed consolidated statements of operations. No pro forma condensed consolidated balance sheet has been included as the Transactions took place on August 4, 1998 and therefore are included in the September 30, 1998 unaudited interim balance sheet. The unaudited pro forma condensed consolidated statements of operations for the year ended June 30, 1998 and for the three-month period ended September 30, 1998 assume that the HSI Acquisition and the Transactions occurred on July 1, 1997. The unaudited pro forma condensed consolidated statements of operations are presented for informational purposes only, are not necessarily indicative of the results of operations of the Company had the HSI Acquisition and the Transactions actually occurred on July 1, 1997 or been in effect for the periods presented and do not purport to be indicative of the results of operations of the Company for any future period. The unaudited pro forma condensed consolidated statements of operations should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and the financial statements of HSI, including the related notes thereto, included elsewhere herein. The pro forma adjustments are based on available information and upon certain assumptions that the Company believes are reasonable under the circumstances. 28 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1998
PRO FORMA ADJUSTMENTS -------------------------- HSI HISTORICAL HISTORICAL ACQUISITION TRANSACTION COMPANY(A) HSI(A) ADJUSTMENTS ADJUSTMENTS PRO FORMA ----------- ----------- ------------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues.................................. $ 101,170 $ 13,536 $ 114,706 Cost of Revenues.......................... 72,395 9,785 82,180 ----------- ----------- ----- ----------- ----------- Gross profit............................ 28,775 3,751 32,526 General and administrative expense........ 19,880 2,164 $ 461(b) $ (2,056)(b) 20,449 Other compensation........................ 3,271 -- -- (3,271)(c) -- Other operating income.................... 644 -- 644 ----------- ----------- ----- ----------- ----------- Earnings before interest expense and income taxes.......................... 6,268 1,587 (461) 5,327 12,721 Interest expense.......................... 1,036 21 169(f) 13,097(d) 14,323 ----------- ----------- ----- ----------- ----------- Earnings (loss) before income taxes..... 5,232 1,566 (630) (7,770) (1,602) Income tax expense (benefit).............. 2,531 -- (3,171)(e) (640) ----------- ----------- ----- ----------- ----------- Net earnings (loss)..................... 2,701 1,566 (630) (4,599) (962) Accretion of preferred stock to redemption value................................... -- -- -- (2,554)(g) (2,554) Accrual of cumulative dividends on preferred stock......................... -- -- -- (2,577)(g) (2,577) ----------- ----------- ----- ----------- ----------- Net earnings (loss) available to common stockholders.......................... $ 2,701 $ 1,566 $ (630) $ (9,730) $ (6,093) ----------- ----------- ----- ----------- ----------- ----------- ----------- ----- ----------- ----------- Earnings (loss) per share: Basic................................... $ .63 $ (6.12) Diluted................................. $ .62 $ (6.12) Weighted average number of shares outstanding: Basic................................... 4,277,888 995,000 Diluted................................. 4,355,303 995,000
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 29 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
PRO FORMA HISTORICAL TRANSACTION COMPANY ADJUSTMENTS PRO FORMA ------------ ----------- ----------- (DOLLARS IN THOUSANDS) Revenues............................................................... $ 38,913 $ 38,913 Cost of Revenues....................................................... 27,868 27,868 ------------ ----------- ----------- Gross profit......................................................... 11,045 11,045 General and administrative expense..................................... 17,211 $ (3,093)(b) 5,249 (8,869)(i) Other operating income................................................. 260 260 ------------ ----------- ----------- Earnings (loss) before interest expense and income taxes............. (5,906) 11,962 6,056 Interest expense....................................................... 2,616 1,187(d) 3,803 ------------ ----------- ----------- Earnings (loss) before income taxes.................................. (8,522) 10,775 2,253 Income tax expense (benefit)........................................... (1,721) (926)(e) 901 3,548(i) ------------ ----------- ----------- Net earnings (loss).................................................. (6,801) 8,153 1,352 Accretion of preferred stock to redemption value....................... (395) (292)(g) (687) Accrual of cumulative dividends on preferred stock..................... (388) (309)(g) (697) ------------ ----------- ----------- Net earnings (loss) available to common stockholders................. $ (7,584) $ 7,552 $ (32) ------------ ----------- ----------- ------------ ----------- ----------- Earnings (loss) per share: Basic................................................................ $ (3.32) $ (.03) Diluted.............................................................. $ (3.32) $ (.03) Weighted average number of shares outstanding: Basic................................................................ 2,286,725 995,000 Diluted.............................................................. 2,286,725 995,000
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 30 NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) (a) Historical Company includes twelve months of Company results of operations and HSI results of operations from April 30, 1998 through June 30, 1998. Historical HSI includes HSI results of operations for the period July 1, 1997 through April 29, 1998. (b) Pro forma adjustment to reflect general and administrative expenses is as follows:
FOR THE FOR THE THREE-MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------- HSI Acquisition--Goodwill amortization (i).................................... $ 461 -- ------------- ------- ------------- ------- Compensation expense for certain employee salaries and bonuses (ii)............................................................ $ (1,180) $ (46) Inclusion of the Company in the BRS and Co. Portfolio Insurance Program (iii)(vi)................................................................... (814) (68) Nonrecurring Transactions related expenses incurred during the period......... (1,200) (3,091) Sponsor management fee (iv)(vi)............................................... 300 25 Pro forma amortization of financing fees (v)(vi).............................. 838 87 ------------- ------- Net pro forma general and administrative transaction adjustment............. $ (2,056) $ (3,093) ------------- ------- ------------- -------
---------------------------- (i) Reflects goodwill amortization related to the HSI Acquisition which is being amortized on a straight line basis over 15 years. (ii) As a result of the Recapitalization these functions will no longer be performed or will be performed by other personnel of the Company or by the Sponsor. (iii) Reflects the difference between the Company's actual insurance costs and the insurance costs which have been contracted for as a result of the Company's inclusion in the BRS Portfolio Company Insurance Program. (iv) Under the terms of the Management Agreement, the Sponsor will receive an annual management fee in consideration for financial and strategic advisory services. See "Certain Relationships and Related Transactions." (v) Adjustment to reflect amortization of financing fees related to the Revolving Credit Facility, Term Loan Facility and the Notes is as follows:
PRO FORMA AMORTIZATION -------------------------------------- FOR THE ASSUMED FOR THE YEAR THREE MONTHS FINANCING MATURITY ENDED ENDED ASSUMED NEW DEBT FEES (IN YEARS) JUNE 30, 1998 SEPTEMBER 30, 1998 - --------------------------------------------------- ----------- --------------- --------------- --------------------- Revolving Credit Facility.......................... $ 600 6 $ 100 10 Term Loan Facility................................. 600 6 100 10 Notes.............................................. 5,100 8 638 67 ----------- ----- ----- Total $ 6,300 $ 838 87 ----------- ----- ----- ----------- ----- -----
(vi) For the three-months ended September 30, 1998 the pro forma adjustment includes amounts related to the period prior to the Transactions of July 1, 1998 through August 4, 1998. 31 NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS) (c) The pro forma adjustment is to eliminate nonrecurirng other compensation expense incurred in connection with the Transactions. (d) Pro forma adjustment to record interest expense related to the Revolving Credit Facility, Term Loan Facility and the Notes, net of a decrease in interest expense from the assumed repayment of existing debt, is as follows:
FOR THE FOR THE THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------- Pro forma interest expense on new debt (i).................................... $ 13,950 $ 1,298 Fee for unused portion of Revolving Credit Facility (ii)...................... 150 13 Decrease from repayment of actual interest expense on existing debt........... (1,003) (124) ------------- ------ Net pro forma interest expense adjustment................................... $ 13,097 $ 1,187 ------------- ------ ------------- ------
(i) Pro forma adjustment to record interest expense on new debt is as follows:
PRO FORMA INTEREST PRO FORMA INTEREST ASSUMED ASSUMED EXPENSE FOR EXPENSE FOR THE INTEREST OUTSTANDING YEAR ENDED THREE MONTHS ENDED ASSUMED NEW DEBT RATE BALANCE JUNE 30, 1998 SEPTEMBER 30, 1998 - -------------------------------------------------- ----------- ----------- ------------- ------------------- Revolving Credit Facility......................... 9.75%(1) -- -- -- Term Loan Facility................................ 9.75%(2) $ 20,000 $ 1,950 $ 205(3) Notes............................................. 12.0% 100,000 12,000 1,093(3) ------------- ------ Total pro forma interest expense on new debt.... $ 13,950 $ 1,298 ------------- ------ ------------- ------
------------------------------ (1) Interest on the Revolving Credit Facility is based on 1.25% in excess of prime rate (prime rate assumed to be 8.50%). See "Description of Certain Indebtedness--New Credit Facility". (2) Interest on the Term Loan Facility is based on 1.25% in excess of prime rate (prime rate assumed to be 8.50%). See "Description of Certain Indebtedness--New Credit Facility". If interest rates for the Term Loan Facility and the Revolving Credit Facility were to increase (decrease) by 1/8 of 1%, net income (loss) would decrease (increase) by less than $0.1 million each for the year ended June 30, 1998 and the three months ended September 30, 1998. (3) For the three-months ended September 30, 1998 the pro forma adjustment includes amounts related to the period prior to the Transactions of July 1, 1998 through August 4, 1998. (ii) Represents the commitment fee equal to 1/2 of 1% per annum on the undrawn portion of the available commitment under the Revolving Credit Facility. See "Description of Certain Indebtedness--New Credit Facility". (e) The pro forma income tax adjustment has been computed to result in a pro forma income tax expense (benefit) that is at a 40% effective rate. 32 NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS) (f) Reflects ten months of interest expense for the period ended June 30, 1998 related to the promissory note due to the seller of HSI that will remain outstanding after the Transactions. The note bears interest at a rate of 5.51% per annum.
FOR THE YEAR ENDED JUNE 30, 1998 ------------- Interest expense related to promissory note..................................................... $ 169
(g) Reflects the accretion of redeemable preferred stock to the mandatory redemption price and accrual of cumulative dividends on preferred stock. Increase represents the cumulative dividends which accrue at a 13%, 10.5%, and 13% per annum rate for the Series A Preferred Stock, Senior Exchangeable Preferred Stock and Series B Preferred Stock, respectively.
FOR THE FOR THE THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------- Accretion of Senior Exchangeable Preferred Stock to redemption value.......... $ 1,107 $ 128(1) Accretion of Series A Preferred Stock to redemption value..................... 1,447 164(1) ------ ------ $ 2,554 $ 292 ------ ------ ------ ------ Accrual of cumulative dividends on Series B preferred stock................... $ 2,577 $ 309(1) ------ ------ ------ ------
------------------------------ (1) For the three-months ended September 30, 1998 the pro forma adjustment includes amounts related to the period prior to the Transactions (July 1, 1998 through August 4, 1998). (h) Pro forma Adjusted EBITDA is calculated as follows:
FOR THE FOR THE THREE MONTHS YEAR ENDED ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------- Earnings before interest expense and income taxes............................. $ 12,721 $ 6,056 Depreciation and amortization................................................. 10,699 2,575 Stock-based compensation expense.............................................. 1,315 73 ------------- ------ Pro Forma Adjusted EBITDA................................................. $ 24,735 $ 8,704 ------------- ------ ------------- ------
(i) The pro forma adjustment is to eliminate nonrecurring stock-based compensation expense of $8,869 and related income tax benefit of $3,548 that is triggered by the Transactions as this is a material nonrecurring charge. 33 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical consolidated financial data of the Company for the five fiscal years ended June 30, 1998 and for the three months ended September 30, 1997 and 1998. The consolidated statement of operations data for the three years ended June 30, 1998 and the consolidated balance sheet data as of June 30, 1997 and 1998 was derived from the audited consolidated financial statements of the Company included elsewhere herein. The consolidated statement of operations data for the two years ended June 30, 1995 and the consolidated balance sheet data as of June 30, 1994, 1995 and 1996 was derived from audited consolidated financial statements of the Company. The consolidated statement of operations data for the three months ended September 30, 1997 and 1998 and the consolidated balance sheet data as of September 30, 1998 was derived from the unaudited consolidated financial statements of the Company included elsewhere herein which, in the opinion of Management, include all adjustments necessary for a fair presentation of the financial condition and results of operations of the Company for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. The other data presented below was derived from Company prepared schedules. This table is qualified in its entirety by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the related notes thereto, included elsewhere herein.
THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------------- --------------------- 1994 1995 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues......................... $ 69,808 $ 70,839 $ 74,895 $ 95,298 $ 101,170 $ 28,351 $ 38,913 Cost of revenues................. 50,799 50,142 51,200 68,541 72,395 20,015 27,868 Gross profit..................... 19,009 20,697 23,695 26,757 28,775 8,336 11,045 General and administrative expenses....................... 12,659 12,989 15,156 16,953 19,880 4,703 17,211 Other compensation............... -- -- -- -- 3,271 -- -- Other operating income, net...... 502 1,025 867 871 644 153 260 Earnings (loss) before interest expense and income taxes....... 6,852 8,733 9,406 10,675 6,268 3,786 (5,906) Interest expense................. 205 418 783 811 1,036 250 2,616 Earnings (loss) before income taxes.......................... 6,647 8,315 8,623 9,864 5,232 3,536 (8,522) Income taxes..................... 2,849 3,455 3,538 4,407 2,531 1,395 (1,721) ---------- ---------- ---------- ---------- ---------- --------- ---------- Net earnings (loss).............. 3,798 4,860 5,085 5,457 2,701 2,141 (6,801) Accretion of preferred stock to redemption value............... -- -- -- -- -- -- (395) Accrual of cumulative dividends on preferred stock............. -- -- -- -- -- -- (388) ---------- ---------- ---------- ---------- ---------- --------- ---------- Net earnings (loss) available to common stockholders............ $ 3,798 $ 4,860 $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (7,584) ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- EARNINGS (LOSS) PER SHARE: Basic.......................... $ .93 $ 1.20 $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32) Diluted........................ .98 1.18 1.24 1.27 .62 .49 (3.32) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic.......................... 4,077,205 4,059,940 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725 Diluted........................ 4,100,606 4,103,806 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725 OTHER DATA: Adjusted EBITDA(1)............... $ 10,709 $ 13,638 $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615 Adjusted EBITDA margin(2)........ 15.3% 19.3% 20.9% 20.5% 20.7% 21.3% 22.1% Net cash provided by (used in) operating activities........... $ 4,624 $ 9,120 $ 10,686 $ 8,562 $ 16,628 $ 4,940 $ (14,675) Net cash used in investing activities..................... $ (5,613) $ (11,168) $ (10,522) $ (15,086) $ (17,047) $ (3,455) $ (3,216) Net cash provided by (used in) financing activities........... $ 1,060 $ 270 $ 735 $ 6,263 $ (23) $ (1,292) $ 19,649 Depreciation and amortization.... $ 3,303 $ 4,168 $ 5,417 $ 6,878 $ 8,870 $ 2,045 $ 2,488 Capital expenditures............. $ 5,809 $ 11,834 $ 11,511 $ 16,089 $ 12,287 $ 3,588 $ 3,337 Units of operated equipment rentals at end of period....... 298 335 369 420 497 432 513
(FOOTNOTES ON FOLLOWING PAGE) 34
THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------------- --------------------- 1994 1995 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Number of locations at end of period......................... 15 15 16 21 22 21 22 Ratio of earnings to fixed charges(3)..................... 17.7x 14.3x 10.4x 11.4x 5.3x 13.4x -- CONSOLIDATED BALANCE SHEET DATA AT PERIOD END: Total assets..................... $ 39,376 $ 45,473 $ 53,378 $ 69,833 $ 88,323 $ 78,374 $ 101,794 Long-term obligations, including current maturities............. 6,200 6,781 8,981 14,111 18,564 12,819 125,405 Stockholders' equity (deficit)... 22,363 26,912 32,032 39,253 43,606 41,394 (66,002)
- ------------------------ (1) Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude stock-related compensation expense, reorganization costs and other compensation (for discussion of the Company's stock-related compensation expense and reorganization costs and other compensation, see notes 8 and 1, respectively, to the Company's consolidated financial statements). Adjusted EBITDA is presented because Management believes it provides useful information regarding a company's ability to incur and/or service debt. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of a company's profitability or liquidity. The following chart depicts the components of Adjusted EBITDA:
THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1994 1995 1996 1997 1998 1997 1998 --------- --------- --------- --------- --------- --------- --------- Net earnings (loss)............ $ 3,798 $ 4,860 $ 5,085 $ 5,457 $ 2,701 $ 2,141 $ (6,801) Interest expense............... 205 418 783 811 1,036 250 2,616 Income taxes................... 2,849 3,455 3,538 4,407 2,531 1,395 (1,721) Depreciation and amortization................. 3,303 4,168 5,417 6,878 8,870 2,045 2,488 Stock related compensation expense...................... 554 737 821 2,012 1,315 215 8,942 Reorganization costs........... -- -- -- -- 1,207 -- 3,091 Other compensation............. -- -- -- -- 3,271 -- -- --------- --------- --------- --------- --------- --------- --------- Adjusted EBITDA $ 10,709 $ 13,638 $ 15,644 $ 19,565 $ 20,931 $ 6,046 $ 8,615 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues. (3) For the purpose of computing the ratio of earnings to fixed charges, "earnings" consists of earnings before income taxes and fixed charges. "Fixed Charges" consist of interest expense, which includes amortization of debt issue costs and the interest portion of the Company's rent expense. The Company's earnings were insufficient to cover its fixed charges by approximately $8.5 million during the three months ended September 30, 1998. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE PENHALL GROUP SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. GENERAL The Penhall Group was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. The Penhall Group differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, the Penhall Group complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. The Penhall Group provides its services from 22 locations in nine states, with a presence in some of the fastest growing states in terms of construction spending and population growth. From fiscal 1993 to fiscal 1998, revenue and Adjusted EBITDA have grown at a CAGR of 15.0% and 25.7%, respectively, due primarily to Management's successful implementation of a strategy focused on (i) maximizing high-margin Operated Equipment Rental Services revenues through increased equipment rental fleet utilization, (ii) controlling overhead and (iii) successfully integrating the Penhall Group's acquisitions and start-up locations. The Operated Equipment Rental Industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. The Penhall Group has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1994, the Penhall Group has effected six strategic acquisitions, including Concrete Coring Company, an Austin-based company acquired in 1995, Zig Zag Company, a Denver-based firm acquired in 1996, Metro Concrete Cutting, an Atlanta-based company acquired in 1996, HSI, a Minnesota-based firm acquired in April 1998, Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998 and Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998. During the same period, the Penhall Group established operations in four new markets by opening offices in Las Vegas, Salt Lake City, Portland and Dallas. The Penhall Group derives its revenues primarily from services provided for infrastructure related jobs. The Penhall Group's Operated Equipment Rental Services are complemented by long-term fixed-price contracts. Approximately 53% of the Penhall Group's revenues are derived from highway-related projects, approximately 29% of revenues are generated from building-related projects and the remainder of revenues are generated from airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated:
THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------------------- ------------------------------------------ 1996 1997 1998 1997 1998 -------------------- -------------------- -------------------- -------------------- -------------------- % OF % OF % OF % OF % OF $ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Operated Equipment Rental Services.... $ 59,759 79.8% $ 69,510 72.9% $ 77,445 76.5% $ 20,999 74.1% $ 24,331 62.5% Contract Services(1)........ 15,136 20.2 25,788 27.1 23,725 23.5 7,352 25.9 14,582 38.5 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total Revenues..... $ 74,895 100.0% $ 95,298 100.0% $ 101,170 100.0% $ 28,351 100.0% $ 38,913 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Contract services revenues excludes services performed by the operated equipment rental divisions on long-term contracts. 36 Revenue growth is influenced by infrastructure change, including new construction, modification, and regulatory changes. The Penhall Group's revenues are also impacted positively after the occurrence of natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence the Penhall Group's operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters. The principal components of the Penhall Group's operating costs include the cost of labor, equipment rental fleet maintenance costs including parts and service, equipment rental fleet depreciation, insurance and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, the Penhall Group utilizes a range of periods over which it depreciates its equipment on a straight line basis. On average, the Penhall Group depreciates its equipment over an estimated useful life of six years with a 10% residual value. The Penhall Group invests in and maintains a large and versatile fleet of rental equipment ranging from relatively small items such as diamond abrasive saws and coring units to larger equipment, including backhoes, excavators, water trucks and concrete grinders. Used equipment is sometimes sold in the ordinary course of business, and gains on sales of assets are recognized in "Other Operating Income" in PII's consolidated statements of earnings. In fiscal 1996, 1997 and 1998, gains on sales of assets from such equipment sales were $331,000, $258,000 and $203,000, respectively. The following table shows the number of units in the Penhall Group's operated equipment rental fleet for the following periods:
THREE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER JUNE 30, 30, ------------------------------------- ----------- 1996 1997 1998 1997 ----- ----- ----- ----- Beginning of Period.................................................. 335 369 420 420 # Units Purchased.................................................... 70 75 99 16 # Units Disposed..................................................... 36 24 22 4 --- --- --- --- End of Period........................................................ 369 420 497 432 --- --- --- --- --- --- --- --- 1998 ----- Beginning of Period.................................................. 497 # Units Purchased.................................................... 19 # Units Disposed..................................................... 3 --- End of Period........................................................ 513 --- ---
RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES. Revenues for the three months ended September 30, 1998 ("Interim 1999") were $38.9 million, an increase of $10.6 million or 37.4% over the three months ended September 30, 1997 ("Interim 1998"). The growth in revenues is attributable to the acquisition of HSI, which added $7.7 million of revenues in Interim 1999, and strength in the Company's operated equipment rental business in most of the markets it serves. The Company operated through 22 locations in nine states at September 30, 1998, compared to 21 locations in eight states at September 30, 1997. The Company's equipment fleet grew from 432 to 513 or 18.8% during this period. GROSS PROFIT. Gross profit totaled $11.0 million in Interim 1999, an increase of $2.7 million or 32.5% from Interim 1998. Gross profit as a percentage of revenues decreased from 29.4% in Interim 1998 to 28.4% in Interim 1999. The decrease in gross profit as percentage of revenues was primarily attributable to a higher percentage of the Company's revenues being derived from contract revenues in Interim 1999. Gross margins for contract services are generally lower than for Operated Equipment Rental Services revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for Interim 1999 were $17.2 million, an increase of $12.5 million or 266.0% from Interim 1998. The substantial increase in these costs was caused by an increase of $8.7 million in stock compensation costs triggered by the Transactions 37 and $3.1 million of costs incurred with respect to the Mergers. After adjusting for the impact of these costs related to the Transactions and the expenses related to HSI which was acquired in April 1998, general and administrative expenses were $5.3 million, approximately the same as in Interim 1998. EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and income taxes decreased $9.7 million from a profit of $3.8 million in Interim 1998 to a loss of $5.9 million in Interim 1999. After adjusting for the impact of the stock compensation expense and transaction costs mentioned above, earnings before interest and income taxes increased $2.1 million or 55.3%. This increase was primarily attributable to increased revenues. INTEREST EXPENSE. Interest expense in Interim 1999 was $2.6 million, an increase of $2.4 million or 946.4% from Interim 1998. The substantial increase in interest expense was directly attributable to the issuance of $100.0 million of Senior Notes and the incurrence of $20.0 million of Term Loans in connection with the Transactions. INCOME TAXES. The effective tax rate changes from 39.5% of earnings before income taxes in Interim 1998 to 20.2% of loss before income taxes in Interim 1999. The lower tax benefit in Interim 1999 is attributable to approximately $1.3 million of reorganization costs related to the Transactions which is not deductible for tax purposes. NET EARNINGS (LOSS). Net earnings decreased by $8.9 million from net earnings of $2.1 million in Interim 1998 to a net loss of $6.8 million in Interim 1999 for the reasons discussed above. YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997 REVENUES. Revenues for fiscal 1998 were $101.2 million, an increase of $5.9 million, or 6.2%, over fiscal 1997 revenues. The increase was primarily attributable to the acquisition of HSI in April 1998, the opening of new locations in Dallas, Portland and Salt Lake City late in fiscal 1997 and general strength in the construction markets which the Company serves. These improvements were partially offset by the impact of the unusual amount of rain experienced during the winter of 1998 in all of California as well as the Southeast. The Penhall Group operated through 22 locations in nine states at June 30, 1998, compared to 21 locations in eight states at June 30, 1997. The Penhall Group also expanded the size of its operated equipment rental fleet during this time period from 420 units to 497 units, or 18.3%. GROSS PROFIT. Gross profit totaled $28.8 million in fiscal 1998, an increase of $2.0 million, or 7.5%, from fiscal 1997. Gross profit as a percentage of revenues increased from 28.1% for 1997, to 28.4% for 1998. This increase in gross profit as a percentage of revenues was primarily attributable to a lower proportion of the Company's revenues being derived from contract revenues in fiscal 1998. Gross margins for contract services are generally lower than for Operated Equipment Rental Services revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for fiscal 1998 were $19.9 million, an increase of $2.9 million, or 17.3%, over fiscal 1997. General and administrative expenses as a percentage of revenues increased from 17.8% for fiscal 1997, to 19.7% for fiscal 1998. This increase in general and administrative expenses as a percentage of revenues was primarily attributable to costs associated with the Transactions and increases in payroll and payroll related expenses, offset by a reduction in stock compensation expense. OTHER COMPENSATION. During fiscal 1998, approximately $3.3 million was accrued for tax gross-up payments to be made to certain members of Management in reimbursement for income taxes required to be paid by them. The other compensation expense is directly related to the Transactions and will not be a recurring item. EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and income taxes decreased $4.4 million, or 41.1%, to $6.3 million for fiscal 1998 as compared to $10.7 million during fiscal 1997. Earnings before interest and income taxes as a percentage of revenues decreased from 11.2% in 1997, to 6.2% in 38 fiscal 1998. The decrease in earnings before interest and income taxes, and decrease in earnings before interest and income taxes as a percentage of revenues, during fiscal 1998 was primarily attributable to $1.2 million in costs associated with the Transactions and other compensation expense of $3.3 million for tax gross-up payments to certain members of management associated with the Transactions. INTEREST EXPENSE. Interest expense was slightly higher in fiscal 1998 at $1.0 million as a result of higher average outstanding debt balances during fiscal 1998 as compared with fiscal 1997. INCOME TAXES. The effective income tax rate increased from 45% of earnings before income taxes for fiscal 1997 to 48% for fiscal 1998. The increase was attributable to an increase in the non-deductible portion of stock based compensation, state income tax expense and permanent differences as a percentage of total income tax expense. NET EARNINGS. Net earnings were $2.7 million in fiscal 1998 compared to net earnings of $5.5 million in fiscal 1997. This decrease of $2.8 million, or 50.5%, was attributable to improved results from operations offset by costs associated with the Transactions. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 REVENUES. Revenues for fiscal 1997 were $95.3 million, an increase of $20.4 million, or 27.2%, over fiscal 1996 revenues. This increase was primarily attributable to an improvement in the Southern California construction market, a large contract in Northern California and the impact of the acquisition of Zig Zag Company, a Denver-based firm, during fiscal 1996, which contributed to revenues in fiscal 1997. The Penhall Group operated through 21 locations in eight states at June 30, 1997, compared to 16 locations in five states at June 30, 1996. The Penhall Group also expanded the size of its operated equipment rental fleet during this time period, increasing units from 369 to 420, or 13.8%. GROSS PROFIT. Gross profit totaled $26.8 million in fiscal 1997, an increase of $3.1 million, or 12.9%, from fiscal 1996. Gross profit as a percentage of revenues decreased from 31.6% for 1996, to 28.1% for 1997. This decrease in gross profit as a percentage of revenues was primarily attributable to a higher proportion of the Company's revenues being derived from contract revenues in fiscal 1997. Gross margins for contract services are generally lower than for Operated Equipment Rental Services revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for fiscal 1997 were $17.0 million, an increase of $1.8 million, or 11.9%, over fiscal 1996. General and administrative expenses as a percentage of revenues decreased from 20.2% for fiscal 1996, to 17.8% for fiscal 1997. This decrease in general and administrative expenses as a percentage of revenues was primarily attributable to the Penhall Group's ability to expand its operations and grow without a proportionate increase in overhead cost offset by an increase of $1.2 million in stock related compensation expense for the year ended June 30, 1997 as compared to 1996. EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and income taxes increased $1.3 million, or 13.5%, to $10.7 million for fiscal 1997 as compared to $9.4 million during fiscal 1996. Earnings before interest and income taxes as a percentage of revenues decreased slightly from 12.6% in 1996, to 11.2% in fiscal 1997. The increase in earnings before interest and income taxes, and decrease in earnings before interest and income taxes as a percentage of revenues, during fiscal 1997 was primarily attributable to substantially higher revenues partially offset by lower gross margins and increases in general and administrative expenses. INTEREST EXPENSE. Interest expense was relatively unchanged in fiscal 1997 at $0.8 million as a result of similar average outstanding debt balances during fiscal 1997 as compared with fiscal 1996. INCOME TAXES. The effective income tax rate increased from 41% of earnings before income taxes for fiscal 1996 to 45% for fiscal 1997. The increase was attributable to an increase in the non-deductible portion of stock based compensation related to the vesting and increase in repurchase value of PII's common stock under certain buy-out agreements. 39 NET EARNINGS. Net earnings were $5.5 million in fiscal 1997 compared to net earnings of $5.1 million in fiscal 1996. This increase of $0.4 million, or 7.3%, was attributable to an improvement in earnings before interest and income taxes partially offset by the increase in the effective tax rate. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities during fiscal 1996, 1997 and 1998 was $10.7 million, $8.6 million and $16.6 million, respectively. Cash provided by operating activities for the three months ended September 30, 1997 was $4.9 million compared to a use of cash in operations of $14.7 million for the three months ended September 30, 1998. In fiscal 1998, higher depreciation, deferred taxes and higher accrued liabilities due to the Transactions accounted for the improved cash from operations. In fiscal 1997, accounts receivable increased due to an increase in average days sales outstanding and strong fourth quarter 1997 revenues. Offsetting this was higher depreciation costs resulting from growth in the Penhall Group's equipment rental fleet and an increase in trade accounts payable. For the three months ended September 30, 1998, the significant use of cash from operations primarily arose from the stock compensation expense of $8.9 million, $3.1 million in costs incurred with respect to the Mergers and the payment of $2.9 million of tax gross-up payments accrued as of June 30, 1998. Management estimates that the Penhall Group's annual capital expenditures will be approximately $12.0 million to $13.0 million for fiscal 1999, including replacement and maintenance of equipment, purchases of new equipment and acquisitions. Net cash used in investing activities during fiscal 1996, 1997 and 1998 was $10.5 million, $15.1 million and $17.0 million, respectively. Cash used in investing activities for the three months ended September 30, 1997 was $3.5 million as compared to $3.2 million for the same period in fiscal 1999. Such cash was primarily used for capital expenditures of $11.5 million in fiscal 1996, $16.1 million in fiscal 1997, $12.3 million in fiscal 1998, $3.6 million for the three months ended September 30, 1997 and $3.3 million for the same period in fiscal 1999. Also, in fiscal 1998 cash used in investing activities includes $5.9 million related to the HSI acquisition. Net cash provided by (used in) financing activities during fiscal 1996, 1997 and 1998 was $0.7 million, $6.3 million and $0.0 million, respectively. For the three months ended September 30, 1997 cash used in financing activities was $1.3 million as compared to cash provided by financing activities of $19.6 million for the same period in fiscal 1999. Financing activities of the Penhall Group are primarily the result of the Transactions for the three months ended September 30, 1998 and borrowings and repayments of long-term debt. Historically, the Penhall Group has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. See "Description of Certain Indebtedness--New Credit Facility" and "Description of the Notes." As of September 30, 1998, the Company and its subsidiaries had approximately $125.4 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $66.0 million. On a Pro Forma Basis, the Company's earnings were insufficient to cover its fixed charges by approximately $7.9 million during fiscal 1998 and approximately $9.7 million during the three months ended September 30, 1998. It is anticipated that the Company's principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company's strategy of pursuing strategic acquisitions and expanding through internal growth. The Company's principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility. The New Credit Facility consists of two facilities: (i) a six-year senior secured term loan facility in an aggregate principal amount equal to $20.0 million (the "Term Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate principal amount not to exceed $30.0 million (the "Revolving Credit Facility"). The Company drew $20.0 million of loans under the Term Loan Facility ("Term Loans") on the closing date of the New Credit Facility in connection with the Recapitalization. As of September 30, 1998, $29.2 million of additional borrowings were available under the Revolving Credit Facility. The Term Loans amortize on a quarterly basis 40 commencing in September 2000 and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving Credit Facility ("Revolving Loans") are due and payable in full at maturity. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any subsidiary of the Company that guarantees amounts under the New Credit Facility. Such loans are also required to be prepaid with 75% of the the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company's Leverage Ratio (as such term is defined in the New Credit Facility) is less than 4.75 to 1.0, 50% of such Excess Cash Flow. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on indebtedness; (iii) the agreements governing the Company's long-term indebtedness will contain restrictive financial and operating covenants that could limit the Company's ability to compete and expand; (iv) the Company's leverage may make it more vulnerable to industry-related or general economic downturns and may limit its ability to withstand competitive pressures; and (v) certain of the Company's borrowings are and will continue to be at variable rates of interest, which exposes the Company to the risk of increased interest rates. RECENT DEVELOPMENTS NEW ACCOUNTING PRONOUNCEMENTS During 1997, the Financial Accounting Standards Board issued two new pronouncements: SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components; and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes new standards for reporting information about operating segments in interim and annual financial statements. Implementation of these statements are effective for fiscal years beginning after December 15, 1997, although SFAS No. 131 does not need to be implemented for interim periods. In the initial year of application, comparative information for earlier years is to be restated. The Company does not expect that adoption of these standards will have a material effect on its financial position or results of operations. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Penhall Group has established an informal Year 2000 task force. The Penhall Group has a plan which lists the milestones achieved and yet to be completed to become Year 2000 ready. A checklist of potential failure sources has been compiled and includes both information technology and embedded technology systems. The Penhall Group has completed its assessment of its information technology and embedded technology systems and is in the testing phase of their plan. The Penhall Group expects to be Year 2000 ready by June 30, 1999. The Penhall Group does not believe it has a material relationship with any one third party that would have a significant impact to the Penhall Group if that third party was not Year 2000 ready. The Penhall Group recently upgraded their information technology system, both hardware and software, and feel those systems are Year 2000 ready. The Penhall Group does not anticipate significant additional costs to become Year 2000 ready. Delays in the implementation of the Year 2000 solutions or the failure of any critical technology components to operate properly in the Year 2000 could adversely affect the Penhall Group's operations. In addition, the Penhall Group is uncertain as to the extent its customers may be affected by Year 2000 issues that require commitment of significant resources and may cause disruptions in its customers' businesses. Contingency plans have not been developed for all mission critical information and embedded technologies in the event Year 2000 readiness is not met. The Penhall Group plans to have these contingency plans in place by June 30, 1999. 41 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), the Company will accept for exchange Existing Notes which are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City time, on , 199 ; provided, however, that if the Company has extended the period of time for which the Exchange Offer is open, the term "Expiration Date" means the latest time and date to which the Exchange Offer is extended. As of the date of this Prospectus, $100.0 million aggregate principal amount of the Existing Notes are outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 1998 to all holders of Existing Notes known to the Company. The Company's obligation to accept Existing Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth under "--Certain Conditions to the Exchange Offer" below. The Company expressly reserves the right, at any time or from time to time, to extend the period of time during which the Exchange Offer is open, and thereby delay acceptance for any exchange of any Existing Notes, by giving notice of such extension to the holders thereof. During any such extension, all Existing Notes previously tendered will remain subject to the Exchange Offer and may be accepted for exchange by the Company. Any Existing Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Existing Notes not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified below under "--Certain Conditions to the Exchange Offer." The Company will give notice of any extension, amendment, non-acceptance or termination to the holders of the Existing Notes as promptly as practicable, such notice in the case of any extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Holders of Existing Notes do not have any appraisal or dissenters' rights under the Arizona Business Corporation Act in connection with the Exchange Offer. PROCEDURES FOR TENDERING EXISTING NOTES The tender to the Company of Existing Notes by a holder thereof as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Existing Notes for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to United States Trust Company of New York at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, either (i) certificates for such Existing Notes must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes, if such procedure is available, into the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or the holder must comply with the guaranteed delivery procedure described below. THE METHOD OF DELIVERY OF EXISTING NOTES, LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE 42 HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Existing Notes surrendered for exchange pursuant thereto are tendered (i) by a registered holder of the Existing Notes who has not completed the box entitled "Special Issuance Instruction" or "Special Delivery Instruction" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States (collectively, "Eligible Institutions"). If Existing Notes are registered in the name of a person other than a signer of the Letter of Transmittal, the Existing Notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by, the registered holder with the signature thereon guaranteed by an Eligible Institution. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Existing Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all tenders of any particular Existing Notes not properly tendered or to not accept any particular Existing Notes which acceptance might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Existing Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Existing Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Existing Notes either before or after the Expiration Date (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Existing Notes for exchange must be cured within such reasonable period of time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Existing Notes for exchange, nor shall any of them incur any liability for failure to give such notification. If the Letter of Transmittal or any Existing Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. By tendering, each holder of Existing Notes will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the holder and any beneficial holder, that neither the holder nor any such beneficial holder has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. If the holder is not a broker-dealer, the holder must represent that it is not engaged in nor does it intend to engage in a distribution of the New Notes. ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES For each Existing Note accepted for exchange, the holder of such Existing Note will receive a New Note having a principal amount equal to that of the surrendered Existing Note. For purposes of the 43 Exchange Offer, the Company shall be deemed to have accepted properly tendered Existing Notes for exchange when, as and if the Company has given oral and written notice thereof to the Exchange Agent. In all cases, issuance of New Notes for Existing Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Existing Notes or a timely Book-Entry Confirmation of such Existing Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Existing Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Existing Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged Existing Notes will be returned without expense to the tendering holder thereof (or, in the case of Existing Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Existing Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration of the Exchange Offer. BOOK-ENTRY TRANSFER Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Existing Notes by causing the Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Existing Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof with any required signature guarantees and any other required documents must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of the Existing Notes desires to tender such Existing Notes and the Existing Notes are not immediately available, or time will not permit such holder's Existing Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent received from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Existing Notes and the amount of Existing Notes tendered, stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Existing Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent and (iii) the certificates for all physically tendered Existing Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL RIGHTS Tenders of Existing Notes may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any such notice of withdrawal must specify the 44 name of the person having tendered the Existing Notes to be withdrawn, identify the Existing Notes to be withdrawn (including the principal amount of such Existing Notes), and (where certificates for Existing Notes have been transmitted) specify the name in which such Existing Notes are registered, if different from that of the withdrawing holder. If certificates for Existing Notes have been delivered or otherwise identified to the Exchange Agent then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If Existing Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Existing Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Existing Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Existing Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of Existing Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Existing Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Existing Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Existing Notes may be retendered by following one of the procedures described under "--Procedures for Tendering Existing Notes" above at any time on or prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Existing Notes and may terminate or amend the Exchange Offer if at any time before the acceptance of such Existing Notes for exchange or the exchange of New Notes for such Existing Notes, the Company determines that the Exchange Offer violates applicable law, any applicable interpretation of the staff of the Commission or any order of any governmental agency or court of competent jurisdiction. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its reasonable discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, the Company will not accept for exchange any Existing Notes tendered, and no New Notes will be issued in exchange for any such Existing Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). In any such event the Company is required to use every reasonable effort to obtain the withdrawal of any stop order at the earliest possible time. EXCHANGE AGENT United States Trust Company of New York has been appointed as the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal should be directed to the Exchange Agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: 45 BY MAIL, OVERNIGHT COURIER OR HAND: United States Trust Company of New York 114 West 47th Street New York, New York 10036 Attention: Corporate Trust Administration BY FACSIMILE: (212) 852-1626 CONFIRM BY TELEPHONE: (212) 852-1600 Delivery other than as set forth above will not constitute a valid delivery. FEES AND EXPENSES The Company will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The principal solicitation is being made by mail; however, additional solicitations may be made in person or by telephone by officers and employees of the Company. The expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Existing Notes, which is the principal amount as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The debt issuance costs will be capitalized for accounting purposes. TRANSFER TAXES Holders who tender their Existing Notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Company to register New Notes in the name of, or request that Existing Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES Holders of Existing Notes who do not exchange their Existing Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Existing Notes as set forth in the legend thereon as a consequence of the issuance of the Existing Notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. Existing Notes not exchanged pursuant to the Exchange Offer will continue to accrue interest at 12% per annum and will otherwise remain outstanding in accordance with their terms. Holders of Existing Notes do not have any appraisal or dissenters' rights under the Arizona Business Corporation Act in connection with the Exchange Offer. In general, the Existing Notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Existing Notes under the Securities Act. However, (i) if the Initial Purchasers so request with respect to Existing Notes not eligible to be exchanged for New Notes in the 46 Exchange Offer and held by them following consummation of the Exchange Offer or (ii) if any holder of Existing Notes is not eligible to participate in the Exchange Offer or, in the case of any holder of Existing Notes that participates in the Exchange Offer, does not receive freely tradable New Notes in exchange for Existing Notes, the Company is obligated to file a registration statement on the appropriate form under the Securities Act relating to the Existing Notes held by such persons. Based on certain interpretive letters issued by the staff of the Commission to third parties in unrelated transactions, the Company is of the view that New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than (i) any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or (ii) any broker-dealer that purchases Notes from the Company to resell pursuant to Rule 144A or any other available exemption) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement or understanding with any person to participate in the distribution of such New Notes. If any holder has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. A broker-dealer who holds Existing Notes that were acquired for its own account as a result of market-making or other trading activities may be deemed to be an "underwriter" within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of New Notes. Each such broker-dealer that receives New Notes for its own account in exchange for Existing Notes, where such Existing Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. The Company has agreed, pursuant to the Registration Rights Agreement and subject to certain specified limitations therein, to register or qualify the New Notes for offer or sale under the securities or blue sky laws of such jurisdictions as any holder of the Notes reasonably requests in writing. 47 INDUSTRY OVERVIEW The United States equipment rental industry serves a wide variety of construction, industrial, manufacturing, governmental and residential markets and benefits from the trend among businesses to outsource non-core operations. Outsourcing reduces capital investment, converts costs from fixed to variable and allows customers to focus on core operations and to minimize the downtime, maintenance, repair and storage associated with equipment ownership. Customers are increasingly using rental companies to provide a comprehensive supply of equipment, ranging from construction and industrial equipment to general tools and homeowner equipment. According to industry sources, the United States equipment rental industry grew from approximately $600 million in 1982 to an estimated $18 billion in 1997, resulting in a CAGR of 23.7%. The industry is highly fragmented, with an estimated 17,000 equipment rental companies in the United States, 85% of which operate four or fewer locations. The top 100 equipment rental firms account for only approximately 17% of industry revenue. The Operated Equipment Rental Industry is a specialized niche of the United States equipment rental industry and is characterized by heavy equipment which is rented along with skilled operators to provide demolition, rehabilitation and construction services in connection with infrastructure projects. Like the overall equipment rental industry, the Operated Equipment Rental Industry is highly fragmented and primarily consists of many relatively small, independent businesses typically serving discrete local markets within 30 to 50 miles of the equipment rental location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services companies have focused their operations on providing a broad array of services to relatively large customers, primarily in medium to large metropolitan markets, while generally serving smaller markets through delivery from distant major markets. The basis of competition in the Operated Equipment Rental Industry is typically the breadth of product lines, the availability of equipment and skilled operators, the condition of equipment, service, name recognition, proximity to customers and price. Management does not believe that the Penhall Group faces any significant competitor on a national scale, as the Operated Equipment Rental Services niche of the United States equipment rental industry is characterized primarily by local providers offering a limited array of services. The Penhall Group believes that there are substantial consolidation opportunities for large Operated Equipment Rental Services providers such as itself. 48 BUSINESS GENERAL The Penhall Group, founded in 1957, is one of the largest operated equipment rental providers in the United States. The Penhall Group differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators on an hourly or fixed-price quote basis ("Operated Equipment Rental Services") to serve construction, industrial, manufacturing, governmental and residential customers. In addition, the Penhall Group complements its Operated Equipment Rental Services by providing services on a fixed-price contract basis for long-term projects. The Penhall Group employs over 517 skilled operators and has approximately 513 units in its diverse operated equipment rental fleet, which includes a broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units, to large equipment such as backhoes, excavators, water trucks and concrete grinders. The Penhall Group provides its services from 22 locations in nine states, with a presence in some of the fastest growing states in terms of construction spending and population growth, including its primary market, California, as well as other strategic markets including Arizona, Colorado, Nevada, Texas, Georgia and Utah. The Penhall Group has a diverse base of over 6,800 customers. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of its total revenue in any of the past five fiscal years. The Penhall Group has a reputation for high quality service which results in a high degree of customer loyalty and, based on the last fiscal quarter, Management believes that on average in excess of 95% of its revenues are derived through repeat business from existing customers. The Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993 to 20.7% in fiscal 1998 due to Management's focus on (i) maximizing high-margin Operated Equipment Rental Services revenues through increased equipment rental fleet utilization, (ii) controlling overhead and (iii) successfully integrating acquisitions and start-up locations. During that same period, revenue and Adjusted EBITDA grew at a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7 million and $24.7 million, respectively, during fiscal 1998 and approximately $38.9 million and $8.7 million, respectively, during the three months ended September 30, 1998. The Penhall Group had a net loss of approximately $1.0 million on a Pro Forma Basis during fiscal 1998 and net earnings of approximately $1.4 million on a Pro Forma Basis during the three months ended September 30, 1998. Through its skilled operators and equipment rental fleet, the Penhall Group performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, the Penhall Group generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. Operated Equipment Rental Services represented approximately three quarters of total revenues for fiscal 1998. For longer duration projects, which may last from a few days to several years, the Penhall Group provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of fixed-price contract revenues are derived from long-term highway projects which have an average contract length of approximately ten months. The Penhall Group strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, the Penhall Group is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 20% to 30% of Operated Equipment Rental Services revenues are generated from fixed-price contracts. Revenues generated by Penhall's contract divisions, excluding services performed by the equipment rental divisions on long-term contracts, represent approximately 23.5% of the total revenues for fiscal 1998. 49 The Operated Equipment Rental Industry is a specialized niche segment of the highly fragmented United States equipment rental industry. There are an estimated 17,000 equipment rental companies in the United States, and no single company represented more than 2% of total market revenues in 1996. According to industry sources, the United States equipment rental industry grew from approximately $600 million in revenues in 1982 to an estimated $18 billion in 1997, representing a CAGR of 23.7%. Management believes that the Operated Equipment Rental Industry has grown at a similar rate during this period. This growth has been driven primarily by construction spending and continued outsourcing of equipment needs by construction and industrial companies. While customers traditionally have rented equipment for specific purposes such as supplementing capacity during peak periods and in connection with special projects, customers are increasingly looking to rental operators to provide an ongoing, comprehensive supply of equipment, enabling such customers to benefit from the economic advantages and convenience of rental. Also, according to industry sources, for the six months ended January 31, 1998, construction spending in the Penhall Group's Markets grew by an average of 12.3%, significantly outperforming the 8% growth of United States construction spending, primarily due to strong regional economies, favorable demographics and growing levels of construction activity present in these Markets. In addition, Management believes the Operated Equipment Rental Industry will continue to grow significantly as, according to the United States Department of Transportation, 59% of the nation's major roads are in poor or mediocre condition and 31% of the nation's bridges are structurally deficient and/or functionally obsolete. Also, the Transportation Bill recently approved by the President of the United States calls for approximately a 44% increase in national spending on highways and mass transit from current levels over the next six years and approximately a 58% increase in the Penhall Group's Markets overall on a non-weighted average basis. COMPETITIVE STRENGTHS Management believes that the following strengths will provide the Penhall Group with significant competitive advantages and the opportunity to achieve continued growth and increased profitability: DIVERSIFIED REVENUE BASE. The Penhall Group has a diverse revenue base resulting from (i) a broad base of over 6,800 customers, (ii) serving a broad array of end-user markets, and (iii) offering a variety of services. Management believes that the Penhall Group's diverse revenue base, along with the portion of its business derived from customers that have fixed spending budgets, help insulate it from economic downturns. The Penhall Group derives its revenues from a diverse group of customers consisting of highway, airport and building general contractors, and federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of the Penhall Group's total revenue in any of the past five fiscal years. A significant portion of the Penhall Group's revenues are generated from federal, state and municipal agencies, which typically invest in infrastructure projects based on a fixed budget for a certain time period, as opposed to discretionary spending tied to economic cycles. The Penhall Group also offers a broad array of services ranging from the rental of a single unit to contracting for an entire job, and its specialized services are concentrated in both new construction as well as rehabilitation and maintenance of existing infrastructure, which serves to mitigate the effects of cycles within the construction industry. Within its array of services, the Penhall Group's fixed-price contracts complement its Operated Equipment Rental Services and serve to diversify the Penhall Group's revenue base, increase utilization of its operated equipment rental fleet, and differentiate it from other equipment rental competitors. BROAD, MODERN OPERATED EQUIPMENT RENTAL FLEET. Management believes that the Penhall Group has one of the most modern, diversified and well-maintained operated equipment rental fleets in the United States and believes that the quality and breadth of its fleet differentiates the Penhall Group from other local operators. The Penhall Group has invested over $57.5 million in new equipment over the past five fiscal years, during which period the Penhall Group's operated equipment rental fleet grew from 298 to approximately 497 units of equipment. The units in the Penhall Group's operated equipment rental fleet 50 have an average age of approximately four and a half years and an average useful life of approximately nine years. The Penhall Group conducts a preventative maintenance program which increases fleet utilization, extends the useful life of the equipment and generally results in higher resale values. WELL-POSITIONED FOR GROWTH. Management believes that the Penhall Group is well-positioned for continued growth, primarily due to (i) its presence in high-growth Markets, (ii) its leadership position in the growing Operated Equipment Rental Industry, especially with respect to services for highway projects, and (iii) acquisition opportunities resulting from the fragmented nature of the Operated Equipment Rental Industry. In fiscal 1998, construction spending in the Penhall Group's Markets significantly outperformed the national growth rate of 8%. Management expects construction growth in the Markets to continue to outpace national growth due to strong local economies, favorable demographics and increased spending under the new Transportation Bill. In addition, Management believes that based on the number of grinder units in its operated equipment rental fleet, the Penhall Group is the largest provider of grinding services in the United States, maintaining a market share of over 40% of the national grinding market and approximately 80% of the grinding market in California. As a market leader, the Penhall Group is well-positioned to benefit from highway spending, which will increase from current levels by approximately 44% nationally, and approximately 58% in the Penhall Group's Markets overall on a non-weighted average basis, under the new Transportation Bill. Finally, Management believes that the financial resources available to the Penhall Group following consummation of the Transactions, along with the fragmented nature of the Operated Equipment Rental Industry, will enable the Penhall Group to take advantage of strategic acquisition opportunities in both existing and new markets. The Penhall Group has benefited from having the majority of its operations located in some of the fastest growing states in terms of construction spending and population growth. The following table shows construction spending and population growth statistics, two widely used indicators of activity in the Operated Equipment Rental Industry, in the Penhall Group's Markets as compared to national levels:
INCREASE IN % OF 1998 PENHALL CONSTRUCTION POPULATION PROJECTED INCREASE IN MARKETS GROUP REVENUES SPENDING(1) GROWTH(2) HIGHWAY SPENDING(3) - ----------------------------------------------- ------------------- --------------- ------------- ----------------------- Arizona........................................ 8.7% 10.1% 2.7% 59.5% California..................................... 70.8 19.5 1.3 45.6 Colorado....................................... 3.4 4.0 2.0 52.3 Georgia........................................ 2.9 5.3 2.0 69.7 Nevada......................................... 4.3 19.5 4.8 61.8 Texas.......................................... 3.8 19.4 2.0 60.7 Utah........................................... 1.6 8.6 2.1 57.8 Other.......................................... 4.5 Non-weighted average for the Markets....... 12.3% 2.4% 58.2% National average........................... 8.0% 0.9% 44.1%
- ------------------------------ (1) Year-over-year growth for six months ended January 31, 1998. (2) Year-over-year growth for year ended December 31, 1997. (3) Represents the projected percentage increase in aggregate highway spending under the Transportation Bill for the period between 1998-2003 as compared to the aggregate highway spending for the period 1992-1997. STRONG REPUTATION AND SUPERIOR CUSTOMER SERVICE. Over its 40-year history, the Penhall Group has built a reputation for high quality service, encompassing (i) responsiveness to customer requirements, (ii) quality and availability of equipment, (iii) experienced operators, and (iv) reliability of service. As a result of its focus on customer service, the Penhall Group has developed many long-term relationships, and based on the last fiscal quarter, Management believes that on average in excess of 95% of its revenues are derived through repeat business from existing customers. In addition, the Penhall Group's skilled operators contribute to its superior customer service as they are trained to specialize in the operation of particular 51 types of equipment and provide effective and efficient on-site services to complement the Penhall Group's modern equipment rental fleet. EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Management has an average of approximately 19 years of industry experience and 17 years of experience with the Penhall Group. The Penhall Group's senior and regional managers have successfully developed and implemented equipment rental fleet management and financial strategies which have enabled the Penhall Group to become one of the largest operators in its Markets. Upon consummation of the Transactions, the Management Stockholders held approximately 37.5% of the common equity of the Company. GROWTH STRATEGY Management has implemented a business strategy which is designed to enhance the Penhall Group's position as one of the leading Operated Equipment Rental Services companies in its Markets and to capitalize on opportunities to enter new markets through a combination of acquisitions and start-up operations. The Penhall Group has increased its Adjusted EBITDA margin from 13.2% in fiscal 1993 to 20.7% in fiscal 1998, and during the same period revenues and Adjusted EBITDA grew at a CAGR of 15.0% and 25.7%, respectively. On a Pro Forma Basis, the Penhall Group generated revenues and Adjusted EBITDA of approximately $114.7 million and $24.7 million, respectively, during fiscal 1998 and approximately $38.9 million and $8.7 million, respectively, during the three months ended September 30, 1998. The Penhall Group had a net loss of approximately $1.0 million on a Pro Forma Basis during fiscal 1998 and net earnings of approximately $1.4 million on a Pro Forma Basis during the three months ended September 30, 1998. The Penhall Group believes that the following key elements of its on-going strategy will provide it with the opportunity to continue to achieve growth and increased profitability: EXPAND GEOGRAPHIC PRESENCE. Management intends to continue to expand the Penhall Group's geographic presence through both acquisitions and start-up operations. Since 1994, the Penhall Group has effected six strategic acquisitions and plans to continue to opportunistically target acquisition candidates that (i) have a strong local market share and participate in a high-growth market, and (ii) are led by an experienced management team that will continue to manage the acquired business. Acquisitions enable the Penhall Group to (i) enter new markets and increase geographic diversity, (ii) realize synergies by leveraging its expertise in operated equipment rental fleet management, and (iii) expand its operated equipment rental fleet and range of services. Management believes that the equipment rental industry offers substantial consolidation opportunities for large equipment rental providers such as the Penhall Group. Relative to smaller companies with only one or two rental locations, multi-regional operators such as the Penhall Group benefit from a number of competitive advantages, including access to capital, the ability to offer a broader range of modern, high-quality equipment, standardized management information systems, volume purchasing discounts and the ability to service larger, multi-regional accounts. Management also plans to selectively enter new markets which have favorable growth dynamics through start-up operations. The Penhall Group's decision to open a start-up location is based upon its review of demographic information, business growth projections and the level of existing competition. The Penhall Group opened three start-up locations in fiscal 1997, the benefits of which have not yet been fully realized. Based on the Penhall Group's historical experience, a new location tends to realize significant increases in revenues, cash flow and profitability during the first two years of operation as the Penhall Group builds a diverse operated equipment rental fleet and contributes skilled management. EXPAND OPERATED EQUIPMENT RENTAL FLEET AND INCREASE RANGE OF SERVICES OFFERED. Management intends to continue to grow the Penhall Group's business in both new and existing markets through further expansion of its operated equipment rental fleet and services provided to its customers. Management plans to expand the Penhall Group's operated equipment rental fleet by (i) adding new units to existing equipment lines as utilization increases, and (ii) expanding into new equipment lines which complement an existing Penhall Group service. In addition, Management intends to further increase utilization through the introduction of new services. To that end, the Penhall Group has recently started offering Bare Equipment Rentals to its customers in Southern California and expects to introduce this service to other 52 markets. Management believes that this strategy will help continue to increase profitability and enable the Penhall Group to attract new business as a single source supplier for its customers. EQUIPMENT RENTAL FLEET The Penhall Group owns and operates a well-maintained fleet of approximately 513 units of operated equipment, including excavators, stompers, backhoes, compressors, "bobcats," crushing equipment, saws, drills and grinding and grooving equipment. The Penhall Group also carries state-of-the-art manually- operated and remote-controlled breakers, which provide access to contaminated, hazardous or limited access areas and which have been used for hazardous projects such as the demolition of decommissioned nuclear power plants. The following table is a summary of the Penhall Group's operated equipment rental fleet and skilled operators as of September 30, 1998:
NUMBER OF SKILLED DESCRIPTION QUANTITY OPERATORS - ----------------------------------------------------------------------- ----------- ------------- Diamonds............................................................... 212 209 Compressors............................................................ 81 82 Excavators............................................................. 30 32 Grinders............................................................... 28 30 Backhoes............................................................... 37 38 Bobcats................................................................ 41 42 Tankers................................................................ 34 37 Stompers............................................................... 10 8 Loaders................................................................ 5 7 Miscellaneous.......................................................... 35 32 --- --- Total Units.......................................................... 513 517 --- --- --- ---
Management believes that the size of the Penhall Group's operated equipment rental fleet, combined with its inventory of specialty equipment, enables it to compete more effectively by ensuring the availability of equipment at a favorable cost. Management estimates the average utilization of the Penhall Group's operated equipment rental fleet to be approximately 71%. The average age of the operated equipment rental fleet is approximately four and a half years, and the average useful life of the fleet is approximately nine years. In addition to its 513 unit operated equipment rental fleet, the Penhall Group maintains an inventory of approximately 361 Bare Equipment Rentals which are rented out on an hourly, daily, weekly or monthly basis without skilled operators. Bare Equipment Rentals include personnel lifts, forklifts, front-end loaders and light towers, and revenue generated by such units was not significant for fiscal 1998. The Penhall Group protects its investments in its equipment rental fleet with an emphasis on proper operation and regular maintenance of the equipment. Each Penhall Group location has its own shop, repair and maintenance staff that routinely maintains and repairs the equipment rental fleet. The Penhall Group believes that its maintenance program helps ensure maximum economic life of the equipment and improves its ultimate resale value upon disposition. This maintenance program also improves the availability of the equipment for use, which in turn results in higher utilization rates. SERVICES The Penhall Group, through its operated equipment rental fleet and skilled operators, serves its customer base in a wide variety of infrastructure projects, including new construction, rehabilitation and demolition projects, and provides specialized services such as highway and airport runway grooving, asphalt cutting, concrete coring and demolition work. These services are available singly but are more commonly provided by the Penhall Group in conjunction with other services necessary to their application 53 to a particular project, including breaking, excavating, removing and recycling of construction materials. The Penhall Group also provides services in connection with earthquake retrofit projects, particularly in California, which include retrofitting of highways, buildings, bridges and tunnels in order to bring them in compliance with more stringent earthquake safety laws. Moreover, as a result of the HSI Acquisition, the Company is the largest provider of grinding services in the United States. SPECIALTY SERVICES: - CUTTING. Cutting is the use of diamond abrasive saws to cut concrete and asphalt. This service is frequently utilized in new construction to provide rectangular openings in walls or floors, and is generally more efficient than framing and forming the opening while the concrete is being poured. Flat sawing also is commonly used in modifying existing structures and road rehabilitation. - CORING. Coring is the use of rotary drills to create holes ranging from less than one inch to 42 inches in diameter. This service is most frequently utilized both in new construction and in retrofit of existing facilities to create spaces needed for installation of ventilation ducts, conduits, electrical and other cables, and mechanical passageways. Coring is also used in the Company's earthquake retrofit projects. - GRINDING. Grinding is the use of diamond abrasive grinders to mill away excess material as necessary to attain a uniform, level finish on flat surfaces, such as highways, airport runways and industrial floors. Grinding is also utilized as a maintenance process to extend the useful life of highways by evening the wear patterns caused by years of heavy traffic, to prevent cracking and subsequent failure of the surface. - GROOVING. Grooving is the use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with the construction or modification of highways and airport runways and provides for better tire traction on these surfaces. - SAWING AND SEALING. Sawing and sealing is the cutting of concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength. OTHER SERVICES: - BREAKING. Breaking is the use of manually-operated or, in hostile environments, remotely-controlled high-energy hydraulic breaking equipment to remove concrete. This service was most visibly utilized by the Penhall Group in the removal of large sections of the Nimitz Freeway in Oakland, California, following the 1989 earthquake, and in the removal of damaged freeway bridges and overpasses in southern California following the 1994 earthquake. Breaking equipment is more commonly used in less dramatic settings, such as interior renovation of industrial buildings to adapt them to a new use, and in removal of existing structures in preparation for redevelopment of the real estate. The Penhall Group has designed and used remotely-controlled breakers for modification and removal of facilities contaminated with radioactive material, such as nuclear power stations and development laboratories. The Penhall Group is currently providing breaking services in connection with a large-scale project in Salt Lake City which calls for the breaking and removal of approximately 115 highway overpasses on U.S. Interstate 15 in order to widen the Interstate in preparation for the 2002 Olympic Games. - CLEARING AND REMOVAL. Clearing and removal is the use of excavators and other heavy-duty equipment to remove broken concrete and other material from a site to a point of recycling or disposal. - CRUSHING AND RECYCLING. Crushing and recycling is the use of specialized equipment to reduce the size of the material to a consistent specification, separating out the steel reinforcing material for sale as scrap, and providing an aggregate material suitable for use as construction fill material and roadbase material. Such recycling provides a valuable environmental benefit by conserving solid waste landfill space, and converting a waste into a usable product. 54 - COMPACTION. Compaction is the preparation of subsoil base and fill materials to a specification suitable for new construction on the site. Compaction services typically are provided together with removal services in the site preparation process for new construction or redevelopment. OPERATIONS The Penhall Group provides its services through (i) Operated Equipment Rental Services, performed on an hourly as well as a fixed-price quote basis, and (ii) fixed-price contracts, in which the Penhall Group is responsible for the completion of a particular project. The Penhall Group's Operated Equipment Rental Services involve short duration assignments lasting from several hours to a few weeks and typically generate revenues of less than $7,500. Services provided on this basis include specialized work such as highway and airport runway grooving, asphalt cutting, and demolition work such as concrete breaking, removal, and recycling. Although all lines of equipment are rented for these types of projects, a given project will typically use only one piece of equipment. Operated Equipment Rental Services are typically provided on an hourly basis or for a project with pre-determined specifications, and the Penhall Group quotes a fixed-price to bid on, perform, and invoice the customer for the project. In fiscal 1998, the Penhall Group generated 76.5% of its revenues from Operated Equipment Rental Services. The Penhall Group's services are made available to customers through its 22 regional locations. The Penhall Group maintains a basic equipment rental fleet and operators at each of its 22 locations. If necessary, equipment can be shipped from any of the Penhall Group's locations to projects at remote sites. Rental fees for the Penhall Group's equipment range from $90 to $400 per hour and encompass both the equipment and the operator's time. The Penhall Group guarantees the availability of its equipment and operators for a committed job with an "on-time guarantee," and will provide the first hour of work free if the Penhall Group's operators fail to arrive for work at an appointed time. The Penhall Group has not experienced any significant amount of lost revenues through its "on-time guarantee" policy. The Penhall Group solicits and receives business over the telephone, by facsimile, by written purchase order or through Penhall Group salesmen. Each day the Penhall Group's dispatcher at each location is responsible for the allocation of resources to meet the customer's service and timing requirements. The dispatcher matches all of the work requests for that day to available equipment and operators. Each of the Penhall Group's skilled operators has an expertise with a particular piece of equipment. Depending on the requirements for that day, an operator may be assigned from one to four jobs on a given day. An operator's time is allocated by job through job tickets, which generate both payroll and customer billing data. Historically, the Penhall Group has rented its equipment only in conjunction with the services of a Penhall Group employee as the operator. Recently, however, the Penhall Group has started operating rental yards and offering Bare Equipment Rentals, or renting equipment without operators. To date, such Bare Equipment Rentals have not constituted a material part of the Penhall Group's revenues; however, the Penhall Group regards equipment only rentals as a potential source of growth going forward. Contract pricing involves longer duration assignments lasting from a few days to several years and normally generates revenues of between $7,500 and $10,000,000. Services provided on this basis include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. Fixed-price contract projects typically use multiple types of equipment concurrently and require a Penhall Group supervisor to coordinate the safe and efficient function of the Penhall Group's workmen and equipment. For fixed-price contract projects, the Penhall Group typically employs the use of its Operated Equipment Rental Services as well as outside rental equipment and sub-contractors. Although the Penhall Group has obtained contractor's licenses in approximately 15 states (not including 16 states which do not require licensing), it typically provides its services in the capacity of a subcontractor under prime or general contracts in approximately half of its fixed-price contract projects. On average, approximately 20% to 30% of Operated Equipment Rental Services revenues are generated from fixed-price contracts. Revenues generated by Penhall's contract divisions, excluding services performed by the 55 equipment rental divisions on long-term contracts, represent approximately 23.5% of the total revenues for fiscal 1998. The majority of the Penhall Group's fixed-price contracts are obtained through competitive bidding for general contractors. The Penhall Group determines whether to bid on a project primarily on the basis of the type of work involved. Other factors, including the time of the project, the Penhall Group's ongoing project schedule and any particular risks involved also affect the Penhall Group's determination whether to bid on a project. In preparing a bid, the Penhall Group's estimators analyze material, labor and all other cost components of the proposed project. The Penhall Group also will make its own determination of the quantity of items needed for the project and assess any special risks involved. The Penhall Group must specify in its bid a fixed-price per unit within the range of the estimated quantity to be provided under the contract. Generally, within this range, no adjustments in unit prices are made and the Penhall Group is committed to provide the items at the fixed unit prices specified in its bid, and any unforeseen increase in the cost of the items over the prices bid is borne by the Penhall Group. The Penhall Group has not borne a significant amount of cost increases in connection with its fixed-price contracting services. The Penhall Group sometimes contracts directly with federal, state or local governments or agencies, and in addition some of its work performed for general contractors may relate to a general or prime contract with a governmental entity. Generally the contracting agency reserves the right to terminate the contract with the general contractor, without cause, for its own convenience. In that event, the Penhall Group generally is entitled to be paid its costs for the work performed to the date of termination. The Penhall Group has not experienced any material contract cancellations in the past. SALES AND MARKETING The Penhall Group maintains a sales and estimating force of approximately 64 people, with at least two salespersons based at each of the Penhall Group's operating locations calling on both new and existing customers. These salespeople provide estimates and prepare bids for projects. Management believes that its fixed-price contract services serve as a unique marketing tool for its Operated Equipment Rental Services and help to increase the utilization of the Penhall Group's operated equipment rental fleet. Each of the Penhall Group's offices also maintains a sales and marketing staff of approximately five people, which receives and schedules orders for equipment rentals. The Penhall Group also regularly participates in industry trade shows and conferences, and advertises in trade journals. PURCHASING AND SUPPLIERS The Penhall Group's size, status in the industry and relationships enable it to purchase equipment directly from manufacturers at prices and on terms that the Penhall Group believes to be more favorable than are available to its smaller competitors. The Penhall Group's procurement of equipment for its rental fleet is generally coordinated through its headquarters in Anaheim, California, while smaller inventory items are typically purchased at the divisional level. The Penhall Group's suppliers must meet specified standards of quality and experience, and include well-known equipment manufacturers such as Caterpillar, John Deere, Ingersoll-Rand, Kenworth, General Motors Company and Ford Motor Company. The favorable pricing, service, training and information that the Penhall Group receives from its suppliers represent what the Penhall Group believes to be a significant competitive advantage. Management continually analyzes the effectiveness, quality and profitability of the Penhall Group's equipment and addresses equipment procurement issues. The Penhall Group maintains no long-term supply or purchasing contracts and believes that it could readily replace any of its existing suppliers if it were no longer advantageous to purchase equipment from such suppliers. 56 CUSTOMERS Most of the Penhall Group's customers consist of highway, airport and building general contractors and subcontractors, and federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. Some of the Penhall Group's major customers include the California Department of Transportation, Wasatch Constructors, Turner Construction, San Diego Gas & Electric, Morrison Knudsen and Koll Construction Company. During fiscal 1998, the Penhall Group served approximately 6,800 customers and, with the exception of the California Department of Transportation, no one customer has accounted for more than 5% of the Penhall Group's revenues in any of the past five fiscal years. The Company believes that a loss of the California Department of Transportation as a customer would have a material adverse effect on the Company's business. Based on the last fiscal quarter, Management believes that on average, in excess of 95% of the Penhall Group's revenues represented repeat business from existing customers. The capture rate for contracts on which the Penhall Group bids is greater than 25% based on volume. COMPETITION The Operated Equipment Rental Industry is a specialized niche of the overall equipment rental industry and is highly competitive. The Penhall Group's competitors include large national rental companies, regional companies, smaller independent businesses and equipment vendors which sell and rent equipment to customers. The industry is also highly fragmented, and primarily consists of many relatively small, independent businesses typically serving discrete local markets within 30 to 50 miles of the equipment rental location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services companies have focused their operations on providing a broad array of services to relatively large customers, primarily in medium to large metropolitan markets, while generally serving smaller markets through delivery from distant major markets. Competitive factors in the Operated Equipment Rental Industry include breadth of product lines, the availability of equipment and skilled operators, the condition of equipment, service, name recognition, proximity to customers and price. The Penhall Group believes that it is able to successfully compete in the markets that it serves because of its reputation and large fleet of equipment. In addition, certain of the services provided by the Penhall Group, such as diamond saw cutting services, are highly specialized and therefore not widely available; the market for these services therefore tends to be somewhat less competitive. Management does not believe that the Penhall Group faces any significant competitor on a national scale, as the Operated Equipment Rental Industry is characterized primarily by local providers offering a limited array of services. Management believes the Operated Equipment Rental Industry benefits from the trend among businesses to outsource non-core operations to reduce capital investment, convert costs from fixed to variable and minimize the downtime, maintenance, repair and storage associated with equipment ownership. Customers are increasingly using Operated Equipment Rental Services companies to provide a comprehensive supply of equipment and operators. The Penhall Group's fixed-price contract projects are obtained through competitive bidding. In many cases, a performance bond is required by a customer before a contract is awarded. The Penhall Group believes that its bonding capacity is a competitive advantage over smaller, less financially stable competitors. Moreover, the Penhall Group believes that it is able to compete effectively for fixed-price contract jobs because of its extensive resources and relationships with general contractors. See "Risk Factors-- Competition." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Penhall Group currently holds a United States trademark and service mark with respect to the "Penhall" name and logo, which it believes are of particular importance to the Penhall Group's business. 57 Except with respect to the "Penhall" name and logo, the Penhall Group is not dependent on any intellectual property rights. MANAGEMENT INFORMATION SYSTEM The Penhall Group utilizes a state-of-the-art management information system, which was implemented at the beginning of fiscal 1997 and gives Management the ability to analyze divisional results by line of equipment. This information network is used to make decisions with respect to investments in new equipment as well as certain other competitive decisions. In addition, the system provides information with respect to contract work in progress, which is used by project managers and contract division management to monitor the status of jobs in progress. The Penhall Group continues to invest in state-of-the-art network and communications equipment in order to provide more timely information to the outlying locations and to ensure on-line access to the information needed to run their operations. RADIO COMMUNICATIONS The Penhall Group licenses from Motorola and, in one case, from an individual, the right to operate and install certain radio repeater equipment at a number of sites in the State of California. This equipment allows the Penhall Group and its operators in the field to communicate with each other by radio. In connection with the radio communications referred to above, the Penhall Group holds several licenses from the Federal Communications Commission ("FCC") that allow it to broadcast over certain designated radio frequencies. These licenses may not be assigned without the FCC's consent. The Penhall Group believes that the Mergers constituted an assignment for purposes of the FCC licenses and has applied for the necessary FCC consent. The Penhall Group expects to receive the FCC's consent by the end of August 1998, if not sooner, and has applied for temporary authorization to continue to use the FCC licenses during the pendency of its application for such consent. LABOR RELATIONS The Penhall Group has approximately 950 full-time employees, including approximately 510 skilled workers and approximately 76 management and supervisory employees who have been employed with the Penhall Group for an average of 11 years. The Penhall Group also hires hourly equipment operators on a project basis and when the number of jobs in progress necessitates additional operators. While none of the employees at the Company are represented by a labor union, approximately 376 employees at PenCo are represented by various labor unions. The Penhall Group's unionized workforce is divided into approximately 16 certified or lawfully recognized bargaining units, several of which are represented by the same local union. Approximately 319 of the Penhall Group's employees fall into six bargaining units; the remaining ten bargaining units are quite small, consisting in some cases of only one or two employees. As is common in the industry, most of the collective bargaining agreements covering these bargaining units are multi-employer agreements negotiated by various employer associations. One of the agreements expired in May 1998, and the Penhall Group and the union have agreed to abide by the terms of the expired agreement on a month-to-month basis while the multi-employer association attempts to negotiate a successor agreement. The Penhall Group cannot provide assurances that a successor agreement will be reached or that work stoppages will not occur in connection with the negotiation of a successor agreement. Another master agreement covering three bargaining units in Southern California (consisting of approximately 76 employees) expired on June 30, 1998. A successor agreement proposed by the multi-employer bargaining association has been accepted by the unions (and ratified by their members), and it is anticipated that the multi-employer association will sign the agreement shortly. A third multi-employer agreement covering a bargaining unit of 31 employees in Nevada also expired on June 30, 1998, and a successor agreement has recently been entered into with the union. Of the remaining collective bargaining agreements, one expires in October 1998; one in May 1999; two in June 1999; three in June 2000; three in April 2001; and one in May 2001. 58 There are currently no unfair labor practice charges pending against the Penhall Group either before the National Labor Relations Board or the courts. However, Local 12 of the Operating Engineers, which represents workers at three of the bargaining units, claims that its master agreement covers certain Penhall Group employees whom the Penhall Group has not recognized as covered by the agreement. Local 12 claims, in particular, that the Penhall Group is required to contribute to a certain union benefit fund on behalf of these employees; the claimed delinquency payments owed to the fund were, as of the fund's last audit in 1994, approximately $392,074. Local 12 has not, however, filed any legal proceedings or grievances arising from this dispute, even though the dispute is long-standing. In addition to this dispute with Local 12, the Penhall Group is party to two union grievances, neither of which is likely have any material adverse effect on the Penhall Group's operations or financial condition regardless of their resolution. PROPERTIES The Penhall Group is headquartered in Anaheim, California. As of September 30, 1998, the Penhall Group owned or leased 22 facilities (one of which is currently vacant and for sale) which are used for equipment yards and accompanying office space. The following table sets forth the location and square footage of each of such facilities.
