SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number. 333-64745
PENHALL INTERNATIONAL CORP.
(Exact Name of registrant as specified in its charter)
| ARIZONA (State or other jurisdiction of incorporation or organization) | 86-0634394 (I.R.S. Employer Identification Number) |
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| CLASS AND TITLE OF CAPITAL STOCK | SHARES OUTSTANDING AS OF May 14, 2003 | |||
| Common Stock, $.01 Par Value | 986,552 |
PENHALL INTERNATIONAL CORP.
INDEX
| Page No. | |||||||
Part I — Financial Information |
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Item 1. Financial Statements |
|||||||
Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2003 |
3 | ||||||
Condensed Consolidated Statements of Operations for the three and nine month periods ended March 31, 2002 and 2003 |
5 | ||||||
Condensed Consolidated Statements of Cash Flows for the nine month periods ended March 31, 2002 and 2003 |
6 | ||||||
Notes to Condensed Consolidated Financial Statements |
7 | ||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 | ||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
23 | ||||||
Item 4. Controls and Procedures |
23 | ||||||
Part II — Other Information |
|||||||
Items 1-5 are not applicable |
23 | ||||||
Item 6. Exhibits and Reports on Form 8-K |
23 | ||||||
a) Reports on Form 8-K |
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None |
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2
Part I. Financial Information
Item 1. Financial Statements
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | March 31, | |||||||||||
| 2002 | 2003 | |||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 6,205,000 | $ | 4,027,000 | ||||||||
Receivables: |
||||||||||||
Contract and trade receivables |
31,361,000 | 25,211,000 | ||||||||||
Contract retentions due upon completion and acceptance of work |
4,756,000 | 4,154,000 | ||||||||||
Income taxes |
1,990,000 | 2,600,000 | ||||||||||
| 38,107,000 | 31,965,000 | |||||||||||
Less allowance for doubtful receivables |
1,421,000 | 1,436,000 | ||||||||||
Net receivables |
36,686,000 | 30,529,000 | ||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
2,514,000 | 1,641,000 | ||||||||||
Deferred tax assets |
3,133,000 | 3,133,000 | ||||||||||
Inventories |
1,895,000 | 2,459,000 | ||||||||||
Prepaid expenses and other current assets |
2,375,000 | 2,137,000 | ||||||||||
Total current assets |
52,808,000 | 43,926,000 | ||||||||||
Property, plant and equipment, at cost: |
||||||||||||
Land |
5,004,000 | 5,004,000 | ||||||||||
Buildings and leasehold improvements |
8,822,000 | 8,756,000 | ||||||||||
Construction and other equipment |
121,890,000 | 120,841,000 | ||||||||||
| 135,716,000 | 134,601,000 | |||||||||||
Less accumulated depreciation and amortization |
69,449,000 | 77,767,000 | ||||||||||
Net property, plant and equipment |
66,267,000 | 56,834,000 | ||||||||||
Goodwill, net of accumulated amortization |
9,053,000 | 9,053,000 | ||||||||||
Debt issuance costs, net of accumulated amortization |
3,177,000 | 2,605,000 | ||||||||||
Other assets, net |
1,610,000 | 1,341,000 | ||||||||||
| $ | 132,915,000 | $ | 113,759,000 | |||||||||
See accompanying notes to condensed consolidated financial statements
3
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | March 31, | |||||||||||
| 2002 | 2003 | |||||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||||||
Current liabilities: |
||||||||||||
Current installments of long-term debt |
$ | 9,217,000 | $ | 8,800,000 | ||||||||
Trade accounts payable |
9,726,000 | 3,889,000 | ||||||||||
Accrued liabilities |
17,783,000 | 13,643,000 | ||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
680,000 | 1,252,000 | ||||||||||
Total current liabilities |
37,406,000 | 27,584,000 | ||||||||||
Long-term debt, excluding current installments |
19,753,000 | 14,186,000 | ||||||||||
Senior notes |
100,000,000 | 100,000,000 | ||||||||||
Deferred tax liabilities |
9,339,000 | 9,339,000 | ||||||||||
Senior Exchangeable Preferred Stock, redemption value $15,075,000 and $16,311,000 at June 30, 2002 and March 31,
2003, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2002 and March 31, 2003 |
15,075,000 | 16,311,000 | ||||||||||
Series A Preferred Stock, redemption value $17,332,000 and $19,107,000 at June 30, 2002 and March 31, 2003,
respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2002 and March 31, 2003 |
17,332,000 | 19,107,000 | ||||||||||
Stockholders’ deficit: |
||||||||||||
Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,791 shares
at June 30, 2002 and 18,798 shares at March 31, 2003 |
31,200,000 | 34,412,000 | ||||||||||
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,127 at June 30, 2002 and
1,021,870 shares at March 31, 2003 |
10,000 | 10,000 | ||||||||||
Additional paid-in capital |
2,044,000 | 2,082,000 | ||||||||||
Treasury stock, at cost, 34,796 common shares at June 30, 2002 and 35,318 common shares at March 31, 2003 |
(317,000 | ) | (336,000 | ) | ||||||||
Accumulated deficit |
(98,927,000 | ) | (108,936,000 | ) | ||||||||
Total stockholders’ deficit |
(65,990,000 | ) | (72,768,000 | ) | ||||||||
Commitments and contingencies |
||||||||||||
| $ | 132,915,000 | $ | 113,759,000 | |||||||||
See accompanying notes to condensed consolidated financial statements
4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| THREE MONTH PERIODS | NINE MONTH PERIODS | ||||||||||||||||
| ENDED MARCH 31, | ENDED MARCH 31, | ||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||||||
Revenues |
$ | 30,010,000 | $ | 29,850,000 | $ | 116,841,000 | $ | 118,470,000 | |||||||||
Cost of revenues |
23,965,000 | 25,416,000 | 86,286,000 | 94,306,000 | |||||||||||||
Gross profit |
6,045,000 | 4,434,000 | 30,555,000 | 24,164,000 | |||||||||||||
General and administrative expenses |
6,606,000 | 6,617,000 | 21,555,000 | 20,627,000 | |||||||||||||
Other operating income |
423,000 | 199,000 | 979,000 | 1,088,000 | |||||||||||||
Earnings (loss) before interest expense and income taxes |
(138,000 | ) | (1,984,000 | ) | 9,979,000 | 4,625,000 | |||||||||||
Interest expense |
3,440,000 | 3,429,000 | 10,747,000 | 10,574,000 | |||||||||||||
Loss before income taxes |
(3,578,000 | ) | (5,413,000 | ) | (768,000 | ) | (5,949,000 | ) | |||||||||
Income tax benefit |
(1,465,000 | ) | (1,949,000 | ) | (315,000 | ) | (2,142,000 | ) | |||||||||
Net loss |
(2,113,000 | ) | (3,464,000 | ) | (453,000 | ) | (3,807,000 | ) | |||||||||
