SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the year ended June 30, 2004 |
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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)
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ARIZONA |
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86-0634394 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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CLASS AND TITLE OF CAPITAL STOCK |
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SHARES OUTSTANDING AS OF OCTOBER 1, 2004 |
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Common Stock, $.01 Par Value |
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986,552 |
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. ý
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 ý 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 ý
DOCUMENTS INCORPORATED BY REFERENCE:
None
TABLE OF CONTENTS
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GENERAL
Penhall consists of Penhall International Corporation, an Arizona corporation, and a wholly owned subsidiary, Penhall Company, a California corporation. Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Bob Mack Company, 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”).
On August 4, 1998, a series of mergers (Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., became the corporate parent of Penhall International Inc. (collectively, the Parent Company). Concurrent with the Recapitalization, Phoenix Concrete Cutting, Inc. was renamed Penhall International Corp. and Penhall International Inc. was renamed Penhall Rental Corp. Effective October 1, 1998, all of the operations, and certain of the assets and liabilities of Penhall International Corp., were transferred into Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002. In connection with the Recapitalization in August of 1998, the Company became the successor obligor of $100,000,000 12% Senior Notes (Senior Notes) due August 2006. The foregoing transactions are collectively referred to herein as the “Transactions.”
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 696 revenue 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, 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, 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 $95.3 million in fiscal 1997 to $157.0 million in fiscal 2004 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 27% of Operated Equipment Rental Services revenues are generated from fixed-price contracts.
Based on industry sources, the Company estimates that the United States equipment rental industry has grown from approximately $6.5 billion in annual rental revenues in 1990 to approximately $23.5 billion in 2003. This represents a compound annual growth rate of approximately 10.3%, although in the past two years industry rental revenues decreased by about $1.3 billion. The operated equipment rental industry is a specialized niche segment of the highly fragmented United States equipment rental industry. Management believes that the operated equipment rental industry has grown at a similar rate during the same period.
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The recent slowdown in industry revenues is a reflection of the significant slowdown in private non-residential construction activity, which declined 13.2% and 5.2% in 2002 and 2003, respectively, as well as significant lower state highway and bridge spending due to state budgets deficits. The Company is particularly sensitive to changes in state highway and non-residential construction activity because these sectors have been principal users of the Company’s services. The long-term growth of the equipment rental industry 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.
EQUIPMENT RENTAL FLEET
Penhall owns and operates a well-maintained fleet of 696 units of operated equipment, including excavators, stompers, backhoes, and compressors, “bobcats,” crushing equipment, saws, drills and grinding, asphalt milling, 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, 2004:
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DESCRIPTION |
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QUANTITY |
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Diamond saws |
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355 |
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Compressors |
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104 |
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Excavators |
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22 |
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Grinders |
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21 |
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Backhoes |
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49 |
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Bobcats |
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59 |
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Tankers |
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27 |
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Stompers |
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8 |
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Loaders |
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2 |
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Milling |
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17 |
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Miscellaneous |
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32 |
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Total Units |
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696 |
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In addition to its 696-unit operated equipment rental fleet, Penhall maintains an additional fleet of 34 tankers, and 19 grinders which are used exclusively on fixed-price contracts. Also, Penhall has an inventory of approximately 399 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 its 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, 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.
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• Coring. Coring is the use of rotary drills to create holes ranging from less than one inch to 42 inches in diameter. This service is most frequently utilized both in new construction and in retrofit of existing facilities to create spaces needed for installation of ventilation ducts, conduits, electrical and other cables, and mechanical passageways. Coring is also used in the Company’s earthquake retrofit projects.
• Grinding. Grinding is the use of diamond abrasive grinders to mill away excess material as necessary to attain a uniform, level finish on flat surfaces, such as highways, airport runways and industrial floors. Grinding is also utilized as a maintenance process to extend the useful life of highways by evening the wear patterns caused by years of heavy traffic, to prevent cracking and subsequent failure of the surface.
• Grooving. Grooving is the use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with the construction or modification of highways and airport runways and provides for better tire traction on these surfaces.