LOCATION APPROX. SQUARE FEET - -------------------------------------------------------------------------- ------------------- Anaheim, California....................................................... 18,300 Gardena, California....................................................... 3,850 Camarillo, California..................................................... 3,600 San Leandro, California................................................... 6,000 Sacramento, California.................................................... 8,000 San Diego, California..................................................... 5,600 San Diego, California(1).................................................. 3,750 Rialto, California(2)..................................................... 6,000 Santa Clara, California(2)................................................ 9,950 Irvine, California(2)..................................................... 3,600 Irvine, California(2)..................................................... 9,500 Bakersfield, California(2)................................................ 4,000 Burbank, California....................................................... 6,200 Phoenix, Arizona.......................................................... 12,900 Austin, Texas............................................................. 6,100 Grapevine, Texas(2)....................................................... 11,000 Denver, Colorado.......................................................... 15,100 Austell, Georgia(2)....................................................... 8,000 Las Vegas, Nevada(2)...................................................... 4,000 Portland, Oregon(2)(3).................................................... 24,000 Salt Lake City, Utah(2)................................................... 10,500 Rogers, Minnesota(2)...................................................... 11,000
- ------------------------ (1) Property is currently vacant and for sale. (2) Leased property. (3) 12,000 square feet of this property is sub-leased to a sub-tenant. The Penhall Group presently leases ten sites in six states (collectively, the "Leased Sites"). The average remaining term of the leases under which the Leased Sites are held (collectively, the "Real Property Leases") is 5.6 years (assuming the exercise of all option periods). The Real Property Leases for the following four Leased Sites have remaining terms of less than three years: (i) Las Vegas, Nevada-- monthly tenancy; (ii) Irvine California (16332 Construction Circle West)--monthly tenancy; (iii) Bakersfield, California--May 30, 2000; and (iv) Austell, Georgia--January 31, 2001. 59 The Penhall Group acquired a property in Las Vegas, Nevada, on or about July 30, 1998, upon which it intends to construct a new facility. The lease term for the Las Vegas facility which the Penhall Group currently occupies has expired and the Penhall Group is leasing the property on a month-to-month basis. Once it constructs the new facility, the Penhall Group's operations in Las Vegas will be transferred and the current month-to-month lease will be terminated. The lease for one of the two facilities that the Penhall Group has in Irvine, California (located at 16332 Construction Circle West) has expired and the Penhall Group is occupying the property on a month to month basis. The Penhall Group is currently negotiating a renewal of the expired Irvine, California lease and does not foresee any difficulties in finalizing the renewal. Based on the rental rates in effect on July 1, 1998, aggregate annual base rent payable under all of the Real Property Leases totals approximately $596,000 and the average annual base rent payable under each of the Real Property Leases is approximately $54,000 exclusive of common area maintenance charges and other items of additional rent. Several of the Real Property Leases provide for increases in the base rent during the remaining term thereof (including option periods). In some cases, the amounts of the increases are fixed, while in others, the increases are tied to the Consumer Price Index. The Penhall Group believes that its facilities are suitable for its current operations and provide sufficient capacity to meet present needs. However, if the Penhall Group expands its geographic base of operations it may have to obtain additional facilities. GOVERNMENTAL REGULATION The operations of the Penhall Group are subject to certain federal, state and local laws and regulations concerning labor relations, wage rates, equal opportunity employment and affirmative action. While compliance with such laws and regulations has not adversely affected the Penhall Group's operations in the past, there can be no assurance that these requirements will not change or that future compliance will not adversely affect the Penhall Group's operations. The Penhall Group's facilities and operations are also subject to certain federal, state and local laws and regulations relating to environmental protection and occupational health and safety, including those governing wastewater discharges, the treatment, storage and disposal of solid and hazardous wastes and materials, and the remediation of contamination associated with the release of hazardous substances. The Penhall Group believes that it is in material compliance with such requirements and does not currently anticipate any material capital expenditures for environmental compliance or remediation for the current or the immediately succeeding fiscal year. The Penhall Group operates at a number of locations at which petroleum products are stored in underground tanks. The Penhall Group is currently in the process of complying with up-coming regulatory obligations to upgrade or close underground storage tanks under the Resource Conservation and Recovery Act of 1980, as amended ("RCRA"), including all applicable requirements of state regulatory agencies, which must be met by December 22, 1998. The Penhall Group believes that the costs associated with the storage tank upgrades or closures (including the cost to address any associated contamination) would not reasonably be expected to exceed $170,000. Certain of the Penhall Group's present and former facilities and operations at off-site construction sites have used substances and generated or disposed of wastes which may include material which is or may be considered hazardous or are otherwise regulated by environmental laws, and the Penhall Group may incur liability in connection therewith. Moreover, there can be no assurance that environmental and safety requirements will not become more stringent or be interpreted and applied more stringently in the future. Such future changes or interpretations, or the identification of adverse environmental conditions currently unknown to the Penhall Group, could result in additional environmental compliance or remediation costs to the Penhall Group. Such compliance and remediation costs could be material to the Penhall Group's financial condition or results of operations. See "Risk Factors--Governmental Regulation." LEGAL PROCEEDINGS The Penhall Group is from time to time involved in various legal proceedings and claims arising in the ordinary course of business. The Penhall Group believes that there is no outstanding litigation which could have a material impact on its operations. 60 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company. Directors of the Company hold their offices for a term of one year or until their successors are elected and qualified; executive officers of the Company serve at the discretion of the Board of Directors. For information concerning certain arrangements with respect to the election of directors, see "Ownership of Capital Stock -- Stockholders Agreement."
NAME AGE TITLE - ----------------------------------------------------- --- ----------------------------------------------------- John T. Sawyer....................................... 53 Chairman of the Board of Directors, President and Chief Executive Officer Clark George Bush.................................... 43 Vice President and Regional Manager, Southern California Region M. Bruce Repchinuck.................................. 49 Vice President and Regional Manager, Northwest Region Bruce F. Varney...................................... 46 Vice President and Regional Manager, Southwest Region Martin W. Houge...................................... 40 Vice President-Finance and Chief Financial Officer David S. Neal........................................ 36 Regional Manager, Southern Region Gary Aamold.......................................... 48 Vice President and Regional Manager, Highway Services Division Bruce C. Bruckmann................................... 44 Director Harold O. Rosser II.................................. 49 Director
JOHN T. SAWYER, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, joined PII in 1978 as the Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was appointed Manager of PII's National Contracting Division, and in 1984, he assumed the position of Vice President and became responsible for managing all construction services divisions. Mr. Sawyer has been President of PenCo since 1989. CLARK GEORGE BUSH, VICE PRESIDENT AND REGIONAL MANAGER, SOUTHERN CALIFORNIA REGION, joined PII in 1980 as an Estimator and Jobsite Manager and became a Division Manager in 1984. Mr. Bush was promoted to Regional Manager of Southern California in 1986. In 1990, Mr. Bush was appointed as President of the Company, where he served until his recent appointment as Vice President of PII with responsibility for the Southern California region. M. BRUCE REPCHINUCK, VICE PRESIDENT AND REGIONAL MANAGER, NORTHWEST REGION, began his career with PII in 1975 and served in several capacities before being named as Manager of the Oakland Division in 1980. In 1987, Mr. Repchinuck was promoted to Regional Manager and in 1989 was named as Vice President. Mr. Repchinuck currently serves as Regional Manager of the Northwest region. BRUCE F. VARNEY, VICE PRESIDENT AND REGIONAL MANAGER, SOUTHWEST REGION, began his employment with PII in 1977, and in 1981 was named Manager of the San Diego Division. From 1991 to 1993, Mr. Varney served as Regional Manager for Southern California, and in 1993 he was appointed as Southwest Regional Manager. In April 1998, Mr. Varney was promoted to Vice President. MARTIN W. HOUGE, VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER, joined PII in 1996 as Chief Financial Officer. From 1989 to 1996, Mr. Houge served in various financial positions with the Furon Company, including Director of Accounting, Division Controller and Director of Internal Audit. From 1979 to 1989, he was in public accounting with Arthur Young and Company. Mr. Houge is a certified public accountant. DAVID S. NEAL, REGIONAL MANAGER, SOUTHERN REGION, joined PII in 1990. Mr. Neal served as an estimator and division manager prior to being named Regional Manager in April 1998. Prior to joining PII, Mr. Neal held several project management positions in the highway contracting industry. 61 GARY AAMOLD, VICE PRESIDENT AND REGIONAL MANAGER, HIGHWAY SERVICES DIVISION, joined PII as a result of the HSI Acquisition in April 1998. Since 1989, Mr. Aamold has served in various managerial capacities for HSI. BRUCE C. BRUCKMANN, DIRECTOR, is a Managing Director of Bruckmann, Rosser, Sherrill & Co., Inc. (the "Sponsor"). Prior to forming the Sponsor in 1995, Mr. Bruckmann was an officer of Citicorp Venture Capital Ltd. from 1983 through 1994. Previously, he was an associate at the New York law firm of Patterson, Belknap, Webb & Tyler. Mr. Bruckmann is a director of AmeriSource Health Corporation, Anvil Knitwear, Inc., California Pizza Kitchen, Inc., Chromecraft Revington Corporation, Cort Furniture Rental Corp., Jitney-Jungle Stores of America, Inc., MEDIQ Incorporated, Mohawk Industries, Inc. and Town Sports International, Inc. HAROLD O. ROSSER II, DIRECTOR, is a Managing Director of the Sponsor. Prior to forming the Sponsor in 1995, Mr. Rosser was an officer of Citicorp Venture Capital Ltd. from 1987 through 1994. Previously, he spent twelve years with Citicorp/Citibank in various management and corporate finance positions. Mr. Rosser is a director of American Paper Group, Inc., B&G Foods, Inc., California Pizza Kitchen, Inc., Jitney-Jungle Stores of America, Inc. and Acapulco Restaurants, Inc. For information concerning certain arrangements with respect to the composition of the Board of Directors of the Company, see "Ownership of Capital Stock -- Stockholders Agreement." DIRECTOR COMPENSATION AND ARRANGEMENTS Following consummation of the Transactions, each non-employee director of the Company will be paid an annual retainer of $12,000 plus fees of $1,000 for each board meeting attended and $500 for each committee meeting attended. Directors who are employees of the Company will not receive additional compensation as directors. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued for fiscal 1998 to the Chief Executive Officer of PII and to each of the four other most highly compensated executive officers of the Penhall Group. Upon consummation of the Transactions, Roger C. Stull retired as Chief Executive Officer of PII. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) COMPENSATION(3) - -------------------------------------------------------- ---------- ---------- --------------- --------------- Roger C. Stull.......................................... $ 402,412 $ 500,000 $ 8,856 $ 79,109(4) Chief Executive Officer-PII John T. Sawyer.......................................... $ 254,676 $ 155,000 $ 8,856 $ 3,452(5) Vice President-PII and President-PenCo C. George Bush.......................................... $ 142,607 $ 90,000 $ 8,856 $ 3,262(6) Vice President-PII M. Bruce Repchinuck..................................... $ 137,340 $ 120,000 $ 8,856 $ 3,373(7) Vice President-PII Bruce F. Varney......................................... $ 128,091 $ 100,000 $ 8,856 $ 3,452(8) Vice President-PII
- ------------------------------ (1) Includes amounts contributed as salary deferral contributions in fiscal 1998 under the Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan (the "Plan"), as follows: $9,204 for Mr. Stull; $9,046 for Mr. Sawyer; $9,024 for Mr. Bush; $9,840 for Mr. Repchinuck; and $10,400 for Mr. Varney. (2) Includes the amount attributable to the use of an automobile furnished by PII. (3) Includes PII matching contributions under the Plan, premiums for group term and split-dollar life insurance, premiums for health care insurance and long-term disability insurance premiums. (4) Includes $910 of PII matching contributions under the Plan, approximately $444 of premiums for group term life insurance, approximately $1,763 of premiums for health care insurance, approximately $430 for long-term disability insurance premiums 62 and approximately $75,562 of premiums, in the aggregate, for life insurance policies on the lives of Mr. Stull and his wife, Ann R. Stull, maintained by PII under a split-dollar insurance arrangement. In fiscal 1998, all of the premiums for the split-dollar insurance were paid directly, or by borrowing against the policies, by PII. (5) Includes $910 of PII matching contributions under the Plan, approximately $444 of premiums for group term life insurance, approximately $1,668 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (6) Includes $910 of PII matching contributions under the Plan, approximately $331 of premiums for group term life insurance, approximately $1,591 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (7) Includes $910 of PII matching contributions under the Plan, approximately $444 of premiums for group term life insurance, approximately $1,589 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (8) Includes $910 of PII matching contributions under the Plan, approximately $444 of premiums for group term life insurance, approximately $1,668 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. EMPLOYMENT AGREEMENTS Upon consummation of the Transactions, the Company entered into a five-year employment agreement with John T. Sawyer pursuant to which Mr. Sawyer is employed as President and Chief Executive Officer of the Company; the Company also entered into three-year employment agreements with Messrs. Bush and Varney pursuant to which each of such executives is employed as a Vice President of the Company. The agreements provide for a base salary (approximately $246,000 for Mr. Sawyer, $134,000 for C. George Bush and $119,000 for Bruce F. Varney), which will be subject to annual merit increases, and an annual performance bonus. In addition, the agreements provide for the receipt by the executives of standard company benefits. The agreements are terminable by the Company with or without cause. In the event an agreement is terminated without cause, the executive will be entitled to continue to receive his base salary and, for certain executives, bonus, and certain other benefits, for specified periods. Following any termination of employment of an executive, it is expected that the executive will be subject to a non-competition covenant with a duration of two years pursuant to the terms of the Stockholders Agreement (as defined). 401(K) PLAN PII sponsors the Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan (the "Plan"), which is intended to satisfy the tax qualification requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain terms and conditions of the Plan, substantially all of the Penhall Group's non-union employees are eligible to participate in the Plan. Eligible employees may contribute between 1% and 15% of their compensation to the Plan on a pre-tax basis. PII may, but is not required, to make matching contributions to the Plan each year. Any matching contributions will be allocated to each participant's account under the Plan proportionate to the amount that he or she has contributed to the Plan during the applicable Plan year. All PII and employee contributions to the Plan are allocated to a participant's individual account. $161,000 was charged to general and administrative expense by PII related to contributions to and expenses of the Plan for the year ended June 30, 1998. All PII and employee contributions to the Plan plus the earnings thereon are 100% vested. Employees may direct the investment of their accounts to various investment funds. The Plan provides for hardship withdrawals and loans to participants. STOCK OPTION PLAN In March 1993, PII adopted a stock option plan pursuant to which certain key employees of PII were granted options to purchase up to 13,750 shares of PII's common stock at an exercise price equal to $51.49 per share. All stock options had ten-year terms, and vested and became fully exercisable five years following the date of grant. In connection with the provisions of the Merger Agreement, on June 30, 1998 each holder of an option exercised all options held by such holder and delivered a promissory note to PII in payment of the exercise price therefor. Upon consummation of the Transactions, PII forgave all but approximately $129,000 of the indebtedness represented by such promissory notes. 63 OWNERSHIP OF CAPITAL STOCK The following table sets forth certain information with respect to (i) the beneficial ownership of the Common Stock of the Company by each person or entity who owns five percent or more thereof and (ii) the beneficial ownership of each class of equity securities of the Company by each director of the Company who is a shareholder, the Chief Executive Officer of the Company and the other executive officers named in the "Summary Compensation Table" above who are shareholders, and all directors and officers of the Company as a group. The table also sets forth certain information with respect to the ownership of the Senior Exchangeable Preferred Stock, Series A Preferred Stock and Series B Preferred Stock of the Company by BRS, the Foundation and PII. Unless otherwise specified, all shares are directly held.
NUMBER AND PERCENT OF SHARES -------------------------------------------------------------------- SERIES A SERIES B COMMON SENIOR EXCHANGEABLE PREFERRED PREFERRED NAME OF BENEFICIAL OWNER STOCK(1) PREFERRED STOCK STOCK STOCK - ------------------------------------------ --------------- ------------------- -------------- -------------- Bruckmann, Rosser, Sherrill & Co., 582,312/58.52% --/-- 9,717/93.18% 9,333/41.35% L.P.(2)................................. Two Greenwich Plaza Suite 100 Greenwich, CT 06830 The National Christian Charitable Foundation Inc.......................... --/-- 10,000/100.0% --/-- --/-- Penhall Rental Corp. (PII)................ --/-- --/-- --/-- 4,000/17.72% John T. Sawyer............................ 110,113/11.07% --/-- --/-- 2,465/10.92% C. George Bush............................ 40,380/4.06% --/-- --/-- 873/3.87% M. Bruce Repchinuck(3).................... 27,843/2.80% --/-- --/-- 487/2.16% Bruce F. Varney........................... 36,504/3.67% --/-- --/-- 754/3.34% Bruce C. Bruckmann(4)..................... 624,915/62.81% --/-- 10,428/100.0% 10,016/44.37% Harold O. Rosser II(4).................... 624,915/62.81% --/-- 10,428/100.0% 10,016/44.37% All directors and officers as a group (9 persons)............................. 878,978/88.34% --/-- 10,428/100.0% 15,433/68.37%
- ------------------------ (1) The Company expects to grant options to acquire Common Stock to certain employees to be designated. The shares of Common Stock issuable upon the exercise of such options would equal, in the aggregate, up to an additional 5.0% of the Common Stock on a fully-diluted basis. The table does not include any such shares. See "Certain Relationships and Related Transactions--Stock Options." (2) BRS is a limited partnership, the sole general partner of which is BRS Partners, Limited Partnership ("BRS Partners") and the manager of which is the Sponsor. The sole general partner of BRS Partners is BRSE Associates, Inc. ("BRSE Associates"). Bruce C. Bruckmann, Harold O. Rosser II, Stephen C. Sherrill and Stephen F. Edwards are the only stockholders of the Sponsor and BRSE Associates and may be deemed to share beneficial ownership of the shares shown as beneficially owned by BRS. Such individuals disclaim beneficial ownership of any such shares. (3) All such shares are held in the name of the Michael Bruce Repchinuck Revocable Trust. (4) Includes shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock which are owned by BRS and certain other entities and individuals affiliated with BRS. Although Messrs. Bruckmann and Rosser may be deemed to share beneficial ownership of such shares, such individuals disclaim beneficial ownership thereof. See Note 2 above. COMMON STOCK The Company is authorized to issue up to 5,000,000 shares of Common Stock. The holders of Common Stock are entitled to one vote per share on all matters submitted for action by the stockholders. There is no provision for cumulative voting with respect to the election of directors. Accordingly, the holders of more than 50% of the shares of Common Stock will be able to elect all of the directors. In such event, the holders of the remaining shares of Common Stock will not be able to elect any directors. 64 Subject to the rights of any holders of outstanding preferred stock of the Company, all shares of Common Stock are entitled to share in such dividends as the Board of Directors of the Company may from time to time declare from sources legally available therefor. Subject to the rights of any holders of outstanding preferred stock of the Company, upon liquidation or dissolution of the Company, whether voluntary or involuntary, all shares of Common Stock are entitled to share equally in the assets available for distribution to stockholders after payment of all prior obligations of the Company. SENIOR EXCHANGEABLE PREFERRED STOCK The Company is authorized to issue up to 250,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), of which 10,000 shares have been designated as Senior Exchangeable Preferred Stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of the Company, the Senior Exchangeable Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock and the Series B Preferred Stock. Holders of Senior Exchangeable Preferred Stock are entitled to receive, when as and if declared by the Board of Directors of the Company, out of funds legally available for payment thereof, cash dividends on each share of Senior Exchangeable Preferred Stock at a rate PER ANNUM equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Senior Exchangeable Preferred Stock ("Senior Exchangeable Junior Stock") with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. "Senior Exchangeable Preferred Liquidation Preference" means, on any specific date, with respect to each share of Senior Exchangeable Preferred Stock, the sum of (i) $1,000 per share plus (ii) the accumulated unpaid dividends with respect to such share. The New Credit Facility and the Indenture restrict, and any future credit agreements or indentures to which the Company becomes a party may restrict, the ability of the Company to pay cash dividends. The Company may, at its option, redeem at any time, from any source of funds legally available therefor, in whole or in part, any or all of the shares of Senior Exchangeable Preferred Stock, at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On February 1, 2007, the Company shall redeem, from any source of funds legally available therefor, all of the then outstanding shares of Senior Exchangeable Preferred Stock at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. The Senior Exchangeable Preferred Stock is exchangeable by the Company at any time and from time to time for junior subordinated notes (the "Junior Subordinated Notes") in an amount equal to the Senior Exchangeable Preferred Liquidation Preference plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the exchange date to the exchange date. The Junior Subordinated Notes will pay interest from the date of exchange at the rate of 10.5% per annum in cash; provided, however, that the Company shall be prohibited from paying interest on the Junior Subordinated Notes in cash for so long as the Notes shall remain outstanding. In such event, interest shall be deemed to be paid by such amount being added to the outstanding principal amount of the Junior Subordinated Notes and shall accrue interest as a portion of the principal amount of the Junior Subordinated Notes to the maximum extent permitted by law. If issued, the Junior Subordinated Notes will mature on February 1, 2007. The New Credit Facility and the Indenture restrict, and any future credit agreements or indentures to which the Company becomes a party may restrict, the ability of the Company to exchange the Senior Exchangeable Preferred Stock for the Junior Subordinated Notes and redeem or repurchase the Junior Subordinated Notes. 65 In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of Senior Exchangeable Preferred Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to the Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Senior Exchangeable Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Senior Exchangeable Preferred Stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Senior Exchangeable Preferred Stock have no voting rights and are not be entitled to any notice of meeting of stockholders. SERIES A PREFERRED STOCK The Company has designated 25,000 shares of Preferred Stock as Series A Preferred Stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of the Company, the Series A Preferred Stock ranks senior to the Common Stock and on a parity with the Series B Preferred Stock. Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available for payment thereof, cash dividends on each share of Series A Preferred Stock at a rate PER ANNUM equal to 13% of the Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Series A Preferred Stock ("Junior Stock") with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. "Liquidation Preference" means, on any specific date, with respect to each share of Series A Preferred Stock, the sum of (i) $1,000 per share plus (ii) the accumulated dividends with respect to such share. The New Credit Facility and the Indenture restrict, and any future credit agreements or indentures to which the Company becomes a party may restrict, the ability of the Company to pay cash dividends. The Company may, at its option, redeem at any time, from any source of funds legally available therefor, in whole or in part, any or all of the shares of Series A Preferred Stock, at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On August 1, 2007, the Company shall redeem, from any source of funds legally available therefor, all of the then outstanding shares of Series A Preferred Stock at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to the Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Series A Preferred Stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Series A Preferred Stock have no voting rights and are not be entitled to any notice of meeting of stockholders. SERIES B PREFERRED STOCK The Company has designated 50,000 shares of Preferred Stock as Series B Preferred Stock. The preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions (including, without limitation, dividend rights and rights on liquidation, winding up and dissolution of the Company) of the Series B Preferred Stock are identical to those of the Series A 66 Preferred Stock, except that the Series B Preferred Stock is not be subject to any mandatory or optional redemption by the Company. STOCKHOLDERS AGREEMENT Upon consummation of the Transactions, the BRS Entities, the Management Stockholders and the Company entered into a Securities Holders Agreement (the "Stockholders Agreement") containing certain agreements among such stockholders with respect to the capital stock and corporate governance of the Company and its subsidiaries. The following is a summary description of the principal terms of the Stockholders Agreement, a copy of which is available upon request to the Company. Pursuant to the Stockholders Agreement, the Board of Directors of the Company shall be comprised of no less than three and no more than seven persons (with the exact number to be determined by BRS from time to time). If the Board of Directors is composed of three or four persons, then one individual shall be designated by the Management Stockholders holding a majority of the Common Stock owned by the Management Stockholders and the remainder shall be designated by BRS. If the Board of Directors is composed of five or more persons, then two individuals shall be designated by the Management Stockholders holding a majority of the Common Stock owned by the Management Stockholders (who shall be Management Stockholders and officers of the Company during the term of their directorship) and the remainder shall be designated by BRS. The initial designees of BRS will be Bruce C. Bruckmann and Harold O. Rosser II. Subject to certain rights of removal, John T. Sawyer shall be the designee of the Management Stockholders. The Stockholders Agreement contains certain provisions which, with certain exceptions, restrict the ability of the Management Stockholders from transferring any Common Stock or Series B Preferred Stock except pursuant to the terms of the Stockholders Agreement. If the Board of Directors of the Company and holders of at least a majority of the Common Stock of the Company then outstanding shall approve the sale of the Company or any of its subsidiaries to an unaffiliated third person (an "Approved Sale"), each stockholder of the Company shall consent to, vote for and raise no objections against, and waive dissenters and appraisal rights (if any) with respect to, the Approved Sale and, if such sale shall include the sale of capital stock, each stockholder shall sell such stockholder's capital stock on the terms and conditions approved by the Board of Directors of the Company and the holders of a majority of the Common Stock of the Company then outstanding. The Stockholders Agreement also provides for certain additional restrictions on transfer of the Company's Common Stock and Series B Preferred Stock by the Management Stockholders, including the right of the Company to purchase certain Common Stock and Series B Preferred Stock of the Company held by a Management Stockholder upon termination of such Management Stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Transactions and the 180th day following an Initial Public Offering (as defined below), at a formula price, and the grant of a right of first refusal in favor of the Company in the event a Management Stockholder elects to transfer such Common Stock or Series B Preferred Stock. Under the Stockholders Agreement, a Management Stockholder has the right, subject to the restrictions set forth in the Indenture, the New Credit Facility and other agreements relating to indebtedness of the Company, to require the Company to purchase certain Common Stock and Series B Preferred Stock of the Company held by such Management Stockholder upon termination of such Management Stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Transactions and the 180th day following an Initial Public Offering, at a formula price. "Initial Public Offering" means the sale by the Company in an underwritten public offering made pursuant to an effective registration statement under the Securities Act of Common Stock for gross offering proceeds of at least $30 million. REGISTRATION RIGHTS AGREEMENT Upon consummation of the Transactions, the BRS Entities, the Management Stockholders and the Company entered into a Registration Rights Agreement (the "Company Registration Rights Agreement") 67 pursuant to which the Company granted certain registration rights to the stockholders of the Company with respect to the Company's Common Stock. Under the Company Registration Rights Agreement, the Company granted to the BRS Entities demand registration rights with respect to the shares of Common Stock held by the BRS Entities. All of the stockholders party to the Company Registration Rights Agreement have the right to participate, or "piggyback," in certain registrations initiated by the Company. STOCK OPTIONS It is expected that certain employees of the Company to be designated will be provided with an opportunity to receive non-qualified options (the "New Options") to purchase shares of Common Stock representing approximately 5% of the outstanding Common Stock on a fully diluted basis. Such persons will have the opportunity to acquire one-fifth of the New Options during each year of the five-year period beginning with the consummation of the Transactions. For each such year, the opportunity to receive any New Option will be subject to the Company's achievement of certain financial performance goals. In certain circumstances, such persons will have the right to immediately receive any unissued or unvested New Options regardless of whether such performance goals have been met. 68 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NOTE PAYABLE TO ROGER STULL In December 1995, PII purchased from Roger Stull certain facilities previously leased to PII for $2.2 million, consisting of $700,000 in cash and a $1.5 million promissory note bearing interest at the prime rate plus 0.25%. The promissory note was secured by a deed of trust and was paid in equal quarterly installments of $375,000, the last of which was made on October 1, 1997. CERTAIN FEES PAYABLE TO BRS; BRS MANAGEMENT AGREEMENT Upon consummation of the Transactions, the Company paid the Sponsor a closing fee of $2.0 million (the "Closing Fee"). In addition, the Company entered into a management services agreement (the "Management Agreement") with the Sponsor pursuant to which the Sponsor will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The Closing Fee and the fees payable pursuant to the Management Agreement were negotiated on an arm's-length basis by representatives of the Sponsor and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company. See "Description of the Notes--Certain Covenants--Transactions with Affiliates." SPLIT-DOLLAR INSURANCE POLICIES In addition to group term life insurance, PII maintains and pays the premiums on five split-dollar whole life insurance policies on the lives of Mr. Roger C. Stull and his wife, Ann R. Stull. Mr. Stull is the beneficiary under three of the policies and Mrs. Stull is the beneficiary under two of the policies. The split-dollar insurance provides death benefits equal to, in the aggregate, $1,762,216 for Mr. Stull and $1,530,789 for Mrs. Stull. Since July 1, 1997, PII has paid premiums on the policies in the aggregate amount of $20,173, net of premiums which were paid by borrowing against the policies. As of July 13, 1998, PII had borrowed a total of $1,432,236 against the policies and the aggregate net cash surrender value of the policies as of such date was $301,269. Upon consummation of the Transactions, (i) PII and the Stulls terminated their split-dollar insurance arrangement, (ii) PII relinquished any and all claims against the Stulls for reimbursement of premiums paid by PII on the policies, (iii) the Stulls relinquished any and all claims against PII arising out of borrowings by PII against the policies, and (iv) the Stulls obtained ownership of the policies free and clear of any claims by PII. TAX GROSS-UP PAYMENTS Pursuant to the terms of a certain Compensation, Tax Consistency and Indemnification Agreement executed on June 30, 1998, by and among PII and certain members of Management (the "Compensation Agreement"), PII was obligated to make approximately $3.0 million of tax gross-up payments on or before September 15, 1998. John T. Sawyer, Vice President of PII and President of PenCo, C. George Bush, Vice President of PII, M. Bruce Repchinuck, Vice President of PII and Bruce F. Varney, Vice President of PII, received approximately $1,007,511, $444,184, $322,443 and $312,411, respectively, pursuant to the Compensation Agreement. On September 15, 1998, PII made such payments out of working capital. The Penhall Group expects that it will realize tax benefits of approximately $3.0 million in the form of reduced tax payment obligations or refunds of tax overpayments as a result of deductions for certain of such tax gross-up payments and deductions with respect to employee stock options. The Penhall Group has realized or anticipates it will realize these tax benefits during a four-month period that began on June 15, 1998. INDEBTEDNESS OF MANAGEMENT On or about April 15, 1998, PII advanced approximately $205,862 to John T. Sawyer, Vice President of PII and President of PenCo, to pay income taxes resulting from compensation income recognized by Mr. Sawyer in calendar year 1997. Pursuant to the Compensation Agreement, the amount advanced to Mr. Sawyer was offset against certain supplemental cash compensation payments that PII made to to Mr. Sawyer on September 15, 1998. 69 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of certain indebtedness of the Company. To the extent such summary contains descriptions of the New Credit Facility and other loan documents, such descriptions do not purport to be complete and are qualified in their entirety by reference to such documents, which are available upon request from the Company. NEW CREDIT FACILITY In order to finance a portion of the cash consideration to be paid pursuant to the Merger, the Company's existing credit facility (the "Existing Credit Facility") was replaced by the $50.0 million New Credit Facility with Bankers Trust Company ("BTCo") as administrative agent (the "Administrative Agent"), Credit Suisse First Boston ("CSFB") as syndication agent (the "Syndication Agent") and a syndicate of banks formed by BTCo (the "Senior Lenders"). The New Credit Facility consists of two facilities: (i) a six-year senior secured Term Loan Facility in an aggregate principal amount equal to $20.0 million; and (ii) a six-year Revolving Credit Facility in an aggregate principal amount not to exceed $30.0 million. Term Loans in an aggregate principal amount of $20.0 million were drawn on the closing date of the New Credit Facility in connection with the Recapitalization. Subject to compliance with customary conditions precedent, Revolving Loans will be available at any time prior to the final maturity of the Revolving Credit Facility. Amounts repaid under the Revolving Credit Facility may be reborrowed prior to the final maturity of the Revolving Credit Facility, provided that availability requirements are met. Standby letters of credit will be available at any time and will have an expiry date occurring no later than one year after issuance and, in any case, no later than one business day prior to the final maturity of the Revolving Credit Facility. Trade letters of credit will be available at any time and will have an expiry date occurring no later than 180 days after issuance and, in any case, no later than the thirtieth day prior to the final maturity of the Revolving Credit Facility. All obligations of the Company under the New Credit Facility are unconditionally guaranteed (the "Facility Guaranties") by each existing and each subsequently acquired or organized subsidiary of the Company (the "Facility Guarantors"). The New Credit Facility and the related guarantees are secured by substantially all the assets of the Company and each Facility Guarantor, including but not limited to (i) a first priority pledge of all the capital stock and notes owned by the Company and each Facility Guarantor and (ii) perfected first priority security interests in substantially all tangible and intangible assets of the Company and each Facility Guarantor. Borrowings under the New Credit Facility bear interest at a floating rate based upon, at the Company's option, (i) the Applicable Margin plus the Base Rate (as such terms are defined in the New Credit Facility) in effect from time to time, or (ii) the Applicable Margin plus the Eurodollar Rate (as such term is defined in the New Credit Facility), adjusted for required reserves. The Company may elect interest periods of one, two, three or six months for Eurodollar borrowings. Interest on Eurodollar borrowings shall be payable at the end of each interest period and, in any event, at least every three months, at the time of repayment of any loans and at maturity. Interest on Base Rate borrowings shall be payable quarterly and at maturity. In addition to paying interest on outstanding principal under the New Credit Facility, the Company is required to pay a commitment fee to the Senior Lenders equal to 0.5% per annum of the undrawn portion of the commitments in respect of the Revolving Credit Facility, payable quarterly in arrears and upon the termination of the Revolving Credit Facility, in each case for the actual number of days elapsed in a 360-day year. The New Credit Facility contains provisions under which margins on interest rates under the facilities will be adjusted in increments based on performance goals. The Term Loans amortize on a quarterly basis commencing in September 2000 and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving 70 Credit Facility are due and payable in full at maturity. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any Facility Guarantor. Such loans are also required to be prepaid with 75% of the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company's Leverage Ratio (as such term is defined in the New Credit Facility) is less than 4.75 to 1.0, 50% of such Excess Cash Flow. The New Credit Facility contains numerous restrictive financial and other covenants, including, but not limited to (i) limitations on the incurrence of liens and indebtedness, (ii) restrictions on consolidations, mergers and sales of assets, investments (including the purchase of stock, obligations or securities), advances and loans, capital expenditures, changes in business, prepayment of indebtedness (including the Notes), affiliate transactions, issuances of capital stock, payments of interest on certain indebtedness and creation of subsidiaries, (iii) a prohibition (with certain limited exceptions) on dividends, distributions and payments on, and redemptions of, shares of capital stock, and (iv) a requirement to meet certain identified financial targets, based generally on rolling four fiscal quarter periods, such as a maximum leverage ratio and a minimum interest coverage ratio and a requirement to maintain a minimum Consolidated EBITDA (as defined in the New Credit Facility) during specified quarterly periods. Events of default under the New Credit Facility include, among others, (i) breach of representations and warranties, (ii) nonpayment of interest, fees or principal when due, (iii) breach in the observance or performance of any covenants, condition or agreement, (iv) voluntary or involuntary bankruptcy proceedings, (v) default in any other indebtedness that permits acceleration of such indebtedness, (vi) any events or conditions which would result in the termination of a pension plan or the creation of certain liabilities under the Employment Retirement Income Security Act of 1974, as amended, (vii) judgments or decrees involving liability of $3.5 million or more that remain undischarged or unbonded for 60 consecutive days, (viii) the invalidity of certain security documents and security interests or the cessation of any Subsidiary Guarantees (as defined in the New Credit Facility) or any denial or disaffirmation by a Guarantor as to its obligations under a Subsidiary Guarantee and (ix) the occurrence of a Change of Control (as defined in the New Credit Facility). Upon the occurrence of any event of default under the New Credit Facility, the Senior Lenders may accelerate the maturity of the loans made thereunder and terminate the commitments under the New Credit Facility. The New Credit Facility contains representations, warranties and other provisions customary for credit facilities of this type. The Company will pay the Senior Lenders certain syndication and administration fees, reimburse certain expenses and provide certain indemnities, in each case which are customary for credit facilities of this type. NOTE PAYABLE TO HSI In April 1998, PenCo purchased substantially all of the assets of HSI for approximately $9.7 million plus the assumption of approximately $1.3 million of liabilities. PenCo paid approximately $6.0 million of the purchase price in cash, with the remainder payable in equal installments in April 1999 and 2000 pursuant to a $3.7 million secured promissory note which bears interest at 5.51% per annum. 71 DESCRIPTION OF THE NOTES The Existing Notes were issued under an indenture (the "Indenture"), dated as of August 1, 1998, between the Issuer and United States Trust Company of New York, as trustee (the "Trustee"). Upon consummation of the Recapitalization Merger, the Company assumed all of the Issuer's obligations under the Existing Notes and the Indenture and the Guarantors became parties to the Indenture and executed the Guarantees. The terms of the Indenture apply to the Existing Notes and to the New Notes to be issued in exchange therefor pursuant to the Exchange Offer (all such Notes being referred to herein collectively as the "Notes"). The following is a summary of the material provisions of the Indenture. This summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. A copy of the Indenture has been filed as an exhibit to the Exchange Offer Registration Statement of which this Prospectus is a part. The definitions of certain capitalized terms used in this summary are set forth below under "-- Certain Definitions." For purposes of this section, references to the "Company" include only the Company and not its Subsidiaries. The Notes will be senior unsecured obligations of the Company, ranking PARI PASSU in right of payment to all senior unsecured obligations of the Company. The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as paying agent and registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any paying agent and registrar without notice to holders of the Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office in New York, New York. At the Company's option, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered address of Holders. Any Notes that remain outstanding after the completion of the Exchange Offer, together with the Exchange Notes issued in connection with the Exchange Offer, will be treated as a single class of securities under the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $150,000,000, of which $100,000,000 were issued in connection with the Transactions. The Notes will mature on August 1, 2006. Additional amounts may be issued in one or more series from time to time subject to the limitations set forth under "-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness" and restrictions contained in the New Credit Facility. Interest on the Notes will accrue at the rate of 12% per annum and will be payable semiannually in arrears on each February 1 and August 1, commencing on February 1, 1999, to the persons who are registered Holders at the close of business on the January 15 and July 15, respectively, immediately preceding the applicable interest payment date. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after August 1, 2003, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if 72 redeemed during the twelve-month period commencing on August 1 of the years set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE - ---------------------------------------------------------------------------------- ----------- 2003.............................................................................. 106.000% 2004.............................................................................. 104.000% 2005.............................................................................. 102.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time to time, on or prior to August 1, 2001, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined below) to redeem up to 30% of the sum of (i) the initial aggregate principal amount of Notes issued in connection with the Transactions and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date, at a redemption price equal to 112.0% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption; PROVIDED that at least 70% of the sum of (i) the initial aggregate principal amount of Notes issued in connection with the Transactions and (ii) the respective initial aggregate principal amounts of Notes issued under the Indenture after the Issue Date remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 120 days after the consummation of any such Public Equity Offering. As used in the preceding paragraph, "Public Equity Offering" means an underwritten public offering of Qualified Capital Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER, that if a partial redemption is made with the proceeds of a Public Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as is practicable (subject to DTC procedures or the procedures of any other depositary), unless such method is otherwise prohibited. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the paying agent funds in satisfaction of the applicable redemption price pursuant to the Indenture. RANKING The Notes will be general unsecured senior obligations of the Company. The Notes will rank on a parity in right of payment with all existing and future unsubordinated Indebtedness of the Company and senior in right of payment to all existing and future subordinated Indebtedness of the Company. The Notes will be effectively subordinated to all secured Indebtedness of the Company (including all Indebtedness outstanding under the New Credit Facility) to the extent of the value of the assets securing such Indebtedness and to all Indebtedness of any other Subsidiaries of the Company (other than the 73 Guarantors). The Guarantees will be effectively subordinated to all existing and future secured Indebtedness of the related Guarantor (including all Indebtedness outstanding under the New Credit Facility and guaranteed by the Guarantors) to the extent of the value of the assets securing such Indebtedness. All of the outstanding Indebtedness under the New Credit Facility will be guaranteed by the Guarantors on a secured basis. See "Description of Certain Indebtedness -- New Credit Facility." As of September 30, 1998, the Company had approximately $121.1 million of indebtedness outstanding (including $20.8 million of secured indebtedness outstanding pursuant to the New Credit Facility but exclusive of $29.2 million of unused commitments thereunder), and the Guarantors had approximately $4.3 million of indebtedness outstanding (including $3.9 million of secured indebtedness but exclusive of guarantees by the Guarantors of the Company's obligations under the Notes and the New Credit Facility). Although the Indenture contains limitations on the amount of additional Indebtedness that the Company may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be secured. Although the Indenture limits the incurrence of Indebtedness and the issuance of preferred stock of certain of the Company's subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Indenture does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not considered Indebtedness under the Indenture. See "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness." GUARANTEES Each Guarantor will unconditionally guarantee, on a senior basis, jointly and severally, to each Holder and the Trustee, the full and prompt performance of the Company's obligations under the Indenture and the Notes, including the payment of principal of and interest on the Notes. The obligations of each Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount PRO RATA, based on the net assets of each Guarantor, determined in accordance with GAAP. Each Guarantor may consolidate with or merge into or sell its assets to the Company or another Guarantor that is a Restricted Subsidiary of the Company without limitation, or with other Persons upon the terms and conditions set forth in the Indenture. See "Certain Covenants -- Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by the Company and the sale complies with the provisions set forth in "--Certain Covenants -- Limitation on Asset Sales," the Guarantor's Guarantee will be released. Each Guarantor that is designated as an Unrestricted Subsidiary in accordance with the Indenture shall be released from its Guarantee and related obligations set forth in the Indenture for so long as it remains an Unrestricted Subsidiary. CHANGE OF CONTROL The Indenture provides that upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date for the Notes, which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, 74 other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is made, there can be no assurance the Company will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event the Company is required to purchase outstanding Notes pursuant to a Change of Control Offer, the Company expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to a Holder's right to redemption upon a Change of Control. Restrictions in the Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on its property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Subsidiaries by the management of the Company. While such restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations or any applicable exchange regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and exchange regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any of its Restricted Subsidiaries may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than (i) 2.0 to 1.0, if the Indebtedness is to be incurred prior to August 1, 2000, (ii) 2.25 to 1.0, if the Indebtedness is to be incurred on or after August 1, 2000 and prior to August 1, 2002, or (iii) 2.50 to 1.0, if the Indebtedness is to be incurred on or after August 1, 2002; PROVIDED, FURTHER, HOWEVER, that the Company shall not be permitted to exchange any of its Senior Exchangeable Preferred Stock for Junior Subordinated Notes or any other instrument of Indebtedness unless, after giving effect to 75 the exchange thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.75 to 1.0. For purposes of determining compliance with this covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness permitted by this covenant, the Company in its sole discretion will classify such item of Indebtedness and will only be required to include the amount and type of each class of Indebtedness in the test specified in the first paragraph of this covenant or in one of the clauses of the definition of the term "Permitted Indebtedness," (ii) the amount of Indebtedness issued at a price which is less than the principal amount thereof shall be equal to the amount of liability in respect thereof determined in accordance with GAAP, (iii) Indebtedness incurred in connection with, or in contemplation of, any transaction described in the definition of the term "Acquired Indebtedness" shall be deemed to have been incurred by the Company or one of its Restricted Subsidiaries, as the case may be, at the time an acquired Person becomes such a Restricted Subsidiary (or is merged into the Company or such a Restricted Subsidiary) or at the time of the acquisition of assets, as the case may be, and (iv) guarantees or Liens supporting Indebtedness permitted to be incurred under this covenant may be issued or granted if otherwise issued or granted in accordance with the terms of the Indenture. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock (other than purchases, redemptions, acquisitions or retirements of Capital Stock of the Company otherwise allowed pursuant to the definition of Permitted Investments), (c) make any principal payment on, purchase, defease, redeem, prepay or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company or a Guarantor that is subordinate or junior in right of payment to the Notes or a Guarantee, as the case may be, or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of the following amounts (without duplication): (1) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company accrued on a cumulative basis during the period beginning on the first day of the fiscal quarter immediately following the Issue Date and ending on the last day of the last fiscal quarter preceding the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (2) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company or any options, warrants or other rights to acquire Qualified Capital Stock of the Company; plus (3) 100% of the aggregate net cash proceeds received subsequent to the Issue Date by the Company from any Person (other than a Subsidiary of the Company) from the issuance or sale of debt securities or shares of Disqualified Capital Stock that have been converted into or exchanged for Qualified Capital Stock, together with the aggregate cash received by the Company at the time of such conversion or exchange; plus (4) 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Qualified Capital Stock subsequent to the Issue Date; plus (5) an amount equal to the net reduction in 76 Investments in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary (except to the extent any such payment is otherwise included in the calculation of Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries, valued in each case as provided in the definition of "Investments," not to exceed, in the case of an Unrestricted Subsidiary, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of such dividend if the dividend would have been permitted on the date of declaration; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition, redemption, repurchase or retirement of any shares of Capital Stock of the Company, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any Indebtedness of the Company or a Guarantor that is subordinate or junior in right of payment to the Notes or the Guarantees, as applicable, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (4) repurchases by the Company of Capital Stock of the Company from employees, officers or directors of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment of such employees, officers or directors, or as otherwise required by existing employment agreements, in an aggregate amount not to exceed $1,000,000 in any calendar year (including any cash payments made during such calendar year pursuant to Indebtedness incurred in order to repurchase Capital Stock of the Company from employees, officers or directors of the Company) and $5,000,000 in the aggregate during the term of the Notes, in each case plus (i) the aggregate cash proceeds actually received from any reissuance during such calendar year of Capital Stock by the Company to employees, officers or directors of the Company and its Subsidiaries and (ii) the aggregate cash proceeds actually received in such calendar year from any payments on life insurance policies in which the Company or any of its Subsidiaries is the beneficiary with respect to any employees, officers or directors of the Company and its Subsidiaries which proceeds are used to purchase the Capital Stock of the Company held by any such employees, officers or directors; PROVIDED, HOWEVER, that the Company shall not be permitted to repurchase Capital Stock pursuant to this clause (4), if (x) any Default or Event of Default shall have occurred and be continuing or (y) on the date of any such repurchase the Company could not incur at least $1.00 of Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant; (5) repurchases of Capital Stock deemed to occur upon the exercise of stock options if such Capital Stock represents a portion of the exercise price thereof; and (6) the exchange of Senior Exchangeable Preferred Stock for Junior Subordinated Notes; PROVIDED, that after giving effect to the exchange thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.75 to 1.0. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1), (2)(ii), (3)(ii)(A), and (4) shall be included in such calculation. LIMITATION ON ASSET SALES. The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors); (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; PROVIDED, HOWEVER, that the amount of (A) any liabilities (as shown on the 77 Company's or such Restricted Subsidiary's most recent balance sheet or the notes thereto) of the Company or any Restricted Subsidiary that are assumed by the transferee in such Asset Sale and from which the Company or such Restricted Subsidiary is released and (B) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) shall be deemed to be cash for the purposes of this covenant; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to repay any Indebtedness ranking at least PARI PASSU with the Notes (including amounts under Bank Credit Facilities), (B) to make an investment in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date or in businesses reasonably related thereto ("Replacement Assets"), or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), an amount equal to such aggregate amount of Net Cash Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 45 nor more than 60 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any consideration other than cash or Cash Equivalents received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. A transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to a Wholly Owned Restricted Subsidiary will not be deemed to be an Asset Sale. A transaction that is subject to and made in compliance with the "Merger, Consolidation and Sale of Assets" covenant shall not be subject to the application of this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $5,000,000 resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $5,000,000, shall be applied as required pursuant to this paragraph). Notwithstanding the immediately preceding paragraph, the Company and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraph to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Replacement Assets and (ii) such Asset Sale is for fair market value; PROVIDED that any consideration not constituting Replacement Assets received by the Company or any of its Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the two preceding paragraphs. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 30 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a PRO RATA basis (based on amounts tendered) unless otherwise 78 required by law or any applicable exchange regulations. A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations or any applicable exchange regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and exchange regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture, the Notes and the Guarantees; (3) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary of the Company; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired (and such Person's direct and indirect Subsidiaries); (5) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (6) a Bank Credit Facility; (7) an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (5) or (6) above; PROVIDED, HOWEVER, that the provisions relating to such encumbrance or restriction contained in any such Indebtedness are no less favorable to the Company or the relevant Restricted Subsidiary of the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (4), (5) or (6); (8) any restriction or encumbrance contained in contracts for sale of assets permitted by the Indenture in respect of the assets being sold pursuant to such contracts pending the close of such sale, which encumbrance or restriction is not applicable to any asset other than the assets being sold pursuant to such contracts; (9) Purchase Money Obligations incurred in accordance with the terms of the Indenture for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (c) above on the property so acquired; or (10) restrictions of the nature described in clause (c) above on the transfer of assets subject to any Lien permitted under the Indenture imposed by the holder of such Lien. LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of its Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly Owned Restricted Subsidiary of the Company) or permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company) to own any Preferred Stock of any Restricted Subsidiary of the Company unless at the time of such issuance such Restricted Subsidiary would be entitled to create, incur or assume Indebtedness pursuant to the covenant described under "-- Limitation on Incurrence of Additional Indebtedness" in the aggregate amount equal to the aggregate liquidation value, plus any accrued and unpaid dividends, of the Preferred Stock to be issued. Notwithstanding the foregoing, nothing contained in such covenant will prohibit the ownership of Preferred Stock issued by a Person prior to the time (a) such Person becomes a Restricted Subsidiary of the Company, (b) such Person merges with or into a Restricted Subsidiary of the Company or (c) a Restricted Subsidiary of the Company merges with or into 79 such Person; PROVIDED that such Preferred Stock was not issued by such Person in anticipation of a transaction contemplated by any of clauses (a), (b) or (c) above. LIMITATION ON LIENS. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes or any Guarantee, the Notes and such Guarantee, as the case may be, are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes and the Guarantees are equally and ratably secured, except for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Indebtedness incurred pursuant to Bank Credit Facilities; (C) Liens securing the Notes and the Guarantees; (D) Liens in favor of the Company or a Restricted Subsidiary of the Company on assets of any Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; PROVIDED, HOWEVER, that such Liens (a) are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and (b) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted Liens. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes, the Indenture and the Registration Rights Agreement on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on Incurrence of Additional Indebtedness" covenant; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred and be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. 80 For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The Indenture provides that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing in which the Company is not the continuing corporation, the Surviving Entity formed by such consolidation or into which the Company is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under, and the Company shall be discharged from its obligations under, the Indenture, the Notes and the Registration Rights Agreement with the same effect as if such Surviving Entity had been named as such. Each Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and the Indenture in connection with any transaction complying with the provisions of "-- Limitation on Asset Sales") will not, and the Company will not cause or permit any Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Guarantor unless: (i) the entity formed by or surviving any such consolidation or merger (if other than the Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) such entity assumes by supplemental indenture all of the obligations of the Guarantor on the Guarantee; and (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. Any merger or consolidation of a Restricted Subsidiary with and into the Company (with the Company being the Surviving Entity) or any Guarantor need only comply with clause (iv) of the first paragraph of this covenant. LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $2,500,000 shall be approved by a majority of non-interested directors of the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such majority of non-interested directors of the Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $5,000,000, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain an opinion stating that such transaction or series of related transactions are fair to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in paragraph (a) above shall not apply to (i) reasonable fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees, agents or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among 81 the Company and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the Indenture; (iii) any agreement (including the Management Agreement and the payment of all fees and expenses contemplated thereunder; PROVIDED, that no payment of management fees or expenses (other than the Closing Fee) contemplated under the Management Agreement shall be made unless (i) the Consolidated Fixed Charge Coverage Ratio during the four full fiscal quarters ending on or prior to the date of any such payment is greater than or equal to 1.75 to 1.0 and (ii) the Consolidated Fixed Charge Coverage Ratio calculated solely for the one full fiscal quarter ending on or prior to the date of any such payment is greater than or equal to 1.75 to 1.0) as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Company or its Restricted Subsidiaries, as the case may be, in any material respect than the original agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by the Indenture; (v) any issuance of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans of the Company entered into in the ordinary course of business and approved by the Board of Directors; (vi) loans and advances, or guarantees of loans of third parties, to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business not in excess of $2.0 million at any one time outstanding; and (vii) indemnification agreements provided for the benefit of the Company or any Restricted Subsidiary of the Company from officers, directors or employees of the Company or any Restricted Subsidiary. ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its Restricted Subsidiaries transfers or causes to be transferred, in one transaction or a series of related transactions, any property to any Restricted Subsidiary (other than a Foreign Subsidiary) that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another Restricted Subsidiary (other than a Foreign Subsidiary), in each case having total assets with a book value in excess of $500,000, then such transferee or acquired or other Restricted Subsidiary (other than a Foreign Subsidiary) shall (i) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver to the Trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary; PROVIDED that such opinion may contain exceptions that are customary in opinions of that type. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture. REPORTS TO HOLDERS. The Indenture provides that the Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will, beginning on the earlier of the date the Exchange Offer Registration Statement becomes effective and 180 days after the Issue Date, file with the Commission, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section 314(a). NO RESTRICTIONS ON CONSUMMATION OF THE RECAPITALIZATION. The Indenture provides that notwithstanding any provision contained therein to the contrary, the consummation of the Recapitalization will not be prohibited. 82 ADDITIONAL EQUITY CONTRIBUTIONS. The Indenture provides that if the Company's Consolidated EBITDA for the quarter ended June 30, 1998 is less than $5.6 million on a Pro Forma Basis, BRS or any other Principal will purchase, with cash or Cash Equivalents, Qualified Capital Stock of the Company, in an amount equal to the difference between (x) $5.6 million and (y) the amount of the Company's Consolidated EBITDA for the quarter ended June 30, 1998. The Indenture further provides that any purchase of Qualified Capital Stock required pursuant to this covenant shall occur on or prior to September 30, 1998 and that no other provision of the Indenture will prohibit the issuance of such Qualified Capital Stock. EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days; (ii) the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer); (iii) a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect to the "Merger, Consolidation and Sale of Assets" covenant, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company, which failure continues for a period of 20 days or more, or the acceleration of the final stated maturity of any such Indebtedness (which acceleration is not rescinded, annulled or otherwise cancelled within 20 days of receipt by the Company or such Restricted Subsidiary of notice of any such acceleration) if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, in each case with respect to which the 20-day period described above has passed, aggregates $5,000,000 or more at any time; (v) one or more judgments in an aggregate amount in excess of $5,000,000 (excluding judgments to the extent covered by insurance by one or more reputable insurers and as to which such insurers have acknowledged coverage for) shall have been rendered against the Company or any of its Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (vi) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries; or (vii) any Guarantee of a Significant Subsidiary ceases to be in full force and effect or any Guarantee of a Significant Subsidiary is declared to be null and void and unenforceable or any Guarantee of a Significant Subsidiary is found to be invalid or any Guarantor that is a Significant Subsidiary denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the Indenture); PROVIDED, HOWEVER, that an Event of Default will also be deemed to occur with respect to Subsidiaries that are not Significant Subsidiaries ("Insignificant Subsidiaries") if the Guarantees of such Insignificant Subsidiaries cease to be in full force and effect or are declared null and void and unenforceable or such Insignificant Subsidiaries deny their liability under their Guarantees, if when aggregated and taken as a whole the Insignificant Subsidiaries subject to this clause (vii) would meet the definition of a Significant Subsidiary. 83 If an Event of Default (other than an Event of Default specified in clause (vi) above relating to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same shall become immediately due and payable. If an Event of Default specified in clause (vi) above relating to the Company occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Indenture provides that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes or except as otherwise prohibited by the TIA. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Under the Indenture, the Company is required to provide an officers' certificate to the Trustee promptly upon any such officer obtaining knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, except for (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company 84 may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "--Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (viii) the Company shall have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (ix) certain other customary conditions precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel required by clauses (ii) and (iii) above need not be delivered if all Notes not theretofore delivered to the Trustee for cancellation (x) have become due and payable or (y) will become due and payable on the maturity date within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid 85 to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company, the Guarantors and the Trustee, without the consent of the Holders, may amend the Indenture for certain specified purposes, including curing ambiguities, defects or inconsistencies, so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture, except that, without the consent of each Holder affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default; (vi) after the Company's obligation to purchase Notes arises thereunder, amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto; (vii) modify or change any provision of the Indenture or the related definitions affecting the ranking of the Notes or any Guarantee in a manner which adversely affects the Holders; or (viii) release any Guarantor from any of its obligations under its Guarantee or the Indenture otherwise than in accordance with the terms of the Indenture. GOVERNING LAW The Indenture provides that it, the Notes and the Guarantees will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS OR DIRECTORS The Indenture provides that no direct or indirect stockholder, employee, officer or director, as such, past, present or future of the Issuer, the Company, the Guarantors or any other successor entity shall have any personal liability in connection with the Indenture or the Notes solely by reason of his or its status as such stockholder, employee, officer or director. Each holder of Notes by accepting a Note waives and releases all such liability, and acknowledges and consents to the transactions described under "The 86 Transactions" for purposes of Section 506 of the California General Corporation Law and Section 10-640 of the Arizona Business Corporation Act. The waiver and release are part of the consideration for the issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. THE TRUSTEE The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of the Company or a Subsidiary of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions; PROVIDED that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Restricted Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "AFFILIATE" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprise any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "ASSET SALE" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; PROVIDED, HOWEVER, that 87 Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $1,000,000, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under "Merger, Consolidation and Sale of Assets," (iii) disposals or replacements of obsolete or outdated equipment in the ordinary course of business and (iv) a disposition consisting of a Permitted Investment or Restricted Payment permitted under "Limitation on Restricted Payments." "BANK CREDIT FACILITY" means the New Credit Facility and any other agreement or agreements between the Company and/or one or more of the Guarantors and a financial institution or institutions, providing for the making of loans, on a term or revolving basis, the issuance of letters of credit and/or the creation of bankers' acceptances. "BOARD OF DIRECTORS" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "BORROWING BASE" means the sum of (i) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries of the Company and (ii) 50% of the net book value of the inventory of the Company and the Restricted Subsidiaries of the Company. "CAPITAL STOCK" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and including any warrants, options or rights to acquire any of the foregoing and instruments convertible into any of the foregoing, and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "CAPITALIZED LEASE OBLIGATIONS" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "CHANGE OF CONTROL" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of 88 the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture) (other than a Person or Group controlled by a Permitted Holder); (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of the Indenture); (iii) any Person or Group (other than the Permitted Holders) shall become the owner, directly or indirectly, beneficially or of record, of shares of Capital Stock of the Company representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; (iv) Permitted Holders cease to beneficially own shares of Capital Stock of the Company representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company, and any Person or Group (other than Permitted Holders), directly or indirectly, beneficially or of record owns shares of Capital Stock having more of the aggregate ordinary voting power of the Capital Stock of the Company than the aggregate ordinary voting power represented by shares of Capital Stock of the Company owned by Permitted Holders; or (v) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "CHANGE OF CONTROL OFFER" has the meaning set forth under "-- Change of Control." "CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "-- Change of Control." "COMMON STOCK" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of, such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary, unusual or nonrecurring gains or losses or taxes attributable to sales or dispositions outside the ordinary course of business), (B) Consolidated Interest Expense, (C) Consolidated Non-cash Charges, less any non-cash items increasing Consolidated Net Income for such period, (D) fees and expenses of the HSI Acquisition and the Transactions, including but not limited to capitalization of costs and expenses related thereto, and (E) non-recurring severance and transaction costs incurred in connection with any acquisition, all as determined on a consolidated basis in accordance with GAAP for such Person and its Restricted Subsidiaries. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for such Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a PRO FORMA basis (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Securities Act) for the period of such calculation to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the 89 case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness; PROVIDED, HOWEVER, that where such Person and one or more of its Restricted Subsidiaries is, or two or more of such Person's Restricted Subsidiaries are, liable for the same Indebtedness, whether as principal or guarantor, the above sentence shall be calculated to avoid duplication. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense, plus (ii) to the extent not included in Consolidated Interest Expense, the product of (x) the amount of all dividend payments actually paid in cash in such period on any series of Preferred Stock of such Person or its Restricted Subsidiaries (other than dividends paid by any Restricted Subsidiary to the Company or any other Restricted Subsidiary) and (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (excluding any accrued and unpaid interest on the Junior Subordinated Notes; PROVIDED, that such interest is not payable in cash prior to the maturity of the Notes), including without limitation, (a) any amortization of debt discount and amortization or write-off of deferred financing costs, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; PROVIDED, that aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period shall be determined before any reduction in respect of accrued and unpaid Preferred Stock dividends and before any reduction for accrued and unpaid interest on the Junior 90 Subordinated Notes that is not payable in cash prior to the maturity of the Notes; and PROVIDED, FURTHER, that there shall be excluded from aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period (a) after-tax gains or losses from Asset Sales (less fees and expenses related thereto) or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) for purposes of the covenant entitled "-- Limitation on Restricted Payments," the net income (or loss) of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Restricted Subsidiary of the referent Person, (d) the net income (but not loss) of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise, except to the extent of cash dividends or distributions paid to the referent Person or to a Restricted Subsidiary of the referent Person by such Restricted Subsidiary, (e) the net income (or loss) of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Restricted Subsidiary of the referent Person by such Person, (f) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of Consolidated Net Income accrued at any time following the Issue Date, (g) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued), and (h) for purposes of the covenant entitled "-- Limitations on Restricted Payments," in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent Person's assets, any earnings (or losses) of the successor corporation prior to such consolidation, merger or transfer of assets. "CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any period, the aggregate depreciation, amortization and other non-cash charges or expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charges constituting an extraordinary item or loss or any such charge which requires an accrual of or a reserve for cash charges for any future period). "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "DEFAULT" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in each case on or prior to the final maturity date of the Notes, other than Capital Stock of the Company which certain management stockholders have the right to put to the Company pursuant to the terms of the Stockholders' Agreement. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "FAIR MARKET VALUE" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company. 91 "FOREIGN SUBSIDIARY" means any Subsidiary of the Company which (i) is not organized under the laws of the United States, any state thereof or the District of Columbia and (ii) conducts substantially all of its business operations in a country other than the United States of America. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "GUARANTOR" means (i) each of the Subsidiaries of the Company on the Issue Date and (ii) each of the Company's Restricted Subsidiaries that in the future executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of the Indenture as a Guarantor; PROVIDED that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of the Indenture. Notwithstanding the above, no direct or indirect Foreign Subsidiary of the Company will be considered a Guarantor. "HSI ACQUISITION" means the acquisition by Penhall Company of substantially all of the assets of Highway Services Inc. prior to the Issue Date. "HSI NOTE" means the $3.7 million secured promissory note incurred by Penhall Company in connection with the HSI Acquisition. "INDEBTEDNESS" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any Lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person, and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance on such date of all unconditional Obligations as described above, and the maximum liability upon the occurrence of the contingency giving rise to the Obligation, on any contingent Obligations at such date; PROVIDED, HOWEVER, that the amount outstanding at any time of any Indebtedness incurred with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. 