Accretion of preferred stock to redemption value |
(905,000 | ) | (1,023,000 | ) | (2,674,000 | ) | (3,011,000 | ) | |||||||||
Accrual of cumulative dividends on preferred stock |
(953,000 | ) | (1,084,000 | ) | (2,803,000 | ) | (3,191,000 | ) | |||||||||
Net loss available to common stockholders |
$ | (3,971,000 | ) | $ | (5,571,000 | ) | $ | (5,930,000 | ) | $ | (10,009,000 | ) | |||||
Loss per share basic and diluted |
$ | (4.02 | ) | $ | (5.65 | ) | $ | (6.02 | ) | $ | (10.15 | ) | |||||
Weighted average number of shares outstanding basic and diluted |
986,657 | 986,552 | 984,998 | 986,358 | |||||||||||||
See accompanying notes to condensed consolidated financial statements
5
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| NINE MONTH PERIODS | ||||||||||||
| ENDED MARCH 31, | ||||||||||||
| 2002 | 2003 | |||||||||||
Cash flows provided by operating activities: |
||||||||||||
Net loss |
$ | (453,000 | ) | $ | (3,807,000 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
12,752,000 | 12,633,000 | ||||||||||
Amortization of debt issuance costs |
664,000 | 705,000 | ||||||||||
Provision for doubtful accounts |
(5,000 | ) | 440,000 | |||||||||
Gain on sale of assets |
(129,000 | ) | (224,000 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Receivables |
6,873,000 | 5,717,000 | ||||||||||
Inventories, prepaid expenses and other assets |
(123,000 | ) | (326,000 | ) | ||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
(13,000 | ) | 873,000 | |||||||||
Trade accounts payable and accrued liabilities |
(5,477,000 | ) | (7,097,000 | ) | ||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
(1,106,000 | ) | 572,000 | |||||||||
Net cash provided by operating activities |
12,983,000 | 9,486,000 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sale of assets |
320,000 | 507,000 | ||||||||||
Capital expenditures |
(7,235,000 | ) | (3,214,000 | ) | ||||||||
Acquisition of assets |
(3,507,000 | ) | — | |||||||||
Net cash used in investing activities |
(10,422,000 | ) | (2,707,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Borrowings under long-term debt |
62,641,000 | 58,774,000 | ||||||||||
Repayments of long-term debt |
(62,480,000 | ) | (64,758,000 | ) | ||||||||
Debt issuance costs |
— | (133,000 | ) | |||||||||
Book overdraft |
(966,000 | ) | (2,880,000 | ) | ||||||||
Proceeds from issuance of common stock |
213,000 | 38,000 | ||||||||||
Repurchase of common stock and Series B preferred stock |
(40,000 | ) | (35,000 | ) | ||||||||
Issuance of Series B preferred stock |
158,000 | 37,000 | ||||||||||
Net cash used in financing activities |
(474,000 | ) | (8,957,000 | ) | ||||||||
Net change in cash and cash equivalents |
2,087,000 | (2,178,000 | ) | |||||||||
Cash and cash equivalents at beginning of period |
1,030,000 | 6,205,000 | ||||||||||
Cash and cash equivalents at end of period |
$ | 3,117,000 | $ | 4,027,000 | ||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Income taxes |
$ | 791,000 | $ | — | ||||||||
Interest |
$ | 13,084,000 | $ | 12,890,000 | ||||||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||||||
Accrued liabilities related to the acquisition of assets |
$ | 3,400,000 | $ | — | ||||||||
Borrowings related to the acquisition of assets |
$ | 3,265,000 | $ | — | ||||||||
Borrowings related to capital leases and equipment financing agreements |
$ | 300,000 | $ | — | ||||||||
Accretion of preferred stock to redemption value |
$ | 2,674,000 | $ | 3,011,000 | ||||||||
Accrual of cumulative dividends on preferred stock |
$ | 2,803,000 | $ | 3,191,000 | ||||||||
See accompanying notes to condensed consolidated financial statements
6
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
(1) Basis Of Presentation
Penhall International, Inc. (“PII”) was founded in 1957 and was incorporated in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to effect the recapitalization of PII. As part of the recapitalization, a series of mergers (the Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor of the Senior Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall International Corp., and PII changed its name to Penhall Rental Corp. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.
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 the Third-Party did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.
The accompanying unaudited condensed consolidated financial statements of Penhall International Corp. (“Penhall” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Results of operations for the nine month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending June 30, 2003. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended June 30, 2002.
Loss Per Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential dilutive securities. The dilutive effect of outstanding options is reflected in diluted loss per share by application of the treasury stock method. For the three and nine month periods ended March 31, 2002 diluted loss per share is the same as basic loss per share as options to purchase 9,305 shares of common stock were not included in the computation of diluted loss per share for the three and nine month periods ended March 31, 2002 as the effect would have been anti-dilutive. During the three and nine month periods ended March 31, 2003, diluted loss per share is the same as basic loss per share as options to purchase 9,135 shares of common stock were not included in the computation of diluted loss per share for the three and nine month periods ended March 31, 2003 as the effect would have been anti-dilutive.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affects its more significant judgments and estimates used in the preparation of its consolidated financial statements:
7
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
Revenue Recognition on Long-Term Construction Contracts
Revenue 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.
Valuation of Long-Lived Assets and Goodwill
We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include:
| • | Significant underperformance relative to expected historical or projected future operating results; | ||
| • | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; | ||
| • | Significant negative industry or economic trends; | ||
| • | Unanticipated competition; and | ||
| • | EBITDA relative to net book value |
Stock Compensation
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. The Company accounts for the Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”.
