0001095811-01-505241.txt : 20011009 0001095811-01-505241.hdr.sgml : 20011009 ACCESSION NUMBER: 0001095811-01-505241 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENHALL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001070772 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS EQUIPMENT RENTAL & LEASING [7350] IRS NUMBER: 860634394 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-64745 FILM NUMBER: 1746791 BUSINESS ADDRESS: STREET 1: 1801 PENHALL WAY CITY: ANAHEIM STATE: CA ZIP: 92803 BUSINESS PHONE: 7147726450 10-K405 1 a75703e10-k405.txt FORM 10-K405 FISCAL YEAR ENDED JUNE 30, 2001 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the year ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________. Commission File Number 333-64745 ---------------- PENHALL INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) ARIZONA 86-0634394 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
1801 PENHALL WAY, ANAHEIM, CA 92803 (Address of principal executive offices) (Zip Code) (714) 772-6450 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of June 30, 2001, there were 983,307 shares of the registrant's common stock outstanding, all of which were owned by affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE: None ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Penhall consists of Penhall International Corporation, an Arizona Corporation, and two wholly owned subsidiaries, Penhall Company and Penhall Rental Corporation, both California Corporations. Penhall Company has two wholly owned subsidiaries, Penhall Investments, a California Corporation, and Penhall Leasing, a California single member limited liability company (collectively Penhall International Corporation and the four subsidiaries are the "Company" or "Penhall"). Penhall was founded in 1957 and is one of the largest operated equipment rental providers in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators on an hourly or fixed-price quote basis ("Operated Equipment Rental Services") to serve construction, industrial, manufacturing, governmental and residential customers. In addition, Penhall complements its Operated Equipment Rental Services by providing the same type of services on a fixed-price contract basis for long-term projects. Penhall employs over 800 skilled operators and has 747 units in its diverse operated equipment rental fleet, which includes a broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units, to large equipment such as backhoes, excavators, water trucks and concrete grinders. Penhall provides its services from 37 locations in 17 states, with a presence in some of the fastest growing states in terms of construction spending and population growth, including its primary market, California, as well as other strategic markets including Arizona, Colorado, Nevada, Texas, Georgia, North and South Carolina, Oregon, New York and Utah. Penhall has a diverse base of over 14,000 customers. With the exception of the California Department of Transportation (which represents less than 6% of total revenue in fiscal 2001), no one customer has accounted for more than 5% of its total revenue in any of the past five fiscal years. Penhall has a reputation for high quality service, which results in a high degree of customer loyalty, and management believes that a significant percent of its revenues are derived through repeat business from existing customers. Penhall has increased its revenues from $74.9 million in fiscal 1996 to $175.8 million in fiscal 2001 through 1) increased rental fleet utilization, 2) increasing its rental equipment fleet, 3) acquisitions, and 4) opening of new offices. Through its skilled operators and equipment rental fleet, Penhall performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, Penhall generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. For longer duration projects, which may last from a few days to several years, Penhall provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of fixed-price contract revenues are derived from long-term highway projects, which have an average contract length of approximately ten months. Penhall strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, Penhall is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 23% to 31% of Operated Equipment Rental Services revenues are generated from fixed-price contracts. The operated equipment rental industry is a specialized niche segment of the highly fragmented United States equipment rental industry. As of June 30, 2001, there were an estimated 17,000 equipment rental companies in the United States, and no single company represented more than 7% of total market revenues in 1999. According to industry sources, the United States equipment rental industry grew from approximately $600 million in revenues in 1982 to an estimated $28 billion in 1999, representing an approximate Compounded Annual Growth Rate (CAGR) of 25.4%. 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. The Highway Transportation Bill was approved by the President of the United States in June 1998, which calls for a $218 billion increase in national spending on highways and mass transit over six years from date of approval and an approximate increase of 58% in Penhall markets overall on a non-weighted average basis. 2 3 THE REORGANIZATION Penhall International, Inc., a California corporation ("PII"), prior to the consummation of the Transactions (as defined below) conducted all its operations through Phoenix Concrete Cutting, Inc., an Arizona corporation (the "Company"), and the Penhall Company, a California corporation ("PenCo"). As of June 30, 1998, PII, the stockholders of PII, the Company, and Penhall Acquisition Corp., an Arizona Corporation (the "Issuer" or "PAC"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, the Company formed PCC Merger Sub, a California corporation and wholly-owned subsidiary ("PCC Merger Sub"), which on August 4, 1998, was merged with and into PII (the "Reorganization Merger"), with the result that (i) PII continued as the surviving corporation, (ii) each stockholder of PII had his or her common equity in PII converted into common equity in the Company, (iii) PII received common equity in the Company approximately equal in value to the value of its common equity in the Company immediately prior to the consummation of the Reorganization Merger and (iv) the Company received common equity in PII such that the Company became the corporate parent of and owns all the outstanding capital stock of PII (which continues to hold all the outstanding capital stock of PenCo). Pursuant to the Merger Agreement, immediately following the Reorganization Merger, the Issuer merged with and into the Company (the "Recapitalization Merger" and, together with the Reorganization Merger, the "Mergers"), with the Company continuing as the surviving corporation (the "Surviving Corporation"). Prior to or simultaneously with the consummation of the Recapitalization Merger, the Issuer entered into a new senior secured credit facility (the "New Credit Facility") providing for $20.0 million of Term Loans (as defined therein) and up to $30.0 million of Revolving Loans (as defined therein), and all indebtedness of PII except $3.7 million of notes payable was repaid (the "Refinancing"). Following the consummation of the Mergers, the Company changed its corporate name to "Penhall International Corp." and PII changed its corporate name to "Penhall Rental Corp." The aggregate consideration paid upon consummation of the Recapitalization Merger (the "Merger Consideration") was approximately $136.2 million. Pursuant to the Merger Agreement, (i) certain management stockholders of PII (the "Existing Management Stockholders") agreed to convert a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation (the "Equity Rollover"), (ii) the National Christian Charitable Foundation, Inc., a foundation formed by the Company's former majority shareholder received $10.0 million of preferred equity of the Surviving Corporation in lieu of $10.0 million of cash Merger Consideration otherwise payable to it in the Recapitalization Merger, and (iii) BRS and certain persons affiliated with BRS (together with BRS, the "BRS Entities") and the New Management Stockholders (consisting of certain existing management and certain new management shareholders) purchased $21.1 million and $0.2 million, respectively, of common and preferred equity of the Surviving Corporation (the "Equity Contribution" and, together with the Mergers, the Refinancing and the Equity Rollover, the "Recapitalization"). Following the consummation of the Recapitalization, the BRS Entities held approximately 62.5% of the Common stock, par value $.01 per share, of the Surviving Corporation ("Common stock"), 100.0% of the Series A Preferred stock, par value $.01 per share, of the Surviving Corporation ("Series A Preferred stock") and 43.3% of the Series B Preferred stock, par value $.01 per share, of the Surviving Corporation ("Series B Preferred stock"), the Management Stockholders held approximately 37.5% of the Common stock and 38.6% of the Series B Preferred stock, the Foundation held 100% of the Senior Exchangeable Preferred stock and PII held approximately 18.1% of the Series B Preferred stock. In connection with the Recapitalization in August of 1998, the Issuer issued $100,000,000 of 12% Senior Notes due 2006 (the "Existing Notes"). As part of the Recapitalization, the Company became the successor obligor under the Exiting Notes. In order to satisfy certain obligations of the Company and the Guarantors (consisting of the Company's wholly-owned subsidiaries) contained in the Registration Rights Agreement, dated August 4, 1998 (the "Registration Rights Agreement") by and among the Issuer, the Company, the Guarantors, BT Alex. Brown Incorporated ("BTAB") and Credit Suisse First Boston (collectively with BTAB, the "Initial Purchasers") with respect to the initial sale of the Existing Notes, the Company offered to exchange an aggregate principal amount of up to $100,000,000 of its 12% Senior Notes due 2006 (the "New Notes") for a like principal amount of the Existing Notes outstanding in December 1998. The New Notes and the Existing Notes are hereinafter collectively referred to as the "Notes." The terms of the New Notes are identical in all material respects to those of the Existing Notes, except for certain transfer restrictions and registration rights relating to the Existing Notes. The New Notes were issued pursuant to, and are entitled to the benefits of, the Indenture (as defined) governing the Existing Notes. The foregoing transactions, the application of the proceeds therefrom and the payment of related fees and expenses, are collectively referred to herein as the "Transactions." Penhall was obligated to make approximately $3 million of tax gross-up payments to certain members of Management on or before September 15, 1998. The Company made such payments out of working capital on September 15, 1998. During the fiscal years ended June 30, 1998 and 1999, Penhall realized tax benefits of approximately $3 million in the form of reduced tax payment 3 4 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. EQUIPMENT RENTAL FLEET Penhall owns and operates a well-maintained fleet of 747 units of operated equipment, including excavators, stompers, backhoes, compressors, "bobcats," crushing equipment, saws, drills and grinding and grooving equipment. Penhall also carries state-of-the-art manually-operated and remote-controlled breakers, which provide access to contaminated, hazardous or limited access areas and which have been used for hazardous projects such as the demolition of decommissioned nuclear power plants. The Company employs skilled operators, including trainees, for each piece of equipment it operates. The following table is a summary of Penhall's operated equipment rental fleet as of June 30, 2001:
DESCRIPTION QUANTITY ----------- -------- Diamonds .............................................................. 408 Compressors ........................................................... 108 Excavators ............................................................ 33 Grinders .............................................................. 19 Backhoes .............................................................. 48 Bobcats ............................................................... 58 Tankers ............................................................... 26 Stompers .............................................................. 10 Loaders ............................................................... 3 Miscellaneous ......................................................... 34 --- Total Units ........................................................... 747 ===
In addition to its 747-unit operated equipment rental fleet, Penhall maintains an inventory of approximately 552 Bare Equipment Rentals, which are rented out on an hourly, daily, weekly or monthly basis without skilled operators. Bare Equipment Rentals include personnel lifts, forklifts, front-end loaders and light towers. Each Penhall location has it's own shop and repair and maintenance staff that routinely maintains and repairs the equipment rental fleet. SERVICES Penhall, through its operated equipment rental fleet and skilled operators, serves its customer base in a wide variety of infrastructure projects, including new construction, rehabilitation and demolition projects, and provides specialized services such as highway and airport runway grooving, asphalt cutting, concrete coring and demolition work. These services are available singly but are more commonly provided by Penhall in conjunction with other services necessary to their application to a particular project, including breaking, excavating, removing and recycling of construction materials. Penhall also provides services in connection with earthquake retrofit projects, particularly in California, which include retrofitting of highways, buildings, bridges and tunnels in order to bring them in compliance with more stringent earthquake safety laws. Moreover, as a result of the HSI Acquisition in April 1998, the Company is the largest provider of grinding services in the United States. 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 4 5 process to extend the useful life of highways by evening the wear patterns caused by years of heavy traffic, to prevent cracking and subsequent failure of the surface. - Grooving. Grooving is the use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with the construction or modification of highways and airport runways and provides for better tire traction on these surfaces. - Sawing and Sealing. Sawing and sealing is the cutting of concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength. Other Services: - Breaking. Breaking is the use of manually-operated or, in hostile environments, remotely-controlled high-energy hydraulic breaking equipment to remove concrete. This service was most visibly utilized by Penhall in the removal of large sections of the Nimitz Freeway in Oakland, California, following the 1989 earthquake, and in the removal of damaged freeway bridges and overpasses in southern California following the 1994 earthquake. Breaking equipment is more commonly used in less dramatic settings, such as interior renovation of industrial buildings to adapt them to a new use, and in removal of existing structures in preparation for redevelopment of the real estate. The Company has designed and used remotely-controlled breakers for modification and removal of facilities contaminated with radioactive material, such as nuclear power stations and development laboratories. Penhall is completing 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. - Compaction. Compaction is the preparation of subsoil base and fill materials to a specification suitable for new construction on the site. Compaction services typically are provided together with removal services in the site preparation process for new construction or redevelopment. OPERATIONS Penhall provides the rental of operator assisted equipment through (i) Operated Equipment Rental Services, performed on an hourly as well as a fixed-price quote basis, and (ii) fixed-price contracts, in which Penhall is responsible for the completion of a particular project. Penhall's Operated Equipment Rental Services involve short duration assignments lasting from several hours to a few weeks and typically generate revenues of less than $7,500. Services provided on this basis include specialized work such as highway and airport runway grooving, asphalt cutting, and demolition work such as concrete breaking, removal, and recycling. Although all lines of equipment are rented for these types of projects, a given project will typically use only one piece of equipment. Operated Equipment Rental Services are typically provided on an hourly basis or for a project with pre-determined specifications, and Penhall quotes a bid to perform and invoice the customer for the project. Penhall's services are made available to customers through its 37 regional locations. Penhall maintains a basic equipment rental fleet and operators at each of its 37 locations. If necessary, equipment can be shipped from any of Penhall's locations to projects at remote sites. Rental fees for Penhall's equipment range from $77 to $430 per hour and encompass both the equipment and the operator's time. Penhall solicits and receives business over the telephone, by facsimile, by written purchase order or through Penhall Group salesmen. Each day Penhall's dispatcher at each location is responsible for the allocation of resources to meet the customer's service and timing requirements. The dispatcher matches all of the work requests for that day to available equipment and operators. Each of 5 6 Penhall's skilled operators has an expertise with a particular piece of equipment. Depending on the requirements for that day, an operator may be assigned from one to four jobs on a given day. An operator's time is allocated by job through job tickets, which generate both payroll and customer billing data. Historically, Penhall rented its equipment only in conjunction with the services of a Penhall