92 "INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "INVESTMENT" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any Investment (other than as specified in clause (i) above) shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends, distributions, interest payments or repayments of loans or advances in connection with such Investment or any other amounts received in respect of such Investment; PROVIDED that no such payment of dividends, distributions, interest payments or repayments of loans or advances or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends, distributions, interest payments or repayments of loans or advances or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, it ceases to be a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "ISSUE DATE" means the date of original issuance of the Notes. "JUNIOR SUBORDINATED NOTES" means the Company's 10.5% Junior Subordinated Notes due 2007 which may be issued in exchange for Senior Exchangeable Preferred Stock. "LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and Covenant Defeasance." "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "MANAGEMENT AGREEMENT" means the Management Services Agreement that becomes effective upon consummation of the Recapitalization Merger among Bruckmann, Rosser, Sherrill & Co., Inc. and the Company, as in effect on the Issue Date. 93 "NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements, (c) repayment of Indebtedness that is required to be repaid in connection with such Asset Sale and (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "NET PROCEEDS OFFER" has the meaning set forth under "-- Certain Covenants - -- Limitation on Asset Sales." "NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "-- Certain Covenants -- Limitation on Asset Sales." "NET PROCEEDS OFFER PAYMENT DATE" has the meaning set forth under "-- Certain Covenants -- Limitation on Asset Sales." "NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "-- Certain Covenants -- Limitation on Asset Sales." "NEW CREDIT FACILITY" means the Credit Agreement dated as of the Issue Date, between the Issuer, the lenders party thereto in their capacities as lenders thereunder and Bankers Trust Company, as Administrative Agent and Credit Suisse First Boston, as Syndication Agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder or adding or deleting Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "OBLIGATIONS" means all obligations for principal, premium, interest, penalties, fees, matured indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "PERMITTED HOLDERS" means the Principals and their Related Parties. "PERMITTED INDEBTEDNESS" means, without duplication, each of the following: (i) Indebtedness under the Notes issued in connection with the Transactions and the Guarantees thereof; (ii) Indebtedness incurred pursuant to any Bank Credit Facility in an aggregate principal amount at any time outstanding not to exceed an amount equal to (x) $20.0 million plus (y) the greater of (i) $30.0 million, less the amount of any required permanent repayments of Bank Credit Facilities in accordance with the provisions set forth under "--Certain Covenants -- Limitation on Asset Sales" (which are accompanied by a corresponding permanent commitment reduction thereunder) or (ii) the Borrowing Base; 94 (iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date; (iv) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Restricted Subsidiaries and Interest Swap Obligations of any Restricted Subsidiary of the Company covering Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; PROVIDED that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Restricted Subsidiary of the Company to the Company or to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Restricted Subsidiary of the Company, in each case subject to no Lien (other than a Lien in connection with a Bank Credit Facility) held by a Person other than the Company or a Restricted Subsidiary of the Company; PROVIDED that if as of any date any Person other than the Company or a Restricted Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness (other than a Lien in connection with a Bank Credit Facility), such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Restricted Subsidiary of the Company, in each case subject to no Lien (other than a Lien in connection with the a Bank Credit Facility); PROVIDED that (a) any Indebtedness of the Company to any Restricted Subsidiary of the Company is unsecured and subordinated in right of payment, pursuant to a written agreement, to the Company's obligations under the Indenture and the Notes and (b) if as of any date any Person other than a Restricted Subsidiary of the Company owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness (other than a Lien in connection with a Bank Credit Facility), such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within five business days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self- insurance or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness; (xi) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $5,000,000 at any one time outstanding (which may, but need not, be incurred under a Bank Credit Facility); (xii) Obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary of the Company in the ordinary course of business, in 95 accordance with customary industry practice, in amounts and for purposes customary in the Company's industry; (xiii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for adjustment of purchase price, earn out or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary of the Company or any of its Restricted Subsidiaries, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; PROVIDED that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xiv) Guarantees of Indebtedness permitted to be incurred under the Indenture and guarantees of third-party loans to employees or officers of the Company or its Restricted Subsidiaries permitted by clause (vii) of the definition of "Permitted Investments;" (xv) Capitalized Lease Obligations and Purchase Money Obligations of the Company or any of its Restricted Subsidiaries in an aggregate principal amount not to exceed $5,000,000 at any one time outstanding; (xvi) Indebtedness of the Company or any of its Restricted Subsidiaries that is subordinate to the Notes and is incurred in order to repurchase Capital Stock of the Company from employees, officers or directors of the Company or any of its Subsidiaries upon the death, disability or termination of employment of such employees, officers or directors or as otherwise required by existing employment agreements in an aggregate principal amount not to exceed $1,000,000 in any calender year; and (xvii) Indebtedness incurred as a result of accrued and unpaid interest being added to the principal amount of the Junior Subordinated Notes in accordance with the terms of such Junior Subordinated Notes; PROVIDED that such interest is not payable in cash prior to the maturity of the Notes. "PERMITTED INVESTMENTS" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Restricted Subsidiary of the Company, (ii) Investments in the Company by any Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing such Investment is unsecured and subordinated in right of payment, pursuant to a written agreement, to the Company's obligations under the Notes and the Indenture; (iii) Investments in cash and Cash Equivalents; (iv) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture; (v) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (vi) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the "Limitation on Asset Sales" covenant; (vii) loans and advances to, or guarantees of third-party loans to, employees and officers of the Company and its Restricted Subsidiaries for relocation expenses and purchasing Capital Stock of the Company not in excess of $2.0 million at any one time outstanding; (viii) Investments the payment for which consists exclusively of Qualified Capital Stock of the Company; (ix) guarantees of Indebtedness permitted to be incurred under the Indenture; and (x) additional Investments not to exceed $2.5 million at any time outstanding. "PERMITTED LIENS" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; 96 (ii) statutory Liens of landlords or of mortgagees of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default; (v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; PROVIDED that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation or other property subject to a Permitted Lien held by the lienholder of such Capitalized Lease Obligation; (vii) purchase money Liens to finance property or assets (including the cost of construction) of the Company or any Restricted Subsidiary of the Company acquired in the ordinary course of business; PROVIDED, HOWEVER, that (A) the related purchase money Indebtedness shall not exceed the cost of such property or assets (including the cost of construction) and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition or construction; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods or construction; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Acquired Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the 97 Company or of any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company; (xiv) Liens securing Indebtedness under any Bank Credit Facility; (xv) Liens arising out of consignment or similar arrangements for the sale of goods in the ordinary course of business; (xvi) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries; (xvii) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xviii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods; (xix) Liens securing Indebtedness under the HSI Note; and (xx) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $2.5 million at any one time outstanding. "PERSON" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "PREFERRED STOCK" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "PRINCIPAL" means (i) Bruckmann, Rosser, Sherrill & Co., Inc., a Delaware corporation, and any of its Affiliates, and (ii) Messrs. Bruckmann, Rosser, Sherrill and Edwards, each of whom is a principal on the Issue Date of Bruckmann, Rosser, Sherrill & Co., Inc. "PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such Person or any of its Subsidiaries to any seller or any other person incurred or assumed in connection with the purchase, installation, construction or improvement of real or personal property to be used in the business of such Person or any of its Subsidiaries within 180 days of such purchase, installation, construction or improvement. "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified Capital Stock. "REFINANCE" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any Restricted Subsidiary of the Company of Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (xii), (xiii), (xiv) or (xvi) of the definition of Permitted Indebtedness), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness 98 being Refinanced is Indebtedness solely of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "RELATED PARTY" means, with respect to any Principal, (A) any spouse or immediate family member (in the case of an individual) of such Principal or (B) a trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners or Persons beneficially holding a 66 2/3% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "REPRESENTATIVE" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt; PROVIDED that if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "REVOLVING CREDIT FACILITY" means one or more revolving credit facilities under a Bank Credit Facility. "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. "SENIOR EXCHANGEABLE PREFERRED STOCK" means the Company's 10.5% Senior Exchangeable Preferred Stock, par value $.01 per share. "SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(w) of Regulation S-X under the Securities Act. "STOCKHOLDERS' AGREEMENT" means that Securities Holders Agreement, dated the Issue Date, among the Company and the stockholders of the Company. "SUBSIDIARY", with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary of the Company; PROVIDED that (x) the Company certifies to the Trustee that such designation complies with the "Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving 99 effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. 100 BOOK-ENTRY; DELIVERY AND FORM Except as set forth below, the New Notes will initially be issued in the form of one registered note in global form without coupons (the "Global Note"). Upon issuance, the Global Note will be deposited with, or on behalf of, the Depository Trust Company (the "Depository") and registered in the name of Cede & Co., as nominee of the Depository. If a holder tendering Existing Notes so requests, such holder's New Notes will be issued as described below under "Certificated Securities" in registered form without coupons (the "Certificated Securities"). The Depository has advised the Company that it is (i) a limited purpose trust company organized under the laws of the State of New York, (ii) a member of the Federal Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to Section 17A of the Exchange Act. The Depository was created to hold securities for its participants (collectively, the "Participants") and facilitates the clearance and settlement of securities transactions between Participants through electronic book-entry changes to the accounts of its Participants, thereby eliminating the need for physical transfer and delivery of certificates. The Depository's Participants include securities brokers and dealers (including the Initial Purchaser), banks and trust companies, clearing corporations and certain other organizations. Access to the Depository's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. The Company expects that pursuant to procedures established by the Depository (i) upon deposit of the Global Note, the Depository will credit the accounts of Participants who elect to exchange Existing Notes with an interest in the Global Note and (ii) ownership of the New Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depository (with respect to the interest of Participants), the Participants and the Indirect Participants. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own and that security interests in negotiable instruments can only be perfected by delivery of certificates representing the instruments. So long as the Depository or its nominee is the registered owner of the Global Note, the Depository or such nominee, as the case may be, will be considered the sole owner or holder of the New Notes represented by the Global Note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in the Global Note will not be entitled to have New Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Certificated Securities, and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instruction or approval to the Trustee thereunder. As a result, the ability of a person having a beneficial interest in New Notes represented by the Global Note to pledge such interest to persons or entities that do not participate in the Depository's system, or to otherwise take action with respect to such interest, may be affected by the lack of a physical certificate evidencing such interest. The Company understands that under existing industry practice, in the event the Company requests any action of holders or an owner of a beneficial interest in the Global Note desires to take any action that the Depository, as the holder of such Global Note, is entitled to take, the Depository would authorize the Participants to take such action and the Participant would authorize persons owning through such Participants to take such action or would otherwise act upon the instruction of such persons. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of New Notes by the Depository, or for maintaining, supervising or reviewing any records of the Depository relating to such New Notes. 101 Payments with respect to the principal of, premium, if any, and interest on any New Notes represented by the Global Note registered in the name of the Depository or its nominee on the applicable record date will be payable by the Trustee to or at the direction of the Depository or its nominee in its capacity as the registered holder of the Global Note representing such New Notes under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names the New Notes, including the Global Note, are registered as the owners thereof for the purpose of receiving such payment and for any and all other purposes whatsoever. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of New Notes (including principal, premium, if any, and interest), or to immediately credit the accounts of the relevant Participants with such payment, in amounts proportionate to their respective holdings in principal amount of beneficial interest in the Global Note as shown on the records of the Depository. Payments by the Participants and the Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practice and will be the responsibility of the Participants or the Indirect Participants. CERTIFICATED SECURITIES If (i) the Company notifies the Trustee in writing that the Depository is no longer willing or able to act as a depository and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in definitive form under the Indenture, then, upon surrender by the Depository of its Global Note, Certificated Securities will be issued to each person that the Depository identifies as the beneficial owner of the New Notes represented by the Global Note. In addition, any person having a beneficial interest in the Global Note or any holder of Existing Notes whose Existing Notes have been accepted for exchange may, upon request to the Trustee or the Exchange Agent, as the case may be, exchange such beneficial interest or Existing Notes for Certificated Securities. Upon any such issuance, the Trustee is required to register such Certificated Securities in the name of such person or persons (or the nominee of any thereof), and cause the same to be delivered thereto. Neither the Company nor the Trustee shall be liable for any delay by the Depository or any Participant or Indirect Participant in identifying the beneficial owners of the related New Notes and each such person may conclusively rely on, and shall be protected in relying on, instructions from the Depository for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the New Notes to be issued). 102 FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material United States federal income tax consequences of the Exchange Offer to a holder of Existing Notes that is an individual citizen or resident of the United States or a United States corporation that purchased the Existing Notes pursuant to their original issue (a "U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), existing and proposed Treasury regulations, and judicial and administrative determinations, all of which are subject to change at any time, possibly on a retroactive basis. The following relates only to the Existing Notes, and the New Notes received therefor, that are held as "capital assets" within the meaning of Section 1221 of the Code by U.S. Holders. It does not discuss state, local, or foreign tax consequences, nor does it discuss tax consequences to subsequent purchasers (persons who did not purchase the Existing Notes pursuant to their original issue), or to categories of holders that are subject to special rules, such as foreign persons, tax-exempt organizations, insurance companies, banks, and dealers in stocks and securities. Tax consequences may vary depending on the particular status of an investor. No rulings will be sought from the Internal Revenue Service with respect to the federal income tax consequences of the Exchange Offer. THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE EXISTING NOTES FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE EXISTING NOTES FOR NEW NOTES. THE EXCHANGE OFFER The exchange of Existing Notes pursuant to the Exchange Offer should be treated as a continuation of the corresponding Existing Notes because the terms of the New Notes are not materially different from the terms of the Existing Notes. Accordingly, such exchange should not constitute a taxable event to U.S. Holders and, therefore, (i) no gain or loss should be realized by a U.S. Holder upon receipt of a New Note, (ii) the holding period of the New Note should include the holding period of the Existing Note exchanged therefor and (iii) the adjusted tax basis of the New Note should be the same as the adjusted tax basis of the Existing Note exchanged therefor immediately before the exchange. STATED INTEREST Stated interest on a Note will be taxable to a U.S. Holder as ordinary interest income at the time that such interest accrues or is received, in accordance with the U.S. Holder's regular method of accounting for federal income tax purposes. The Notes are not considered to have been issued with original issue discount for federal income tax purposes. SALE, EXCHANGE OR RETIREMENT OF THE NOTES A U.S. Holder's tax basis in a Note generally will be its cost. A U.S. Holder generally will recognize gain or loss on the sale, exchange or retirement of a Note in an amount equal to the difference between the amount realized on the sale, exchange or retirement and the tax basis of the Note. Gain or loss recognized on the sale, exchange or retirement of a Note (excluding amounts received in respect of accrued interest, which will be taxable as ordinary interest income) generally will be capital gain or loss and will be long-term capital gain or loss if the Note was held for more than one year. BACKUP WITHHOLDING Under certain circumstances, a U.S. Holder of a Note may be subject to "backup withholding" at a 31% rate with respect to payments of interest thereon or the gross proceeds from the disposition thereof. 103 This withholding generally applies if the U.S. Holder fails to furnish his or her social security number or other taxpayer identification number in the specified manner and in certain other circumstances. Any amount withheld from a payment to a U.S. Holder under the backup withholding rules is allowable as a credit against such U.S. Holder's federal income tax liability, provided that the required information is furnished to the IRS. Corporations and certain other entities described in the Code and Treasury regulations are exempt from backup withholding if their exempt status is properly established. PLAN OF DISTRIBUTION Based on certain interpretive letters issued by the staff of the Commission to third parties in unrelated transactions, the Company is of the view that New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than (i) any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or (ii) any broker-dealer that purchases Notes from the Company to resell pursuant to Rule 144A or any other available exemption) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement or understanding with any person to participate in the distribution of such New Notes. If any holder has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. A broker-dealer who holds Existing Notes that were acquired for its own account as a result of market-making or other trading activities may be deemed to be an "underwriter" within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of New Notes. Each such broker-dealer that receives New Notes for its own account in exchange for Existing Notes, where such Existing Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Existing Notes where such Existing Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Exchange Offer Registration Statement is declared effective, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 1999 (90 days after the date of this Prospectus), all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 104 For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Existing Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Existing Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. 105 LEGAL MATTERS The validity of the New Notes offered hereby will be passed upon for the Company by Dechert Price & Rhoads, New York, New York. EXPERTS The consolidated financial statements of Penhall International Corp. and subsidiaries as of June 30, 1997 and 1998 and for each of the years in the two-year period ended June 30, 1998, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in accounting and auditing. The consolidated financial statements of Penhall International Corp. for the year ended June 30, 1996, included in this Prospectus, have been audited by Moss Adams LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Highway Services, Inc. for the year ended December 31, 1997 included in this Prospectus, have been audited by John A. Knutson & Co., PLLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Moss Adams L.L.P. was replaced in July 1997 by KPMG Peat Marwick LLP. The decision to change auditors was approved by the Company's Board of Directors. Moss Adams LLP's report does not contain an adverse opinion or a disclaimer of opinion, nor is it qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements between the Company and Moss Adams LLP on any matter or practices, financial statement disclosure, or auditing scope or procedure. 106 INDEX TO FINANCIAL STATEMENTS
PAGE --------- PENHALL INTERNATIONAL CORP. Independent Auditors' Report of KPMG Peat Marwick LLP ..................................................... F-2 Independent Auditors' Report of Moss Adams LLP ............................................................ F-3 Consolidated Balance Sheets as of June 30, 1997 and 1998, and September 30, 1998 (unaudited)............... F-4 Consolidated Statements of Operations for the years ended June 30, 1996, 1997 and 1998, and for the three month periods ended September 30, 1997 and 1998 (unaudited).............................................. F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1996, 1997 and 1998, and for the three month period ended September 30, 1998 (unaudited)...................................... F-6 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 and 1998, and for the three month periods ended September 30, 1997 and 1998 (unaudited).............................................. F-7 Notes to Consolidated Financial Statements................................................................. F-9 HIGHWAY SERVICES, INC. Independent Auditors' Report of John A. Knutson & Co., PLLP................................................ F-39 Statements of Income for the year ended December 31, 1997, and for the three month periods ended March 31, 1997 and 1998 (unaudited)................................................................................ F-40 Statements of Cash Flows for the year ended December 31, 1997, and for the three month periods ended March 31, 1997 and 1998 (unaudited)............................................................................ F-41 Notes to Financial Statements.............................................................................. F-42
F-1 INDEPENDENT AUDITORS' REPORT The Stockholders Penhall International Corp. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Penhall International Corp. (Note 1) and subsidiaries ("the Company") as of June 30, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penhall International Corp. and subsidiaries as of June 30, 1997 and 1998, the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP September 25, 1998 Orange County, California F-2 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Penhall International Corp. (Note 1) and Subsidiaries for the year ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Penhall International Corp. and Subsidiaries for the year ended June 30, 1996, in conformity with generally accepted accounting principles. /s/ Moss Adams LLP MOSS ADAMS LLP Costa Mesa, California September 26, 1996, except as to the sixth paragraph of Note 1 which is as of August 4, 1998 F-3 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, ------------------------ 1998 1997 1998 (UNAUDITED) ----------- ----------- ------------- ASSETS Current assets: Cash............................................................................. $ 676,000 $ 234,000 $ 1,992,000 ----------- ----------- ------------- Receivables: Contract and trade receivables................................................. 20,896,000 23,454,000 26,667,000 Contract retentions, due upon completion and acceptance of work (note 2)....... 3,744,000 4,454,000 4,808,000 Income taxes receivable........................................................ 216,000 2,399,000 4,575,000 ----------- ----------- ------------- 24,856,000 30,307,000 36,050,000 Less allowance for doubtful receivables (note 2)............................... 1,110,000 995,000 1,033,000 ----------- ----------- ------------- Net receivables............................................................ 23,746,000 29,312,000 35,017,000 ----------- ----------- ------------- Costs and estimated earnings in excess of billings on uncompleted contracts (note 12)............................................................................ 668,000 976,000 670,000 Deferred tax assets (note 6)..................................................... 1,042,000 891,000 1,194,000 Inventories...................................................................... 1,066,000 1,458,000 1,765,000 Prepaid expenses and other current assets........................................ 615,000 670,000 820,000 ----------- ----------- ------------- Total current assets....................................................... 27,813,000 33,541,000 41,458,000 ----------- ----------- ------------- Property, plant and equipment, at cost: Land............................................................................. 3,919,000 4,538,000 5,338,000 Buildings and leasehold improvements............................................. 6,962,000 7,715,000 7,745,000 Construction and other equipment................................................. 59,062,000 67,934,000 69,982,000 ----------- ----------- ------------- 69,943,000 80,187,000 83,065,000 Less accumulated depreciation and amortization................................... 29,282,000 35,180,000 37,136,000 ----------- ----------- ------------- Net property, plant and equipment.......................................... 40,661,000 45,007,000 45,929,000 Goodwill, net of accumulated amortization of $199,000, $471,000 and $801,000 (unaudited) at June 30, 1997, 1998 and September 30, 1998, respectively.......... 631,000 8,649,000 8,465,000 Debt issuance costs net of accumulated amortization of $0, $0, and $123,000 (unaudited) at June 30, 1997, 1998 and September 30, 1998, respectively.......... -- 719,000 5,801,000 Other assets, net (note 3)......................................................... 728,000 407,000 141,000 ----------- ----------- ------------- $69,833,000 $88,323,000 $101,794,000 ----------- ----------- ------------- ----------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of long-term debt (note 5).................................. $ 185,000 $ 2,034,000 $ 1,984,000 Current installments of notes payable to stockholders (note 11).................. 819,000 131,000 109,000 Trade accounts payable........................................................... 4,233,000 7,532,000 7,663,000 Accrued liabilities (note 4)..................................................... 4,924,000 9,041,000 8,479,000 Billings in excess of costs and estimated earnings on uncompleted contracts (note 12)............................................................................ 207,000 665,000 931,000 ----------- ----------- ------------- Total current liabilities.................................................. 10,368,000 19,403,000 19,166,000 ----------- ----------- ------------- Long-term debt, excluding current portion (note 5)................................. 12,756,000 16,125,000 23,064,000 Notes payable to stockholders, excluding current portion (note 11)................. 351,000 274,000 248,000 Senior Notes (note 5).............................................................. -- -- 100,000,000 Deferred tax liabilities (note 6).................................................. 2,479,000 3,609,000 4,423,000 Accrued compensation (note 8)...................................................... 4,626,000 5,306,000 73,000 Senior Exchangeable Preferred Stock, redemption value $10,167,000. Authorized, issued and outstanding 10,000 shares............................................. -- -- 10,167,000 Series A Preferred Stock, redemption value $10,655,000. Authorized 25,000 shares; issued and outstanding 10,428 shares............................................. -- -- 10,655,000 Stockholders' equity (deficit): Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,572 shares........................................... -- -- 18,960,000 Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 4,280,939, 4,452,264 and 995,000 (unaudited) shares at June 30, 1997, June 30, 1998 and September 30, 1998, respectively...................................... 40,000 42,000 10,000 Additional paid-in capital....................................................... 12,848,000 14,498,000 985,000 Retained earnings (accumulated deficit).......................................... 26,365,000 29,066,000 (85,957,000) ----------- ----------- ------------- Total stockholders' equity (deficit)....................................... 39,253,000 43,606,000 (66,002,000) Commitments and contingencies (notes 7, 8 and 10)................................ ----------- ----------- ------------- $69,833,000 $88,323,000 $101,794,000 ----------- ----------- ------------- ----------- ----------- -------------
See accompanying notes to consolidated financial statements. F-4 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS FOR THE THREE MONTH PERIODS ENDED JUNE 30, ENDED SEPTEMBER 30, ----------------------------------------- --------------------------- 1996 1997 1998 1997 1998 ------------ ------------ ------------- ------------ ------------- UNAUDITED Revenues................................. $ 74,895,000 $ 95,298,000 $ 101,170,000 $ 28,351,000 $ 38,913,000 Cost of revenues......................... 51,200,000 68,541,000 72,395,000 20,015,000 27,868,000 ------------ ------------ ------------- ------------ ------------- Gross profit........................... 23,695,000 26,757,000 28,775,000 8,336,000 11,045,000 General and administrative expenses (notes 1 and 8)........................ 15,156,000 16,953,000 19,880,000 4,703,000 17,211,000 Other compensation (note 1).............. -- -- 3,271,000 -- -- Other operating income, net.............. 867,000 871,000 644,000 153,000 260,000 ------------ ------------ ------------- ------------ ------------- Earnings before interest expense and income taxes......................... 9,406,000 10,675,000 6,268,000 3,786,000 (5,906,000) Interest expense......................... 783,000 811,000 1,036,000 250,000 2,616,000 ------------ ------------ ------------- ------------ ------------- Earnings (loss) before income taxes.... 8,623,000 9,864,000 5,232,000 3,536,000 (8,522,000) Income taxes (note 6).................... 3,538,000 4,407,000 2,531,000 1,395,000 (1,721,000) ------------ ------------ ------------- ------------ ------------- Net earnings (loss)...................... 5,085,000 5,457,000 2,701,000 2,141,000 (6,801,000) ------------ ------------ ------------- ------------ ------------- Accretion of preferred stock to redemption value....................... -- -- -- -- (395,000) Accrual of cumulative dividends on preferred stock........................ -- -- -- -- (388,000) ------------ ------------ ------------- ------------ ------------- Net earnings (loss) available to common stockholders........................... $ 5,085,000 $ 5,457,000 $ 2,701,000 $ 2,141,000 $ (7,584,000) ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- Earnings (loss) per share: Basic.................................. $ 1.25 $ 1.29 $ .63 $ .50 $ (3.32) Diluted................................ $ 1.24 $ 1.27 $ .62 $ .49 $ (3.32) Weighted average number of shares outstanding: Basic.................................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725 Diluted................................ 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725
See accompanying notes to consolidated financial statements. F-5 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B PREFERRED STOCK COMMON STOCK RETAINED ------------------------- ---------------------- ADDITIONAL EARNINGS TOTAL SHARES SHARES PAID-IN (ACCUMULATED STOCKHOLDERS' OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT) EQUITY ----------- ------------ ----------- --------- -------------- ------------- ------------- Balances at June 30, 1995.................... -- -- 4,052,421 $ 38,000 $ 10,947,000 $ 15,927,000 $ 26,912,000 Issuance of shares........ -- -- 22,144 -- 224,000 -- 224,000 Repurchase of shares...... -- -- (14,372) -- (85,000) (104,000) (189,000) Net earnings.............. -- -- -- -- -- 5,085,000 5,085,000 ----------- ------------ ----------- --------- -------------- ------------- ------------- Balance at June 30, 1996.. -- -- 4,060,193 38,000 11,086,000 20,908,000 32,032,000 Issuance of shares........ -- -- 220,746 2,000 1,762,000 -- 1,764,000 Net earnings.............. -- -- -- -- -- 5,457,000 5,457,000 ----------- ------------ ----------- --------- -------------- ------------- ------------- Balance at June 30, 1997.. -- -- 4,280,939 40,000 12,848,000 26,365,000 39,253,000 Issuance of shares........ -- -- 33,232 -- 1,000,000 -- 1,000,000 Exercise of stock options................. -- -- 145,200 2,000 706,000 -- 708,000 Repurchase of shares...... -- -- (7,107) -- (56,000) -- (56,000) Net earnings.............. -- -- -- -- -- 2,701,000 2,701,000 ----------- ------------ ----------- --------- -------------- ------------- ------------- Balance at June 30, 1998.. -- -- 4,452,264 42,000 14,498,000 29,066,000 43,606,000 Repurchase of shares (unaudited)............. (3,856,501) (36,000) (13,908,000) (107,439,000) (121,383,000) Shares issued (unaudited)............. 18,572 $ 18,572,000 399,237 4,000 395,000 -- 18,971,000 Accretion of redeemable preferred stock (unaudited)............. -- -- -- -- -- (395,000) (395,000) Accrual of cumulative dividends (unaudited)... -- 388,000 -- -- -- (388,000) -- Net loss (unaudited)...... -- -- -- -- -- (6,801,000) (6,801,000) ----------- ------------ ----------- --------- -------------- ------------- ------------- Balance at September 30, 1998 (unaudited)........ 18,572 $ 18,960,000 995,000 $ 10,000 $ 985,000 $ (85,957,000) $ (66,002,000) ----------- ------------ ----------- --------- -------------- ------------- ------------- ----------- ------------ ----------- --------- -------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-6 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH FOR THE YEARS PERIODS ENDED ENDED JUNE 30, SEPTEMBER 30, ------------------------------------- ----------------------- 1996 1997 1998 1997 1998 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss)...................................... $ 5,085,000 $ 5,457,000 $ 2,701,000 $2,141,000 $(6,801,000) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 5,417,000 6,878,000 8,870,000 2,045,000 2,488,000 Amortization of debt issuance costs.................... -- -- -- -- 123,000 Provision for doubtful accounts........................ 337,000 (94,000) (115,000) (4,000) 38,000 Provision for deferred taxes........................... 642,000 (332,000) 1,281,000 (113,000) 511,000 Compensation expense related to exercise of stock options.............................................. -- -- 579,000 -- -- (Gains) loss on sale of assets......................... (331,000) (258,000) (203,000) (31,000) 4,000 (Increase) decrease in assets and increase (decrease) in liabilities net of effects of acquisition of Highway Services, Inc.: Receivables.......................................... 914,000 (6,427,000) (4,710,000) (6,828,000) (5,743,000) Inventories, prepaid expenses and other assets....... (735,000) (662,000) 295,000 105,000 (203,000) Costs and estimated earnings in excess of billings on uncompleted contracts.............................. (717,000) 212,000 (308,000) (50,000) 306,000 Trade accounts payable and accrued liabilities....... (1,341,000) 2,248,000 7,100,000 6,489,000 (431,000) Billings in excess of costs and estimated earnings on uncompleted contracts.............................. 594,000 (472,000) 458,000 971,000 266,000 Accrued compensation................................. 821,000 2,012,000 680,000 215,000 (5,233,000) ----------- ----------- ----------- ---------- ----------- Net cash provided by (used in) operating activities....................................... 10,686,000 8,562,000 16,628,000 4,940,000 (14,675,000) ----------- ----------- ----------- ---------- ----------- Cash flows from investing activities: Proceeds from sale of assets............................. 989,000 1,003,000 1,122,000 133,000 121,000 Capital expenditures..................................... (11,511,000) (16,089,000) (12,287,000) (3,588,000) (3,337,000) Acquisition of Highway Services, Inc., net of cash acquired............................................... -- -- (5,882,000) -- -- ----------- ----------- ----------- ---------- ----------- Net cash used in investing activities.............. (10,522,000) (15,086,000) (17,047,000) (3,455,000) (3,216,000) ----------- ----------- ----------- ---------- ----------- Cash flows from financing activities: Borrowings under long-term debt.......................... 700,000 31,744,000 30,341,000 5,275,000 23,495,000 Repayments of long-term debt............................. -- (26,495,000) (29,824,000) (6,171,000) (16,606,000) Paydown on notes payable to stockholders................. (750,000) (765,000) (396,000) (48,000) Borrowings on Senior Notes............................... -- -- -- -- 100,000,000 Debt issuance costs...................................... -- -- (719,000) -- (5,205,000) Proceeds from issuance of common stock................... 224,000 1,764,000 1,000,000 -- 399,000 Repurchase of common stock............................... (189,000) -- (56,000) -- (93,050,000) Issuance of Series A Preferred Stock..................... -- -- -- -- 10,427,000 Issuance of Series B Preferred Stock..................... -- -- -- -- 237,000 ----------- ----------- ----------- ---------- ----------- Net cash provided by (used in) financing activities....................................... 735,000 6,263,000 (23,000) (1,292,000) 19,649,000 ----------- ----------- ----------- ---------- ----------- Net increase (decrease) in cash.................... 899,000 (261,000) (442,000) 193,000 1,758,000 Cash at beginning of period................................ 38,000 937,000 676,000 676,000 234,000 ----------- ----------- ----------- ---------- ----------- Cash at end of period...................................... $ 937,000 $ 676,000 $ 234,000 $ 869,000 $ 1,992,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes........................................... $ 2,825,000 $ 4,390,000 $ 2,730,000 $ 20,000 $ -- Interest............................................... 783,000 746,000 1,085,000 215,000 478,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- -----------
F-7 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE-MONTH FOR THE YEARS PERIODS ENDED ENDED JUNE 30, SEPTEMBER 30, ------------------------------------- ----------------------- 1996 1997 1998 1997 1998 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Supplemental disclosure of noncash investing and financing activities: Borrowings related to the acquisition of assets.......... $ 1,500,000 $ 556,000 $ 3,692,000 $ -- $ -- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Exercise of stock options................................ $ -- $ -- $ 708,000 $ -- $ -- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Issuance of Senior Exchangeable Preferred Stock in connection with the Recapitalization Mergers........... $ -- $ -- $ -- $ -- $10,000,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Accretion of Preferred Stock to redemption value......... $ -- $ -- $ -- $ -- $ 395,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Accrual of cumulative dividends on preferred stock....... $ -- $ -- $ -- $ -- $ 388,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Issuance of Series B Preferred Stock..................... $ -- $ -- $ -- $ -- $18,335,000 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- -----------
The fair value of Highway Services, Inc. net assets at the date of acquisition in fiscal 1998 was $1,283,000. Goodwill of $8,291,000 was recorded in connection with the acquisition. See accompanying notes to consolidated financial statements. F-8 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY'S ACTIVITIES AND OPERATING CYCLE Penhall International, Inc. ("PII") was founded in 1957 and was incorporated in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to effect the recapitalization of PII. As part of the recapitalization, a series of mergers (the Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor of the Senior Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall International Corp., and PII changed its name to Penhall Rental Corp. Under generally accepted accounting principles, the Recapitalization Mergers were accounted for as a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to a new investor did not change the accounting basis of the assets and liabilities in PII's separate stand-alone financial statements. In connection with the Recapitalization Mergers, PII on June 30, 1998 entered into a certain Compensation Tax Consistency and Indemnificaiton Agreement (the Agreement) with certain members of management. Under the Agreement, PII was obligated to make approximately $3,000,000 of tax gross-up payments to certain members of management. Such expense is included in the statement of operations for the year ended June 30, 1998 as other compensation. For the year ended June 30, 1998 and the three months ended September 30, 1998, $1,200,000 and $3,090,000 (unaudited), respectively, is included in general and administrative expenses for the costs associated with the Recapitalization Mergers. Penhall International Corp. and its wholly-owned subsidiaries: Penhall Rental Corp. and Penhall Company (collectively, "the Company") serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company's revenues are generated through equipment rentals and construction contracts. The length of the construction contracts varies, but typically range from one to 12 months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company's base of operations include among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc. (see note 14), the Company's operations have been expanded to include the mid-western states of the United States and Canada. The Company's operations are primarily conducted through Penhall International Corp. and its wholly-owned subsidiary, Penhall Company. The California Department of Transportation accounted for approximately 1%, 18%, 10%, 14% (unaudited) and 3% (unaudited) of consolidated revenues of the Company for the years ending June 30, 1996, 1997, 1998 and the three month periods ended September 30, 1997 and 1998, respectively. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Penhall International Corp. and its wholly-owned subsidiaries: Penhall Rental Corp. and Penhall Company. Although the Recapitalization Mergers F-9 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) did not take place until August 4, 1998, since the Recapitalization Mergers were accounted for in a manner similar to a pooling of interests, there was no impact on PII consolidated financial statements as of June 30, 1997 and 1998 and for the three-year period ended June 30, 1998. All significant intercompany transactions have been eliminated in consolidation. REVENUE RECOGNITION ON LONG-TERM CONSTRUCTION CONTRACTS Income from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage of completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which percentage of completion is determined based on costs to date as compared to total estimated costs to complete. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed. Contract costs include all direct material, equipment rentals, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools, supplies, repairs and depreciation cost. General and administrative costs are charged to expense as incurred. The asset "costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. Income from claims for additional contract compensation is recorded upon settlement of the disputed amount. INVENTORIES Inventories, which consist of diamond cutting blades and blade fuel, are stated at cost. Cost is determined using the purchase price of the assets and is expensed based on usage. PROPERTY, PLANT AND EQUIPMENT The Company and its subsidiaries provide for depreciation of property, plant and equipment based on the estimated useful lives of the assets, using the straight-line method and a residual value of 10% as follows: Buildings 15 to 39 years Equipment 3 to 8 years
Leasehold improvements are amortized over the lesser of the life of the lease or useful life of the asset. The cost and accumulated depreciation applicable to assets sold or otherwise disposed of are eliminated from the asset and accumulated depreciation accounts. Gain or loss on disposition is reflected in other operating income. F-10 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Amortization expense related to goodwill amounted to $28,000, $171,000 and $272,000 for the years ended June 30, 1996, 1997 and 1998, respectively and was $3,000 (unaudited) and $140,000 (unaudited) for the three-month periods ending September 30, 1997 and 1998, respectively. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on July 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have an impact on the Company's consolidated financial position, results of operations or liquidity. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ENVIRONMENTAL REMEDIATION COSTS Losses associated with environmental remediation obligations are accrued for when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. F-11 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Prior to June 30, 1996, the Company accounted for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. In accordance with APB Opinion No. 25, compensation expense for "fixed" stock compensation plans is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. For "variable" stock compensation plans, compensation expense is recorded at the end of each reporting period based on the difference between the purchase or exercise price and the buy-out price or market value of the underlying security. On July 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and to provide disclosures for employee stock-based compensation grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. No stock options have been granted since 1993. As such, no pro forma disclosures have been made. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing adjusted net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Dilutive earnings (loss) per share is calculated by dividing net earnings (loss) available to common stockholders plus the impact of assumed dilutive potential securities. The Company has granted certain options which have been treated as common share equivalents for purposes of calculating diluted earnings (loss) per share. All common shares included in the consolidated financial statements and earnings (loss) per share calculations have been restated to reflect a 10.56 to one common stock split effected as part of the Recapitalization Mergers. F-12 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table sets forth the calculation of diluted earnings (loss) per share for each of the years in the three-year period ended June 30, 1998 and the three-month periods ended September 30, 1997 and 1998:
THREE-MONTHS PERIOD ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------- --------------------- 1996 1997 1998 1997 1998 --------- --------- --------- --------- ---------- (UNAUDITED) Diluted earnings (loss) per share calculation Net earnings (loss) available to common stockholders........... $5,085,000 $5,457,000 $2,701,000 $2,141,000 $(7,584,000) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Weighted average shares--basic................. 4,054,596 4,232,585 4,277,888 4,280,940 2,286,725 Plus-incremental shares from assumed conversion of stock options....................... 59,802 73,023 77,415 73,974 -- --------- --------- --------- --------- ---------- Weighted average shares--dilutive.............. 4,114,398 4,305,608 4,355,303 4,354,914 2,286,725 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Diluted earnings (loss) per share............................. $ 1.24 $ 1.27 $ .62 $ .49 $ (3.32) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ----------
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. SFAS 128 introduces and requires the presentation of "basic" earnings per share which represents net earnings divided by the weighted average shares outstanding. Dual presentation of "diluted" earnings per share, reflecting the effects of all potentially dilutive securities, is also required. The Company adopted the provisions of SFAS No. 128 on July 1, 1997. Earnings per share for all periods presented prior to the Company's adoption of SFAS No. 128 have been restated to conform to the provisions of SFAS No. 128. The adoption of SFAS No. 128 did not have a material impact on the consolidated financial statements of the Company. MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior years' balances to conform to the current presentation. F-13 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (2) RECEIVABLES Contract receivables represent those amounts which actually have been billed. Contract retentions are collectible upon completion or other milestones of contract performance. Based upon anticipated contract completion dates, these retainages are expected to be collected as follows:
JUNE 30, JUNE 30, SEPTEMBER 30, 1997 1998 1998 ------------ ------------ ------------- (UNAUDITED) Years ending June 30: 1998............................................... $ 1,872,000 $ -- $ -- 1999............................................... 1,123,000 445,000 480,000 2000............................................... 749,000 1,782,000 1,923,000 2001............................................... -- 1,336,000 1,442,000 2002............................................... -- 891,000 963,000 ------------ ------------ ------------- $ 3,744,000 $ 4,454,000 $ 4,808,000 ------------ ------------ ------------- ------------ ------------ -------------
Transactions in the allowance for doubtful receivables are summarized as follows:
THREE-MONTH YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------- ------------- ------------------ (UNAUDITED) Balance, beginning of period..................... $ 998,000 $ 1,335,000 $ 1,110,000 $ 995,000 Provision for doubtful accounts................... 346,000 (94,000) 14,000 44,000 Accounts charged off......... (9,000) (131,000) (129,000) (6,000) ------------- ------------- ------------- ------------------ Balance end of period........ $ 1,335,000 $ 1,110,000 $ 995,000 $ 1,033,000 ------------- ------------- ------------- ------------------ ------------- ------------- ------------- ------------------
(3) OTHER ASSETS
JUNE 30, ---------------------------- SEPTEMBER 30, 1997 1998 1998 ------------- ------------- ------------- (UNAUDITED) Cash surrender value on officers' life insurance policies....................................... $ 1,685,000 $ 574,000 $ -- Loans on officers' life insurance policies....... (1,357,000) (449,000) -- Covenants not to compete......................... 288,000 288,000 288,000 Accumulated amortization......................... (52,000) (146,000) (160,000) Other............................................ 164,000 140,000 13,000 ------------- ------------- ------------- $ 728,000 $ 407,000 $ 141,000 ------------- ------------- ------------- ------------- ------------- -------------
F-14 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (3) OTHER ASSETS (CONTINUED) The covenants not to compete are amortized over the life of the agreement. Amortization expense related to the covenants not to compete amounted to $171,000, $107,000 and $94,000 for the years ended June 30, 1996, 1997 and 1998, respectively and $30,000 (unaudited) and $14,000 (unaudited) for the three-month periods ended September 30, 1997 and 1998, respectively. (4) ACCRUED LIABILITIES
JUNE 30, -------------------------- SEPTEMBER 30, 1997 1998 1998 ------------ ------------ ------------- (UNAUDITED) Union benefits..................................... $ 770,000 $ 700,000 $ 712,000 Accrued bonuses.................................... 1,056,000 807,000 1,317,000 Accrued debt issuance costs........................ -- 351,000 -- Accrued merger costs............................... -- 905,000 76,000 Accrued tax gross-up payments (note 1)............. -- 2,936,000 -- Accrued interest................................... -- -- 2,046,000 Accrued insurance.................................. 764,000 618,000 775,000 Accrued vacation................................... 320,000 320,000 320,000 Accrued payroll.................................... 459,000 1,521,000 1,907,000 Other.............................................. 1,555,000 883,000 1,326,000 ------------ ------------ ------------- $ 4,924,000 $ 9,041,000 $ 8,479,000 ------------ ------------ ------------- ------------ ------------ -------------
F-15 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (5) SENIOR NOTES AND LONG-TERM DEBT SENIOR NOTES On August 4, 1998, in connection with the Recapitalization Mergers, the Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company's option, in whole at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes contain certain financial and non-financial covenants. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, ---------------------------- SEPTEMBER 30, 1997 1998 1998 ------------- ------------- -------------- (UNAUDITED) The Company had a secured bank line of credit with the Company's principal bank for working capital purposes as follows: $20,000,000 through October 31, 1998 and $15,000,000 from November 1, 1998 through October 31, 1999. Advances under the line bore interest at various rates of interest ranging from 7.4% to 8.5% at June 30, 1997 and 1998. Interest was payable monthly and principal was due upon maturity on October 31, 1999. Repaid in full on August 4, 1998........................................ $ 12,150,000 13,860,000 -- Note payable secured by certain equipment, bearing interest at 6.0%; payable in annual principal and interest installments of $208,000; all unpaid principal and interest due June 4, 2000................................ 556,000 381,000 381,000 Note payable secured by property in Austin, Texas, bearing interest at 10.0%; payable in monthly principal and interest installments of $1,815; all unpaid principal and interest due November 1, 2021............................ 199,000 197,000 196,000 Note payable secured by certain equipment, bearing interest at 5.51%; payable in two installments of principal and interest of $2,000,000 due on April 29, 1999 and 2000.... -- 3,692,000 3,692,000
F-16 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (5) SENIOR NOTES AND LONG-TERM DEBT (CONTINUED)
JUNE 30, ---------------------------- SEPTEMBER 30, 1997 1998 1998 ------------- ------------- -------------- (UNAUDITED) $20,000,000 Term Loan secured by certain assets of the Company; quarterly principal payments of $750,000 per quarter commencing September 15, 2000 through June 15, 2001, $1,250,000 per quarter through June 15, 2002, and $1,500,000 per quarter through June 15, 2004. The Company may elect to maintain the Term Loan as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or the current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. All unpaid principal and interest is due June 15, 2004............................................ -- -- 20,000,000 Revolving Loan in the maximum credit amount of $30,000,000 secured by certain assets of the Company. The Company may elect to maintain the Revolving Loan as a Base Rate Loan, which accrues interest quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or the then current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrues interest at 2.25% plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. All unpaid principal and interest is due June 15, 2004............................................ -- -- 750,000 Other...................................................... 36,000 29,000 29,000 ------------- ------------- -------------- 12,941,000 18,159,000 25,048,000 Less current installments of long-term debt................ 185,000 2,034,000 1,984,000 ------------- ------------- -------------- Long-term debt, excluding current installments............. $ 12,756,000 $ 16,125,000 $ 23,064,000 ------------- ------------- -------------- ------------- ------------- --------------
As part of the Revolving Loan, the Company has a Swingline Loan in the maximum credit amount of $2,500,000 secured by certain assets of the Company; interest accrues quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or then current prime rate and is payable in quarterly installments. All unpaid principal and interest is due June 10, 2004. F-17 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (5) SENIOR NOTES AND LONG-TERM DEBT (CONTINUED) The Company had unused and available amounts under its line of credit with its principal bank in the amounts of $1,850,000 and $6,140,000, at June 30, 1997 and 1998, respectively. Under the terms of its line of credit, the Company was required to meet certain financial covenants and ratios, including working capital, net worth, and debt to equity ratios. The Company was in compliance with all covenants and ratios at June 30, 1997 and 1998. Additionally, under the terms of the line of credit, the Company had pledged all of the assets of its wholly owned subsidiaries for the line of credit. The Term Loan, Revolving Loan, and Swingline Loan (the "Credit Facility") contain certain financial and non-financial covenants. Annual maturities of long-term debt for the next five years for the periods ended June 30, 1998 and September 30, 1998 (unaudited) are as follows:
JUNE 30, SEPTEMBER 30, 1998 1998 ------------- ------------- (UNAUDITED) 1999................................................. $ 2,034,000 $ 1,984,000 2000................................................. 15,919,000 2,843,000 2001................................................. 10,000 3,503,000 2002................................................. 10,000 5,253,000 2003................................................. 3,000 6,003,000 Thereafter........................................... 183,000 5,462,000 ------------- ------------- $ 18,159,000 $ 25,048,000 ------------- ------------- ------------- -------------
(6) INCOME TAXES Income tax expense (benefit) is comprised of the following components:
JUNE 30, SEPTEMBER 30, ----------------------------------------- --------------------------- 1996 1997 1998 1997 1998 ------------ ------------ ------------- ------------ ------------- (UNAUDITED) Current tax expense: Federal...................... $ 2,270,000 $ 3,674,000 $ 918,000 $ 1,217,000 $ (2,232,000) State........................ 626,000 1,065,000 332,000 291,000 -- ------------ ------------ ------------- ------------ ------------- 2,896,000 4,739,000 1,250,000 1,508,000 (2,232,000) ------------ ------------ ------------- ------------ ------------- Deferred tax expense (benefit): Federal...................... 494,000 (252,000) 1,062,000 (60,000) 569,000 State........................ 148,000 (80,000) 219,000 (53,000) (58,000) ------------ ------------ ------------- ------------ ------------- 642,000 (332,000) 1,281,000 (113,000) 511,000 ------------ ------------ ------------- ------------ ------------- $ 3,538,000 $ 4,407,000 $ 2,531,000 $ 1,395,000 $ (1,721,000) ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ -------------
F-18 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (6) INCOME TAXES (CONTINUED) Significant components of the Company's deferred income tax assets and liabilities are as follows:
JUNE 30, ---------------------------- SEPTEMBER 30, 1997 1998 1998 ------------- ------------- ------------- (UNAUDITED) Deferred tax assets: Allowance for doubtful receivables....................... $ 444,000 $ 408,000 $ 424,000 Accrued compensation..................................... 1,013,000 731,000 -- Other.................................................... 598,000 788,000 1,131,000 ------------- ------------- ------------- Total deferred tax assets............................ 2,055,000 1,927,000 1,555,000 ------------- ------------- ------------- Deferred tax liabilities: Depreciation............................................. (3,392,000) (4,545,000) (4,684,000) Other.................................................... (100,000) (100,000) (100,000) ------------- ------------- ------------- Total deferred tax liabilities....................... (3,492,000) (4,645,000) (4,784,000) ------------- ------------- ------------- Net deferred tax liability........................... $ (1,437,000) $ (2,718,000) $(3,229,000) ------------- ------------- ------------- ------------- ------------- -------------
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. Deferred income tax expense (benefit) consists of the following:
JUNE 30, SEPTEMBER 30, -------------------------------------- ------------------------- 1996 1997 1998 1997 1998 ----------- ----------- ------------ ----------- ------------ (UNAUDITED) Allowance for doubtful receivables............ $ (135,000) $ 90,000 $ 36,000 $ 2,000 $ (16,000) Other......................................... 284,000 (756,000) (190,000) (131,000) (343,000) Depreciation.................................. 692,000 860,000 1,153,000 170,000 139,000 Accrued compensation.......................... (199,000) (526,000) 282,000 (154,000) 731,000 ----------- ----------- ------------ ----------- ------------ $ 642,000 $ (332,000) $ 1,281,000 $ (113,000) $ 511,000 ----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ----------- ------------
F-19 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (6) INCOME TAXES (CONTINUED) Income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to earnings (loss) before income taxes as follows:
JUNE 30, SEPTEMBER 30, ------------------------------- --------------------- 1996 1997 1998 1997 1998 --------- --------- --------- --------- ---------- (UNAUDITED) Computed "expected" tax expense (benefit)....................... $2,932,000 $3,353,000 $1,779,000 $1,202,000 $(2,897,000) Increase (decrease) in taxes resulting from: State income tax expense, net of Federal income tax deduction..................... 529,000 605,000 367,000 246,000 (156,000) Nondeductible portion of stock- based compensation............ 138,000 299,000 221,000 (64,000) -- Nondeductible reorganization costs......................... -- -- -- -- 1,267,000 Other, net...................... (61,000) 150,000 164,000 12,000 65,000 --------- --------- --------- --------- ---------- $3,538,000 $4,407,000 $2,531,000 $1,395,000 $(1,721,000) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ----------
(7) EMPLOYEE RETIREMENT PLANS The Company and its subsidiaries contribute to multi-employer pension plans, primarily defined benefit plans, as required by collective bargaining agreements. Contributions to such plans are determined in accordance with the provisions of negotiated labor contracts and are generally based on the number of hours worked. Amounts contributed to these plans in fiscal 1996, 1997, and 1998 aggregated $1,380,000, $1,605,000 and $1,772,000, respectively and for the three-month periods ended Septembernb]30, 1997 and 1998 aggregated $510,000 (unaudited) and $520,000 (unaudited), respectively. In the event of the Company's partial or total withdrawal from such plans, it may be liable for its share of any unfunded vested benefits thereunder. The Company also may be assessed for its share of any unfunded vested benefits resulting from partial or total withdrawal from such plans and any non-payment by other employer participants. Less than 1% of labor is covered by a collective bargaining agreement that will expire within one year. The Company sponsors a defined contribution 401(k) plan. Subject to certain terms and conditions of the plan, substantially all of the Company's non-union employees are eligible to participate in the plan. The Company may, but is not required to, make matching contributions to the plan each year, which are allocated to each participant's account in proportion to the amount that he or she has contributed to the plan during the applicable plan year. All Company and employee contributions to the plan plus the earnings thereon are 100% vested. Costs incurred under the plan were $106,000, $152,000 and $161,000 related to the plan for the years ended June 30, 1996, 1997 and 1998, respectively and $39,000 (unaudited) and $54,000 (unaudited) for the three-month periods ended September 30, 1997 and 1998, respectively. F-20 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (8) STOCK COMPENSATION PLANS EMPLOYEE STOCK PURCHASE PLANS--The Company had established employee stock purchase plans referred to as "stock buy-out agreements". Selected employees were allowed to purchase shares at prices that were determined based on a book value formula. The Company guaranteed to repurchase the shares upon certain events or termination of the employee. The repurchase price that was paid by the Company was determined based on a book value formula that included increased multiples at dates specified in the agreements. The stock buy-out agreements entered into subsequent to January 28, 1988 gave rise to compensation expense that was accrued over the vesting period based on the difference of the original purchase price and the buy-out price of the shares. Shares outstanding that were subject to the stock buy-out agreements were 654,720 and 792,000 at June 30, 1997 and 1998, respectively. The contingent repurchase price of all these shares were $10,606,000 and $13,328,000 at June 30, 1997 and 1998, respectively. Compensation expense related to the stock purchase plans amounted to $519,000, $1,643,000 and $994,000 for the years ended June 30, 1996, 1997 and 1998, respectively and $87,000 (unaudited) and $8,942,000 (unaudited) for the three-month periods ended September 30, 1997 and 1998, respectively. The accrued compensation related to the stock buy-out agreements entered into subsequent to January 28, 1988 is reflected as accrued compensation in the accompanying consolidated balance sheets at June 30, 1997 and 1998. STOCK OPTION PLAN--In March 1993, the Company adopted a stock option plan (the Plan) pursuant to which certain key employees were granted options to purchase up to 145,200 shares of the Company's common stock. Stock options were granted in March 1993 with an exercise price equal to $4.88 per share. All stock options have 10-year terms and vest and become fully exercisable after 5 years from the date of grant. In addition, specific vesting provisions provide for an acceleration of the option exercise date in the event of the occurrence of certain changes in control of the Company. Any shares acquired under these agreements are subject to terms similar to the various employee stock buy-out agreements, as described under Employee Stock Purchase Plans. There are no additional options available for grant under the Plan. Compensation expense (benefit) related to the stock option plans due to the related stock buy-out agreements amounted to $302,000, $369,000 and $(314,000) for the years ended June 30, 1996, 1997 and 1998, respectively and $128,000 (unaudited) and $0 (unaudited) for the three-month periods ended September 30, 1997 and 1998, respectively. The accrued compensation related to the stock option plan is reflected as accrued compensation in the accompanying consolidated balance sheets at June 30, 1997 and 1998. Stock options outstanding were 145,200 and 0 at June 30, 1997 and 1998, respectively. There was no stock option activity during the years ended June 30, 1996 and 1997. All 145,200 stock options were exercised on June 30, 1998. The Company forgave the exercise price of $4.88 for 118,800 stock options exercised and the resulting compensation expense of $579,000 is included in general and administrative expenses for the year ended June 30, 1998. F-21 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (8) STOCK COMPENSATION PLANS (CONTINUED) STOCKHOLDERS AGREEMENT Upon consummation of the Recapitalization Mergers, the Third Party, the management stockholders and Penhall International Corp. entered into a Securities Holders Agreement (the "Stockholders Agreement") containing certain agreements among such stockholders with respect to the capital stock and corporate governance of the Company and its subsidiaries. The Stockholders Agreement contains certain provisions which, with certain exceptions, restrict the ability of the management stockholders from transferring any Common Stock or Series B Preferred Stock except pursuant to the terms of the Stockholders Agreement. If the Board of Directors of Penhall International Corp. and holders of at least a majority of the Common Stock of Penhall International Corp. then outstanding shall approve the sale of Penhall International Corp. or any of its subsidiaries to an unaffiliated third person (an "Approved Sale"), each stockholder of the Company shall consent to, vote for and raise no objections against, and waive dissenters and appraisal rights (if any) with respect to, the Approved Sale and, if such sale shall include the sale of capital stock, each stockholder shall sell such stockholder's capital stock on the terms and conditions approved by the Board of Directors of Penhall International Corp. and the holders of a majority of the Common Stock of Penhall International Corp. then outstanding. The Stockholders Agreement also provides for certain additional restrictions on transfer of Penhall International Corp.'s Common Stock and Series B Preferred Stock by the management stockholders, including the right of Penhall International Corp. to purchase certain Common Stock and Series B Preferred Stock of Penhall International Corp. held by a management stockholder upon termination of such management stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering (as defined below), at a formula price, and the grant of a right of first refusal in favor of Penhall International Corp. in the event a management stockholder elects to transfer such Common Stock or Series B Preferred Stock. Under the Stockholders Agreement, a management stockholder has the right, subject to the restrictions set forth in agreements relating to indebtedness of the Company, to require Penhall International Corp. to purchase certain Common Stock and Series B Preferred Stock of the Company held by such management stockholder upon termination of such management stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering, at a formula price. "Initial Public Offering" means the sale by the Company in an underwritten public offering made pursuant to an effective registration statement under the Securities Act of Common Stock for gross offering proceeds of at least $30 million. On August 4, 1998, the Recapitalizaiton Mergers caused the stock buy out agreements to be terminated and replaced by the terms of the Stockholders Agreement. The Recapitalization Mergers established a new cost basis for the stock under the stock-buy out agreements which resulted in stock-based compensation expense of $8,869,000 (unaudited) which is included in general and administrative expenses for the three month period ended September 30, 1998. Management shareholders rolled over certain shares in the Recapitalization Mergers at a new cost basis resulting in the reduction of the remaining accrued compensation recorded under the stock-buy out agreements as an equity contribution. Shares outstanding that are subject to the buy-out provisions of the Stockholders Agreement are 370,085 shares of Common Stock and 8,556 shares of Series B Preferred Stock at September 30, 1998. F-22 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (8) STOCK COMPENSATION PLANS (CONTINUED) Compensation expense related to the formula buy-out provisions of the Stockholders Agreement amounted to $73,000 (unaudited) for the three month period ended September 30, 1998. (9) REDEEMABLE PREFERRED STOCK SENIOR EXCHANGEABLE PREFERRED STOCK As of August 4, 1998 and in connection with the Recapitalization Mergers, Penhall International Corp. is authorized to issue up to 250,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), of which 10,000 shares have been designated as Senior Exchangeable Preferred Stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Senior Exchangeable Preferred Stock ranks senior to the Common Stock, the Series A Preferred Stock and the Series B Preferred Stock. Holders of Senior Exchangeable Preferred Stock are entitled to receive, when as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Senior Exchangeable Preferred Stock at a rate PER ANNUM equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Senior Exchangeable Preferred Stock ("Senior Exchangeable Junior Stock") with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. "Senior Exchangeable Preferred Liquidation Preference" means, on any specific date, with respect to each share of Senior Exchangeable Preferred Stock, the sum of (i) $1,000 per share plus (ii) the accumulated unpaid dividends with respect to such share. Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefor, in whole or in part, any or all of the shares of Senior Exchangeable Preferred Stock, at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On February 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefor, all of the then outstanding shares of Senior Exchangeable Preferred Stock at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. The Senior Exchangeable Preferred Stock is exchangeable by Penhall International Corp. at any time and from time to time for junior subordinated notes (the "Junior Subordinated Notes") in an amount equal to the Senior Exchangeable Preferred Liquidation Preference plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the exchange date to the exchange date. The Junior Subordinated Notes will pay interest from the date of exchange at the rate of 10.5% per annum in cash; provided, however, that Penhall International Corp. shall be prohibited from 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. F-23 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (9) REDEEMABLE PREFERRED STOCK (CONTINUED) In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Senior Exchangeable Preferred Stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Senior Exchangeable Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Senior Exchangeable Preferred Stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Senior Exchangeable Preferred Stock have no voting rights and are not be entitled to any notice of meeting of stockholders. SERIES A PREFERRED STOCK Penhall International Corp. has designated 25,000 shares of Preferred Stock as Series A Preferred Stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Series A Preferred Stock ranks senior to the Common Stock and on a parity with the Series B Preferred Stock. Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Series A Preferred Stock at a rate PER ANNUM equal to 13% of the Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Series A Preferred Stock ("Junior Stock") with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. "Liquidation Preference" means, on any specific date, with respect to each share of Series A Preferred Stock, the sum of (i) $1,000 per share plus (ii) the accumulated dividends with respect to such share. Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefor, in whole or in part, any or all of the shares of Series A Preferred Stock, at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On August 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefor, all of the then outstanding shares of Series A Preferred Stock at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Series A Preferred Stock shall be entitled to be paid out of the assets of Penhall 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 F-24 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (9) REDEEMABLE PREFERRED STOCK (CONTINUED) such holders. Except as otherwise required by law, the holders of Series A Preferred Stock have no voting rights and are not be entitled to any notice of meeting of stockholders. (10) COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company and its subsidiaries lease various properties and equipment under long-term agreements which expire at varying dates through 2002. Certain of these leases provide for renegotiation of annual rentals at specified dates. Rent expense was $452,000, $452,000 and $561,000 for the years ended June 30, 1996, 1997 and 1998, respectively and $118,000 (unaudited) and $158,000 (unaudited) for the three-month periods ended September 30, 1997 and 1998, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows:
YEARS ENDING JUNE 30: JUNE 30, 1998 SEPTEMBER 30, 1998 - --------------------------------------- --------------- ------------------ (UNAUDITED) 1999................................... $ 515,000 $ 505,000 2000................................... 530,000 523,000 2001................................... 471,000 460,000 2002................................... 381,000 332,000 2003................................... 185,000 157,000 Thereafter............................. 114,000 88,000 --------------- ------------------ $ 2,196,000 $ 2,065,000 --------------- ------------------ --------------- ------------------
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk consist primarily of cash accounts, and contract and trade receivables. CASH At June 30, 1997, 1998 and September 30, 1998, the Company has approximately $676,000, $234,000 and $1,992,000 (unaudited) on deposit at one financial institution. ENVIRONMENTAL REMEDIATION COSTS The Company is currently in the process of complying with upcoming regulatory obligations to upgrade or close underground storage tanks under the Resource Conservation and Recovery Act of 1980, including all applicable requirements of state regulatory agencies, which must be met by December 22, 1998. The Company believes that the costs to address any associated contamination would not reasonably be expected to exceed $170,000. The total estimated aggregate cost of $72,000, principally related to the upgrade or removal of the underground storage tanks, is expected to be paid in 1999 and has been accrued for at June 30, 1998. The cost estimate is based on the proposals from outside environmental engineering F-25 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (10) COMMITMENTS AND CONTINGENCIES (CONTINUED) companies and from historical costs incurred and represents Management's best estimate of the cost. The estimate of costs and their timing of payment could change as a result of unforeseen circumstances existing at the site. LETTERS OF CREDIT The Company has an existing standby letter of credit with a financial institution in the amount of $450,000 for the benefit of a certain customer of the Company. The standby letter of credit expires on March 1, 1999 and there is no outstanding balance at June 30, 1998. The Company obtained a new standby letter of credit in the aggregate amount of $2,000,000 on July 2, 1998 which expires on December 31, 1998. LITIGATION There are various lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management's present opinion that the outcome of these proceedings will not have a material effect on the Company's consolidated financial statements taken as a whole. (11) RELATED PARTY TRANSACTIONS AND NOTES PAYABLE TO STOCKHOLDERS During December 1995, the Company purchased from its majority stockholder facilities previously leased under a noncancelable operating arrangement. These facilities were purchased for $2,200,000, with an initial payment of $700,000 and a note payable issued in the amount of $1,500,000. All unpaid principal and interest was paid October 1, 1997. In July 1994, the Company repurchased 51,987 shares from a stockholder for a $590,000 promissory note. The note bears interest at 8.0% and is payable in monthly principal and interest installments of $8,333. All unpaid principal and interest is due October 2002. In December 1997, the Company repurchased 7,107 shares from a stockholder with a $111,000 promissory note. The note bears interest at 8.0% and is payable in monthly principal and interest installments of $8,333. All unpaid principal and interest is due January 1999. F-26 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
JUNE 30, ---------------------------- SEPTEMBER 30, 1997 1998 1998 ------------- ------------- ------------- (UNAUDITED) Costs incurred on uncompleted contracts................... $ 15,043,000 $ 24,533,000 $ 29,156,000 Estimated earnings to date................................ 5,849,000 3,279,000 5,578,000 ------------- ------------- ------------- 20,892,000 27,812,000 34,734,000 Less billings to date..................................... 20,431,000 27,501,000 34,995,000 ------------- ------------- ------------- $ 461,000 $ 311,000 $ (261,000) ------------- ------------- ------------- ------------- ------------- ------------- Included in accompanying consolidated balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts............................... $ 668,000 $ 976,000 $ 670,000 Billings in excess of costs and estimated earnings on uncompleted contracts............................... (207,000) (665,000) (931,000) ------------- ------------- ------------- $ 461,000 $ 311,000 $ (261,000) ------------- ------------- ------------- ------------- ------------- -------------
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. F-27 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1997 and 1998 and at September 30, 1998 (unaudited).
JUNE 30, ------------------------------------------------------ 1997 1998 SEPTEMBER 30, 1998 -------------------------- -------------------------- --------------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ ------------- ------------ (UNAUDITED) Financial assets: Cash...................... $ 676,000 $ 676,000 $ 234,000 $ 234,000 $ 1,992,000 $ 1,992,000 Net receivables........... 23,746,000 23,746,000 29,312,000 29,312,000 35,017,000 35,017,000 Financial liabilities: Current installments of long-term debt.......... 185,000 185,000 2,034,000 2,034,000 1,846,000 1,846,000 Current installments of notes payable to stockholders............ 819,000 819,000 131,000 131,000 -- -- Trade accounts payable.... 4,233,000 4,233,000 7,532,000 7,532,000 7,663,000 7,663,000 Long-term debt............ 12,756,000 12,758,000 16,125,000 16,123,000 23,202,000 23,101,000 Senior Notes.............. -- -- -- -- 100,000,000 90,037,000 Notes payable to stockholders............ 351,000 351,000 274,000 274,000 357,000 357,000
The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash, net receivables, current installments of long-term debt, current installments of notes payable to stockholders, and trade accounts payables: The carrying amounts approximate fair value because of the short maturity of these instruments. Long-term debt, Senior Notes and notes payable to stockholders: The fair value of the Company's long-term debt, Senior Notes and notes payable to stockholders is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company as of the date of the consolidated balance sheets for similar debt instruments of comparable maturities by the Company's bankers. (14) HIGHWAY SERVICES ACQUISITION On April 29, 1998, Penhall Company, a wholly-owned subsidiary of the Company, purchased substantially all of the assets of Highway Services, Inc. for approximately $9,654,000 plus the assumption of approximately $1,324,000 of liabilities. Penhall Company paid approximately $5,962,000 in cash, with the remainder payable in equal installments in April 1999 and 2000 pursuant to a $3,692,000 secured promissory note which bears interest at 5.51% per annum. HSI is based in Minnesota and operates in approximately 25 states and is a national provider of construction services including grinding, grooving, F-28 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) (14) HIGHWAY SERVICES ACQUISITION (CONTINUED) sawing, sealing and pavement replacement. The acquisition has been accounted for by the purchase method and accordingly, the results of operations of HSI have been included in the Company's consolidated financial statements since April 29, 1998. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $8,291,000 has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. The purchase agreement also provides that certain stockholders of HSI purchase 3,147 of the Company's common stock for $1,000,000. The following unaudited pro forma financial information presents the combined results of operations of the Company and HSI as if the acquisition had occurred as of the beginning of fiscal year 1997 and 1998, after giving affect to certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisition, and related income taxes. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and HSI constituted a single entity during such periods.