The following table illustrates the effect on net loss available to common stockholders and basic and diluted loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2002 | 2003 | |||||||
Net loss available to common stockholders as reported |
$ | (5,930,000 | ) | $ | (10,009,000 | ) | ||
Add: |
||||||||
Stock-based compensation expense included in reported
net income available to common stockholders, net of
related tax effects |
$ | — | $ | — | ||||
Deduct: |
||||||||
Total stock-based compensation expense determined under
the fair value method for all awards, net of tax effects |
$ | (9,000 | ) | $ | (16,000 | ) | ||
Proforma net loss available to common stockholders |
$ | (5,939,000 | ) | $ | (10,025,000 | ) | ||
Basic and diluted loss per share as reported |
$ | (6.02 | ) | $ | (10.15 | ) | ||
Proforma basic and diluted loss per share |
$ | (6.03 | ) | $ | (10.16 | ) | ||
The weighted average fair values of options granted as of March 31, 2002 and 2003 were $21.02 and $19.23 per share, respectively, using the Black-Scholes option-pricing model with the following assumptions as of the grant date: risk-free interest rate 4.7%, volatility 0.0%, dividend rate 0.0% and an expected life of 10 years. Outstanding options at March 31, 2002 and 2003 were 9,305 and 9,135 respectively.
8
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets.” SFAS requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. The Company has adopted these accounting standards effective July 1, 2002. As of December 31, 2002, we had completed the transitional impairment analysis under SFAS No. 142, no indicated impairment of goodwill was identified. There were no adjustments to identifiable intangible assets’ useful lives or recorded balances as a result of the adoption of SFAS No. 142. We will perform an annual impairment analysis of goodwill as required by SFAS No. 142. The following is a reconciliation of net loss and loss per share between the amounts reported for the three and nine month periods ended March 31, 2003 and 2002 and the adjusted amounts reflecting these new accounting rules:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2002 | 2003 | 2002 | 2003 | |||||||||||||
Net loss: |
||||||||||||||||
Reported loss available to common stockholders |
$ | (3,971,000 | ) | $ | (5,571,000 | ) | $ | (5,930,000 | ) | $ | (10,009,000 | ) | ||||
Add back: Goodwill amortization (net of income taxes) |
90,000 | — | 331,000 | — | ||||||||||||
Adjusted net loss |
$ | (3,881,000 | ) | $ | (5,571,000 | ) | $ | (5,599,000 | ) | $ | (10,009,000 | ) | ||||
Basic and diluted loss per share: |
||||||||||||||||
Reported basic loss per share |
$ | (4.02 | ) | $ | (5.65 | ) | $ | (6.02 | ) | $ | (10.15 | ) | ||||
Add back: Goodwill amortization (net of income taxes) |
0.09 | — | 0.34 | — | ||||||||||||
Adjusted basic and diluted loss per share |
$ | (3.93 | ) | $ | (5.65 | ) | $ | (5.68 | ) | $ | (10.15 | ) | ||||
On August 16, 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. The statement requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company has adopted this statement effective July 1, 2002. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position or results from operations.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” which supercedes SFAS No. 121 and certain sections of APB Opinion No. 30. SFAS No. 144 classifies long-lived assets as either (1) to be held and used, (2) to be disposed of by other than sale, or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. The Company adopted this statement beginning July 1, 2002. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
In April 2002, the Financial Accounting Standards Board, (“FASB”), issued Statement of Financial Accounting Standards No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which among other things provides guidance in reporting gains and losses from extinguishments of debt and accounting for leases. The Company will adopt this statement in fiscal year 2004 and is currently reviewing this statement to determine its impact. However, the Company does not expect the adoption of this standard to have a material impact on its financial position or its results of operations.
On July 30, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. Adoption of SFAS 146 has not had a material impact on our financial position or results from operations.
9
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company did not have any guarantees at March 31, 2003 and will apply the provisions of FIN No. 45 prospectively to guarantees made after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. The Company has complied with the disclosure requirements under SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies when variable interest entities are consolidated by business enterprises where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or, where equity investors lack certain characteristics of a controlling financial interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not have any investments in any variable interest entities at March 31, 2003 and will apply the provisions of FIN No. 46 prospectively to investments in variable interest entities made after February 1, 2003.
10
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
(2) Commitments and Contingencies
Litigation
There are various lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management’s present opinion, based in part upon the advise of legal counsel, that the outcome of these proceedings will not have a material effect on the Company’s consolidated financial statements taken as a whole.
(3) Long Term Debt
Under a Credit Agreement with its lenders, the Company is required to be in compliance with certain covenants and ratios. As of March 31, 2003, the Company was in violation and subsequently received a waiver for each of the following covenants/ratios : (1) Interest Coverage Ratio, (2) Leverage Ratio, and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the Credit Agreement). The waiver requires the Company’s aggregate debt under the Credit Facility not to exceed $30,173,000 and expires May 30, 2003. The Company is in the process of and anticipates refinancing the Credit Facility prior to May 30, 2003. In the event that the Credit Facility is not refinanced by May 30, 2003, the Company is required to pay an amount equal to 0.25% of the sum of the outstanding principal amount of its respective Term Loans and its Revolving Commitment.