employee as the operator. However, in 1996, Penhall started operating rental yards and offering Bare Equipment Rentals, or renting equipment without operators. To date, such Bare Equipment Rentals have not yet constituted a significant part of Penhall's revenues. Contract pricing utilizes the same equipment and services provided through its Operated Equipment Rental Services; however, these services involve longer duration assignments lasting from a few days to several years and may generates revenues of between $7,500 and $10,000,000. Services provided on this basis include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. Fixed-price contract projects typically use multiple types of equipment concurrently and require a Penhall supervisor to coordinate the safe and efficient function of Penhall's workmen and equipment. For fixed-price contract projects, Penhall typically employs the use of its Operated Equipment Rental Services as well as outside rental equipment and sub-contractors. Although Penhall has obtained contractor's licenses in 26 states (not including 24 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. The majority of Penhall's fixed-price contracts are obtained through competitive bidding for general contractors. Penhall determines whether to bid on a project primarily on the basis of the type of work involved. Other factors, including the time of the project, Penhall's ongoing project schedule and any particular risks involved also affect Penhall's determination whether to bid on a project. In preparing a bid, Penhall's estimators analyze material, labor and all other cost components of the proposed project. Penhall also will make its own determination of the quantity of items needed for the project and assess any special risks involved. Penhall must specify in its bid a fixed-price per unit within the range of the estimated quantity to be provided under the contract. Generally, within this range, no adjustments in unit prices are made and Penhall is committed to provide the items at the fixed unit prices specified in its bid, and any unforeseen increase in the cost of the items over the prices bid is borne by the Penhall Group. Penhall has not borne a significant amount of cost increases in connection with its fixed-price contracting services. Penhall sometimes contracts directly with Federal, state or local governments or agencies, and in addition some of its work performed for general contractors may relate to a general or prime contract with a governmental entity. Generally the contracting agency reserves the right to terminate the contract with the general contractor, without cause, for its own convenience. In that event, Penhall generally is entitled to be paid its costs for the work performed to the date of termination. Penhall has not historically experienced any material contract cancellations. SALES AND MARKETING Penhall maintains a sales and estimating force of approximately 120 people, with at least two salespersons based at each of Penhall's operating locations calling on both new and existing customers. These salespeople provide estimates and prepare bids for projects. Management believes that its fixed-price contract services serve as a unique marketing tool for its Operated Equipment Rental Services and help to increase the utilization of Penhall's operated equipment rental fleet. Penhall also regularly participates in industry trade shows and conferences, and advertises in trade journals. PURCHASING AND SUPPLIERS Penhall's size, status in the industry and relationships enable it to purchase equipment directly from manufacturers at prices and on terms that Penhall believes to be more favorable than are available to its smaller competitors. Penhall's procurement of equipment for its rental fleet is generally coordinated through its headquarters in Anaheim, California, while smaller inventory items are typically purchased at the divisional level. Penhall's suppliers must meet specified standards of quality and experience, and include well-known equipment manufacturers such as Caterpillar, John Deere, Ingersoll-Rand, Kenworth, General Motors Company and Ford Motor Company. The favorable pricing, service, training and information that Penhall receives from its suppliers represent what Penhall believes to be a significant competitive advantage. Management continually analyzes the effectiveness, quality and profitability of Penhall's equipment and addresses equipment procurement issues. Penhall maintains no long-term supply or purchasing contracts and believes that it could readily replace any of its existing suppliers if it were no longer advantageous to purchase equipment from such suppliers. CUSTOMERS 6 7 Most of Penhall's customers consist of highway, airport and building general contractors and subcontractors, and Federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. Some of Penhall's major customers include the California Department of Transportation, Wasatch Constructors, Turner Construction, C.W. Matthews Contracting, Peterson-Chase, and Denver International Airport. During fiscal 2001, Penhall served over 11,000 customers and, with the exception of the California Department of Transportation, no one customer has accounted for more than 3% of Penhall's revenues. Management believes that a significant percent of Penhall's revenues represented repeat business from existing customers. COMPETITION The operated equipment rental industry is a specialized niche of the overall equipment rental industry and is highly competitive. Penhall's competitors include large national rental companies, regional companies, smaller independent businesses and equipment vendors, which sell and rent equipment to customers. The industry is also highly fragmented, and primarily consists of many relatively small, independent businesses typically serving discrete local markets within 30 to 50 miles of the equipment rental location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services companies have focused their operations on providing a broad array of services to relatively large customers, primarily in medium to large metropolitan markets, while generally serving smaller markets through delivery from distant major markets. Competitive factors in the operated equipment rental industry include breadth of product lines, the availability of equipment and skilled operators, the condition of equipment, service, name recognition, proximity to customers and price. Penhall believes that it is able to successfully compete in the markets that it serves because of its reputation and large fleet of equipment. In addition, certain of the services provided by Penhall, such as diamond saw cutting services, are highly specialized and therefore not widely available; the market for these services therefore tends to be somewhat less competitive. Management does not believe that Penhall faces any significant competitor on a national scale, as the operated equipment rental industry is characterized primarily by local providers offering a limited array of services. Management believes the operated equipment rental industry benefits from the continuing trend among businesses to outsource non-core operations to reduce capital investment, convert costs from fixed to variable and minimize the downtime, maintenance, repair and storage associated with equipment ownership. Customers are increasingly using Operated Equipment Rental Services companies to provide a comprehensive supply of equipment and operators. Penhall's fixed-price contract projects are obtained through competitive bidding. In many cases, a performance bond is required by a customer before a contract is awarded. Penhall believes that its bonding capacity is a competitive advantage over smaller, less financially stable competitors. Moreover, Penhall believes that it is able to compete effectively for fixed-price contract jobs because of its extensive resources and relationships with general contractors. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Penhall currently holds a United States trademark and service mark with respect to the "Penhall" name and logo, which it believes are of particular importance to Penhall's business. Except with respect to the "Penhall" name and logo, Penhall is not dependent on any intellectual property rights. MANAGEMENT INFORMATION SYSTEM Penhall utilizes a management information system, which was implemented in fiscal 1997 and subsequently upgraded. The management information system gives management the ability to analyze certain cost results by line of equipment and location. 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. RADIO COMMUNICATIONS Penhall licenses from Motorola and, in one case, from an individual, the right to operate and install certain radio repeater equipment at a number of sites in the State of California. This equipment allows Penhall and its operators in the field to communicate with each other by radio. 7 8 In connection with the radio communications referred to above, Penhall holds several licenses from the Federal Communications Commission ("FCC") that allow it to broadcast over certain designated radio frequencies. These licenses may not be assigned without the FCC's consent. LABOR RELATIONS As of June 30, 2001 Penhall Company had approximately 1,500 full-time employees. The Company also hires, on an as-needed basis, equipment operators when work in progress necessitates additional personnel. Approximately, 600 of Penhall's employees are represented by various labor unions. The Company's unionized work force is divided into approximately 25 certified or lawfully recognized bargaining units. With the exception of three agreements, all agreements expiring during Fiscal 2001 have been renewed or extended. Of the three pending agreements, two represent two or less employees. It is anticipated that all three agreements will be renewed without any disruption to operations. There are nine agreements expiring during fiscal 2002, one in August 2001, four expire in May 2002 and four expire in June 2002. No discussions have begun on those agreements. There is no reason to believe that any expiration will have a material effect on Fiscal 2002 operations. There are currently no unfair labor practice charges pending against Penhall either before the National Labor Relations' Board or the courts. ITEM 2. PROPERTIES Penhall is headquartered in Anaheim, California. As of June 30, 2001 Penhall owned or leased 37 facilities which are used for equipment yards and accompanying office space. The following table sets forth the location and square footage of each of such facilities.
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 Riverside, California (1) ................... 9,000 Santa Clara, California (1) ................. 9,950 Irvine, California (1) ...................... 9,500 Bakersfield, California (1) ................. 5,000 Burbank, California ......................... 6,200 Phoenix, Arizona ............................ 12,900 Austin, Texas ............................... 6,100 Grapevine, Texas (1) ........................ 11,000 Denver, Colorado ............................ 15,100 Austell, Georgia (1) ........................ 8,000 Las Vegas, Nevada ........................... 11,000 Portland, Oregon (1) ........................ 24,000 Salt Lake City, Utah (1) .................... 10,500 Rogers, Minnesota (1) ....................... 11,000 Birmingham, Alabama (1) ..................... 2,000 Golden Valley, Minnesota (1) ................ 24,000 Superior, Wisconsin (1) ..................... 4,000 Morrisville, North Carolina (1) ............. 15,000 Charlotte, North Carolina (1) ............... 6,000 Greensboro, North Carolina (1) .............. 5,000 Wilmington, North Carolina (1) .............. 2,000 Greenville, South Carolina (1) .............. 3,500 Columbia, South Carolina (1) ................ 3,500 Charleston, South Carolina (1) .............. 6,500 Buffalo, New York (1) ....................... 3,000 Kansas City, Missouri (1) ................... 5,000
8 9
LOCATION APPROX. SQUARE FEET -------- ------------------- Seattle, Washington (1) ..................... 2,000 Fresno, California (1) ...................... 4,500 Richmond, Virginia (1) ...................... 1,000 Reno, Nevada (1) ............................ 900 Tucson, Arizona (1) ......................... 1,500
---------- (1) Leased property. Penhall presently leases 26 sites in 17 states (collectively, the "Leased Sites"). The average remaining term of the leases under which the Leased Sites are held (collectively, the "Real Property Leases") is approximately 5 years (assuming the exercise of all option periods). The Real Property Leases for the following four Leased Sites have remaining terms of less than three years: (i) Santa Clara, California - October 31, 2002, (ii) Columbia, South Carolina - October 31, 2001 (iii) Buffalo, New York - November 30, 2003 and (iv) Greenville, South Carolina - month to month. ITEM 3. LEGAL PROCEEDINGS Penhall is from time to time involved in legal proceedings arising in the ordinary course of business. Penhall believes there is no outstanding litigation, which could have a material impact on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended June 30, 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common equity is not publicly traded and, accordingly, an established market does not exist for such common equity. The Company did not pay any dividends in fiscal 2000 or 2001. The Indenture contains covenants that restrict, among other things, the ability of the Company to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined therein), enter into transactions with affiliates, allow its subsidiaries to make certain payments, create liens, make certain asset dispositions and merge or consolidate with, or transfer substantially all of it's assets to another person, or engage in certain change of control transactions. As part of the Recapitalization, the Issuer issued the Existing Notes in accordance with Rule 144A of the Securities Act of 1933, as amended. In December 1998, the Company filed a registration statement and the Existing Notes were exchanged for registered debt. As part of the Recapitalization, the Company became the successor obligor under the Existing Notes. See "Business -- the Reorganization". 9 10 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JUNE 30, --------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues ............................ $ 95,298 $ 101,170 $ 143,446 $ 173,060 $ 175,769 Cost of revenues .................... 68,541 72,395 101,389 119,854 123,868 ----------- ----------- ----------- ----------- ----------- Gross profit ........................ 26,757 28,775 42,057 53,206 51,901 General and administrative expenses .......................... 16,953 18,673 32,570 28,474 28,887 Reorganization expenses ............. -- 1,207 3,501 43 -- Other compensation .................. -- 3,271 -- -- -- Other operating income .............. 871 644 1,121 1,228 1,408 ----------- ----------- ----------- ----------- ----------- Earnings before interest expense and income taxes .......... 10,675 6,268 7,107 25,917 24,422 Interest expense .................... 811 1,036 14,334 15,591 15,263 ----------- ----------- ----------- ----------- ----------- Earnings (loss) before income taxes ...................... 9,864 5,232 (7,227) 10,326 9,159 Income tax expense (benefit) ........ 4,407 2,531 (1,388) 4,376 3,900 ----------- ----------- ----------- ----------- ----------- Net earnings (loss) ................. 5,457 2,701 (5,839) 5,950 5,259 Accretion of preferred stock to redemption value .................. -- -- (2,304) (2,854) (3,207) Accrual of cumulative dividends on preferred stock ................ -- -- (2,323) (2,946) (3,263) ----------- ----------- ----------- ----------- ----------- Net earnings (loss) available to common stockholders ............... $ 5,457 $ 2,701 $ (10,466) $ 150 $ (1,211) =========== =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE: Basic ............................ $ 1.29 $ .63 $ (8.16) $ .15 $ (1.22) Diluted .......................... 1.27 .62 (8.16) $ .15 $ (1.22) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ............................ 4,232,585 4,277,888 1,282,996 1,000,953 995,747 Diluted .......................... 4,305,608 4,355,303 1,282,996 1,000,953 995,747 OTHER DATA: Adjusted EBITDA (1) ................. $ 19,565 $ 20,931 $ 31,129 $ 40,481 $ 40,676 Adjusted EBITDA margin (2) .......... 20.5% 20.7% 21.7% 23.4% 23.1% Net cash provided by (used in) operating activities .............. $ 8,562 $ 16,628 $ (487) $ 20,282 $ 15,732 Net cash used in investing activities $ (15,086) $ (17,047) $ (21,188) $ (17,228) $ (17,697) Net cash provided by (used in) financing activities .............. $ 6,263 $ (23) $ 24,526 $ (4,030) $ 886 Depreciation and amortization ....... $ 6,878 $ 8,870 $ 11,652 $ 14,521 $ 16,254 Capital expenditures ................ $ 16,089 $ 12,287 $ 14,456 $ 18,093 $ 18,469 Units of operated equipment rentals At end of period .................. 420 497 623 664 747 Number of locations at end of period 21 22 32 31 37 Ratio of earnings to fixed charges (3) ....................... 11.4x 5.3x .5x 1.7x 1.6x CONSOLIDATED BALANCE SHEET DATA AT PERIOD END: Total assets ........................ $ 69,833 $ 88,323 $ 114,163 $ 122,162 $ 126,962 Long-term obligations, including current maturities ................ 14,111 18,564 131,324 125,235 125,208 Stockholders' equity (deficit) ...... 39,253 43,606 (66,965) (62,787) (61,075)
---------- (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 10 11 for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America or as a measure of a company's profitability or liquidity. The following chart depicts the components of Adjusted EBITDA:
FISCAL YEAR ENDED JUNE 30, ----------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Net earnings (loss) .............. $ 5,457 $ 2,701 $ (5,839) $ 5,950 $ 5,259 Interest expense ................. 811 1,036 14,334 15,591 15,263 Income tax expense (benefit) ..... 4,407 2,531 (1,388) 4,376 3,900 Depreciation and amortization .... 6,878 8,870 11,652 14,521 16,254 Stock related compensation expense 2,012 1,315 8,869 -- -- Reorganization costs ............. -- 1,207 3,501 43 -- Other compensation ............... -- 3,271 -- -- -- -------- -------- -------- -------- -------- Adjusted EBITDA ........... $ 19,565 $ 20,931 $ 31,129 $ 40,481 $ 40,676 ======== ======== ======== ======== ========