(UNAUDITED) YEAR ENDED JUNE 30, ------------------------------ 1997 1998 -------------- -------------- Revenues......................................................................... $ 114,238,000 $ 114,706,000 -------------- -------------- -------------- -------------- Net earnings..................................................................... $ 7,061,000 $ 3,701,000 -------------- -------------- -------------- -------------- Earnings per share: Basic.......................................................................... 1.67 .87 Diluted........................................................................ 1.64 .85 Weighted average number of shares outstanding: Basic.......................................................................... 4,232,585 4,277,888 Diluted........................................................................ 4,305,607 4,355,303
(15) SUBSEQUENT EVENTS (UNAUDITED) The Company completed the following acquisitions which were accounted for as purchases: On October 16, 1998, the Company purchased certain assets of Daley Concrete Cutting, a division of U.S. Rentals for $3,743,000 cash. On November 13, 1998, the Company purchased Lipscomb Concrete Cutting for $4,252,000. The purchase price included a cash payment of $3,376,000 and a seller carryback note of $876,000 at 6% interest, all due and payable November 1, 1999. F-29 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) 16. GUARANTORS AND FINANCIAL INFORMATION The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not provide additional information that is material to investors. The condensed consolidating financial information presents condensed financial statements as of June 30, 1997 and 1998 and for the years ended June 30, 1996, 1997 and 1998 and the three-month period ended September 30, 1997 of: a) Penhall Rental Corp. on a parent company only basis ("Parent") (carrying its investments in the subsidiaries under the equity method), b) the Subsidiaries (Penhall International Corp. and Penhall Company) c) elimination entries necessary to consolidate the parent company and its subsidiaries, and d) the Company on a consolidated basis. The condensed consolidating financial information presents condensed financial statements as of September 30, 1998 and for the three-month period ended September 30, 1998 of: a) Penhall International Corp. on a parent company only basis ("Parent") (carrying its investments in the subsidiaries under the equity method), b) the Guarantor Subsidiaries (Penhall Rental Corp. and Penhall Company) c) elimination entries necessary to consolidate the parent company and its subsidiaries, and d) the Company on a consolidated basis. F-30 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1997 -------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- -------------- ------------- Assets Current assets: Receivables, net................ $ 3,365,000 $ 429,000 $ 19,952,000 $ -- $ 23,746,000 Inventories..................... 129,000 -- 937,000 -- 1,066,000 Costs and estimated earnings in excess of billings on uncompleted contracts......... -- -- 668,000 -- 668,000 Intercompany assets............. (20,000) 9,190,000 32,000 (9,202,000) -- Other current assets............ 412,000 371,000 1,550,000 -- 2,333,000 ------------- ------------- ------------- -------------- ------------- Total current assets.......... 3,886,000 9,990,000 23,139,000 (9,202,000) 27,813,000 Net property, plant and equipment....................... 5,191,000 8,503,000 26,967,000 -- 40,661,000 Other assets, net................. 842,000 477,000 40,000 -- 1,359,000 Investment in subsidiaries........ -- 38,088,000 -- (38,088,000) -- ------------- ------------- ------------- -------------- ------------- $ 9,919,000 $ 57,058,000 $ 50,146,000 $ (47,290,000) $ 69,833,000 ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- -------------- ------------- Liabilities and Stockholders' Equity: Current installments of long-term debt and notes payable to stockholders.................... $ 185,000 $ 819,000 $ -- $ -- $ 1,004,000 Trade accounts payable............ 755,000 84,000 3,394,000 -- 4,233,000 Accrued liabilities............... 1,602,000 266,000 3,056,000 -- 4,924,000 Billings in excess of costs and estimated earnings on uncompleted contracts........... -- -- 207,000 -- 207,000 Intercompany liabilities.......... 1,204,000 7,000 7,991,000 (9,202,000) -- ------------- ------------- ------------- -------------- ------------- Total current liabilities..... 3,746,000 1,176,000 14,648,000 (9,202,000) 10,368,000 Long-term debt, excluding current portion......................... 372,000 12,735,000 -- -- 13,107,000 Deferred tax liabilities.......... 549,000 (732,000) 2,662,000 -- 2,479,000 Accrued Compensation.............. -- 4,626,000 -- -- 4,626,000 Stockholders' equity................ 5,252,000 39,253,000 32,836,000 (38,088,000) 39,253,000 ------------- ------------- ------------- -------------- ------------- $ 9,919,000 $ 57,058,000 $ 50,146,000 $ (47,290,000) $ 69,833,000 ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- -------------- -------------
F-31 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET
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 ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- -------------- -------------
F-32 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998 ------------------------------------------------------------------------ PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------ ------------- ------------- Assets Current assets: Receivables, net................... $ 9,552,000 $ -- $ 25,465,000 $ -- $ 35,017,000 Inventories........................ 146,000 -- 1,619,000 -- 1,765,000 Costs and estimated earnings in excess of billings on uncompleted contracts........................ 119,000 -- 551,000 -- 670,000 Intercompany assets................ 48,217,000 19,491,000 8,738,000 (76,446,000) -- Other current assets............... (152,000) 1,715,000 2,443,000 -- 4,006,000 ------------- ------------- ------------ ------------- ------------- Total current assets............. 57,882,000 21,206,000 38,816,000 (76,446,000) 41,458,000 Net property, plant and equipment.... 5,121,000 9,473,000 31,335,000 -- 45,929,000 Other assets, net.................... 6,332,000 (3,000) 8,078,000 -- 14,407,000 Investment in parent................. -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries........... 17,275,000 -- -- (17,275,000) -- ------------- ------------- ------------ ------------- ------------- $ 86,610,000 $ 34,677,000 $ 78,229,000 $ 97,722,000 $ 101,794,000 ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- Liabilities and Stockholders' Equity (Deficit) Current installments of long-term debt and notes payable to stockholders....................... $ 185,000 $ 112,000 $ 1,796,000 $ -- $ 2,093,000 Trade accounts payable............... 515,000 77,000 7,071,000 -- 7,663,000 Accrued liabilities.................. 2,915,000 -- 5,564,000 -- 8,479,000 Billings in excess of costs and estimated earnings on uncompleted contracts.......................... 58,000 -- 873,000 -- 931,000 Intercompany liabilities............. 3,274,000 56,849,000 16,323,000 (76,446,000) -- ------------- ------------- ------------ ------------- ------------- Total current liabilities........ 6,947,000 57,038,000 31,627,000 (76,446,000) 19,166,000 Long-term debt, excluding current portion............................ 20,196,000 1,220,000 1,896,000 -- 23,312,000 Senior Notes......................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities............. 573,000 (266,000) 4,116,000 -- 4,423,000 Accrued Compensation................. 73,000 -- -- -- 73,000 Senior Exchangable Preferred Stock..... 10,167,000 -- -- -- 10,167,000 Series A Preferred Stock............... 10,655,000 -- -- -- 10,655,000 Stockholders' equity (deficit)......... (62,001,000) (23,315,000) 40,590,000 (21,276,000) (66,002,000) ------------- ------------- ------------ ------------- ------------- $ 86,610,000 $ 34,677,000 $ 78,229,000 $ (97,722,000) $ 101,794,000 ------------- ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- -------------
F-33 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996 ------------------------------------------------------------------------ PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------- ------------- Revenues............................... $ 14,918,000 $ 2,424,000 $ 59,881,000 $ (2,328,000) $ 74,895,000 Cost of revenues....................... 9,886,000 7,000 41,307,000 -- 51,200,000 ------------- ------------ ------------- ------------- ------------- Gross profit......................... 5,032,000 2,417,000 18,574,000 (2,328,000) 23,695,000 General and administrative expenses.... 2,550,000 3,294,000 11,090,000 (1,778,000) 15,156,000 Other operating income, net............ 75,000 132,000 660,000 -- 867,000 Equity earnings in subsidiaries........ -- 6,113,000 -- (6,113,000) -- ------------- ------------ ------------- ------------- ------------- Earnings before interest expense and income taxes....................... 2,557,000 5,368,000 8,144,000 (6,663,000) 9,406,000 Interest expense....................... 132,000 738,000 463,000 (550,000) 783,000 ------------- ------------ ------------- ------------- ------------- Earnings before income taxes......... 2,425,000 4,630,000 7,681,000 (6,113,000) 8,623,000 Income taxes........................... 989,000 (455,000) 3,004,000 -- 3,538,000 ------------- ------------ ------------- ------------- ------------- Net earnings........................... $ 1,436,000 $ 5,085,000 $ 4,677,000 $ (6,113,000) $ 5,085,000 ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- -------------
F-34 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997 ------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Revenues............................. $ 16,544,000 $ 2,879,000 $ 78,748,000 $ (2,873,000) $ 95,298,000 Cost of revenues..................... 11,567,000 48,000 56,926,000 -- 68,541,000 ------------- ------------- ------------- ------------- ------------- Gross profit....................... 4,977,000 2,831,000 21,822,000 (2,873,000) 26,757,000 General and administrative expenses........................... 3,221,000 4,227,000 11,627,000 (2,122,000) 16,953,000 Other operating income, net.......... 125,000 0 746,000 0 871,000 Equity earnings in subsidiaries...... -- 7,025,000 -- (7,025,000) -- ------------- ------------- ------------- ------------- ------------- Earnings before interest expense and income taxes................. 1,881,000 5,629,000 10,941,000 (7,776,000) 10,675,000 Interest expense..................... 220,000 751,000 591,000 (751,000) 811,000 ------------- ------------- ------------- ------------- ------------- Earnings before income taxes....... 1,661,000 4,878,000 10,350,000 (7,025,000) 9,864,000 Income taxes......................... 676,000 (579,000) 4,310,000 -- 4,407,000 ------------- ------------- ------------- ------------- ------------- Net earnings......................... $ 985,000 $ 5,457,000 $ 6,040,000 $ (7,025,000) $ 5,457,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
F-35 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998 -------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- -------------- Revenues............................ $ 19,952,000 $ 3,213,000 $ 81,218,000 $ (3,213,000) $ 101,170,000 Cost of revenues.................... 13,316,000 (35,000) 59,114,000 -- 72,395,000 ------------- ------------- ------------- ------------- -------------- Gross profit...................... 6,636,000 3,248,000 22,104,000 (3,213,000) 28,775,000 General and administrative expenses.......................... 3,804,000 4,652,000 13,718,000 (2,294,000) 19,880,000 Other compensation.................. -- 3,271,000 -- -- 3,271,000 Other operating income, net......... 105,000 6,000 533,000 -- 644,000 Equity Earnings in subsidiaries..... -- 6,441,000 -- (6,441,000) -- ------------- ------------- ------------- ------------- -------------- Earnings before interest expense and income taxes................ 2,937,000 1,772,000 8,919,000 (7,360,000) 6,268,000 Interest expense.................... 193,000 926,000 836,000 (919,000) 1,036,000 ------------- ------------- ------------- ------------- -------------- Earnings before income taxes...... 2,744,000 846,000 8,083,000 (6,441,000) 5,232,000 Income taxes........................ 1,105,000 (1,855,000) 3,281,000 -- 2,531,000 ------------- ------------- ------------- ------------- -------------- Net earnings........................ $ 1,639,000 $ 2,701,000 $ 4,802,000 $ (6,441,000) $ 2,701,000 ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- --------------
F-36 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 ----------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------- ------------- ------------- Revenues................................ $5,295,000 $ 811,000 $ 23,056,000 $ (811,000) $ 28,351,000 Cost of revenues........................ 3,488,000 12,000 16,515,000 -- 20,015,000 ------------ ------------ ------------- ------------- ------------- Gross profit.......................... 1,807,000 799,000 6,541,000 (811,000) 8,336,000 General and administrative expenses..... 995,000 753,000 3,503,000 (548,000) 4,703,000 Other operating income, net............. 34,000 3,000 116,000 -- 153,000 Equity earnings in subsidiaries......... -- 2,199,000 -- (2,199,000) -- ------------ ------------ ------------- ------------- ------------- Earnings before interest expense and income taxes........................ 846,000 2,248,000 3,154,000 (2,462,000) 3,786,000 Interest expense........................ 76,000 259,000 178,000 (263,000) 250,000 ------------ ------------ ------------- ------------- ------------- Earnings before income taxes.......... 770,000 1,989,000 2,976,000 (2,199,000) 3,536,000 Income taxes............................ 315,000 (152,000) 1,232,000 -- 1,395,000 ------------ ------------ ------------- ------------- ------------- Net earnings............................ $ 455,000 $ 2,141,000 $ 1,744,000 $ (2,199,000) $ 2,141,000 ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- ------------- -------------
F-37 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------- PENHALL PENHALL INTERNATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- -------------- ------------- ------------ ------------- Revenues.............................. $ 5,905,000 $ 294,000 $ 33,008,000 $ (294,000) $ 38,913,000 Cost of revenues...................... 3,569,000 5,000 24,294,000 -- 27,868,000 ------------- -------------- ------------- ------------ ------------- Gross profit........................ 2,336,000 289,000 8,714,000 (294,000) 11,045,000 General and administrative expenses... 1,099,000 12,142,000 4,287,000 (317,000) 17,211,000 Other operating income, net........... 29,000 801,000 130,000 (700,000) 260,000 Equity earnings in subsidiaries....... (5,224,000) -- -- 5,224,000 -- ------------- -------------- ------------- ------------ ------------- Earnings (loss) before interest expense and income taxes.......... (3,958,000) (11,052,000) 4,557,000 4,547,000 (5,906,000) Interest expense...................... 2,331,000 155,000 107,000 23,000 2,616,000 ------------- -------------- ------------- ------------ ------------- Earnings (loss) before income taxes............................. (6,289,000) (11,207,000) 4,450,000 4,524,000 (8,522,000) Income taxes.......................... (188,000) (3,030,000) 1,497,000 -- (1,721,000) ------------- -------------- ------------- ------------ ------------- Net earnings (loss)................... $ (6,101,000) $ (8,177,000) $ 2,953,000 $ 4,524,000 $ (6,801,000) ------------- -------------- ------------- ------------ ------------- ------------- -------------- ------------- ------------ -------------
F-38 JOHN A. KNUTSON & CO., PLLP CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT Board of Directors Highway Services, Inc. We have audited the accompanying statements of income, retained earnings, and cash flows of Highway Services, Inc. for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Highway Services, Inc. for the year ended December 31, 1997, in conformity with generally accepted accounting principles. JOHN A. KNUTSON & CO., PLLP /s/ John A. Knutson & Co., PLLP Certified Public Accountants January 29, 1998 Minneapolis, Minnesota F-39 HIGHWAY SERVICES, INC. STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR FOR THE THREE FOR THE THREE ENDED MONTH PERIOD MONTH PERIOD DECEMBER 31, ENDED MARCH ENDED MARCH 1997 31, 1997 31, 1998 ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) Contract income..................................................... $ 19,693,559 $ 2,722,826 $ 1,402,182 Contract costs...................................................... 15,062,354 2,415,860 772,225 ------------- ------------- ------------- Gross profit.................................................. 4,631,205 306,966 629,957 Operating expenses Equipment (Note 4)................................................ 537,534 192,373 288,155 General and administrative........................................ 1,467,427 230,889 236,695 Interest, net..................................................... 54,281 18,325 4,317 ------------- ------------- ------------- 2,059,242 441,587 529,167 ------------- ------------- ------------- Net income (loss)............................................. 2,571,963 (134,621) 100,790 Retained earnings Beginning of year................................................. 2,465,831 2,465,831 3,408,794 Dividends declared and paid....................................... (1,629,000) -- (1,889,846) ------------- ------------- ------------- End of year....................................................... $ 3,408,794 $ 2,331,210 $ 1,619,738 ------------- ------------- ------------- ------------- ------------- ------------- Net earnings (loss) per common share.......................... $ 1,420.97 $ (74.38) $ 55.68 ------------- ------------- ------------- ------------- ------------- -------------
See Notes to Financial Statements. F-40 HIGHWAY SERVICES, INC. STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FOR THE THREE MONTH FOR THE THREE MONTH DECEMBER 31, PERIOD ENDED MARCH PERIOD ENDED MARCH 1997 31, 1997 31, 1998 ------------ ------------------- ------------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income............................................. $2,571,963 $ (134,621) $ 100,790 Adjustments to reconcile net income to net cash flows from operating activities Depreciation......................................... 416,678 104,169 121,033 Gain on sale of equipment............................ (20,790) -- (3,064) Cash value increase in excess of premiums............ (23,762) 5,836 25 (Increase) decrease in assets Accounts receivable................................ (452,892) (1,892,764) 660,232 Costs and estimated earnings in excess of billings on uncompleted contracts......................... 110,169 110,169 -- Inventories........................................ 214,856 206,632 (42,065) Prepaid expenses................................... (52,442) (46,718) 29,025 Refundable taxes................................... (6,280) -- 6,280 Increase (decrease) in liabilities Accounts payable................................... 231,002 685,511 (411,189) Accrued expenses................................... (128,614) (111,898) (98,059) ------------ ------------------- ------------------- Net cash provided by operating activities........ 2,859,888 (1,073,684) 363,008 ------------ ------------------- ------------------- Cash flows from investing activities: Proceeds from sale of equipment........................ 73,640 -- 12,939 Expenditures for property and equipment................ (387,284) (131,564) (32,337) Deposit on computer equipment.......................... 14,225 14,225 -- Life insurance premiums paid........................... (23,799) (16,036) (7,800) ------------ ------------------- ------------------- Net cash (used) in investing activities.......... (323,218) (133,375) (27,198) Cash flows from financing activities: Principal payments on long-term debt................... (257,062) 937,589 807,769 Principal payments on capitalized lease obligation..... (25,694) -- -- Distributions to stockholders.......................... (1,629,000) -- (1,889,846) ------------ ------------------- ------------------- Net cash (used) in financing activities.......... (1,911,756) 937,589 (1,082,077) ------------ ------------------- ------------------- Net increase (decrease) in cash and cash equivalents.................................... 624,914 (269,470) (746,267) Cash and cash equivalents Beginning of period.................................... 259,540 259,540 884,454 ------------ ------------------- ------------------- End of period.......................................... $ 884,454 $ (9,930) $ 138,187 ------------ ------------------- ------------------- ------------ ------------------- -------------------
See Notes to Financial Statements. SUPPLEMENTAL DISCLOSURES See Note 7 F-41 HIGHWAY SERVICES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Highway Services, Inc., incorporated on March 15, 1968, is a contractor specializing in grinding, sawing, and repairing concrete highways throughout the United States. USE OF ESTIMATES Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. REVENUE AND COST RECOGNITION The Company reports revenue from construction contracts on the percentage of completion method for both financial and income tax reporting. Percentage of completion is measured by the percentage of total costs incurred to date compared to estimated total costs for each contract. Contract costs include material, labor and benefits, subcontractors, equipment overhead, and other direct costs. Provision for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Revisions in cost and profit estimates are reflected in the accounting period when the facts which require the revision become known. UNAUDITED INTERIM STATEMENTS: The financial statements for the three months ended March 31, 1997 and 1998 are unaudited. In the opinion of Management all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such financial statements have been included. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the Company's future results of operations for the full year ending December 31, 1998. PROPERTY AND DEPRECIATION Property and equipment are carried at cost. Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of property sold, retired, or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses thereon are reflected in operations. Depreciation is computed using straight-line and accelerated methods over the following estimated service lives:
TYPE OF ASSET LIVES - ----------------------------------------------------------------------------- --------------- Construction equipment....................................................... 5 to 7 Years Equipment capitalized under lease............................................ 5 Years Trucks, trailers, and autos.................................................. 7 Years Shop and office equipment.................................................... 5 to 12 Years Building..................................................................... 39 Years
2. RETIREMENT PLANS PROFIT SHARING PLAN In 1994 the Company adopted an employee retirement savings plan under Internal Revenue Code Section 401(k). Full-time employees with at least one year of service may enter the plan and elect to defer F-42 HIGHWAY SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. RETIREMENT PLANS (CONTINUED) up to 15% of their salaries. Discretionary employer matching contributions are determined periodically by the Company's board of directors. For the year ended December 31, 1997, and the three month periods ended March 31, 1997 and 1998, the Company matched 40% of employee elective deferrals. Total employer matching contributions were $79,717, $9,085 (unaudited) and $8,195 (unaudited) for the years ended December 31, 1997 and the three month periods ended March 31, 1997 and 1998, respectively. MULTI-EMPLOYER PENSION PLANS The Company contributes to union-sponsored multi-employer retirement plans in accordance with negotiated union contracts. The plans cover all union employees, which represent substantially all of the Company's employees. Contributions, based on varying rates for the hours worked by the employees, totaled $170,986, $51,884 (unaudited) and $28,354 (unaudited) for the year ended December 31, 1997 and the three month periods ended March 31, 1997 and 1998, respectively. Government regulations significantly increase pension responsibilities for participating employers. Under these regulations (the Multi-Employer Pension Plan Amendments Act of 1980) if a plan terminates or the employer withdraws, the Company could be subject to a substantial "withdrawal liability". The most current financial information available from the plan which covers most of the Company employees states that as of December 31, 1996 (the date of the latest actuarial valuation) the unfunded value of vested benefits was $0. The Company does not anticipate withdrawal from the plans, nor is the Company aware of any unexpected plan terminations. 3. PROVISION FOR INCOME TAXES The Company has elected to be taxed as an S corporation, whereby all taxable income flows through to the stockholders. Therefore, no provision for federal income taxes has been made. Taxes currently payable occur for those states which charge minimum fees for S corporations. In the future, if the Company elects to be taxed as a C corporation, deferred income taxes would be set-up for the cumulative difference between financial statement and income tax depreciation methods. As of December 31, 1997 the cumulative difference between depreciation methods was approximately $693,000, on which deferred income taxes would be approximately $277,000. 4. EQUIPMENT EXPENSE
THREE MONTH THREE MONTH YEAR ENDED PERIOD ENDED PERIOD ENDED DECEMBER 31, MARCH 31, MARCH 31, 1997 1997 1998 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Depreciation................................................. $ 416,678 $ 104,876 $ 114,224 Repairs...................................................... 807,286 156,096 146,384 Labor and fringes............................................ 266,473 60,168 77,686 Equipment rent............................................... (13,940) 0 0 Licenses and fees............................................ 46,914 32,200 44,941 Gain on sale of equipment.................................... (20,790) 0 (3,064) ------------ ------------ ------------ 1,502,621 353,340 380,171 Equipment costs charged to contracts......................... (965,087) (160,967) (92,016) ------------ ------------ ------------ $ 537,534 $ 192,373 $ 288,155 ------------ ------------ ------------ ------------ ------------ ------------
F-43 HIGHWAY SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RELATED PARTY TRANSACTIONS AND LEASES The Company leases its building from R & B Properties, a partnership related to Highway Services, Inc. through common ownership. The building lease has a one year term ending February 1, 1998, with a base rent of $2,800 per month. This is a triple net lease requiring the Company to pay all taxes, insurance, and maintenance costs. Rent expense, including real estate taxes was $48,156, $6,663 (unaudited) and $8,954 (unaudited) for the year ended December 31, 1997 and three month periods ended March 31, 1997 and 1998, respectively. Future minimum annual lease payments required for years ending December 31 are as follows: 1998............................................................... $ 36,254 1999............................................................... 38,050 2000............................................................... 39,942 2001............................................................... 42,025 2002............................................................... 3,517
6. JOINT VENTURE On November 19, 1996, the Company entered into a joint venture agreement with Penhall Company of California. The joint venture has signed a subcontract with Granite Construction to grind existing concrete pavement in the State of California for approximately $2,600,000. The Company's portion of the work, approximately $1,300,000 or 50% of the subcontract, was accounted for as a separate job with Granite Construction and was completed during 1997. 7. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS Supplemental cash flow information and schedules of non-cash investing and financing activities:
YEAR ENDED THREE MONTHS THREE MONTHS DECEMBER 31 ENDED ENDED 1997 MARCH 31, 1997 MARCH 31, 1998 ------------ -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Interest paid............................................ $ 79,792 $ 18,325 $ 12,625 ------------ -------------- -------------- ------------ -------------- --------------
F-44 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS
PAGE --------- Available Information......................... iv Summary....................................... 1 Risk Factors.................................. 17 The Transactions.............................. 25 Use of Proceeds............................... 26 Capitalization................................ 27 Unaudited Pro Forma Condensed Consolidated Financial Statements........................ 28 Selected Historical Consolidated Financial Data........................................ 34 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 36 The Exchange Offer............................ 42 Industry Overview............................. 48 Business...................................... 49 Management.................................... 61 Ownership of Capital Stock.................... 64 Certain Relationships and Related Transactions................................ 69 Description of Certain Indebtedness........... 70 Description of the Notes...................... 72 Book-Entry; Delivery and Form................. 101 Federal Income Tax Consequences............... 103 Plan of Distribution.......................... 104 Legal Matters................................. 106 Experts....................................... 106 Index to Financial Statements................. F-1
UNTIL , 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THE ORIGINAL DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS $100,000,000 [LOGO] PENHALL INTERNATIONAL CORP. OFFER TO EXCHANGE 12% SENIOR NOTES DUE 2006 FOR ALL OUTSTANDING 12% SENIOR NOTES DUE 2006 , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 10-851 of the Arizona Business Corporation Act provides that an Arizona corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if the individual (1) conducted himself in good faith; (2) reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and (ii) in all other cases, that his conduct was at least not opposed to its best interests; and (3) in the case of any criminal proceedings, he had no reasonable cause to believe his conduct was unlawful. A corporation may indemnify a director in these circumstances only upon specific authorization by the board of directors (or in certain circumstances, a committee thereof) special legal counsel or by shareholders as provided in Section 10-855. Section 10-852 of the Arizona Business Corporation Act provides that an Arizona corporation must indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding, unless the articles of incorporation provide otherwise. The Articles of Incorporation of the Company provide that a director of the Company shall be entitled to the benefits of all limitations on the liability of directors generally that are available under the Arizona Business Corporation Act, except liability for: (i) the amount of a financial benefit received by a director to which the director is not entitled; (ii) an intentional infliction of harm on the corporation or the shareholders; (ii) a violation Section 10-833 of the Arizona Business Corporation Act; or (iv) an intentional violation of criminal law. The Bylaws of the Company provide that the Company shall, to the full extent permitted by the laws of the State of Arizona, indemnify all directors and officers whom it has the power to indemnify pursuant thereto. The foregoing summary of the Arizona Business Corporation Act, of the Company's Articles of Incorporation and of the Company's Bylaws is qualified in its entirety by reference to the relevant provisions of the Arizona Business Corporation Act and by reference to the relevant provisions of the Company's Articles of Incorporation (filed as Exhibit 3.1) and the relevant provisions of the Company's Bylaws (filed as Exhibit 3.2). ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 2 Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. 3.1 Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.)* 3.2 Bylaws of the Company* 3.3 Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.)* 3.4 Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.)*
II-1
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 3.5 Articles of Incorporation of Penhall Company* 3.6 Bylaws of Penhall Company* 4.1 Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee* 4.2 First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York* 4.3 Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company* 4.4 Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation* 4.5 Form of the Company's 12% Senior Notes due 2006 (included in Exhibit 4.1)* 4.6 Credit Agreement dated August 4, 1998, by and among the Company, Penhall Acquisition Corp., Bankers Trust Company, as administrative agent, Credit Suisse First Boston, as syndication agent, and various lending institutions named therein* 4.7 Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein* 5 Opinion of Dechert Price & Rhoads** 10.1 Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006* 10.2 Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc.* 10.3 Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush* 10.4 Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney* 10.5 Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell* 10.6 Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs* 10.7 Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez* 10.8 Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee* 10.9 Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan 10.10 Form of Penhall International Corp. 1998 Stock Option Plan 12 Statement of Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Company*
II-2
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Moss Adams LLP 23.4 Consent of John A. Knutson & Co., PLLP 24 Power of Attorney* 25 Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1* 27 Financial Data Schedule 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery
- ------------------------ * Previously filed. ** To be supplied by amendment. (b) Financial Statement Schedules: SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities II-3 offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (d) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES PENHALL INTERNATIONAL CORP. Pursuant to the requirements of the Securities Act of 1933, as amended, the above-named Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 2nd day of December, 1998. PENHALL INTERNATIONAL CORP. By: /s/ JOHN T. SAWYER ----------------------------------------- John T. Sawyer CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities indicated on December 2, 1998.
SIGNATURE TITLE - ------------------------------ -------------------------- Chairman of the Board, /s/ JOHN T. SAWYER President and Chief - ------------------------------ Executive Officer John T. Sawyer (Principal Executive Officer) Vice President-Finance and /s/ MARTIN W. HOUGE Chief Financial Officer - ------------------------------ (Principal Accounting Martin W. Houge Officer) * - ------------------------------ Director Bruce C. Bruckmann * - ------------------------------ Director Harold O. Rosser II
/s/ JOHN T. SAWYER ---------------------------------- John T. Sawyer *By: ATTORNEY-IN-FACT
II-5 SIGNATURES PENHALL RENTAL CORP. Pursuant to the requirements of the Securities Act of 1933, as amended, the above-named Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 2nd day of December, 1998. PENHALL RENTAL CORP. By: /s/ JOHN T. SAWYER ----------------------------------------- John T. Sawyer CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities indicated on December 2, 1998.
SIGNATURE TITLE - ------------------------------ -------------------------- Chairman of the Board (Sole Director), /s/ JOHN T. SAWYER President and Chief - ------------------------------ Executive Officer John T. Sawyer (Principal Executive Officer) Vice President-Finance, /s/ MARTIN W. HOUGE Chief Financial Officer - ------------------------------ and Secretary (Principal Martin W. Houge Accounting Officer)
II-6 SIGNATURES PENHALL COMPANY Pursuant to the requirements of the Securities Act of 1933, as amended, the above-named Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 2nd day of December, 1998. PENHALL COMPANY By: /s/ JOHN T. SAWYER ----------------------------------------- John T. Sawyer CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities indicated on December 2, 1998.
SIGNATURE TITLE - ------------------------------ -------------------------- Chairman of the Board (Sole Director), /s/ JOHN T. SAWYER President and Chief - ------------------------------ Executive Officer John T. Sawyer (Principal Executive Officer) Vice President-Finance, /s/ MARTIN W. HOUGE Chief Financial Officer - ------------------------------ and Secretary (Principal Martin W. Houge Accounting Officer)
II-7 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ----------- -------------------------------------------------------------------------------------------------- ----- 2 Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. 3.1 Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.)* 3.2 Bylaws of the Company* 3.3 Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.)* 3.4 Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.)* 3.5 Articles of Incorporation of Penhall Company* 3.6 Bylaws of Penhall Company* 4.1 Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee* 4.2 First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York* 4.3 Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company* 4.4 Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation* 4.5 Form of the Company's 12% Senior Notes due 2006 (included in Exhibit 4.1)* 4.6 Credit Agreement dated August 4, 1998, by and among the Company, Penhall Acquisition Corp., Bankers Trust Company, as administrative agent, Credit Suisse First Boston, as syndication agent, and various lending institutions named therein* 4.7 Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein* 5 Opinion of Dechert Price & Rhoads** 10.1 Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006* 10.2 Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc.* 10.3 Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush* 10.4 Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney* 10.5 Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell* 10.6 Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs*
EXHIBIT NO. DESCRIPTION PAGE - ----------- -------------------------------------------------------------------------------------------------- ----- 10.7 Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez* 10.8 Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee* 10.9 Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan 10.10 Form of Penhall International Corp. 1998 Stock Option Plan 12 Statement of Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Company* 23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Moss Adams LLP 23.4 Consent of John A. Knutson & Co., PLLP 24 Power of Attorney (included on signature page)* 25 Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1* 27 Financial Data Schedule 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery
- ------------------------ * Previously filed. ** To be supplied by amendment. EX-2 2 EXHIBIT 2 Exhibit 2 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER among BRUCKMANN, ROSSER, SHERRILL & CO., L.P., PENHALL ACQUISITION CORP., PENHALL RENTAL CORP. (F/K/A PENHALL INTERNATIONAL, INC.), PHOENIX CONCRETE CUTTING, INC. and THE STOCKHOLDERS OF PENHALL RENTAL CORP. Dated as of August 3, 1998 TABLE OF CONTENTS ARTICLE I THE MERGER .........................................................................................3 1.1 Exchange of Penhall Shares; the PCC Merger.........................................................3 1.2. Transactions at Closing...........................................................................4 1.3. Terms of the Merger...............................................................................5 1.4. Closing Date, Time and Place......................................................................6 1.5. Waiver............................................................................................7 1.6. Payment of Seller Consideration and Merger Consideration; Surrender of Stock......................7 1.7. No Further Ownership Rights in Existing Company Stock.............................................9 1.8. Termination of Exchange Fund......................................................................9 1.9. Lost, Stolen or Destroyed Certificates............................................................9 1.10. Closing Balance Sheet; Closing Date Indebtedness Amount; Adjustment to Seller Consideration...................................................................................9 1.11. Adjustment of Seller Consideration for Certain Company Acquisitions.............................12 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE COMPANY....................................13 2.1. Organization and Standing........................................................................13 2.2. Capitalization...................................................................................14 2.3. Authorization; Binding Agreement.................................................................15 2.4. Conflicts, Consents and Approvals................................................................15 2.5. Litigation.......................................................................................16 2.6. Financial Statements.............................................................................16 2.7. No Brokers or Finders............................................................................17 2.8. Taxes............................................................................................17 2.9. Absence of Undisclosed or Contingent Liabilities.................................................18 2.10. Property........................................................................................19 2.11. Insurance.......................................................................................21 2.12. Environmental Matters...........................................................................22 2.13. Intellectual Property...........................................................................23 2.14. Permits.........................................................................................24 2.15. Compliance with Laws............................................................................24 2.16. Labor Matters...................................................................................25 2.17. Absence of Changes..............................................................................25 2.18. Transactions with Affiliates....................................................................27 2.19. Contracts and Commitments.......................................................................27 2.20. Benefit Plans...................................................................................29 2.21. Absence of Questionable Payments................................................................32 2.22. Books and Records...............................................................................32 2.23. Disclosure......................................................................................32
ARTICLE III SEVERAL REPRESENTATIONS AND WARRANTIES OF THE SELLERS...........................................32 3.1. Ownership of Shares..............................................................................32 3.2. Authorization; Binding Agreement.................................................................33 3.3. Conflicts, Consents and Approvals................................................................33 3.4. No Brokers or Finders............................................................................34 3.5 Investment Intent.................................................................................34 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BRS AND NEWCO..................................................34 4.1. Organization.....................................................................................34 4.2. Authorization; Binding Agreement.................................................................34 4.3. Conflicts, Consents and Approvals................................................................35 4.4. Litigation.......................................................................................36 4.5. Financing........................................................................................36 4.6. No Brokers or Finders............................................................................36 4.7 Investment........................................................................................36 ARTICLE V CERTAIN COVENANTS................................................................................36 5.1. Conduct of the Company's Business................................................................36 5.2. Notices Prior to Closing.........................................................................37 5.3. Access and Information...........................................................................38 5.4. Public Announcements.............................................................................38 5.5. Hart-Scott-Rodino Act............................................................................38 5.6. Further Assurances...............................................................................38 5.7. Transfer of Certain Assets.......................................................................39 5.8. Voting, Shareholders Agreement and Other Matters.................................................39 5.9. Competition......................................................................................40 5.10. Consents........................................................................................41 5.11. Best Efforts....................................................................................41 5.12. Employees.......................................................................................41 5.13. Financing.......................................................................................41 5.14. Estoppel Certificates...........................................................................42 5.15. Title Insurance.................................................................................42 5.16. Surveys.........................................................................................43 5.17. FIRPTA..........................................................................................43 5.18. Zoning Letters..................................................................................43 5.19. Exceptions That Will Not Exist At Closing.......................................................43 5.20. Termination of Certain Promotional Activities...................................................44 5.21. Release of Stulls from Fidelity Agreement.......................................................44 ARTICLE VI CONDITIONS.......................................................................................44 6.1. Conditions Precedent to Each Party's Obligations.................................................44 6.2. Conditions Precedent to BRS' and Newco's Obligations............................................44 6.3. Conditions Precedent to the Sellers' Obligations.................................................46
ii 6.4. Up-Dating of Disclosure Schedules................................................................48 ARTICLE VII TERMINATION AND ABANDONMENT....................................................................48 7.1. Termination......................................................................................48 7.2. Effect of Termination............................................................................49 ARTICLE VIII INDEMNIFICATION................................................................................49 8.1. The Sellers' Obligation to Indemnify.............................................................49 8.2. The Surviving Corporation's Obligations to Indemnify.............................................50 8.3. Notice and Opportunity to Defend.................................................................51 8.4. Procedure for Claims by Parties..................................................................52 8.5. Limitations on Indemnification...................................................................53 8.6. Insurance and Tax Effect.........................................................................57 8.7. Survival of Representations and Warranties.......................................................57 ARTICLE IX APPOINTMENT OF SELLER REPRESENTATIVE............................................................58 9.1 Appointment of the Seller Representative; Enforcement of Rights, Benefits and Remedies............58 ARTICLE X MISCELLANEOUS....................................................................................60 10.1. Amendment and Modification......................................................................60 10.2. Waiver of Compliance; Consents.................................................................60 10.3. Notices.........................................................................................60 10.4. Assignment; No Third Party Beneficiaries........................................................61 10.5. Expenses........................................................................................61 10.6. Governing Law...................................................................................62 10.7. Counterparts....................................................................................62 10.8. Entire Agreement................................................................................62 10.9. Arbitration.....................................................................................62 10.10. Severability...................................................................................64 10.11. Arm Length Contract............................................................................64 10.12. Headings; Interpretative Provisions............................................................64 10.13. Time is of the Essence.........................................................................65 10.14. Golden Parachute Approval Requirement..........................................................65 10.15. Date of Representations and Warranties.........................................................65
iii EXHIBITS Exhibit A - Restated Charter of Penhall Exhibit B - Restated Charter of PCC Exhibit C Intentionally Omitted Exhibit D - Form of PCC Plan of PCC Merger Exhibit E - Plan of Merger, together with Officer's Certificates Exhibit F - Form of Securities Holders Agreement Exhibit G - Form of Opinion of Counsel to the Seller and the Company Exhibit H- Compensation, Tax Consistency and Indemnification Agreement Exhibit I Employment Agreement for John Sawyer Exhibit J Employment Agreement for Other Management Exhibit K - Form of Mutual Release and Satisfaction of the Seller and Affiliates Exhibit L - Form of Opinion of Counsel to Newco Exhibit M - Form of Mutual Release and Satisfaction of the Company and Subsidiaries Exhibit N - Form of Statement of Designation of Senior Exchangeable Preferred Stock
iv SCHEDULES Schedule 1.10 Closing Balance Sheet; Closing Date Indebtedness Amount; Adjustment to Seller Consideration Schedule 1.11 Acquisition Candidates Schedule 2.1(b) Articles of Incorporation and Bylaws of the Company Schedule 2.2(b) Subsidiaries Schedule 2.2(c) Agreements Relating to the Company Stock Schedule 2.4 Conflicts, Consents and Approvals Schedule 2.5 Litigation Schedule 2.6(a) Financial Statements Schedule 2.6(b) Exceptions to Financial Statements Schedule 2.8 Tax Matters Schedule 2.9 Undisclosed or Contingent Liabilities Schedule 2.10(a) Personal Property Schedule 2.10(c) Owned Real Property/Tenant Leases/Landlord Leases Schedule 2.10(d) Title Exceptions - Owned Real Property Schedule 2.10(e) Title Exceptions - Leasehold Estates (Subsidiaries) Schedule 2.10(f) Title Exceptions - Leasehold Estates (The Company) Schedule 2.10(h) Exceptions to Exclusive Possession, Rent Payments, and Tenant Improvement Work Schedule 2.10(i) Real Property Casualties and Defaults Schedule 2.10(k) Matters Impairing Use of Property and Operations Schedule 2.11(a) Insurance Schedule 2.11(b) Bonding Arrangements Schedule 2.12(a) Environmental Matters Schedule 2.12(b) Hazardous Substances Schedule 2.12(c) Underground Tanks Schedule 2.13 Intellectual Property Schedule 2.14 Permits Schedule 2.15 Compliance with Laws Schedule 2.16 Labor Matters Schedule 2.17 Changes Since June 30, 1997 Schedule 2.18 Transactions with Affiliates Schedule 2.19 Contracts and Commitments Schedule 2.20(a) Benefit Plans Schedule 2.20(c) Benefit Plan Exceptions Schedule 3.1(a) Ownership of Shares Schedule 3.1(b) Seller Stock Agreement Schedule 3.3 Conflicts, Consents and Approvals of Sellers Schedule 4.3 Conflicts, Consents and Approvals of Newco and BRS Schedule 4.6 Brokers or Finders Schedule 5.7 Transfer of Certain Assets Schedule 5.8 Voting, Shareholders Agreement and Other Matters Schedule 5.9 Competition
v Schedule 6.2 (j) Employment Agreements Schedule 6.2(l) Closing Approvals and Consents
DEFINED TERMS
Page ---- A and B Stockholders..............................................................................................7 AAA..............................................................................................................62 ABCA..............................................................................................................4 Accounting Referee...............................................................................................11 Acquisition Candidates...........................................................................................12 Adjustment Amount................................................................................................10 affiliate........................................................................................................27 Agreement.........................................................................................................4 Applicable Accounting Principles.................................................................................10 Arbiter..........................................................................................................63 Asserted Liability...............................................................................................51 associate........................................................................................................26 Audited Financial Statements.....................................................................................16 Basket...........................................................................................................53 Benefit Plans....................................................................................................29 BRS...............................................................................................................4 BRS Purchase Shares...............................................................................................4 Cash Merger Consideration.........................................................................................6 CERCLA...........................................................................................................23 CGCL..............................................................................................................7 Claim Response...................................................................................................52 Claims Notice....................................................................................................51 Class A Common Stock..............................................................................................3 Class B Common Stock..............................................................................................3 Class B Merger Consideration......................................................................................6 Class B Purchase Price............................................................................................4 Class C Common Stock..............................................................................................3 Closing...........................................................................................................6 Closing Date......................................................................................................6 Closing Date Balance Sheet.......................................................................................10 Closing Date Indebtedness Amount.................................................................................10 Closing Price....................................................................................................55 Code.............................................................................................................18 Common Stock......................................................................................................5 Company.......................................................................................................4, 17 Company Accountants..............................................................................................10 Company Indemnified Party........................................................................................49 Company's knowledge..............................................................................................64
vi Compensation Agreement...........................................................................................45 Competitive Business.............................................................................................40 Constituent Corporations..........................................................................................5 Contracts........................................................................................................27 Current Market Price.........................................................................................55, 56 Defaulting Seller................................................................................................54 Disputing Parties................................................................................................62 DOJ..............................................................................................................38 EBITDA...........................................................................................................13 Effective Time....................................................................................................5 Eligible Assets..................................................................................................55 Employment Agreements............................................................................................45 Environmental Laws...............................................................................................23 Environmental Permits............................................................................................23 ERISA............................................................................................................31 ERISA Affiliate..................................................................................................31 Exceptions That Will Not Exist At Closing........................................................................19 Exchange..........................................................................................................3 Exchange Agent....................................................................................................7 Exchange Agent Agreement..........................................................................................7 Exchange Fund.....................................................................................................9 Existing Company Stock............................................................................................2 Fidelity.........................................................................................................57 Fidelity Agreement...............................................................................................57 Final Adjustment Amount..........................................................................................11 Final Indebtedness Amount........................................................................................11 Financial Statements.............................................................................................17 Financing........................................................................................................42 FTC..............................................................................................................38 GAAP.............................................................................................................16 Hazardous Substance..............................................................................................23 Historical EBITDA................................................................................................13 HSI...............................................................................................................2 HSR Act..........................................................................................................38 Indemnified Parties..............................................................................................50 Indemnifying Party...............................................................................................51 Intellectual Property............................................................................................23 Interim Balance Sheet............................................................................................18 Interim Balance Sheet Date.......................................................................................18 Interim Financial Statements.....................................................................................17 IRS..............................................................................................................29 Labor Agreement..................................................................................................25 Landlord Leases..................................................................................................19 Leased Real Property.............................................................................................19 Leasehold Estates................................................................................................20
vii Leases...........................................................................................................19 Liens............................................................................................................14 Litigation Conditions............................................................................................51 Losses...........................................................................................................49 Management.......................................................................................................23 Management Stockholders...........................................................................................4 material.........................................................................................................27 Material Adverse Change..........................................................................................54 Material Adverse Effect......................................................................................14, 54 Measurement Date.................................................................................................13 Merger............................................................................................................2 Merger Consideration..............................................................................................6 Multiemployer Plan...............................................................................................29 NCCF.............................................................................................................54 Net Loss.........................................................................................................57 Newco.............................................................................................................4 Newco Breach.....................................................................................................49 Newco Common Stock................................................................................................2 Non-Defaulting Seller............................................................................................54 Non-Management Stockholders.......................................................................................4 Owned Real Property..............................................................................................19 PCC...............................................................................................................4 PCC Merger........................................................................................................4 PCC Merger Sub....................................................................................................4 PCC Plan of Merger................................................................................................4 Peerless L/C.....................................................................................................10 Penhall Class A Common Stock......................................................................................3 Penhall Class B Common Stock......................................................................................3 Penhall International Corp.....................................................................................5, 6 Pension Plan.....................................................................................................30 Permits..........................................................................................................24 Permitted Exceptions.............................................................................................20 Permitted Leasehold Property Exceptions..........................................................................20 person...........................................................................................................14 Personal Property................................................................................................19 Plan of Merger....................................................................................................4 Pledge Agreement.................................................................................................55 Pro Rata Share...................................................................................................12 Proposed Acquisition.............................................................................................12 Real Property....................................................................................................19 Recapitalization..................................................................................................2 Release..........................................................................................................23 Remediation Costs................................................................................................50 Response Period..................................................................................................52 Restated Penhall Charter..........................................................................................3
viii Review Period....................................................................................................10 Rogers Fee.......................................................................................................62 Schedules B......................................................................................................20 Securities Act...................................................................................................14 Securities Holders Agreement......................................................................................5 Seller Breach....................................................................................................48 Seller Consideration..............................................................................................6 Seller Indemnified Party.........................................................................................50 Sellers...........................................................................................................4 Senior Exchangeable Preferred Stock...............................................................................5 Senior Management................................................................................................64 Series A Preferred Stock..........................................................................................5 Series B Preferred Stock..........................................................................................5 Shareholders Agreements..........................................................................................39 Shareholders' Valuation Benefit..................................................................................13 Stock Option Plan................................................................................................45 Stull Children...................................................................................................40 Stull Indemnification Payments...................................................................................57 Stulls...........................................................................................................57 Subsidiaries.....................................................................................................14 Subsidiary...................................................................................................14, 17 Surveys..........................................................................................................43 Surviving Corporation.............................................................................................4 Tax..............................................................................................................17 Tax Returns......................................................................................................17 Taxes............................................................................................................17 Tenant Leases....................................................................................................19 Territory........................................................................................................40 Title Policies...................................................................................................42 Transfer.........................................................................................................39 Valuation Benefit................................................................................................13 Wooditch Shares..................................................................................................39 Zoning Letters...................................................................................................43
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER THIS IS AN AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of August 3, 1998 (the "Agreement"), by and among Bruckmann, Rosser, Sherrill & Co., L.P., a Delaware limited partnership ("BRS"), Penhall Acquisition Corp., an Arizona corporation ("Newco"), Penhall Rental Corp., a California corporation formerly known as Penhall International, Inc. (the "Company"), Phoenix Concrete Cutting, Inc., an Arizona corporation ("PCC"), the stockholders of the Company identified on the signature pages hereto as the "Management Stockholders" (the "Management Stockholders") and the stockholders of the Company identified on the signature pages hereto as the "Non-Management Stockholders" (the 1 "Non-Management Stockholders" and, together with the Management Stockholders, the "Sellers"). Background A. The Company has issued and outstanding 421,615 shares of Common Stock, without par value ("Existing Company Stock"), all of which are owned of record by the Sellers, including 13,750 shares of Existing Company Stock issued upon exercise of options to acquire Existing Company Stock and 3,146 shares of Existing Company Stock issued to certain Management Stockholders who are shareholders of Highway Services, Inc. ("HSI") in connection with the Company's acquisition of substantially all of the assets of HSI. B. Prior to the Closing referred to herein, all of the issued and outstanding shares of Existing Company Stock will be exchanged for shares of Penhall Class A Common Stock and Penhall Class B Common Stock (each as hereafter defined) as provided herein. C. Prior to the Closing, a newly formed subsidiary of PCC will have merged with and into the Company, as a result of which (i) the Company will become a wholly owned subsidiary of PCC and (ii) each holder of shares of Penhall Class A Common Stock and Penhall Class B Common Stock will receive an equal amount of shares of Class A Common Stock and Class B Common Stock (each as hereafter defined), respectively, of PCC. D. Newco's authorized stock consists solely of 100 shares of Common Stock, par value $.01 per share ("Newco Common Stock"). BRS owns one (1) share of Newco Common Stock, which presently comprises the sole issued and outstanding share of capital stock of Newco. E. The Boards of Directors of the Company and PCC deem it advisable and in the best interests of the Company and PCC and their stockholders, and the Board of Directors of Newco deems it advisable and in the best interests of Newco and its stockholder, to adopt a plan of recapitalization of PCC (the "Recapitalization") pursuant to which, among other things, (i) Newco will merge with and into PCC (the "Merger") on the terms and conditions set forth in this Agreement, with PCC continuing as the surviving corporation of such Merger, and (ii) BRS will purchase certain securities of PCC as the surviving corporation in the Merger, all on the terms and conditions set forth herein. F. It is intended that these transactions be recorded as a recapitalization for financial reporting purposes. G. As to certain Management Stockholders and BRS, it is intended that certain of these transactions constitute and be treated as transfers of property to a corporation controlled by the transferors under Section 351 of the Code (as hereafter defined), and comparable provisions of state tax law. H. The parties hereto executed that certain Agreement and Plan of Merger, dated as of June 30, 1998 (the "Original Agreement"), and wish to amend and restate such agreement as set forth herein. 2 Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, and agreements, and upon the terms and subject to the conditions hereinafter set forth, and intending to be legally bound hereby, the parties do hereby agree as follows: ARTICLE I THE MERGER 1.1. Exchange of Company Shares; the PCC Merger. Prior to the Closing, the Company, PCC and the Sellers shall have taken the following actions: (a) the Articles of Incorporation of the Company shall have been amended and restated substantially in the form attached hereto as Exhibit A (the "Restated Penhall Charter") to authorize 2,000,000 shares of Existing Company Stock, without par value, 2,000,000 shares of Class A Common Stock, without par value (the "Penhall Class A Common Stock"), and 1,000,000 shares of Class B Common Stock, without par value (the "Penhall Class B Common Stock") of the Company; (b) the Articles of Incorporation of PCC shall have been amended substantially in the form attached hereto as Exhibit B to authorize 1,000,000 shares of Common Stock, without par value, 2,000,000 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), 1,000,000 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock") and 1,000,000 shares of Class C Common Stock, par value $.01 per share (the "Class C Common Stock"); (c) the Company shall have caused all of the Options to be fully vested and the Sellers holding such Options shall have exercised all of the Options for shares of Existing Company Stock; (d) all of the outstanding shares of Existing Company Stock shall have been exchanged for shares of Penhall Class A Common Stock and Penhall Class B Common Stock. Accordingly, the Company and each Seller hereby agree that, prior to the Closing, (i) the Company will issue to each Seller the number of shares of Penhall Class A Common Stock and Penhall Class B Common Stock set forth under such Seller's name on Schedule 3.1(a) hereto in exchange for all of the shares of Existing Company Stock owned by such Seller and set forth under such Seller's name on Schedule 3.1(a) hereto, and (ii) each Seller will accept such Penhall Class A Common Stock and Penhall Class B Common Stock in full redemption and discharge of all of the shares of Existing Company Stock owned by such Seller (the "Exchange"). Pursuant to the Exchange, each Seller shall forward certificate(s) evidencing the Existing Company Stock to be exchanged, together with duly executed stock powers therefor, and, upon filing the Restated Penhall Charter with the Secretary of State of the State of California, the Company will forward to such Seller either (x) the certificates representing the shares of Penhall Class A Common Stock and Penhall Class B Common Stock to be issued to such Seller or (y) if the Exchange fails to be consummated, a notification to that effect together with the certificate(s) evidencing shares of 3 Existing Company Stock previously delivered to the Company by such Stockholder. Immediately following the Exchange and giving effect thereto, the Company shall have issued and outstanding 365,199 shares of Penhall Class A Common Stock and 56,416 shares of Penhall Class B Common Stock, all of which shall be owned by the Sellers as set forth in Schedule 3.1(a) hereto; (e) PCC shall have declared and paid a dividend of $3,600,000 to the Company, which dividend may be in the form of one or more of assumptions of liability, cash or other assets; (f) PCC shall have formed a new subsidiary under the laws of the State of California ("PCC Merger Sub"). PCC Merger Sub shall have been merged with and into the Company (the "PCC Merger") pursuant to a Plan of Merger substantially in the form of Exhibit D hereto (the "PCC Plan of Merger"), as a result of which: (i) each share of common stock of PCC Merger Sub issued and outstanding shall be converted into 1 share of Existing Company Common Stock, which will represent all of the issued and outstanding shares of the Company and (ii) each holder of shares of Penhall Class A Common Stock and Penhall Class B Common Stock will receive an equal number of shares of Class A Common Stock and Class B Common Stock, respectively. Pursuant to the PCC Plan of Merger, at the effective time of the PCC Merger, the Company will exchange all of the shares of PCC stock held by the Company for 12,386 shares of Class C Common Stock; (g) Immediately following the Exchange and the PCC Merger, and giving effect thereto, PCC shall have issued and outstanding 365,199 shares of Class A Common Stock and 56,416 shares of Class B Common Stock, all of which shall be owned beneficially and of record by the Sellers in the amounts and as set forth in Schedule 3.1(a) hereto, and 12,386 shares of Class C Common Stock, all of which shall be owned beneficially by the Company. 1.2. Transactions at Closing. The following transactions, which together shall constitute the Recapitalization, shall be consummated at the Closing on the Closing Date in the following order and each transaction shall be conditioned upon the occurrence of the other transactions: (a) each Management Stockholder shall sell, and BRS shall purchase, all of the outstanding shares of Class B Common Stock set forth opposite such Management Stockholder's name and designated as "BRS Purchase Shares" on Schedule 3.1(a) hereto at a purchase price of $322.94 per share (such per share consideration multiplied by the total number of shares of Class B Common Stock being referred to herein as the "Class B Purchase Price"); (b) Newco shall obtain the proceeds of the Financing (as hereafter defined); (c) upon the terms and subject to the conditions contained in Section 1.3 hereof and elsewhere in this Agreement, at the Effective Time (as defined below), Newco shall be merged with and into PCC in accordance with this Agreement, the Articles of Amendment and Merger attached hereto as Exhibit E (the "Plan of Merger") and the applicable provisions of the Arizona Business Corporation Act (the "ABCA"), the separate existence of Newco shall cease, and PCC shall continue as the surviving corporation (the "Surviving Corporation") and continue 4 its corporate existence under the laws of the State of Arizona. Pursuant to the Plan of Merger, the Articles of Incorporation of PCC shall be amended to change the corporate name of PCC to "Penhall International Corp."; (d) the Surviving Corporation shall pay the Cash Merger Consideration (as hereafter defined); (e) BRS, the Management Stockholders and the Surviving Corporation shall enter into a Securities Holders Agreement (the "Securities Holders Agreement") substantially in the form attached hereto as Exhibit F; and (f) the Surviving Corporation shall sell, and BRS shall purchase, 299,477.35 shares of Common Stock of the Surviving Corporation at a purchase price of $1.00 per share and 10,427.78 shares of Series A Preferred Stock of the Surviving Corporation at a purchase price of $1,000 per share. 1.3. Terms of the Merger. (a) Effective Time. At the Closing, the parties hereto shall cause the Merger to be consummated by the execution and filing of the Plan of Merger (and any other appropriate documents, such as Officer's Certificates) with the Arizona Corporation Commission of the State of Arizona containing or referencing a copy of this Agreement and shall make all other filings or recordings required in accordance with the ABCA. The Plan of Merger shall provide that the Merger shall become effective immediately upon the filing of the Plan of Merger. The time when the Merger shall become effective is hereinafter referred to as the "Effective Time." (b) Effect of Merger. At the Effective Time, the effect of the Merger will be as provided by the ABCA. Without limiting the foregoing, at the Effective Time, the Surviving Corporation shall thereupon and thereafter possess all the rights, privileges, immunities, powers and franchises, of a public as well as of a private nature, of each of Newco and PCC (the "Constituent Corporations"); and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all other choses in action, and all and every other interest, of or belonging to or due to each of the Constituent Corporations shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed; and the title to any real estate, or any estate or interest therein, vested in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. (c) Articles of Incorporation, Bylaws, Directors and Officers of Surviving Corporation. At the Effective Time, the Articles of Incorporation of PCC in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided therein and by law, except that such Articles of Incorporation shall be amended and restated as provided in the Plan of Merger to, among other things: (i) authorize 5,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), 25,000 shares of Series A Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), 50,000 shares of Series B Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and 10,000 shares of 10.5% Senior Exchangeable Preferred Stock, par value $.01 per share (the "Senior Exchangeable Preferred Stock"), of the Surviving 5 Corporation and (ii) to change the corporate name of the Surviving Corporation to "Penhall International Corp." At the Effective Time, the Bylaws of Newco in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended as provided therein and by law. The directors of Newco immediately prior to the Effective Time shall be the directors of the Surviving Corporation, and the officers of PCC immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their successors are duly elected or appointed and qualified or as otherwise provided in the Bylaws of the Surviving Corporation or by law. (d) Conversion of Shares. (i) Conversion of Class A Common Stock. Each share of Class A Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and extinguished and converted into the right to receive an amount in cash, without interest, equal to the quotient of $117,937,365 (the "Cash Merger Consideration" and, together with the Class B Purchase Price, the "Seller Consideration") divided by the total number of shares of Class A Common Stock issued and outstanding immediately prior to the Effective Time. The National Christian Charitable Foundation, Inc. (the "NCCF") agrees, however, that it may receive up to $10,000,000 of Cash Merger Consideration in the form of an equal amount in aggregate initial liquidation preference amount of the Senior Exchangeable Preferred Stock; (ii) Conversion of Class B Common Stock. Each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into 10.56 shares of Common Stock and 0.325 shares of Series B Preferred Stock of the Surviving Corporation (the "Class B Merger Consideration" and, together with the Cash Merger Consideration, the "Merger Consideration"). (iii) Conversion of Class C Common Stock. Each share of Class C Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into 0.323 shares of Series B Preferred Stock of the Surviving Corporation. (iv) Cancellation of Treasury Stock. Each share of Class A Common Stock or Class B Common Stock then held in the treasury of PCC, shall be cancelled and retired without any conversion thereof and no payment of any consideration therefor and thereafter will cease to exist. (v) Capital Stock of Newco. Each share of Newco Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled without any conversion thereof or payment of any consideration therefor and thereafter will cease to exist. 1.4. Closing Date, Time and Place. Unless this Agreement has been terminated pursuant to Section 7.1 hereof, the consummation of the Merger (the "Closing") shall take place on the third business day after all of the conditions to closing set forth in Article VI are fulfilled or waived, or such other date and at such other time as the Company and Newco may agree in writing (the "Closing Date"). The Closing shall take place at 10:00 a.m. local time at the offices 6 of Dechert Price & Rhoads, 30 Rockefeller Plaza, New York, New York or at such other location as the parties shall mutually agree. 1.5. Waiver. Each Seller (on behalf of itself and its affiliates) hereby waives any and all rights held by it or its affiliates to demand payment for fair value of any capital stock of the Company or PCC under Chapter 13 of the California General Corporation Law ("CGCL"), Chapter 13 of the ABCA, respectively, or similar provisions of applicable law in connection with the Merger and the other transactions contemplated hereby in respect of any capital stock of the Company or PCC now or hereafter owned by such Seller or its affiliates. 1.6. Payment of Seller Consideration and Merger Consideration; Surrender of Stock. (a) Upon delivery to BRS of certificates evidencing the shares of Class B Common Stock representing the BRS Purchase Shares, BRS will deliver to the holders of the BRS Purchase Shares the Class B Purchase Price to be received by such holders pursuant to Section 1.2(a) at the Closing by wire transfer of immediately available funds to one or more accounts designated in writing by the Seller Representative (as defined below) not less than one (1) business day prior to Closing. (b) Prior to the Effective Time, Newco shall designate one or more reputable banks or trust companies (the "Exchange Agent") to act at the Surviving Corporation's sole expense as agent for the holders of Class A Common Stock and Class B Common Stock immediately prior to the Effective Time (the "A and B Stockholders") pursuant to the terms of an exchange agent agreement in the form and substance reasonably satisfactory to Newco and the Seller Representative (the "Exchange Agent Agreement"), to receive the Cash Merger Consideration or Class B Merger Consideration to be delivered to such A and B Stockholders pursuant to Section 1.3(d). Alternatively, Newco may designate the Surviving Corporation to act as the Exchange Agent in accordance with this Section 1.6. At or immediately following the Effective Time, Newco shall deposit or cause to be deposited with the Exchange Agent in trust for the benefit of the A and B Stockholders, the Merger Consideration to which the A and B Stockholders shall become entitled pursuant to Section 1.3(d). (c) With respect to holders of record of the Class A Common Stock and Class B Common Stock who shall have given written notice to Newco at least one (1) Business Day prior to the Effective Time of, in the case of holders of Class A Common Stock, wire instructions for payment of the Cash Merger Consideration or, in the case of holders of the Class B Common Stock, instructions for registration of shares constituting the Class B Merger Consideration, the Exchange Agent shall deliver to such holders at the Closing, upon surrender at the Closing to the Exchange Agent of such certificates that evidenced the shares of Class A Common Stock or Class B Common Stock, the Merger Consideration payable in respect of the shares of Class A Common Stock or Class B Common Stock represented by such certificates in accordance with the instructions for such payment or delivery provided by such holder, and such certificates shall be cancelled forthwith. (d) With respect to holders of record of the Class A Common Stock and Class B Common Stock who shall not have given proper written notice and received payment in accordance with subparagraph (c) above, promptly after the Effective Time, the Exchange Agent 7 shall mail to each person who was, at the Effective Time, a holder of record of Class A Common Stock or Class B Common Stock entitled to receive the Merger Consideration pursuant to Section 1.3(d), a form (mutually agreed to prior to the Effective Time by Newco and the Company) of letter of transmittal and instructions for use in effecting the surrender of the certificates that, at the Effective Time, shall have evidenced any of such shares of Class A Common Stock or Class B Common Stock to be exchanged pursuant to the Merger. Upon surrender to the Exchange Agent of such certificates that evidenced the shares of Class A Common Stock or Class B Common Stock to be exchanged pursuant to the Merger, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be requested, the Exchange Agent shall promptly deliver to the persons entitled thereto the Merger Consideration payable in respect of such shares of Class A Common Stock or Class B Common Stock represented by such certificates, and such certificates shall forthwith be cancelled. Until so surrendered and exchanged, each such certificate evidencing such shares of Class A Common Stock or Class B Common Stock shall, after the Effective Time, be deemed to evidence only the right to receive the Merger Consideration to which such holder is entitled pursuant to Section 1.3(d). (e) If payment of the Merger Consideration in respect of cancelled shares of Class A Common Stock or Class B Common Stock is to be made to a person other than the Seller in whose name a surrendered certificate or instrument is registered, it shall be a condition to such delivery or payment that (i) the certificate or instrument so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer, (ii) the Seller requesting such delivery or payment shall have paid any transfer and other taxes required by reason of such delivery or payment in a name other than that of the registered holder of the certificate or instrument surrendered or shall have established to the reasonable satisfaction of the Surviving Corporation or the Exchange Agent that such tax either has been paid or is not payable, and (iii) the Seller requesting such delivery or payment shall have provided security reasonably satisfactory to BRS and the Seller Representative for such Seller's indemnification obligations under this Agreement. (f) At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Class A Common Stock, Class B Common Stock, Class C Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or any Existing Company Stock thereafter on the records of the Company. From and after the Effective Time, the holders of certificates evidencing ownership of shares of Class A Common Stock, Class B Common Stock, Class C Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or any Existing Company Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares except as otherwise provided herein or by law. If, after the Effective Time, shares of Class A Common Stock, Class B Common Stock, Class C Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or Existing Company Stock are duly presented to the Surviving Corporation for any reason, they will be cancelled and exchanged as provided in this Article I. No interest shall be paid or accrue on any portion of the Merger Consideration, except that dividends shall accrue with respect to Series A Preferred Stock and Series B Preferred Stock in accordance with the terms of such stock. 8 (g) Notwithstanding anything to the contrary in this Section 1.6, none of the Surviving Corporation or any party hereto shall be liable to a holder of shares of Class A Common Stock, Class B Common Stock or any Existing Company Stock for any amount properly paid to a public official pursuant to any applicable property, escheat or similar law. If any certificates representing shares of Class A Common Stock, Class B Common Stock or any Existing Company Stock shall not have been surrendered prior to two years after the Effective Time (or immediately prior to such earlier date on which any cash or other property in respect of such certificate would otherwise escheat to or become the property of any Authority (as defined in Section 2.14)), any such cash or other distributions in respect of such certificates shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. 1.7. No Further Ownership Rights in Existing Company Stock. The issuance or payment of the Merger Consideration pursuant to this Article I will be in full satisfaction of all rights pertaining to the Class A Common Stock, Class B Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or any Existing Company Stock surrendered in exchange therefor. 1.8. Termination of Exchange Fund. Any portion of the Merger Consideration deposited with the Exchange Agent pursuant to Section 1.6 (the "Exchange Fund") which remains undistributed to the holders of the certificates representing shares of Class A Common Stock, Class B Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or Existing Company Stock for six months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any holders of shares of Class A Common Stock, Class B Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or Existing Company Stock prior to the Merger who have not theretofore complied with this Article I shall thereafter look only to the Surviving Corporation and only as general creditors thereof for payment of their claim for cash or other property, if any. 1.9. Lost, Stolen or Destroyed Certificates. In the event certificates representing any shares of Class A Common Stock, Class B Common Stock, Penhall Class A Common Stock, Penhall Class B Common Stock or Existing Company Stock have been lost, stolen or destroyed and the holder thereof is unable to obtain a new certificate by reason of the fact that there can be no further registration of transfers of such certificates on the records of the Surviving Corporation pursuant to Section 1.6, the Exchange Agent will issue or pay in exchange therefor, upon receipt of an affidavit by the holder thereof stating that such certificates have been lost, stolen or destroyed, the portion of the Merger Consideration to which the holder is entitled under Section 1.3; provided, however, that the Surviving Corporation may, in its discretion and as a condition precedent to the issuance or payment thereof, require the holder to agree to indemnify, or if such indemnity is deemed inadequate in Surviving Corporation's reasonable discretion, to deliver a bond in such sum as it may reasonably direct as indemnity, against any claim that may be made against the Surviving Corporation, Newco or the Exchange Agent with respect to such certificates alleged to have been lost, stolen or destroyed. 