(4) Condensed Consolidating Financial Information
The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries, (Penhall Rental Corp. and Penhall Company). Effective July 1, 2002, Penhall Rental was merged into Penhall International Corp. Accordingly, consolidating financial information as of and for the three and nine months ended March 31, 2003 does not include Penhall Rental Corp. 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, 2002 and March 31, 2003 and for the three and nine month periods ended March 31, 2002 and 2003 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. (through dissolution effective July 1, 2002) 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. |
11
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
| JUNE 30, 2002 | |||||||||||||||||||||||
| Penhall | Penhall | Penhall | |||||||||||||||||||||
| International Corp. | Rental Corp. | Company | Eliminations | Consolidated | |||||||||||||||||||
Assets |
|||||||||||||||||||||||
Current assets: |
|||||||||||||||||||||||
Receivables, net |
$ | 1,990,000 | $ | — | $ | 34,696,000 | $ | — | $ | 36,686,000 | |||||||||||||
Inventories |
— | — | 1,895,000 | — | 1,895,000 | ||||||||||||||||||
Costs and estimated earnings in excess of billings on
uncompleted contracts |
— | — | 2,514,000 | — | 2,514,000 | ||||||||||||||||||
Intercompany assets |
28,303,000 | — | — | (28,303,000 | ) | — | |||||||||||||||||
Other current assets |
242,000 | 6,143,000 | 5,328,000 | — | 11,713,000 | ||||||||||||||||||
Total current assets |
30,535,000 | 6,143,000 | 44,433,000 | (28,303,000 | ) | 52,808,000 | |||||||||||||||||
Net property, plant and equipment |
— | 9,078,000 | 57,189,000 | — | 66,267,000 | ||||||||||||||||||
Other assets, net |
3,177,000 | — | 10,663,000 | — | 13,840,000 | ||||||||||||||||||
Investment in parent |
— | 4,001,000 | — | (4,001,000 | ) | — | |||||||||||||||||
Investment in subsidiaries |
63,239,000 | — | — | (63,239,000 | ) | — | |||||||||||||||||
| $ | 96,951,000 | $ | 19,222,000 | $ | 112,285,000 | $ | (95,543,000 | ) | $ | 132,915,000 | |||||||||||||
Liabilities and Stockholders’ Equity (Deficit): |
|||||||||||||||||||||||
Current installments of long-term debt |
$ | 6,061,000 | $ | 3,000 | $ | 3,153,000 | $ | — | $ | 9,217,000 | |||||||||||||
Trade accounts payable |
4,000 | — | 9,722,000 | — | 9,726,000 | ||||||||||||||||||
Accrued liabilities |
5,178,000 | 2,000 | 12,603,000 | — | 17,783,000 | ||||||||||||||||||
Billings in excess of costs and estimated earnings on
uncompleted contracts |
— | — | 680,000 | — | 680,000 | ||||||||||||||||||
Intercompany liabilities |
— | 26,245,000 | 2,058,000 | (28,303,000 | ) | — | |||||||||||||||||
Total current liabilities |
11,243,000 | 26,250,000 | 28,216,000 | (28,303,000 | ) | 37,406,000 | |||||||||||||||||
Long-term debt, excluding current installments |
15,290,000 | 183,000 | 4,280,000 | — | 19,753,000 | ||||||||||||||||||
Senior notes |
100,000,000 | — | — | — | 100,000,000 | ||||||||||||||||||
Deferred tax liabilities |
— | (157,000 | ) | 9,496,000 | — | 9,339,000 | |||||||||||||||||
Senior Exchangeable Preferred stock |
15,075,000 | — | — | — | 15,075,000 | ||||||||||||||||||
Series A Preferred stock |
17,332,000 | — | — | — | 17,332,000 | ||||||||||||||||||
Stockholders’ equity (deficit) |
(61,989,000 | ) | (7,054,000 | ) | 70,293,000 | (67,240,000 | ) | (65,990,000 | ) | ||||||||||||||
| $ | 96,951,000 | $ | 19,222,000 | $ | 112,285,000 | $ | (95,543,000 | ) | $ | 132,915,000 | |||||||||||||
12
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
| Penhall | |||||||||||||||||||
| International | Penhall | ||||||||||||||||||
| Corp. | Company | Eliminations | Consolidated | ||||||||||||||||
Assets |
|||||||||||||||||||
Current assets: |
|||||||||||||||||||
Receivables, net |
$ | 2,596,000 | $ | 27,933,000 | $ | — | $ | 30,529,000 | |||||||||||
Inventories |
— | 2,459,000 | — | 2,459,000 | |||||||||||||||
Costs and estimated earnings in excess of
billings on uncompleted
contracts |
— | 1,641,000 | — | 1,641,000 | |||||||||||||||
Intercompany assets |
— | 4,303,000 | (4,303,000 | ) | — | ||||||||||||||
Other current assets |
4,318,000 | 4,979,000 | — | 9,297,000 | |||||||||||||||
Total current assets |
6,914,000 | 41,315,000 | (4,303,000 | ) | 43,926,000 | ||||||||||||||
Net property, plant and equipment |
8,865,000 | 47,969,000 | — | 56,834,000 | |||||||||||||||
Other assets, net |
2,578,000 | 10,421,000 | — | 12,999,000 | |||||||||||||||
Investment in subsidiary |
68,162,000 | — | (68,162,000 | ) | — | ||||||||||||||
| $ | 86,519,000 | $ | 99,705,000 | $ | (72,465,000 | ) | $ | 113,759,000 | |||||||||||
Liabilities and Stockholders’ Equity (Deficit) |
|||||||||||||||||||
Current installments of long-term debt |
$ | 6,004,000 | $ | 2,796,000 | $ | — | $ | 8,800,000 | |||||||||||
Trade accounts payable |
4,000 | 3,885,000 | — | 3,889,000 | |||||||||||||||
Accrued liabilities |
2,145,000 | 11,498,000 | — | 13,643,000 | |||||||||||||||
Billings in excess of costs and estimated earnings on uncompleted
contracts |
— | 1,252,000 | — | 1,252,000 | |||||||||||||||
Intercompany liabilities |
4,303,000 | — | (4,303,000 | ) | — | ||||||||||||||
Total current liabilities |
12,456,000 | 19,431,000 | (4,303,000 | ) | 27,584,000 | ||||||||||||||
Long-term debt, excluding current installments |
11,570,000 | 2,616,000 | — | 14,186,000 | |||||||||||||||
Senior notes |
100,000,000 | — | — | 100,000,000 | |||||||||||||||
Deferred tax liabilities |