(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues. (3) For the purpose of computing the ratio of earnings to fixed charges, "earnings" consists of earnings before income taxes and fixed charges. "Fixed Charges" consist of interest expense, which includes amortization of debt issuance costs and the interest portion of the Company's rent expense. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of the results of operations and financial condition of Penhall should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Part II of this report. GENERAL Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 37 locations in 17 states, with a presence in some of the fastest growing states in terms of construction spending and population growth. From fiscal 1997 to fiscal 2001, revenue and Adjusted EBITDA have grown at a CAGR of 16.5% and 20.1%, respectively, due primarily to management's successful implementation of a strategy focused on (i) maximizing high-margin Operated Equipment Rental Services revenues through increased equipment rental fleet utilization, (ii) controlling overhead and (iii) successfully integrating Penhall's acquisitions and start-up locations. The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1994, Penhall has effected nine strategic acquisitions, including: 1. Concrete Coring Company, an Austin-based company acquired in 1995, 2. Zig Zag Company, a Denver-based firm acquired in 1996, 3. Metro Concrete Cutting, an Atlanta-based company acquired in 1996, 4. HSI, a Minnesota-based firm acquired in April 1998, 5. Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998, 6. Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998, 7. Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999, 8. Advance Concrete Sawing and Drilling, Inc., a Bakersfield, California-based company acquired in September 2000 and 9. H&P Sawing and Drilling, A Kansas City, Missouri-based Company acquired in March 2001. 11 12 During the same period, Penhall established operations in nine new markets by opening offices in Las Vegas, Salt Lake City, Portland, Dallas, Richmond, Fresno, Buffalo, Reno, and Seattle. Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall's Operated Equipment Rental Services are provided primarily under hourly rentals, which are complemented by long-term fixed-price contracts. During fiscal 2001, approximately 48.8% of Penhall's revenues were derived from highway-related projects, approximately 23.6% of revenues were generated from municipal-related projects such as road construction and airport construction and the remainder of revenues were generated from commercial, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated:
FISCAL YEAR ENDED JUNE 30, -------------------------------------------------------------------------------- 1999 2000 2001 ---------------------- ---------------------- ---------------------- $ % OF TOTAL $ % OF TOTAL $ % OF TOTAL -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Hourly Service Rentals ....... $ 98,834 68.9% $121,256 70.1% $126,068 71.7% Long Term Service Contracts(1) 44,612 31.1 51,804 29.9 49,701 28.3 -------- -------- -------- -------- -------- -------- Total Revenues ............. $143,446 100.0% $173,060 100.0% $175,769 100.0% ======== ======== ======== ======== ======== ========
---------- (1) Excludes services performed by the operated equipment rental divisions on long-term contracts. Revenue growth is influenced by infrastructure change, including new construction, modification, and regulatory changes. Penhall's revenues are also impacted positively after the occurrence of natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence Penhall's operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters. The principal components of Penhall's operating costs include the cost of labor, equipment rental fleet maintenance costs including parts and service, equipment rental fleet depreciation, insurance and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, Penhall utilizes a range of periods over which it depreciates its equipment on a straight-line basis. On average, Penhall depreciates its equipment over an estimated useful life of six years with a 10% residual value. Penhall invests in and maintains a large and versatile fleet of rental equipment ranging from relatively small items such as diamond abrasive saws and coring units to larger equipment, including backhoes, excavators, water trucks and concrete grinders. Used equipment is sometimes sold in the ordinary course of business, and gains on sales of assets, net are recognized in "Other Operating Income" in Penhall's consolidated statements of operations. In fiscal 1999, 2000 and 2001, gains on sales of assets from such equipment sales were $420,000, 305,000 and $422,000 respectively. The following table shows the number of units in Penhall's operated equipment rental fleet for the following periods:
FISCAL YEAR ENDED JUNE 30, ----------------------------- 1999 2000 2001 ----- ----- ----- Beginning of Period ..... 497 623 664 # Units Purchased ....... 185 75 135 # Units Disposed ........ (59) (34) (52) ----- ----- ----- End of Period ........... 623 664 747 ===== ===== =====
RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year Ended June 30, 2001 Compared to Year Ended June 30, 2000 Revenues. Revenues for fiscal 2001 were $175.8 million, compared to revenues of $173.1 million for the prior year, an increase of $2.7 million or 1.6%. The increase was due primarily to the opening of new offices in Reno, Nevada, Seattle, Washington, Buffalo, New York, and Richmond, Virginia, as well as the acquisition of Advance Concrete Sawing & Drilling, Inc. in Bakersfield, California 12 13 and H&P Sawing & Drilling in Kansas City, Missouri. The increased revenue from the new offices and acquisitions was partially offset by lower revenues in Southern California and Minnesota. The Company faced increased competition in most of its markets, particularly those served by the divisions in Southern California and Minnesota. Penhall operated through 37 locations in 17 states at June 30, 2001, compared to 31 locations in 13 states at June 30, 2000. At June 30, 2001, Penhall's operating fleet consisted of 747 units compared to 644 units at June 30, 2000, an increase of 16.0%. A majority of these new units were put in place during the later part of the fiscal year. Gross Profit. For fiscal year 2001, gross profit was $51.9 million compared to gross profit of $53.2 million for fiscal year 2000, a decrease of $1.3 million, or (2.5%). As a percent of revenue, gross profit was 29.5% in fiscal year 2001 compared to 30.7% in fiscal year 2000. The decrease in gross profit in 2001 was due primarily to the decrease in utilization of the equipment rental fleet in fiscal 2001. Utilization rates were lower due to the softening of the commercial construction market and increased competition in most of the Company's markets, particularly those markets serviced by the Minnesota and the Southern California divisions. General and Administrative Expenses. General and administrative expenses were $28.9 million in fiscal year 2001 compared to $28.5 million in fiscal year 2000, an increase of $0.4 million or 1.4%. As a percent of revenues, general and administrative expenses were 16.4% in fiscal 2001 compared to 16.5% in fiscal 2000, a decrease of (0.1%). The reduction in general and administrative expenses as a percent of revenues occurred because many of these types of expenses remain somewhat constant, and do not increase or decrease in proportion to the increases or decreases in revenues. Reorganization Expenses. Reorganization expenses, consisting primarily of closing fees and legal expenses, were $0 in fiscal 2001 and $43,000 in fiscal 2000. These expenses were associated with the reorganization of the Company, which occurred in August 1998, and are non-recurring expenses. Other Operating Income. Other operating income, consists primarily of gains and losses on the sale of fixed assets, interest income, and discounts earned. Other operating income in fiscal 2001 of $1.4 million is only slightly higher than the $1.2 million in fiscal 2000. Most of the fiscal 2001 increase is due to increases in gains on sales of assets. Interest Expense. Interest expense was $15.3 million in fiscal 2001 compared to $15.6 million in fiscal 2000, a decrease of 2.1%. The decrease is attributable to the lower interest rates during fiscal 2001. Income Tax Expense. The Company recorded income tax expense of $3.9 million, or 42.6% of earnings before income taxes in fiscal 2001, compared to an income tax expense of $4.4 million, or 42.4% of earnings before taxes in fiscal 2000. Year Ended June 30, 2000 Compared to Year Ended June 30, 1999 Revenues. Revenues for fiscal 2000 were $173.1 million, compared to revenues of $143.4 million for the prior year, an increase of $29.7 million or 20.6%. The increase was due primarily to the inclusion of a full year of operations of Daley Concrete Cutting (acquired in October 1998), Lipscomb Concrete Cutting (acquired in November 1998), Diamond Concrete Services (acquired in April 1999) and Prospect Drilling and Sawing (acquired in June 1999). Combined, these operations contributed $22.5 million of revenue in fiscal 2000. In addition, construction markets remained strong in fiscal 2000 in the areas the Company serves leading to increased fleet size and increased utilization of the fleet. Penhall operated through 31 locations in 13 states at June 30, 2000, compared to 32 locations in 13 states at June 30, 1999. At June 30, 2000, Penhall's operating fleet consisted of 664 units compared to 623 units at June 30, 1999, an increase of 6.6%. Gross Profit. For fiscal year 2000, gross profit was $53.2 million compared to gross profit of $42.1 million for fiscal year 1999, an increase of $11.1 million, or 26.4%. As a percent of revenue, gross profit was 30.7% in fiscal year 2000 compared to 29.3% in fiscal year 1999. The increase in gross profit in 2000 was due primarily to the increase in revenues in fiscal 2000 coupled with better utilization of the equipment rental fleet in fiscal 2000. Gross profit margins for contract services are generally lower than gross profit margins for operated equipment rental services revenues. General and Administrative Expenses. General and administrative expenses were $28.5 million in fiscal year 2000 compared to $32.6 million in fiscal year 1999. As a percent of revenues, general and administrative expenses were 16.5% in fiscal 2000 compared to 22.7% in fiscal 1999. Included in the fiscal 1999 general and administrative expenses is $8.9 million of compensation expense 13 14 related to the Company's Employee Stock Purchase Plans. Without the compensation expense, general and administrative expenses were $23.7 million, or 16.5% of revenues in fiscal 1999. General and Administrative expenses in fiscal 2000, compared to general and administrative expenses in fiscal 1999 (net of stock related compensation expense), increased by $4.8 million. The increase in general and administrative expenses in fiscal 2000 was the result of the increased administration associated with higher revenues compared to fiscal 1999. The increase in stock related compensation expense in fiscal 1999 was the result of the Transactions in August 1998. Reorganization Expenses. Reorganization expenses, consisting primarily of closing fees and legal expenses, were $43,000 in fiscal 2000 compared to $3.5 million in fiscal 1999. These expenses were associated with the reorganization of the Company which occurred in August 1998 and are non-recurring expenses. Other Operating Income. Other operating income consists primarily of gains and losses on the sale of fixed assets, interest income, and discounts earned. Other operating income in fiscal 2000 of $1.2 million is only slightly higher than the $1.1 million in fiscal 1999. Most of the fiscal 2000 increase is due to increased discounts earned partially offset by lower gains on sale of assets. Interest Expense. Interest expense was $15.6 million in fiscal 2000 compared to $14.3 million in fiscal 1999. The increase was due to both a full year of significant debt resulting from the Transactions in August of fiscal 1999 as well as higher interest rates during fiscal 2000 partially offset by lower borrowing levels during fiscal 2000. Income Tax Expense (Benefit). The Company recorded income tax expense of $4.4 million, or 42.4% of earnings before income taxes in fiscal 2000, compared to an income tax benefit of $1.4 million, or 19% of loss before income taxes in the prior year. The lower tax benefit in fiscal 1999 is attributable to certain reorganization costs related to the Transactions, which are not deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES It is anticipated that the Company's principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company's strategy of pursuing strategic acquisitions and expanding through internal growth. The Company's principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility. The New Credit Facility consists of two facilities: (i) a six-year senior secured term loan facility in an aggregate principal amount equal to $20.0 million (the "Term Loan Facility"); and (ii) a six-year revolving credit facility in an aggregate principal amount not to exceed $30.0 million (the "Revolving Credit Facility"). The Company drew $20.0 million of loans under the Term Loan Facility ("Term Loans") on the closing date of the New Credit Facility in connection with the Recapitalization. The Term Loans began amortizing on a quarterly basis commencing in September 2000 and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving Credit Facility ("Revolving Loans") are due and payable in full on June 15, 2004. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any subsidiary of the Company that guarantees amounts under the New Credit Facility. Such loans are also required to be prepaid with 75% of the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company's Leverage Ratio (as such term is defined in the New Credit Facility) is less than 4.75 to 1.0, 50% of such Excess Cash Flow. For fiscal 2001 and 2000, no prepayments resulted from Excess Cash Flow as defined above. Cash provided by (used in) operating activities during fiscal, 1999, 2000 and 2001 was ($.5) million, $20.3 and $15.7 million respectively. In fiscal 2001, the Company's net earnings plus depreciation, amortization and provision for deferred income tax and decreases in cost and estimated earnings in excess of billings on uncompleted contracts were partially offset by increases in receivables and inventories and decreases in accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts which resulted in net cash provided by operating activities of $15.7 million. In fiscal 2000, the Company's net earnings plus depreciation and amortization and increases in accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts were partially offset by increases in receivables and inventories and costs and estimated earnings in excess of billings on uncompleted contracts, resulting in net cash provided by operating activities of $20.3 million. In fiscal 1999, the Company's net loss plus depreciation and amortization expense plus increases in accounts receivable and cost and estimated earnings in excess of billings on uncompleted contracts were partially offset by increases in accounts payable, resulted in net cash used in operating activities of $0.5 million. 14 15 Management estimates that Penhall's annual capital expenditures will be approximately $15.5 million for fiscal 2002, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property improvements. Net cash used in investing activities during fiscal 1999, 2000 and 2001 was $21.2 million, $17.2 and $17.7, respectively. Such cash was primarily used for capital expenditures of $14.5 million in fiscal 1999, $18.1 million in fiscal 2000, and $18.5 million in fiscal 2001. In fiscal 1999, $7.7 million of cash was used for the acquisitions of Daley Concrete Cutting, Lipscomb Concrete Cutting, Diamond Concrete Services and Prospect Drilling and Sawing. In fiscal 2001, $0.5 million was used for the acquisition of Advance Concrete Sawing & Drilling, Inc. and H&P Sawing & Drilling. Net cash provided by (used in) financing activities during fiscal 1999, 2000 and 2001 was $24.5 million, ($4.0) million and $0.9 million, respectively. Cash provided by financing activities in fiscal 2001 is primarily the result of the overdraft of $2.9 million and proceeds from the issuance of common stock and preferred stock of $0.5 million partially offset by the net repayment of long-term debt of $1.7 million and the repurchase of common and preferred stock of $0.5 million. Historically, Penhall has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of June 30, 2001, the Company and its subsidiaries had approximately $125.2 million of total indebtedness outstanding (including the Notes) and a stockholders' deficit of approximately $61.1 million. As of June 30, 2001 approximately $23.7 million of additional borrowing was available under the Company's New Credit Facility. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which have been accounted for using the pooling-of-interests method, and Statement 142 effective July 1, 2002. Companies with fiscal year ends beginning after March 15, 2001, who have not yet issued financial statements for their first interim period may early adopt Statement 142. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have 15 16 up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. And finally, any unamortized negative goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. The Company is currently performing a review to determine when it will adopt Statement 142. The adoption of Statement 142 may have a significant effect on the Company's results from operations. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these statements on the Company's consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to interest rate changes primarily as a result of its notes payable, including Senior Notes, Term Loan and Revolving Loan which are used to maintain liquidity and fund capital expenditures and expansion of the Company's operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the Term Loan and Revolving Loan. The Company does not enter into derivative or interest rate transactions for speculative purposes. There are no derivate transactions during the years ended June 30, 2001 and 2000. At June 30, 2001, the annual maturities of long-term debt and senior notes are as follows:
YEARS ENDING JUNE 30, ------------------------------------------------- FAIR 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE --------- ------ ------- -- -------- ---- -------- -------- (IN THOUSANDS) Fixed rate debt .......................... $ 1,436 $ 571 $ 17 $4 $100,004 $171 $102,203 $100,203 Average interest rate .................... 11.89% Variable rate LIBOR debt (1) ............. 5,000 6,000 12,005 0 0 0 23,005 23,005 Weighted average current interest rate (1) 6.23%
At June 30, 2000, the annual maturities of long-term debt and senior notes are as follows:
YEARS ENDING JUNE 30, -------------------------------------------- FAIR 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE ------ ------ ------ ------ -- -------- -------- ------- (IN THOUSANDS) Fixed rate debt .......................... $1,649 $ 550 $ 3 $ 4 $4 $100,175 $102,385 $99,635 Average interest rate .................... 12% Variable rate LIBOR debt (1) ............. 3,000 5,000 6,000 8,850 0 0 22,850 22,850 Weighted average current interest rate (1) 8.45%
---------- (1) The Company has different interest rate options for its variable rate debt. See note 5 in the consolidated financial statements for additional information. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of the Company filed as part of this report on Form 10-K are listed in Item 14(a). 16 17 INDEPENDENT AUDITORS' REPORT The Board of Directors Penhall International Corp. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Penhall International Corp. and subsidiaries ("the Company") as of June 30, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ----------------------------------------- KPMG LLP September 24, 2001 Orange County, California 17 18 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30,
2000 2001 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 2,109,000 $ 1,030,000 ------------ ------------ Receivables: Contract and trade receivables .......................... 31,834,000 35,257,000 Contract retentions, due upon completion and acceptance of work (note 2) ......................... 5,724,000 5,328,000 Income taxes ............................................ -- 1,084,000 ------------ ------------ 37,558,000 41,669,000 Less allowance for doubtful receivables (note 2) ........ 1,617,000 1,763,000 ------------ ------------ Net receivables .................................. 35,941,000 39,906,000 ------------ ------------ Costs and estimated earnings in excess of billings on uncompleted contracts (note 11) ..................... 4,126,000 1,856,000 Deferred tax assets (note 6) ................................ 2,318,000 2,329,000 Inventories ................................................. 1,741,000 2,273,000 Prepaid expenses and other current assets ................... 916,000 1,417,000 ------------ ------------ Total current assets ............................. 47,151,000 48,811,000 ------------ ------------ Property, plant and equipment, at cost: Land ........................................................ 5,229,000 5,004,000 Buildings and leasehold improvements ........................ 8,135,000 9,417,000 Construction and other equipment ............................ 102,284,000 115,670,000 ------------ ------------ 115,648,000 130,091,000 Less accumulated depreciation and amortization .............. 53,924,000 63,888,000 ------------ ------------ Net property, plant and equipment ................ 61,724,000 66,203,000 Goodwill, net of accumulated amortization of $1,864,000 and $2,551,000, respectively .................................... 7,566,000 7,263,000 Debt issuance costs net of accumulated amortization of $1,696,000 and $2,580,000, respectively (note 5) ....................... 4,946,000 4,062,000 Other assets, net (note 3) ...................................... 775,000 623,000 ------------ ------------ $122,162,000 $126,962,000 ============ ============
See accompanying notes to consolidated financial statements. 18 19 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF JUNE 30,
2000 2001 ------------- ------------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current installments of long-term debt (note 5) ................. $ 4,649,000 $ 6,436,000 Trade accounts payable .......................................... 10,953,000 9,976,000 Accrued liabilities (note 4) .................................... 14,045,000 15,061,000 Income taxes payable (note 6) ................................... 451,000 -- Billings in excess of costs and estimated earnings on uncompleted contracts (note 11) ................... 2,635,000 1,688,000 ------------- ------------- Total current liabilities ............................ 32,733,000 33,161,000 ------------- ------------- Long-term debt, excluding current installments (note 5) ............. 20,586,000 18,772,000 Senior Notes (note 5) ............................................... 100,000,000 100,000,000 Deferred tax liabilities (note 6) ................................... 6,045,000 7,312,000 Senior Exchangeable Preferred stock, redemption value $12,220,000 and $13,573,000 at June 30, 2000 and 2001, respectively. Authorized, issued and outstanding 10,000 shares (note 9) .................... 12,220,000 13,573,000 Series A Preferred stock, redemption value $13,365,000 and $15,219,000 at June 30, 2000 and 2001, respectively, Authorized 25,000 shares; issued and outstanding 10,428 shares (note 9) ........................................... 13,365,000 15,219,000 Stockholders' deficit: Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 19,052 and 18,701 shares at June 30, 2000 and June 30, 2001, respectively (note 9) ................ 24,385,000 27,273,000 Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,012,513 and 1,017,480 shares at June 30, 2000 and June 30, 2001, respectively .................... 10,000 10,000 Additional paid-in capital .......................................... 1,522,000 1,831,000 Treasury stock, at cost, 6,014 and 34,173 common shares at June 30, 2000 and June 30, 2001, respectively ......................... (14,000) (288,000) Accumulated deficit ................................................. (88,690,000) (89,901,000) ------------- ------------- Total stockholders' deficit .......................... (62,787,000) (61,075,000) Commitments and contingencies (notes 7, 8 and 10) Subsequent event (note 16) $ 122,162,000 $ 126,962,000 ============= =============
See accompanying notes to consolidated financial statements. 19 20 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30,
1999 2000 2001 ------------- ------------- ------------- Revenues ........................................... $ 143,446,000 $ 173,060,000 $ 175,769,000 Cost of revenues ................................... 101,389,000 119,854,000 123,868,000 ------------- ------------- ------------- Gross profit .................................... 42,057,000 53,206,000 51,901,000 General and administrative expenses (note 8) ....... 32,570,000 28,474,000 28,887,000 Reorganization expenses ............................ 3,501,000 43,000 -- Other operating income ............................. 1,121,000 1,228,000 1,408,000 ------------- ------------- ------------- Earnings before interest expense and income taxes 7,107,000 25,917,000 24,422,000 Interest expense ................................... 14,334,000 15,591,000 15,263,000 ------------- ------------- ------------- Earnings (loss) before income taxes ............. (7,227,000) 10,326,000 9,159,000 Income tax expense (benefit) (note 6) .............. (1,388,000) 4,376,000 3,900,000 ------------- ------------- ------------- Net earnings (loss) ................................ (5,839,000) 5,950,000 5,259,000 Accretion of preferred stock to redemption value ... (2,304,000) (2,854,000) (3,207,000) Accrual of cumulative dividends on preferred stock . (2,323,000) (2,946,000) (3,263,000) ------------- ------------- ------------- Net earnings (loss) available to common stockholders $ (10,466,000) $ 150,000 $ (1,211,000) ============= ============= ============= Earnings (loss) per share: Basic ........................................... $ (8.16) $ .15 $ (1.22) Diluted ......................................... $ (8.16) $ .15 $ (1.22) Weighted average number of shares outstanding: Basic ........................................... 1,282,996 1,000,953 995,747 Diluted ......................................... 1,282,996 1,000,953 995,747
See accompanying notes to consolidated financial statements. 20 21 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B PREFERRED STOCK COMMON STOCK -------------------------------- -------------------------------- SHARES SHARES OUTSTANDING AMOUNT OUTSTANDING AMOUNT ------------- ------------- ------------- ------------- Balance at June 30, 1998 ...... -- -- 4,452,264 42,000 Repurchase of shares .......... -- -- (3,856,501) (36,000) Shares issued ................. 18,572 18,572,000 399,237 4,000 Accretion of redeemable preferred stock ............. -- -- -- -- Accrual of cumulative dividends -- 2,323,000 -- -- Repurchase of shares .......... (16) (15,000) -- -- Net loss ...................... -- -- -- -- ------------- ------------- ------------- ------------- Balance at June 30, 1999 ...... 18,556 20,880,000 995,000 10,000 Shares issued ................. 511 574,000 17,513 -- Accretion of redeemable preferred stock ............. -- -- -- -- Accrual of cumulative dividends -- 2,946,000 -- -- Repurchase of shares .......... (15) (15,000) -- -- Net earnings .................. -- -- -- -- ------------- ------------- ------------- ------------- Balance at June 30, 2000 ...... 19,052 24,385,000 1,012,513 10,000 Shares issued ................. 146 186,000 4,967 -- Accretion of redeemable preferred stock ............. -- -- -- -- Accrual of cumulative dividends -- 3,263,000 -- -- Repurchase of shares .......... (497) (561,000) -- -- Net earnings .................. -- -- -- -- ------------- ------------- ------------- ------------- Balance at June 30, 2001 ...... 18,701 $ 27,273,000 1,017,480 $ 10,000 ============= ============= ============= =============
TREASURY STOCK RETAINED -------------------------------- EARNINGS TOTAL ADDITIONAL SHARES (ACCUMULATED STOCKHOLDERS' PAID-IN CAPITAL OUTSTANDING AMOUNT DEFICIT) EQUITY (DEFICIT) ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1998 ...... 14,498,000 -- -- 29,066,000 43,606,000 Repurchase of shares .......... (13,908,000) -- -- (107,440,000) (121,384,000) Shares issued ................. 395,000 -- -- -- 18,971,000 Accretion of redeemable preferred stock ............. -- -- -- (2,304,000) (2,304,000) Accrual of cumulative dividends -- -- -- (2,323,000) -- Repurchase of shares .......... -- (523) -- -- (15,000) Net loss ...................... -- -- -- (5,839,000) (5,839,000) ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1999 ...... 985,000 (523) -- (88,840,000) (66,965,000) Shares issued ................. 537,000 -- -- -- 1,111,000 Accretion of redeemable preferred stock ............. -- -- -- (2,854,000) (2,854,000) Accrual of cumulative dividends -- -- -- (2,946,000) -- Repurchase of shares .......... -- (5,491) (14,000) -- (29,000) Net earnings .................. -- -- -- 5,950,000 5,950,000 ------------- ------------- ------------- ------------- ------------- Balance at June 30, 2000 ...... 1,522,000 (6,014) (14,000) (88,690,000) (62,787,000) Shares issued ................. 309,000 -- -- -- 495,000 Accretion of redeemable preferred stock ............. -- -- -- (3,207,000) (3,207,000) Accrual of cumulative dividends -- -- -- (3,263,000) -- Repurchase of shares .......... -- (28,159) (274,000) -- (835,000) Net earnings .................. -- -- -- 5,259,000 5,259,000 ------------- ------------- ------------- ------------- ------------- Balance at June 30, 2001 ...... $ 1,831,000 (34,173) $ (288,000) $ (89,901,000) $ (61,075,000) ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements. 21 22 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30,
1999 2000 2001 ------------- ------------ ------------ Cash flows from operating activities: Net earnings (loss) ................................................. $ (5,839,000) $ 5,950,000 $ 5,259,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................................. 11,652,000 14,521,000 16,254,000 Amortization of debt issuance costs ........................... 811,000 885,000 884,000 Provision for doubtful receivables ............................ 282,000 340,000 146,000 Provision for (benefit from) deferred income taxes ............ (1,388,000) 2,397,000 1,256,000 Gains on sale of assets, net .................................. (420,000) (305,000) (422,000) Changes in operating assets and liabilities, net of effects of acquisitions: Receivables ................................................ (1,114,000) (4,793,000) (4,111,000) Inventories, prepaid expenses and other assets ............. 1,275,000 (780,000) (1,074,000) Costs and estimated earnings in excess of billings on uncompleted contracts .................................... (2,178,000) (972,000) 2,270,000 Trade accounts payable, accrued liabilities and income taxes payable ............................................ 1,353,000 1,454,000 (3,783,000) Billings in excess of costs and estimated earnings on uncompleted contracts .................................... 385,000 1,585,000 (947,000) Accrued compensation ....................................... (5,306,000) -- -- ------------- ------------ ------------ Net cash provided by (used in) operating activities .. (487,000) 20,282,000 15,732,000 ------------- ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets .................................. 968,000 865,000 1,292,000 Capital expenditures .......................................... (14,456,000) (18,093,000) (18,469,000) Acquisition of companies, net of cash acquired ................ (7,700,000) -- (520,000) ------------- ------------ ------------ Net cash used in investing activities ................ (21,188,000) (17,228,000) (17,697,000) ------------- ------------ ------------ Cash flows from financing activities: Borrowings under long-term debt ............................... 45,945,000 28,726,000 71,824,000 Repayments of long-term debt .................................. (35,582,000) (36,796,000) (73,803,000) Paydown on notes payable to stockholders ...................... (405,000) -- -- Book overdraft ................................................ 2,471,000 2,965,000 2,891,000 Borrowings on Senior Notes .................................... 100,000,000 -- -- Debt issuance costs ........................................... (5,916,000) (7,000) -- Proceeds from issuance of common stock ........................ 399,000 537,000 309,000 Repurchase of common stock and Series B preferred stock ....... (93,050,000) (29,000) (521,000) Issuance of Series A preferred stock .......................... 10,427,000 -- -- Issuance of Series B preferred stock .......................... 237,000 574,000 186,000 ------------- ------------ ------------ Net cash provided by (used in) financing activities .. 24,526,000 (4,030,000) 886,000 ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents . 2,851,000 (976,000) (1,079,000) Cash and cash equivalents at beginning of year ...................... 234,000 3,085,000 2,109,000 ------------- ------------ ------------ Cash and cash equivalents at end of year ............................ $ 3,085,000 $ 2,109,000 $ 1,030,000 ============= ============ ============