1.10. Closing Balance Sheet; Closing Date Indebtedness Amount; Adjustment to Seller Consideration. (a) As promptly as practicable, but not later than one hundred twenty (120) 9 days after the Closing Date, the Surviving Corporation will cause to be prepared and delivered to the Seller Representative (i) a balance sheet (the "Closing Date Balance Sheet") of the Company and its Subsidiaries, together with an unqualified report thereon by KPMG Peat Marwick LLP (the "Company Accountants"), and (ii) a statement based on such Closing Date Balance Sheet setting forth in detail a calculation of the Closing Date Indebtedness Amount (as hereafter defined) and the Adjustment Amount (as hereinafter defined), determined in accordance with the Applicable Accounting Principles (as hereafter defined) and this Agreement. For this purpose, (i) "Closing Date Indebtedness Amount" shall mean an amount equal to all indebtedness (including principal, accrued interest and any applicable premiums) of the Company or its Subsidiaries to any Seller or former stockholder of the Company and to Bank of America (consisting in each case of short- and long-term notes payable), all similar indebtedness of the Company or its Subsidiaries for borrowed money (excluding borrowings under life insurance policies payable from the cash surrender value of such policies), and all amounts drawn under the $2 million dollar letter of credit posted in favor of Peerless Insurance Company (or any substitute letter of credit) (the "Peerless L/C"), in each case as of immediately prior to the Closing, whether or not such indebtedness shall have been repaid or refinanced in connection with the Closing; (ii) "Adjustment Amount" means the amount, if any, by which (i) the difference between (x) the Closing Date Indebtedness Amount minus (y) the amount of the proceeds from the Closing Date Indebtedness Amount used to fund additions to working capital of the Company and property, plant and equipment of the Company necessary to support continued growth in the Company's business (including without limitation all monies used to pay for Proposed Acquisitions (as defined in Section 1.11(a) below) but excluding all amounts drawn under the Peerless L/C) or to fund the employee bonuses, employee loans, tax payments and other items set forth in Schedule 1.10 exceeds (ii) $10,000,000; and (iii) "Applicable Accounting Principles" means GAAP (as defined in Section 2.6) applied in a manner consistent with the Audited Financial Statements (as defined in Section 2.6), except that all amounts, irrespective of size, quantity or nature shall be considered material. (b) After delivery of its calculation of the Closing Date Indebtedness Amount, the Surviving Corporation shall make available to the Seller Representative all books, records, work papers, personnel and other materials and sources used by the Surviving Corporation and the Company's Accountants to prepare the Surviving Corporation's calculation of the Closing Date Indebtedness Amount and the Adjustment Amount. The Seller Representative may dispute any items or amounts reflected on the Closing Date Balance Sheet or in the Closing Date Indebtedness Amount and the Adjustment Amount calculations on the basis that such items or amounts were not presented in accordance with the Applicable Accounting Principles or this Agreement (or on the basis of math, entry or other errors); provided, however, that the Seller Representative shall notify the Surviving Corporation in writing of each disputed item or amount within thirty (30) days of the Seller Representative's receipt of the Closing Date Balance Sheet and statement of the Closing Date Indebtedness Amount and the Adjustment Amount (such thirty (30) day period hereinafter referred to as the "Review Period"). Any such notice of disagreement shall specify those items or amounts as to which the Seller disagrees (and shall include the Seller Representative's calculation of the Closing Date Indebtedness Amount and the Adjustment Amount), and the Sellers and the Seller Representative shall be deemed to have agreed with all 10 other items and amounts included in the calculation of the Closing Date Indebtedness Amount and the Adjustment Amount delivered pursuant to Section 1.10(a). (c) If a notice of disagreement shall be duly given pursuant to Section 1.10(b), the Surviving Corporation and the Seller Representative shall, during the fifteen (15) business days following receipt of such notice, use their reasonable best efforts to reach agreement on the disputed items or amounts in order to determine the Closing Date Indebtedness Amount and the Adjustment Amount. If, during such period, the Surviving Corporation and the Seller Representative are unable to reach such agreement, they shall promptly thereafter cause a nationally recognized firm of independent accountants chosen and mutually accepted by the parties, or, if no such agreement is reached within five (5) business days after the end of such period, the firm of Arthur Andersen LLP (the "Accounting Referee"), to review this Agreement and the disputed items or amounts for the purpose of calculating the Closing Date Indebtedness Amount and the Adjustment Amount. In making such calculation, the Accounting Referee shall consider only those items or amounts in the Surviving Corporation's calculation of the Closing Date Indebtedness Amount and the Adjustment Amount as to which the Seller Representative has disagreed. The Accounting Referee shall deliver to the Surviving Corporation and the Seller Representative, as promptly as practicable but in no event later than thirty (30) days after retention of the Accounting Referee by the Surviving Corporation and the Seller Representative, a report setting forth such calculations. Such report shall be final and binding upon the Surviving Corporation and the Sellers and shall constitute an arbitral award upon which a judgment may be entered in any court having jurisdiction thereof. The cost of such review and report shall be borne equally by the Surviving Corporation and the Sellers. The "Final Indebtedness Amount" and the "Final Adjustment Amount" shall mean the Closing Date Indebtedness Amount and the Adjustment Amount, respectively, (A) as shown in the Surviving Corporation's calculation delivered pursuant to Section 1.10(a) if no notice of disagreement with respect thereto is duly delivered pursuant to Section 1.10(b) or (B) if such a notice of disagreement is delivered, as agreed by the Surviving Corporation and the Seller Representative pursuant to this Section 1.10(c) or in the absence of such agreement, as shown in the Accounting Referee's calculation delivered pursuant to this Section 1.10(c). (d) The Sellers and Surviving Corporation agree that they will, and will cause their (and their affiliates') agents and representatives to, cooperate and assist in the preparation of the Closing Date Balance Sheet and the calculation of the Closing Date Indebtedness Amount and the Adjustment Amount and in the conduct of the audits and reviews referred to in this Section 1.10, including the making available to the extent necessary of books, records, work papers, and personnel. (e) The Surviving Corporation shall be solely responsible for the fees, costs and expenses due to the Company's Accountants in respect of the preparation of the Closing Date Balance Sheet and of the calculation of the Closing Date Indebtedness Amount and the Adjustment Amount pursuant to this Section 1.10. (f) Each of the Sellers shall pay to the Surviving Corporation such Seller's pro rata share, based on his or its ownership interest in the Company specified in Schedule 3.1(a) 11 ("Pro Rata Share"), of the Final Adjustment Amount, if any, with interest as provided in paragraph (g) below. (g) Any payments pursuant to paragraph (f) above shall be made by wire transfer of immediately available funds within ten (10) days after the Final Indebtedness Amount and the Final Adjustment Amount have been determined to such account of the Surviving Corporation as may be designated by the Surviving Corporation in writing (it being understood that if at the conclusion of the Review Period, any portion of the Adjustment Amount is not in dispute, such amount shall be paid within ten (10) business days after the conclusion of the Review Period). The amount of any payment to be made pursuant to this Section 1.10 shall bear interest from and including the Closing Date to but excluding the date of payment at a rate per annum equal to the rate of interest from time to time announced by Morgan Guaranty Trust Company of New York as its Base Rate in New York City in effect from time to time during the period from the Closing Date to the date of payment. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of three hundred sixty-five (365) days and the actual number of days elapsed. 1.11. Adjustment of Seller Consideration for Certain Company Acquisitions. (a) With respect to any acquisition (a "Proposed Acquisition") of any of the acquisition candidates identified on Schedule 1.11 hereto (the "Acquisition Candidates") consummated by the Company or a Subsidiary of the Company either prior to Closing or within one hundred twenty (120) days following the Closing, the Sellers will be entitled to receive the Shareholders' Valuation Benefit (as defined below) in accordance with the terms and conditions of this Section 1.11. (b) For each Proposed Acquisition consummated prior to Closing (including the acquisition of HSI), the Merger Consideration and the Class B Purchase Price shall be increased ratably by an amount equal to 50% of the Shareholders' Valuation Benefit attributable to such Proposed Acquisition; and the parties agree that the Merger Consideration reflects such amount attributable to the acquisition of HSI. In the event that one or more Proposed Acquisitions are consummated on or before the 120th day following the Closing, the Sellers shall be entitled to receive, allocated among the Sellers according to each Seller's respective interest in the total of the Merger Consideration and the Class B Purchase Price as set forth in Schedule 3.1(a), an amount equal to 50% of the Shareholders' Valuation Benefit attributable to each such Proposed Acquisition. Payments pursuant to this paragraph (b) shall be made (i) at the Closing and in the manner provided in the first sentence of this subparagraph (b) with respect to any Proposed Acquisition consummated prior to the Closing (it being acknowledged that the Class B Purchase Price and the Merger Consideration specified in Sections 1.2(a) and 1.3(d) include such payments with respect to HSI), and (ii) with respect to any Proposed Acquisition consummated following the Closing, by wire transfer of immediately available funds within ten (10) business days after the consummation of such Proposed Acquisition to a single account for the benefit of the Sellers as may be designated by the Seller Representative in writing. (c) In the event that the EBITDA of an Acquisition Candidate (acquired pursuant to a Proposed Acquisition for which payment or adjustment shall have been made under paragraph (b) above) for the period ending on the first anniversary of the Measurement Date (as defined below) of such Proposed Acquisition shall equal or exceed 90% of such Acquisition 12 Candidate's Historical EBITDA (as defined below), the Sellers shall be entitled to receive from the Surviving Corporation, as an adjustment to the Seller Consideration, an amount equal to the remaining 50% of the Shareholders' Valuation Benefit for such Acquisition Candidate. EBITDA shall be calculated in a manner consistent with the calculation of the Historical EBITDA of such Acquisition Candidate. Any such payment pursuant to this paragraph (c) shall be made by the Surviving Corporation by wire transfer of immediately available funds within ten (10) business days after the first anniversary date of the consummation of such Proposed Acquisition to a single account for the benefit of the Sellers as may be designated by the Seller Representative in writing. (d) For purposes of this Section 1.11: (i) "Shareholders' Valuation Benefit" means an amount equal to 50% of the Valuation Benefit (as defined below); (ii) "Valuation Benefit" means an amount equal to the positive difference, if any, of (x) the product of Historical EBITDA (as defined below) of any Acquisition Candidate multiplied by six (6), less (y) the actual purchase price (including the value of all assumed bank debt, purchase money debt and other indebtedness for borrowed money and the estimated value of any future payments and adjustments as the parties may agree) to be paid for such Acquisition Candidate; (iii) "Historical EBITDA" of any Acquisition Candidate means normalized (i.e., after adjustments for non-recurring and similar items) earnings before interest, taxes, depreciation and amortization ("EBITDA") for the twelve month period ending on the Measurement Date of such Proposed Acquisition, it being understood that the Surviving Corporation (or BRS in the case of any Proposed Acquisition consummated prior to Closing) and the Seller Representative shall use their respective best efforts to agree upon the Historical EBITDA of an Acquisition Candidate prior to the date of consummation of such Proposed Acquisition; provided that the parties agree that Historical EBITDA of HSI shall equal $3,271,000; and (iv) "Measurement Date" means, with respect to any Proposed Acquisition that is consummated, the date that is the last day of the month immediately preceding the month during which the closing of such Proposed Acquisition occurs, except that if the closing occurs on the last day of a month, the Measurement Date shall be the closing date. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE COMPANY Subject to Section 10.15, each Seller and the Company hereby represent and warrant jointly and severally to BRS and Newco as follows: 2.1. Organization and Standing. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and 13 has all requisite corporate power and authority to own, lease and operate its property and to conduct the business in which it is engaged as presently conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it, or the conduct of its business, makes such qualification necessary, except where the failure to be so duly qualified and in good standing could not reasonably be expected to have a Material Adverse Effect. As used herein, the term "Material Adverse Effect" means any change, effect or circumstance that has or is reasonably likely to have, any material adverse effect (i) on the assets, liabilities, operations, business, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or (ii) on the ability of the Sellers or the Company to consummate the transactions contemplated hereby or (iii) on the ability of each of the Company and its Subsidiaries to continue to operate its business immediately after the Closing in substantially the same manner as such business is conducted prior to the Closing. (b) Attached hereto as Schedule 2.1(b) are true and complete copies of the current Articles of Incorporation and Bylaws of the Company, as in effect on the date of this Agreement. 2.2. Capitalization. (a) The authorized capital stock of the Company consists solely of 5,000,000 shares of Existing Company Stock, of which 421,615 shares are issued and outstanding and will be issued and outstanding immediately prior to the filing of the Restated Penhall Charter. The Sellers are the sole record owners of the Existing Company Stock. There are no other shares of capital stock of the Company issued. All of the outstanding shares of the Company's capital stock (i) are duly authorized, validly issued, fully paid and nonassessable, (ii) have not been issued in violation of any preemptive rights of stockholders and (iii) have been offered and sold pursuant to a valid exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), and otherwise in compliance with the Securities Act and the rules and regulations thereunder. (b) The Company has subsidiaries as set forth on Schedule 2.2(b) (each, a "Subsidiary" and collectively, the "Subsidiaries"). Except for the Subsidiaries, the Company does not own, and, except as set forth on Schedule 2.2(b), has not owned, directly or indirectly, beneficially or of record, or have or, except as set forth on Schedule 2.2(b), had any operational control over, or have any obligation to acquire, any capital stock or other equity securities of any corporation, nor does the Company have any direct or indirect equity or ownership investment, or any obligation to incur such investment, in any person. As used herein, the term "person" means any individual, corporation, partnership, limited liability company, joint venture, association, trust or other entity or organization. Each issued and outstanding share of capital stock or other equity security of the Subsidiaries (i) has been duly authorized and validly issued, (ii) is fully paid and non-assessable, (iii) has not been issued in violation of any preemptive rights of equityholders, and (iv) except as set forth on Schedule 2.2(b) hereto and for the transactions set forth in Article I, is owned, beneficially and of record by the Company, free and clear of any claim, lien, security interest, mortgage, deed of trust, pledge, charge, conditional sale or other title retention agreement, lease, preemptive right, right of first refusal, option, restriction, tenancy, easement, license, encroachment (from or onto any other property) or other encumbrance of any kind (collectively, "Liens"). Except as set forth on Schedule 2.2(b), each Subsidiary is a corporation 14 duly organized, validly existing and in good standing under the laws of its respective state of incorporation set forth on Schedule 2.2(b) hereto and has full corporate power and authority to carry on its business as it is now being conducted and to own, operate and lease its properties and assets; is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it, or the conduct of its business, makes such qualification necessary, except where the failure to be so duly qualified and in good standing could not reasonably be expected to have a Material Adverse Effect. The copies of the Articles of Incorporation and By-Laws of each Subsidiary heretofore delivered to Newco are complete and correct copies of such instruments as presently in effect. (c) Except as set forth on Schedule 2.2(c) hereto, there are no outstanding (i) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or equity securities of the Company or any Subsidiary or (ii) options, warrants, calls or other rights to acquire from the Company or any Subsidiary, or other obligations or understandings or arrangements of the Company or any Subsidiary to issue, any capital stock, equity securities or securities convertible into or exchangeable for capital stock or equity securities of the Company or any Subsidiary. Except as set forth on Schedule 2.2(c) hereto and for the transactions set forth in Article I, there are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any capital stock or equity securities of the Company or any Subsidiary (or any of the other securities set forth in the previous sentence). Except pursuant to this Agreement or as set forth on Schedule 2.2(c) hereto, neither the Company nor any Subsidiary is a party to, or bound by, any arrangement, agreement, instrument or order (i) relating to the transfer of any capital stock or equity securities of the Company or any Subsidiary, (ii) relating to the dividend or voting rights of any capital stock or equity securities of the Company or any Subsidiary, or (iii) relating to rights to registration under the Securities Act of any capital stock or equity securities of the Company or any Subsidiary. 2.3. Authorization; Binding Agreement. The Company has full corporate power and authority to execute and deliver this Agreement and each other document or instrument contemplated hereby, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Company of this Agreement and each other document or instrument executed or to be executed by it in connection herewith, and the consummation by the Company of the transactions contemplated hereby and thereby, have been, or, with respect to the PCC Merger and the Merger, will have been prior to Closing, duly and validly authorized by all necessary corporate and shareholder action. This Agreement has been, and each other document or instrument to be executed by the Company in connection herewith will be, duly executed and delivered by the Company, and constitutes, or will constitute, a legal, valid and binding obligation of the Company, enforceable against the Company, in accordance with its terms. 2.4. Conflicts, Consents and Approvals. Except as set forth on Schedule 2.4 hereto, the execution and delivery by the Company of this Agreement and any other documents or instruments contemplated hereby, the performance by the Company of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, do not and will not: 15 (a) violate or conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws of the Company or any Subsidiary, as such instruments are currently in effect; (b) subject to obtaining the consents and approvals specified in Schedule 2.4, require any consent, approval or notice under, or conflict with, or result in a violation or breach of, or constitute (with or without the giving of notice or the lapse of time or both) a default (or give rise to any right of termination, modification, cancellation or acceleration or result in the creation or imposition of any Lien upon the property of the Company or a Subsidiary) under, any of the terms, conditions or provisions of any (i) note, bond, mortgage, indenture, license, lease, agreement or other document or instrument or obligation to which the Company or a Subsidiary is a party, under or pursuant to which any of its properties or assets are held, or by which any portion of its properties or assets may be bound, or (ii) any permit, license, approval, franchise or other governmental or regulatory authorization held or used by or binding on the Company or any of the Subsidiaries, except for conflicts, violations, breaches, defaults or other events that could not be reasonably expected to have a Material Adverse Effect; (c) violate or contravene any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award currently in effect, the violation or contravention of which could reasonably be expected to have a Material Adverse Effect; or (d) other than in respect of the HSR Act (as defined in Section 5.5), require any action, consent, approval or authorization of, or review by, or declaration, registration or filing with, or notice to, any court, arbitrator, governmental agency or other regulatory authority, or any stock exchange or similar self-regulatory organization. 2.5. Litigation. Except as set forth on Schedule 2.5 hereto, (a) there is no pending or, to the knowledge of the Company, threatened claim, arbitration proceeding, action, suit, investigation or other proceeding against or involving the Company or any Subsidiary, or any of the property or rights of the Company or any Subsidiary, which has had or could reasonably be expected to have a Material Adverse Effect and (b) neither the Company nor any Subsidiary is in violation of or default under any order, judgment, writ, injunction or decree of any court, arbitrator or Authority (as defined in Section 2.14). Any such order, injunction or decree binding on the Company or any Subsidiary is disclosed in Schedule 2.5. 2.6. Financial Statements. Attached hereto as Schedule 2.6(a) are copies of the audited consolidated financial statements of the Company and its Subsidiaries for the years ended, and as of, June 30, 1997, June 30, 1996 and June 30, 1995, together with, in each case, the audit reports thereon of, for the year ended and as of June 30, 1997, KPMG Peat Marwick LLP or, for the years ended and as of June 30, 1996 and 1995, Moss Adams LLP (the "Audited Financial Statements"). Except as set forth on Schedule 2.6(b) hereto, the Audited Financial Statements are in accordance with the books and records of the Company and its Subsidiaries, and fairly present in accordance with generally accepted accounting principles ("GAAP") consistently applied the consolidated assets, liabilities and financial position of the Company and its Subsidiaries, as at the respective dates thereof, and the consolidated results of their operations for the periods covered thereby. Also attached hereto as Schedule 2.6(a) is a copy of the unaudited 16 financial statements of the Company and its Subsidiaries for the nine month period ended, and as of, March 31, 1998 (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements"). Except as set forth on Schedule 2.6(b), the Interim Financial Statements are in accordance with the books and records of the Company and its Subsidiaries, and fairly present in accordance with GAAP (for interim reporting) consistently applied the consolidated assets, liabilities and financial position of the Company and its Subsidiaries, as at the date thereof, and the consolidated results of their operations for the period covered thereby (except in respect of normal and recurring year end adjustments, none of which is material in amount). The contingency, tax and other reserves reflected on the Financial Statements are adequate, appropriate and reasonable in accordance with GAAP. 2.7. No Brokers or Finders. Except for William L. Rogers and his affiliates, the fees related to which shall be borne as provided in Section 10.5, none of the Company, its Subsidiaries, affiliates, officers, directors or employees, (a) has employed (or will employ) any broker or finder, or (b) has incurred (or will incur) any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. 2.8. Taxes. (a) For purposes of this Agreement: (i) "Tax" or "Taxes" means all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, alternative minimum, license, withholding, employment, payroll, excise, estimated, severance, stamp, occupation, real or personal property or other taxes, customs duties, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any federal, state, local or foreign tax authority; (ii) "Tax Returns" means all returns, reports, forms or other information required to be filed with, or supplied to, any tax authority and all information forms required to be supplied to third parties with respect to any Taxes; and (iii) For purposes of this Section 2.8 and Section 2.17(m) hereof relating to Tax matters, "Company" and "Subsidiary" include any predecessor entity to which the Company or a Subsidiary is a successor for Tax purposes. (b) Except as set forth in Schedule 2.8: All Tax Returns (including consolidated, combined or unitary federal and state Tax Returns which include or which should include the Company or any Subsidiary) required to be filed by or on behalf of the Company or any Subsidiary have been timely filed and each such Tax Return is materially complete and accurate. All Taxes shown on such Tax Returns have been paid by or on behalf of the Company and the Subsidiaries when due. The charges, accruals, and reserves for unpaid Taxes that are reflected on the books of the Company and each Subsidiary are adequate to cover such Taxes in accordance with GAAP. Neither the Company nor any Subsidiary has filed a consent, election or agreement under Section 341(f) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder 17 (collectively, the "Code"). No Liens for Taxes have been filed with respect to any property of the Company or any Subsidiary except for Taxes not yet due, there is no unpaid assessment of Taxes against the Company or any Subsidiary, no claims are being asserted with respect to any Taxes of the Company or any Subsidiary and to the Company's knowledge no examination is being conducted or is pending which could result in Taxes being owed by the Company or any Subsidiary. Neither the Company nor any Subsidiary has been advised by any tax authority that it has or may have an obligation to file Tax Returns in a jurisdiction where the Company or Subsidiary has not filed or has ceased filing Tax Returns. The Company and each Subsidiary have complied in all material respects with applicable laws, rules and regulations relating to the payment and withholding of Taxes and have withheld and properly remitted all Taxes required to be withheld from the wages, salaries, payments or transfers of property to employees and independent contractors. There are no effective waivers or consents extending the statute of limitations with respect to Taxes for which the Company or any Subsidiary could be liable. Neither the Company nor any Subsidiary is a party to any agreement under which the Company or any Subsidiary could be liable to indemnify another person for Taxes. Neither the Company nor any Subsidiary is subject to any adjustment under Section 481 of the Code. Neither the Company nor any Subsidiary is the subject of any private letter ruling from, or closing agreement with any tax authority. Neither the Company nor any Subsidiary owns an equity interest in any entity treated as a partnership for federal income tax purposes. Neither the Company nor any Subsidiary has ever been a member of an affiliated group that files or filed consolidated federal income tax returns other than the affiliated group of which the Company is the common parent. (c) Neither the Company nor any Subsidiary has made, or is obligated to make, any "excess parachute payment" within the meaning of Section 280G of the Code. 2.9. Absence of Undisclosed or Contingent Liabilities. Except as set forth on Schedule 2.9 hereto and except as (and to the extent) accrued for in the interim balance sheet, as of the date (the "Interim Balance Sheet Date") of the balance sheet included in the Interim Financial Statements (the "Interim Balance Sheet"), neither the Company nor any Subsidiary had any liability or obligation, other than (i) executory obligations under contracts and other contractual or employment arrangements not requiring disclosure in the Interim Balance Sheet under GAAP and incurred in the ordinary course of business consistent with past practice and (ii) liabilities and obligations arising from normal year-end adjustments none of which, individually or in the aggregate, would be material to the Company's financial position as reflected in the Interim Financial Statements. Since the Interim Balance Sheet Date, neither the Company nor any Subsidiary has become subject to any such liability or obligation, other than (a) liabilities and obligations incurred in the ordinary course of business consistent with past practice of a type reflected on the Interim Balance Sheet which are not in an amount materially in excess of the liabilities and obligations accrued for in the Interim Balance Sheet Date, (b) executory obligations under contracts and other contractual or employment arrangements not requiring disclosure in the Interim Balance Sheet under GAAP and incurred in the ordinary course of business consistent with past practice (c) liabilities and obligations arising from normal year-end adjustments none of which, individually or in the aggregate, would be material to the Company's financial position as reflected in the Interim Financial Statements and (d) liabilities and obligations set forth on Schedule 2.9 hereto. Notwithstanding the foregoing, no representations or warranties are given in this Section 2.9 with respect to liabilities or obligations arising from environmental matters or 18 conditions, employee benefit plans or pursuant to ERISA, and Sections 2.12 and 2.20 shall contain the only representations and warranties with respect to such items. 2.10. Property. (a) Except as set forth on Schedule 2.10(a) hereto, the Company, or if so designated in Schedule 2.10(a), a Subsidiary, has (and will continue to have immediately after the Closing) good and valid title to all assets and properties the Company and the Subsidiaries purport to own (other than the Real Property, as hereinafter defined), tangible and intangible, in each case free and clear of any Liens, except for inventories and other assets disposed of by the Company or any Subsidiary prior to the Closing in the ordinary course of business consistent with past practice and except for Liens for taxes not yet due and payable (collectively, the "Personal Property"). (b) Except as set forth in Schedule 2.10(a) hereto, all of the assets, tangible and intangible, used in the operation of the business of the Company and the Subsidiaries as of the Interim Balance Sheet Date were owned, leased or licensed by the Company and the Subsidiaries or, with respect to intellectual property, in the public domain. (c) Attached hereto as Schedule 2.10(c) is a list of (i) all of the owned real property of the Company and the Subsidiaries (collectively, the "Owned Real Property"), (ii) all leases, assignments of leases, subleases, licenses, rights of use or occupancy and other written agreements pursuant to which the Company or the Subsidiaries lease, sublease, use or occupy real property (other than Job Sites (as defined below) used or occupied) (collectively, the "Tenant Leases"), and (iii) all leases, assignments of leases, subleases, rights of occupancy and other written agreements pursuant to which the Company or any of the Subsidiaries lease, have assigned leasehold estates, subleased or otherwise let to any person any Real Property (as hereinafter defined) or any portion of or interest therein (the "Landlord Leases"). The interests of the Company and the Subsidiaries in the Real Property constitute the only interests in real property required to be owned by the Company or the Subsidiaries in order that the Company and the Subsidiaries may conduct their business as presently conducted, except for job sites owned or leased by customers of either the Company or any of its Subsidiaries ("Job Sites"). As used in this Agreement, the following terms have the following meanings: (i) "Exceptions That Will Not Exist At Closing" means those matters disclosed on Schedules B which are also separately listed on Schedule 2.10(d) under the heading Exceptions That Will Not Exist At Closing. (ii) "Leased Real Property" means, collectively, all the leasehold estates demised under the Tenant Leases. (iii) "Leases" means, collectively, the Tenant Leases and the Landlord Leases. (iv) "Real Property" means, collectively, the Owned Real Property and the Leased Real Property. 19 (v) "Schedules B" means, collectively, Schedule B to each of the title insurance policies listed on Schedule 2.10(d), copies of which schedules are attached hereto as Exhibit A to Schedule 2.10(d). (d) Except as set forth on Schedule 2.10(d) hereto, the Company or, if so designated in Schedule 2.10(d), a Subsidiary, has (and will continue to have immediately after the Closing) good and marketable, indefeasible fee simple title to the Owned Real Property free and clear of any and all Liens and title defects, except for (x) matters listed on Schedules B, (y) minor imperfections of title, conditions, encroachments, easements, covenants or restrictions, if any, none of which is substantial in amount and none of which, individually or in the aggregate, materially detracts from the value of the affected property or impairs the use of the affected property in the manner such property is currently being used or impairs the conduct of the Company's or any Subsidiary's business, and (z) Liens for real estate Taxes and assessments not yet delinquent (all of the items described in (x), (y) and (z), collectively, the "Permitted Fee Property Exceptions"). (e) On and as of the Closing Date, all of the Real Property shall be free and clear of and none of the Real Property shall be subject to any of the Exceptions That Will Not Exist At Closing, other than the Exceptions that Will Not Exist At Closing applicable to the properties located at 13750 Catalina Street in San Leandro, California and 3845 Imperial Avenue in San Diego, California (the "Continuing Exceptions"). (f) Except as set forth on Schedule 2.10(f) hereto, the Company or, if so designated in Schedule 2.10(f), a Subsidiary, has (and will continue to have immediately after the Closing) good and valid (i) title to the leasehold estates conveyed under the Leases (the "Leasehold Estates"), and (ii) leasehold title to the Leased Real Property free and clear of any Liens and title defects, except for (x) matters set forth on Schedule 2.10(f), (y) minor imperfections of title, conditions, encroachments, easements, covenants or restrictions, if any, none of which is substantial in amount and none of which, individually or in the aggregate, materially detracts from the value of the affected property or impairs the use of the affected property in the manner such property is currently being used or impairs the conduct of the Company's or any Subsidiary's business, and (z) Liens for real estate Taxes and assessments not yet delinquent (all of the items described in (x), (y) and (z), collectively, the "Permitted Leasehold Property Exceptions," and together with the Permitted Fee Property Exceptions, the "Permitted Exceptions"). Nothing in this representation and warranty shall be deemed a representation or warranty with respect to the fee interests encumbered by any of the Tenant Leases. (g) The Company has delivered to Newco complete and correct copies of all existing title insurance policies in the Company's or any Subsidiary's possession and all surveys possessed by the Company or a Subsidiary with respect to any of the Real Property. (h) Except as set forth in Schedule 2.10(h), the Company is in actual, exclusive possession of all of the Real Property, other than Real Property that is the subject of a Landlord Lease, if any. Except as set forth in Schedule 2.10(h), the basic rent and all additional rent payable under the Leases have been paid to date and not more than one month in advance. All tenant improvement work and all other work required to be performed under any of the Leases by the 20 landlords thereunder or by the Company or any Subsidiary has been performed, and, to the extent that the Company or a Subsidiary is responsible for payment of such work, has been fully paid for, whether directly to the contractor performing such work or to such landlord as reimbursement therefor, except for items which the Company or any Subsidiary is disputing in good faith (which items are fully reserved for in the Interim Balance Sheet. Except as set forth on Schedule 2.10(h), there are no brokerage commissions or finder's fees due from any Seller or the Company or any Subsidiary which are unpaid with regard to any of the Leases or which will become due at any time in the future with regard to the Leases. (i) Except as set forth on Schedule 2.10(i) hereto, there have been no casualties which are reasonably likely to result in the termination of any of the Leases or the exercise of any buy-out provision contained in any of the Leases relative to damage by casualty. (j) To the Company's knowledge, there is not currently (i) any pending or threatened condemnation action, eminent domain proceeding or other litigation, action or proceeding concerning any of the Real Property, or (ii) any pending or threatened investigation by any governmental authority which relates to the ownership, maintenance, use or operation of any of the Real Property. The Sellers have caused the Company and the Subsidiaries to deliver to Newco complete and correct copies of all written notices and other correspondence received by the Company or any Subsidiary within the past two (2) years with respect to any of the matters set forth in the immediately preceding clauses (i) and (ii). All of the buildings and other improvements upon the Real Property are operational and do not require material repair and are in a state of repair suitable for the continued operation of the business conducted thereon without material repair. The water, gas, electricity and other utilities serving each parcel of the Real Property are currently adequate to service the normal operation by the Company or its Subsidiary, as the case may be, of such parcel as currently conducted. Each parcel of the Real Property has physical access to public right of ways sufficient for the conduct of the business as presently conducted on such parcel. (k) None of the matters listed on Schedule 2.10(k), individually or in the aggregate: (i) materially impairs, or grants rights which if exercised would materially impair the use of the affected property, including, without limitation, any improvements thereon, in the manner such property is currently being used, or (2) materially adversely affects or grants rights which if exercised would materially adversely affect the operations of the Company and the Subsidiaries or the results thereof, in either case taken as a whole. 2.11. Insurance. Attached hereto as Schedule 2.11(a) is a list of the insurance with respect to the business carried on by the Company and its Subsidiaries. Such insurance is in effect and will be kept in effect up to the Closing. Except as set forth on Schedule 2.11(a), (i) all of the Company's liability insurance policies are on an "occurrence," as opposed to "claims made," basis, (ii) none of the premiums under such policies are subject to retroactive adjustment as a result of loss experience under such policies, and (iii) the coverage provided by the Company's liability insurance policies for any injuries or offenses that have occurred prior to the Closing will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated hereby. Attached hereto as Schedule 2.11(b) are true and complete lists of all open surety, 21 bonding or similar arrangements for the Company or any Subsidiary, prepared by the Company's brokers of surety and bonding arrangements. 2.12. Environmental Matters. (a) Except as set forth in Schedule 2.12(a), neither the Company nor any of its Subsidiaries has received from any governmental authority or other person any requests for information, notices of claim, complaint, order, assessment, demand or other written notification that the Company or any of its Subsidiaries are, may be or will be potentially responsible with respect to any investigation, clean-up or other liabilities or responsibilities arising from or related to the presence, Release or threat of Release of Hazardous Substances at any sites, and to the knowledge of the Company, the Sellers have received no such notice, nor does the Company have knowledge of any legitimate basis upon which such request, notice, demand or claim would be sent. (b) Except as set forth in Schedule 2.12(b), to the knowledge of the Company, no Hazardous Substances have been Managed or Released or threatened to be Released at, on, about, under, from or onto any Real Property now owned, operated or leased by the Company or any Subsidiary or in connection with the conduct of the business of the Company and the Subsidiaries (as presently conducted) at such Real Property, except for such Management or Releases the consequences of which could not reasonably be expected to have a Material Adverse Effect. (c) Except as set forth in Schedule 2.12(c), no Real Property owned or leased by the Company or any Subsidiary contains underground tanks, active or abandoned. Except as set forth on Schedule 2.12(c), none of the foregoing is required to be upgraded, retrofitted or replaced within the next one (1) year pursuant to 40 CFR Part 280 or under any analogous state or local Environmental Laws regulating underground storage tanks. (d) The Company and each Subsidiary have obtained all Environmental Permits, all such Environmental Permits are in full force and effect and the Company and each Subsidiary are in compliance with all terms and conditions of the Environmental Permits except where the failure to so obtain or comply could not reasonably be expected to have a Material Adverse Effect. The Company and each Subsidiary have made or will make before the Closing timely application for renewals of all such Environmental Permits for which Environmental Laws require that applications must be filed on or before the Closing to maintain the Environmental Permits in full force and effect. If any Environmental Permits are required to be transferred, or any notifications are required to be made so that the Surviving Corporation can operate the Company and its Subsidiaries after the Closing in the manner they were operated prior to Closing, the Company and the Subsidiaries will prepare and file all required applications therefor. BRS and Newco shall use their reasonable efforts to cooperate with the Company and the Subsidiaries as to the foregoing. (e) Each of the Company and its Subsidiaries and the operations of its businesses are in compliance with all Environmental Laws except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. 22 (f) As used herein, "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Environmental Laws" means the common law and all applicable federal, state and local laws relating to pollution or protection of human health or the environment including, laws, statutes, ordinances, rules, regulations, orders, codes and notices as adopted or issued as of the date of this Agreement relating to the Management or Release or threatened Release of Hazardous Substances into the environment (including without limitation ambient air, surface water, ground water, land surface or subsurface strata). "Environmental Permits" means all permits, approvals, certificates, registrations, licenses and other authorizations which are required under Environmental Laws. "Hazardous Substance" means any hazardous or toxic substance or waste, pollutant or contaminant including petroleum products, asbestos, PCBs and radioactive materials. "Management" (and its correlative terms) means the generation, possession, manufacture, processing, distribution, use, treatment, storage, disposal, transport, recycling or handling of Hazardous Substances. "Release" means any spill, leak, discharge, disposal, pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing to escape or presence of any Hazardous Substance. 2.13. Intellectual Property. (a) Attached hereto as Schedule 2.13 is a correct list of all material trademarks, service marks, and registrations and applications for trademarks, service marks and trade names, copyrights registrations, and patents and patent applications owned or used by the Company or a Subsidiary, and all licenses pertaining thereto. The items listed in Schedule 2.13, together with any material trade secrets (including without limitation, proprietary inventions, technology, know-how, customer or product information, designs, and technical information to the extent they are trade secrets) owned or used by the Company or any Subsidiary are referred to as the "Intellectual Property". All of the trademarks, service marks and trade names listed in Schedule 2.13 are currently being used by the Company or a Subsidiary in its business except as otherwise explicitly indicated in such Schedule. Except as set forth on Schedule 2.13 hereto, to the Company's knowledge, the Company and the Subsidiaries have adequate and sufficient rights, whether registered or unregistered, to use such Intellectual Property as currently used in their respective businesses, free and clear of any Lien or competing rights or interests of others which would preclude or otherwise impair the use by the Company or any Subsidiary, as the case may be. (b) The Company or a Subsidiary solely and exclusively owns all right, title and interest in and to the Intellectual Property, except as set forth on Schedule 2.13. The operation of the Company's and its Subsidiaries' business does not, to the Company's knowledge, infringe on the patents, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other intellectual property rights of any third party. Except as set forth on Schedule 2.13, to the Company's knowledge, no claims have been asserted by any person in respect of the use of any Intellectual Property by the Company or a Subsidiary. (c) Except as set forth on Schedule 2.13, all of the patents, trademark and service mark registrations, and copyright registrations listed on Schedule 2.13 are valid and in full force, are held of record in the name of the Company or a Subsidiary, are not, to the Company's knowledge, the subject of any cancellation, reexamination opposition, extension of time to oppose, interference, rejection, refusal to register or any other proceeding challenging their extent or validity. With respect to the Intellectual Property, the Company or a Subsidiary is the assignee 23 in all patent applications, and the Company or a Subsidiary is the applicant of record for all applications for trademark, service mark, and copyright registration. No patents are held in the names of individual inventors. No order, holding, decision or judgment has been rendered by any governmental authority, and no agreement, consent or stipulation exists, which would limit the Company's or any Subsidiary's use of any Intellectual Property or any advertising or promotional claim or campaign. Except as set forth on Schedule 2.13, to the Company's knowledge, neither the Company nor its Subsidiaries have given any indemnification against infringement of patent, trademark, copyright or other intellectual property rights as to any equipment, materials, products, services or supplies. (d) Other than as set forth on Schedule 2.13, neither the Company nor any Subsidiary has asserted any claim of infringement, dilution, unfair competition, misappropriation or misuse against any person with respect to the Intellectual Property within the past three years. To the Company's knowledge, no person is infringing, diluting, unfairly competing with or misappropriating the rights of the Company or any Subsidiary with respect to the Intellectual Property. 2.14. Permits. Except as set forth on Schedule 2.14 and except where the Company's failure to own a Permit could not reasonably be expected to have a Material Adverse Effect, the Company has obtained all certificates, permits, franchises, licenses and authorizations ("Permits") required for the operation of the Company's business as currently conducted by any governmental or quasi-governmental authority having jurisdiction over the Company, its properties or business or the Subsidiaries or their properties or business. All such Permits are in full force and effect. The Company or any Subsidiary is not in default (or non-compliance) under any Permit, except where a default could not reasonably be expected to have a Material Adverse Effect. No modification, suspension or cancellation of any Permit, or any proceeding relating thereto, is pending or, to the knowledge of the Company, threatened with respect to any Permit. No written notice has been received by the Company or the Subsidiaries with respect to any failure by the Company or any Subsidiary to have any Permit nor of any asserted present or past failure by the Company or any Subsidiary to comply with any Permit or its terms, in each case, where such failure could reasonably be expected to have a Material Adverse Effect. 2.15. Compliance with Laws. Except as set forth in Schedule 2.15 hereto, the operations of the Company and each of its Subsidiaries have been conducted in compliance in all material respects with applicable laws, regulations and other requirements of all Authorities having jurisdiction over the Company or any Subsidiary or any of their respective businesses or operations, including without limitation such laws, regulations and requirements relating to employment and employment practices, terms and conditions of employment and wages and hours, rental of vehicles, machinery and equipment, contracting and subcontracting, antitrust, consumer protection, immigration, health, occupational safety and health, plant closing, pension, building, zoning, subdivision matters, and securities, except in each case where a failure to comply could not reasonably be expected to have a Material Adverse Effect and except for laws, regulations or requirements relating to Hazardous Substances. During the past three years, neither the Company nor any Subsidiary has received any notification of any asserted present or past failure by the Company or any Subsidiary to comply with any laws, rules or regulations, except where an asserted present or past failure to comply could not reasonably be expected to 24 have a Material Adverse Effect and except for laws, regulations or requirements relating to Hazardous Substances. 2.16. Labor Matters. (a) Except as set forth in Schedule 2.16, (i) neither the Company nor any Subsidiary is party to or bound by any agreement with any labor organization, including any collective bargaining or similar agreement ("Labor Agreement"), (ii) there is no labor strike, dispute, slowdown or stoppage pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary, and (iii) neither the Company nor any Subsidiary has experienced any material work stoppage, strike, slowdown, or union organizational efforts since January 1, 1995. The Company has delivered all Labor Agreements of the Company and its Subsidiaries to BRS. (b) Except as set forth in Schedule 2.16, neither the Company nor any Subsidiary has had asserted against it any worker's compensation claim which could reasonably be expected to have a Material Adverse Effect. 2.17. Absence of Changes. Except as and to the extent set forth on Schedule 2.17, since June 30 1997, there has not been any Material Adverse Effect or any change or occurrence which could reasonably be expected to have a Material Adverse Effect. Without limiting the foregoing, except as and to the extent set forth in Schedule 2.17 or pursuant to the transactions set forth in Article I or the covenants set forth in Article V, since June 30, 1997 to the date of this Agreement, neither the Company nor any Subsidiary has: (a) Increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency, tax or other reserves or changed its accounting practices, methods or assumptions (including changes in estimates or valuation methods); (b) Changed the manner or timing of collecting accounts receivable or satisfying accounts payable; (c) Entered into any lease or sublease of real property or assignment of any leasehold estate or exercised any purchase options or rights of first refusal contained in any of the Leases, or terminated, surrendered, cancelled or assigned any of its properties demised under the Leases, or any part thereof; (d) Permitted or allowed any of its Owned Real Property or Leased Real Property, or assets (real, personal or mixed, tangible or intangible) to be subjected to any Lien, except for Permitted Exceptions; (e) Executed or consummated any contract or agreement for the purchase or sale of any real property or otherwise purchased or conveyed any real property or any interest therein; (f) Written down the value of any assets except in accordance with the Company's historical depreciation policy as reflected in the Audited Financial Statements, consistently applied in accordance with past practice (including write-downs by reason of shrinkage or mark-down); 25 (g) Cancelled any debts or waived any claims or rights involving more than $50,000; (h) Sold, transferred, or otherwise disposed of any of its Owned Real Property, or any interest therein, or its other properties or assets (real, personal or mixed, tangible or intangible), except for (i) inventory (and dispositions of used equipment previously held for rental or for use in the Company's subcontracting businesses) in the ordinary course of business consistent with past practice, (ii) dispositions of excess, unnecessary or obsolete furniture, fixtures and equipment which are not material in the aggregate, or (iii) asset dispositions for consideration of less than $100,000 in the aggregate; (i) Granted any increase in the compensation of officers or employees (including any such increase pursuant to any bonus, pension, profit sharing or other plan or commitment) or any increases in the compensation payable or to become payable to any officer or employee, except for normal increases granted in the ordinary course of business consistent with past practices, or entered into or amended any employment, consulting or similar agreement or made any agreement or commitment to pay any severance or similar compensation; (j) Made any single capital expenditure or commitment in excess of $50,000 for additions to property, plant, equipment or intangible capital assets or made aggregate capital expenditures and commitments in excess of $100,000 for additions to property, plant, equipment or intangible capital assets; (k) Made any distribution, in cash or otherwise, to any Seller (except for payments of salaries and bonuses to officers and employees consistent with the terms of existing employment agreements or arrangements and past practice and loans or payments prior to June 30, 1998 in respect of vesting of restricted stock in 1997 and the exercise of options), or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock or redeemed, purchased or otherwise acquired, or offered, sold or issued, directly or indirectly, any shares of capital stock or other securities of the Company (including options, warrants or rights to acquire securities), or merged or consolidated with any person or effected any share exchange, reclassification or subdivision of any of its capital stock or adopted any plan of liquidation or dissolution or other reorganization, or acquired the stock, assets or business of any other person; (l) Paid, distributed, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with any Seller, any affiliate of a Seller, officers or directors of either the Company or any Subsidiary, or any affiliate or "associate" (as defined in Rule 405 under the Securities Act) of any officers or directors of either the Company or any Subsidiary (except in each case for payments of salaries and bonuses to officers and employees consistent with the terms of existing employment agreements or arrangements and past practice and loans or payments prior to June 30, 1998 in respect of vesting of restricted stock in 1997 and the exercise of options); (m) Made or revoked any election for Tax purposes (or had any election made or revoked on its behalf) or changed a method of accounting for Tax purposes; or 26 (n) Agreed, whether in writing or otherwise, to take any action described in this Section. 2.18. Transactions with Affiliates. Except as set forth on Schedule 2.18 hereto, neither any Seller nor (to the Company's knowledge) any affiliate, as defined in Rule 405 under the Securities Act ("affiliate"), of a Seller (other than the Company and the Subsidiaries) nor any of the Company's officers, directors or employees or (to the Company's knowledge) any of their associates, has any interest, directly or indirectly, in any lease, Lien, contract, license, loan or other agreement or commitment to which the Company or any Subsidiary is a party, or any property or asset used or owned by, or any interest in any supplier or customer of, the Company or any Subsidiary. Except as set forth on Schedule 2.18 hereto, neither the Company nor any Subsidiary is indebted, directly or indirectly, to (a) any Seller or (to the Company's knowledge) any affiliate of a Seller or (b) any officer, director or employee of the Company or any Subsidiary for any liability or obligation, whether arising by reason of stock ownership, oral or written agreement or understanding or otherwise. Schedule 2.18 is a complete and accurate list of all employees of the Company and each Subsidiary owing more than $2,000 (except in respect of advances for business expenses, none of which exceeds $5,000 or $50,000 in the aggregate) in principal to the Company or any Subsidiary, setting forth the amounts owed, the applicable interest rates, a description of the security and the maturity dates of all such debts. 2.19. Contracts and Commitments. Schedule 2.19 hereto contains a complete, current and correct list of all material contracts, commitments, obligations or agreements of each of the Company and the Subsidiaries, and all amendments thereto, whether written or oral, including the Leases (the "Contracts"). For purposes of this Section 2.19 a contract which is "material" shall include any single contract, whether written or oral: (a) where any party thereto is obligated to make annual payments aggregating more than $200,000; (b) which constitutes a consulting or similar agreement having a term greater than twelve (12) months or which constitutes an employment agreement or an agreement which calls for severance payments; (c) where any party thereto is obligated to make annual payments aggregating more than $100,000 and either (i) the term of such contract will not expire of its own accord within twelve (12) months of the date hereof, or (ii) such contract is not subject to cancellation by the Company or a Subsidiary, as the case may be, on not more than thirty (30) days notice without material penalty; (d) which constitutes an agreement by the Company or any Subsidiary to pay a former employee compensation (including any bonus but excluding any benefits made available to Company employees generally) at the annual rate of more than $50,000; (e) which constitutes an agreement that restricts the Company or any Subsidiary from carrying out its business anywhere in the world or from competing with any other person or which is a confidentiality or non-disclosure agreement restrictive of the Company; 27 (f) which constitutes an agreement by the Company or any Subsidiary with any affiliate (other than the Company or any Subsidiary); (g) which constitutes a franchising, partnership, joint venture or similar agreement; (h) which is a lease, purchase and sale agreement, subordination, nondisturbance and attornment agreement or other agreement relating to real property, including the Leases and any and all subordination, nondisturbance and attornment agreements or similar agreements relating to any of the Leases or to any of the Real Property; (i) which relates to indebtedness or indemnification or any guarantee of the Company or a Subsidiary (including any letter of credit) or which grants any Lien on any assets, rights or properties of the Company or a Subsidiary, or which is a tax sharing or similar agreement; (j) which deals with any environmental investigations, remediations or similar matters; (k) which deals with any bonding or surety agencies or relates to bonding capacity; (l) which is a license or similar agreement for Intellectual Property, whether as licensee or licensor; and (m) where the consequences of a breach or default thereunder, or the termination, expiration or cancellation thereof, could reasonably be expected to result in a Material Adverse Effect. True, correct and complete copies of all written Contracts described in Schedule 2.19 have been delivered to Newco, together with a complete written description of any oral Contract. Each of the Contracts is in full force and effect and constitutes the legal, valid, binding and enforceable obligations of the Company or Subsidiary, as applicable, and, to the Company's knowledge, the other parties thereto in accordance with its terms. Except as set forth on Schedule 2.19 and except for breaches or defaults that could not reasonably be expected to have a Material Adverse Effect, neither the Company nor any Subsidiary is in default under or has breached any of the Contracts and no act or omission has occurred which, with notice or lapse of time or both, would constitute a breach or default under any term or provision of any such Contract. To the knowledge of the Company, no other party is in breach or default under any of such Contracts, and no act or omission has occurred by any other party thereto which, with notice or lapse of time or both, would constitute such a breach or default under any term or provision thereof. Subject to receipt of the consents set forth in Schedule 2.4, the Contracts will remain in full force and effect (without any breach or default or modification thereunder, or event which could give rise to breach, default or modification) for the benefit of the Company, the Subsidiaries and the Surviving Corporation following the Closing. 28 2.20. Benefit Plans. (a) Set forth on Schedule 2.20(a) is a true and complete list of each (i) "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA (a "Multiemployer Plan")), (ii) other pension, retirement, supplemental retirement, deferred compensation, excess benefit, profit sharing, bonus, incentive, stock purchase, stock ownership, stock option, stock appreciation right, employment, severance, salary continuation, termination, change-of-control, health, life, disability, group insurance, vacation, holiday and fringe benefit plan, program, contract, or arrangement maintained, contributed to, or required to be contributed to, by the Company or any ERISA Affiliate for the benefit of any employee, former employee, director, officer or independent contractor of the Company or a Subsidiary or under which the Company or any ERISA Affiliate has any liability with respect to any employee, former employee, director, officer or independent contractor of the Company or Subsidiary (the "Benefit Plans"). (b) As applicable with respect to each Benefit Plan (other than a Multiemployer Plan), the Company has made available to Newco true and complete copies of (i) each Benefit Plan, including all amendments thereto, and in the case of an unwritten Benefit Plan, a written description thereof, (ii) all trust documents, investment management contracts, custodial agreements and insurance contracts relating thereto, (iii) the current summary plan description and each summary of material modifications thereto, (iv) the three most recent annual reports (Form 5500 and all schedules thereto) filed with the Internal Revenue Service ("IRS"), (v) the most recent IRS determination letter and each currently pending application to the IRS for a determination letter, (vi) the three most recent summary annual reports, actuarial reports, financial statements and trustee reports and (vii) all records, notices and filings concerning IRS or Department of Labor audits or investigations, "prohibited transactions" within the meaning of Section 406 of ERISA or Section 4975 of the Code and "reportable events" within the meaning of Section 4043 of ERISA. The Company has made a written request to the sponsoring union of each Multiemployer Plan for true and complete copies of the three most recent annual reports (Form 5500 and all schedules thereto) filed with the IRS, and statements or computations regarding potential withdrawal liability, if any. The Company made available to Newco true and complete copies of such information and documentation outlined in the previous sentence with respect to such Multiemployer Plans that the Company has in its possession on or prior to the date hereof and the Closing Date, as applicable. (c) Except as otherwise disclosed with particularity on Schedule 2.20(c): (i) There has been no failure by the Company or any ERISA Affiliate to comply with the provisions of ERISA and the Code applicable to the Benefit Plans (other than a Multiemployer Plan), which failure could reasonably be expected to have a Material Adverse Effect. There has been no failure by any Benefit Plan (other than a Multiemployer Plan) to be maintained, operated and administered in compliance with its terms and any related documents or agreements and the applicable provisions of ERISA and the Code, which failure could reasonably be expected to have a Material Adverse Effect. (ii) There has been no failure by any Benefit Plans (other than a Multiemployer Plan) which are "employee pension benefit plans" within the meaning of Section 3(2) of ERISA and which are intended to meet the qualification requirements of Section 401(a) of 29 the Code (each a "Pension Plan") to meet the requirements for such qualification or by their related trusts to meet the requirements for exemption from taxation under Section 501(a) of the Code, which failure could reasonably be expected to have a Material Adverse Effect. (iii) All Pension Plans (other than a Multiemployer Plan) have received determination letters from the IRS to the effect that such Pension Plans are qualified and their related trusts are exempt from federal income taxes and no determination letter with respect to any Pension Plan has been revoked nor, to the knowledge of the Company is there any reason for such revocation, nor has any Pension Plan been amended since the date of its most recent determination letter in any respect which would adversely affect its qualification. (iv) No Benefit Plan (other than a Multiemployer Plan) is now or at any time has been subject to Part 3, Subtitle B of Title I of ERISA or Title IV of ERISA. All contributions to, and payments from, any Benefit Plan which may have been required in accordance with the terms of such Benefit Plan or any related document have been timely made. All such contributions to, and payments from, any Benefit Plan, except those to be made from a trust, qualified under Section 401(a) of the Code, for any period ending before the Closing Date that are not yet, but will be, required, are properly accrued and reflected on the Interim Balance Sheet. (v) Neither the Company nor any ERISA Affiliate has ever contributed to, or been required to contribute to any Multiemployer Plan . Neither the Company nor any ERISA Affiliate has any liability (contingent or otherwise) relating to the withdrawal or partial withdrawal from a Multiemployer Plan. All required contributions, withdrawal liability payments or other payments of any type that the Company or any ERISA Affiliate have been obligated to make to any Multiemployer Plan have been duly and timely made. Any withdrawal liability incurred with respect to any Multiemployer Plan has been fully paid as of the date hereof. Neither the Company nor any ERISA affiliate has undertaken any course of action that could reasonably be expected to lead to a complete or partial withdrawal from any Multiemployer Plan. To the knowledge of the Company, no Multiemployer Plan is in "reorganization" within the meaning of Section 4241 of ERISA nor has notice been received by the Company or any ERISA Affiliate that any such Multiemployer Plan will be placed in "reorganization." (vi) To the knowledge of the Company, there are no pending audits or investigations by any governmental agency involving the Benefit Plans, and no threatened or pending claims (except for individual claims for benefits payable in the normal operation of the Benefit Plans), suits or proceedings involving any Benefit Plan, any fiduciary thereof or service provider thereto, nor to the knowledge of the Company is there any basis for any such claim, suit or proceeding. (vii) Neither the Company, any ERISA Affiliate, nor to the knowledge of the Company, any fiduciary, trustee or administrator of any Benefit Plan, has engaged in or, in connection with the transactions contemplated by this Agreement, will engage in any transaction with respect to any Benefit Plan which would subject any such Benefit Plan, the Company, any ERISA Affiliate, Newco or the Surviving Corporation to a tax, penalty or liability for a "prohibited transaction" under Section 406 of ERISA or Section 4975 of the Code. None of the 30 assets of any Benefit Plan (other than a Multiemployer Plan) is invested in any property constituting "employer real property" or an "employer security," within the meaning of Section 407 of ERISA. (viii) All insurance premiums with respect to any insurance policy related to a Benefit Plan (other than a Multiemployer Plan) for any period up to and including the Closing Date shall have been paid, or accrued and booked on or before the Closing Date, and, with respect to any such insurance policy or premium payment obligation, neither the Company nor any ERISA Affiliate shall be subject to a retroactive rate adjustment, loss sharing arrangement or other actual or contingent liability. (ix) There has been no failure by any Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code to comply with the continuation coverage requirements of the Code and ERISA, which failure could reasonably be expected to have a Material Adverse Effect. (x) No Benefit Plan provides benefits, including, without limitation, death or medical benefits, beyond termination of service or retirement other than (A) coverage mandated by law, (B) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code or (C) coverage mandated by the terms of any collective bargaining agreement; provided, however, that neither the Company nor any ERISA Affiliate will be required, whether pursuant to the terms of any collective bargaining agreement or otherwise, to make any contributions or payments to the applicable health or welfare plan or fund with respect to any period after the termination of the collective bargaining relationship between the applicable union and the Company or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has made a written or oral representation to any current or former employee promising or guaranteeing any employer paid continuation of medical, dental, life or disability coverage for any period of time beyond retirement or termination of employment. (xi) The Sellers' and the Company's execution of, and performance of the transactions contemplated by, this Agreement will not constitute an event under any Benefit Plan that will result in any payment (whether as severance pay or otherwise), acceleration, vesting or increase in benefits with respect to any employee. (xii) All of the employees whose primary responsibility relate to the business of the Company and the Subsidiaries are employed by the Company and the Subsidiaries and no such individual is employed by any other ERISA Affiliate. (d) As used herein, the capitalized terms below have the following meanings: (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (ii) "ERISA Affiliate" means (i) any corporation included with the Company in a controlled group of corporations within the meaning of Section 414(b) of the Code; (ii) any trade or business (whether or not incorporated) which is under common control with the 31 Company within the meaning of Section 414(c) of the Code; (iii) any member of an affiliated service group of which the Company is a member within the meaning of Section 414(m) of the Code; or (iv) any other person or entity treated as an affiliate of the Company under Section 414(o) of the Code. 2.21. Absence of Questionable Payments. Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any of their respective directors, officers, agents, employees or other person acting on their behalf, has used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds. Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any of their respective directors, officers, agents, employee or other persons acting on their behalf, has accepted or received any unlawful contributions, payments, gifts, or expenditures. 2.22. Books and Records. The Company has maintained complete, current and correct copies of: (a) the Articles of Incorporation and Bylaws and other organizational documents of the Company and each of its Subsidiaries and all amendments thereto; (b) the stock records of the Company and each Subsidiary; and (c) the minutes and other records of the meetings and other proceedings of the stockholders and directors of the Company and each Subsidiary. 2.23. Disclosure. No representation or warranty made by the Sellers or the Company in this Agreement or any disclosure schedule or certificate or other agreement delivered hereunder contains any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein not misleading. ARTICLE III SEVERAL REPRESENTATIONS AND WARRANTIES OF THE SELLERS Subject to Section 10.15, each Seller hereby represents and warrants severally to BRS and Newco as follows: 3.1. Ownership of Shares. (a) Except as set forth on Schedule 3.1(a) hereto, (i) such Seller is the sole record and beneficial owner of the shares of Existing Company Stock set forth opposite such Seller's name on Schedule 3.1(a) hereto, free and clear of any Liens, and (ii) at and as of the Closing, such Seller will be the sole record and beneficial owner of the shares of Class A Common Stock or Class B Common Stock set forth opposite such Seller's name on Schedule 3.1(a) hereto, free and clear of any Lien. Subject to the conditions set forth herein, at the Closing, such Seller will transfer and deliver to BRS good and valid title to the BRS Purchase Shares (if any) set forth opposite such Seller's name on Schedule 3.1(a) hereto, free and clear of any Lien. (b) Except pursuant to this Agreement or as set forth on Schedule 3.1(b) hereto, neither such Seller nor any of its affiliates is a party to, or bound by, any arrangement, 32 agreement, instrument or order (i) relating to the transfer of any capital stock or equity securities of the Company or any Subsidiary, (ii) relating to the dividend or voting rights of any capital stock or equity securities of the Company or any Subsidiary, or (iii) relating to rights to registration under the Securities Act of any capital stock or equity securities of the Company or any Subsidiary. 3.2. Authorization; Binding Agreement. Such Seller has full corporate, trust, limited liability company or partnership power and authority (or, if such Seller is a natural person, individual capacity) to execute and deliver this Agreement and each other document or instrument contemplated hereby, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by such Seller (if such Seller is a corporation or other entity) of this Agreement and each other document or instrument executed or to be executed by it in connection herewith, and the consummation by it of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate, trust, partnership or other organizational action. This Agreement has been, and each other document or instrument to be executed by such Seller in connection herewith will be, duly executed and delivered by such Seller, and constitutes, or will constitute, a legal, valid and binding obligation of such Seller, enforceable against such Seller, in accordance with its terms. 3.3. Conflicts, Consents and Approvals. Except as set forth on Schedule 3.3 hereto, the execution and delivery by such Seller of this Agreement and any other documents or instruments contemplated hereby, the performance by such Seller of its obligations hereunder and thereunder, and the consummation by such Seller of the transactions contemplated hereby and thereby, do not and will not: (a) if such Seller is a corporation or other entity, violate or conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws (or similar documents) of such Seller, as such instruments are currently in effect; (b) subject to obtaining the consents and approvals specified in Schedule 3.3, require any consent, approval or notice under, or conflict with, or result in a violation or breach of, or constitute (with or without the giving of notice or the lapse of time or both) a default (or give rise to any right of termination, modification, cancellation or acceleration or result in the creation or imposition of any Lien upon the property of such Seller, the Company or a Subsidiary) under, any of the terms, conditions or provisions of any (i) note, bond, mortgage, indenture, license, lease, agreement or other document or instrument or obligation to which such Seller is a party, under or pursuant to which any of its properties or assets are held, or by which any portion of its properties or assets may be bound, or (ii) any permit, license, approval, franchise or other governmental or regulatory authorization held or used by or binding on such Seller; (c) violate or contravene any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award currently in effect and applicable to such Seller; or 33 (d) other than in respect of the HSR Act (as defined in Section 5.5), require any action, consent, approval or authorization of, or review by, or declaration, registration or filing with, or notice to, any court, arbitrator, governmental agency or other regulatory authority, or any stock exchange or similar self-regulatory organization. 3.4. No Brokers or Finders. Except as contemplated by Section 10.5 with respect to the fees of William L. Rogers and his affiliates, such Seller and its affiliates (excluding the Company and the other Sellers) (a) have not employed (and will not employ) any broker or finder, and (b) have not incurred (and will not incur) any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. 3.5. Investment Intent. The shares of Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock, Class B Common Stock, Common Stock, Series B Preferred Stock or Senior Exchangeable Preferred Stock to be acquired by such Seller pursuant to this Agreement are being acquired for such Seller's own account and (except for Seller's BRS Purchase Shares) not with a view to or for sale in connection with any distribution thereof. Each Seller acknowledges that none of the Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock, Class B Common Stock, Common Stock, Series B Preferred Stock or Senior Exchangeable Preferred Stock has been registered under the Securities Act of 1933, as amended, or any state securities laws, and that each certificate representing the Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock, Class B Common Stock, Common Stock, Series B Preferred Stock or Senior Exchangeable Preferred Stock shall bear a legend setting forth or referring to the restrictions contained in this Agreement and to such other restrictions as may be required by applicable law. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BRS AND NEWCO Subject to Section 10.15, BRS and Newco hereby represent and warrant, jointly and severally, to the Sellers as follows: 4.1. Organization. (a) Newco is a corporation duly incorporated, validly existing, and in good standing under the laws of the jurisdiction of its formation, and has all requisite power and authority to carry on its business as it is now being conducted. (b) BRS is a limited partnership duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation, and has all requisite power and authority to carry on its business as it is now being conducted. 4.2. Authorization; Binding Agreement. (a) Newco has full corporate power and authority to execute and deliver this Agreement and each other document or instrument contemplated hereby, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Newco of this Agreement and each other document or instrument executed or to be executed by it in connection 34 herewith, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action. This Agreement has been, and each other document or instrument to be executed by Newco in connection herewith will be, duly executed and delivered by Newco, and constitutes, or will constitute, legal, valid and binding obligations of Newco, enforceable against Newco in accordance with their terms. (b) BRS has full partnership power and partnership authority to execute and deliver this Agreement and each other document or instrument contemplated hereby and to which it is party, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by BRS of this Agreement and each other document or instrument executed or to be executed by it in connection herewith, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate or partnership action. This Agreement has been, and each other document or instrument to be executed by BRS in connection herewith will be, duly executed and delivered by BRS, and constitutes, or will constitute, legal, valid and binding obligations of BRS, enforceable against BRS in accordance with their terms . 4.3. Conflicts, Consents and Approvals. Except as set forth in Schedule 4.3, the execution and delivery by Newco and BRS of this Agreement and any other documents or instruments contemplated hereby, the performance by Newco and BRS of their respective obligations hereunder and thereunder, and the consummation by Newco and BRS of the transactions contemplated hereby and thereby, do not and will not: (a) violate or conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws of Newco or the partnership agreement of BRS; (b) require any consent, approval or notice under, or conflict with, or result in a violation or breach of, or constitute (with or without the giving of notice or the lapse of time or both) a default (or give rise to any right of termination, modification, cancellation or acceleration or result in the creation or imposition of any Lien upon the property of Newco or BRS) under, any of the terms, conditions or provisions of any (i) note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Newco or BRS is a party, under or pursuant to which any of their respective properties or assets are held or by which any portion of their respective properties or assets may be bound, or (ii) any permit, license, approval, franchise or other governmental or regulatory authorization held or used by or binding on Newco or BRS, except for conflicts, violations, breaches, defaults or other events that could not reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business, results of operations or condition (financial or otherwise) of Newco or BRS or on the ability of Newco or BRS to consummate the transactions contemplated hereby; (c) violate or contravene any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award currently in effect; or (d) require any action, consent, approval or authorization of, or review by, or declaration, registration or filing with, or notice to, any court, arbitrator, governmental agency or other regulatory authority. 35 4.4. Litigation. There is no claim, action, suit, investigation or proceeding pending or, to the knowledge of Newco or BRS, threatened against or involving Newco or BRS, or any of their respective properties or rights, which, if adversely determined, could reasonably be expected to have a material adverse effect on the ability of Newco or BRS to perform their respective obligations hereunder. 4.5. Financing. Newco has received and delivered to the Company true and correct copies of (i) letter(s) from Bankers Trust Corporation and CS First Boston Corporation regarding high yield debt financing in the amount of $100,000,000 and (ii) a letter from Bank of America regarding senior bank financing in the amount of $60,000,000. The letters referred to in clauses (i) and (ii) above are collectively referred to as the "Financing Letters." The Financing Letters have been accepted by Newco and BRS and are in full force and effect. 4.6. No Brokers or Finders. Except as set forth in Schedule 4.6, neither Newco nor BRS, nor any of their respective affiliates, nor any of their respective officers, directors, or employees, (a) has employed (or will employ) any broker or finder, or (b) has incurred (or will incur) any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. 4.7. Investment. BRS is acquiring the BRS Purchase Shares for its own account and not with a view to any resale or distribution of such stock in violation of the Securities Act of 1933, as amended, or any other applicable laws of the United States or any state therein. By reason of BRS's business or financial experience, it has the capacity to protect its interests in connection with the transactions contemplated by this Agreement. ARTICLE V CERTAIN COVENANTS 5.1. Conduct of the Company's Business. (a) Except as contemplated by this Agreement, during the period from the date of this Agreement to the Closing Date, the Company and its Subsidiaries shall, and the Sellers shall cause the Company and the Subsidiaries to, conduct the operations of the Company and the Subsidiaries in the ordinary course of business and consistent with past practice, and shall use commercially reasonable efforts to preserve intact their business organization, keep available the services of their officers and key employees, and maintain satisfactory relationships with material customers, suppliers, contractors, distributors, licensors, licensees and others having business relationships with the Company. During the period from the date of this Agreement to the Closing Date, neither the Company, any Subsidiary nor any Seller will take any action reasonably within their control, or omit to take any action reasonably within their control, which would cause any of the representations and warranties in Article II and Article III hereof to become untrue in any material respect. (b) Without limiting the foregoing, during the period from the date of this Agreement to the Closing Date, neither the Company nor any Subsidiary shall, and the Sellers shall cause the Company and the Subsidiaries not to, take any of the actions specified in Section 36 2.17 without the prior written consent of Newco, except the Company and the Subsidiaries may consummate the acquisition of HSI. 5.2. Notices Prior to Closing. (a) Prior to the Closing, the Company shall give prompt notice to Newco of: (i) any breach or default by the Company of any of its representations, warranties, covenants or agreements hereunder or under any document or instrument contemplated hereby; (ii) any notice or other communication to the Company from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement; (iii) any notice or other communication to the Company from any Authority in connection with the transactions contemplated by this Agreement; (iv) any materially adverse change in the assets, liabilities, operations, business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole; and (v) any claim, action, or proceeding against the Company or a Subsidiary which could reasonably be expected to have a Material Adverse Effect. (b) Prior to the Closing, each Seller shall give prompt notice to Newco of: (i) any breach or default by such Seller or any of such Sellers' representations or warranties set forth in Article III, or such Seller's covenants or agreements hereunder or under any document or instrument contemplated hereby; (ii) any notice or other communication to such Seller from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement. (iii) any notice or other communication to such Seller from any Authority in connection with the transactions contemplated by this Agreement; and (iv) any claim, action, or proceeding against such Seller which could reasonably be expected to have a Material Adverse Effect. (c) Prior to the Closing, BRS and Newco shall give prompt notice to the Sellers of: (i) any breach or default by BRS or Newco of any of its representations, warranties, covenants or agreements hereunder or under any document or instrument contemplated hereby; 37 (ii) any notice or other communication to BRS or Newco from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement; (iii) any notice or other communication to BRS or Newco from any Authority in connection with the transactions contemplated by this Agreement; and (iv) any claim, action, or proceeding which could reasonably be expected to materially adversely affect the ability of BRS or Newco to consummate the transactions contemplated hereby. 5.3. Access and Information. Prior to the Closing Date, the Company and the Subsidiaries will give Newco (and any lender providing financing in connection with the transactions contemplated hereby) and their authorized representatives (including without limitation accountants, environmental auditors, surveyors and legal counsel) access at all reasonable times during business hours, upon reasonable notice, to all of the offices, warehouses and other facilities of the Company and the Subsidiaries, to all contracts, agreements, commitments, books and records of the Company and the Subsidiaries and to the officers and key employees (including auditors) of the Company and the Subsidiaries. 5.4. Public Announcements. From the date of this Agreement until Closing, BRS and Newco, on the one hand, and the Sellers, the Company and the Subsidiaries, on the other hand, shall not, and shall cause their affiliates not to, issue or cause the publication of any press release or any other public announcements with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the other party, except (subject to the other party's right to review and consult in the formulation of the published material) as required by applicable law and as is customary in connection with the transactions contemplated by the Financing. The provisions of this Section 5.4 shall survive any termination of this Agreement pursuant to Section 7.1. 5.5. Hart-Scott-Rodino Act. As soon as practicable after the date of this Agreement, Newco, the Sellers and the Company, in cooperation with each other, shall file (or cause to be filed) with each of the United States Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") any reports or notifications that may be required to be filed by them under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), in connection with the transactions contemplated by this Agreement, and shall use their respective reasonable best efforts to obtain early termination of all waiting periods under the HSR Act. All fees due from any party to the FTC or DOJ under the HSR Act in connection with the filing of any of those reports or notifications shall be shared equally by the Company and BRS (subject to Section 10.5 hereof). 5.6. Further Assurances. The Sellers, the Company and the Subsidiaries, on the one hand, and BRS and Newco, on the other hand, agree that subsequent to the Closing Date, at the request of the other party, they will execute and deliver, or cause to be executed and delivered, to the other party such further instruments and take such other reasonable actions as may be necessary to carry out the transactions contemplated by this Agreement (which, except as 38 otherwise provided herein, shall not include any obligation of any party to make payments or incur financial obligations). 5.7. Transfer of Certain Assets. (a) Prior to or simultaneous with the Closing, the Company will transfer and assign to Roger C. Stull, without representation, warranty or recourse, all of its right, title and interest in and to (i) all of the shares of capital stock of The Wooditch Group held by the Company (the "Wooditch Shares"), and (ii) the six automobiles identified on Schedule 5.7 hereto. Roger C. Stull shall indemnify, defend and hold harmless the Company Indemnified Parties (as hereafter defined) from and against any and all Losses (as hereafter defined) in respect of (i) Taxes attributable to the transfer of the Wooditch Shares and the automobiles identified on Schedule 5.7 and (ii) the ownership and use of the automobiles identified on Schedule 5.7 following such transfer. (b) It is acknowledged that Roger C. Stull and Ann R. Stull own the following life insurance policies, which are subject to split dollar understandings and Assignments of Life Insurance Policies as Collateral with the Company: (i) Northwestern Mutual, Nos. 7228156, 7494474 and 9161473 (Roger C. Stull, insured); and Northwestern, Mutual Nos. 7555323 and 9372584 (Ann R. Stull, insured). As of the Closing, (A) the Company and the Stulls will terminate their split dollar understandings and the Assignments of Life Insurance Policy as Collateral, (B) the Company will relinquish any and all claims against the Stulls for reimbursement of premiums paid by the Company on the policies (C) the Stulls will relinquish any and all claims against the Company arising out of borrowings by the Company against the policies, and (D) the Stulls will own the policies free and clear of any claims by the Company. 5.8. Voting, Shareholders Agreement and Other Matters. (a) Each of the Sellers hereby consents to the execution and delivery by the Sellers and the Company of this Agreement and the performance of the transactions contemplated hereby, including, without limitation, to the extent such execution, delivery or performance conflict with the provisions of the Shareholders Agreements (as defined below). On or prior to the Closing Date, each of the Sellers and the Company shall terminate the agreements identified under the heading "Stock Buy-Out Agreements" on Schedule 2.2(c) hereto (the "Shareholders Agreements"). (b) Other than pursuant to the Exchange and in accordance with Article I hereto, each Seller hereby agrees not to Transfer (as hereafter defined) any shares of Existing Company Stock, Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock or Class B Common Stock from the date of this Agreement. As used herein, "Transfer" means the making of any sale, exchange, assignment, hypothecation, gift, security interest, pledge or other encumbrance, or any contract therefor, any voting trust or other agreement or arrangement with respect to the transfer of voting rights (including any proxy or similar arrangement (whether or not revocable)) or any other beneficial interest in any of the Existing Company Stock, Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock or Class B Common Stock, the creation of any other claim thereto or any other transfer or disposition whatsoever, whether voluntary or involuntary, affecting the right, title, interest or possession in or to such Existing Company Stock, Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock or Class B Common Stock. 39 (c) Each of the Management Stockholders agrees to execute and deliver at the Closing a Securities Holders Agreement substantially in the form attached hereto as Exhibit F. (d) Each Seller, by executing and delivering this Agreement, hereby authorizes, approves and consents to, as a stockholder of the Company and PCC, and in the manner provided under Section 603 of the CGCL and Section 704 of the ABCA, (i) the execution, delivery and performance by the Company and PCC and their Subsidiaries of this Agreement and the transactions contemplated hereby (including, without limitation, the transactions contemplated by the Compensation Agreement (as defined in Section 6.2(i)), and (ii) officers of the Company and PCC executing and delivering such agreements, documents, assignments, certificates and other instruments and taking such other action as they may deem necessary, advisable, convenient or proper in connection with this Agreement and the transactions contemplated hereby. Each Seller will take all additional required or appropriate actions, as directors and/or stockholders, to vote for, consent to, approve, adopt and otherwise effect the Merger and the other transactions contemplated hereby. 