(157,000 | ) | 9,496,000 | — | 9,339,000 | ||||||||||||||
Senior Exchangeable Preferred stock |
16,311,000 | — | — | 16,311,000 | |||||||||||||||
Series A Preferred stock |
19,107,000 | — | — | 19,107,000 | |||||||||||||||
Stockholders’ equity (deficit) |
(72,768,000 | ) | 68,162,000 | (68,162,000 | ) | (72,768,000 | ) | ||||||||||||
| $ | 86,519,000 | $ | 99,705,000 | $ | (72,465,000 | ) | $ | 113,759,000 | |||||||||||
13
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| THREE MONTH PERIOD ENDED MARCH 31, 2002 | |||||||||||||||||||||
| Penhall | Penhall | ||||||||||||||||||||
| International | Rental | Penhall | |||||||||||||||||||
| Corp. | Corp. | Company | Eliminations | Consolidated | |||||||||||||||||
Revenues |
$ | — | $ | 2,163,000 | $ | 31,433,000 | $ | (3,586,000 | ) | $ | 30,010,000 | ||||||||||
Cost of revenues |
— | — | 24,062,000 | (97,000 | ) | 23,965,000 | |||||||||||||||
Gross profit |
— | 2,163,000 | 7,371,000 | (3,489,000 | ) | 6,045,000 | |||||||||||||||
General and administrative expenses |
97,000 | 77,000 | 8,042,000 | (1,610,000 | ) | 6,606,000 | |||||||||||||||
Royalties |
— | — | 1,880,000 | (1,880,000 | ) | — | |||||||||||||||
Other operating income, net |
1,000 | — | 422,000 | — | 423,000 | ||||||||||||||||
Equity in loss of subsidiaries |
(47,000 | ) | — | — | 47,000 | — | |||||||||||||||
Earnings (loss) before interest expense and income taxes |
(143,000 | ) | 2,086,000 | (2,129,000 | ) | 48,000 | (138,000 | ) | |||||||||||||
Interest expense |
3,403,000 | 4,000 | 33,000 | — | 3,440,000 | ||||||||||||||||
Earnings (loss) before income taxes |
(3,546,000 | ) | 2,082,000 | (2,162,000 | ) | 48,000 | (3,578,000 | ) | |||||||||||||
Income tax expense (benefit) |
(1,433,000 | ) | 854,000 | (886,000 | ) | — | (1,465,000 | ) | |||||||||||||
Net earnings (loss) |
$ | (2,113,000 | ) | $ | 1,228,000 | $ | (1,276,000 | ) | $ | 48,000 | $ | (2,113,000 | ) | ||||||||
14
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| THREE MONTH PERIOD ENDED MARCH 31, 2003 | ||||||||||||||||||
| Penhall | ||||||||||||||||||
| International | Penhall | |||||||||||||||||
| Corp. | Company | Eliminations | Consolidated | |||||||||||||||
Revenues |
$ | 2,187,000 | $ | 29,850,000 | $ | (2,187,000 | ) | $ | 29,850,000 | |||||||||
Cost of revenues |
— | 25,416,000 | — | 25,416,000 | ||||||||||||||
Gross profit |
2,187,000 | 4,434,000 | (2,187,000 | ) | 4,434,000 | |||||||||||||
General and administrative expenses |
183,000 | 6,830,000 | (396,000 | ) | 6,617,000 | |||||||||||||
Royalties |
— | 1,791,000 | (1,791,000 | ) | — | |||||||||||||
Other operating income, net |
12,000 | 187,000 | — | 199,000 | ||||||||||||||
Equity in loss of subsidiary |
(2,558,000 | ) | — | 2,558,000 | — | |||||||||||||
Loss before interest expense and income taxes |
(542,000 | ) | (4,000,000 | ) | 2,558,000 | (1,984,000 | ) | |||||||||||
Interest expense |
3,377,000 | 52,000 | — | 3,429,000 | ||||||||||||||
Loss before income taxes |
(3,919,000 | ) | (4,052,000 | ) | 2,558,000 | (5,413,000 | ) | |||||||||||
Income tax benefit |
(455,000 | ) | (1,494,000 | ) | — | (1,949,000 | ) | |||||||||||
Net loss |
$ | (3,464,000 | ) | $ | (2,558,000 | ) | $ | 2,558,000 | $ | (3,464,000 | ) | |||||||
15
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| NINE MONTH PERIOD ENDED MARCH 31, 2002 | |||||||||||||||||||||
| Penhall | Penhall | ||||||||||||||||||||
| International | Rental | Penhall | |||||||||||||||||||
| Corp. | Corp. | Company | Eliminations | Consolidated | |||||||||||||||||
Revenues |
$ | — | $ | 8,427,000 | $ | 121,578,000 | $ | (13,164,000 | ) | $ | 116,841,000 | ||||||||||
Cost of revenues |
— | — | 86,616,000 | (330,000 | ) | 86,286,000 | |||||||||||||||
Gross profit |
— | 8,427,000 | 34,962,000 | (12,834,000 | ) | 30,555,000 | |||||||||||||||
General and administrative expenses |
285,000 | 268,000 | 26,549,000 | (5,547,000 | ) | 21,555,000 | |||||||||||||||
Royalties |
— | — | 7,288,000 | (7,288,000 | ) | — | |||||||||||||||
Other operating income, net |
3,000 | — | 976,000 | — | 979,000 | ||||||||||||||||
Equity in earnings of subsidiaries |
5,987,000 | — | — | (5,987,000 | ) | — | |||||||||||||||
Earnings before interest expense and income taxes |
5,705,000 | 8,159,000 | 2,101,000 | (5,986,000 | ) | 9,979,000 | |||||||||||||||
Interest expense |
10,634,000 | 14,000 | 99,000 | — | 10,747,000 | ||||||||||||||||
Earnings (loss) before income taxes |
(4,929,000 | ) | 8,145,000 | 2,002,000 | (5,986,000 | ) | (768,000 | ) | |||||||||||||
Income tax expense (benefit) |
(4,476,000 | ) | 3,340,000 | 821,000 | — | (315,000 | ) | ||||||||||||||
Net earnings (loss) |
$ | (453,000 | ) | $ | 4,805,000 | $ | 1,181,000 | $ | (5,986,000 | ) | $ | (453,000 | ) | ||||||||
16
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| NINE MONTH PERIOD ENDED MARCH 31, 2003 | |||||||||||||||||
| Penhall | |||||||||||||||||
| International | Penhall | ||||||||||||||||
| Corp. | Company | Eliminations | Consolidated | ||||||||||||||
Revenues |
$ | 8,294,000 | $ | 118,470,000 | $ | (8,294,000 | ) | $ | 118,470,000 | ||||||||
Cost of revenues |
— | 94,306,000 | — | 94,306,000 | |||||||||||||
Gross profit |
8,294,000 | 24,164,000 | (8,294,000 | ) | 24,164,000 | ||||||||||||
General and administrative expenses |
567,000 | 21,246,000 | (1,186,000 | ) | 20,627,000 | ||||||||||||
Royalties |
— | 7,108,000 | (7,108,000 | ) | — | ||||||||||||
Other operating income, net |
13,000 | 1,075,000 | — | 1,088,000 | |||||||||||||
Equity in loss of subsidiary |