See note 15 for supplementary cash flow information. See accompanying notes to consolidated financial statements. 22 23 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (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 accounting principles generally accepted in the United States of America, the recapitalization mergers were accounted for as a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to a new investor did not change the accounting basis of the assets and liabilities in PII's separate stand-alone financial statements. In connection with the recapitalization mergers, PII on June 30, 1998 entered into a certain Compensation Tax Consistency and Indemnification Agreement (the Agreement) with certain members of management. Under the Agreement, PII was obligated to make approximately $3,000,000 of tax gross-up payments to certain members of management. For the years ended June 30, 1999, 2000 and 2001, $3,501,000, $43,000, and $0, respectively, is included in reorganization expenses for the costs associated with the recapitalization mergers. Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental Corp. and Penhall Company (collectively, "the Company" or "Penhall") serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company's revenues are generated through equipment rentals, both short-term and longer term under fixed price agreements. The length of the fixed price agreements (contracts) varies, but typically range from one to 12 months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company's base of operations includes among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc., the Company's operations were expanded to include the mid-western states of the United States and some provinces of Canada. The Company's operations are primarily conducted through Penhall International Corp. and its wholly owned subsidiary, Penhall Company. 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. Penhall Company has two wholly owned subsidiaries, Penhall Investments , a California Corporation and Penhall Leasing, a California single member limited liability company. All significant intercompany transactions have been eliminated in consolidation. REVENUE RECOGNITION ON LONG-TERM CONSTRUCTION CONTRACTS Income from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage of completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which percentage of completion is determined based on costs to date as compared to total estimated costs at completion. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts, which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed. 23 24 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 Contract costs include all direct material, equipment rentals, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools, supplies, repairs and depreciation. General and administrative costs are charged to expense as incurred. The asset "costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. Income from claims for additional contract compensation is recorded upon settlement of the disputed amount. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of June 30, 2000 and 2001, cash equivalents were insignificant. INVENTORIES Inventories, which consist primarily of diamond cutting blades and blade fuel, are stated at cost. Cost is determined using the purchase price of the assets and is expensed based on usage. PROPERTY, PLANT AND EQUIPMENT The Company and its subsidiaries provide for depreciation of property, plant and equipment based on the estimated useful lives of the assets, using the straight-line method and a residual value of 10% as follows: Buildings and leasehold improvements 15 to 39 years Construction and other 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. 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 $700,000, $689,000 and $687,000 for the years ended June 30, 1999, 2000 and 2001, respectively. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows (undiscounted and without interest) expected to be generated 24 25 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. 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. SELF INSURANCE Effective May 2001, the Company increased its third-party insurance deductible to $250,000 per occurrence. Such self insurance relates to losses and liabilities primarily associated with workers' compensation claims and general and vehicle liability. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions and based on Company experience. As of June 30, 2001, the Company has recorded an accrued liability of $1,038,000 related to self insurance. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," 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 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 net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential diluted securities. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. For the years ended June 30, 1999, 2000 and 2001 diluted earnings per share is the same as basic earnings per share as there are no assumed potential dilutive securities. 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. 25 26 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMPREHENSIVE INCOME In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which established new rules for the reporting and display of comprehensive income and its components. Comprehensive income equals net income for each of the years in the three-year period ended June 30, 2001. SEGMENT INFORMATION The Company's only line of business is the rental of operator assisted equipment for use in infrastructure projects. This equipment is rented on an hourly basis (Services) and on a longer-term, fixed price basis (Contracts). In fiscal 2001, approximately 72% of revenues were generated from Services, and approximately 28% of revenues were generated from Contracts. The Company does not account for, or manage, the hourly or fixed-price rentals in a separate manner. Over the past 3 fiscal years, approximately 23% to 31% of Services revenues have been generated from Contracts. The Company has a non-operated assisted rental business (Bare Rentals). Bare Rentals were insignificant to the consolidated operations for each of the fiscal years ended June 30, 1999, 2000 and 2001. (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, 2000 2001 ---------- ---------- Years ending June 30: 2001 ......................... 4,693,000 -- 2002 ......................... 687,000 4,209,000 2003 ......................... 344,000 799,000 2004 ......................... -- 320,000 ---------- ---------- $5,724,000 $5,328,000 ========== ==========
Transactions in the allowance for doubtful receivables are summarized as follows:
YEARS ENDED JUNE 30, ----------------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Balance, beginning of year ..... $ 995,000 $ 1,277,000 $ 1,617,000 Provision for doubtful accounts 554,000 1,818,000 84,000 Accounts (charged off) collected (272,000) (1,478,000) 62,000 ----------- ----------- ----------- Balance, end of year ........... $ 1,277,000 $ 1,617,000 $ 1,763,000 =========== =========== ===========
26 27 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (3) OTHER ASSETS: Other assets consist of the following:
JUNE 30, JUNE 30, 2000 2001 ----------- ----------- Covenants not to compete $ 1,602,000 $ 1,702,000 Accumulated amortization (907,000) (1,325,000) Other .................. 80,000 246,000 ----------- ----------- $ 775,000 $ 623,000 =========== ===========
The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $314,000, $445,000 and $418,000 for the years ended June 30, 1999, 2000 and 2001, respectively. (4) ACCRUED LIABILITIES: Accrued liabilities consist of the following:
JUNE 30, JUNE 30 2000 2001 ----------- ----------- Union benefits .......... $ 1,005,000 $ 1,013,000 Accrued bonuses ......... 3,165,000 3,204,000 Accrued interest ........ 5,026,000 5,253,000 Accrued insurance ....... 1,076,000 1,726,000 Accrued vacation ........ 421,000 421,000 Accrued payroll ......... 2,257,000 2,443,000 Other ................... 1,095,000 1,001,000 ----------- ----------- $14,045,000 $15,061,000 =========== ===========
(5) SENIOR NOTES AND LONG-TERM DEBT Senior Notes On August 4, 1998, in connection with the Recapitalization Mergers, the Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company's option, in whole at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes contain certain financial and non-financial covenants. The Company was in compliance with all such covenants at June 30, 2001. 27 28 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 Long-term Debt Long-term debt consists of the following:
JUNE 30, JUNE 30, 2000 2001 ----------- ----------- Note payable to former officer and shareholder, bearing interest at 8.0% per annum; principal and interest payable monthly until October 2002 ............. $ -- $ 233,000 Note payable secured by certain equipment, stated interest of 0%, imputed interest at 9.25% per annum which resulted in a discount of $200,000; payable $400,000 due June 1, 2000 and 2001, and $428,000 due June 1, 2002 ........................................................ 728,000 400,000 Note payable secured by certain equipment bearing interest at 6.0% per annum; principal and interest due either November 1, 1999 or upon collection of specified accounts receivable in accordance with the Lipscomb purchase ......................................................................... 100,000 -- Note payable secured by certain equipment, stated interest of 0%, imputed interest at 10.0% per annum which resulted in a discount of $61,000; payable $100,000 due September 30, 2001 and $300,000 due September 30, 2002 ............................................................................. -- 365,000 Note payable secured by certain equipment, stated interest of 0%, imputed interest at 9.0% per annum which resulted in a discount of $51,000; payable $193,000 due March 31, 2002 and 2003 ......................... -- 346,000 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 .75% to 1.50% (as defined) 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 1.75% to 2.25% (as defined) plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. All unpaid principal and interest is due June 15, 2004. The effective interest rate at June 30, 2000 and 2001 was 8.51% and 6.23%, respectively ................................................................... 2,850,000 6,005,000 $20,000,000 Term Loan secured by certain assets of the Company; principal payments of $750,000 per quarter commencing September 15, 2000 through June 15, 2001, $1,250,000 per quarter through June 15, 2002, and $1,500,000 per quarter through June 15, 2004. The Company may elect to maintain the Term Loan as a Base Rate Loan, which accrues interest quarterly at .75% to 1.50% (as defined) 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 1.75% to 2.25% (as defined) plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company All unpaid principal and interest is due June 15, 2004. The effective interest rate at June 30, 2000 and 2001 was 8.44% and 5.69%, respectively ........................................................ 20,000,000 17,000,000 Various capital leases and equipment financing agreements due through December 2003 with interest ranging from 0% to 2.29% per annum .................. 1,351,000 662,000 Other ............................................................................... 206,000 197,000 ----------- ----------- 25,235,000 25,208,000 Less current installments of long-term debt ......................................... 4,649,000 6,436,000 ----------- ----------- Long-term debt, excluding current installments ...................................... $20,586,000 $18,772,000 =========== ===========
28 29 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 As part of the Revolving Loan, the Company has a Swingline Loan in the maximum credit amount of $2,500,000 secured by certain assets of the Company; interest accrues quarterly at 1.25% plus the higher of the Federal Funds Effective Rate (as defined) or then current prime rate and is payable in quarterly installments. All unpaid principal and interest is due June 10, 2004. The Term Loan, Revolving Loan, and Swingline Loan (the "Credit Facility") contain certain financial and non-financial covenants, including working capital, net worth, and debt to equity ratios. The company is also required to make defined prepayments in the event cash flows from operations exceed specified amounts, as defined. The Company was in compliance with all covenants and ratios at June 30, 2001. No prepayments were required during the years ended June 30, 2000 and 2001. Additionally, under the terms of the Credit Facility, the Company had pledged all of the assets of its wholly owned subsidiaries as collateral. The Company had unused and available amounts under its Credit Facility in the amount of $23,745,000 at June 30, 2001. Annual maturities of long-term debt for the next five years are as follows:
JUNE 30 ----------- 2002 ............... $ 6,436,000 2003 ............... 6,571,000 2004 ............... 12,022,000 2005 ............... 4,000 2006 ............... 4,000 Thereafter ......... 171,000 ----------- $25,208,000 ===========
(6) INCOME TAXES Income tax expense (benefit) is comprised of the following components for each fiscal year ended June 30:
YEAR ENDED JUNE 30, ----------------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Current tax expense: Federal ......... $ -- $ 1,506,000 $ 2,345,000 State ........... -- 473,000 299,000 ----------- ----------- ----------- -- 1,979,000 2,644,000 ----------- ----------- ----------- Deferred tax expense (benefit): Federal ......... (630,000) 2,490,000 490,000 State ........... (758,000) (93,000) 766,000 ----------- ----------- ----------- (1,388,000) 2,397,000 1,256,000 ----------- ----------- ----------- $(1,388,000) $ 4,376,000 $ 3,900,000 =========== =========== ===========
As of June 30, 2000 and 2001, the Company has a current net deferred tax asset of $2,318,000 and $2,329,000, respectively, and a net non-current deferred tax liability of $6,045,000 and $7,312,000, respectively. 29 30 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 Significant components of the Company's deferred income tax assets and liabilities are as follows:
JUNE 30, JUNE 30, 2000 2001 ----------- ----------- Deferred tax assets: Allowance for doubtful receivables .................. $ 606,000 $ 709,000 Accruals not currently deductible ................... 1,344,000 1,620,000 Other ............................................... 442,000 -- ----------- ----------- Total deferred tax assets ....................... $ 2,392,000 $ 2,329,000 =========== =========== Deferred tax liabilities - Depreciation and amortization (6,119,000) (7,312,000) ----------- ----------- Net deferred tax liability .................... $(3,727,000) $(4,983,000) =========== ===========
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:
YEARS ENDED JUNE 30 ----------------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Allowance for doubtful receivables ........ $ (101,000) $ (97,000) $ (103,000) Accruals not currently deductible and other (230,000) (958,000) 166,000 Depreciation and amortization ............. 425,000 1,239,000 1,193,000 Accrued compensation ...................... 731,000 -- -- Net operating loss carryforwards .......... (2,213,000) 2,213,000 -- ----------- ----------- ----------- $(1,388,000) $ 2,397,000 $ 1,256,000 =========== =========== ===========
Income tax expense (benefit) for each fiscal year ended June 30 differed from the amounts computed by applying the U.S. Federal income tax rate of 34% for the year ended June 30, 1999, and 35% for the years ended June 30, 2000 and 2001 to earnings (loss) before income taxes as follows:
YEARS ENDED JUNE 30 ---------------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Computed "expected" tax expense (benefit) ..... $(2,457,000) $ 3,614,000 $ 3,206,000 Increase (decrease) in taxes resulting from: State income tax expense, net of Federal income tax deduction ............................... (500,000) 250,000 692,000 Nondeductible reorganization costs ............ 1,009,000 -- -- Other, net .................................... 560,000 512,000 2,000 ----------- ----------- ----------- $(1,388,000) $ 4,376,000 $ 3,900,000 =========== =========== ===========
30 31 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (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 1999, 2000 and 2001 aggregated $2,597,000, $2,475,000 and $3,035,000, respectively. In the event of the Company's partial or total withdrawal from such plans, it may be liable for its share of any unfunded vested benefits thereunder. The Company may also be assessed for its share of any unfunded vested benefits resulting from partial or total withdrawal from such plans and any non-payment by other employer participants. Less than 10% of the Company's employees are covered by a collective bargaining agreement that will expire within one year. The Company sponsors a defined contribution 401(k) plan. Subject to certain terms and conditions of the plan, substantially all of the Company's non-union employees are eligible to participate in the plan. The Company may, but is not required to, make matching contributions to the plan each year, which are allocated to each participant's account in proportion to the amount that he or she has contributed to the plan during the applicable plan year. All Company and employee contributions to the plan plus the earnings thereon are 100% vested. Costs incurred under the plan were $316,000, $349,000 and $376,000 related to the plan for the years ended June 30, 1999, 2000 and 2001, respectively. (8) STOCK COMPENSATION PLANS Stock Plans Employee Stock Purchase Plans - The Company had established employee stock purchase plans. Selected employees were allowed to purchase shares at prices that were determined based on a book value formula. The Company guaranteed to repurchase the shares upon certain events or termination of the employee. The repurchase price that was paid by the Company was determined based on a book value formula that included increased multiples at dates specified in the agreements. Such plans were terminated in August 1998. The stock buy-out plans entered into subsequent to January 28, 1988 gave rise to compensation expense that was accrued over the vesting period based on the difference of the original purchase price and the buy-out price of the shares. Shares outstanding that were subject to stock buy-outs were 792,000 at June 30, 1998. The contingent repurchase price of all these shares was $13,328,000 at June 30, 1998. Compensation expense related to the stock purchase plans amounted to $8,869,000, $0 and $0 for the years ended June 30, 1999, 2000 and 2001, respectively Stock Incentive Plan - On October 7, 1999, the Company's Board of Directors approved a stock incentive plan (the "Plan") under which employees, officers, directors or consultants ("Eligible Participants") may be granted stock options and restricted stock awards. The Board authorized the issuance of up to 50,000 shares of common stock and 2,500 shares of Series B Preferred Stock under the Plan. The Plan is administered by the Board of Directors or an appointed committee (Administrator). The exercise price for stock options or restricted stock awards shall not be less than the Fair Market Value (as defined) of the stock on the grant date subject to restrictions and conditions, including the Company's option to repurchase, as determined by the Administrator at the time of the grant. The term of each stock option shall be fixed, and not exceeding 10 years from the grant date of the stock option. In addition, stock options may be subject to specific vesting and acceleration provisions as determined by the Administrator at or after the grant date. On November 12, 1999, the Company issued 17,513 shares of common stock for an aggregate purchase price of $537,000 and 511 shares of Series B Preferred Stock for an aggregate purchase price of $574,000 to Eligible Participants under the Plan. On October 20, 2000, the Company issued 4,967 shares of common stock for an aggregate purchase price of $309,000 and 146 shares of Series B Preferred Stock for an aggregate purchase price of $186,000 to Eligible Participants under the Plan. No stock options have been