5.9. Competition. (a) Following the Closing, each Seller set forth on Schedule 5.9 hereto, on behalf of itself and its affiliates, agrees that, for the period specified opposite such Seller's name on Schedule 5.9 hereto, neither it nor its affiliates shall, without the prior written consent of the Surviving Corporation, directly or indirectly, as owner, partner, agent, employee, consultant or otherwise, (i) engage in any business in the Territory (as defined below) which provides services or sells or leases products similar or equivalent to the products or services provided or sold immediately after the Closing by the Company and the Subsidiaries (a "Competitive Business") or (ii) solicit, attempt to solicit for employment or otherwise engage the services of, or become associated in any Competitive Business with, any person who was an employee, officer or director of the Company or the Subsidiaries at any time during the twelve (12) months preceding the date of this Agreement. Without limiting the generality of the foregoing, following the Closing, Roger C. Stull, on behalf of himself and his affiliates, agrees that, for the period specified opposite Mr. Stull's name on Schedule 5.9 hereto, neither he nor his affiliates shall, without the prior written consent of the Surviving Corporation, directly or indirectly, as owner, partner, agent, employee, consultant or otherwise, assist or promote in any manner Gregory J. Stull, Kimberlie R. McTavish, Christine Marie Kiser or Nicole Lynn Stull (the "Stull Children") in engaging in any activity prohibited by the foregoing sentence, it being understood and agreed that if any of the Stull Children engages in any activity described in this Section 5.9(a) during the period specified opposite Roger C. Stull's name on Schedule 5.9 hereto, then there shall be a rebuttable presumption that Roger C. Stull assisted or promoted such activity. For purposes of this Agreement, "Territory" shall mean each and every county located in the states of California, Arizona, Nevada, Minnesota, Alabama, Arkansas, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, Wyoming, and all other counties of other states of the United States or foreign jurisdictions in which the Company has conducted business, or during the period applicable to any Seller, shall have conducted business. None of the foregoing shall (i) prevent any Seller from owning up to 5% of the outstanding equity of a publicly-traded company or from making indirect investments through an investment 40 partnership or other investment entity in any corporation, partnership, limited liability company or other person or entity, (ii) prevent Roger C. Stull from participating in charitable, business or trade associations, or in the auto racing industry in any respect, or (iii) be construed as being binding in any way on the Stull Children or on William L. Rogers or his affiliates (other than an affiliate who is a Seller listed in Schedule 5.9). (b) The parties agree that to the extent any provision or portion of Section 5.9(a) shall be held, found or deemed to be unreasonable, unlawful or unenforceable by a court of competent jurisdiction, then any such provision or portion thereof shall be deemed to be modified to the extent necessary in order than any such provision or portion thereof shall be legally enforceable to the fullest extent permitted by applicable law; and the parties do further agree that any court of competent jurisdiction shall, and the parties hereto do hereby expressly authorize, require and empower any court of competent jurisdiction to, enforce any such provision or portion thereof in order that any such provision or portion thereof shall be enforced to the fullest extent permitted by applicable law. (c) As the violation by a Seller or its affiliates of the provisions of this Section 5.9 would cause irreparable injury to the Surviving Corporation, and there is no adequate remedy at law for such violation, the Surviving Corporation shall, notwithstanding anything to the contrary herein, have the right in addition to any other remedies available, at law or in equity, to seek to enjoin such Seller or its affiliates in a court of equity from violating such provisions. Each Seller, on behalf of itself and its affiliates, hereby waives any and all defenses it may have on the ground of lack of jurisdiction or competence of the court to grant an injunction or other equitable relief, or otherwise. The existence of this right shall not preclude any other rights and remedies at law or in equity which the Surviving Corporation may have. The prevailing party in any enforcement action or court proceeding under this Section 5.9 shall be entitled to the extent permitted by law to reimbursement from the other party for all of the prevailing party's costs, expenses and attorneys' fees. 5.10. Consents. Following the execution and delivery of this Agreement, the Company shall use commercially reasonable efforts to obtain the consents required from the relevant parties pursuant to the contracts (including the Leases) set forth on Schedule 2.4 (it being understood that neither the Company nor any Seller shall be required to execute any guaranty, incur any other obligation or pay any money to any third party or commence any legal, administrative or other proceeding). 5.11. Best Efforts. Each of the parties hereto will use its reasonable best efforts to cause the conditions to Closing set forth herein to be satisfied as soon as reasonably practicable. 5.12. Employees. The Company, the Sellers, BRS and Newco shall use their reasonable best efforts to cooperate with one another in making any required communications with current or former employees regarding the transactions contemplated by this Agreement and any employee benefit plans or other benefit arrangements. 5.13. Financing. BRS and Newco will use their commercially reasonable efforts to obtain for the Company the debt financing required to effect the transactions contemplated by this 41 Agreement and to pay related fees and expenses on terms and conditions reasonably satisfactory to Newco (the "Financing"). 5.14. Estoppel Certificates. The Company and the Subsidiaries shall use their commercially reasonable efforts to obtain on or prior to the Closing Date, landlord's estoppel certificates in form and substance reasonably acceptable to Newco and dated a date occurring not more than twenty (30) days prior to the Closing Date from each of the lessors under all of the Leases (collectively, the "Estoppel Certificates"). No Estoppel Certificate shall be conditioned upon any increase in rental or other payment, a reduced term or any other change in the terms and provisions of the subject lease. 5.15. Title Insurance. The Company and the Subsidiaries shall use their commercially reasonable efforts to obtain, at their sole expense, good and valid, irrevocable ALTA or CLTA title insurance binders or commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies reasonably acceptable to Newco (collectively, the "Title Company"), irrevocably committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment and reasonably acceptable to Newco) to issuing: (i) date down endorsements to, in form and substance acceptable to Newco or, at the Company's election, reissuances of, with effective dates of the Closing Date (collectively, the "Date Down Endorsements"), existing policies held on the date hereof by the Company or the Subsidiary owning the covered parcel of Real Property in amounts substantially the same as those of the existing policies or in such higher amounts as may be required by any lender providing financing in connection with the transactions contemplated hereby and otherwise in form and substance acceptable to Newco, or (ii) with respect to parcels of Owned Real Property not covered by the preceding clause (i), ALTA or, with respect to all Owned Real Property located in California, CLTA form of title insurance policies insuring good, valid, indefeasible fee simple title to each parcel of the Owned Real Property in the Company in the respective amounts listed on Schedule 2.11(a), where applicable, or in amounts substantially the same as those of the existing policies or in such higher amounts as may be required by any lender providing financing in connection with the transactions contemplated hereby, in any case subject to no Liens or exceptions to title other than the following (collectively, the "Permitted Title Exceptions"): (x) matters listed on Schedules B, except, subject to the last sentence of Section 5.19, for the Exceptions That Will Not Exist At Closing, (y) minor imperfections of title, conditions, encroachments, easements, covenants or restrictions, if any, none of which is substantial in amount and none of which, individually or in the aggregate, materially detracts from the value of the affected property or impairs the use of the affected property in the manner such property is currently being used or impairs the conduct of the Company's or any Subsidiary's business, and (z) Liens for real estate Taxes and assessments not yet due and payable, (collectively the "Title Policies"). Newco agrees that the issuers of the existing policies are acceptable and that First American Title Insurance Company shall be an acceptable issuer of any new title policy. Each of the Title Commitments shall be effective as of a date occurring not earlier than the date of the Original Agreement and the effective dates of each of them shall be brought down to the time of the Closing. Each such Title Commitment shall include such endorsements thereto as may reasonably be requested by Newco, provided that Newco shall bear the cost of any such endorsements. On or prior to the Closing Date, the Company and the Subsidiaries shall execute and deliver, or cause to be executed and delivered, to the Title Company any affidavits reasonably 42 requested by the Title Company in connection with the issuance of the Title Commitments, the Title Policies or the Date Down Endorsements in form and substance as required hereunder. The Company shall pay at Closing all premiums and other fees, costs and expenses necessary for the issuance of the Title Policies and Date Down Endorsements. 5.16. Surveys. If any lender providing financing in connection with the transactions contemplated hereby requires surveys of any of the Owned Real Property or requires title insurance upon such Owned Real Property of a nature or extent that a survey thereof is, for practical purposes, required, then, with respect to all of those parcels for which surveys are so required, the Company and the Subsidiaries shall use their commercially reasonable efforts to obtain, at their sole expense, no later than fifteen (15) days prior to Closing, as-built surveys of each parcel of the Owned Real Estate (the "Surveys") in accordance with the 1992 minimum standard detail requirements for ALTA/ACSM Land Title Surveys, including, to the extent required by such lender or for the issuance of such title insurance, Table A items 2,3,4,6,7,8,9,10,11 and 13 and with the Accuracy Standards (as adopted by ALTA and ACSM) of an Urban Survey, dated after April 20, 1998, and showing, without limiting the foregoing, with respect to each parcel of the Owned Real Estate, all easements and other appurtenances and all easements and other encumbrances burdening such parcel. Each Survey shall be certified to such lender, the Company, Newco, the Title Company and any other person reasonably requested by Newco and shall comply with any requirements imposed by the Title Company as a condition to the removal of any survey exception from the general exceptions to the Title Policy covering the Owned Real Property shown on the property surveyed. 5.17. FIRPTA. Either (a) on or before the Closing Date, the Company and PCC shall issue to Newco and BRS a certificate in compliance with U.S. Treasury Regulation Section 1.1445-2(c)(3) certifying that the shares of Class A Common Stock and the BRS Purchase Shares are not a U.S. real property interest or (b) each Seller shall issue to Newco and BRS a certificate in compliance with U.S. Treasury Regulation Section 1.1445-2(b)(2) certifying that such Seller is not a foreign person. 5.18. Zoning Letters. The Company and the Subsidiaries shall, at the request of BRS or Newco, reasonably cooperate with Newco in obtaining building code and zoning code compliance letters stating that each parcel of Real Property complies with the building and zoning codes applicable thereto and otherwise in form and substance satisfactory to Newco from the governmental authorities having jurisdiction over such matters with respect to such parcel of Real Property for which BRS or Newco requests such letters (collectively, the "Zoning Letters"). 5.19. Exceptions That Will Not Exist At Closing. Immediately upon its execution of this Agreement, the Company and the Subsidiaries shall use their commercially reasonable efforts to have satisfied or discharged of record all of the Exceptions That Will Not Exist At Closing. Notwithstanding the foregoing, the parties hereto acknowledge and agree that (a) the Continuing Exceptions will still exist at Closing, (b) after the Closing, the Sellers shall use their reasonable best efforts (and the Surviving Corporation shall reasonably cooperate with the Sellers) to have the Continuing Exceptions satisfied or discharged, and (c) the Sellers shall indemnify, defend and hold harmless the Company Indemnified Parties from and against any and all losses that may arise 43 from a failure of the Sellers to have satisfied or discharged after the Closing the Continuing Exceptions. 5.20. Termination of Certain Promotional Activities. The parties acknowledge that the Company and the Subsidiaries have received from the auto racing teams managed by Roger C. Stull advertising and promotional benefits. The parties agree that, immediately after the Closing, the Surviving Corporation and its subsidiaries shall have no obligation to sponsor and make any payments for such racing teams, shall cease to receive such advertising and promotional benefits, and shall have no continuing rights to sponsor such auto racing teams. 5.21. Release of Stulls from Fidelity Agreement. Following the Closing, the Surviving Corporation shall use its reasonable best efforts to cause Roger C. Stull and Ann R. Stull to be released at the earliest practicable date following the Closing, through the procurement of bonds from other issuers to replace the bonds previously issued by Fidelity and Deposit Company of Maryland or through other means, from all obligations and liability under the Fidelity Agreement (as defined in Section 8.5(1)), provided that the Surviving Corporation shall not be required to make out of pocket expenditures of more than $150,000 in connection with such efforts. ARTICLE VI CONDITIONS 6.1. Conditions Precedent to Each Party's Obligations. The respective obligations of each party to consummate the transactions contemplated hereby shall be subject to fulfillment (or written waiver) of each of the following conditions: (a) no order, statute, rule, regulation, executive order, stay, decree, judgment or injunction shall have been enacted, entered, promulgated or enforced by any court, governmental authority or regulatory body which restrains, prohibits or prevents the consummation of the transactions contemplated hereby; and (b) any waiting period applicable to the transactions contemplated hereby under the HSR Act shall have been terminated or expired. 6.2. Conditions Precedent to BRS' and Newco's Obligations. BRS' and Newco's obligation to consummate the transactions contemplated hereby shall be subject to the fulfillment of each of the following additional conditions, any one or more of which may be waived in writing by BRS and Newco: (a) each of the Sellers and the Company shall have performed in all material respects its obligations under this Agreement required to be performed on or prior to the Closing Date pursuant to the terms hereof; (b) the representations and warranties of the Sellers and the Company contained in this Agreement that are not qualified by materiality shall be true and correct in all material respects, and the representations and warranties of the Sellers and the Company set forth in this Agreement that are qualified by materiality shall be true and correct, as of the time 44 immediately prior to the consummation of the Exchange (irrespective of any notice delivered to Newco after the date hereof), with the same force and effect as though such representations and warranties had been made as of the time immediately prior to the consummation of the Exchange; (c) there shall not have occurred after the date hereof any material adverse change in the assets, liabilities, operations, business, results of operations or financial condition of the Company and its Subsidiaries taken as a whole; (d) Newco shall have received a certificate of the Seller Representative on behalf of the Sellers, dated the Closing Date, certifying to the fulfillment of the conditions set forth in clauses (a), (b) and (c) above; (e) Newco shall have received a certificate, dated the Closing Date, duly executed by the Secretary or an Assistant Secretary of the Company certifying as to: (i) the attached copy of the resolutions of the Board of Directors (or a duly authorized committee or officer) of the Company authorizing and approving the execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement and any other documents or instruments contemplated hereby, and stating that the resolutions thereby certified have not been amended, modified, revoked or rescinded; and (ii) the incumbency, authority and specimen signature of each officer of the Company executing this Agreement or any other document or instrument contemplated hereby; (f) Newco shall have received a certificate of the Company's organization, valid existence and good standing as a domestic corporation in the state of its incorporation as of a date no more than five (5) days prior to the Closing Date; (g) Newco shall have received from counsel for the Company and for the Sellers an opinion dated the Closing Date in the form attached hereto as Exhibit G and from counsel for the Management Stockholders an opinion in form and substance reasonably satisfactory to Newco; (h) Each of Management Stockholders shall have validly executed and delivered the Securities Holders Agreement referred to in Section 5.8; (i) On or prior to June 30, 1998, each of the Management Stockholders, Floyd E. Skor, Charles D. Steichen and the Company shall have validly executed and delivered the Compensation, Tax Consistency and Indemnification Agreement substantially in the form attached hereto as Exhibit H (the "Compensation Agreement"); (j) Each of the persons designated on Schedule 6.2(j) shall have validly executed and delivered the Employment Agreements substantially in the forms attached hereto as Exhibits I and J (the "Employment Agreements"); (k) The Surviving Corporation shall have adopted a stock-based management incentive plan covering 5% of the Surviving Corporation's common equity (the "Stock Option Plan"); 45 (l) The Company shall have received (and furnished to Newco evidence thereof reasonably satisfactory to Newco) all of the approvals and consents from third parties and Authorities designated on Schedule 6.2(l) (and such approvals and consents shall not have expired or been withdrawn as of the Closing Date); (m) Newco shall have received the proceeds of the Financing on terms reasonably acceptable to Newco; (n) Each Seller, on behalf of itself and its affiliates (other than the Company and the Subsidiaries) (i) shall have executed and delivered to the Company and the Subsidiaries and the Surviving Corporation a Mutual Release and Satisfaction in the form of Exhibit K hereto, and (ii) shall have executed and delivered to the Company and the Subsidiaries and the Surviving Corporation all documents necessary to release or terminate any Liens in favor of such Seller or its affiliates (other than the Company and the Subsidiaries) on the assets, properties or rights of the Company and the Subsidiaries and the Surviving Corporation and (iii) shall have terminated the Shareholders Agreements; (o) Newco and the Company and any lender providing financing to the transactions contemplated hereby, shall have received such Title Commitments, Title Policies, Surveys and Estoppel Certificates as shall be required by such lender in order to provide such financing; (p) On or before the Closing Date, Newco shall have received evidence reasonably satisfactory to it that the Exceptions That Will Not Exist At Closing (other than the Continuing Exceptions) have been satisfied or discharged and no longer encumber or otherwise affect any of the Real Property; (q) The Company and the Sellers shall have delivered updated disclosure Schedules, if any, pursuant to Section 6.4; and (r) The Sellers shall have caused the shareholder approval to be made in accordance with Section 10.14. 6.3. Conditions Precedent to the Sellers' Obligations. The Sellers' and the Company's obligation to consummate the transactions contemplated hereby shall be subject to the fulfillment of each of the following additional conditions, any one or more of which may be waived in writing by the Seller Representative and the Company: (a) Each of BRS and Newco shall have performed in all material respects its obligations under this Agreement required to be performed on or prior to the Closing Date pursuant to the terms hereof; (b) the representations and warranties of each of BRS and Newco contained in this Agreement that are not qualified by materiality shall be true and correct in all material respects, and the representations and warranties of BRS and Newco set forth in this Agreement that are qualified by materiality shall be true and correct, on and as of the Closing Date (irrespective of any notice delivered to the Sellers or the Company after the date hereof) with the 46 same force and effect as though such representations and warranties had been made on and as of the Closing Date; (c) the Sellers and the Company shall have received a certificate of an officer of BRS and Newco, dated the Closing Date, on behalf of Newco, certifying to the fulfillment of the conditions set forth in clauses (a) and (b) above; (d) the Sellers and the Company shall have received a certificate, dated the Closing Date, duly executed by an officer of Newco certifying as to: (i) the attached copy of the resolutions of Newco authorizing and approving the execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement and any other documents or instruments contemplated hereby, and stating that the resolutions thereby certified have not been amended, modified, revoked or rescinded; and (ii) the incumbency, authority and specimen signature of each officer of Newco executing this Agreement or any other document or instrument contemplated hereby; (e) the Sellers and the Company shall have received a certificate, dated the Closing Date, duly executed by an authorized person of BRS certifying as to: (i) the attached copy of the resolutions of BRS authorizing and approving the execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement and any other documents or instruments contemplated hereby, and stating that the resolutions thereby certified have not been amended, modified, revoked or rescinded; and (ii) the incumbency, authority and specimen signature of each authorized person of BRS executing this Agreement or any other document or instrument contemplated hereby; (f) the Sellers and the Company shall have received from counsel for Newco an opinion dated the Closing Date in the form of Exhibit L; (g) BRS and the Surviving Corporation shall have validly executed and delivered the Securities Holders Agreement referred to in Section 5.8; (h) On or prior to June 30, 1998, the Company shall have validly executed and delivered the Compensation Agreement; (i) The Surviving Corporation shall have validly executed and delivered the Employment Agreements; (j) The Surviving Corporation shall have adopted the Stock Option Plan; (k) the Company and the Subsidiaries shall have executed and delivered to the Sellers a Mutual Release and Satisfaction in the form of Exhibit M hereto; and (l) BRS and Newco shall have furnished to the Sellers and the Company evidence reasonably satisfactory to the Seller Representative and the Company that the purchasers of the senior subordinated notes in the Financing and Newco's and the Surviving Corporation's other lenders (including all bank lenders) have consented to the payment of the Cash Merger Consideration, it being understood that incorporation of the language provided by Sellers prior to 47 the date hereof for inclusion in the indenture for the senior subordinated notes and the loan agreements with bank lenders to Newco and the Surviving Corporation shall constitute conclusively such satisfactory evidence. 6.4. Up-Dating of Disclosure Schedules. Prior to the Closing, the Company and the Sellers may deliver to Newco and BRS revised disclosure Schedules modifying or qualifying the representations and warranties of the Sellers and the Company under Articles II and III hereof with respect to any matter or event that causes an inaccuracy or breach of a representation or warranty and that first arises prior to the Closing Date (whether before or after the date of this Agreement), except for matters or events of which any Seller (solely with respect to such Seller's representations and warranties in Article III) or the Company (solely with respect to the Company's and the Sellers' representations and warranties in Article II) had knowledge as of the date of this Agreement; provided, that the Company also may add matters or events to the revised disclosure Schedules of which Floyd E. Skor, but no other person listed in Section 10.12(c), had knowledge as of the date of this Agreement. Such revised disclosure Schedules shall be deemed to have modified the representations and warranties made by the Sellers and the Company as of the date of the Original Agreement and to be made as of the time immediately prior to the consummation of the Exchange and to have superseded any similarly numbered Schedule delivered to Newco and BRS on the date hereof. The foregoing, however, shall not affect the condition to the Closing obligations of BRS and Newco contained in Section 6.2(b) as such condition relates to such representations and warranties prior to giving effect to the delivery of such revised Schedules. In the event that the condition to the Closing obligations of BRS and Newco set forth in Section 6.2(b), as such condition relates to representations and warranties, shall not have been satisfied, but would be satisfied after giving effect to the delivery of revised disclosure Schedules under this Section 6.4, then, subject to Section 8.5(j), the sole remedy of Newco and BRS in respect of the failure of such condition shall be to elect not to consummate the transactions contemplated by this Agreement. ARTICLE VII TERMINATION AND ABANDONMENT 7.1. Termination. Except with respect to provisions that expressly survive the termination of this Agreement, this Agreement may be terminated: (a) by mutual written agreement of BRS, Newco, the Company and the Sellers; (b) by BRS or Newco (provided BRS or Newco is not in material breach of this Agreement), by written notice to the parties hereto, at any time if (i) the representations and warranties of a Seller or the Company in this Agreement were incorrect in any material respect when made or at any time thereafter, or (ii) any of the Sellers or the Company is in breach in any material respect of any of its covenants or agreements in this Agreement (each, a "Seller Breach"), and, in either of such cases, such Seller Breach continues uncured for ten (10) days after written notice thereof by BRS or Newco; provided, however, if such Seller or the Company (as the case may be) commences to effect a cure within the foregoing ten-day period, such person shall be permitted such additional time as may be reasonable (based on the nature of the Seller 48 Breach, the possibility for cure, and the effect of delay on the party seeking termination) to cure so long as such person diligently continues to seek to effect a cure; (c) by the Sellers (provided no Seller is in material breach of this Agreement), by written notice to the parties hereto, at any time if (i) the representations and warranties of BRS or Newco in this Agreement were incorrect in any material respect when made or at any time thereafter, or (ii) BRS or Newco is in breach in any material respect of any of its covenants or agreements in this Agreement (each, a "Newco Breach"), and, in either of such cases, such Newco Breach continues uncured for ten (10) days after written notice thereof by the Sellers; provided, however, if BRS or Newco (as the case may be) commences to effect a cure within the foregoing ten-day period, such entity shall be permitted such additional time as may be reasonable (based on the nature of the Newco Breach, the possibility for cure, and the effect of delay on the party seeking termination) to cure so long as such entity diligently continues to seek to effect a cure; (d) by BRS, Newco or the Sellers, if a court of competent jurisdiction or governmental or regulatory body shall have issued an order, decree or ruling, or taken any other action, restraining, enjoining or otherwise prohibiting the Closing of the transactions contemplated hereby and such order, decree, ruling or other action shall have become final and non-appealable; or (e) by BRS, Newco, the Company or the Sellers, if the Closing shall not have occurred by August 31, 1998; provided, however, that at the time of any such termination, the terminating party is not in willful and material breach of any of its representations, warranties, covenants or obligations hereunder. 7.2. Effect of Termination. If this Agreement is terminated as provided herein, no party shall have any liability or further obligation to any other party under the terms of this Agreement or otherwise; provided that if such termination shall result from the willful breach by the non-terminating party of any representation or warranty, or the failure of the non-terminating party to perform a covenant of this Agreement, such party shall be fully liable for any and all damages incurred or suffered by the other parties as a result of such failure. The provisions of Section 10.5 shall survive any termination of this Agreement pursuant to Section 7.1. ARTICLE VIII INDEMNIFICATION 8.1. The Sellers' Obligations to Indemnify. Subject to the limitations and procedures contained in this Article VIII, from and after the Closing, the Sellers, jointly and severally, shall indemnify, defend and hold harmless Newco, BRS, the Surviving Corporation and each of their affiliates, and their respective directors, officers, employees and representatives (each, a "Company Indemnified Party"; provided that such term shall not include any Seller regardless of their affiliation with the Surviving Corporation), from and against any and all claims, losses, settlements, fines, liabilities, damages, deficiencies, costs or expenses (including interest, penalties and reasonable attorneys' fees and disbursements) (collectively, "Losses") suffered, sustained, 49 incurred or required to be paid by any such Company Indemnified Party due to, based upon, arising out of or otherwise in respect of (i) any inaccuracy in, or any breach of, any representation or warranty of the Sellers or of the Company contained in this Agreement (or any schedule hereto or any certificate or other agreement delivered on behalf of Sellers hereunder), determined without regard to any materiality, Material Adverse Effect, Material Adverse Change, substantial compliance or similar exception or qualification contained in or otherwise applicable to such representation or warranty; provided that, the indemnification obligation of the Sellers with respect to the representations and warranties contained in Article III hereof shall be several and not joint as to each Seller, (ii) any breach of any covenant or agreement of the Sellers or the Company contained in this Agreement, (iii) any Loss, whether disclosed or undisclosed and whether existing prior to, on or after the Closing (other than on account of defaults, violations or breaches arising from actions first occurring after the Closing by the Surviving Corporation or any of its subsidiaries under any obligations assumed by it or them in connection with the transactions contemplated hereby), arising from or relating to any sold or discontinued business or operation of the Company or any Subsidiary (or any respective predecessor) or any business or activity conducted by the Company or any Subsidiary (or any respective predecessor) other than the businesses and activities conducted by the Company and its Subsidiaries on or after the date of the Original Agreement, (iv) the enforcement by any Company Indemnified Party of its rights under this Agreement, (v) any Loss, whether disclosed or undisclosed, arising from or relating to (A) environmental conditions first occurring, existing or arising prior to the Closing due to, based upon, arising out of or otherwise in respect of a Release or threat of Release of Hazardous Substances at any property owned or leased by the Company or the Subsidiaries prior to the date of the Original Agreement (but not on the date thereof) (whether into the air, soil, ground or surface waters on or off-site), (B) the off-site transportation, storage, treatment, recycling, disposal or spill of Hazardous Substances (but excluding crushed concrete, concrete slurry, asphalt, rebar and associated materials that are generated in the ordinary course of operations of the Company or the Subsidiaries) generated or caused by the Company or the Subsidiaries, prior to the Closing, or (C) any investigation, remediation or other response costs ("Remediation Costs") associated with any environmental conditions identified in connection with the removal or upgrading of any existing underground storage tanks identified on Schedule 2.12(c) (except for the cost of removing, upgrading or installing such tanks) not meeting the December 1998 RCRA technical requirements for such tanks except for conditions resulting from Releases occurring after the Closing; provided, however, that with respect to Sections 8.1(v)(A) and (B) above, Sellers shall only be responsible for such Losses which, individually or in the aggregate but collectively for such Sections, exceed $50,000, and provided further that with respect to Section 8.1(v)(C) above, the Surviving Corporation shall be responsible for the first $100,000 of such Remediation Costs, Sellers shall be responsible for the next $100,000 of Remediation Costs, and the parties shall share equally all such Remediation Costs in excess of $200,000. 8.2. The Surviving Corporation's Obligations to Indemnify. Subject to the limitations and procedures contained in this Article VIII, from and after the Closing, the Surviving Corporation shall indemnify, defend and hold harmless each Seller and its affiliates, and their respective directors, officers, employees and representatives (each, a "Seller Indemnified Party" and, together with the Company Indemnified Parties, the "Indemnified Parties"), from and against any and all Losses suffered, sustained, incurred or required to be paid by any such Seller 50 Indemnified Party due to, based upon, arising out of or otherwise in respect of (i) any inaccuracy in, or breach of, any representation or warranty of BRS or Newco contained in this Agreement (or any certificate or other agreement delivered by Newco hereunder), (ii) any breach of any covenant or agreement of the Surviving Corporation, BRS or Newco contained in this Agreement and (iii) the enforcement by any Seller Indemnified Party of its rights under this Agreement. 8.3. Notice and Opportunity to Defend. The obligations and liabilities of any party hereto against which indemnification is sought hereunder with respect to claims resulting from the assertion of liability by third parties shall be subject to this Section 8.3. (a) Promptly after receipt by any Indemnified Party of notice of any demand or claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that could reasonably be expected to result in a Loss, the Indemnified Party shall give notice thereof (a "Claims Notice") to any other party obligated to provide indemnification pursuant to Section 8.1 or 8.2 (each, an "Indemnifying Party"). Each Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may be suffered by the Indemnified Party. The rights of any Indemnified Party to be indemnified hereunder shall not be adversely affected by its failure to give, or its failure to timely give, a Claims Notice with respect thereto unless, and if so, only to the extent that, the Indemnifying Party is materially prejudiced thereby. (b) The Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel, any Asserted Liability if (i) the claim involves (and continues to involve) solely monetary damages and the Indemnifying Party's assumption of the defense or settlement of such claim will not have a material adverse effect on the Indemnified Party's business, (ii) the Indemnifying Party states in writing to the Indemnified Party the Indemnifying Party's good faith belief (based on the facts then known by the Indemnifying Party) that, as between the two, the Indemnifying Party is solely obligated to satisfy and discharge the claim, and (iii) the Indemnifying Party makes reasonably adequate provision to satisfy the Indemnified Party of the Indemnifying Party's ability to satisfy and discharge the claim (the foregoing collectively, the "Litigation Conditions"); provided, however, that if the parties in any action shall include both an Indemnifying Party and an Indemnified Party, and the Indemnified Party shall have received written advice of counsel that counsel selected by the Indemnifying Party has a conflict of interest under applicable standards of professional responsibility because of the availability of different or additional defenses to the Indemnified Party, the Indemnified Party shall have the right to select one separate counsel to participate in the defense of such action on its behalf, at the expense of the Indemnifying Party; and provided further, however, that the Indemnifying Party shall forfeit the right to control the defense or settlement of any such claim if, at any time after assuming the defense or settlement thereof, the Indemnifying Party no longer satisfies the Litigation Conditions. Subject to the foregoing, if the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall within thirty (30) days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnified Party of its intent to do so, and the Indemnified Party shall cooperate, at the expense of the Indemnifying Party, in the compromise of, or defense against, such Asserted Liability. If the Indemnifying Party elects not to compromise or defend (or, as provided below, discontinues its defense of) the Asserted Liability, fails to notify the Indemnified Party of its election as herein provided, or fails to satisfy the Litigation Conditions, the 51 Indemnified Party may pay, compromise or defend such Asserted Liability. Either of the Indemnified Party or the Indemnifying Party may participate, at its own expense (except as provided in the first sentence of this subparagraph (b)), in the defense of an Asserted Liability being controlled by the other party. Notwithstanding the foregoing, if, subsequent to the Indemnifying Party's satisfaction of the Litigation Conditions and election to compromise or defend an Asserted Liability, the Indemnifying Party can demonstrate to the reasonable satisfaction of the Indemnified Party, based on facts not available to the Indemnifying Party at the time of the original satisfaction of the Litigation Conditions, that the Indemnifying Party is not obligated to satisfy or discharge such claim, then Indemnifying Party may elect to discontinue the defense or settlement of the Asserted Liability and the Indemnified Party may elect to assume the defense or settlement of the Asserted Liability at the Indemnified Party's expense. If the Indemnifying Party chooses to defend any claim, the Indemnified Party shall, subject to receipt of a reasonable confidentiality agreement, make available to the Indemnifying Party any books, records or other documents within its control, and the reasonable assistance of its employees, for which the Indemnifying Party shall be obliged to reimburse the Indemnified Party the reasonable out-of-pocket expenses of making them available. If the Indemnifying Party elects to discontinue the defense or settlement of an Asserted Liability and the Indemnified Party elects to assume such defense or settlement, the Indemnifying Party shall, subject to the receipt of a reasonable confidentiality agreement, make available to the Indemnified Party any books, records or other documents within its control, and shall provide to the Indemnified Party the work product of the litigation or proceeding related to such defense or settlement (except for books, records, documents and work product (or portions thereof) relating solely to the Indemnifying Party's liability for the relevant claim and the provision of which, based on opinion of counsel, would prejudice the Indemnifying Party's defense of any action by the Indemnified Party under this Article VIII). (c) The Indemnifying Party and the Indemnified Party shall use commercially reasonable efforts to cooperate in determining the validity of any third party claim for any Loss for which a claim for indemnification may be made hereunder. Each party shall use commercially reasonable efforts to minimize all Losses. 8.4. Procedure for Claims by Parties. In the event that any party incurs or suffers any Losses with respect to which indemnification may be sought by such party pursuant to this Article VIII (other than in respect of third party claims), the Indemnified Party must assert the claim by a Claims Notice to the Indemnifying Party. The Claims Notice must state the nature and basis of the claim in reasonable detail based on the information available to the Indemnified Party. Each Indemnifying Party to whom a Claims Notice is given shall respond to any Indemnified Party that has given a Claims Notice (a "Claim Response") within thirty (30) days (the "Response Period") after the date that the Claims Notice is given. Any Claim Response shall specify whether or not the Indemnifying Party given the Claim Response disputes the claim described in the Claims Notice. If any Indemnifying Party fails to give a Claim Response within the Response Period, such Indemnifying Party shall be deemed not to dispute the claim described in the related Claims Notice. If any Indemnifying Party elects not to dispute a claim described in a Claims Notice, whether by failing to give a timely Claim Response or otherwise, then the amount of such claim shall be conclusively deemed to be an obligation of such Indemnifying Party, unless the amount of the Loss actually suffered by the Indemnified Party differs from the amount of the claim (whether 52 by change of circumstance, mistake or fraud of the Indemnified Party or otherwise). If any Indemnifying Party shall be obligated to indemnify an Indemnified Party hereunder, such Indemnifying Party shall pay to such Indemnified Party the amount to which such Indemnified Party shall be entitled within thirty (30) days after the last day of the applicable Response Period or, if the Claims Notice relates to Losses that have not been liquidated as of the date of the Claims Notice, the date on which all or any part of such Losses shall have become liquidated and determined. If there shall be a dispute as to the amount or manner of indemnification under this Agreement, the Indemnifying Party and the Indemnified Party shall seek to resolve such dispute through negotiations and, if such dispute is not resolved within twenty (20) days, the Indemnified Party may submit such dispute to arbitration pursuant to Section 10.9. If any Indemnifying Party fails to pay all or any part of any indemnification obligation on or before the later to occur of (y) thirty (30) days after the last day of the applicable Response Period, and (z) if the Claims Notice relates to Losses that have not been liquidated as of the date of the Claims Notice, the date on which all or any part of such Losses shall have become liquidated and determined, then the Indemnifying Party shall also be obligated to pay to the Indemnified Party interest on the unpaid amount for each day during which the obligation remains unpaid at an annual rate established in the manner described in Section 1.10(g). 8.5. Limitations on Indemnification. The indemnification provided for in Sections 8.1 and 8.2 shall be subject to the following limitations: (a) The Sellers shall not be obligated to pay any indemnification amounts for Losses pursuant to Section 8.1(i) until the aggregate amount of all Losses pursuant thereto exceeds an amount equal to $3,000,000 (the "Basket"), whereupon the Company Indemnified Parties shall be entitled to indemnification under Section 8.1(i) for all such Losses in excess of such amount, up to a maximum amount equal to $50,000,000, subject to paragraph (d) below. In addition, no claim shall be made for Losses with respect to any breach of a representation or warranty under Section 8.1(i) unless the claim for Losses with respect to such breach reasonably could be expected to exceed $50,000; provided, however, that any breaches arising out of a series of related events or the same set of operative facts shall be treated as a single claim for purposes of this paragraph (a). (b) No claims for indemnification in respect of Sections 8.1(i) or 8.2(i) shall be made after the date on which the applicable representation or warranty upon which such claim was based ceases to survive pursuant to Section 8.7; provided that the expiration of any representation or warranty under Section 8.7 shall not affect any claim made pursuant to a Claims Notice delivered prior to the date of such expiration. (c) The limitations on the indemnification obligations set forth in this Section 8.5 shall not apply to any covenants of the Sellers (or any other party) in this Agreement (including covenants in Article II and Article III, except to the extent that any representations or warranties are contained within such covenants). In addition, notwithstanding the provisions of paragraph (a) above, the limitations on the indemnification obligations of Sellers set forth in paragraph (a) above shall not apply to breaches of the representations and warranties made in Sections 2.1 (other than the second sentence of Section 2.1(a)), 2.2 (other than in Section 2.2(b) 53 with respect to the qualification or licensing of the Subsidiaries as foreign corporations), 2.3, 3.1 and 3.2. (d) Notwithstanding anything to the contrary set forth herein, no limitation or condition of liability or indemnity applicable to any Seller shall apply to any breach of a representation or warranty if such representation or warranty was made with actual knowledge by such Seller that it (i) contained an untrue statement of a material fact or (ii) omitted to state a material fact necessary to make the statements contained therein not misleading. For purposes of calculating the amount of Losses incurred arising out of or relating to any breach of a representation or warranty by any Seller, the references to "Material Adverse Effect" or "Material Adverse Change" or other materiality qualifications (or correlative terms), including as expressed in accounting concepts such as GAAP, shall be disregarded. (e) The Company Indemnified Parties may seek recovery against any Seller for any Loss for which the Sellers are jointly and severally liable hereunder, except that (i) in any action (including any arbitration pursuant to Section 10.9) to recover such Loss, the appropriate Company Indemnified Parties may not proceed against any Seller unless (subject to jurisdictional, venue or other procedural limitations) it also proceeds against each of the Roger C. Stull and Ann R. Stull Trust, the NCCF, John Sawyer, J&J Investments, LLC, the Repchinuck Revocable Trust, C. George Bush and Bruce Varney; (ii) the Servants' Trust shall not be liable for any portion of the Pro Rata Share of the Roger C. Stull and Ann R. Stull Trust, the Gregory J. Stull Family Trust, the Kevin C. McTavish Family Trust, the Christine Marie Stull Family Trust or Nicole Lynn Stull of such Loss, and J&J Investments, LLC shall not be liable for any portion of the Pro Rata Share of John Sawyer of such Loss; (iii) the Management Stockholders, Floyd E. Skor, the Charles D. Steichen and Martha L. Steichen Trust, as a group shall not be liable for more than their aggregate Pro Rata Share of such Loss; (iv) B-R Investors/Penhall I, L.P. shall not be liable for more than its Pro Rata Share of such Loss; (v) the liability of each Management Stockholder (other than John Sawyer, J&J Investments, LLC, the Repchinuck Revocable Trust, C. George Bush and Bruce Varney) shall be limited to his or its Eligible Assets (as defined in Section 8.5(g)); and (vi) no Non-Defaulting Seller (as defined in Section 8.5 (f)) who is a Non-Management Stockholder, and none of John Sawyer, J&J Investments, LLC, the Repchinuck Revocable Trust, C. George Bush or Bruce Varney, shall be liable for any Management Stockholder's Pro Rata Share of such Loss until the appropriate Company Indemnified Parties have attempted in good faith, through appropriate judicial or other proceedings, to recover indemnification payments from such Management Stockholder under Section 8.1 for the full amount of such Management Stockholder's Eligible Assets. (f) The Sellers agree among themselves that each Seller shall pay such Seller's Pro Rata Share of any Loss, other than a Loss arising out of a breach of a representation or warranty by another Seller under Article III or a breach of a covenant by another Seller for which the breaching Seller is solely liable hereunder; provided, however, subject to the limitations of Section 8.5(e), if any Seller (a "Defaulting Seller") fails to pay any or all of his or its Pro Rata Share of such Loss, each remaining Seller (a "Non-Defaulting Seller") shall also pay a fraction of the shortfall of such Loss equal to such Non-Defaulting Seller's Pro Rata Share divided by the aggregate Pro Rata Share of all Non-Defaulting Sellers. Each Defaulting Seller shall indemnify, defend and hold harmless the Non-Defaulting Sellers from any Losses incurred by the Non- 54 Defaulting Sellers that are caused by the failure of such Defaulting Seller to pay such Defaulting Seller's Pro Rata Share of any Losses to the extent required herein. Each Seller acknowledges it is his or its intent, as a material part of the consideration for the execution of this Agreement, that each Seller shall be liable to pay such Seller's Pro Rata Share of any Losses to the extent provided herein. At the Closing, each Management Stockholder shall grant a security interest in the shares of the Surviving Corporation stock received as Merger Consideration, and the proceeds thereof, to the Surviving Corporation in respect of such Management Stockholder's obligations under this Article VIII by executing a pledge agreement containing terms and conditions reasonably satisfactory to the Surviving Corporation (including without limitation the full subordination of such pledge to the Surviving Corporation's rights under the Securities Holders Agreement) (the "Pledge Agreement"). (g) Each Management Stockholder may, at his or its option, satisfy any indemnification obligation under Section 8.1 by payment of cash or by delivery to the Surviving Corporation of shares of stock of the Surviving Corporation, which shares shall have a Current Market Value determined in accordance with Section 8.5(h); provided, however, that if any Management Stockholder elects to satisfy such indemnification obligation by payment of cash, such Management Stockholder must make such election irrevocably by written notice to the Surviving Corporation before the commencement of any determination of Fair Market Value under Section 8.5(h), of which commencement the Surviving Corporation will give ten (10) days prior notice. Other than pursuant to the Securities Holders Agreement, but subject to the terms of the Pledge Agreement, no cash shall be paid to a Management Stockholder upon the occurrence of any event requiring the redemption from such Management Stockholder of shares of Surviving Corporation stock received as Merger Consideration, and, other than pursuant to the Securities Holders Agreement, but subject to the terms of the Pledge Agreement, no Management Stockholder shall otherwise be permitted to transfer any shares of Surviving Corporation stock received as Merger Consideration or receive cash or other property in respect of such shares, unless such Management Stockholder first provides security reasonably satisfactory to BRS and the Seller Representative for such Management Stockholder's indemnification obligations under this Agreement in the full amount of his or its Eligible Assets. For purposes of this Agreement, a Management Stockholder's "Eligible Assets" shall include (i) all shares of stock of the Surviving Corporation received by such Management Stockholder as Merger Consideration, (ii) all cash and other property received by such Management Stockholder in connection with any transfer or redemption of such shares, and (iii) all cash and other property (including other securities of the Surviving Corporation or any other entity) received by such Management Stockholder in respect of such shares, whether by way of dividend, merger, reorganization, recapitalization, or otherwise. (h) For purposes of this Agreement, "Current Market Price" on any date shall mean, with respect to any security, if such security is publicly traded in the United States, the average of the daily Closing Prices for the ten (10) consecutive trading days ending on the date immediately prior to the date as of which the Current Market Price is to be determined, or, if such day is not a trading date, the trading day immediately preceding such date. The "Closing Price" for each day shall be the average of the closing bid and asked price for such security on the NASDAQ National Market System, or, if not then traded thereon, the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked price regular way on the principal stock exchange on which such security is 55 then listed or traded, or, if not then listed or traded on any such exchange, the mean of the closing bid and asked prices on an automated quotation system as furnished by any New York Stock Exchange member firm selected from time to time by the Surviving Corporation for that purpose. Except as set forth in the preceding sentence, with respect to any security that is not publicly traded in the United States, "Current Market Price" on any date shall mean the fair market value of such security on such date as determined by mutual agreement of BRS, John Sawyer and the Seller Representative, or, if they are unable to agree, by an independent appraiser selected by the Surviving Corporation and reasonably acceptable to John Sawyer and the Seller Representative. The costs of any such appraiser shall be paid by the Surviving Corporation. (i) The parties further agree that the NCCF may, at its option, satisfy any indemnification obligation under Section 8.1 by payment of cash or by delivery to the Surviving Corporation of shares of Senior Exchangeable Preferred Stock in an aggregate Liquidation Preference (as defined in the statement of designation thereof attached hereto as Exhibit N), plus accrued but unpaid dividends thereon, equal to the amount of such indemnification obligation or Junior Subordinated Notes, for which shares of the Senior Exchangeable Preferred Stock are exchangeable, in an aggregate principal amount, plus accrued but unpaid interest thereon, equal to the amount of such indemnification obligation. This Section 8.5(i), however, shall not limit in any other way the NCCF's indemnification obligations under Article VIII, including without limitation the obligation to satisfy indemnification obligations in cash in the event that the NCCF no longer shall hold any shares of the Senior Exchangeable Preferred Stock or any such Junior Subordinated Notes. (j) Each Seller agrees that neither it nor any of the other Sellers is a necessary or indispensable party for any action (including an arbitration pursuant to Section 10.9) for the purpose of determining whether the Company Indemnified Parties are entitled to indemnification for any Losses pursuant to this Agreement, hereby waives, to the fullest extent permitted by law, any requirement that the Company Indemnified Parties join such Seller in, or provide such Seller with notice of, any such action and hereby agrees not to file a motion to dismiss, vacate, stay or transfer such action by reason of a Company Indemnified Party's failure to join any Seller as a party to such action. Notwithstanding the foregoing, the Company Indemnified Parties (i) shall give notice of such action to the Seller Representative and the Sellers to the extent required by the other provisions of this Agreement, (ii) shall name in such action the persons specified in clause (i) of Section 8.5(e), and (iii) shall not oppose the joinder of any of the Sellers, if not named as a party in any such action brought by any Company Indemnified Party against one or more of the Sellers pursuant to this Agreement, as a party to such action, upon any of such Sellers' written request; provided, however, any failure of the Company Indemnified Parties to give notice of any such action to any of the Sellers (other than the Seller Representative) or of any of the Sellers to actually receive such notice shall not affect the validity of the agreements and waivers of each Seller set forth in the first sentence of this Section 8.5(i). Each Seller also agrees that service of process or any other legal process for any action brought by the Company Indemnified Parties pursuant to this Agreement may be made as set forth in Section 9.1(b) of this Agreement. Each Seller agrees that any of the other Sellers may join or be joined in any such action in which such Seller has been named as an Indemnifying Party by the Company Indemnified Parties, or in which such Seller has joined in the action. 56 (k) Notwithstanding anything in this Agreement to the contrary, none of the Sellers shall have any liability on account of a breach or inaccuracy in a representation or warranty pursuant to Section 8.1(i), to the extent that (A) the matter or event which causes the inaccuracy or breach first arose prior to the Closing Date (either before or after the date of this Agreement), (B) neither any Seller nor the Company had knowledge of such matter or event as of the date of the Original Agreement, (C) such matter or event is disclosed to BRS and Newco in the revised disclosure Schedules delivered pursuant to Section 6.4 and (D) BRS and Newco shall have elected to proceed with the Closing. (l) The parties agree that: (i) in the event that the Roger C. Stull and Ann R. Stull Trust, the Servants' Trust or the NCCF shall be obligated to make any indemnification payments under this Article VIII ("Stull Indemnification Payments"), such Stull Indemnification Payments shall not be payable until the sooner of such time as (x) Roger C. Stull and Ann R. Stull shall have been released from their obligations under that certain Agreement of Indemnity, dated January 7, 1991 (the "Fidelity Agreement"), among Roger C. Stull, Ann R. Stull, Penhall, Penhall Company, PCC, Penhall Environmental Services and Fidelity and Deposit Company of Maryland ("Fidelity") and (y) all of the bonding obligations of Fidelity that are the subject of the Fidelity Agreement shall have expired or have been terminated, and no interest shall accrue with respect to such Stull Indemnification Payments prior to such time, provided, that no such deferral of the Stull Indemnification Payments shall result in an increase in the amounts payable by any other Seller under this Article VIII; (b) the Roger C. Stull and Ann R. Stull Trust shall be entitled to offset any amounts actually paid by Roger C. Stull and Ann R. Stull (together with their affiliates, the "Stulls") from and after the Closing under the Fidelity Agreement against any Stull Indemnification Payments required to be made by it; and (c) the Surviving Corporation will indemnify, defend and hold harmless the Stulls from and against any Losses incurred by them under the Fidelity Agreement. 8.6. Insurance and Tax Effect. (a) Any payments made pursuant to the provisions of this Article VIII shall be treated as an adjustment to the total consideration payable to the Sellers under this Agreement. (b) The amount of any Loss for which indemnification is provided under any of Sections 8.1 or 8.2 shall be net of any amounts (net of the costs of recovery of such amounts) recovered by the Indemnified Party under insurance policies with respect to such Loss (collectively, a "Net Loss"). (c) The amount of any Loss shall be (i) increased to take account of the net Tax cost (if any) actually incurred by the Indemnified Party arising from the receipt of indemnity payments hereunder (grossed up for such increase) and (ii) reduced to take account of any net Tax benefit (if any) actually realized by the Indemnified Party arising from the incurrence or payment of any such Net Loss. 8.7. Survival of Representations and Warranties. The provisions set forth in Section 10.5 of this Agreement shall expressly survive the termination or abandonment of this Agreement. All covenants and agreements contained in this Agreement shall survive the Closing Date in perpetuity and shall remain in full force and effect in accordance with their terms. The 57 representations and warranties set forth in Articles II, III and IV of this Agreement (and any Schedule thereto) shall survive the Closing Date for a period of eighteen (18) months, except (a) the representations in Section 2.8 (and any Schedules thereto) shall survive until the date which is 60 days after the expiration of the statute of limitations applicable to such matters, (b) the representations and warranties in Sections 2.12 and 2.20 (and any Schedules thereto) shall survive the Closing Date for a period of five (5) years, (c) the representations and warranties in Sections 2.1 - 2.4, Article III and Sections 4.1 and 4.2 (and any Schedules thereto) shall survive the Closing Date in perpetuity, and (d) the foregoing time limitations shall not apply to any claims which have been the subject of a Claims Notice prior to expiration of the applicable time period. Subject to Section 8.5(j), no right of indemnification hereunder shall be limited by reason of any investigation or audit conducted before or after the Closing or the knowledge of any party of any breach of a representation, warranty, covenant or agreement by the other party at any time, or the decision of any party to complete the Closing. ARTICLE IX APPOINTMENT OF SELLER REPRESENTATIVE 9.1 Appointment of the Seller Representative; Enforcement of Rights, Benefits and Remedies. (a) Each Seller hereby irrevocably constitutes and appoints Roger C. Stull as the Seller Representative for the purpose of performing and consummating the transactions contemplated by this Agreement. The appointment of Roger C. Stull as the Seller Representative is coupled with an interest and all authority hereby conferred shall be irrevocable and shall not be terminated by any or all of the Sellers without the consent of Newco (or, after the Closing, the Surviving Corporation), which consent may be withheld for any reason, and the Seller Representative is hereby authorized and directed to perform and consummate all of the transactions contemplated by this Agreement. Not by way of limiting the authority of the Seller Representative, each and all of the Sellers, for themselves and their respective heirs, executors, administrators, successors and assigns, hereby authorize the Seller Representative to: (i) waive any provision of this Agreement which the Seller Representative deems necessary or desirable; (ii) execute and deliver on their behalf all documents and instruments which may be executed and delivered pursuant to this Agreement, including without limitation the shares of Existing Company Stock, Penhall Class A Common Stock, Penhall Class B Common Stock, Class A Common Stock, Class B Common Stock or Class C Common Stock and the stock powers with respect thereto; (iii) make and receive notices and other communications pursuant to this Agreement and service of process in any legal action or other proceeding arising out of or related to this Agreement or any of the transactions hereunder; (iv) settle any dispute, claim, action, suit or proceeding arising out of or related to this Agreement or any of the transactions hereunder; 58 (v) receive and distribute the Seller Consideration and adjustments thereto; (vi) appoint or provide for successor agents; and (vii) pay expenses incurred or which may be incurred by or on behalf of the Sellers in connection with this Agreement. In the event of the inability, failure or refusal of Roger C. Stull to act as the Seller Representative, or in the event of the death of Roger C. Stull or any successor, the Sellers promptly shall appoint one of the Sellers as their agent for purposes of this Article IX by action of Sellers who held a majority in interest of the shares of Existing Company Stock. Failing such an appointment within thirty (30) days of such inability, failure, refusal or death, Newco (or, after the Closing, the Surviving Corporation) may, by written notice to the Sellers at the last address of the Sellers applicable for purposes of Section 10.3 hereof, designate one of the Sellers as the Seller Representative. (b) Any claim, action, suit, or other proceeding, whether in law or equity, to enforce any right, benefit or remedy granted to the Sellers under this Agreement may be asserted, brought, prosecuted or maintained only by the Seller Representative. Any claim, action, suit or other proceeding, whether in law or equity, to enforce any right, benefit or remedy granted under this Agreement, including without limitation any right of indemnification provided in Article VIII hereof, may be asserted, brought, prosecuted or maintained by a Company Indemnified Party against the Sellers or the Seller Representative by service or process on the Seller Representative and without the necessity of serving process on, or otherwise joining or naming as a defendant in such claim, action, suit or other proceeding, any Seller. With respect to any matter contemplated by this Article IX, the Sellers shall be bound by any determination in favor of or against the Seller Representative or the terms of any settlement or release to which the Seller Representative shall become a party. (c) The Seller Representative shall not be liable to any Seller for any acts or omissions of the Seller Representative in connection with his duties and obligations hereunder, except in the case of the Seller Representative's gross negligence or willful misconduct. The Sellers (excluding the Seller Representative and his affiliates), jointly and severally, agree to indemnify and hold the Seller Representative harmless as to any liability (other than on account of his respective indemnification obligations under Article VIII) incurred by him to any person by reason of his having accepted the same or in carrying out any of the terms hereof, and to reimburse the Seller Representative for all of his costs and expenses, including, among other things, reasonable attorneys' fees and costs, incurred by reason of any matter as to which an indemnity is paid under this Section 9.1(c); provided, however, that no indemnity need be paid in the case of the Seller Representative's gross negligence or willful misconduct. 59 ARTICLE X MISCELLANEOUS 10.1. Amendment and Modification. This Agreement may be amended, modified supplemented or altered only by a written agreement signed by the parties hereto at any time prior to the Closing with respect to any of the terms contained herein. 10.2. Waiver of Compliance; Consents. Any failure of a party to comply with any obligation, covenant, agreement or condition herein may be waived, but only if such waiver is in writing and is signed by the party against whom the waiver is to be effective. Such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 10.2. 10.3. Notices. All notices and other communications hereunder shall be in writing (including by telecopy) and shall be deemed to have been duly given when delivered in person (including by overnight courier), when telecopied (with confirmation of transmission having been received) or three (3) days after being mailed by registered or certified mail (postage prepaid, return receipt requested), in each case to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice). (a) if to Newco or BRS: Penhall Acquisition Corp. c/o Bruckmann, Rosser, Sherrill & Co., Inc. 126 East 56th Street New York, New York 10022 Attn: Mr. Harold O. Rosser II Facsimile No.: (212) 521-3707 with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19102 Attn: G. Daniel O'Donnell, Esq. Facsimile No.: (215) 994-2222 60 (b) if to the Sellers: Roger C. Stull 1440 Vista Del Mar Fullerton, California 92631 Facsimile No.: (714) 871-0490 with a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067 Attn: Milton B. Hyman, Esq. Facsimile No.: (310) 203-7199 (c) If to the Company or PCC: Penhall International, Inc. 1801 Penhall Way Anaheim, California 92803 Attn: Roger C. Stull Facsimile No.: (714) 999-2493 10.4. Assignment; No Third Party Beneficiaries. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto without the prior written consent of the other parties hereto; provided that the Company or the Surviving Corporation may assign its rights and obligations to any lender providing financing in connection with the transactions contemplated hereby (or in connection with any sale by the Surviving Corporation of its business or any part thereof); provided that no such assignment shall relieve BRS or the Surviving Corporation of its obligations under this Agreement. The affiliates, directors, officers, employees and representatives of BRS, Newco and the Surviving Corporation are intended third party beneficiaries of Section 8.1 of this Agreement. The affiliates, directors, officers, employees and representatives of the Sellers are intended third party beneficiaries of Section 8.2 of this Agreement. Nothing else contained in this Agreement is intended to confer upon any person (including, without limitation, any employees) other than the parties hereto and their respective successors and permitted assigns, and rights or remedies hereunder. 10.5. Expenses. Except as otherwise expressly provided herein, each of the parties hereto will bear its own expenses in connection with the negotiation, preparation, execution and delivery of this Agreement and the documents and instruments contemplated hereby and in connection with the transactions contemplated hereby and thereby, including all fees and disbursements of counsel, accountants, appraisers and other advisors retained by such party; 61 provided, however, that if the transactions contemplated by this Agreement are consummated, (i) Roger C. Stull will pay a portion of the fees payable to William L. Rogers and his affiliates (the "Rogers Fee") in an amount equal to the product of the Rogers Fees multiplied by the Non-Management Stockolders' (excluding Floyd E. Skor, B-R Investors/Penhall I, L.P. and the Charles D. Steichen and Martha L. Steichen Trust) pre-Closing ownership percentage of Existing Company Stock (without giving effect to the transactions under the Exchange) and (ii) except as provided in the immediately preceding clause (i), the Surviving Corporation shall bear the expenses of the Sellers, BRS and Newco in addition to its own expenses. In addition, the financial cost to BRS of the dilution from certain of the Surviving Corporation's post-Closing management stock arrangements, in the aggregate amount of $995,922, shall be borne one-third by the Roger C. Stull and Ann R. Stull Trust, one-third by BRS and one-third by the Management Stockholders. The Roger C. Stull and Ann R. Stull Trust's share of such cost, $331,974, shall be subtracted from the Cash Merger Consideration payable to it at Closing in full satisfaction of its obligations under the preceding sentence. 10.6. Governing Law. This agreement, and all agreements, documents and instruments delivered pursuant to hereto incorporated herein, unless otherwise expressly provided therein, shall be governed by, and construed in accordance with, the substantive laws of the State of California applicable to agreements made and to be performed entirely within such state, without reference to the conflicts of laws rules of such state. 10.7. Counterparts. This Agreement may be executed by the parties hereto individually or in any combination, in one or more counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. 10.8. Entire Agreement. This Agreement, including the documents and instruments referred to herein or contemplated hereby, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter hereof. There are no restriction, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. Except for that certain Letter Agreement (regarding confidentiality) dated March 13, 1998 between the Company and BRS, this Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. 10.9. Arbitration. (a) If any dispute or controversy shall arise among the parties hereto as to any matter arising out of or in connection with this Agreement, the parties shall attempt in good faith to resolve such controversy by mutual agreement. If such dispute or controversy cannot be so resolved, it shall be resolved solely in accordance with the provisions of this Section 10.9. (b) Any dispute, controversy or claim between or among the parties to this Agreement (the "Disputing Parties") arising out of or related to this Agreement, or the breach thereof, shall be settled by a single arbitrator by arbitration, conducted in the State of California, in accordance with the Commercial Rules of the American Arbitration Association (the "AAA"). Such arbitration shall be administered by the AAA only if one (or more) of the Disputing Parties requests such administration. Arbitration shall be the exclusive remedy for determining any such 62 dispute, regardless of its nature. Unless mutually agreed by the parties otherwise, any arbitration shall take place in the City of Los Angeles, California. (c) The arbitrator shall be selected by the Disputing Parties within fifteen (15) days after demand for arbitration is made by a Disputing Party. If the Disputing Parties are unable to agree on an arbitrator within such period, then each Disputing Party shall select one arbitrator, and each such arbitrator shall select a third arbitrator and the dispute shall be settled by the panel consisting of such three arbitrators (such panel, or the single arbitrator agreed to by both parties, as the case may be, being hereinafter referred to as the "Arbiter"). Each arbitrator shall be an attorney licensed in the State of California and shall possess substantive legal experience with respect to the principal issues on dispute. (d) This agreement to resolve any disputes by binding arbitration shall extend to claims against any parent, subsidiary or affiliate of each party, and when acting within such capacity, any officer, director, shareholder, employee or agent of each party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law. In the event of a dispute subject to this paragraph the Disputing Parties shall be entitled to reasonable discovery subject to the discretion of the Arbiter. The remedial authority of the Arbiter shall be the same as, but no greater than, would be the remedial power of a court having jurisdiction over the parties and their dispute. In the event of a conflict between the Commercial Rules of the AAA and these procedures, the provisions of these procedures shall govern. (e) Except as may otherwise be agreed to in writing by the Disputing Parties or as ordered by the Arbiter upon substantial justification, the hearings of the dispute shall be held and concluded within ninety (90) days of submission of the dispute to arbitration. The Arbiter shall render its final award within thirty (30) days following closing of the record. The Arbiter shall state the factual and legal basis for the award. The decision of the Arbiter shall be final and binding, and no appeal shall be permitted therefrom. Final judgment may be entered upon such an award in any State or Federal court having the arbitration jurisdiction thereof, but entry of such judgment shall not be required to make such award effective. (f) Any filing or administration fees shall be borne initially by the Disputing Party requesting administration by the AAA. If more than one Disputing Party requests such administration, the fees shall be borne initially by the party incurring such fees as provided by the rules of the AAA. The initial fees and costs of the Arbiter shall be borne equally between the Disputing Parties. The prevailing party in such arbitration, as determined by the Arbiter, and in any enforcement or other court proceedings, shall be entitled to the extent permitted by law, to reimbursement from the other party for all of the prevailing party's costs (including but not limited to the Arbiter's compensation), expenses, and attorneys' fees. (g) Nothing in this Section 10.9 shall limit any right that any party may otherwise have to seek to obtain (i) preliminary injunctive relief in order to preserve the status quo pending the disposition of any such arbitration proceeding or (ii) temporary or permanent injunctive relief from any breach of any provision of this Agreement. 63 10.10. Severability. If any provision or provisions of this Agreement or of any of the documents or instruments delivered pursuant hereto, or any portion of any provision hereof or thereof, shall be deemed invalid or unenforceable pursuant to a final determination of any court of competent jurisdiction or as a result of future legislative action, such determination or action shall be construed so as not to affect the validity or enforceability hereof or thereof and shall not affect the validity or effect of any other portion hereof or thereof. 10.11. Arm Length Contract. This Agreement has been negotiated "at arms length" by the parties, each represented by counsel of its choice and each having an equal opportunity to participate in the drafting of the provisions hereof. Accordingly, in construing the provisions of this Agreement no party shall be presumed or deemed to be the "drafter" or "preparer" of the same. 10.12. Headings; Interpretative Provisions. (a) The headings of the various Articles and Sections of this Agreement have been inserted for the purpose of convenience of reference only, and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. (b) When reference is made in this Agreement to an Article or Section or Schedule, such reference shall be to an Article, Section or Schedule of this Agreement unless otherwise indicated. Whenever the words "included", "includes" or "including" (or any other tense or variation of the word "include") are used in this Agreement, they shall be deemed to be followed by the words "without limitation". As used in this Agreement, the auxiliary verbs "will" and "shall" are mandatory, and the auxiliary verb "may" is permissive (and, by extension, is prohibitive when used negatively, as a denial of permission). All accounting terms used but not otherwise defined in this Agreement shall have the meanings determined by GAAP. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The definitions contained in this Agreement are applicable to the singular as well as to the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any document or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes. (c) Whenever a representation or warranty is stated to be based on the "knowledge of the Company", the "Company's knowledge" or a similar qualification, such phrase refers to whether any of the Company's Senior Management (as hereafter defined) has actual knowledge, after due inquiry, of the matters involved. For purposes of this Agreement, the Company's "Senior Management" consists of C. George Bush, Martin Houge, David S. Neal, Robert Norling, Renee O'Brien, Bruce Repchinuck, John Sawyer, Floyd Skor, Charles D. Steichen, Roger C. Stull and Bruce Varney. (d) Any matter disclosed by the Company or the Sellers to BRS and Newco in any disclosure Schedule shall be deemed to be disclosed with respect to any other Schedule so 64 long as the relevance of the matter to such other Schedule is readily apparent from the disclosure of the matter that appears in the Schedule where it is disclosed. (e) Reasonable or Best Efforts. Whenever a covenant requires a party to use its "best efforts," "reasonable efforts," "reasonable best efforts" or "commercially reasonable efforts" to do something or cause something to occur, such party shall be deemed to have performed such covenant if it used the requisite efforts regardless of whether such efforts were successful. 10.13. Time is of the Essence. Time is of the essence in the performance of this Agreement. 10.14. Golden Parachute Approval Requirement. Prior to execution of the Compensation Agreement, the Sellers shall have caused the shareholder approval requirements set forth in Section 280G(b)(5) of the Code to be satisfied with respect to all payments incident to the transactions under the Compensation Agreement to any "disqualified individual" as defined in Section 280G(c) of the Code. 10.15. Date of Representations and Warranties and Covenant Obligations. Notwithstanding anything in this Agreement to the contrary, but without limiting the conditions set forth in Sections 6.2(b) and 6.3(b), the representations and warranties of the parties to this Agreement set forth in Articles II, III and IV shall be deemed to have been given, and the Schedules to this Agreement prepared, as of the date of the Original Agreement. No failure of a representation or warranty herein to be true and correct as of the date of this Agreement shall constitute a breach of this Agreement unless such failure constituted a breach of the Original Agreement as of the date of the Original Agreement. In addition, the covenants and agreements set forth in Article V shall be deemed to have been made as of the date of the Original Agreement. Without limiting the foregoing the terms "as of the date hereof," "as of the date of this Agreement," "current," "currently" and other terms referring to a specific date, as used in Articles II, III, IV and V hereof, shall refer to the date of the Original Agreement. 65 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf as of the date first above written. PENHALL ACQUISITION CORP. By /s/ Harold O. Rosser II ------------------------------------ Name: Harold O. Rosser II Title: President BRUCKMANN, ROSSER, SHERRILL & CO., L.P. By: BRS Partners, Limited Partnership, the general partner By: BRSE Associates, Inc., its general partner By: /s/ Harold O. Rosser II ------------------------------------ Name: Harold O. Rosser II Title: Managing Director PENHALL RENTAL CORP. (F/K/A PENHALL INTERNATIONAL, INC.) By /s/ Roger C. Stull ------------------------------------ Name: Roger C. Stull Title: President PHOENIX CONCRETE CUTTING, INC. By /s/ C. George Bush ------------------------------------ Name: C. George Bush Title: President 66 MANAGEMENT STOCKHOLDERS /s/ Gary T. Bush ------------------------------------ Gary T. Bush /s/ C. George Bush ------------------------------------ C. George Bush /s/ Scott E. Campbell ------------------------------------ Scott E. Campbell /s/ David A. Ellison ------------------------------------ David A. Ellison /s/ Alfred R. Fenton ------------------------------------ Alfred R. Fenton /s/ Vincent M. Gutierrez ------------------------------------ Vincent M. Gutierrez /s/ Lawrence E. Henkels ------------------------------------ Lawrence E. Henkels /s/ David P. Henning ------------------------------------ David P. Henning /s/ Jack S. Hobbs ------------------------------------ Jack S. Hobbs /s/ Richard M. Lawler ------------------------------------ Richard M. Lawler /s/ Alan G. Lowry ------------------------------------ Alan G. Lowry 67 /s/ Randel E. Mathews ------------------------------------ Randel E. Mathews /s/ Leif McAfee ------------------------------------ Leif McAfee /s/ Joseph P. Morello ------------------------------------ Joseph P. Morello /s/ David S. Neal ------------------------------------ David S. Neal NORLING LIVING TRUST DATED OCTOBER 5, 1995 By: /s/ Robert C. Norling --------------------------------- Robert C. Norling Its: Trustee By: /s/ Karen D. Norling --------------------------------- Karen D. Norling Its: Trustee /s/ Richard S. Reel ------------------------------------ Richard S. Reel MICHAEL BRUCE REPCHINUCK REVOCABLE TRUST By: /s/ Michael Bruce Repchinuck --------------------------------- Michael Bruce Repchinuck Its: Trustee 68 /s/ John T. Sawyer ------------------------------------ John T. Sawyer J&J INVESTMENTS, LLC, a Nevada limited liability company By: /s/ Brian Sweeney --------------------------------- Brian Sweeney Its: General Manager /s/ Kevin Sheridan ------------------------------------ Kevin Sheridan /s/ Bruce F. Varney ------------------------------------ Bruce F. Varney NON-MANAGEMENT STOCKHOLDERS /s/ Roger C. Stull ------------------------------------ Roger C. Stull NATIONAL CHRISTIAN CHARITABLE FOUNDATION, INC. By: /s/ Terrill A. Parker --------------------------------- Terrill A. Parker General Counsel THE SERVANTS' CHARITABLE TRUST, a 501(c)(3) Charitable Trust By: /s/ Roger C. Stull --------------------------------- Roger C. Stull Trustee 69 ROGER C. STULL and ANN R. STULL, TRUSTEES UNDER DECLARATION DATED JANUARY 19, 1984 By: /s/ Roger C. Stull --------------------------------- Roger C. Stull Trustee B-R INVESTORS/PENHALL I, L.P., a California limited partnership By: B-R Investors, Inc., a California corporation, its general partner By: /s/ William L. Rogers --------------------------------- William L. Rogers President /s/ Floyd E. Skor --------------------------------- Floyd E. Skor CHARLES D. STEICHEN AND MARTHA L. STEICHEN TRUST dated September 21, 1989 By: /s/ Charles D. Steichen --------------------------------- Charles D. Steichen Trustee 70 EX-10.9 3 EXHIBIT 10.9 Exhibit 10.9 PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT WHEREAS, PENHALL COMPANY, a California corporation, heretofore established the PENHALL COMPANY AMENDED PROFIT SHARING PLAN (hereinafter referred to as the "Plan") and, in connection therewith, established a trust fund (hereinafter referred to as the "Trust"), by executing a plan and a trust instrument (hereinafter referred to as the "Agreements"); WHEREAS, PENHALL INTERNATIONAL, INC., a California corporation (hereinafter referred to as the "Sponsoring Company"), subsequently assumed sponsorship of the Plan and now maintains the Trust; and WHEREAS, the Sponsoring Company desires to amend and restate the Agreement to include certain of the provi sions now required to be included in the Plan as a result of the enactment of new laws and to enable certain Affiliated Companies (as hereinafter defined) to adopt the Plan and to make contributions to the Trust; NOW, THEREFORE, the Sponsoring Company hereby amends the Plan to read as hereinafter set forth, effective July 1, 1989: ARTICLE I PURPOSE OF PLAN AND TRUST; DEFINITIONS 1.1 - Purpose. This Plan and Trust, which shall be known as the PEN HALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES Employees' Profit Sharing (401(k)) Plan and Trust, are designed and intended to qualify as a qualified plan and trust under the applicable provisions of the Code. 1.2 - Definitions. (a) "Accounts" means the accounts established and maintained for the Participants pursuant to the provisions hereof. (b) "Accrued Benefit" means the sum of the balances of a Participant's Company Contributions and Matching Contribu tions Accounts. (c) "Act" means the Employee Retirement Income Security Act of 1974, as modified by any subsequent amend ments thereto. (d) "Adjustment Factor" means the cost of living ad justment factor prescribed by the Secretary of the Treasury pursuant to the provisions of Section 415(d) of the Code for years beginning after December 31, 1987. (e) "Adopting Company" means the Sponsoring Company and each Affiliated Company which has adopted the Plan. (f) "Affiliated Company" means any corporation which, together with the Sponsoring Company, constitutes an Af filiated Service Group, a controlled group of corporations as defined in Section 414(b) of the Code as modified by Section 415(h) of the Code, a trade or business, (whether incorporated or not) which, together therewith, are under common control as defined in Section 414(c) of the Code as modified by Section 415(h) of the Code, and any other entity required to be aggregated with the Sponsoring Company pursuant to regulations under Section 414(o) of the Code. (g) "Affiliated Service Group" means: (1) A group of organizations consisting of a Service Organization (the "First organization") and one or more of the following: (A) Any Service Organization which: (i) is a shareholder or partner in the first organization, and (ii) regularly performs services for the first organization or is regularly associated with the first organization in performing services for third persons, and (B) Any other organization if: (i) a significant portion of the business of such organization is the performance of services (for the first organization, for organizations described in subpart (A) above, or for both) of a type historically performed in such service field by employees, and (ii) Ten Percent (10%) or more of the interest in such organization is held by persons who are officers, highly compensated employees, or owners of the first organization or an organization described in subpart (A) above. (2) A group of organizations consisting of: (A) An organization or group of "related organizations" which is performing, on a regular and con tinuing basis, management functions for one organization or group of "related organizations," and (B) The organization or group of "related organizations" described in subpart (A) above for which such functions are performed. As used hereinabove, the term "related or ganizations" shall be deemed to have the same meaning as the term "related persons" as used in Section 103(b)(6)(C) of the Code. (h) "Anniversary Date" means the last day of each Plan Year. (i) "Annuity Starting Date" means the first day of the first period for which an amount is payable if distribution of a Participant's benefit is to be made in the form of an annuity or as of which all events must occur to entitle a Participant or his Beneficiary to distribution of his benefit if distribution thereof is not to be made in the form of an annuity. (j) "Beneficiary" means the person last designated by a Participant pursuant to the provisions of Section 2.3 to receive the benefits, if any, payable in the event of his death. (k) "Calendar Year Elective Deferral Dollar Limitation" means Seven Thousand Dollars ($7,000), as adjusted by the Adjustment Factor. (l) "Code" means the Internal Revenue Code of 1986, as modified by any subsequent amendments thereto. (m) "Committee" means the Committee established by an Adopting Company pursuant to the provisions of Article VII hereof, and, unless otherwise indicated, with respect to a particular Participant, the Committee of the Adopting Com pany by which such Participant is employed. (n) "Company Contributions Account" means the account established and maintained for each Participant to which any Salary Reduction Contributions made to the Plan on his behalf are credited. (o) "Compensation" means: (1) For purposes of computing the limitations on benefits and contributions under Section 415 of the Code, an Employee's wages, salary, fees for professional services and other amounts paid to or accrued for such Employee for personal services actually rendered for an Adopting Company for any Plan limitation year prior to July 1, 1991, and paid to or made available to such Employee for personal services actually rendered for the Company for any Plan limitation year beginning after June 30, 1991, specifically including but not limited to (A) commissions, (B) compensation based on a percentage of profits, (C) commissions payable with respect to insurance premiums, (D) tips, (E) bonuses, (F) in the case of any Self-Employed Individual, earned income, as defined in Section 402(c)(2) of the Code, (G) earned income from sources outside of the United States, (H) amounts described in Sections 104(a)(3), 105(a) and 105(h) of the Code to the extent includable in gross income, (I) amounts described in Section 105(d) of the Code, (J) amounts paid or reimbursed by an Adopting Company for moving expenses to the extent not deductible under Section 217 of the Code, (K) the value of any nonqualified stock option includable in gross income for the year during which such option is granted, (L) any amount includable in gross income as a result of making an election described in Section 83(b) of the Code and (M) reimbursements or other expense allowances under a nonaccountable plan (as described in Treasury Regulation Section 1.62-2(c)), but shall not include (A) any contributions made to any deferred compensation plan which are not includable in gross income for the year in which contributed, (B) any contributions made to a simplified employee pension plan to the extent deductible by the Employee, (C) any distributions made under any deferred compensation plan, (D) any amount includable in gross income as a result of the exercise of a nonqualified stock option or the lapse of restrictions on any restricted stock or property which renders such stock or property freely transferable or no longer subject to any substantial risk or forfeiture, (E) any amount includable in gross income as a result of the exercise of any qualified stock option, (F) any other amounts accorded special tax favored treatment, such as premiums for group term life insurance to the extent not includable in gross income, or (G) any contributions made towards the purchase of an annuity contract described in Section 403(b) of the Code, whether or not made pursuant to a salary reduction agreement. (2) For purposes of computing benefits here under or contributions to the Plan, Compensa tion as defined in subsection (1) hereinabove, except that (A) items (H) through (L), inclusive, described as specifically included in such definition and (B) the amount or cost of any other welfare benefit provided or paid for by an Adopting Company shall be excluded. (3) For purposes of identifying Highly Com pensated Employees, Compensation as defined in subsection (1) hereinabove but without regard to the provisions of Sections 125, 402(a)(8), 402(h)(1)(B) and 403 of the Code. (4) For Plan Years beginning after 1988, Compensation shall not exceed the "Compensation Limit." The "Compensation Limit" means $200,000, modified by the Adjustment Factor for years after 1989. Modifications in effect on January 1 of any calendar year shall be effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990. If the Plan determines Compensation on a period of time that contains fewer that 12 calendar months, then the applicable Compensation Limit shall be an amount equal to the Compensation Limit for the calendar year in which the compen sation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. In applying the Compensation Limit, the rules of Section 414(q)(6) of the Code shall apply, except that the term Family Member shall include only the Participant's spouse and lineal descendants under age 19 as of the close of the applicable year. If as a result of the application of such rules the Compensation Limit is exceeded, then the Compensation Limit shall be prorated among the affected individuals in proportion to each such individual's Compensation prior to the application of this Compensation Limit. Notwithstanding any other provision of the Plan, the Compensation Limit shall not apply for any purpose prior to the Plan Year beginning in 1989. (p) "Contract" means any individual or group annuity contract issued by an Insurer and acquired by the Trustee for the benefit of one or more of the Participants. (q) "Date of Employment" means the first day upon which an Eligible Employee is credited with an Hour of Service. (r) "Date of Re-employment" means the first day upon which a Former Participant is again credited with an Hour of Service. (s) "Effective Date" means July 1, 1973, as to PENHALL INTERNATIONAL, INC., July 1, 1989, as to each Affiliated Company which adopts the Plan concurrently herewith and the date specified as such in the Joinder Agreement whereby any other Affiliated Company subsequently adopts the Plan as to such other Affiliated Company. (t) "Eligibility Computation Period" means the twelve (12) consecutive month period beginning with a Participant's Date of Employment or Date of Re-employment. (u) "Eligible Employee" means each Employee of an Adopting Company other than Employees who are included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and an Adopting Company, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such Adopting Company or Companies. (v) "Employee" means any person who is employed by an Adopting Company, including Leased Employees. (w) "Entry Date" means, as to each Adopting Company, each July 1st and January 1st after the Effective Date of the Plan as to such Adopting Company. (x) "Family Member" means the spouse, lineal ancestors, lineal descendants and spouses of any lineal ancestors or descendants of (i) a Five Percent Owner or (ii) a Highly Compensated Employee who is among the Ten (10) Highly Compensated Employees receiving the greatest amount of Compensation during any Plan Year. (y) "Fiduciary" means any person who (i) exercises any discretionary authority or control with respect to the man agement of the Plan or control with respect to the manage ment or disposition of the assets thereof, (ii) renders any investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the Plan, or has any discretionary authority or responsibility to do so, or (iii) has any discretionary authority or responsibility in the administration of the Plan, including any other persons (other than Trustees) designated by any Named Fiduciary to carry out fiduciary responsibilities, except to the extent otherwise provided by the Act. (z) "Former Participant" means a Participant who has separated from the service of an Adopting Company and incur red one or more One Year Breaks In Service. (aa) "Highly Compensated Employee" means highly compensated active Employees and highly compensated former Employees. A highly compensated active Employee includes any Employee who performs service for an Affiliated Company during the determination year and who, during the look-back year: (i) received Compensation from an Affiliated Company in excess of $75,000 (as adjusted by the Adjustment Factor); (ii) received Compensation from an Affiliated Company in excess of $50,000 (as adjusted by the Adjustment Factor) and was a member of the Top-Paid Group of Employees for such year; or (iii) was an officer of an Affiliated Company and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Section 415(b)(1)(A) of the Code. The term Highly Compensated Employee also includes: (i) Employees who are both described in the preceding sentence if the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 Employees who received the most Compensation from an Affiliated Company during the determination year; and (ii) Employees who are 5 percent owners at any time during the look-back year or the determination year. If no officer has satisfied the Compensation requirement of (iii) above during either a determination year or a look back year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. A highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for an Affiliated Company during the determination year, and was a highly compensated active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or look-back year, a Family Member of either a 5 percent owner who is an active or former Employee or a Highly Compensated Employee who is one of the 10 most Highly Compensated Employees ranked on the basis of Compensation paid by an Affiliated Company during such year, then the Family Member and the 5 percent owner or top-ten Highly Compensated Employee shall be treated as a single Employee receiving Compensation and Plan contributions equal to the sum of such Compensation and Contributions of the Family Member and 5 percent owner or top-ten Highly Compensated Employee. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the Top-Paid Group of Employees, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. (bb) "Hour of Service" means each hour for which (i) an Employee is paid or entitled to payment for the performance of duties for an Affiliated Company, (ii) an Employee is paid or entitled to payment for the non-performance of duties for an Affiliated Company, and (iii) back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Affiliated Company. However, an Employee shall not be credited with Hours of Service under both clause (iii) and (i) or (ii) of the foregoing sentence. Hours of Service for the non-performance of duties shall be credited in accordance with Department of Labor Regulation Section 2530.200b-2(b) and Hours of Service in general shall be credited to the applicable computation period in accordance with Department of Labor Regulation Section 2530.200b-2(c). (cc) "Inactive Participant" means any Employee or Former Employee who has ceased to be a Participant but for whose benefit an Account is maintained under the Plan. (dd) "Insurer" means any legal reserve life insurance company authorized to do business in the state of California selected by the Sponsoring Company's Committee from time to time to issue any Contract acquired hereunder. (ee) "Investment Manager" means any Fiduciary other than a trustee or Named Fiduciary (i) who has the power to manage, acquire or dispose of any asset of the Plan; (ii) who is (a) registered as an investment adviser under the Investment Advisers Act of 1940; (b) is a bank, as defined in such Act; or (c) is an insurance company qualified to perform the services described in clause (i) hereof under the laws of more than one state of the United States; and (iii) has acknowledged in writing that he is a Fiduciary with respect to the Plan. (ff) "Joinder Agreement" means the separate document by which an Affiliated Company other than one which is a sig natory hereto on the date of the execution hereof subse quently adopts the Plan and specifies the Effective Date of the Plan as to such Affiliated Company. (gg) "Key Employee" means each Employee, Former Employee or Beneficiary thereof who, at any time during the current Plan Year or any of the four (4) immediately preced ing Plan Years, is or was (i) an Officer of an Adopting Company who has received annual Compensation greater than One Hundred Fifty Percent (150%) of the amount specified in Section 415(c)(1)(A) of the Code, as adjusted by the Adjustment Factor, for any of such Years beginning prior to January 1, 1987, or Fifty Percent (50%) of the amount specified in Section 415(b)(1)(A) of the Code, as adjusted by the Adjustment Factor, for any of such Years beginning after December 31, 1986, (ii) among the ten (10) Employees owning or considered to own (within the meaning of Section 318 of the Code, as modified by Section 416 of the Code) the largest interests in an Adopting Company and who has received annual Compensation greater than the amount specified in Section 415(c)(1)(A) of the Code, as adjusted by the Adjustment Factor, for any of such Years, (iii) an Employee owning or considered to own Five Percent (5%) or more of an Adopting Company ("Five Percent Owner"), or (iv) an Employee owning or considered to own One Percent (1%) or more of an Adopting Company and receiving more than One Hundred Fifty Thousand Dollars ($150,000.00), as adjusted by the Adjustment Factor, of annual Compensation therefrom. Notwithstanding the foregoing, no more than Fifty (50) Employees or, if less, the greater of (i) three (3) or (ii) Ten Percent (10%) of the Employees of an Adopting Company excluding any Employees described in Section 414(q)(8) of the Code, shall be treated as officers; for the purposes of determining ownership under clauses (iii) and (iv), the provisions of Section 414(b), (c) and (m) of the Code shall not apply; and, for purposes of clause (ii), if two (2) Employees own or are considered to own equal percentages of an Adopting Company, the Employee who has received the grea ter amount of Compensation shall be considered to own a lar ger interest such Adopting Company. Annual Compensation means Compensation as defined herein, but including amounts contributed by the Adopting Company pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. (hh) "Leased Employee" means any person other than an Employee who has performed services for an Adopting Company or for an Adopting Company and a party determined to be a "related person" pursuant to the provisions of Section 414(n)(6) of the Code ("recipient") on a substantially full time basis for a period of at least one (1) year and such services are of a type historically performed by employees in the business field of the recipient pursuant to an agreement between the recipient and any other person ("leasing organization"). However, any contributions made or benefits provided by the leasing organization which are attributable to the services performed for the recipient shall be deemed to have been made or provided by the recipient. Notwithstanding the foregoing, a person who would otherwise be deemed to be a Leased Employee shall not be deemed to be an Employee if (1) such person is a participant in a money purchase pension plan providing for (A) a nonintegrated employer contribution of at least ten percent (10%) of compensation, as defined in SEction 415(c)(3) of the Code, but including any amounts contributed pursuant to a salary reduction agreement which are excludible from such employee's gross income under the provisions of Section 125, 402(a)(8), 402(h) or 403(b) of the Code, (B) immediate participation and (C) full and immediate vesting and (2) Leased Employees do not constitute more than twenty percent (20%) of the recipient's nonhighly compensated workforce. (ii) "Matching Contributions Account" means the account established and maintained for each Participant to which any Matching Company Contribution made to the Plan on his behalf is credited. (jj) "Maternity or Paternity Absence" means any period of time during which an Eligible Employee or Participant is absent from work by reason of pregnancy, the birth of a child thereto or adoption of a child thereby or for the purpose of caring for such child for a period beginning immediately following such birth or adoption. (kk) "Named Fiduciary" means the Fiduciary or Fiducia ries named herein who jointly or severally have the authority to control and manage the operation and adminis tration of the Plan. (ll) "Net Profit" means the amount of the taxable income of an Adopting Company for Federal Income Tax pur poses for any Plan Year before any deduction for any con tribution to be made to the Plan. (mm) Non-Highly Compensated Employee means an Employee who is neither a Highly-Compensated Employee nor a Family Member thereof. (nn) "Non-Key Employee" means each Participant who is not a Key Employee. (oo) "Normal Retirement Age" means age sixty-five (65). (pp) "Normal Retirement Date" means the first day of the first month following the date upon which a Participant attains his Normal Retirement Age. (qq) "One Year Break In Service" means each Vesting and Eligibility Computation Period during which an Eligible Em ployee or Participant is not credited with more than Five Hundred (500) Hours of Service. However, subject to the conditions hereinafter set forth, for Plan Years beginning after August 23, 1984, an Eligible Employee or Participant shall be credited with the number of Hours of Service with which he or she would have been credited but for any absence from work constituting a Maternity or Paternity Absence or, if the number of such hours may not be determined, with eight (8) Hours of Service for each day of such absence. In general, any Hours of Service with which an Eligible Employee or Participant is so credited shall be credited only to the Eligibility or Vesting Computation Period during which such absence begins and only if he or she would otherwise incur a One Year Break In Service during such Period. However, if an Eligible Employee or Participant would not otherwise incur a One Year Break In Service during the Eligibility or Vesting Computation Period during which such Maternity or Paternity Absence begins, such Hours of Service shall be credited to the immediately succeeding Eligibility or Vesting Computation Period. Notwithstanding anything herein to the contrary, in no event shall any Eli gible Employee or Participant be credited with more than Five Hundred and One (501) Hours of Service in such Eligi bility or Vesting Computation Period as a result of the foregoing provisions or with any such Hours of Service un less he or she provides such information as may be reason ably required to establish that such absence constitutes a Maternity or Paternity Absence and the number of days of such absence qualifying as such on a timely basis. (rr) "Owner-Employee" means the owner of the entire interest in an unincorporated trade or business or a partner who owns more than Ten Percent (10%) of either the capital interest or profits interest in a partnership and, to the extent provided in applicable regulations, an individual who has been an Owner-Employee. (ss) "Participant" means an Eligible Employee of an Adopting Company who has satisfied the requirements for par ticipation in the Plan. (tt) "Party-In-Interest" means any person described in Section 3(14) of the Act, which description includes but is not limited to any Fiduciary, any person (including legal counsel) providing services to the Plan, an Adopting Company and the Employees thereof. (uu) "Plan" means the Employees' Profit Sharing (401(k)) Plan established by this Agreement and all subse quent amendments thereof. (vv) "Plan Year" means the twelve (12) consecutive month period beginning on each July 1st and ending June 30. (ww) "Self-Employed Individual" means, with respect to any taxable year, an individual who has earned income for such Year and, to the extent provided in applicable regula tions, includes any individual who would be self-employed but for the fact that his or her trade or business did not have any net profits for such year and any individual who has been a Self-Employed Individual for any prior taxable year. (xx) "Service Organization" shall mean an organization the principal purposes of which is the performance of ser vices. (yy) "Sponsoring Company" means PENHALL INTERNATIONAL, INC., a California corporation. (zz) "Top Heavy" means that the aggregate of the balan ces of the Company Contributions Accounts of all Key Em ployees of all Adopting Companies hereunder, including (i) any amounts distributed to any Participants, Former Participants or Beneficiaries thereof during the five (5) Plan Years ending on the immediately preceding Anniversary Date or, if the first Plan Year begins after December 31, 1983, as of the Anniversary Date thereof, and (ii) any contribution not actually made as of the Anniversary Date which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder, but excluding (i) any Rollover Contribution or similar transfer initiated by an Eligible Employee or a Participant, made after December 31, 1983, and to a plan maintained by an employer other than an Adopting Company or required to be aggregated with such Adopting Company pursuant to the provisions of Section 414(b), (c) or (m) of the Code, (ii) the value of the Company Contributions Account of each then Non-Key Employee of all Adopting Com panies who was previously a Key Employee and (iii) for Plan Years beginning after December 31, 1984, the value of the Company Contributions Account of any individual who has not performed any services for an Adopting Company or any other employer described in clause (i) hereinbefore at any time during the five (5) Plan Years ending on such Anniversary Date, exceeds Sixty Percent (60%) of the aggregate of the balances of the Company Contributions Accounts of all Par ticipants (with the same inclusions and exclusions) as of such Anniversary Date. Moreover, the Plan shall be aggre gated with each other plan maintained by an Adopting Company in which a Key Employee participates or which enables the Plan to meet the requirements of Section 401(a)(4) or 410 of the Code and may be aggregated with any other plan main tained by an Adopting Company with which the Plan need not be so aggregated but which meets the requirements of said Sections of the Code when considered together therewith. (aaa) "Top Heavy Compensation" means the maximum amount of the Compensation of a Participant who is employed by an Adopting Company which may be taken into account dur ing any Plan Year the Plan is Top Heavy with respect to such Adopting Company for purposes of determining the amount of deductible contributions hereto (currently Two Hundred Thousand Dollars ($200,000)), as adjusted by the Adjustment Factor. (bbb) "Top-paid Group of Employees" means the Employees who, when ranked on the basis of Compensation, constitute the Twenty Percent (20%) of the Employees receiving the greatest Compensation for the Plan Year; provided, however, that Employees who (i) have not completed six (6) months of service, (ii) normally work less than Seventeen and One-half (17-1/2) hours per week, (iii) normally work less than six (6) months during the year, (iv) have not attained the age of twenty-one (21) years, (v) except to the extent provided in regulations, are Employees who are included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and an Adopting Company, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such Adopting Company or Companies, or (vi) are non-resident aliens as defined in Section 414(q)(8)(F) of the Code shall be excluded for purposes of determining the number of such Employees. (ccc) "Trust" means the trust established and maintained pursuant to the provisions of this Agreement. (ddd) "Trust Fund" means the assets held by the Trustee hereof for and on behalf of the Plan and the Participants. (eee) "Trustee" means the person, persons or other en tities designated by the Sponsoring Company as the Trustee hereof and initially means Roger C. Stull. (fff) "Year of Service" for eligibility purposes means each Eligibility Computation Period during which an Eligible Employee is credited with at least One Thousand (1,000) Hours of Service and for benefit accrual purposes means each Plan Year during which a Participant is credited with at least One Thousand (1,000) Hours of Service. In determining the number of Years of Service with which an Eligible Employee or Participant is credited for eligibility and benefit accrual purposes, service with both the Sponsoring Company and any Adopting Company shall be taken into consideration and service with any predecessor to the Spon soring Company or an Adopting Company shall be taken into consideration if the Plan was established or maintained by such predecessor. ARTICLE II PARTICIPATION 2.1 - Commencement of Participation. Each Eligible Employee shall commence participation on the Entry Date coinciding with or immediately following the later of (a) the last day of his first Eligibility Compu tation Period for which he is credited with a Year of Service for eligibility purposes or (b) the date upon which he attains the age of twenty-one (21) years. 2.2 - Certification By Adopting Company. Within thirty (30) days after each Entry Date, each Adopting Company shall notify the Sponsoring Company's Com mittee, in writing, of the Eligible Employees employed thereby who have become eligible to participate in the Plan as of such Entry Date. Such notification shall be in such form and contain such information as the Sponsoring Company's Committee may specify and, except in the case of a possible mistake, need not be questioned by such Committee. 2.3 - Enrollment of Participant and Designation of Beneficiary. Each Eligible Employee shall, upon notification that he has become a Participant hereunder, designate a Bene ficiary, in writing, on a form provided by and filed with the Sponsoring Company's Committee. An unmarried Participant may, from time to time, change his Beneficiary without the consent of such Beneficiary by filing a new written designation with the Sponsoring Company's Committee. A married Participant may, from time to time, change his Beneficiary by filing a new written designation with the Sponsoring Company's Committee but, if such Participant desires to designate a party other than his spouse as a Beneficiary of all or any portion of the amount payable from the Plan upon his death, only with the written consent of his spouse. Any such written consent by a Participant's spouse shall be witnessed by a Notary Public unless it is established to the satisfaction of such Committee that such consent is not required as a result of a prior written con sent or cannot be obtained because such Participant is not married, because his spouse cannot be located or because of such other circumstances as may be prescribed in any regula tions promulgated under Section 417 of the Code. The Sponsoring Company's Committee, the Adopting Company by which such Participant is employed and the Trustee may rely upon the last designation so filed for purposes of making distribution of any amount payable hereunder as the result of a Participant's death. 2.4 - Duration of Participation. A Participant shall continue to participate during his subsequent employment with any Adopting Company until the date he separates from the service thereof for any reason ("Separation Date"). 2.5 - Retirement. A Participant shall retire on his Normal Retirement Date unless he elects to continue in the employ of an Adopt ing Company beyond such date with the approval thereof. 2.6 - Reparticipation By Former Participant. A Former Participant shall again become a Participant on his subsequent Date of Re-employment. 2.7 - Ineligible Employees. An Employee who is not an Eligible Employee shall be come a Participant on the Entry Date coinciding with or next following the date such Employee first meets the re quirements specified in Section 2.1. A Participant who loses his status as an Eligible Employee and subsequently regains such status shall again become a Participant on the date he regains status as an Eligible Employee. ARTICLE III COMPANY CONTRIBUTIONS 3.1 - Obligation. Prior to the execution hereof, the Sponsoring Company has paid to the Trustee the sum of at least One Hundred Dol lars ($100.00) as its initial contribution to the Trust and each Adopting Company shall, subject to its rights under Article X, make additional contributions for each Plan Year of the amount determined under Section 3.2. 3.2 - Adopting Company Contributions. Each Plan Year, each Adopting Company shall make a contribution to the Plan on behalf of each Participant em ployed thereby who has elected to have his Compensation re duced pursuant to the provisions of Section 4.1 hereof of the amount equal to the sum of (a) such Participant's Salary Reduction Amount (the "Salary Reduction Contribution") and (b) may, but shall not be required to, make an additional contribution (the "Matching Contribution"), whether or not such Adopting Company has current or accumulated Net Profits for such Year. The Salary Reduction Contribution, if any, made on behalf of each Participant shall be credited to his Company Contributions Account. Notwithstanding the foregoing, the Plan is designed and intended to qualify as a profit sharing plan for purposes of Section 401(a), 402 and 417 of the Code. 3.3 - Limitations on Contributions. The total amount of the contribution made to the Plan by any Adopting Company for any Plan Year shall not exceed Fifteen Percent (15%) of the Net Compensation of all Participants employed thereby for such Year. Moreover, the Net Compensation of each Participant taken into account for purposes of the computing the foregoing limitation shall not exceed Two Hundred Thousand Dollars ($200,000), as adjusted by the Adjustment Factor. 3.4 - Payment of Contributions. Each Adopting Company shall deliver its Salary Reduc tion Contributions to the Trustee at such time or times as may be convenient for such Adopting Company but in any case within forty-five (45) days of the date any such amounts are deducted from the Compensation of the Participants employed thereby. In addition, each Adopting Company shall deliver any Matching Contributions made thereby for any Plan Year to the Trustee but may do so on any date or dates selected by such Company so long as all of such contributions are so delivered to the Trustee within the time permitted by the Code to obtain a Federal income tax deduction for such Year. Any amount delivered to the Trustee after the last day of any Plan Year but within such time shall be treated as a contribution on account of such Year and as if delivered on the last day thereof provided such amount has either been designated as a contribution on account of or is claimed as a deduction for such Year. ARTICLE IV PARTICIPANTS' SALARY REDUCTIONS 4.1 - Salary Reductions. Subject to the provisions hereinafter set forth in this Article IV, each Participant shall elect to have his Compensation for each Plan Year (or, if such Participant's Entry Date is any day other than the first day of a Plan Year, initially for the period beginning with his Entry Date and ending with the following Anniversary Date, and thereaf ter, for each Plan Year) reduced by such amount as he may select ("Salary Reduction Amount"). 4.2 - Specification of Salary Reduction Amount. (a) Each Participant shall specify his Salary Reduction Amount in a written election delivered to the Adopting Company by which he is employed during the first Salary Reduction Election Period beginning immediately prior to his Entry Date. The term "Salary Reduction Election Period" means each thirty (30) day period ending on each May 1st or December 1st subsequent to the Effective Date. (b) Each Participant shall specify his Salary Reduction Amount in the form of a percentage, in increments of one percent (1%), or, with the approval of the Adopting Company by which he is employed in accordance with a uniform and non-discriminatory policy, of a fixed dollar amount, of his Compensation for each regular payroll period. 4.3 - Modification of Salary Reduction Amount. A Participant may modify his Salary Reduction Amount only during a subsequent Salary Reduction Election Period or during such other periods as the Sponsoring Company, in ac cordance with a uniform and non-discriminatory policy, may specify from time to time. Any such modification shall be effective as of the first day of the first regular payroll period beginning at least fifteen (15) days after the date upon which written notice of such modification is delivered by the Participant to the payroll or accounting department of the Adopting Company by which he is employed. 4.4 - Revocation of Salary Reduction Election. A Participant may revoke his election to have his Com pensation reduced at any time but shall not thereafter be entitled to make any subsequent election to again reduce his Compensation until the next succeeding Salary Reduction Election Period. Any such revocation shall be effective as of the first day of the first regular payroll period begin ning at least fifteen (15) days after the date upon which written notice of such revocation is delivered to the payroll or accounting department of the Adopting Company by which he is employed. 4.5 - Limitations on Salary Reduction Amounts. (a) The Salary Reduction Amount of each Participant who is a Highly Compensated Employee, when expressed as a percentage of his Net Compensation, shall not exceed Twelve Percent (12%) for any Plan Year, the Salary Reduction Amount of each Participant who is a Non-Highly Compensated Employee, when expressed as a percentage of his Net Compen sation, shall not exceed Seventeen and Sixty Five One Hundredths Percent (17.65%) of his Net Compensation for any Plan Year and, in the case of any Participant, shall not exceed the Calendar Year Elective Deferral Dollar Limitation, whether he is a Highly Compensated Employee or a Non-Highly Compensated Employee. (b) Notwithstanding anything herein to the contrary, each Adopting Company shall have the right and shall be re quired to limit the Salary Reduction Amount of each Parti cipant employed thereby who is a Highly Compensated Employee to the extent necessary to assure that the Average Actual Deferral Percentage for the Highly Compensated Employees ("High Average Actual Deferral Percentage") for each Plan Year, after giving effect to the provisions of Section 5.1 for such Year, will not exceed the higher of the following two percentages ("Percentage Limitations"): (1) The percentage which is one and one-quarter (1 1/4) times the Average Actual Deferral Percentage for all Participants who are not Highly Compensated Employees ("Low Average Actual Deferral Percentage"); or (2) The percentage which is two (2) times the Low Average Actual Deferral Percentage; provided such percentage does not exceed the Low Average Actual Deferral Percentage by more than two (2) percentage points. (c) The term "Average Actual Deferral Percentage" means the average of the Actual Deferral Percentages of the relevant group of Participants; the term "Actual Deferral Percentage" means for a specified group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the amount of Salary Deferral Contributions actually paid over to the Trust on behalf of such Participant for the Plan Year to (2) the Participant's Compensation for such Plan Year. Salary Deferral Contributions on behalf of any Participant shall include Excess Deferrals of Highly Compensated Employees, but exclude Excess Deferrals of Non-highly Compensated Employees that arise solely from Salary Deferral Contributions made under the Plan or plans of an Adopting Company. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Salary Deferral Contributions shall be treated as a Participant on whose behalf no Salary Deferral Contributions are made. 4.6 - Distribution of Excess Contributions. (a) "Excess contributions" means, with respect to any Plan Year, the excess of: (1) The aggregate amount of Salary Deferral Contributions actually taken into account in computing the Actual Deferral Percentage of Highly Compensated Employees for such Plan Year; over (2) The maximum amount of such amounts permitted by the Actual Deferral Percentage test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the Actual Deferral Percentage, beginning with the highest of such percentages). (b) Notwithstanding any other provision of this Plan, excess contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such excess contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Adopting Company with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the excess contributions attributable to each such Employee. Excess contributions shall be allocated to Participants who are subject to the Family Member aggregation rules of Section 414(q)(6) of the Code in proportion to the Salary Deferral Contributions of each Family Member that is combined to determine the combined Actual Deferral Percentage. Excess contributions shall be treated as Annual Additions under the Plan. (c) Excess contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to excess contributions is the sum of: (1) income or loss allocable to the Participant's Company Contributions Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's excess contributions for the year and the denominator of which is the Participant's Company Contributions Account without regard to any income or loss occurring during such Plan Year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th day of such month. 4.7 - Additional Rules. (a) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Salary Deferral Contributions allocated to his Accounts under two or more arrangements described in Section 401(k) of the Code that are maintained by an Adopting Company or any Affiliated Company, shall be determined as if such Salary Deferral Contributions were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under the regulations of Code Section 401(k). (b) In the event that this Plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Actual Deferral Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (c) Each Adopting Company shall maintain records sufficient to demonstrate satisfaction of the Actual Deferral Percentage test. (d) The determination and treatment of the Actual Deferral Percentage amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (e) The Compensation and Salary Deferral Contributions of an individual who is a 5 percent owner as determined under Section 416(i) of the Code or one of the ten most highly-paid Highly Compensated Employees shall include the Salary Deferral Contributions of Family Members of such individual. Such Family Members shall be disregarded as separate Employees in determining the Actual Deferral Percentage both for Participants who are Nonhighly Compensated Employees and for Participants who are Highly Compensated Employees. (f) Salary Deferral Contributions must be deposited into the Trust before the last day of the twelve-month period immediately following the Plan Year to which contributions relate in order to be considered in calculating the Actual Deferral Percentage. 4.8 - Excess Deferrals. On or before March 1 of any year, each Participant may advise the Sponsoring Company's Committee of the amount by which the aggregate of all elective deferrals he has made during the immediately preceding calendar year to all plans described in Sections 401(k), 403(b) and 408(k) of the Code exceeds the Calendar Year Elective Deferral Dollar Limitation, if any ("Excess Deferrals") and the amount, if any, of such Excess Deferrals which he desires to be deemed to have been made to this Plan. If a Participant designates any portion of the Salary Deferral Contribution contributed to this Plan on his behalf as an Excess Deferral, the Committee shall direct the Trustee to distribute such amount, together with any income attributable thereto, to such Participant on or before the following April 15th. The income or loss allocable to Excess Deferrals is the sum of: (1) income or loss allocable to the Participant's Company Contributions Account for the preceding calendar year multiplied by a fraction, the numerator of which is such Participant's Excess Deferrals for such year and the denominator is the Participant's account balance attributable to Salary Deferral Contributions without regard to any income or loss occurring during such year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of such year and the date of distribution, counting the month of distribution if distribution occurs after the 15th day of such month. ARTICLE V MATCHING CONTRIBUTIONS 5.1 - Allocation of Matching Contributions. (a) Any contribution made by an Adopting Company for a Plan Year shall first be allocated to the Matching Contribu tions Accounts of those Participants employed thereby who have been credited with a Year of Service for such Year as follows: (1) For the Plan Year ending June 30, 1990, if the High Average Actual Deferral Percentage for such Plan Year would exceed the higher of the two Percentage Limitations described in Section 4.5(b), the portion of such Adopting Company's contribution for such Year which equals the smal lest aggregate amount which, when allocated to the Matching Contributions Accounts of those Partici pants employed thereby who are Non-Highly Compensated Employees in the same ratios which each such Participant's Salary Reduction Contribution for such Year bears to the aggregate of the Salary Reductions Contributions of all of such Participants and included as constituting Salary Reduction Contributions of such Participants in computing the Low Average Actual Deferral Percentage, will result in the High Ave rage Actual Deferral Percentage meeting one of such Percentage Limitations shall be allocated to the Matching Company Contributions Accounts of such Participants who are Non-Highly Compensated Employees. By so providing, each Adopting Company intends that any amount allocated to the Matching Contributions Account of a Participant who is a Non-Highly Compensated Employee pursuant to the provisions of this Section 5.1(a)(1) constitute a qualified nonelective contribution. Accordingly, all of such amounts shall be deemed to constitute Salary Reduction Contributions for purposes hereof. (2) For Plan Years beginning after June 30, 30, 1990, the portion of such Adopting Company's contribution which equals the aggregate amount which, when allocated to the Matching Contributions Account of each Participant employed thereby on the basis of One Dollar ($1.00) for each One Dollar ($1.00) of such Participant's Sal ary Reduction Contribution for such Year up to but not exceeding Two Hundred Dollars ($200.00), or such other amount as the Sponsoring Company may specify for such Plan Year (the "Dollar For Dollar Match Limit"), shall be allocated to each such Participant's Matching Contributions Account. All of such amounts shall be deemed to constitute Salary Reduction Contributions for all purposes hereof other than the provisions of Section 5.1(a)(4); thereafter, for succeeding Plan Years beginning after June 30, 1991, the portion of such Adopting Company's contribution which equals the aggregate amount which, when allocated to the Matching Contributions Account of each Participant employed thereby on the basis of Fifty Cents ($0.50) for each One Dollar ($1.00) of such Participant's Salary Reduction Contribution for such Year up to but not to exceed Four Hundred Dollars ($400.00), or such other amount as the Sponsoring Company may specify for such Plan Year (the "50% Match Limit"), shall be allocated to each such Participant's Matching Contributions Account. All of such amounts shall be deemed to constitute Salary Reduction Contributions for all purposes hereof other than the provisions of Section 5.1(a)(4). (4) For Plan Years beginning after June 30, 1990, if the High Average Actual Deferral Per centage for such Plan Year would exceed the higher of the two Percentage Limitations described in Section 4.5(b), the portion of such Adopting Company's contribution for such Year which equals the smallest aggregate amount which, when allocated to the Matching Contributions Accounts of those Participants employed thereby who are Non-Highly Compensated Employees in the same ratios which each such Participant's Salary Reduction Contribution for such Year bears to the aggregate of the Salary Reductions Contributions of all of such Participants and included as constituting Salary Reduction Contributions of such Participants in computing the Low Average Actual Deferral Percentage, will result in the High Average Actual Deferral Percentage meeting one of such Percentage Limitations shall be allocated to the Matching Company Contributions Accounts of such Participants who are Non-Highly Compensated Employees. By so providing, each Adopting Company intends that any amount allocated to the Matching Contributions Account of a Participant who is a Non-Highly Compensated Employee pursuant to the provisions of this Section 5.1(a)(3) constitute a qualified nonelective contribution. Accordingly, all of such amounts shall be deemed to constitute Salary Reduction Contributions for purposes hereof. (5) If the contribution made by an Adopting Company for the Plan Year ending June 30, 1990, exceeds the amount, if any, required to be allocated to the Matching Contributions Accounts of Participants who are Non-Highly Compensated Employees pursuant to the provisions of Section 5.1(a)(1), or, for Plan Years beginning after June 30, 1990, the amount, if any, required to be allocated to the Matching Contributions accounts of Participants who are Non-Highly Compensated Employees pursuant to the provisions of Section 5.1(a)(3), the balance of such Adopting Company's contributions for such Year shall be allocated to the Matching Contributions Accounts of those Participants employed thereby who have been credited with a Year of Service for such Year in the same ratios that each such Participant's Salary Reduction Contribution for such Year bears to the Salary Reduction Contributions of all Participants employed thereby for such Year; provided, however, that the Salary Reduction Contribution for such Year of each Participant who is a Non-Highly Compensated Employee shall be deemed to include the amount, if any, required to be allocated to the Matching Contribution Account of such Participant pursuant to the provisions of Section 5.1(a)(1) or 5.1(a)(3), as the case may be. By so providing, each Adopting Company intends to comply with the provisions of Section 401(m)(3) of the Code. (b) Notwithstanding the provisions of subsection (a) hereinabove, if an Adopting Company does not maintain a qualified defined benefit retirement plan, or does maintain such a plan but each Non-Key Employee thereof does not ac crue the minimum benefit thereunder required by Section 416 of the Code, such Adopting Company's contribution, if any, for any Plan Year beginning after December 31, 1983 for which this Plan is Top Heavy as to such Adopting Company shall be allocated on the basis of the Top Heavy Compensa tion of each Participant therein and in such manner as may be prescribed by the Code or any pertinent regulations pro mulgated thereunder as will result in each Non-Key Employee who is a Participant therein receiving an allocation here under of the amount which, when added to the amount allocat ed to his Company Contribution Account under any other qualified defined contribution retirement plan maintained by such Adopting Company for such Year, will at least equal the lesser of (i) Three Percent (3%) of his Top Heavy Compensa tion, (ii) the highest percentage computed by dividing the amount of the Company contributions so allocated to the Ac counts of each Key-Employee who is a Participant therein by his Top Heavy Compensation, or (iii) the amount otherwise required after any credit against or reduction of the mini mum amounts described in clauses (i) or (ii) allowable for benefits accrued under any such defined benefit plan. How ever, if such Adopting Company maintains any other qualified defined benefit retirement plan and this Plan is aggregated therewith for purposes of meeting the requirements of Sec tion 401(a)(4) or 410 of the Code, the minimum amount des cribed in clause (ii) of the preceding sentence shall not be applicable. Further, if such Adopting Company maintains any other qualified defined benefit plan for purposes of provid ing the additional benefits permissible by Section 415 of the Code, and each Non-Key Employee does not accrue the minimum benefit thereunder required by Section 416 of the Code, the percentage set forth in clause (i) hereinabove shall be deemed to be Four Percent (4%). For purposes of the foregoing, the term Non-Key Employee shall include each Non-Key Employee who must be considered to be a Participant to satisfy the coverage requirements of Section 410(b) of the Code in accordance with Section 401(a)(5) of the Code, whether or not he has been credited with One Thousand (1,000) Hours of Service, declined to make mandatory contri butions to the Plan or has been excluded from the Plan be cause his Compensation is less than a stated amount set forth in the Plan. (c) The Annual Additions to a Participant's Accounts (including the additions to his accounts under any other qualified defined contribution retirement plan to which an Affiliated Company contributes on his behalf) during any Plan Year shall not exceed the lesser of (i) the greater of (A) Thirty Thousand Dollars ($30,000) or (B) one quarter (1/4) of the Defined Benefit Dollar Limit (as defined in Section 5.2(a)(3)), or (ii) Twenty-Five Percent (25%) of his Compensation during such Plan Year. If a short limitation year is created because of an amendment changing the limitation year to a different 12-consecutive month period, the maximum permissible amount will not exceed the defined contribution dollar limitation multiplied by the following fraction: Number of months in the short limitation year: 12 The term "Annual Additions" means the sum of: (1) each Affiliated Company's contributions; (2) the Participant's voluntary contributions for such period; and (3) any amounts contributed by an Affiliated Company and allocated to any individual medical account which is part of any pension or annuity plan, including the Plan, maintained by such Company and any amounts contributed by such Company and allocated to a separate account main tained by such Company in connection with a funded welfare benefit plan from which medical or life insurance benefits are provided for a Key Employee employed thereby after retirement. If the Annual Additions to a Participant's Accounts for any Year would exceed the limitation described hereinabove, the amount by which such Annual Additions so exceed such limita tion ("Excess Annual Additions") shall be credited to a suspense account, such suspense account shall be adjusted as of the immediately following Anniversary Date to reflect the increase or decrease in the fair market value of the Trust Fund attributable thereto (including gains and other income or losses thereof as of such Anniversary Date and shall then be allocated or reallocated to the Company Contributions Accounts of all Participants employed by the Adopting Company making the contributions resulting in such Excess Annual Additions who have been credited with a Year of Service for benefit accrual purposes as of such Anniversary Date in the same ratios that each such Participant's Compen sation for the Plan Year ending with such Anniversary Date bears to the total Compensation of all of such Participants for such Plan Year before allocation of any contributions made to the Plan for such Plan Year by such Adopting Company. Moreover, if the Plan is terminated, the balance then credited to the suspense account and not previously reallocated to the Participant's Company Contributions and Matching Contributions Accounts shall revert to the appropriate Adopting Company, notwithstanding any provision hereof to the contrary. 5.2 - Additional Limitations in the Event of Adopting Company Defined Benefit Pension Plan. (a) If an Affiliated Company has established or establishes and maintains a qualified defined benefit pen sion plan, the sum of the Defined Benefit Fraction and the Defined Contribution Fraction for each Participant therein for any Plan Year shall not exceed 1.0. (1) The Defined Benefit Fraction for each Participant for any Year is a fraction, the numerator of which is the Participant's projected annual benefit under such defined benefit pension plan and the denominator of which is the lesser of (i) the product of 1.25 multiplied by the Defined Benefit Dollar Limit for such Year or (ii) the product of 1.4 multiplied by his Defined Benefit Compensation Limit. Nothwithstanding the above, at the election of the Committee, if the Participant was a Participant as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by an Affiliated Company which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last limitation year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all limitation years beginning before January 1, 1987. (2) The Defined Contribution Fraction for each Participant for any Year is a fraction, the numerator of which is the sum of the Annual Addi tions to his account for such Year and the denomi nator of which is the lesser of (i) the product of (A) 1.25 and (B) Thirty Thousand Dollars ($30,000), as adjusted by the Adjustment Factor, or (ii) the product of (A) 1.4 and (B) Twenty-five Percent (25%) of his Compensation for such Year. Notwithstanding the foregoing, at the election of the plan administrator, the amount taken into account for purposes of computing the denominator of the Defined Contribution Fraction of any Par ticipant for all Years ending before January 1, 1983 shall be equal to the product of (i) the amount determined as the denominator of the Defined Contribution Fraction for the Year ending in 1982 multiplied by (ii) a fraction the numer ator of which is the lesser of (a) $51,875 or (b) the product of 1.4 multiplied by Twenty-five Percent (25%) of his Net Compensation for the Year ending in 1981, and the denominator of which is the lesser of (a) $41,500 or (b) Twenty-five Percent (25%) of his Net Compensation for the Year ending in 1981. Notwithstanding the foregoing, at the election of the Committee, if the Employee was a Participant as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans maintained by an Affiliated Company which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987, shall not be recomputed to treat all employee contributions as annual additions. (3) The Defined Benefit Dollar Limit for any Year is the projected annual benefit provided for a Participant by an Adopting Company's contribu tions to any defined benefit pension plan estab lished and maintained by such Adopting Company, expressed as a benefit payable annually in the form of a straight life annuity with no ancillary benefits which does not exceed the lesser of (i) Ninety Thousand Dollars ($90,000), as adjusted by the Adjustment Factor, or (ii) One Hundred Percent (100%) of his Compensation averaged over his high Three (3) years; provided, however, that both such limits shall be reduced by One-tenth (1/10th) (i) for Plan years beginning before January 1, 1987, for each Year of Service for benefit accrual pur poses or (ii) for Plan Years beginning before December 31, 1986, for each year of participation in the plan less than Ten (10) which such Partici pant will have at his Normal Retirement Date. In addition, the Defined Benefit Dollar Limit shall be further adjusted in accordance with any regulations promulgated under Section 415 of the Code, as follows: (a) If payment of a Participant's re tirement income benefit under such defined benefit pension plan would begin before the age used as retirement age under Section 216(1) of the Social Security Act without regard to the age increase factor and as if the early retirement age under said section of the Social Security Act were sixty-two (62) (the "Social Security Retirement Age") to the equivalent of an annual retirement income benefit of the Defined Benefit Dollar Limit beginning at the Social Security Retirement Age. (b) For Plan Years beginning before January 1, 1987, if payment of a Participant's retirement income benefit would begin before age Fifty-five (55), to the equivalent of an annual retirement income benefit of Seventy-Five Thousand Dollars ($75,000) beginning age Fifty-five (55); or (c) For Plan Years beginning before January 1, 1987, if payment of such benefit would begin after age Sixty-five (65), or, for Plan Years beginning after December 31, 1986, the Social Security Retirement Age, to the equivalent of an annual retirement income benefit of the Defined Benefit Dollar Limit beginning at age Sixty-five (65) or the Social Security Retirement age, as the case may be. In making the adjustments described in sub-subsec tions (a) and (b) above, the interest rate assump tion shall be no less than the greater of Five Percent (5%) or such other rate as may be specified in the plan, and in making the adjustment described in subsubsection (c) above, the interest rate assumption shall be no greater than the lesser of Five Percent (5%) or such other rate as may be specified in such plan. Moreover, the accrued benefit of each Non Key Employee shall be computed (i) under the method, if any, which is applied uniformly to all defined pension plan maintained by the Company for purposes of computing accrued benefits or (ii) as if such benefit accrued at a rate which is not more rapid than the slowest rate at which benefits may be accrued pursuant to the fractional rule described in Section 411(b)(1)(C) of the Code. 5.3 - Annual Valuation. On each Anniversary Date, each Participant's Accounts, including the Accounts of Inactive Participants, shall be adjusted to reflect the net increase or decrease in the fair market value of the assets constituting the Trust Fund since the preceding Anniversary Date. Any such increase or de crease attributable to (a) assets which have been acquired at the direction of Participants shall be allocated solely to the Accounts to which such assets are credited, (b) any Contract shall be deemed to have been credited to the Ac counts of the Participants for whom held and (c) the assets not described in the preceding clauses (a) and (b) shall be apportioned among the Participant's Accounts in the same ratios which the fair market value of each of such Accounts attributable to such assets bore to the aggregate fair market value of such assets or the proceeds or avails of which assets were used to acquire such assets as of the preceding Anniversary Date. Moreover, any expenses incurred in connection with the acquisition or disposition of assets which have been acquired at the direction of Participants, including any additional administration expenses incurred in connection therewith, shall be charged solely to the Accounts to which such Assets are allocated and if any Contracts constitute part for the Trust Fund, the interest of each Participant therein shall be deemed to have been allocated to the appropriate Accounts thereof. No Adopting Company, any member of the Committee established thereby or Trustee warrant, guarantee or represent in any manner or to any extent that the value of a Participant's Accounts will at any time equal or exceed the total amount previously contributed thereto by any Adopting Company, any Participant or both. 5.4 - Interim Valuations. The fair market value of the assets, other than assets acquired at the direction of Participants and interests in Contracts, allocated to the Accounts of a Participant whose participation hereunder ceases as of a date other than an Anniversary Date shall not be revalued as of such date unless a substantial change in the fair market value of such assets has occurred. In any such case, the Committee shall cause the Trustee to determine the fair market value of the assets constituting the Trust Fund, other than assets acquired at the direction of Participants and interests in any Contracts, as of the last day of the calendar month immediately preceding the month during which such Participant's participation hereunder ceases, divide such fair market value by the fair market value of such assets as of the preceding Anniversary Date and multiply the result thereof by the portion of the values of the Participant's Accounts attributable thereto as of the immediately preceding Anniversary Date. All such interim valuations shall be made in a uniform and nondiscriminatory manner. ARTICLE VI BENEFITS 6.1 - Vesting of Company Contributions. Each Participant shall have a nonforfeitable vested interest in the balances credited to his Company Contribu tions and Matching Contributions Accounts, which balances shall be determined, at any point in time, after any adjust ments required to be made pursuant to the provisions of Article V. 6.2 - Changes in Vesting Schedule. Notwithstanding anything herein to the contrary, each Participant who has been credited with three (3) or more Years of Service for vesting purposes as of the date any modification of the schedule used to determine such Partici pant's vested percentage in his Accrued Benefit becomes effective shall have the right to elect, during the period beginning with the effective date of such modification and ending on the later of (a) the date which is sixty (60) days after such date or (b) the date which is sixty (60) days after the date upon which such Participant is provided with written notice of such modification, to elect to have his vested percentage in his Accrued Benefit determined in accordance with the schedule in effect prior to such modi fication. 6.3 - Amount Distributable. A Participant shall be entitled to receive the amount equal to the balances of his Company Contributions and Matching Contributions Accounts, adjusted in accordance with the provisions of Section 5.3, and further adjusted, if required, in accordance with the provisions of Section 5.4 ("Distributable Amount"). 6.4 - Events Entitling Participant of Beneficiary to Distribution. Except as provided in Section 6.9, a Participant or his Beneficiary shall only be entitled to distribution of his, or in the case of a Beneficiary, such Participant's Distributable Amount as a result of his attainment of his Normal Retirement Age, becoming disabled within the meaning of Section 5.1(b) or termination of employment with all Adopting Companies or, in the case of a Beneficiary of a Participant whose participation hereunder ceases as a result of his death, the Participant's death, termination of the Plan without the establishment of a successor plan (other than an employee stock ownership plan under Code Section 4975(e) or a simplified employee pension under Code Section 408(k))or the occurrence of any other event prescribed in Section 401(k)(2)(B) of the Code, subject to the provisions of Section 6.8. 6.5 - Distribution of Benefits. (a) When a Participant becomes entitled to receive distribution of his Distributable Amount, the Sponsoring Company's Committee shall, upon computing the amount thereof, authorize and direct the Trustee to make distribution of such benefit in a lump sum; provided, however, that if the amount thereof exceeds Three Thousand Five Hundred Dollars ($3,500), the written consent of both such Participant and his spouse, if any, shall be required within the 90-day period ending on the Annuity Starting Date. Further, if such sum is less than Thirty Five Hundred Dollars ($3,500) but distribution thereof is to be made after the Participant's Annuity Starting Date, the written consent of the Participant and his spouse, if any, or if the Participant has died, of his surviving spouse, shall be required. (b) The Sponsoring Company's Committee shall notify the Participant and the Participant's spouse of the right to defer any distribution of the Participant's Distributable Amount. Such notification shall include a general description of the material features, and an explanation of the relative values of the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the Annuity Starting Date. Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. 6.6 - Form of Distribution. The assets or interests therein allocated to a Par ticipant's Company Contributions and Matching Contributions Accounts shall be distributed in kind or, if so requested by such Participant or his Beneficiary, in writing, or if re quired by the Insurer issuing any Contract, be converted to cash and the cash so realized distributed. 6.7 - Commencement of Benefits. (a) If the participation of a Participant terminates for any reason other than death, disability or retirement on or after attaining Normal Retirement Age, distribution of his Distributable Amount shall be made on or after, but not more than Sixty (60) days after, the Anniversary Date of the Plan Year during which such Former Participant attains his Normal Retirement Age. However, the Sponsoring Company's Committee may, in accordance with a uniform and nondiscriminatory policy, but shall not be required to, authorize distribution of such Participant's Accrued Benefit prior to such Anniversary Date. (b) If the participation of a Participant terminates as a result of death, disability or retirement on or after attaining his Normal Retirement Age, distribution of his Accrued Benefit shall be made at such time as the Sponsoring Company's Committee may, in accordance with a uniform and nondiscriminatory policy, determine but in no event after whichever of the dates specified hereinafter is applicable. If the participation of a Participant terminates as a result of his death and such Participant is survived by his spouse, such Participant's spouse shall have the right to require that distribution of his Distributable Amount begin within a reasonable time following the Participant's death. (c) If a Participant dies after the date his participation terminates but prior to the date distribution of his Distributable Amount is made, distribution of such Distributable Amount shall be made within Five (5) years after the date of his death. (d) Notwithstanding anything herein to the contrary, distribution of the Distributable Amount of each Participant hereunder shall be made not later than the Sixtieth (60th) day after the latest of the close of the Plan Year in which: (1) such Participant attains his Normal Retirement Age; or (2) such Participant terminates his employ ment with all Adopting Companies; unless he elects otherwise but in any case on or before April 1st of the calendar year following the later of the calendar year during which the Participant attains the age of Seventy and One-half (70 1/2) years. (e) If the Sponsoring Company's Committee contemplates directing the Trustee to distribute an amount which has become payable hereunder as a result of the death of a Par ticipant to the person or persons specified in a beneficiary designation from on file therewith but any dispute arises regarding the validity thereof, such Committee may direct the Trustee to interplead such amount with any court of competent jurisdiction. Any and all costs incurred in connection with so doing shall be charged against the amount so interpleaded. (f) If the Distributable Amount of a Participant or his Beneficiary cannot be distributed thereto because the Sponsoring Company's Committee cannot locate such Partici pant or Beneficiary after making a reasonable effort to do so, such Committee may authorize and direct the Trustee to deposit such Amount in a segregated interest bearing account until such Participant or Beneficiary is located. If such Participant or Beneficiary cannot be located within one (1) year of the date as of which written notice of the availability of such Amount has been deposited in the U.S. Postal service, postage prepaid, certified return receipt requested and addressed to the Participant or Beneficiary at the last known address to such Committee, such Committee may treat such amount as an offset against the amount of the Salary Reduction Contribution or Matching Contribution otherwise required to be made by the Adopting Company by which such Participant was employed for the Plan Year with or within which such one (1) year period expires. However, if the Participant or Beneficiary entitled to receive such Amount subsequently files a claim therefor, such Amount shall be reinstated. (g) If a Participant has failed to provide the Committee with a valid and effective Beneficiary designation, the Committee may direct that any amount which becomes payable as a result of such Participant's death be paid to such Participant's surviving spouse or, if such Participant is not survived by a spouse, to such Participant's issue who have survived him, or, if such Participant is not survived by a spouse or by any issue, to the personal representative of his estate. (h) For purposes of the foregoing, any amount paid to a child of a Participant shall be deemed to have been paid to such Participant's spouse if such amount would have been paid to such Participant's spouse if such child had attained the age of majority at the time payment thereof was made. (i) If a Participant, Former Participant, the Beneficiary thereof or any other party who is entitled to receive payments made hereunder is declared incompetent by a court of competent jurisdiction or is otherwise under any legal disability, the Trustee may make payment of all or any portions of any of such payments to which such recipient is entitled to the guardian, conservator or other judicially appointed fiduciary of such person's estate. Moreover, if the Committee determines that a Participant, Former Participant, the Beneficiary thereof or any other party entitled to receive payments made hereunder is unable to manage his or her own financial affairs, the Committee may direct the Trustee to make any payments which would otherwise be made to such person hereunder to the legal representative thereof or, if such person does not have a legal representative, to a relative or friend or on behalf of such person. 6.8 - Loans to Participants. The Sponsoring Company's Committee is specifically authorized to establish and administer a Participant loan program. Moreover, such Committee is further authorized to develop the procedures and guidelines to be followed in granting Participant loans made on or after October 18, 1989. Such procedures and guidelines shall be set forth in a written addendum to the Plan and Trust Agreement and to the summary plan description provided to the Participants hereunder, and shall include but not be limited to the following: (a) A statement declaring that such Committee is authorized to administer the loan program. (b) A description of the procedures to be followed in applying for a Participant loan. (c) A description of the basis upon which applications for loans will be approved or denied. (d) A description of the limitations, if any, imposed on the types and amounts of loans available. However, in no event shall a loan in excess of Ten Thousand ($10,000.00) be made to a Participant or beneficiary if the amount exceeds the lesser of (1) Fifty Thousand Dollars ($50,000.00), reduced by the excess, if any, of the highest outstanding balance of all loans made to such Participant or beneficiary during the one (1) year period ending on the day preceding the date such loan is made or (2) one-half (1/2) of the balance credited to the Company Contributions Account of the Participant or beneficiary to whom such loan is made, unless he acknowledges in writing that he understands that any loan in excess of such limitation may be treated as a premature loan distribution subject to the penalties imposed by Section 72(p) of the Code. Moreover, no such loan of any amount shall be made to any Participant if such loan would constitute a transaction subject to the tax imposed by Section 4975 of the Code and no loan in excess of one-half (1/2) of the balance credited to the Company Contributions Account of a Participant or beneficiary shall be made to such Participant or beneficiary on or after October 18, 1989, if the only security for such loan is such balance. (e) A description of the method by which the rate of interest to be charged will be determined. (f) A description of the types of assets other than or in addition to the balance credited to the Company Contributions Account of the Par ticipant or beneficiary to whom such loan is to be made which may constitute collateral for such loan. (g) A description of the event or occurrence which will constitute a default and the action which may be taken to preserve Plan assets in the event of any such default. (h) All such loans shall, at the direction of the Sponsoring Company's Committee, be available to all Participants and beneficiaries on a uniform and non-discriminatory basis (but considering the credit-worthiness of each such Participant or beneficiary), bear a reasonable rate of interest and be adequately secured. Moreover, if the balance of credited to a Participant's Company Contributions Account constitutes all or any portion of the security for a loan made pursuant to the provisions of this Section 6.8, such Participant and his spouse, if any, shall consent, in writing, to the making of such loan, the use of such balance as security for such loan and the possible reduction of such balance which may subsequently occur as a result thereof within the Ninety (90) day period immediately preceding the date such loan is made or the date such balance is pledged as security therefor. Any such written consent shall be witnessed by a member of the Committee or Notary Public unless it is established to the satisfaction of such Committee member that such consent cannot be obtained because the Participant is not married, his spouse cannot be located or because of such other circumstances as may be prescribed in any regulations promulgated under Section 417 of the Code. (i) Except in the case of a "home loan," each such loan shall, by its terms, be repaid within five (5) years and be repaid in substantially equal installments, payable at least quarterly, of principal and interest. A "home loan" is any loan used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the Participant. (j) For purposes of subparagraph (a) above, the current outstanding balances of all loans made to a Participant from all qualified retirement plans of all Adopting Companies and any Affiliated Companies shall be considered as one having been made by this Plan. 6.9 - Hardship Distributions of Salary Reduction Contributions. A Participant who incurs an immediate and heavy finan cial need ("Hardship") may request, in writing, that he be allowed to withdraw such portion of the amount credited to his Company Contributions Account constituting Salary Reduc tion Contributions (and any earnings credited to such Participant's Account on such Salary Reduction Contributions as of June 30, 1989) as is necessary to satisfy such Hardship. Any such request shall set forth all of the facts and circumstances necessary to enable the Sponsoring Company's Committee to make a determination as to (i) whether the financial need constitutes a Hardship, (ii) the amount necessary to satisfy such Hardship and (iii) whether a distribution of all or some portion of the balance credited to such Participant's Company Contributions Account and constituting Salary Reduction Contributions but not the earnings thereof is required to satisfy such hardship in accordance with the following guidelines: (a) Only amounts required to (1) pay medical expenses described in Section 213(d) of the Code incurred by or necessary to such Participant, his spouse or his dependents (as defined in Section 152 of the Code), (2) purchase a principal resi dence (excluding mortgage payments), (3) pay tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his spouse or any of his dependents, (4) prevent his eviction from his principal residence or foreclosure on a mortgage on his principal residence or (5) satisfy such other need as the Internal Revenue Service may specify in regulations or other pronouncements issued thereby shall constitute immediate and heavy financial needs. (b) Any determination as to whether a dis tribution of all or some portion of the balance of a Participant's Company Contributions Account is necessary to enable a Participant to satisfy a Hardship shall be based on all of the facts and circumstances, including but not limited to whether alternate financial resources are reasonably available. However, if a Participant represents, in writing, that the Hardship will not or cannot be satisfied by (i) reimbursement or compensation by insurance, (ii) reasonable liquidation of the Participant's other assets, (iii) revocation of his election to reduce his Compensation, or (iv) by other distributions or nontaxable (at the time of the loan) loans from any other plan maintained by the Adopting Company by which he is employed and in which the Participant is a participant or by borrowing from a commercial source on then reasonable commercial terms, and the Committee reasonably relies there on, a distribution shall be deemed to be necessary to satisfy such Hardship provided the amount of such distribution does not exceed the amount necessary to satisfy such Hardship, including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. Any withdrawal made as a result of Hardship shall be effected as soon as possible after approval of the request for a Hardship withdrawal. Neither this Plan, nor any other plan maintained by an Affiliated Company may permit an Employee who receives a Hardship Withdrawal to elect Salary Deferral Contributions for the Employee's taxable year immediately following the taxable year of the Hardship Withdrawal in excess of the Calendar Year Elective Deferral Dollar Limitation for such taxable year less the amount of such Employee's Salary Deferral Contribution for the taxable year of the Hardship Withdrawal. ARTICLE VII THE COMMITTEE 7.l - Members. Each Adopting Company shall appoint a Committee of not less than one (1) nor more than five (5) individuals, each of whom shall serve at the pleasure of such Company. Any vacancy on such Committee shall be filled by the appropriate Adopting Company as soon as is reasonably possible after such vacancy occurs. However, the remaining members or member of such Committee shall have full authority to act until such vacancy is so filled. Each Adopting Company shall advise the Sponsoring Company's Committee, in writing, of the names of the members of its Committee and, as changes in the membership thereof occur, the names of any new members. The Committee is the Named Fiduciary and Administrator of the plan of each Adopting Company required to be specified by the Act. 7.2 - Committee Action. Each Committee shall choose a secretary who shall keep the minutes of the Committee's proceedings and all data, records and documents pertaining to the Committee's adminis tration of the Plan with respect to the Participants employed by the Adopting Company establishing such Commit tee. Each Committee shall act by vote of a majority of its members and such action may be taken either by a vote at a meeting or in writing without a meeting; provided, however, that no member of such Committee who is also a Participant hereunder shall vote or act upon any matter relating solely to himself unless such member is the only member of such Committee. Each Committee may, by such majority action, authorize its secretary or any one or more of its members to execute any document or documents on behalf of such Commit tee, in which event such Committee shall notify the Trustee in writing of such action and the name or names of those so designated. The Trustee thereafter shall accept and rely conclusively upon any direction or document executed by such secretary, member or members as representing action duly taken by such Committee until such Committee files a written revocation of such designation with the Trustee. 7.3 - Rights and Duties. Each Committee shall have the duty to administer the Plan in accordance with the provisions set forth herein and shall have all powers necessary to do so, including but not limited to the following: (a) To resolve all questions relating to the eligibility of Employees to participate; (b) To compute and certify to the Sponsoring Company's Committee and the Trustee the amount and nature of benefits payable to Participants or their Beneficiaries; (c) To authorize all disbursements to be made by the Trustee from the Trust; (d) To maintain all records necessary for the administration of the Plan other than those maintained by each other Adopting Company and the Trustee; (e) To interpret the provisions of the Plan and to make and publish such rules for the opera tion of the Plan as are not inconsistent with the terms hereof; and (f) Except to the extent an investment is to be made at the direction of a Participant, to approve or disapprove investment changes recom mended by the Trustee with respect to the assets of the Plan acquired by contributions made by the Adopting Company. Notwithstanding anything herein to the contrary, no Commit tee shall interpret or operate the Plan in any manner which will cause discrimination in favor of Employees who are officers, shareholders or highly compensated. 7.4 - Participant Direction of Investments. (a) The Participants are specifically authorized to direct the manner in which the amounts credited to their respective Company Contributions Accounts are invested. Accordingly, the Sponsoring Company's Committee shall deter mine the investment alternatives which are to be available ("Permitted Investments"). Such alternatives shall include but need not be limited to (1) investment by (A) deposit in an interest bearing account with a bank, savings and loan association or other similar financial institution, which account shall have a high degree of liquidity and be fully insured against loss by the United States or an agency thereof ("Savings Account") or (B) in a pooled investment fund, the assets of which consist solely of cash and securi ties issued or guaranteed by the United States or an agency thereof and the principal investment objectives of which include a high level of current income consistent with the preservation of capital and a high degree of liquidity and (2) three (3) or more groups of diversified investments, at least one of which can reasonably be expected to generate a high level of income while preserving capital in the long term, one of which can be reasonably expected to generate capital appreciation and one of which can be reasonably expected to generate a high level of current income consistent with the preservation of capital and a high degree of liquidity so as to afford each Participant with a reasonable opportunity to diversify the investment of the amounts credited to his Accounts and thereby minimize the risk of large losses. Moreover, such Committee shall be deemed to have intended to provide each Participant with the opportunity to exercise control over the assets allocated to the Accounts maintained hereunder for his benefit in a manner and to the extent necessary to result in no other person who would otherwise be a fiduciary with respect to the Plan being liable for any loss, or with respect to any breach of part 4 of Title I of the Act, which is a direct and necessary result of the exercise of control over such assets by such Participant or his Beneficiary. (b) The Sponsoring Company's Committee shall also advise each Participant and Beneficiary of the following procedures to be followed in exercising control over the assets allocated to his Account: (1) Each Participant or Beneficiary shall obtain a prospectus and any other documents or other information relating to any investment in which a Participant may invest required to be delivered to an investor therein by law. Such Participant or Beneficiary shall also represent and warrant that he has received such prospectus, other documents or other information relating to such investment to such Committee. (2) Each Participant may, during such periods as such Committee may specify from time to time, but at least annually, direct that one or more assets constituting a Permitted Investment be acquired. (3) In no event shall the Trustee be required to acquire any asset if any income generated thereby would be taxable to the Trust. (c) If a Participant fails to advise whichever of the Sponsoring Company's Committee or the Trustee is appropriate as to the manner in which all or any portion of the amounts credited to his Accounts in cash are to be invested, such Committee or the Trustee shall invest such amounts in one or more Savings Accounts. (d) Notwithstanding anything herein to the contrary, each Participant may, subject to the terms and conditions or any Contract or any limitation to which such Participant agreed at the time he directed that an asset be acquired, instruct the Trustee or the Sponsoring Company's Committee to dispose of any asset acquired at his direction and to purchase any other asset or interest therein which constitutes a Permitted Investment. 7.5 - Information. Each Adopting Company shall provide such information to its Committee as such Committee may require to properly administer the Plan and to furnish the Trustee with such information as may be pertinent to the Trustee's administra tion of the Trust Fund on a timely basis. 7.6 - Compensation, Indemnity, and Liability. Each Adopting Company shall pay all expenses incurred and shall furnish such clerical and other services as are required by its Committee in order to perform its duties hereunder. In addition, each Adopting Company hereby prom ises to indemnify each member of its Committee against and hold each such member harmless from any and all expenses or liabilities incurred or arising as the result of his member ship on such Committee, except such expenses or liabilities as may result from such member's wilful misconduct or gross negligence. ARTICLE VIII THE TRUSTEE 8.1 - Acceptance of Trust. The Trustee, by execution hereof, acknowledges accep tance of the trusteeship of this Trust, agrees to hold and administer the Trust Fund in accordance with the terms of and provisions set forth herein and to otherwise perform all of the obligations imposed thereon hereby. 8.2 - Single Fund. The Trustee shall hold and administer the Trust Fund as a single fund. However, the Trustee shall maintain adequate records so as to be able to accurately identify the assets or interests therein acquired at the direction or on behalf of each Participant in the Plan. 8.3 - Duty of Care. The Trustee and each Fiduciary shall discharge its duties under the Plan and Trust solely in the interests of the Participants and their beneficiaries and with the care, skill, prudence and diligence under the circumstances then prevailing which a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims and by diversifying the investments of the Plan and Trust so as to minimize the risk of large losses unless under the circum stances it is clearly prudent not to do so and except to the extent the Participants direct the Trustee as to the manner in which the amounts credited to their respective Company Contributions and Matching Contributions Accounts are in vested. 8.4 - Trustee's Rights and Powers. To carry out the purposes of this Trust, the Trustee, subject to any limitations specified in the provisions of Sections 8.5 through 8.9 hereof, inclusive, shall have the following rights and powers, in addition to any now or here after conferred by law: (a) To acquire any asset or interest therein, including any real or personal property. (b) To sell, assign or convey, at public or private sale, for cash or on credit, exchange, partition, divide, subdivide, or grant options upon any Trust asset or interest therein; (c) To lease any Trust asset or interest therein for terms within or beyond the term of this Trust for any purpose, including the exploration for and removal of gas, oil or other minerals and to enter into any pooling, uniti zation, repressurization, community or other types of agreements relating to the development, operation and conservation of mineral properties; (d) To maintain, repair, alter, develop or improve any Trust asset and, pursuant thereto, to raze or demolish any structure thereupon or portion thereof; (e) To invest and reinvest the Trust Funds as provided by law, from time to time existing, in any type of asset, including any collective investment or common trust fund now or hereafter established by, or stock of, any corporate Trustee hereof; (f) To retain such portion of the Trust Fund in the form of cash or other property unproductive of income without any liability for income which might otherwise be derived therefrom as the Committee determines is necessary or proper; (g) To deposit cash in any bank or savings and loan association up to such amounts as will be federally insured by the appropriate governmental agencies; (h) To participate or continue to participate in any business or other enterprise and to effect incorporation, dissolution, or other change in the form or organization of any business or enterprise held, acquired or received; (i) To participate in foreclosures, reor ganizations, consolidations, mergers, liquidations, pooling agreements and voting trusts, assent to corporate sales and other acts and, in connection therewith, to deposit securities with and transfer title to any protective or other committee upon such terms as the Trustee deems advisable; (j) To vote stock, give proxies, pay calls for assessments, and purchase, sell or exercise stock subscription or conversion rights, warrants, puts and calls; (k) To hold securities, or other property in its own name or in the name of its nominee, without disclosing any fiduciary relationship; (l) To advance money for the protection of the Trust, and for all expenses, losses, and liabilities sustained in the administration of the Trust or as a result of the holding or ownership of any Trust assets, for which advances, and any interest thereon, the Trustee shall have a lien on the Trust assets as against any Adopting Company, Participant or beneficiary thereof; (m) To borrow money for any Trust purpose, hypothecate or encumber the Trust Fund or any portion thereof by mortgage, deed of trust, pledge or otherwise and replace, renew and extend any encumbrance thereon and pay loans or other obliga tions of the Trust; (n) To make loans or advances to any party, at reasonable rates of interest and upon reasonable terms and conditions; (o) To acquire and maintain insurance, in cluding liability insurance, of such kind and in such amounts as is necessary to insure the Trust assets against damage or loss; (p) To institute, prosecute or defend any action or proceeding with respect to the Trust and to contest, arbitrate, compromise, adjust, settle, pay, release or abandon, in whole or in part, any claims existing in favor of or against the Trust; and (q) To employ such agents and advisors as may be reasonable for the administration of the Trust Fund and to pay them reasonable compensation for services rendered. The enumeration of certain powers of the Trustee shall not limit its general powers, the Trustee, subject always to the discharge of its fiduciary obligations, being vested with and having all the rights, powers and privileges which an absolute owner of the same property would have. However, all investments of the Trust Fund shall be made in accordance with the provisions of Section 2261 of the Cali fornia Civil Code and the Trustee shall be responsible for compliance therewith except in the case of any investment made at the direction of a Participant. 8.5 - Compliance with Directions Re: Management and Investment of Trust Fund. Upon receipt of any directions from a Participant, the Trustee shall comply therewith unless such compliance would be in violation of or contrary to any laws or regulations governing the management and investment of the assets hereof. 8.6 - Notices; Directions. All notices or directions provided to the Trustee, whether by the Sponsoring Company, its Committee or a Parti cipant shall be in writing and signed by such person or persons as have been duly authorized to act on behalf there of. However, delivery of any notice or direction to the Trustee by photostatic teletransmission, telegram or other method by which a written document results which contains duplicate or facsimile signatures shall be deemed to fulfill the foregoing requirements unless and until the Trustee is notified in writing by the appropriate party to the contrary. The Trustee may rely upon any notices or direc tions received in such manner and shall not incur any liability to any party for the consequences resulting from any unauthorized use of such devices or methods of deliver ing notices or directions unless the Trustee was aware that such use was unauthorized. 8.7 - Limitations on Trustee's Duties; Liability. So long as an Adopting Company, its Committee, one or more Investment Managers, Participants or any combination thereof are authorized to direct the management and invest ment of the Trust Fund or any portion thereof, the Trustee, to the extent the Trustee does not have such right: (a) May, in the case of such authorization of any Investment Manager or Managers, assume that the person or persons designated as Investment Managers qualify as such and continue to be entitled to manage and invest the Trust Fund (or such portion thereof) until such time as the appropriate Adopting Company or its Committee, as the case may be, notify the Trustee to the contrary. (b) Shall have no duty to take any action with respect to the management and investment of the Trust Fund or to review or make any recommendations with respect thereto in the absence of, or to request, any such directions. The Trustee may, however, in the absence of any such directions, take such action as the Trustee deems appropriate and advisable under the circumstances and shall not be subject to or incur any liability to any party as the result thereof if such action is taken in good faith. (c) Shall have no duty or obligation to determine the existence of any conversion, redemp tion, exchange, subscription or other right which may relate to any security held as part of the Trust Fund if notice of such right was given prior to the acquisition of such security, or to exer cise any such right unless and until informed of the existence thereof and directed to exercise such right by the appropriate party within a reasonable time prior to the expiration of such right. (d) Shall not be liable in any manner to an Adopting Company, its Committee, any Investment Manager, any Participant or any beneficiary of any Participant for any losses or other unfavorable results sustained by or incurred by the Trust Fund as the result of complying with the directions provided thereby to the Trustee; provided such compliance has not been in violation of or contrary to any provision of any applicable law governing the management and investment of the assets hereof. (e) If the party having the right to manage and invest the Trust Fund directs the Trustee to purchase any security issued by any foreign government or agency thereof, or by any corporation domiciled outside of the United States, the Trustee shall have no duty to take any action necessary to comply with any laws, regulations or other requirements imposed by the government or agency thereof issuing such securities or whose laws, regulations or other re quirements govern such corporation, including those applicable to the receipt of dividends or interest paid with respect to such securities, unless and until advised of such laws, regulations or other requirements by the party directing the Trustee to make such purchase. 8.8 - Records; Accounting. The Trustee shall keep accurate and complete records of all transactions made or entered into by the Trustee on behalf of the Trust which each Committee shall have the right to examine at any time during the Trustee's regular business hours. In addition, the Trustee shall, within ninety (90) days of the close of each Plan Year, beginning with the first Plan Year ending after the Effective Date, provide an annual statement of account to the Sponsoring Company's Committee. Such statement of account shall set forth all receipts and disbursements of the Trust during such year and contain a list of all of the assets held by the Trust, the cost and fair market value thereof as of the end of such year. Unless the Trustee receives written notice of any error contained or believed to be contained in such annual statement of account from the Sponsoring Company's Committee within sixty (60) days of the date upon which such account has been provided thereto, the Trustee may presume that such account has been approved thereby. If any dispute arises between such Committee and the Trustee with respect to any item contained in such annual statement of account and such dispute cannot be otherwise resolved, the Trustee may elect to have its account judicially settled. 8.9 - Valuation of Trust Fund. The Trustee shall determine the fair market value of the Trust Fund, based upon such information as the Trustee deems to be reliable, including but not limited to infor mation contained in (i) newspapers of general circulation, (ii) financial periodicals or publications generally relied upon by the public, (iii) statistical or valuation service reports, and (iv) the records of any securities exchanges, Investment Managers, brokerage firms or any combination thereof. The fair market value of the Trust Fund attribut able to any Contract shall be determined by the Insurer issuing such contract using such method as is specified therein and the determination of such fair market value by such Insurer in accordance therewith shall be binding upon the Trustee. Moreover, in making any such determination, any and all expenses arising under any Contract shall be charged to and deducted from the value of the Participants' Accounts thereunder in accordance with the provisions specified in any such Contract. 8.10 - Compensation. Each Adopting Company promises and agrees to pay such reasonable amounts of compensation for services rendered by the Trustee as may be agreed upon from time to time promptly upon request therefor by the Trustee. Unless otherwise specifically agreed upon in writing, the amount of the com pensation to which the Trustee shall be entitled shall be determined in accordance with the fee schedule regularly published by the Trustee, as in effect and applicable at the time such compensation becomes payable, if any. Moreover, the Trustee shall be entitled to reimbursement for any expenses incurred thereby in the performance of its duties as Trustee, including reasonable fees for legal counsel. The amount of any such compensation and reimbursable expenses shall be chargeable to and constitute a lien on the Trust Fund until paid and the Trustee is authorized to withdraw such amounts from the Trust Fund if such amounts are not otherwise paid by the Sponsoring Company within sixty (60) days of the date upon which a statement of the amount so due is presented to the Company. 8.11 - Third Persons. No person dealing with the Trustee shall be required to make any inquiry as to whether an Adopting Company, its Committee, any Investment Manager or a Participant has in structed the Trustee to take or decline to take any specific action, whether any action so taken or which the Trustee declines to take has been authorized thereby or to see to the application of any moneys or other property delivered to the Trustee. Further, any such person may rely upon the signature of any single Trustee individually unless and until such person has been provided with written notice that the signatures of all or a majority of the persons acting as Trustee is required. 8.12 - Indemnification. Each Adopting Company and its Committee jointly and severally promise and agree to indemnify the Trustee against and hold the Trustee harmless from all liabilities which may arise as the result of the lawful performance of its duties under this Agreement. Further, the Trustee shall not be required to perform any act or take any action for or on behalf of the Trust unless and until the Trustee has been indemnified to its satisfaction, to the extent it deems nec essary and as often as it may determine. 8.13 - Controversy Re: Trust Fund Assets. If any controversy arises with respect to any asset of the Trust Fund, the Trustee may retain possession of such asset pending resolution of such controversy without liabi lity. 8.14 - Joinder of Parties. Only the Trustee, the Committees and the Adopting Companies need be joined as parties to any legal action or other proceeding affecting the Trust or any asset of the Trust Fund. No Participant, any beneficiary of any Partici pant or any other person having or claiming any right to or interest in any asset of the Trust Fund shall be entitled to any notice of any such legal action or proceeding but any judgment entered in or with respect to any such action or proceeding shall be binding upon all persons having any in terest in or claim against the Plan or Trust. 8.15 - Consultation with Legal Counsel. The Trustee may consult with or engage the services of such legal counsel (including counsel for an Adopting Company) as the Trustee may select and shall be not subject to any liability as the result of taking any action or failing to take any action in good faith pursuant to the advice of such counsel. 8.16 - Prohibited Transactions. (a) Except as provided in subsection (c) hereof, neither the Trustee nor any Fiduciary shall cause the Plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect: (1) Sale or exchange, or leasing of any property between the Plan and a Party-In-Interest; or (2) Lending of money or extension of credit between the Plan and Party-In-Interest other than as provided in Section 6.8; or (3) Furnishing of goods, services or facili ties between the Plan and a Party-In-Interest; (4) Transfer to, or use by or for the benefit of a Party-In-Interest, of any assets of the Plan; or (5) Acquisition, on behalf of the Plan, of any qualifying employer security or employer real property. (b) Except as provided in subsection (c) of this Section 8.16, a Fiduciary shall not: (1) Deal with the assets of the Plan to his own interest or for his own account; (2) In his individual or any other capacity, act in any transaction involving the Plan on behalf of a party or represent a party whose interests are adverse to the interests of the Plan, its Participants or their beneficiaries; (3) Receive any consideration for his own personal account from any party dealing with such Plan in connection with a transaction involving the assets of the Plan; or (4) Permit the indicia of ownership of any Trust asset to be maintained at any location which is outside of the jurisdiction of the District Courts of the United States except as otherwise authorized by the Secretary of Labor. (c) The prohibited transaction rules set forth in this Section 8.16 shall not prevent a Fiduciary from: (1) Receiving benefits from the Plan as a Participant or beneficiary so long as the benefits are consistent with the terms of the Plan as ap plied to all other Participants and beneficiaries; (2) Receiving reasonable compensation for services to the Plan unless such Fiduciary receives full-time pay from the Employer; (3) Receiving reimbursement for expenses incurred; (4) Serving as an officer, employee or agent of a Party-In-Interest; (5) Making payments to Parties-In-Interest for reasonable compensation for office space and legal, accounting and other services necessary to operate the Plan; or (6) Taking other actions pursuant to specific instructions and authorizations in the Plan governing document so far as consistent with all other fiduciary rules of the Act. 8.17 - Liability Insurance. The following parties may purchase and maintain liability insurance under the following terms and condi tions: (a) Each Committee, as an authorized expense of the Plan, to cover liability or losses occurring by reason of the act or omission of a Fiduciary; provided such insurance permits recourse by the Insurer against the Fiduciary in the case of a breach of a fiduciary obligation by such Fiduciary; (b) A Fiduciary, to cover liability from and for his own account; or (c) An Adopting Company, to cover potential liability of one or more persons who serve in a fiduciary capacity with regard to the Plan. 8.18 - Prohibition Against Certain Persons Holding Certain Positions. No person who has been convicted of, or has been imprisoned as a result of his conviction of, robbery, brib ery, extortion, embezzlement, fraud, grand larceny, burglary, arson, a felony violation of Federal or State law involving substances defined in Section 102(6) of the Com prehensive Drug Abuse Prevention and Control Act of 1970, murder, rape, kidnapping, perjury, assault with intent to kill, any crime described in Section 9(a)(1) of the Investment Company Act of 1940, a violation of any provision of the Employee Retirement Income Security Act of 1974, a vio lation of Section 302 of the Labor-Management Relations Act, 1947, a violation of Chapter 63 of Title 18, United States Code, a violation of Section 874, 1026, 1503, 1505, 1506, 1510, 1951, or 1954 of Title 18, United States Code, a vio lation of the Labor-Management Reporting and Disclosure Act of 1959, or conspiracy to commit any such crimes or attempt to commit any such crimes, or a crime in which any of the foregoing crimes is an element, within the preceding five (5) years shall serve or be permitted to serve (a) as an administrator, fiduciary, officer, trustee, custodian, counsel, agent, or employee of any employee benefit plan; or (b) as a consultant to any employee benefit plan. 8.19 - Bonding Requirements. (a) Every Fiduciary of the Plan and every person who handles funds or other property of the Plan shall be bonded as hereinafter set forth; provided, however, that no such bond shall be required of a Fiduciary (or of any director, officer, or employee of such Fiduciary) if such Fiduciary (1) is a corporation organized and doing business under the laws of the United States or of any State; (2) is authorized under such laws to exercise trust powers or to conduct an insurance business; (3) is subject to supervision or examination by Federal or State authority; and (4) has at all times a combined capital and surplus in excess of such minimum amount as may be established by regulations issued by the Secretary of Labor, which amount shall be at least $1,000,000. (b) The amount of such bond shall be fixed at the beginning of each Plan Year. Such amount shall be not less than ten percent (10%) of the amount of funds handled. In no event shall such bond be less than $1,000 nor more than $500,000, except that the Secretary of Labor, after due no tice and opportunity for hearing to all interested parties, may prescribe an amount in excess of $500,000, subject to the ten percent (10%) limitation of the preceding sentence. Such bond shall provide protection to the Plan against loss by reason of acts of fraud or dishonesty on the part of the Plan official, directly or through connivance with others. 