• Sawing and Sealing. Sawing and sealing is the cutting of concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength.
• Asphalt Milling. Asphalt milling is the grinding of asphalt and concrete surfaces. This service uses equipment with carbide tools to change the elevation of existing roadways as part of highway rehabilitation projects. The work is performed using a fleet of various size machines, ranging from 200 horsepower, 48” wide machines to 800 horsepower, 8 1/2’ wide machines. This service may also involve road reclamation and asphalt recycling.
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.
• 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 material 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 per assignment. 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.
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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 $80 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 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 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 generate revenues of between $7,500 and $10,000,000 per assignment. 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 Penhall. 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 100 people, typically with at least two salespersons based at most 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,
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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
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 Cleveland Wrecking, North Dakota Dept. of Transportation, California Department of Transportation, Indiana Department of Transportation, Griffith Company, Granite Construction, and All American Asphalt. During fiscal 2004, Management estimates that Penhall served over 11,000 customers and that no one customer 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. Penhall believes that it is able to compete effectively for fixed-price contract jobs because of its extensive resources and relationships with general contractors. In many cases, a customer requires a performance bond before a contract is awarded. Penhall believes that its bonding capacity is a competitive advantage over smaller, less financially stable competitors. The Company’s advantage in this area has been demised by the surety market reducing Penhall’s bonding capacity due to both Penhall’s poor results over the past 3 years, as well as reduced bonding capacity in the market. Further, the Company’s current surety has indicated that another year of operating losses could result in the discontinuation of their surety support. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.
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
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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.
In connection with the radio communications referred to above, Penhall holds several licenses from the Federal Communications Commission (“FCC”) that allows it to broadcast over certain designated radio frequencies. These licenses may not be assigned without the FCC’s consent. During fiscal 2004, Penhall sold one of its three FCC licenses for the amount of $800,000. The gain on sale of $795,000 is reported in other income in the consolidated statement of operations.
LABOR RELATIONS
As of June 30, 2004 Penhall Company had approximately 1,200 full-time employees. The Company also hires, on an as-needed basis, equipment operators when work-in-progress necessitates additional personnel.
Approximately, 460 of Penhall’s employees are represented by various labor unions. The Company’s unionized work force is divided into approximately 35 certified or lawfully recognized bargaining units.
With the exception of three agreements, all agreements expiring during fiscal 2004 have been renewed or extended. The three pending agreements represent approximately 100 employees. It is anticipated that all agreements will be renewed without any disruption to operations. There are nine agreements expiring during fiscal 2005, all at the very end of the fiscal year. No discussions have begun on those agreements. There is no reason to believe that any expiration will have a material effect on fiscal 2005 operations. There is currently one unfair labor practice charge pending against Penhall either before the National Labor Relations’ Board or the courts. The National Labor Relations Board has directed that the issue be remanded to the union grievance procedure. The potential liability is estimated to be less than $10,000.
Penhall is headquartered in Anaheim, California. As of June 30, 2004 Penhall 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.
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LOCATION |
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APPROX. |
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Anaheim, California (1) |
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18,300 |
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Gardena, California (1) |
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3,850 |
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Camarillo, California (1) |
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3,600 |
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San Leandro, California |
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6,000 |
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Sacramento, California (1) |
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8,000 |
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San Diego, California (1) |
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5,600 |
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Riverside, California |
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9,000 |
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Santa Clara, California (1) |
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9,950 |
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Irvine, California |
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9,500 |
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Bakersfield, California |
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4,000 |
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Burbank, California (1) |
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6,200 |
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Phoenix, Arizona (1) |
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12,900 |
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Austin, Texas (1) |
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6,100 |
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Grapevine, Texas |
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7,500 |
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Denver, Colorado (1) |
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15,100 |
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Austell, Georgia |
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8,000 |
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Las Vegas, Nevada (1) |
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11,000 |
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Portland, Oregon |
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24,000 |
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Salt Lake City, Utah |
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10,500 |
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Rogers, Minnesota |
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11,000 |
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LOCATION |
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APPROX. |
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Birmingham, Alabama |
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9,600 |
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Golden Valley, Minnesota |
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11,000 |
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Morrisville, North Carolina |
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15,000 |
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Charlotte, North Carolina |
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6,000 |
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Greensboro, North Carolina |
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5,184 |
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Wilmington, North Carolina |
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1,000 |
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Greenville, South Carolina |
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3,500 |
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Columbia, South Carolina |
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3,500 |
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Charleston, South Carolina |
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5,000 |
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Buffalo, New York |
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3,000 |
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Kansas City, Missouri |
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6,000 |
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Tukwila, Washington |
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10,017 |
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Fresno, California |
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4,500 |
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Richmond, Virginia |
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1,000 |
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Reno, Nevada |
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800 |
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Tucson, Arizona |
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1,500 |
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Visalia, California |
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13,600 |
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(1) On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has 4 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.2 million will be amortized over the initial term of the leases of 20 years.