granted under the Plan. 31 32 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 Stockholders Agreement Upon consummation of the Recapitalization Mergers, an affiliate, the management stockholders and Penhall International Corp. entered into a Securities Holders Agreement (the "Stockholders Agreement") containing certain agreements among such stockholders with respect to the capital stock and corporate governance of the Company and its subsidiaries. The Stockholders Agreement contains certain provisions, which, with certain exceptions, restrict the ability of the management stockholders from transferring any common stock or Series B preferred stock except pursuant to the terms of the Stockholders Agreement. If the Board of Directors of Penhall International Corp. and holders of at least a majority of the common stock of Penhall International Corp. then outstanding shall approve the sale of Penhall International Corp. or any of its subsidiaries to an unaffiliated third person (an "Approved Sale"), each stockholder of the Company shall consent to, vote for and raise no objections against, and waive dissenters and appraisal rights (if any) with respect to, the Approved Sale and, if such sale shall include the sale of capital stock, each stockholder shall sell such stockholder's capital stock on the terms and conditions approved by the Board of Directors of Penhall International Corp. and the holders of a majority of the common stock of Penhall International Corp. then outstanding. The Stockholders Agreement also provides for certain additional restrictions on transfer of Penhall International Corp.'s common stock and Series B preferred stock by the management stockholders, including the right of Penhall International Corp. to purchase certain common stock and Series B preferred stock of Penhall International Corp. held by a management stockholder upon termination of such management stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering (as defined below), at its original issuance price, and the grant of a right of first refusal in favor of Penhall International Corp. in the event a management stockholder elects to transfer such common stock or Series B preferred stock. Under the Stockholders Agreement, a management stockholder has the right, subject to the restrictions set forth in agreements relating to indebtedness of the Company, to require Penhall International Corp. to purchase certain common stock and Series B preferred stock of the Company held by such management stockholder upon termination of such management stockholder's employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering, at its original issuance price. "Initial Public Offering" means the sale by the Company in an underwritten public offering made pursuant to an effective registration statement under the Securities Act of common stock for gross offering proceeds of at least $30 million. The Stockholders Agreement also contains certain provisions that provide the management stockholders with a termination benefit upon termination of employment without cause, death or disability. The amount of the termination benefit is based upon the book value of the common stock and Series B preferred stock, as defined in the Stockholders Agreement. However, if Penhall International Corp. does not meet certain EBITDA growth criteria, the amount that a management stockholder will receive for outstanding common stock or Series B preferred stock under any form of termination is the lower of the original issuance price or book value. On August 4, 1998, the Recapitalization Mergers caused the stock buy-out agreements to be terminated and replaced by the terms of the Stockholders Agreement. The Recapitalization Mergers established a new cost basis for the stock under the stock buy-out agreements which resulted in stock-based compensation expense of $8,869,000 which is included in general and administrative expenses for the year ended June 30, 1999. Management shareholders rolled over certain shares in the Recapitalization Mergers at a new cost basis resulting in the reduction of the remaining accrued compensation recorded under the stock buy-out agreements as an equity contribution. Shares outstanding that are subject to the buy-out provisions of the Stockholders Agreement are 380,008 and 358,389 shares of common stock and 8,990 and 8,552 shares of Series B preferred stock at June 30, 2000 and 2001, respectively. 32 33 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (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 therefore, 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 therefore, 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 such notes shall remain outstanding. In such event, interest shall be deemed to be paid by such amount being added to the outstanding principal amount of the Junior Subordinated Notes and shall accrue interest as a portion of the principal amount of the Junior Subordinated Notes to the maximum extent permitted by law. If issued, the Junior Subordinated Notes will mature on February 1, 2007. In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Senior Exchangeable preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Senior Exchangeable Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Senior Exchangeable preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Senior Exchangeable preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders. 33 34 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 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 therefore, 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 therefore, all of the then outstanding shares of Series A preferred stock at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Series A preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of junior stock. If such available assets are insufficient to pay the holders of the outstanding shares of Series A preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Series A preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders. Series B Preferred Stock The Company has designated 50,000 shares of preferred stock as Series B preferred stock. The preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions (including, without limitation, dividend rights and rights on liquidation, winding up and dissolution of the Company) of the Series B preferred stock are identical to those of the Series A preferred stock, except that the Series B preferred stock is not subject to any mandatory or optional redemption by the Company. (10) COMMITMENTS AND CONTINGENCIES Leases (a) Capital Leases The Company is obligated under various capital leases for certain construction equipment that expire at various dates through December 2003. At June 30, 2000 and 2001, the cost of construction equipment and the related depreciation recorded for equipment under capital leases were as follows:
2000 2001 ---------- ---------- Construction Equipment ...... $1,600,000 $1,623,000 Less accumulated amortization 343,000 444,000 ---------- ---------- $1,257,000 $1,179,000 ========== ==========
34 35 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 The present value of the minimum lease payments is substantially the same as gross maturities due to interest rates of 0% - 2.29% (note 5). (b) Operating Leases The Company and its subsidiaries lease various properties and equipment under long-term agreements, which expire at varying dates through October 2008. Certain of these leases provide for renegotiations of annual rentals at specified dates. Rent expense was $821,000, $1,098,000 and $1,203,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2001 are as follows: YEARS ENDING JUNE 30: 2002 ................ $1,028,000 2003 ................ 861,000 2004 ................ 662,000 2005 ................ 352,000 2006 ................ 242,000 Thereafter .......... 326,000 ---------- $3,471,000 ==========
Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalent accounts, and contract and trade receivables. The California Department of Transportation accounted for approximately 6% of consolidated revenues of the Company for each of the years ended June 30, 1999, 2000 and 2001. No other customer accounted for 5% or more of consolidated revenues for the years end June 30, 1999, 2000 or 2001. Risks and Uncertainties The Company is required to meet certain financial and operating criteria as established by the Department of Transportation to bid and work in certain states. There is no assurance that state regulatory agencies will not change the established criteria or that the Company will continue to comply with the established criteria. Should the Company lose its ability to bid and work in certain states, the operations and the financial position of the Company could be adversely effected. Cash and Cash Equivalents At June 30, 2000 and 2001, the Company had approximately $1,611,000 and $1,533,000, respectively, on deposit at one financial institution. At June 30, 2000, the Company also had approximately $472,000 on deposit at a second financial institution. 35 36 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 Letters of Credit As of June 30, 2001, the Company has an outstanding standby letter of credit of $250,000 with a financial institution for the benefit of a certain customer of the Company. The standby letter of credit, which reduces the amount of borrowing available under the Company's Credit Facility (note 5), expires on November 30, 2001. Litigation There are various lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management's present opinion based in part upon the advise of legal counsel that the outcome of these proceedings will not have a material effect on the Company's consolidated financial statements taken as a whole. Certain Fees Payable to BRS; BRS Management Agreement Upon consummation of the Recapitalization Mergers (note 1), the Company paid the Third Party a closing fee of $2.0 million (the "Closing Fee"). In addition, the Company entered into a management services agreement (the "Management Agreement") with the Third Party pursuant to which the Third Party will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The Closing Fee and the fees payable pursuant to the Management Agreement were negotiated on an arm's-length basis by representatives of the Third Party and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company. (11) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Cost and estimated earnings on uncompleted contracts consists of the following:
JUNE 30, JUNE 30, 2000 2001 ------------ ------------ Costs incurred on uncompleted contracts .................. $ 53,559,000 $ 82,727,000 Estimated earnings to date ............................... 7,040,000 16,072,000 ------------ ------------ 60,599,000 98,799,000 Less billings to date .................................... 59,108,000 98,631,000 ------------ ------------ $ 1,491,000 $ 168,000 ============ ============ Included in accompanying consolidated balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts ................. $ 4,126,000 $ 1,856,000 Billings in excess of costs and estimated earnings on uncompleted contracts ................. (2,635,000) (1,688,000) ------------ ------------ $ 1,491,000 $ 168,000 ============ ============
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 36 37 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at June 30, 2000 and 2001.
2000 2001 ------------------------------ ------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ Financial assets: Cash and Cash Equivalents ....... $ 2,109,000 $ 2,109,000 $ 1,030,000 $ 1,030,000 Net receivables ................. 35,941,000 35,941,000 39,906,000 39,906,000 Financial liabilities: Current installments of long-term debt ............... 4,649,000 4,649,000 6,436,000 6,436,000 Trade accounts payable .......... 10,953,000 10,953,000 9,976,000 9,976,000 Accrued liabilities and income taxes payable ................ 14,496,000 14,496,000 15,061,000 15,061,000 Long-term debt, excluding current installments ................. 20,586,000 20,586,000 18,772,000 18,772,000 Senior Notes .................... 100,000,000 97,250,000 100,000,000 98,000,000
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 and cash equivalents, net receivables, current installments of long-term debt, trade accounts payables and accrued liabilities and income taxes payable: The carrying amounts approximate fair value because of the short maturity of these instruments. Long-term debt, excluding current installments, and Senior Notes: The fair value of the Company's long-term debt and Senior Notes 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 by the Company's bankers. (13) ACQUISITIONS The Company completed the following acquisitions during fiscal 1999 and 2001, which were accounted for as purchases: In October 1998, the Company purchased certain assets of Daley Concrete Cutting, a division of U.S. Rentals for a cash payment of $3,743,000. The excess of the purchase price over the fair value of the net identifiable assets acquired of $300,000 has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. In November 1998, the Company purchased Lipscomb Concrete Cutting (Lipscomb) for $4,251,000. The purchase price included a cash payment of $3,376,000 and a seller unsecured carryback note of $876,000 at 6% interest, all due and payable November 1, 1999, subject to certain conditions. In April 1999, the Company purchased certain assets of Diamond Concrete Services for a cash payment of $388,000, which represents the fair value of the net identifiable assets acquired. In June 1999, the Company purchased certain assets of Prospect Drilling and Sawing for $1,528,000. The purchase price included a cash payment of $500,000, and a seller unsecured carryback note of $1,028,000 at 9.25% interest, due in three annual installments through June 2002. In September 2000, the Company purchased certain assets of Advance Concrete Sawing & Drilling for $1,096,000. The purchase price included a cash payment of $317,000, $40,000 of covenants not to compete and $400,000 of additional consideration payable in equal installments in October 2000 and September 2001, and a seller unsecured carryback note of $339,000 at 10.0% imputed interest, 37 38 payable in installments of $100,000 due in September 2001 and $300,000 due in September 2002. The excess of the purchase price over the fair value of the net identifiable assets acquired of $384,000 has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. In March 2001, the Company purchased certain assets of H&P Sawing and Drilling for $582,000. The purchase price included a cash payment of $193,000, $50,000 of covenants not to compete and a seller unsecured carryback note of $339,000 at 9.0% imputed interest, due in two annual installments of $193,000 through March 2003. Pro-forma information has not been presented since the results of these operations did not have a significant effect on Penhall's consolidated operations. (14) 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, 2000 and 2001 and for the years ended June 30, 1999, 2000 and 2001 of: a) Penhall International Corp. on a parent company only basis ("Parent") (carrying its investments in the subsidiaries under the equity method), b) the Guarantor Subsidiaries (Penhall Rental Corp. and Penhall Company and subsidiaries), c) elimination entries necessary to consolidate the parent company and its subsidiaries, and d) the Company on a consolidated basis. 38 39 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000 ------------------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Assets Current assets: Receivables, net ................ $ -- $ -- $ 35,941,000 $ -- $ 35,941,000 Inventories ..................... -- -- 1,741,000 -- 1,741,000 Costs and estimated earnings in excess of billings on uncompleted contracts ......... -- -- 4,126,000 -- 4,126,000 Intercompany assets ............. 41,702,000 -- -- (41,702,000) -- Other current assets ............ 217,000 1,394,000 3,732,000 -- 5,343,000 ------------- ------------- ------------- ------------- ------------- Total current assets .......... 41,919,000 1,394,000 45,540,000 (41,702,000) 47,151,000 Net property, plant and equipment . -- 8,882,000 52,842,000 -- 61,724,000 Other assets, net ................. 4,946,000 -- 8,341,000 -- 13,287,000 Intercompany assets ............... 10,000,000 -- -- (10,000,000) -- Investment in parent .............. -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries ........ 41,222,000 -- -- (41,222,000) -- ------------- ------------- ------------- ------------- ------------- $ 98,087,000 $ 14,277,000 $ 106,723,000 $ (96,925,000) $ 122,162,000 ============= ============= ============= ============= ============= Liabilities and Stockholders' Equity (Deficit): Current installments of long-term debt ............................ $ 3,000,000 $ 3,000 $ 1,646,000 $ -- $ 4,649,000 Trade accounts payable ............ -- 103,000 10,850,000 -- 10,953,000 Accrued liabilities ............... 5,066,000 -- 8,979,000 -- 14,045,000 Income taxes payable .............. 451,000 -- -- -- 451,000 Billings in excess of costs and estimated earnings on uncompleted contracts ....................... -- -- 2,635,000 -- 2,635,000 Intercompany liabilities .......... 2,922,000 35,586,000 3,194,000 (41,702,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities ..... 11,439,000 35,692,000 27,304,000 (41,702,000) 32,733,000 Intercompany liabilities .......... -- -- 10,000,000 (10,000,000) -- Long-term debt, excluding current installments ............ 19,850,000 203,000 533,000 -- 20,586,000 Senior notes ...................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities .......... -- (540,000) 6,585,000 -- 6,045,000 Senior Exchangeable Preferred stock 12,220,000 -- -- -- 12,220,000 Series A Preferred stock .......... 13,365,000 -- -- -- 13,365,000 Stockholders' equity (deficit) .... (58,787,000) (21,078,000) 62,301,000 (45,223,000) (62,787,000) ------------- ------------- ------------- ------------- ------------- $ 98,087,000 $ 14,277,000 $ 106,723,000 $ (96,925,000) $ 122,162,000 ============= ============= ============= ============= =============