(2,131,000 | ) | — | 2,131,000 | — | ||||||||||||
Earnings (loss) before interest expense and income taxes |
5,609,000 | (3,115,000 | ) | 2,131,000 | 4,625,000 | ||||||||||||
Interest expense |
10,360,000 | 214,000 | — | 10,574,000 | |||||||||||||
Loss before income taxes |
(4,751,000 | ) | (3,329,000 | ) | 2,131,000 | (5,949,000 | ) | ||||||||||
Income tax benefit |
(944,000 | ) | (1,198,000 | ) | — | (2,142,000 | ) | ||||||||||
Net loss |
$ | (3,807,000 | ) | $ | (2,131,000 | ) | $ | 2,131,000 | $ | (3,807,000 | ) | ||||||
17
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
| NINE MONTH PERIOD ENDED MARCH 31, 2002 | ||||||||||||||||||||||
| Penhall | Penhall | |||||||||||||||||||||
| International | Rental | Penhall | ||||||||||||||||||||
| Corp. | Corp. | Company | Eliminations | Consolidated | ||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (3,955,000 | ) | $ | 4,953,000 | $ | 17,971,000 | $ | (5,986,000 | ) | $ | 12,983,000 | ||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||
Proceeds from sale of assets |
— | — | 320,000 | — | 320,000 | |||||||||||||||||
Capital expenditures |
— | 30,000 | (7,265,000 | ) | — | (7,235,000 | ) | |||||||||||||||
Acquisition of assets |
— | — | (3,507,000 | ) | — | (3,507,000 | ) | |||||||||||||||
Net cash provided by (used in) investing activities |
— | 30,000 | (10,452,000 | ) | — | (10,422,000 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||
Due to (from) affiliates |
5,505,000 | (3,140,000 | ) | (8,351,000 | ) | 5,986,000 | — | |||||||||||||||
Borrowings under long-term debt |
59,760,000 | — | 2,881,000 | — | 62,641,000 | |||||||||||||||||
Repayments of long-term debt |
(61,641,000 | ) | (9,000 | ) | (830,000 | ) | — | (62,480,000 | ) | |||||||||||||
Book overdraft |
— | — | (966,000 | ) | — | (966,000 | ) | |||||||||||||||
Proceeds from issuance of common stock |
213,000 | — | — | — | 213,000 | |||||||||||||||||
Repurchase of common stock and Series B preferred stock |
(40,000 | ) | — | — | — | (40,000 | ) | |||||||||||||||
Issuance of Series B preferred stock |
158,000 | — | — | — | 158,000 | |||||||||||||||||
Net cash provided by (used in) financing activities |
3,955,000 | (3,149,000 | ) | (7,266,000 | ) | 5,986,000 | (474,000 | ) | ||||||||||||||
Net change in cash and cash equivalents |
— | 1,834,000 | 253,000 | — | 2,087,000 | |||||||||||||||||
Cash and cash equivalents at beginning of period |
— | 921,000 | 109,000 | — | 1,030,000 | |||||||||||||||||
Cash and cash equivalents at end of period |
$ | — | $ | 2,755,000 | $ | 362,000 | $ | — | $ | 3,117,000 | ||||||||||||
18
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
| NINE MONTH PERIOD ENDED MARCH 31, 2003 | ||||||||||||||||||||||
| Penhall | Penhall | |||||||||||||||||||||
| International | Rental | Penhall | ||||||||||||||||||||
| Corp. | Corp. | Company | Eliminations | Consolidated | ||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (4,486,000 | ) | $ | — | $ | 13,972,000 | $ | — | $ | 9,486,000 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||
Proceeds from sale of assets |
— | — | 507,000 | — | 507,000 | |||||||||||||||||
Capital expenditures |
— | — | (3,214,000 | ) | — | (3,214,000 | ) | |||||||||||||||
Cash from Penhall Rental Corp. merger |
6,143,000 | (6,143,000 | ) | — | — | — | ||||||||||||||||
Net cash provided by (used in) investing activities |
6,143,000 | (6,143,000 | ) | (2,707,000 | ) | — | (2,707,000 | ) | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||
Due to (from) affiliates |
6,361,000 | — | (6,361,000 | ) | — | — | ||||||||||||||||
Borrowings under long-term debt |
57,710,000 | — | 1,064,000 | — | 58,774,000 | |||||||||||||||||
Repayments of long-term debt |
(61,673,000 | ) | — | (3,085,000 | ) | — | (64,758,000 | ) | ||||||||||||||
Debt issuance costs |
(104,000 | ) | — | (29,000 | ) | — | (133,000 | ) | ||||||||||||||
Book overdraft |
— | — | (2,880,000 | ) | — | (2,880,000 | ) | |||||||||||||||
Proceeds from issuance of common stock |
38,000 | — | — | — | 38,000 | |||||||||||||||||
Repurchase of common stock and Series B preferred stock |
(35,000 | ) | — | — | — | (35,000 | ) | |||||||||||||||
Issuance of Series B preferred stock |
37,000 | — | — | — | 37,000 | |||||||||||||||||
Net cash provided by (used in) financing activities |
2,334,000 | — | (11,291,000 | ) | — | (8,957,000 | ) | |||||||||||||||
Net change in cash and cash equivalents |
3,991,000 | (6,143,000 | ) | (26,000 | ) | — | (2,178,000 | ) | ||||||||||||||
Cash and cash equivalents at beginning of period |
— | 6,143,000 | 62,000 | — | 6,205,000 | |||||||||||||||||
Cash and cash equivalents at end of period |
$ | 3,991,000 | $ | — | $ | 36,000 | $ | — | $ | 4,027,000 | ||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the results of operations and financial
condition of Penhall International Corp. (Penhall) should be read in
conjunction with the unaudited condensed consolidated financial statements and
footnotes thereto included in this quarterly report on
Form 10-Q and the
Company’s audited consolidated financial statements and footnotes thereto
included in the annual report on Form 10-K, filed with the Securities and
Exchange Commission.
General
Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its operated equipment rental services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from thirty eight locations in seventeen states, with a presence in some of the fastest growing states in terms of construction spending and population growth.