8.20 - Payment of Taxes. If the Trustee becomes liable for the payment of any estate, inheritance, income or other tax on behalf of a Participant or his Beneficiary, the Trustee shall have the right to pay such tax from the portion of the Trust Fund held for the benefit of such person and shall not incur any liability to any person whose interest in the Trust Fund is reduced thereby. However, the Trustee may require such re leases or other documents from such persons, including the party to whom such payment is to be made, as the Trustee may deem necessary or proper prior to making any such payment. ARTICLE IX RESIGNATION AND REMOVAL OF TRUSTEE 9.1 - Resignation, Removal. (a) Any Trustee, or if more than one person is acting as Trustee, any one or more of such persons, may resign at any time by delivering written notice of the intention to resign to the Sponsoring Company. (b) The Sponsoring Company may remove any Trustee or, if more than one person is acting as Trustee, any one or more of such persons, by delivering written notice of such removal to such Trustee or person. (c) The notice of such intent to resign or to remove any Trustee or person acting as such shall specify the date as of which such resignation or removal shall be effective, which date shall not be less than thirty (30) days after the date upon which such notice is delivered unless the party to whom such notice is required to be provided hereunder other wise agrees. 9.2 - Appointment of Successor Trustee. Upon providing notice of the removal of any Trustee, receipt of any notice of the intention of any Trustee or person or persons acting as such to resign, or the death or other inability of any Trustee or person or persons acting as such to so act, the Sponsoring Company shall promptly appoint one or more individuals, any corporation authorized to accept trusts in the State of California, or any combina tion thereof, as successor Trustee. However, any remaining Trustee shall exercise all of the powers and discharge all of the duties of the Trustee until such successor has been so appointed. 9.3 - Transfer of Rights. Upon written notice of acceptance of any duly ap pointed successor Trustee of the trusteeship hereof, the resigning or removed Trustee shall transfer all right, title and interest in and to the Trust Fund to such successor Trustee and shall perform such other acts and execute such documents as may be necessary or proper to transfer all rights and privileges as trustee hereof to such successor Trustee. ARTICLE X AMENDMENT; TERMINATION 10.1 - Amendment. The Sponsoring Company may, from time to time, amend this by instrument in writing signed by a duly authorized representative thereof. Thereupon, the provisions of such amendment shall be binding upon the Sponsoring Company, each Adopting Company, each Committee, the Trustee and all of the Participants in the Plan and their beneficiaries. Notwith standing the foregoing, no such amendment shall: (a) Cause any portion of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their beneficiaries; (b) Retroactively deprive any Participant or beneficiary of a Participant of any benefit pre viously vested except to the extent necessary to permit the Plan to meet or continue to meet the applicable requirements of the Act or the Code or to assure the deductibility of the contributions hereto by the Company for federal income tax pur poses; (c) Cause any prohibited discrimination in favor of any Participant who is an officer, share holder or highly compensated employee; or (d) Increase the duties or responsibilities of the Trustee without the written consent of the Trustee. 10.2 - Termination of Trust. This Trust is irrevocable and the Sponsoring Company and each Adopting Company anticipate that the Plan and Trust shall continue indefinitely. However, neither the Sponsoring Company nor any Adopting Company has assumed or shall be deemed to have assumed any obligation to continue the Plan and Trust. Accordingly, the Sponsoring Company or any Adopting Company may, upon fifteen (15) days written no tice to the Trustee, terminate the Plan, the Trust, or both as to its Employees. Further, the Sponsoring Company or any Adopting Company may reduce the benefits to be provided to Participants employed thereby under the Plan prospectively at any time. However, in the event of any partial or total complete termination of the Plan, the interest of each Participant shall immediately become one hundred percent (100%) vested and nonforfeitable to the extent then funded. There upon, the Trustee, after deducting or reserving the amounts necessary to defray all expenses of the Plan and Trust, in cluding the reasonable compensation of the Trustee and any anticipated costs of liquidating or distributing the assets hereof, shall distribute any remaining balance of the Trust Fund in accordance with the written instructions of the ap propriate Committee, which instructions shall conform to the requirements of the Plan. ARTICLE XI EMPLOYEE RIGHTS 11.1 - General Rights of Participants and Beneficiaries. The Plan is established and the Trust Fund is held for the exclusive purpose of providing benefits for Partici pants and their Beneficiaries. Such benefits may be payable upon retirement, death, disability or termination of employ ment with all Adopting Companies, subject to the specific provisions of the Plan. Every Participant and Beneficiary receiving benefits under the Plan is entitled to receive, on a regular basis, a current, comprehensible and detailed written account of his personal benefit status and of the relevant terms of the Plan which provides these benefits. 11.2 - Regular Reports and Disclosure Requirements. Every Participant covered under the Plan and every Beneficiary receiving benefits under the Plan shall receive a summary plan description, summary of the latest annual re port of the Plan, or such other information as may be re quired to be furnished by law, under any of the following circumstances: (a) When the Plan is established, or any material modification or amendment is proposed or adopted; (b) Within ninety (90) days after he becomes a Participant or begins to receive benefits under the Plan; (c) Within two hundred and ten (210) days after the close of the Plan's Fiscal Year. 11.3 - Information Generally Available. The appropriate Committee shall make copies of the Plan description and the latest annual report and any bar gaining agreement, trust agreement, contract or other instruments under which the Plan was established or is operated available for examination by any Plan Participant or Beneficiary in the principal office of such Committee and such other locations as may be necessary to make such infor mation reasonably accessible to all interested parties, and subject to a reasonable charge to defray the cost of fur nishing such copies, the appropriate Committee shall, upon written request of any Participant or Beneficiary, furnish a copy of the latest updated summary plan description, and the latest annual report, any terminal report, any bargaining agreement, trust agreement, contracts, or other instruments under which this Plan is established or operated to the par ty making such request. 11.4 - Special Disclosures. Upon written request to the appropriate Committee once during any twelve (12) month period, a Participant or Beneficiary shall be furnished with a written statement, based on the latest available information, of the total benefits accrued, or the earliest date on which such bene fits will become non-forfeitable. Prior to the distribution of any benefits to which any Participant or Beneficiary may be entitled, he must be provided with a written explanation of the terms and condi tions of the various distribution options that are available and must in turn, file a written election with the appropri ate Committee. Upon termination of employment, an Employee who has been a Participant in the Plan is entitled to a written explanation of and accounting for any vested deferred bene fits which have accrued to his account and of any applicable options regarding the disposition of those benefits. Such information will also be provided to the Social Security Ad ministration by the Internal Revenue Service on the basis of information required to be reported by the Committee. 11.5 - Employee Right to Comment. Pursuant to rights granted by the Act and the Reg ulations issued pursuant to that authority, the Participants shall be advised with respect to, and given an opportunity to comment on, the application of the Plan for a ruling re garding: (a) Initial qualification determination under the requirements of the Internal Revenue Code; (b) Any material amendment to the Plan; (c) Any partial or complete termination of the Plan. 11.6 - Filing a Claim for Benefits. A Participant or Beneficiary or the Adopting Company acting on his behalf, shall notify the appropriate Committee of a claim of benefits under the Plan. Such request may be in any form acceptable to such Committee and shall set forth the basis of such claim and shall authorize such Committee to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Participant or Beneficiary may be en titled under the terms of the Plan. 11.7 - Denial of Claim. Whenever a claim for benefits by any Participant or Beneficiary has been denied, a written notice, prepared in a manner calculated to be understood by the Participant, must be provided, setting forth the specific reasons for the denial and explaining the procedure for an appeal and review of the decision by the appropriate Committee. 11.8 - Remedies Available to Participants. A Participant or Beneficiary shall be entitled, either in his own name or in conjunction with any other in terested parties, to bring such actions in law or equity or to undertake such administrative actions or to seek such relief as may be necessary or appropriate to compel the dis closure of any required information, to enforce or protect his rights, to recover present benefits under the Plan. 11.9 - Protection From Reprisal. No Participant or Beneficiary may be discharged, fined, suspended, expelled, disciplined, or otherwise dis criminated against for exercising any right to which he is entitled or for cooperation with any inquiry or investiga tion under the provisions of this Plan or any governing law or Regulations. No person shall, directly or indirectly, through the use or threatened use of fraud, force or violence, restrain, coerce or intimidate any Participant or Beneficiary for the purpose of interfering with or preventing the exercise of or enforcement of any right, remedy or claim to which he is entitled under the terms of this Plan or any relevant law or Regulations. 11.10 - Mergers, Consolidations or Transfers. In the case of any merger or consolidation with, or transfer of assets or liability to, any other plan after the date of enactment of the Act, each Participant in the Plan will (if the Plan is then terminated) receive a benefit immediately after such merger, consolidation, or transfer which will be equal to or greater than the benefit he would have been entitled to receive immediately before such mer ger, consolidation, or transfer if the Plan then terminated. ARTICLE XII MISCELLANEOUS 12.1 - Contributions Not Recoverable. After an initial determination by the Commissioner of the Internal Revenue Service ("Commissioner") that the Trust is a "qualified" trust as defined in Section 401 of the Code as to any Adopting Company, no portion of the principal or income of the Trust shall be used for or diverted to any purpose other than the exclusive benefit of the Participants employed thereby in the Plan or their Beneficiaries. Not withstanding the foregoing, if the Commissioner determines that the Trust is not a "qualified" trust as defined in Sec tion 401 of the Code as to any Adopting Company, such Company may recover its contributions made hereto prior to such determination. Further, if an Adopting Company con tributes an amount in excess of that required by reason of a mistake of fact, the Trustee shall, upon written demand, distribute cash or property having value equal to amount thereof within one (1) year of the date made. However, the Trustee shall not distribute any cash or property represent ing earnings attributable to such excess contribution and shall reduce the amount otherwise so returned by the amount of any losses attributable thereto. 12.2 - Limitation on Participants' Rights. No person shall be deemed to have acquired any right to be retained in the employ of an Adopting Company or any interest in or claim against the Plan or Trust as the result of becoming a Participant except as otherwise provided here in. Each Adopting Company specifically reserves the right to discharge any Employee without liability to such Company or for any claim against the Plan or Trust, except to the extent otherwise provided in the Plan or Trust. Further, any and all benefits to be provided under the Plan shall be payable solely from assets of the Plan and no Adopting Company assumes any responsibility for any act or failure to act of the Trustee with respect to the assets of the Plan. 12.3 - Nonalienation. No benefit under the Plan, whether payable from this Trust or otherwise, may be anticipated, alienated, assigned, sold, pledged or encumbered in any manner except to secure a loan made by the Plan to a Participant or beneficiary thereof which is exempt from the tax imposed by Section 4975 of the Code by reason of the provisions of Section 4975(d) thereof nor shall any such benefit be subject to any claim of any creditor of any Participant or beneficiary thereof, whether by way of attachment, garnishment or other legal process; provided, however, that the foregoing shall not apply to the extent required to allow payment of benefits hereunder in accordance with any domestic relations order which is determined to be a "qualified domestic relations order" within the meaning of Section 414(p) of the Code, or entered before January 1, 1985. 12.4 - Governing Law. This Plan and Trust shall be governed by and the terms and provisions hereof construed under the applicable Federal law, but to the extent no Federal law is applicable, by or under the laws of the State of California. If any provision hereof is susceptible of more than one interpreta tion, such provision shall be interpreted in the manner which results in the Plan and Trust being deemed to be a qualified retirement plan and trust within the meaning of the Code and the Act. If any provision of this Agreement is void, invalid or unenforceable, the remaining provisions hereof shall continue to be of full force and effect. 12.5 - Rule Against Perpetuities. If the validity of the Trust depends upon compliance with the rule against perpetuities, the Trust shall terminate within twenty-one (21) years of the date of the death of the last to survive of the Participants in the Plan living on the date of the execution hereof. 12.6 - Fiduciary Liability. No provision of this Agreement shall be construed so as to relieve any Fiduciary of the Plan or Trust, including the Trustee hereof, of any liability except to the extent permissible by law. 12.7 - Headings Not Part of Agreement. The headings and subheadings in this Agreement have been inserted for the convenience of reference only and shall not be considered in the construction hereof. 12.8 - Instrument in Counterparts. This Agreement may be executed in several counter parts, each of which shall be deemed an original but shall constitute but one and the same instrument which may be suf ficiently evidenced by one such counterpart. 12.9 - Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns. 12.10 - Gender. As used herein, the masculine, feminine and neuter and the singular and plural shall each be deemed to include the others. IN WITNESS WHEREOF, the Sponsoring Company and a duly authorized representative of each Affiliated Company which is adopting this Plan, have executed this Agreement. "SPONSORING COMPANY" PENHALL INTERNATIONAL, INC., a California corporation By /s/ Roger C. Stull ---------------------------- ROGER C. STULL, President "ADOPTING COMPANIES" PENHALL COMPANY, a California corporation By /s/ John T. Sawyer ---------------------------- John T. Sawyer, President ----------------- PENHALL ENVIRONMENTAL SERVICES, a California corporation By /s/ illegible ---------------------------- , President ----------------- PHOENIX CONCRETE CUTTING, INC., an Arizona corporation By /s/ C. George Bush ---------------------------- C. George Bush, President ----------------- "TRUSTEE" /s/ Roger C. Stull ------------------------------ ROGER C. STULL PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT-SHARING (401(k)) PLAN AND TRUST AGREEMENT PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT-SHARING (401(k)) PLAN AND TRUST AGREEMENT Table of Contents
Article Title Page - ------- ----- ---- ARTICLE I PURPOSE OF PLAN AND TRUST; DEFINITIONS 1 ARTICLE II PARTICIPATION 17 ARTICLE III COMPANY CONTRIBUTIONS 19 ARTICLE IV PARTICIPANT'S SALARY REDUCTIONS 21 ARTICLE V MATCHING CONTRIBUTIONS 28 ARTICLE VI BENEFITS 38 ARTICLE VII THE COMMITTEE 47 ARTICLE VIII THE TRUSTEE 51 ARTICLE IX RESIGNATION AND REMOVAL OF TRUSTEE 63 ARTICLE X AMENDMENT; TERMINATION 64 ARTICLE XI EMPLOYEE RIGHTS 66 ARTICLE XII MISCELLANEOUS 70
AMENDMENT TO THE PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST Pursuant to Article X of the PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST (the "Plan"), Penhall International, Inc. amends the Plan as follows effective January 1, 1995. 1. Section 1.2(w) is deleted and the following inserted in its place: "(w) "Entry Date" means each January 1, April 1, July 1 and October 1. Plan participation commences on the Entry Date following completion of the minimum age and service requirements." This Plan Amendment is executed this ___ day of ________________, 1995, at Anaheim, California. PENHALL INTERNATIONAL, INC. By: --------------------------- Robert C. Stull, President AMENDMENT TO THE PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT Pursuant to Section 10.1 of the PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT (the "Plan"), PENHALL INTERNATIONAL, INC., a California corporation, the Sponsoring Company, hereby amends the Plan in the following particulars only effective on the date this Amendment is executed. 1. The following is added as a new Section 4.9: "4.9 - Rollovers From Qualified Plans. (a) With the consent of the Committee, the Trustee may receive and hold an Eligible Employee's or Participant's qualifying distribution from any other qualified retirement plan ("Rollover Contribution"). The Trustee may accept such Rollover Contribution directly from such other plan, from such Eligible Employee or Participant within sixty (60) days of the receipt thereof by the Eligible Employee or Participant, or from an individual retirement account provided such individual retirement account contains no assets other than those representing employer contributions, earnings thereon and earnings on employee contributions thereto. Any such Rollover Contributions shall be separately accounted for, nonforfeitable and distributed with and in addition to any other benefit to which the Participant effecting such contribution is entitled hereunder. (b) Whenever a Participant elects to make Rollover Contributions to this Plan as provided herein, the Committee shall establish a separate Rollover Contribution Account to which such Participant's Rollover Contributions shall be allocated when received by the Trustee. (c) A Participant may, upon thirty (30) days' written notice to the Committee, withdraw any portion of his Rollover Contributions Account; provided, however, that if such Participant is then married, the written consent to such withdrawal by his spouse shall be required as provided in Section 6.5(b). Any such written consent by a Participant's spouse shall be witnessed by a Notary Public unless it is established to the satisfaction of such Committee that such consent is not required as a result of a prior written consent or cannot be obtained because such Participant is not married, because his spouse cannot be located or because of such other circumstances as may be prescribed in any regulations promulgated under Section 417 of the Code." 2. Section 6.3 is deleted and the following inserted in its place: "6.3 - Amount Distributable. A Participant shall be entitled to receive the amount equal to the balances of his Company Contributions Account, Matching Contributions Account and Rollover Contributions Account, adjusted in accordance with the provisions of Section 5.3, and further adjusted, if required, in accordance with the provisions of Section 5.4 ("Distributable Amount")." 3. The first clause of Section 6.4 is deleted and the following inserted in its place: "6.4 - Events Entitling Participant of Beneficiary to Distribution. Except as provided in Sections 6.9 and 4.9(c)," This Plan Amendment is executed and effective this 21st day of May, 1996. PENHALL INTERNATIONAL, INC. By: /s/ Roger C. Stull -------------------------------------- Robert C. Stull, President AMENDMENT TO THE PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT Pursuant to Section 10.1 of the PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING (401(k)) PLAN AND TRUST AGREEMENT (the "Plan"), PENHALL INTERNATIONAL, INC., a California corporation, the Sponsoring Company, hereby amends the Plan in the following particulars only, effective as set forth below. 1. Section 5.1(a) is deleted and the following inserted in its place: "5.1 - Allocation of Matching Contributions. (a) Any contribution made by an Adopting Company for a Plan Year shall first be allocated to the Matching Contributions Accounts of those Participants (i) employed thereby who have been credited with a Year of Service for such Year and (ii) who made Salary Reduction Contributions for the Plan Year as follows: (1) For Plan Years beginning after June 30, 1998, the portion of such Adopting Company's contribution which equals the aggregate amount which, when allocated to the Matching Contributions Account of each Participant employed thereby on the basis of Fifty Cents ($0.50) for each One Dollar ($1.00) of such Participant's Sal ary Reduction Contribution for such Year up to but not exceeding One Thousand Dollars ($1,000.00) ($0.50 x $1,000.00 = $500.00 maximum), or such other amount as the Sponsoring Company may specify for such Plan Year, shall be allocated to each such Participant's Matching Contributions Account. All of such amounts shall be deemed to constitute Salary Reduction Contributions for all purposes hereof other than the provisions of Section 5.1(a)(5) (2) Next, for Plan Years beginning after June 30, 1998, the portion of such Adopting Company's contribution which equals the aggregate amount which, when allocated to the Matching Contributions Account of each Participant employed thereby on the basis of Thirty Cents ($0.30) for each One Dollar ($1.00) of such Participant's Salary Reduction Contribution for such Year exceeding One Thousand Dollars ($1,000.00) up to but not to exceed Three Thousand Dollars ($3,000.00) ($0.30 x $2,000.00 = $600.00 maximum), or such other amount as the Sponsoring Company may specify for such Plan Year, shall be allocated to each such Participant's Matching Contributions Account. All of such amounts shall be deemed to constitute Salary Reduction Contributions for all purposes hereof other than the provisions of Section 5.1(a)(5). (3) Next, for Plan Years beginning after June 30, 1998, the portion of Penhall Company's contribution which equals the aggregate amount which, when allocated to the Matching Contributions Account of each Participant employed by Penhall Company dba Highway Services (and only that division of the Sponsoring Company) on the basis of Thirty Cents ($0.30) for each One Dollar ($1.00) of such Participant's Salary Reduction Contribution for such Year exceeding Three Thousand Dollars ($3,000.00) up to but not to exceed Six Thousand Dollars ($6,000.00) ($0.30 x $3,000.00 = $900.00 maximum), or such other amount as the Sponsoring Company may specify for such Plan Year, shall be allocated to each such Participant's Matching Contributions Account. All of such amounts shall be deemed to constitute Salary Reduction Contributions for all purposes hereof other than the provisions of Section 5.1(a)(5). (4) Next, for Plan Years beginning after June 30, 1998, if the High Average Actual Deferral Per centage for such Plan Year would exceed the higher of the two Percentage Limitations described in Section 4.5(b), the portion of such Adopting Company's contribution for such Year which equals the smallest aggregate amount which, when allocated to the Matching Contributions Accounts of those Participants employed thereby who are Non-Highly Compensated Employees in the same ratios which each such Participant's Salary Reduction Contribution for such Year bears to the aggregate of the Salary Reductions Contributions of all of such Participants and included as constituting Salary Reduction Contributions of such Participants in computing the Low Average Actual Deferral Percentage, will result in the High Average Actual Deferral Percentage meeting one of such Percentage Limitations shall be allocated to the Matching Company Contributions Accounts of such Participants who are Non-Highly Compensated Employees. By so providing, each Adopting Company intends that any amount allocated to the Matching Contributions Account of a Participant who is a Non-Highly Compensated Employee pursuant to the provisions of this Section 5.1(a)(4) constitute a qualified nonelective contribution. Accordingly, all of such amounts shall be deemed to constitute Salary Reduction Contributions for purposes hereof. (5) Lastly, if the contribution made by an Adopting Company for any Plan Year ending after June 30, 1998, exceeds the amount, if any, required to be allocated to the Matching Contributions Accounts of Participants pursuant to the provisions of Sections 5.1(a)(1), 5.1(a)(2) and 5.1(a)(3), plus the amount, if any, required to be allocated to the Matching Contributions accounts of Participants who are Non-Highly Compensated Employees pursuant to the provisions of Section 5.1(a)(4), the balance of such Adopting Company's contributions for such Year shall be allocated to the Matching Contributions Accounts of all Participants employed thereby who have been credited with a Year of Service for such Year in the same ratios that each such Participant's Salary Reduction Contribution for the Year bears to the Salary Reduction Contributions of all Participants employed thereby for such Year; pro vided, however, that the Salary Reduction Contribution for such Year of each Participant who is a Non-Highly Compensated Employee shall be deemed to include the amount, if any, required to be allocated to the Matching Contribution Account of such Participant pursuant to the provisions of Section 5.1(a)(4). By so providing, each Adopting Company intends to comply with the provisions of Section 401(m)(3) of the Code." 2. Effective immediately, the following special provision shall apply: "Special Eligibility and Vesting Rules for Penhall Company dba Highway Services Employees. Penhall Company is in the process of acquiring substantially all of the assets of a company known as Highway Services, Inc., which company will be operated by Penhall Company as one of its divisions, to be known as 'Penhall Company dba Highway Services.' Effective upon the closing of that acquisition: (a) Any Employee hereafter employed by an Adopting Company will be credited with past service credit for eligibility and vesting purposes under this Plan with all service performed by that Employee for Highway Services, Inc. prior to the acquisition, applying the rules of this Plan as they related to crediting service; (b) The term "Eligible Employee" includes Employees of Penhall Company dba Highway Services (and only that division of the Sponsoring Company) who are included in a unit of Employees covered by a collective bargaining agreement between employee representatives and Penhall Company; and (c) The Plan will have a special one-time Entry Date solely for each Employee who was employed by Highway Services, Inc. immediately prior to the closing of the acquisition, and who commences employment with an Adopting Company during the period from the date of closing of the acquisition through June 30, 1998. That Entry Date is the Employee's Date of Employment (without taking into account paragraph (a) above)." This Plan Amendment is executed this 27th day of April, 1998. PENHALL INTERNATIONAL, INC. By: /s/ Roger C. Stull ------------------------------------- Robert C. Stull, President AMENDMENT TO THE PENNHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT-SHARING (401k) PLAN AND TRUST AGREEMENT (THE "PLAN") Pursuant to Section 10.1 of the Plan, Pennhall International, Inc., as Sponsoring Company under the Plan, hereby amends the Plan in the following particulars only: 1. The following paragraph is added to Section 6.4. "Notwithstanding Sections 6.4, 6.5, 6.6, and 6.7 herein, benefits may be distributed to the "alternate payee" under a "qualified domestic relations order" (as those terms are defined in Section 414(p) of the Code) as required by such order, regardless of the age or employment status of the Participant, provided that: (a) the form and commencement of distribution is authorized under Sections 6.6 and 6.7, assuming the alternate payee to be an unmarried Participant who has terminated employment on the date of entry of the order; and (b) subsequent distributions to persons other than the alternate payee, with respect to the same Participant, shall be reduced if necessary to prevent duplicate distributions with respect to the same benefit amount." IN WITNESS WHEREOF, the Sponsoring Company has executed this Plan Amendment effective March 1, 1992. "SPONSORING COMPANY" PENNHALL INTERNATIONAL, INC., a California corporation By ------------------------------------ Roger C. Stull, President AMENDMENT TO THE PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST Pursuant to Article X of the PENHALL INTERNATIONAL, INC. AND AFFILIATED COMPANIES EMPLOYEES' PROFIT SHARING 401(k) PLAN AND TRUST (the "Plan"), Penhall International, Inc. amends the Plan (as recently amended and restated) as follows effective July 1, 1989. 1. The following is added to Section 4.5(c): "Salary Reduction Contributions must relate to Compensation that either would have been received by the Employee in the Plan Year (but for the Salary Reduction Election) or is attributable to services performed by the Employee in the Plan Year and would have been received by the Employee within 2-1/2 months after the close of the Plan Year (but for the Salary Reduction Election) in order to be considered in calculating the Actual Deferral Percentage." 2. The following is added as Section 1.2(ggg): "(ggg) 'Limitation Year' means the Plan Year." 3. The following sentence is added to Section 3.2: "The Plan shall accept no transfer contributions." 4. The reference to Plan Section 5.1(a)(3) in Section 5.1(a)(4) is changed to read "5.1(a)(4)." The two references to Plan Section 5.1(a)(3) in Section 5.1(a)(5) are changed to read "5.1(a)(4)." There is no Plan Section 5.1(a)(3). 5. Section 4.7(f) is deleted and the following inserted in its place: "(f) Salary Reduction Contributions will be taken into account in computing Actual Deferral Percentages for a Plan Year only if allocated to the Participant's Account as of a date within such Plan Year. For this purpose, Salary Reduction Contributions are considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Salary Reduction Contribution is actually paid to the Trust no later than 12 months after the Plan Year to which such Contribution relates." 6. The parenthetical at the end of Section 4.6(a)(2) is deleted and the following inserted in its place: "(determined in accordance with Section 4.6(d) below)." 7. The following is added as Section 4.6(d): "(d) The amount of excess contributions for a Highly Compensated Employee is determined as follows: (1) First, the Actual Deferral Percentage of the Highly Compensated Employee with the highest Actual Deferral Percentage is reduced to the extent necessary to satisfy the Actual Deferral Percentage test or cause such Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Percentage. (2) Second, this process is repeated until the Actual Deferral Percentage test is satisfied. The amount of excess contributions for a Highly Compensated Employee is then equal to the total Salary Reduction Contributions and Matching Contributions taken into account for the Actual Deferral Percentage test less the product of such Employee's reduced Actual Deferral Percentage as determined above and the Employee's Compensation. Notwithstanding the foregoing, the amount of excess contributions to be distributed shall be reduced by Excess Deferrals previously distributed for the taxable year ending in the same Plan Year, and Excess Deferrals to be distributed for a taxable year will be reduced by excess contributions previously distributed for the Plan Year beginning in such taxable year." This Plan Amendment is executed this 25th day of March, 1994, at Anaheim, California. PENHALL INTERNATIONAL, INC. By: /s/ Roger C. Stull --------------------------- Robert C. Stull, President PLAN AMENDMENT The employer named below ("Employer") is the sponsor of the tax-qualified retirement plan named below (the "Plan"). Employer hereby amends the Plan by adding the following provisions effective as provided below. 1. The following is added effective January 1, 1994: "OBRA '93 Annual Compensation Limit In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the "OBRA '93 Annual Compensation Limit." The "OBRA '93 Annual Compensation Limit" is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (the "determination period") beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 Annual Compensation Limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 Annual Compensation Limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 Annual Compensation Limit in effect for the prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 Annual Compensation Limit is $150,000." 2. The following is added effective January 1, 1993: "Waiver of 30-Day Hold on Distributions If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Regulation Section 1.411(a)-11(c) is given, provided that: (1) The Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution; and (2) The Participant, after receiving such notice, affirmatively elects a distribution." Employer: Penhall International, Inc. ---------------------------- Plan: Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing Plan (401(k)) Plan -------------------------------- Date: April 5, 1993 By: /s/ Charles D. Steichen ------------- ------------------------------ Title: Vice President --------------------------- DIRECT ROLLOVER PLAN AMENDMENT The employer named below ("Employer") is the sponsor of the tax-qualified retirement plan named below (the "Plan). Employer hereby amends the Plan effective January 1, 1993, by adding the following provisions to comply with Code Section 401(a)(31). "DIRECT ROLLOVERS Section A. These provisions apply to Plan distributions made on or after January 1, 1993. Notwithstanding any provisions of the Plan to the contrary that would otherwise limit a Distributee's election under these provisions, a "Distributee" may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an "Eligible Rollover Distribution" paid directly to an "Eligible Retirement Plan" specified by the Distributee in a "Direct Rollover." Section B. "Eligible Rollover Distribution": An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). Section C. Eligible Retirement Plan: An Eligible Retirement Plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. Section D. Distributee: A Distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p), are Distributees with regard to the interest of the spouse or former spouse. Section E. Direct Rollover: A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee." Employer: -------------------------- Plan: ------------------------------ Date: , 1993 By: ------------- -------------------------------- Title: ----------------------------- INTERIM PLAN AMENDMENT The undersigned "Sponsoring Employer" of the "Employee Pension Benefit Plan" set forth below (the "Plan") hereby amends the Plan effective for Plan Years commencing on or after January 1, 1997 as follows: 1. WHEREAS: HR 3448, the Small Business Protection Act of 1996 (the '96 Act"), provides in general in Section 1404(b) that, except for five percent owners, plan participants must begin to receive minimum required distributions under Section 401(a)(9)(C) of the Internal Revenue Code of 1986 (the "Code") by April 1 of the calendar year following the year in which the participant reaches age 70-1/2 or, if later, the year in which the participant retires. The Sponsoring Employer wishes to give Plan participants who (a) are not five percent owners, (b) are currently employed by the Sponsoring Employer and (c) are currently receiving minimum required distributions, the election to stop receiving those distributions until otherwise required by law. THE PLAN IS AMENDED AS FOLLOWS: "Notwithstanding anything in the Plan to the contrary: (a) Participants who are not five percent owners (as defined in Code Section 416) are not required to receive minimum required distributions until April 1 of the calendar year following the later of (i) the calendar year in which the participant attains age 70-1/2 or (ii) the calendar year in which the employee retires. (b) Participants who (i) are not five percent owners (as defined in Code Section 416), (ii) are currently employed by the Sponsoring Employer and (iii) are currently receiving minimum required distributions, shall have the right to elect to stop receiving those distributions until otherwise required by law." 2. WHEREAS: Section 1431 of the '96 Act changes the definition of "highly compensated employee." New Code Section 414(q)(1)(B)(2) allows the employer to elect to limit the group of highly compensated employees (other than five percent owners) to those in the top-paid group of employees for the preceding year. The Sponsoring Employer wishes to make that election. THE PLAN IS AMENDED AS FOLLOWS: "Beginning with the Plan Year commencing on or after January 1, 1997, the Sponsoring Employer makes the election set forth in Code Section 414(q)(1)(B)(2), electing to limit the group of highly compensated employees (other than five percent owners) to those in the top-paid group of employees for the preceding year." This Interim Plan Amendment is executed this 10th day of February, 1997. Sponsoring Employer: /s/ Roger C. Stull --------------------------------------------------------- Name of Employee Pension Benefit Plan: Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan and Trust Agreement ---------------------------------------- EX-10.10 4 EXHIBIT 10.10 Exhibit 10.10 PENHALL INTERNATIONAL CORP. 1998 STOCK OPTION PLAN Date Adopted: ____________, 1998 PENHALL INTERNATIONAL CORP. 1998 STOCK-OPTION PLAN 1. Purpose of the Plan The purpose of the Plan is to assist the Company in attracting and retaining valued employees, non-employee directors and independent contractors by offering them a greater stake in the Company's success and a closer identity with it, and to encourage ownership of the Company's stock by such employees, non-employee directors and independent contractors. 2. Definitions 2.1 "Board" means the Board of Directors of the Company. 2.2 "Cause" means that Employee (i) has engaged in misconduct involving dishonesty, theft, embezzlement or fraud with respect to the Company, (ii) has been convicted of a felony, or (iii) refuses to perform adequately any of his or her usual and ordinary duties for or on behalf of the Company or those reasonably requested by the Company or the Board, provided that the Company shall have given notice to the Employee of the nature of such refusal and such refusal has not been cured within 5 days thereafter. 2.3 "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 1 of Form 8-K promulgated under the Exchange Act, provided, that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who on the date hereof is a director or officer of the Company, is or becomes the "beneficial owner," (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years during the term of this Plan, individuals who at the beginning of such period constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least a majority of the directors then in office who were members of the Incumbent Board or whose election was approved by the Incumbent Board. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Common Stock" means the common stock of the Company, par value $______ per share, or such other class or kind of shares or other securities resulting from the application of Section 7. - 3 - 2.6 "Company" means Penhall International Corp., a ______________ corporation, or any successor corporation. 2.7 "Committee" means a committee composed of members of the Board, designated by the Board to administer the Plan in accordance with Section 4. After the Company becomes Publicly Traded, the Committee shall have at least two members and each member of the Committee shall be a non-employee director within the meaning of Rule 16b-3 under the Exchange Act. 2.8 "Director" means a member of the Board who is not an Employee. 2.9 "Employee" means an officer or other key employee of the Company including a director who is such an employee. 2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.11 "Fair Market Value" means, on any given date, 2.11.1 If the Common Stock is listed on an established stock exchange or exchanges, the last reported sale price per share on such date on the principal exchange on which it is traded, or if no sale was made on such date on such principal exchange, at the closing reported bid price on such date on such exchange; - 4 - 2.11.2 If the Common Stock is not then listed on an exchange, the last reported sale price per share on such date reported by NASDAQ, or if sales are not reported by NASDAQ, or no sale was made on such date, the average of the closing bid and asked prices per share for the Common Stock in the over-the-counter market as quoted on NASDAQ on such date; 2.11.3 If the Common Stock is not then listed on an exchange or quoted on NASDAQ, the average of the reported closing bid and asked prices on the most recent date the Common Stock traded in the over-the-counter market; or 2.11.4 If the Common Stock is not then listed on an exchange, quoted on NASDAQ or traded in the over-the-counter market, the value ascribed to the shares of Common Stock by the Committee based on a good faith attempt to value the Common Stock. 2.12 "Holder" means an Employee, Director or Independent Contractor to whom an Option is granted. 2.13 "Incentive Stock Option" means an Option intended to meet the requirements of an incentive stock option as defined in section 422 of the Code and designated as an Incentive Stock Option. - 5 - 2.14 "Independent Contractor" means an individual other than an Employee who performs services for the Company. 2.15 "Non-Qualified Stock Option" means an Option not intended to be an Incentive Stock Option, and designated as a Non-Qualified Stock Option. 2.16 "Option" means any stock option granted from time to time under Section 6 of the Plan. 2.17 "Option Agreement" means an agreement evidencing the grant of Options under this Plan by the Company to the Holder and containing such terms as the Committee shall determine. 2.18 "Option Share" means any share of Common Stock purchased upon the exercise of an Option. 2.19 "Permitted Transferee" means the spouse, parents, siblings, children or grandchildren (in each case, natural or adopted) of a Holder, any trust for his or her benefit or the benefit of his or her spouse, parents, siblings, children or grandchildren (in each case, natural or adopted), or any corporation or partnership in which the direct and beneficial owner of all of the equity interest in such corporation or partnership is such individual Holder or Permitted Transferee (or any trust for the benefit of such persons). - 6 - 2.20 "Plan" means the Penhall International Corp. 1998 Stock Option Plan herein set forth, as amended from time to time. 2.21 "Publicly Traded" means the Company is required to register shares of any class of common equity under Section 12 of the Exchange Act. 2.22 "Retirement" means retirement from the active employment of the Company pursuant to the relevant provisions of the applicable pension plan to such Employee or as otherwise determined by the Board. 2.23 "Ten Percent Shareholder" means a person who on any given date owns, either directly or indirectly (taking into account the attribution rules contained in section 424(d) of the Code), stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary of which the Company has a 50% or greater, direct or indirect ownership. 3. Eligibility Any Employee, Director or Independent Contractor is eligible to receive an Option. 4. Administration and Implementation of Plan 4.1 The Plan shall be administered by the Committee, which shall have full power to interpret and administer the Plan and full authority to act in selecting the Employees, Directors and Independent Contractors to whom Options will be - 7 - granted, in determining the type and amount of Options to be granted to each such Employee, Director or Independent Contractor, the terms and conditions of Options granted under the Plan and the terms of agreements which will be entered into with Holders. 4.2 The Committee's powers shall include, but not be limited to, the power to determine whether, to what extent and under what circumstances an Option may be exchanged for cash; to determine the effect, if any, of a change in control of the Company upon outstanding Options; and to grant Options (other than Incentive Stock Options) that are transferable by the Holder. 4.3 The Committee shall have the power to adopt regulations for carrying out the Plan and to make changes in such regulations as it shall, from time to time, deem advisable. The Committee shall have the power unilaterally and without approval of a Holder to amend an existing Option Agreement in order to carry out the purposes of the Plan so long as such an amendment does not, other than pursuant to a specific term of the Plan, take away any benefit granted to a Holder by the Option Agreement and as long as the amended Option Agreement comports with the terms of the Plan. Any interpretation by the Committee of the terms and provisions of the Plan and the administration thereof, and all action taken by the Committee, shall be final and binding on Holders. - 8 - 5. Shares of Stock Subject to the Plan 5.1 Subject to adjustment as provided in Section 7, the total number of shares of Common Stock available for Options granted under the Plan shall be ___________ shares. The maximum number of shares of Common Stock for which any individual may be granted options in any calendar year shall be __________. 5.2 Any shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for Options granted under the Plan. Any shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares subject to any Option granted hereunder are forfeited or such Option otherwise terminates without the issuance of such shares or the payment of other consideration in lieu of such shares, the shares subject to such Option, to the extent of any such forfeiture or termination, shall again be available for Options under the Plan. 6. Options Options give an Employee, a Director or an Independent Contractor the right to purchase a specified number of shares of Common Stock from the Company for a specified time period at a fixed price. The grant of Options shall be subject to the following terms and conditions: 6.1 Option Grants: Options shall be granted to an Employee, Director or Independent Contractor at the time and in the amount determined by the - 9 - Committee. Options shall be evidenced by Option Agreements. Such Option Agreements shall conform to the requirements of the Plan, and may contain such other provisions as the Committee shall deem advisable. 6.2 Option Price: The price per share at which Common Stock may be purchased upon exercise of an Option shall be determined by the Committee, but shall be not less than the Fair Market Value of a share of Common Stock on the date of grant. In the case of any Incentive Stock Option granted to a Ten Percent Shareholder, the option price per share shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date of grant. 6.3 Term of Options: The Option Agreements shall specify when an Option may be exercisable and the terms and conditions applicable thereto. The term of an Option shall in no event be greater than ten years (five years in the case of an Incentive Stock Option granted to a Ten Percent shareholder). 6.3.1 Vesting. Options granted under the Plan may be subject to a vesting schedule set forth in the Option Agreement, under which such Options cannot be exercised until they are vested, except as provided in Section 6.3.2. However, Options shall vest at a rate of at least 25% each year on the anniversary of the date the Options were granted, so that all Options will be 100% vested no later than the fourth anniversary of their grant. - 10 - 6.3.2 Early Exercise. An Option Agreement may allow a Holder to exercise an Option before the date on which the Option is vested. Any Option Shares purchased through such an early exercise will be subject to the Repurchase Rights described in Section 6.12 until the underlying Options otherwise would have become vested. 6.4 Incentive Stock Options: Each provision of the Plan and each Option Agreement relating to an Incentive Stock Option shall be construed so that each Incentive Stock Option shall be an incentive stock option as defined in section 422 of the Code, and any provisions of the Option Agreement thereof that cannot be so construed shall be disregarded. In no event may a Holder be granted an Incentive Stock Option which does not comply with the limitations ($100,000 at the date hereof) imposed by Section 422(d) of the Code on the dollar amount of such Options that may first be exercisable in any one calendar year. 6.5 Restrictions on Transferability: No Incentive Stock Option shall be transferable otherwise than by will or the laws of descent and distribution and, during the lifetime of the Holder, shall be exercisable only by the Holder. Upon the death of a Holder, the person to whom the rights have passed by will or by the laws of descent and distribution may exercise an Incentive Stock Option only in accordance with this Section 6. - 11 - 6.6 Payment of Option Price and Taxes: 6.6.1 Payment. The Option Price or, where applicable, a portion thereof, shall be paid in full in cash or by certified or bank cashiers check payable to the Company, or, subject to the approval of the Committee and where provided in the applicable Option Agreement: (a) by surrendering shares of the Company's Common Stock that have an aggregate Fair Market Value equal to the aggregate Option Price and that have been held by Holder for six months, (b) delivery of an irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the aggregate Option Price or delivery of irrevocable instructions to a broker to deliver promptly to the Company sufficient funds to pay the aggregate Option Price, (c) by having the Company retain the number of Option Shares whose aggregate Fair Market Value equals the aggregate Option Price or (d) any combination of the foregoing. 6.6.2 Taxes. Any taxes required to be withheld by the Company upon exercise of an Option shall be paid in full in cash or by certified or bank cashiers check payable to the Company, or, subject to the approval of the Committee (and subject to such rules as the Committee may adopt) and where provided in the applicable Option Agreement, by having the Company retain the number of Option Shares whose aggregate Fair Market Value equals the amount to be withheld in satisfaction of the applicable withholding taxes. - 12 - 6.7 Termination by Death: If a Holder dies, any Option granted to such Holder may thereafter be exercised (to the extent such Option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant) by, where appropriate, the Holder's transferee or by the Holder's legal representative, for a period of three months from the date of death or until the expiration of the stated term of the Option, whichever period is shorter. 6.8 Termination by Reason of Retirement or Disability: If a Holder's employment by the Company or service on the Board terminates by reason of disability (as determined by the Committee) or Retirement, any unexercised Option granted to the Holder may thereafter be exercised by the Holder (or, where appropriate, the Holder's transferee or legal representative), to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant, for a period of three months from the date of such termination or until the expiration of the stated term of the Option, whichever period is shorter. This Section 6.8 shall not apply to any Option held by an Independent Contractor. 6.9 Other Termination: If a Holder's employment by the Company or service on the Board terminates for any reason other than death, disability or Retirement, all unexercised Options, to the extent they were exercisable at the time of termination, may be exercised within the shorter of 60 days following the Holder's termination or the remaining term of the Option. Any such unexercised Options shall then terminate at the end of such 60-day period. All unexercised Options that are - 13 - unexercisable at the time of the Holder's termination shall immediately terminate on the date of the Holder's termination. This Section 6.9 shall not apply to any Option held by an Independent Contractor. 6.10 Rights of First Refusal of Company. In the event that any Holder of Option Shares receives a bona fide offer from a third party to purchase a complete or partial interest in such Option Shares, and at the time of that offer, the Option Shares are not Publicly Traded, the Holder may not transfer the Option Shares unless otherwise permitted by the provisions of the Plan and the Agreement, and without first offering to sell such Option Shares to the Company or its designee pursuant to this Section 6.10. 6.10.1 The Holder shall deliver a written notice (a "Sale Notice") to the Company describing in reasonable detail the Option Shares, the name of the offeror, the purchase price offered and all other material terms of the proposed transfer. The Sale Notice shall be delivered to and received by the Company at least sixty (60) days prior to any such proposed sale. 6.10.2 The Sale Notice shall constitute an irrevocable offer by such Holder to sell the Option Shares described therein to the Company or its designee in accordance with this Section 6.10. 6.10.3 Upon receipt of the Sale Notice, the Company or its designee shall have the right and option to purchase the Option Shares on the terms of - 14 - the proposed transfer set forth in the Sale Notice, except for such terms as are otherwise specified or permitted by this Section 6.10. Within 30 days after receipt of the Sale Notice, the Company shall notify such Holder whether or not it or its designee wishes to purchase the Option Shares. If the Company or its designee elects to purchase the Option Shares, the closing of the purchase and sale of the Option Shares shall be held at the place and on the date established by the Company in its notice to the Holder in response to the Sale Notice, which date shall be not more than 30 days from the date of the Company's notice, unless the terms of the proposed transfer provide for a later closing date. 6.10.4 If neither the Company nor its designee elects to purchase the Option Shares, the Holder may, subject to the other provisions of the Plan and the Agreement, transfer the Option Shares to the offeror specified in the Sale Notice at a price no less than the price specified in the Sale Notice and on other terms no more favorable to the offeror than specified in the Sale Notice during the 90-day period immediately following the last date on which the Company could have elected to purchase the Option Shares. Any such Option Shares not so transferred within such 90-day period will be subject again to all of the provisions of this Section 6.10 upon subsequent transfer. 6.11 Approved Sale of the Company. If the Board and holders of a majority of the Common Stock (voting as a single class) then outstanding approve the sale of the Company (whether by merger, consolidation, sale of all or substantially all of - 15 - the assets or outstanding shares of capital stock (an "Approved Sale"), and if at that time the Common Stock is not Publicly Traded, the following restrictions shall apply with respect to any Option Share: 6.11.1 each Holder shall consent to, vote for and raise no objections with respect to the Approved Sale, and if the Approved Sale is structured as a sale of stock, shall agree to sell all Option Shares held by such Holder on the terms and conditions approved by the Board and the holders of a majority of the Common Stock then outstanding. 6.11.2 Each Holder shall take all action which is necessary or in the judgment of the Company advisable to facilitate or consummate an Approved Sale. The obligations of a Holder with respect to an Approved Sale of the Company are subject to the satisfaction of the following: upon the consummation of the Approved Sale, either all of the holders of Common Stock will receive the same form and amount of consideration per share of Common Stock, or if any such holder of Common Stock is given an option as to the form and amount of consideration to be received, such Holder will be given the same option. Each Holder hereby appoints the Company as its or his true and lawful proxy and attorney-in-fact, with full power of substitution and resubstitution, to vote its or his Option Shares that are entitled to vote to effectuate the provisions and intentions of this Section 6.11. The proxies and powers of attorney granted under this Section 6.11 are hereby declared to be coupled with an interest and shall be irrevocable. - 16 - 6.12 Repurchase Rights of Company. So long as the Common Stock is not Publicly Traded: 6.12.1 If a Holder's employment or service with the Company is terminated by the Company for Cause or by the Holder for any reason whatsoever, and if such Holder has been previously granted an Option or Options under the Plan, then any Option Shares that are held by such Holder shall be subject to the right and option of the Company or its designee to purchase in one or more transactions all or a portion of such Option Shares at an aggregate price equal to the product of the number of such Option Shares and the lower of the Fair Market Value (determined as of a date not more than 30 days prior to the date of the Company's notice called for by Section 6.12.3) and the Option Price paid for such Option Shares, subject to the terms set forth in Section 6.12.3. 6.12.2 If a Holder's employment or service with the Company is terminated by the Company for other than Cause and if such Holder has been previously granted Options under the Plan, then any Option Shares that are held by such Holder shall be subject to the right and option of the Company or its designee to purchase in one or more transactions all or a portion of such Option Shares at an aggregate price equal to the product of the number of such Option Shares and the Option Price paid for such Option Shares, subject to the terms set forth in Section 6.12.3. - 17 - 6.12.3 In the event that the Company or its designee should decide to exercise the right to purchase Option Shares, the Company shall notify the Holder of the Company's or its designee's exercise of such right, setting forth the purchase price determined by the Company as well as the date and place of closing; provided, that the Company or its designee shall provide such notification to Holder in writing within 60 days of termination of Holder's employment or service with the Company. At the closing, the Company or its designee, as the case may be, shall make available to the Holder such purchase price, payable in cash or by check, and the Holder shall deliver any such Option Shares immediately prior to such closing, whereupon the purchase and sale pursuant to such right shall be deemed completed and the Company or its designee, as the case may be, shall be deemed the sole registered and beneficial owner of such Option Shares for all purposes. 7. Adjustments upon Changes in Capitalization In the event of a reorganization, recapitalization, stock split, spin-off, split-off, split-up, stock dividend, issuance of stock rights, combination of shares, merger, consolidation or any other change in the corporate structure of the Company affecting Common Stock, or any distribution to stockholders other than a cash dividend, the Board shall make appropriate adjustment in the number and kind of shares authorized by the Plan and any adjustments to outstanding Options as it determines appropriate. No fractional shares of Common Stock shall be issued pursuant to such an adjustment. The Fair Market Value of any fractional shares resulting from adjustments pursuant to - 18 - this Section shall, where appropriate, be paid in cash to the Holder. 8. Adjustments Upon Change in Control In the event of a Change in Control pursuant to which another person or entity acquires control of the Company (such other person or entity being the "Successor"), at the discretion of the Company and by virtue of the Change in Control: (a) the Common Stock subject to the Plan shall be converted into and replaced by shares of common voting stock of the Successor, or such other class of securities having rights and preferences no less favorable than the common voting stock of the Successor, and the number of shares subject to an Option granted under the Plan and the purchase price per share upon exercise of such Option shall be correspondingly adjusted so that, by virtue of such Change in Control, the Holder of such Option shall have the right to purchase that number of common voting stock of the Successor which has a Fair Market Value equal to the Fair Market Value of the shares of Common Stock subject to the Holder's Option, as of the date of such Change in Control, for a purchase price per share which, when multiplied by the number of shares of common voting stock of the Successor subject to the adjusted Option, shall equal the aggregate exercise price at which the Holder would have received all of the shares of Common Stock optioned to the Holder under the original Option; or - 19 - (b) the Company may convert the Option into a right in the Holder to realize the value of an Option (which value the Company may in its discretion determine equals the excess of the Fair Market Value of the consideration to be received as a result of the Change in Control had such Option been exercised immediately prior thereto, over the option price of such Option) in cash. 9. Effective Date, Termination and Amendment The Plan shall become effective on _________, 1998, subject to shareholder approval. The Plan shall remain in full force and effect until the earlier of 10 years from the date of its adoption by the Board, or the date it is terminated by the Board. The Board shall have the power to amend, suspend or terminate the Plan at any time, provided that no such amendment shall be made without shareholder approval to the extent such approval is required under section 162(m) or section 422 of the Code. Termination of the Plan pursuant to this Section 9 shall not affect Options outstanding under the Plan at the time of termination. 10. Transferability Except as provided below, Options may not be pledged, assigned or transferred for any reason during the Holder's lifetime, and any attempt to do so shall be void and the relevant Option shall be forfeited; provided, however that Options - 20 - (except incentive stock options) may be pledged, assigned or transferred (i) at the discretion of the Committee, during the Holder's lifetime by the Holder to a Permitted Transferee, (ii) at the discretion of the Committee, by a Permitted Transferee to another Permitted Transferee or (iii) as otherwise permitted by the Committee; provided, further, that any such transfer shall (i) not occur for a period of at least six months after the Option is granted, and (ii) comply with all terms and conditions established by the Committee and any term, condition or restriction contained in the relevant Option Agreement. 11. General Provisions 11.1 Nothing contained in the Plan, or any Option granted pursuant to the Plan, shall confer upon any Employee any right with respect to continuance of employment by the Company, nor interfere in any way with the right of the Company to terminate the employment of any Employee at any time. 11.2 To the extent that federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of ____________ and construed accordingly. 11.3 The Committee may amend any outstanding Option to the extent it deems appropriate. Such amendment may be made by the Committee without the consent of the Holder, except in the case of amendments adverse to the Holder, in - 21 - which case the Holder's consent is required to any such amendment, unless the amendment is designed to conform the Option to the terms of the Plan. - 22 - EX-12 5 EXHIBIT 12 EXHIBIT 12 PENHALL INTERNATIONAL INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED FISCAL YEARS SEPTEMBER 30, ------------------------------------------------------ --------------------- 1994 1995 1996 1997 1998 1997 1998 --------- --------- --------- ---------- --------- --------- ---------- Earnings (loss) before income taxes... $6,647,000 $8,315,000 $8,623,000 $ 9,864,000 $5,232,000 $3,536,000 $(8,522,000) Fixed charges--interest expense....... $ 399,000 $ 623,000 $ 919,000 $ 947,000 $1,204,000 $ 285,000 $ 2,663,000 ---------- ---------- ---------- ---------- ---------- ---------- ----------- $7,046,000 $8,938,000 $9,542,000 $10,811,000 $6,436,000 $3,621,000 $(5,859,000) ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- Ratio of Earnings to Fixed Charges.... 17.7 to 1 14.3 to 1 10.4 to 1 11.4 to 1 5.3 to 1 13.4 to 1 -- (1)
- ------------------------------ (1) The Company's earnings were insufficient to cover its fixed charges by $8,522,000. EX-23.2 6 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.2 The Board of Directors Penhall International Corp. and Subsidiaries: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Orange County, California December 1, 1998 EX-23.3 7 EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT ACCOUNTANTS' CONSENT As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in the Prospectus, which is a part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Moss Adams LLP /s/ Moss Adams LLP Costa Mesa, California December 1, 1998 EX-23.4 8 EXHIBIT 23.4 EXHIBIT 23.4 INDEPENDENT ACCOUNTANTS' CONSENT As independent public accountants, we hereby consent to the inclusion of our audit report dated January 29, 1998 on the Highway Services, Inc. financial statements as of December 31, 1997 and for the year then ended (and all references to our firm) included in the Prospectus, which is a part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ John A. Knutson & Co., PLLP Certified Public Accountant Minneapolis, Minnesota December 2, 1998 EX-27 9 EXHIBIT 27
5 0001070772 PENHALL INTERNATIONAL CORP. 3-MOS SEP-30-1998 SEP-30-1998 1,992 0 36,050 (1,033) 1,765 41,458 83,065 (37,136) 101,794 19,166 125,405 20,822 18,960 995 (85,957) 101,794 0 38,913 0 27,868 16,907 44 2,616 (8,522) (1,721) (6,801) 0 0 0 (6,801) (3.32) (3.32)
EX-99.1 10 EXHIBIT 99.1 Exhibit 99.1 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ___________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF EXISTING NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE PENHALL INTERNATIONAL CORP. LETTER OF TRANSMITTAL 12% SENIOR NOTES DUE 2006 TO: UNITED STATED TRUST COMPANY OF NEW YORK THE EXCHANGE AGENT By Mail: By Hand before 4:30 p.m.: United States Trust Company of New York United States Trust Company of New York P.O. Box 843 Cooper Station 111 Broadway New York, New York 10276 New York, New York 10006 Attention: Corporate Trust Services Attention: Lower Level, Corporate Trust Window By Overnight Courier and by Hand after 4:30 p.m.: By Facsimile: United States Trust Company of New York (212) 780-0592 770 Broadway, 13th Floor Attention: Customer Service New York, New York 10003 Confirm by Telephone: (800) 548-6565 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CARE- FULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR EXISTING NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. The undersigned acknowledges receipt of the Prospectus dated ________________, 1998 (the "Prospectus") of Penhall International Corp. (the "Company") and this Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's Offer to Exchange (the "Exchange Offer") $1,000 principal amount of its 12% Senior Notes due 2006 (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of its outstanding 12% Senior Notes due 2006 (the "Existing Notes"), of which $100,000,000 principal amount is outstanding, upon the terms and conditions set forth in the Prospectus and this Letter of Transmittal. Other capitalized terms used but not defined herein have the meaning given to them in the Prospectus. For each Existing Note accepted for exchange, the holder of such Existing Note will receive a New Note having a principal amount equal to that of the surrendered Existing Note. Interest on the New Notes will accrue from the last interest payment date on which interest was paid on the Existing Notes surrendered in exchange therefor. Holders of Existing Notes accepted for exchange will be deemed to have waived the right to receive any other payments or accrued interest on the Existing Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify holders of the Existing Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter of Transmittal is to be used by Holders if: (i) certificates representing Existing Notes are to be physically delivered to the Exchange Agent herewith by Holders; (ii) tender of Existing Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures set forth in the Prospectus under "The Exchange Offer - Procedures for Tendering Existing Notes" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Existing Notes or (iii) tender of Existing Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer - Guaranteed Delivery Procedures." DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The term "Holder" with respect to the Exchange Offer means any person: (i) in whose name Existing Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered Holder; or (ii) whose Existing Notes are held of record by DTC (or its nominee) who desires to deliver such Existing Notes by book-entry transfer at DTC. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders of Existing Notes that are tendering by book-entry transfer to the Exchange Agent's account at DTC can execute the tender through the DTC Automated Tender Offer Program ("ATOP"), for which the transaction will be eligible. DTC participants that are accepting the Exchange Offer must transmit their acceptance to DTC, which will verify the acceptance and execute a book-entry delivery to the Exchange Agent's DTC account. DTC will then send an Agent's Message to the Exchange Agent for its acceptance. DTC participants may also accept the Exchange Offer prior to the Expiration Date by submitting a Notice of Guaranteed Delivery or Agent's Message relating thereto as described herein under Instruction 1, "Guaranteed Delivery Procedures." The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the Exchange Agent. See Instruction 11 herein. HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR EXISTING NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX BELOW
- ----------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF 12% SENIOR NOTES DUE 2006 (EXISTING NOTES) - ----------------------------------------------------------------------------------------------------------------------------- Aggregate Principal Amount Principal Amount Name(s) and Address(es) of Registered Holder(s) Certificate Represented by Tendered (If Less (Please fill in, if blank) Number(s)* Certificate(s) Than All)** - ----------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer. ** Unless indicated in the column labeled "Principal Amount Tendered," any tendering Holder of Existing Notes will be deemed to have tendered the entire aggregate principal amount represented by the column labeled "Aggregate Principal Amount Represented by Certificate(s)." If the space provided above is inadequate, list the certificate numbers and principal amounts on a separate signed schedule and affix the list to this Letter of Transmittal. - -------------------------------------------------------------------------------- The minimum permitted tender is $1,000 in principal amount of Existing Notes. All other tenders must be integral multiples of $1,000. - ------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 4, 5, AND 6) To be completed ONLY if certificates for New Notes issued in exchange, or Existing Notes not tendered or not accepted for exchange, are to be issued in the name of someone other than the undersigned or, if such Existing Notes are being tendered by book-entry transfer, to someone other than DTC or to another account maintained by DTC. Issue certificate(s) to: Name: ------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Include Zip Code) - ------------------------------------------------------------------------------- (Taxpayer Identification or Social Security No.) DTC Acct. No. ------------------------------------------------------------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4, 5 AND 6) To be completed ONLY if certificates for Existing Notes in a principal amount not tendered or not accepted for exchange, are to be sent to someone other than the undersigned, or to the undersigned at an address other than that shown above. Mail certificate(s) to: Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Include Zip Code) - ------------------------------------------------------------------------------- (Taxpayer Identification or Social Security No.) - ------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ---------------------------------------- DTC Book-Entry Account No.: ------------------------------------------- Transaction Code No.: ------------------------------------------------- / / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): -------------------------------------- Window Ticket Number (if any): ---------------------------------------- Date of Execution of Notice of Guaranteed Delivery: ------------------- IF DELIVERED BY BOOK-ENTRY TRANSFER, PLEASE COMPLETE THE FOLLOWING: Account Number: Transaction Code Number: ------------------- -------- / / CHECK HERE IF YOU ARE A BROKER-DEALER AND ARE RECEIVING NEW NOTES FOR YOUR OWN ACCOUNT IN EXCHANGE FOR EXISTING NOTES THAT WERE ACQUIRED AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES. Name: ----------------------------------------------------------------- Address: -------------------------------------------------------------- Ladies and Gentlemen: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Existing Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Existing Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to the Existing Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company and as Trustee under the Indenture for the Existing Notes and New Notes) with respect to the tendered Existing Notes with full power of substitution to (i) deliver certificates for such Existing Notes to the Company, or transfer ownership of such Existing Notes on the account books maintained by DTC and deliver all accompanying evidence of transfer and authenticity to, or upon the order of, the Company and (ii) present such Existing Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Existing Notes, all in accordance with the terms and subject to the conditions of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Existing Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are acquired by the Company. The undersigned hereby further represents that any New Notes acquired in exchange for Existing Notes tendered hereby will have been acquired in the ordinary course of business of the Holder receiving such New Notes, whether or not such person is the Holder, that neither the Holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company or any of its subsidiaries. The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") that the New Notes issued in exchange for the Existing Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangements or understandings with any person to participate in the distribution of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Existing Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the assignment, transfer and purchase of the Existing Notes tendered hereby. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns, trustees in bankruptcy or other legal representatives of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer - Withdrawal Rights" section of the Prospectus. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Existing Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. If any tendered Existing Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Existing Notes will be returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or at such different address as may be indicated under "Special Delivery Instructions" as promptly as practicable after the Expiration Date. The undersigned understands that tenders of Existing Notes pursuant to the procedures described under the caption "The Exchange Offer - Procedures for Tendering Existing Notes" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated under "Special Issuance Instructions," please issue the certificates representing the New Notes issued in exchange for the Existing Notes accepted for exchange and return any Existing Notes not tendered or not accepted for exchange in the name(s) of the undersigned (or in either such event in the case of the Existing Notes tendered through DTC, by credit to the undersigned's account at DTC). Similarly, unless otherwise indicated under "Special Delivery Instructions," please send the certificates representing the New Notes issued in exchange for the Existing Notes accepted for exchange and any certificates for Existing Notes not tendered or not accepted for exchange (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s), unless, in either event, tender is being made through DTC. In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Existing Notes accepted for exchange and return any Existing Notes not tendered or not accepted for exchange in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Existing Notes from the name of the registered Holder(s) thereof if the Company does not accept for exchange any of the Existing Notes so tendered. Holders of Existing Notes who wish to tender their Existing Notes and (i) whose Existing Notes are not immediately available or (ii) who cannot deliver their Existing Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date, may tender their Existing Notes according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer - Guaranteed Delivery Procedures." See Instruction 1 regarding the completion of the Letter of Transmittal printed below. SIGNATURE PAGE PLEASE SIGN HERE WHETHER OR NOT EXISTING NOTES ARE BEING PHYSICALLY TENDERED HEREBY X , 1998 ----------------------------------------------- ---------------------- Date X , 1998 ----------------------------------------------- ---------------------- Signature(s) of Registered Holder(s) Date or Authorized Signatory Area Code and Telephone Number: ------------------------------------------------- The above lines must be signed by the registered Holder(s) of Existing Notes as their name(s) appear(s) on the Existing Notes or, if the Existing Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of Existing Notes, or by a person or persons authorized to become registered Holder(s) by a properly completed bond power from the registered Holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Existing Notes to which this Letter of Transmittal relates are held of record by two or more joint Holders, then all such holders must sign this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must (i) set forth his or her full title below and (ii) unless waived by the Company, submit evidence satisfactory to the Company of such person's authority to act. See Instruction 4 regarding the completion of this Letter of Transmittal printed below. Name(s): ------------------------------------------------------------------------ (Please Print) Capacity: ----------------------------------------------------------------------- (Title) Address: ------------------------------------------------------------------------ (Include Zip Code) Signature(s) Guaranteed by an Eligible Institution (if required by Instruction 4): ----------------------------------------------- (Authorized Signature) ----------------------------------------------- (Title) ----------------------------------------------- (Name of Firm) Dated: , 1998 ------------------------------------------------- INSTRUCTIONS Forming Part of the Terms and Conditions of the Exchange Offer 1. Delivery of this Letter of Transmittal and Existing Notes; Guaranteed Delivery Procedures. This Letter of Transmittal is to be completed by Holders, either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer - Book-Entry Transfer" section of the Prospectus. Certificates for all physically tendered Existing Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter of Transmittal (or manually signed facsimile hereof) and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at one of the addresses set forth herein on or prior to the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Existing Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Holders whose certificates for Existing Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Existing Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer - Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined in Instruction 4 below), (ii) prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery), substantially in the form provided by the Company, setting forth the name and address of the Holder of Existing Notes and the amount of Existing Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Existing Notes, or a Book-Entry Confirmation, and any other documents required by this Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Existing Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by this Letter of Transmittal, are received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE EXISTING NOTES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF EXISTING NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT THE DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. See "The Exchange Offer" section in the Prospectus. 2. Tender by Holder. Only a Holder of Existing Notes may tender such Existing Notes in the Exchange Offer. Any beneficial holder of Existing Notes who is not the registered Holder and who wishes to tender should arrange with the registered Holder to execute and deliver this Letter of Transmittal on his or her behalf or must, prior to completing and executing this Letter of Transmittal and delivering his or her Existing Notes, either make appropriate arrangements to register ownership of the Existing Notes in such holder's name or obtain a properly completed bond power from the registered Holder. 3. Partial Tenders. Tenders of Existing Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Existing Notes is tendered, the tendering Holder should fill in the principal amount tendered in the fourth column of the box entitled "Description of 12% Senior Notes due 2006 (Existing Notes)" above. The entire principal amount of Existing Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of a Holder's Existing Notes is not tendered, then Existing Notes for the principal amount of Existing Notes not tendered and a certificate or certificates representing New Notes issued in exchange for any Existing Notes accepted for exchange will be sent to the Holder at his or her registered address (unless a different address is provided in the appropriate box on this Letter of Transmittal) promptly after the Existing Notes are accepted for exchange. 4. Signatures on this Letter of Transmittal; Endorsements and Powers of Attorney; Guarantee of Signatures. If this Letter of Transmittal is signed by the registered Holder of the Existing Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Existing Notes are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Existing Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of certificates. When this Letter of Transmittal is signed by the registered Holder(s) of the Existing Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any Existing Notes not tendered or not accepted for exchange are to be reissued, to a person or persons other than the registered Holder(s), then endorsements of any certificate(s) transmitted hereby or separate bond powers are required. Signatures on such certificate(s) or power(s) must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered Holder(s) of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers or powers of attorney, in each case signed exactly as the name or names on the registered Holder(s) appear(s) on the certificate(s) and signatures on such certificate(s) or power(s) must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any certificates, bond powers or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Existing Notes or signatures on bond powers or powers of attorney required by this Instruction 4 must be guaranteed by a firm which is a participant in a recognized signature guarantee medallion program (an "Eligible Institution"). Signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution unless the Existing Notes are tendered (i) by a registered Holder of Existing Notes (which term, for purposes of the Exchange Offer, includes any DTC participant whose name appears on a security position listing as the Holder of such Existing Notes) who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter of Transmittal, or (ii) for the account of an Eligible Institution. 5. Special Issuance and Delivery Instructions. Tendering Holders should indicate, in the applicable box or boxes, the name and address to which New Notes or substitute Existing Notes not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal (or in the case of a tender of Existing Notes through DTC, if different from DTC). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. Holders tendering Existing Notes by book-entry transfer may request that New Notes issued in exchange for Existing Notes accepted for exchange or Existing Notes not tendered or accepted for exchange exchanged be credited to such account maintained at DTC as such Holder may designate hereon. If no such instructions are given, such New Notes or Existing Notes not exchanged will be returned to the name and address of the person signing this Letter of Transmittal. 6. Tax Identification Number. Federal income tax law requires that a Holder whose Existing Notes are accepted for exchange must provide the Company (as payer ) with his, her or its correct Taxpayer Identification Number ("TIN"), which, in the case of an exchanging Holder who is an individual, is his or her social security number. If the Company is not provided with the correct TIN or an adequate basis for exemption, such Holder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS"), and payments made with respect to the New Notes or Exchange Offer may be subject to backup withholding at a 31% rate. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9." To prevent backup withholding, each exchanging Holder must provide his, her or its correct TIN by completing the Substitute Form W-9 included below in this Letter of Transmittal, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that the Holder is exempt from backup withholding because (i) the Holder has not been notified by the IRS that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends, or (ii) the IRS has notified the Holder that he, she or it is no longer subject to backup withholding. In order to satisfy the Company that a foreign individual qualifies as an exempt recipient, such Holder must submit a statement signed under penalty of perjury attesting to such exempt status. Such statements may be obtained from the Exchange Agent. If the Existing Notes are in more than one name or are not in the name of the actual owner, consult the substitute Form W-9 for information on which TIN to report. If you do not provide your TIN to the Company within 60 days, backup withholding may begin and continue until you furnish your TIN to the Company. 7. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the exchange of Existing Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Existing Notes not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person(s) other than the registered Holder(s) of the Existing Notes tendered hereby, or if tendered Existing Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Existing Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder(s) or on any other person(s)) will be payable by the tendering Holder(s). If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder(s). Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Existing Notes listed in this Letter of Transmittal. 8. Waiver of Conditions. The Company reserves the absolute right to amend, waive or modify conditions to in the Exchange Offer in the case of any Existing Notes tendered (and to refuse to do so). 9. No Conditional Transfers. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Existing Notes, by execution of this Letter of Transmittal, shall waive any right to receive notice of the acceptance of their Existing Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Existing Notes, nor shall any of them incur any liability for failure to give any such notice. 10. Mutilated, Lost, Stolen or Destroyed Existing Notes. Any tendering Holder whose Existing Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at one of the addresses indicated herein for further instructions. 11. Requests for Assistance or Additional Copies. Questions and requests for assistance for additional copies of the Prospectus, this Letter of Transmittal, the Notice of Guaranteed Delivery or the "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be directed to the Exchange Agent at one of the addresses specified in the Prospectus. (DO NOT WRITE IN THE SPACE BELOW) Account Number: Transaction Code Number: ---------------- ----------------------- Certificate Existing Existing Surrendered Notes Tendered Notes Accepted --------------------- ----------------------- ------------------------- --------------------- ----------------------- ------------------------- --------------------- ----------------------- ------------------------- --------------------- ----------------------- ------------------------- Delivery Prepared by: ----------------------------------------------------------- Checked by: --------------------------------------------------------------------- Date: --------------------------------------------------------------------------- PAYER'S NAME: PENHALL INTERNATIONAL CORP. - -------------------------------------------------------------------------------- SUBSTITUTE FORM W-9 Department of the Treasury Internal Revenue Service Payer's Request for TIN Name (if joint names, list first and circle the name of the person or entity whose number you enter in Part 1 below. See instructions if your name has changed.) - -------------------------------------------------------------------------------- Address ------------------------------------------------------------------------- City, state and ZIP code -------------------------------------------------------- List account number(s) here (optional) ------------------------------------------ - -------------------------------------------------------------------------------- Part 1-PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER ("TIN") IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. - -------------------------------------------------------------------------------- Social Security number or TIN --------------- - -------------------------------------------------------------------------------- Part 2-Check the box if you are not subject to backup withholding under the provisions of section 3408(a)(1)(c) of the Internal Revenue Code because (1) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding / /. - -------------------------------------------------------------------------------- CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. Signature Date ------------------------- ----------------- - -------------------------------------------------------------------------------- Part 3 -- AWAITING TIN / / - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. EX-99.2 11 EXHIBIT 99.2 Exhibit 99.2 NOTICE OF GUARANTEED DELIVERY FOR 12% SENIOR NOTES DUE 2006 OF PENHALL INTERNATIONAL CORP. As set forth in the Prospectus dated _____________, 1998 (the "Prospectus") of Penhall International Corp. (the "Company") and in the accompanying Letter of Transmittal (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Company's offer to exchange (the "Exchange Offer") all of its outstanding 12% Senior Notes due 2006 (the "Existing Notes") for its 12% Senior Notes due 2006 which have been registered under the Securities Act of 1933, as amended, if certificates for the Existing Notes are not immediately available or if the Existing Notes, the Letter of Transmittal or any other documents required thereby cannot be delivered to the Exchange Agent, or the procedure for book-entry transfer cannot be completed, prior to 5:00 P.M., New York City time, on the Expiration Date (as defined below). This form may be delivered by an Eligible Institution by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent as set forth below. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____________, 1998, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF EXISTING NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE. To: United States Trust Company of New York The Exchange Agent By Mail: By Hand before 4:30 p.m.: United States Trust Company United States Trust Company of New York of New York 111 Broadway P.O. Box 843 Cooper Station New York, New York 10006 New York, New York 10276 Attention: Lower Level, Corporate Attention: Corporate Trust Services Trust Window By Facsimile: By Overnight Courier and by Hand (212) 780-0592 after 4:30 p.m.: Attention: Customer Service United States Trust Company of New York Confirm by Telephone: 770 Broadway, 13th Floor (800) 548-6565 New York, New York 10003 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Existing Notes is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the space provided therefor in the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which are hereby acknowledged, ________________ (fill in number of Existing Notes) Existing Notes pursuant to the guaranteed delivery procedures set forth in the Prospectus and Instruction 1 of the Letter of Transmittal. The undersigned understands that tenders of Existing Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Existing Notes pursuant to the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time, on the Expiration Date. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW. Certificate No(s). for Existing Notes Name(s) of Record Holder(s): (if available): _____________________________________ ____________________________ _____________________________________ ____________________________ PLEASE PRINT OR TYPE Principal Amount of Existing Notes: Address: _____________________________________ _____________________________ _____________________________ If Existing Notes will be delivered Area code and by book-entry transfer at the Tel. No._____________________ Depository Trust Company, Depository Account No.: _____________________________________ Signature(s): _____________________________ _____________________________ Dated:_________________, 1998 This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Existing Notes exactly as its (their) name(s) appear(s) on the certificate(s) for Existing Notes covered hereby or on a DTC security position listing naming it (them) as the owner of such Existing Notes, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person(s) must provide the following information: Please print name(s), title(s) and address(es) Name(s): ______________________________________________________________________ Capacity(ies): ________________________________________________________________ Address(es): __________________________________________________________________ GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or an "Eligible Guarantor Institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a) represents that the tender of Existing Notes effected hereby complies with Rule 14e-4 under the Exchange Act and (b) guarantees to deliver to the Exchange Agent a certificate or certificates representing the Existing Notes tendered hereby, in proper form for transfer (or a confirmation of the book-entry transfer of such Existing Notes into the Exchange Agent's account at DTC, pursuant to the procedures for book-entry transfer set forth in the Prospectus), and a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) together with any required signatures and any other required documents, at one of the Exchange Agent's addresses set forth above, within five New York Stock Exchange trading days after the date of execution of this Notice of Guaranteed Delivery. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND EXISTING NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD SPECIFIED FORTH ABOVE AND THAT ANY FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm:________________________ ____________________________________ Authorized Signatures Address:_____________________________ Name:_______________________________ Please Print or Type _____________________________________ Title:______________________________ Zip Code Area Code and Tel. No.:________________________ Date:__________________________, 1998 NOTE: DO NOT SEND EXISTING NOTES WITH THIS FORM; EXISTING NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT WITHIN THE TIME PERIOD SPECIFIED FORTH ABOVE. -----END PRIVACY-ENHANCED MESSAGE-----