39 40 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001 ------------------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Assets Current assets: Receivables, net ................ $ 1,082,000 $ -- $ 38,824,000 $ -- $ 39,906,000 Inventories ..................... -- -- 2,273,000 -- 2,273,000 Costs and estimated earnings in excess of billings on uncompleted contracts ......... -- -- 1,856,000 -- 1,856,000 Intercompany assets ............. 29,006,000 -- -- (29,006,000) -- Other current assets ............ 112,000 966,000 3,698,000 -- 4,776,000 ------------- ------------- ------------- ------------- ------------- Total current assets .......... 30,200,000 966,000 46,651,000 (29,006,000) 48,811,000 Net property, plant and equipment . -- 9,424,000 56,779,000 -- 66,203,000 Other assets, net ................. 4,062,000 -- 7,886,000 -- 11,948,000 Intercompany assets ............... 10,000,000 -- -- (10,000,000) -- Investment in parent .............. -- 4,001,000 -- (4,001,000) -- Investment in subsidiaries ........ 55,992,000 -- -- (55,992,000) -- ------------- ------------- ------------- ------------- ------------- $ 100,254,000 $ 14,391,000 $ 111,316,000 $ (98,999,000) $ 126,962,000 ============= ============= ============= ============= ============= Liabilities and Stockholders' Equity (Deficit): Current installments of long-term debt ............................ $ 5,173,000 $ 10,000 $ 1,253,000 $ -- $ 6,436,000 Trade accounts payable ............ 3,000 -- 9,973,000 -- 9,976,000 Accrued liabilities ............... 5,295,000 (20,000) 9,786,000 -- 15,061,000 Income taxes payable .............. -- -- -- -- -- Billings in excess of costs and estimated earnings on uncompleted contracts ....................... -- -- 1,688,000 -- 1,688,000 Intercompany liabilities .......... -- 28,346,000 660,000 (29,006,000) -- ------------- ------------- ------------- ------------- ------------- Total current liabilities ..... 10,471,000 28,336,000 23,360,000 (29,006,000) 33,161,000 Intercompany liabilities .......... -- -- 10,000,000 (10,000,000) -- Long-term debt, excluding current installments ............ 18,066,000 186,000 520,000 -- 18,772,000 Senior notes ...................... 100,000,000 -- -- -- 100,000,000 Deferred tax liabilities .......... -- (143,000) 7,455,000 -- 7,312,000 Senior Exchangeable Preferred stock 13,573,000 -- -- -- 13,573,000 Series A Preferred stock .......... 15,219,000 -- -- -- 15,219,000 Stockholders' equity (deficit) .... (57,075,000) (13,988,000) 69,981,000 (59,993,000) (61,075,000) ------------- ------------- ------------- ------------- ------------- $ 100,254,000 $ 14,391,000 $ 111,316,000 $ (98,999,000) $ 126,962,000 ============= ============= ============= ============= =============
40 41 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999 ----------------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------- Revenues ............................. $ 5,904,000 $ 1,244,000 $137,542,000 $(1,244,000) $ 143,446,000 Cost of revenues ..................... 3,569,000 5,000 97,815,000 -- 101,389,000 ------------ ------------ ------------ ----------- ------------- Gross profit ...................... 2,335,000 1,239,000 39,727,000 (1,244,000) 42,057,000 General and administrative expenses .. 1,390,000 9,412,000 23,035,000 (1,267,000) 32,570,000 Reorganization expenses .............. -- 3,501,000 -- -- 3,501,000 Other operating income ............... 84,000 919,000 818,000 (700,000) 1,121,000 Equity earnings in subsidiaries ...... 3,489,000 -- -- (3,489,000) -- ------------ ------------ ------------ ----------- ------------- Earnings (loss) before interest expense and income taxes ........ 4,518,000 (10,755,000) 17,510,000 (4,166,000) 7,107,000 Interest expense ..................... 13,552,000 168,000 591,000 23,000 14,334,000 ------------ ------------ ------------ ----------- ------------- Earnings (loss) before income taxes (9,034,000) (10,923,000) 16,919,000 (4,189,000) (7,227,000) Income tax expense (benefit) ......... (3,895,000) (4,456,000) 6,963,000 -- (1,388,000) ------------ ------------ ------------ ----------- ------------- Net earnings (loss) .................. $ (5,139,000) $ (6,467,000) $ 9,956,000 $(4,189,000) $ (5,839,000) ============ ============ ============ =========== =============
41 42 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2000 -------------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ------------ Revenues ............................... $ -- $1,318,000 $173,060,000 $ (1,318,000) $173,060,000 Cost of revenues ....................... -- -- 119,854,000 -- 119,854,000 ------------ ---------- ------------ ------------ ------------ Gross profit ........................ -- 1,318,000 53,206,000 (1,318,000) 53,206,000 General and administrative expenses .... 444,000 410,000 28,938,000 (1,318,000) 28,474,000 Reorganization expenses ................ -- 43,000 -- -- 43,000 Other operating income ................. 64,000 -- 1,164,000 -- 1,228,000 Equity earnings in subsidiaries ........ 15,233,000 -- -- (15,233,000) -- ------------ ---------- ------------ ------------ ------------ Earnings before interest expense and income taxes .......... 14,853,000 865,000 25,432,000 (15,233,000) 25,917,000 Interest expense ....................... 15,115,000 28,000 448,000 -- 15,591,000 ------------ ---------- ------------ ------------ ------------ Earnings (loss) before income taxes . (262,000) 837,000 24,984,000 (15,233,000) 10,326,000 Income tax expense (benefit) ........... (6,212,000) 311,000 10,277,000 -- 4,376,000 ------------ ---------- ------------ ------------ ------------ Net earnings ........................... $ 5,950,000 $ 526,000 $ 14,707,000 $(15,233,000) $ 5,950,000 ============ ========== ============ ============ ============
42 43 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2001 ----------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Revenues .................................... $ -- $ 12,005,000 $ 176,893,000 $ (13,129,000) $ 175,769,000 Cost of revenues ............................ -- -- 123,868,000 -- 123,868,000 ------------- ------------- ------------- ------------- ------------- Gross profit ............................. -- 12,005,000 53,025,000 (13,129,000) 51,901,000 General and administrative expenses ......... 397,000 454,000 30,551,000 (2,515,000) 28,887,000 Royalties ................................... -- -- 10,614,000 (10,614,000) -- Other operating income ...................... 8,000 53,000 1,347,000 -- 1,408,000 Equity earnings in subsidiaries ............. 14,770,000 -- -- (14,770,000) -- ------------- ------------- ------------- ------------- ------------- Earnings before interest expense and income taxes ............... 14,381,000 11,604,000 13,207,000 (14,770,000) 24,422,000 Interest expense ............................ 15,095,000 5,000 163,000 -- 15,263,000 ------------- ------------- ------------- ------------- ------------- Earnings (loss) before income taxes ...... (714,000) 11,599,000 13,044,000 (14,770,000) 9,159,000 Income tax expense (benefit) ................ (5,974,000) 4,510,000 5,364,000 -- 3,900,000 ------------- ------------- ------------- ------------- ------------- Net earnings ................................ $ 5,260,000 $ 7,089,000 $ 7,680,000 $ (14,770,000) $ 5,259,000 ============= ============= ============= ============= =============
43 44 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1999 ----------------------------------------------------------------------------- PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities ................................... $ (593,000) $ (16,821,000) $ 17,627,000 $ (700,000) $ (487,000) ------------- ------------- ------------- ------------- ------------- Cash flows from investing activities: Proceeds from sale of assets ................ 76,000 363,000 529,000 -- 968,000 Capital expenditures ........................ (865,000) (921,000) (12,670,000) -- (14,456,000) Acquisition of companies, net of cash acquired .................................. -- -- (7,700,000) -- (7,700,000) ------------- ------------- ------------- ------------- ------------- Net cash used in investing activities .... (789,000) (558,000) (19,841,000) -- (21,188,000) ------------- ------------- ------------- ------------- ------------- Cash flows from financing activities: Due to (from) affiliates .................... (36,415,000) 33,421,000 2,994,000 -- -- Book overdraft .............................. -- -- 2,471,000 -- 2,471,000 Borrowings under long-term debt ............. 43,200,000 2,745,000 -- -- 45,945,000 Repayments of long-term debt ................ (16,700,000) (16,614,000) (2,268,000) -- (35,582,000) Paydown on notes payable to stockholders .... -- (405,000) -- -- (405,000) Borrowings on Senior Notes .................. 100,000,000 -- -- -- 100,000,000 Debt issuance costs ......................... (5,916,000) -- -- -- (5,916,000) Dividends paid .............................. (700,000) -- -- 700,000 -- Proceeds from issuance of common stock ...... 399,000 -- -- -- 399,000 Repurchase of common stock .................. (93,050,000) -- -- -- (93,050,000) Issuance of Series A Preferred stock ........ 10,427,000 -- -- -- 10,427,000 Issuance of Series B Preferred stock ........ 237,000 -- -- -- 237,000 ------------- ------------- ------------- ------------- ------------- Net cash provided by financing activities ... 1,482,000 19,147,000 3,197,000 700,000 24,526,000 ------------- ------------- ------------- ------------- ------------- Net increase in cash and cash equivalents ... 100,000 1,768,000 983,000 -- 2,851,000 Cash and cash equivalents at beginning of year ...................................... (100,000) 85,000 249,000 -- 234,000 ------------- ------------- ------------- ------------- ------------- Cash and cash equivalents at end of year ....... $ -- $ 1,853,000 $ 1,232,000 $ -- $ 3,085,000 ============= ============= ============= ============= =============
44 45 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000 ------------------------------------------------------------------------ PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities ................................... $ (4,676,000) $ 5,723,000 $ 25,678,000 $ (6,443,000) $ 20,282,000 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets ................ -- -- 865,000 -- 865,000 Capital expenditures ........................ -- (102,000) (17,991,000) -- (18,093,000) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities .... -- (102,000) (17,126,000) -- (17,228,000) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Due to (from) affiliates .................... 7,350,000 (6,094,000) (7,699,000) 6,443,000 -- Book overdraft .............................. -- -- 2,965,000 -- 2,965,000 Borrowings under long-term debt ............. 28,726,000 -- -- -- 28,726,000 Repayments of long-term debt ................ (32,375,000) (10,000) (4,411,000) -- (36,796,000) Debt issuance costs ......................... (7,000) -- -- -- (7,000) Proceeds from issuance of common stock ...... 537,000 -- -- -- 537,000 Repurchase of common stock and Series B preferred stock .......................... (29,000) -- -- -- (29,000) Issuance of Series B preferred stock ........ 574,000 -- -- -- 574,000 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ................... 4,776,000 (6,104,000) (9,145,000) 6,443,000 (4,030,000) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....................... 100,000 (483,000) (593,000) -- (976,000) Cash and cash equivalents at beginning of year ...................................... -- 1,853,000 1,232,000 -- 3,085,000 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year ....... $ 100,000 $ 1,370,000 $ 639,000 $ -- $ 2,109,000 ============ ============ ============ ============ ============
45 46 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2001 ------------------------------------------------------------------------ PENHALL INTER- PENHALL NATIONAL RENTAL PENHALL CORP. CORP. COMPANY ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities ................................... $ (9,922,000) $ 12,256,000 $ 17,957,000 $ (4,559,000) $ 15,732,000 ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets ................ -- 278,000 1,014,000 -- 1,292,000 Acquisition of companies, net of cash acquired .................................. -- -- (520,000) -- (520,000) Capital expenditures ........................ -- (1,175,000) (17,294,000) -- (18,469,000) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities .... -- (897,000) (16,800,000) -- (17,697,000) ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Due to (from) affiliates .................... 9,773,000 (11,798,000) (2,534,000) 4,559,000 -- Book overdraft .............................. -- -- 2,891,000 -- 2,891,000 Borrowings under long-term debt ............. 71,824,000 -- -- -- 71,824,000 Repayments of long-term debt ................ (71,749,000) (10,000) (2,044,000) -- (73,803,000) Debt issuance costs ......................... -- -- -- -- -- Proceeds from issuance of common stock ...... 309,000 -- -- -- 309,000 Repurchase of common stock and Series B preferred stock .......................... (521,000) -- -- -- (521,000) Issuance of Series B preferred stock ........ 186,000 -- -- -- 186,000 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ................... 9,822,000 (11,808,000) (1,687,000) 4,559,000 886,000 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....................... (100,000) (449,000) (530,000) -- (1,079,000) Cash and cash equivalents at beginning of year ...................................... 100,000 1,370,000 639,000 -- 2,109,000 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year ....... $ -- $ 921,000 $ 109,000 -- $ 1,030,000 ============ ============ ============ ============ ============
46 47 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (15) SUPPLEMENTARY CASH FLOW INFORMATION The following supplemental cash flow information is provided with respect to interest and tax payments as well as certain non-cash investing and financing activities for the years ended June 30:
1999 2000 2001 ------------ ------------ ------------ Cash paid (received) during the year for: Income taxes ............................................ $ (2,294,000) $ 1,822,000 $ 4,604,000 Interest ................................................ 8,334,000 14,891,000 14,105,000 ------------ ------------ ------------ Noncash investing and financing activities - Borrowings related to the acquisition of assets ........ $ 1,904,000 $ 1,981,000 $ 963,000 Borrowings related to the repurchase of common stock and Series B preferred .............................. -- -- 314,000 Issuance of Senior Exchangeable Preferred Stock in connection with the Recapitalization Mergers ........ 10,000,000 -- -- Accretion of preferred stock to redemption value ....... 2,304,000 2,854,000 3,207,000 Accrual of cumulative dividends on preferred stock ..... 2,323,000 2,946,000 3,263,000 Issuance of Series B preferred stock ................... 18,336,000 -- --
The following table details the fiscal 1999 and 2001 acquisitions:
1999 2001 ---------- ---------- Accounts receivable, net ......................... $1,452,000 $ -- Inventory ........................................ 317,000 125,000 Prepaid expenses ................................. 507,000 -- Property, plant and equipment .................... 6,725,000 1,066,000 Goodwill ......................................... 300,000 384,000 Other assets ..................................... 1,330,000 100,000 Trade accounts payable ........................... 298,000 -- Accrued liabilities .............................. 288,000 480,000 Amounts due to parent company, net ............... 108,000 -- Long-term debt ................................... 2,237,000 675,000 ========== ==========
(16) SUBSEQUENT EVENT On July 25, 2001, the Company established a letter of credit for the benefit of the Company's third party insurance carrier (note 1). This letter of credit, which reduces the amount of borrowings available under the Company's Credit Facility (note 5), expires on June 15, 2002. The amount of the letter of credit is to automatically increase as follows: July 25, 2001......................... $1,120,000 August 9, 2001........................ 2,240,000 November 9, 2001...................... 3,360,000 February 9, 2001...................... 4,480,000 ==========
47 48 PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 AND 2001 (17) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) The following is unaudited quarterly supplementary financial information for 2000 and 2001:
FOR THE QUARTERS ENDED FISCAL 2000 ------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, ------------ ------------ ------------ ------------ Revenue ................................ $ 49,857,000 $ 40,768,000 $ 37,643,000 $ 44,792,000 Gross profit ........................... 16,014,000 13,212,000 10,368,000 13,612,000 Earnings before income taxes ........... 3,786,000 2,464,000 720,000 3,356,000 Net earnings ........................... 2,152,000 1,535,000 426,000 1,837,000 Net earnings (loss) available to common shareholders ................ 773,000 101,000 (1,043,000) 319,000 Basic earnings (loss) per share ........ 0.78 0.10 (1.04) 0.31
FOR THE QUARTERS ENDED FISCAL 2001 -------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, ------------ ------------ ------------ ------------ Revenue ................................ $ 53,346,000 $ 41,565,000 $ 33,619,000 $ 47,239,000 Gross profit ........................... 16,551,000 12,446,000 8,715,000 14,189,000 Earnings (loss) before income taxes .... 5,524,000 1,708,000 (785,000) 2,712,000 Net earnings (loss) .................... 3,259,000 1,007,000 (463,000) 1,456,000 Net earnings (loss) available to common shareholders ................ 1,674,000 (634,000) (2,005,000) (246,000) Basic earnings (loss) per share ........ 1.65 (0.62) (1.97) (0.28)
48 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company. Directors of the Company hold their offices for a term of one year or until their successors are elected and qualified; executive officers of the Company serve at the discretion of the Board of Directors. For information concerning certain arrangements with respect to the election of directors.