The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1998, Penhall has effected eight strategic acquisitions, including:
| 1. | HSI, a Minnesota-based firm acquired in April 1998, | ||
| 2. | Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998, | ||
| 3. | Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998, | ||
| 4. | Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999, | ||
| 5. | Advance Concrete Sawing and Drilling, Inc., a Bakersfield, California-based company acquired in September 2000, | ||
| 6. | H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2001, | ||
| 7. | Bob Mack Company, a Visalia, California-based company acquired in March 2002, and | ||
| 8. | Arizona Curb Cut Company, an Arizona based company in April 2002. |
During the same period, Penhall established operations in seven new markets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno, Seattle and Cleveland.
Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are complemented by long-term fixed-price contracts. Penhall’s revenues are derived from highway-related projects, building-related projects, airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated:
| THREE MONTH PERIODS ENDED MARCH 31, | NINE MONTH PERIODS ENDED MARCH 31, | ||||||||||||||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||||||||
| % of | % of | % of | % of | ||||||||||||||||||||||||||||||
| $ | Total | $ | Total | $ | Total | $ | Total | ||||||||||||||||||||||||||
| (Dollars in Thousands) | (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
Operated Equipment Rental Services |
$ | 23,232 | 77.8 | % | $ | 23,743 | 79.1 | % | $ | 86,744 | 73.2 | % | $ | 87,422 | 74.8 | % | |||||||||||||||||
Contract Services (1) |
6,618 | 22.2 | % | 6,267 | 20.9 | % | 31,726 | 26.8 | % | 29,419 | 25.2 | % | |||||||||||||||||||||
Total Revenues |
$ | 29,850 | 100.0 | % | $ | 30,010 | 100.0 | % | $ | 118,470 | 100.0 | % | $ | 116,841 | 100.0 | % | |||||||||||||||||
| (1) | Contract services revenues exclude services performed by the operated equipment rental divisions on long-term contracts. |
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Revenue growth is influenced by infrastructure change, including new construction, modification and natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence Penhall’s operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters.
The principal components of Penhall’s operating costs include the cost of labor, equipment rental fleet maintenance costs including parts and service, equipment rental fleet depreciation, insurance and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, Penhall utilizes a range of periods over which it depreciates its equipment on a straight-line basis. On average, Penhall depreciates its equipment over an estimated useful life of six years with a 10% residual value.
Results of Operations
Nine Months Ended March 31, 2003 Compared to Nine months Ended March 31, 2002
Revenues. Revenues for the nine months ended March 31, 2003 (“Interim 2003”) were $118.5 million, an increase of $1.6 million or 1.4 % from the nine months ended March 31, 2002 (“Interim 2002”). Increased revenues in Interim 2003 were primarily a result of an increase of $2.3 million or 7.8% in Contract Services in Interim 2003, partially offset by a $0.7 or 0.8% decrease in Operated Equipment Rental Services.
Gross Profit. Gross profit totaled $24.2 million in Interim 2003, a decrease of $6.4 million or 20.9% from Interim 2002. Gross profit as a percentage of revenues decreased from 26.2% in Interim 2002 to 20.4% in Interim 2003. The decrease in gross profit from Interim 2002 to Interim 2003 is primarily attributable to increased competition, cost overruns on some contracts, and an increase of $2.8 million in insurance costs during Interim 2003. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs and a decrease in equipment utilization.
General and Administrative Expenses. General and administrative expenses were $20.6 million in Interim 2003 compared to $21.6 million in Interim 2002. As a percent of revenues, general and administrative expenses were 17.4% in Interim 2003 compared to 18.4% in Interim 2002. The decrease in general and administrative expenses as a percentage of revenues during Interim 2003 is primarily attributable to decreases of $1.1 million in incentive compensation, $0.4 million in payroll and related expenses and $0.5 million in goodwill amortization partially offset by a $0.6 million increase in insurance costs and a $0.4 million increase in bad debt expense.
Interest Expense. Interest expense was $10.6 million in Interim 2003 compared to interest expense of $10.7 million in Interim 2002. The decrease in interest expense is attributable to lower interest rates and decreased borrowing during Interim 2003.
Income Tax Benefit. The Company recorded an income tax benefit of $2.1 million, or 36% of loss before income taxes in Interim 2003, compared to an income tax benefit of $0.3 million, or 41% of loss before income taxes in Interim 2002. The increase in the income tax benefit is attributable to a higher loss before income tax in Interim 2003.
Three months Ended March 31, 2003 Compared to Three months Ended March 31, 2002
Revenues. Revenues for the three months ended March 31, 2003 (“Interim 2003”) were $29.9 million, a decrease of $0.2 million or 0.5% over the three months ended March 31, 2002 (“Interim 2002”). Contract revenues increased $0.4 million and Operated Equipment Rental Services decreased $0.5 million in Interim 2003 compared to Interim 2002.
Gross Profit. Gross profit totaled $4.4 million in Interim 2003, a decrease of $1.6 million or 26.7% from Interim 2002. Gross profit as a percentage of revenues decreased to 14.9% in Interim 2003 from 20.1% in Interim 2002. The decrease in gross profit is primarily attributable to increased insurance costs, which increased by $1.0 million during Interim 2003, a decrease in equipment utilization and losses on some Contract Services work. The decrease in gross profit as a percentage of revenues was due primarily to increased insurance costs, increased competition and a decrease in equipment utilization.
General and Administrative Expenses. General and administrative expenses were $6.6 million in both Interim 2002 and Interim 2003. As a percent of revenues, general and administrative expenses were 22.2% in Interim 2003 compared to 22.0% in Interim 2002. An increase in bad debt of $0.3 million and an increase in insurance costs of $0.1 million was offset by lower wages of $0.2 million and lower amortization costs of $0.2 million.
Interest Expense. Interest expense was $3.4 million in both Interim 2002 and Interim 2003.
Income Tax Benefit. The Company recorded an income tax benefit of $1.9 million, or 36.0% of loss before income taxes in Interim 2003 compared to an income tax benefit of $1.5 million, or 41.0% of loss before income taxes in Interim 2002. The increase in tax benefit is attributable to a higher loss before income tax in Interim 2003.