NAME AGE TITLE ---- --- ----- John T. Sawyer.................. 57 Chairman of the Board of Directors, President and Chief Executive Officer Clark George Bush............... 46 Vice President and Regional Manager, Southern California Region Bruce F. Varney................. 49 Vice President and Regional Manager, Southwest Region Jeffrey E. Platt................ 50 Vice President-Finance and Chief Financial Officer Gary Aamold..................... 51 Vice President and Regional Manager, Highway Services Division Bruce C. Bruckmann.............. 47 Director Harold O. Rosser II............. 52 Director Paul N. Arnold.................. 55 Director
JOHN T. SAWYER, Chairman of the Board of Directors, President and Chief Executive Officer, joined Penhall in 1978 as the Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was appointed Manager of Penhall's National Contracting Division, and in 1984, he assumed the position of Vice President and became responsible for managing all construction services divisions. Mr. Sawyer has been President of Penhall since 1989. CLARK GEORGE BUSH, Vice President and Regional Manager, Southern California Region, joined Penhall in 1980 as an Estimator and Jobsite Manager and became a Division Manager in 1984. Mr. Bush was promoted to Regional Manager of Southern California in 1986. In 1990, Mr. Bush was appointed as President of the Company, where he served until his recent appointment as Vice President of Penhall with responsibility for the Southern California region. BRUCE F. VARNEY, Vice President and Regional Manager, Southwest Region, began his employment with Penhall in 1977, and in 1981 was named Manager of the San Diego Division. From 1991 to 1993, Mr. Varney served as Regional Manager for Southern California, and in 1993 he was appointed as Southwest Regional Manager. In April 1998, Mr. Varney was promoted to Vice President. JEFFREY E. PLATT, Vice President-Finance and Chief Financial Officer, joined Penhall in July 2000 as Chief Financial Officer. From 1987 to 2000, Mr. Platt was Vice President-Finance and Chief Financial Officer for Nielsen Dillingham Builders Inc. Mr. Platt is a Certified Public Accountant. GARY AAMOLD, Vice President and Regional Manager, Highway Services Division, joined Penhall in April 1998 as part of the Highway Services acquisition. Since 1989, Mr. Aamold has served in various managerial capacities for Highway Services. 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. 49 50 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. PAUL N. ARNOLD, Director, is Chairman and Chief Executive Officer of CORT Business Services Corporation. Mr. Arnold has been with CORT for over 30 years, holding Group Management positions and Regional Management positions within CORT since 1976. Mr. Arnold served as President and Chief Executive Officer from 1992 to 2000. Mr. Arnold is a director of Town Sports International, Inc. DIRECTOR COMPENSATION AND ARRANGEMENTS Each non-employee director of the Company is paid an annual retainer of $12,000 plus fees of $1,000 for each board meeting attended and $500 for each committee meeting attended. Directors who are employees of the Company will not receive additional compensation as directors. ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes the compensation paid or accrued for fiscal 2001 to the Chief Executive Officer of Penhall and to each of the four other most highly compensated executive officers of Penhall. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) COMPENSATION(3) --------------------------- -------- -------- -------------- -------------- John T. Sawyer .................................. $250,000 $117,930 $ 8,856 $ 4,972(4) Chief Executive Officer and President-Penhall C. George Bush .................................. 185,827 149,000 8,856 3,384(5) Vice President-Penhall Jeffrey E. Platt ................................ 191,052 21,000 8,856 2,244(6) Vice President-Penhall Bruce F. Varney ................................. 175,857 162,000 8,856 4,087(7) Vice President-Penhall Gary L. Aamold .................................. 178,752 134,000 -- 10,707(8) Vice President-Penhall
---------- (1) Includes amounts contributed as salary deferral contributions in fiscal 2001 under the Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan (the "Plan"), as follows: $10,500 for Mr. Sawyer; $10,400 for Mr. Bush; $10,500 for Mr. Varney; and $16,790 for Mr. Aamold. (2) Includes the amount attributable to the use of an automobile furnished by Penhall. (3) Includes Penhall matching contributions under the Plan, premiums for group term and split-dollar life insurance, premiums for health care insurance and long-term disability insurance premiums. (4) Includes $1,100 of Penhall matching contributions under the Plan, approximately $258 of premiums for group term life insurance, approximately $3,184 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (5) Includes $1,100 of Penhall matching contributions under the Plan, approximately $60 of premiums for group term life insurance, approximately $1,794 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (6) Includes $469 of Penhall matching contributions under the Plan, approximately $1,775 of premiums for health care. 50 51 (7) Includes $1,100 of Penhall matching contributions under the Plan, approximately $90 of premiums for group term life insurance, approximately $2,467 of premiums for health care insurance and approximately $430 for long-term disability insurance premiums. (8) Includes $2,000 of Penhall matching contributions under the Plan, approximately $83 of premium for group term life insurance, approximately $8,194 of premium health care insurance and approximately $430 for 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 Penhall sponsors the Penhall International, Inc. and Affiliated Companies Employees' Profit Sharing (401(k)) Plan (the "Plan"), which is intended to satisfy the tax qualification requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain terms and conditions of the Plan, substantially all of Penhall's non-union employees are eligible to participate in the Plan. Eligible employees may contribute between 1% and 15% of their compensation to the Plan on a pre-tax basis. Penhall may, but is not required, to make matching contributions to the Plan each year. Any matching contributions will be allocated to each participant's account under the Plan proportionate to the amount that he or she has contributed to the Plan during the applicable Plan year. All Penhall and employee contributions to the Plan are allocated to a participant's individual account. Penhall charged $349,000 and $376,000 to general and administrative expense related to contributions to and expenses of the Plan for the year ended June 30, 2000 and 2001, respectively. All Penhall and employee contributions to the Plan plus the earnings thereon are 100% vested. Employees may direct the investment of their accounts to various investment funds. The Plan provides for hardship withdrawals and loans to participants. STOCK OPTION PLAN On October 7, 1999, the Company's Board of Directors approved a Stock Incentive Plan (the "Plan") under which employees, officers, directors or consultants ("Eligible Participants") may be granted stock options and restricted stock awards. The Board authorized the sale of up to 50,000 shares of common stock and 2,500 shares of Series B Preferred Stock under the Plan. The Plan is administered by the Board of Directors or an appointed committee (Administrator). The exercise price for stock options or restricted stock awards shall not be less than the Fair Market Value (as defined) of the stock on the grant date subject to restrictions and conditions, including the Company's option to repurchase, as determined by the Administrator at the time of the grant. The term of each stock option shall be fixed, and not exceeding 10 years from the grant date of the stock option. In addition, stock options may be subject to specific vesting and acceleration provisions as determined by the Administrator at or after the grant date. On November 12, 1999, the Company issued 17,513 shares of common stock for an aggregate purchase price of $537,000 and 511 shares of Series B Preferred Stock for an aggregate purchase price of $574,000 to Eligible Participants under the Plan. No stock options have been granted under the Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information with respect to (i) the beneficial ownership of the Common stock of the Company by each person or entity who owns five percent or more thereof and (ii) the beneficial ownership of each class of equity securities of the Company by each director of the Company who is a shareholder, the Chief Executive Officer of the Company and the other executive officers named in the "Summary Compensation Table" above who are shareholders, and all directors and officers of the Company as a group. The table also sets forth certain information with respect to the ownership of the Senior Exchangeable 51 52 Preferred stock, Series A Preferred stock and Series B Preferred stock of the Company by BRS, the Foundation and Penhall. Unless otherwise specified, all shares are directly held. Except as otherwise noted below, the address of the following beneficial owners is 1801 Penhall Way, Anaheim, CA 92803
NUMBER AND PERCENT OF SHARES ------------------------------------- COMMON SENIOR EXCHANGEABLE SERIES A SERIES B NAME OF BENEFICIAL OWNER STOCK(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ------------------------ -------- ------------------- --------------- --------------- Bruckmann, Rosser, Sherrill & Co., L.P (2) ........................... 582,312/59.22% -- 9,717/93.18% 9,333/41.36% Two Greenwich Plaza Suite 100 Greenwich, CT 06830 The National Christian Charitable Foundation Inc. ........................ -- 10,000/100.0% -- -- Penhall Rental Corp. (Penhall) ........... -- -- -- 4,000/17.73% John T. Sawyer ........................... 110,113/11.20% -- -- 2,465/10.92% C. George Bush ........................... 41,168/4.19% -- -- 896.21/3.97% Bruce F. Varney .......................... 36,554/3.72% -- -- 754/3.34% Bruce C. Bruckmann (3) ................... 624,915/63.55% -- 10,428/100.0% 10,016/44.38% Harold O. Rosser II (3) .................. 624,915/63.55% -- 10,428/100.0% 10,016/44.38% All directors and officers as a group (9 persons) .............................. 838,559/85.28% -- 10,428/100.0% 14,827/65.70%
---------- (1) The Company expects to grant options to acquire Common stock to certain employees to be designated. The shares of Common stock issuable upon the exercise of such options would equal, in the aggregate, up to an additional 5.0% of the Common stock on a fully-diluted basis. The table does not include any such shares. (2) 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) 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. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NOTE PAYABLE TO ROGER STULL In December 1995, Penhall purchased from Roger Stull (former majority owner) certain facilities previously leased to Penhall for $2.2 million, consisting of $700,000 in cash and a $1.5 million promissory note bearing interest at the prime rate plus 0.25%. The promissory note was secured by a deed of trust and was paid in equal quarterly installments of $375,000, the last of which was made on October 1, 1997. CERTAIN FEES PAYABLE TO BRS; BRS MANAGEMENT AGREEMENT Upon consummation of the Transactions, the Company paid the Sponsor a closing fee of $2.0 million (the "Closing Fee"). In addition, the Company entered into a management services agreement (the "Management Agreement") with the Sponsor pursuant to which the Sponsor will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The Closing Fee and the fees payable pursuant to the Management Agreement were negotiated on an arm's-length basis by representatives of the Sponsor and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company. 52 53 SPLIT DOLLAR INSURANCE POLICIES In addition to group term life insurance (prior to the Transaction), Penhall maintained and paid the premiums on five split-dollar whole life insurance policies on the lives of Mr. Roger C. Stull and his wife, Ann R. Stull. Mr. Stull is the beneficiary under three of the policies and Mrs. Stull is the beneficiary under two of the policies. The split-dollar insurance provides death benefits equal to, in the aggregate, $1,762,216 for Mr. Stull and $1,530,789 for Mrs. Stull. Since July 1, 1997, Penhall has paid premiums on the policies in the aggregate amount of $20,173, net of premiums, which were paid by borrowing against the policies. As of July 13, 1998, Penhall had borrowed a total of $1,432,236 against the policies and the aggregate net cash surrender value of the policies as of such date was $301,269. Upon consummation of the Transactions, (i) Penhall and the Stulls terminated their split-dollar insurance arrangement, (ii) Penhall relinquished any and all claims against the Stulls for reimbursement of premiums paid by Penhall on the policies, (iii) the Stulls relinquished any and all claims against Penhall arising out of borrowings by Penhall against the policies, and (iv) the Stulls obtained ownership of the policies free and clear of any claims by Penhall. TAX GROSS UP PAYMENTS Pursuant to the terms of a certain Compensation, Tax Consistency and Indemnification Agreement executed on June 30, 1998, by and among Penhall and certain members of Management (the "Compensation Agreement"), Penhall was obligated to make approximately $3.0 million of tax gross-up payments on or before September 15, 1998. John T. Sawyer, Vice President of Penhall and President of PenCo, C. George Bush, Vice President of Penhall, M. Bruce Repchinuck, Vice President of Penhall and Bruce F. Varney, Vice President of Penhall, received approximately $1,007,511, $444,184, $322,443 and $312,411, respectively, pursuant to the Compensation Agreement. On September 15, 1998, Penhall made such payments out of working capital. Penhall realized tax benefits of approximately $3.0 million in the form of reduced tax payment obligations or refunds of tax overpayments as a result of deductions for certain of such tax gross-up payments and deductions with respect to employee stock options in fiscal years 1998 and 1999. INDEBTEDNESS OF MANAGEMENT On or about April 15, 1998, Penhall advanced approximately $205,862 to John T. Sawyer, President of Penhall, to pay income taxes resulting from compensation income recognized by Mr. Sawyer in calendar year 1997. Pursuant to the Compensation Agreement, the amount advanced to Mr. Sawyer was offset against certain supplemental cash compensation payments that Penhall made to Mr. Sawyer on September 15, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) LIST OF FINANCIAL STATEMENTS. The following Consolidated Financial Statements of the Company and the Report of Independent Auditors set forth on pages 17 through 48 are incorporated by reference into this item 14 of Form 10-K by item 8 hereof: - Independent Auditors' Report - Consolidated Balance Sheets as of June 30, 2000 and 2001. - Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001. - Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1999, 2000 and 2001. - Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001. - Notes to Consolidated Financial Statements. 53 54 (a)(2) FINANCIAL STATEMENT SCHEDULE. No financial statement schedules have been filed herewith since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes. (a)(3) EXHIBITS.
EXHIBIT 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.)* 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 23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)* 24 Power of Attorney*
54 55
EXHIBIT NO. DESCRIPTION ----------- ----------- 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* 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
---------- * Previously filed. (b) REPORTS ON FORM 8-K None 55 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENHALL INTERNATIONAL CORP. By: /s/ JOHN T. SAWYER ------------------------------------- John T. Sawyer Chairman of the Board, President and Chief Executive Officer September 27, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 27, 2001.
SIGNATURE TITLE --------- ----- /s/ JOHN T. SAWYER Chairman of the Board, President and Chief --------------------------------------------- Executive Officer (Principal Executive Officer) John T. Sawyer /s/ JEFFREY E. PLATT Vice President-Finance and Chief Financial --------------------------------------------- Officer (Principal Accounting Officer) Jeffrey E. Platt
56 57 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The registrant has not sent the following to security holders: (i) any annual report to security holders covering the registrant's last fiscal year; or (ii) any proxy statements, forms of proxy or other proxy soliciting material wither respect to any annual or other meeting of security holders. EXHIBIT INDEX
EXHIBIT 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.)* 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*
57 58
EXHIBIT NO. DESCRIPTION ----------- ----------- 21 Subsidiaries of the Company 23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5)* 24 Power of Attorney (included on signature page)* 25 Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1* 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
---------- * Previously filed. 58 EX-21 3 a75703ex21.txt EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES NAME JURISDICTION ---- ------------ Penhall Rental Corp. Arizona Penhall Company California