21
Liquidity and Capital Resources
It is anticipated that the Company’s principal uses of liquidity will be to fund working capital and meet debt service requirements. The Company’s principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility (originated in 1998). The New Credit Facility consists of two facilities: (i) a six-year senior secured term loan facility in an aggregate principal amount equal to $20.0 million (the “Term Loan Facility”); and (ii) a six-year revolving credit facility in an aggregate principal amount not to exceed $30.0 million (the “Revolving Credit Facility”). The Company drew $20.0 million of loans under the Term Loan Facility (“Term Loans”) on the closing date of the New Credit Facility in connection with the Recapitalization. The Term Loans amortize on a quarterly basis and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving Credit Facility (“Revolving Loans”) are due and payable in full on June 15, 2004. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any subsidiary of the Company that guarantees amounts under the New Credit Facility. Such loans are also required to be prepaid with 75% of the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company’s Leverage Ratio (as such term is defined in the New Credit Facility) is less than 5.25 to 1.0, 50% of such Excess Cash Flow.
| SUMMARY CASH FLOW DATA (000's) FOR THE NINE MONTHS ENDED MARCH 31, | 2002 | 2003 | ||||||
Cash and cash equivalents |
$ | 3,117 | $ | 4,027 | ||||
Net cash provided by (used in): |
||||||||
Operating activities |
12,983 | 9,486 | ||||||
Investing activities |
(10,422 | ) | (2,707 | ) | ||||
Financing activities |
(474 | ) | (8,957 | ) | ||||
Capital expenditures |
(7,235 | ) | (3,214 | ) | ||||
Cash provided by operating activities decreased to $9.5 million in Interim 2003 from $13.0 million in Interim 2002, a decrease of $3.5 million. Net loss increased $3.3 million from a $0.5 million loss in Interim 2002 to a $3.8 million loss in Interim 2003. In Interim 2003, the Company’s net loss and depreciation plus a decrease in receivables offset by a decrease in trade accounts payable and accrued liabilities resulted in $9.5 million in net cash provided by operating activities. In Interim 2002, the Company’s net earnings and depreciation plus a decrease in receivables offset by a reduction in accounts payable and accrued liabilities and a reduction in billings in excess of costs and estimated earnings on uncompleted contracts resulted in $13.0 million in net cash provided from operating activities.
Net cash used in investing activities decreased $7.7 million to $2.7 million in Interim 2003 from $10.4 million in Interim 2002. The reduction in net cash used in investing activities is attributable to a decrease in capital expenditures of $4.0 million and a decrease in the acquisition of assets of $3.5 million.
Management estimates that the Company’s annual capital expenditures will be approximately $5.0 million for fiscal 2003.
Net cash used in financing activities in Interim 2003 was a net use of $9.0 million as compared to a net use of $0.5 million in Interim 2002. In Interim 2003 and Interin 2002 the Company’s financing activities are primarily a result of borrowings and repayments of long-term debt and a book overdraft.
Historically, the Company has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the recapitalization in 1998, however, the Company has substantial indebtedness and debt service obligations. As of March 31, 2003, the Company and its subsidiaries had approximately $123.0 million of total indebtedness outstanding (including the Notes) plus outstanding letters of credit of $8.8 million and a stockholders’ deficit of approximately $72.8 million. As of March 31, 2003, approximately $11.3 million of additional borrowing was available under the Company’s New Credit Facility.
Under a Credit Agreement with its lenders, the Company is required to be in compliance with certain covenants and ratios. As of March 31, 2003, the Company was in violation and subsequently received a waiver for each of the following covenants/ratios: (1) Interest Coverage Ratio, (2) Leverage Ratio, and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the Credit Agreement). The waiver requires the Company’s aggregate debt under the Credit Facility not to exceed $30,173,000 and expires May 30, 2003. The Company is in the process of and anticipates refinancing the Credit Facility prior to May 30, 2003. In the event that the Credit Facility is not refinanced by May 30, 2003, the Company is required to pay an amount equal to 0.25% of the sum of the outstanding principal amount of its respective Term Loans and its Revolving Commitment.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The Company is exposed to interest rate changes primarily as a result of its notes payable, including Senior Notes, Term Loan and Revolving Loan used to maintain liquidity and fund capital expenditures and expansion of the Company’s operations. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower it’s overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the Term Loan and Revolving Loan. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The table below presents the principal amounts of debt, weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of March 31, 2003.
| Years Ended June 30, | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | Value | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Fixed rate debt |
$ | 68 | $ | 2,027 | $ | 174 | $ | 100,012 | $ | 5 | $ | 166 | $ | 102,452 | $ | 63,952 | (2) | |||||||||||||||
Average interest rate |
5.68 | % | 3.12 | % | 4.48 | % | 12.00 | % | 10.00 | % | 10.00 | % | 11.80 | % | 11.69 | % | ||||||||||||||||
Variable rate LIBOR debt (1) |
$ | 1,684 | $ | 16,646 | $ | 791 | $ | 1,248 | $ | 165 | $ | 0 | $ | 20,534 | $ | 20,534 | ||||||||||||||||
Weighted average current interest rate (1) |
4.36 | % | ||||||||||||||||||||||||||||||
| (1) | The Company has different interest rate options for its variable rate debt. | |
| (2) | The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities. |
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In March 2003, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding the Company that is required to be included in our periodic reports to the SEC. In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our March 2003 evaluation. We cannot assure you, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.
Part II — Other Information
Items 1-5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 14, 2003 | Penhall International Corp. /s/ John T. Sawyer | |
|
|
||
|
John T. Sawyer Chairman of the Board, President and Chief Executive Officer |
||
| /s/ Jeffrey E. Platt | ||
|
|
||
| Jeffrey E. Platt Vice President-Finance and Chief Financial Officer |
24
CERTIFICATIONS
I, John T. Sawyer, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of Penhall International Corp. (the “Company”) | |
| (2) | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; | |
| (4) | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) | evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| (5) | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and |
| (6) | The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
May 14, 2003
/s/ JOHN T. SAWYER
John T. Sawyer
Chairman of the Board, President and Chief Executive Officer (Principal
Executive Officer)
25
I, Jeffrey E. Platt, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of Penhall International Corp. (the “Company”) | |
| (2) | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; | |
| (4) | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) | evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| (5) | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and |
| (6) | The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
May 14, 2003
/s/ JEFFREY E. PLATT
Jeffrey E. Platt
Vice President-Finance and Chief Financial Officer (Principal Financial
Officer)
26