Penhall presently leases 37 sites in 16 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 12.9 years (assuming the exercise of all option periods). The Real Property Leases for the following fourteen Leased sites have remaining terms of less than three years: (i) Santa Clara, California - October 31, 2005, (ii) Buffalo, New York - July 1, 2005, (iii) Richmond, Virginia - month to month, (iv) Riverside, California - June 30, 2005 (v) Columbia, South Carolina - month to month, (vi) Tucson, Arizona - July 31, 2006, (vii) Greenville, South Carolina - month to month, (viii) Wilmington, North Carolina - month to month, (ix) Charleston, South Carolina - December 31, 2005, (x) Greensboro, North Carolina- September 30, 2004, (xi) Reno, Nevada - February 28, 2006, (xii) Grapevine, Texas - December 30, 2006, (xiii) Birmingham, Alabama - month to month, and (xiv) Kansas City, Missouri - June 30, 2006.
The Company has an employment related legal matter which was settled and approved by the court subsequent to year end. The Company estimates that reserves as of June 30, 2004 are sufficient based on the settlement. As of June 30, 2004, the Company has accrued $250,000 related to this matter.
There are various additional 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 advice of legal counsel, that the outcome of these proceedings will not have a material effect on the Company’s financial position, results of operations, or liquidity.
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, 2004.
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 2003 or 2004. The indenture agreement
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related to the Senior Notes 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 its assets to another person, or engage in certain change of control transactions.
ITEM 6. SELECTED FINANCIAL DATA
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FISCAL YEAR ENDED JUNE 30, |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) |
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CONSOLIDATED STATEMENT OF OPERATIONS DATA: |
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Revenues |
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$ |
173,060 |
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$ |
175,769 |
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$ |
161,242 |
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$ |
159,617 |
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$ |
157,030 |
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Cost of revenues |
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119,169 |
|
123,725 |
|
121,897 |
|
127,626 |
|
121,811 |
|
|||||
|
Gross profit |
|
53,891 |
|
52,044 |
|
39,345 |
|
31,991 |
|
35,219 |
|
|||||
|
General and administrative expenses |
|
28,474 |
|
28,347 |
|
28,364 |
|
27,935 |
|
28,328 |
|
|||||
|
Reorganization expenses |
|
43 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Goodwill impairment |
|
— |
|
— |
|
— |
|
— |
|
2,682 |
|
|||||
|
Other operating income |
|
543 |
|
725 |
|
839 |
|
938 |
|
827 |
|
|||||
|
Earnings from operations |
|
25,917 |
|
24,422 |
|
11,820 |
|
4,994 |
|
5,036 |
|
|||||
|
Other income |
|
— |
|
— |
|
— |
|
— |
|
859 |
|
|||||
|
Interest expense |
|
15,591 |
|
15,263 |
|
14,293 |
|
14,355 |
|
13,880 |
|
|||||
|
Earnings (loss) before income taxes |
|
10,326 |
|
9,159 |
|
(2,473 |
) |
(9,361 |
) |
(7,985 |
) |
|||||
|
Income tax expense (benefit) |
|
4,376 |
|
3,900 |
|
(856 |
) |
(3,441 |
) |
(2,342 |
) |
|||||
|
Net earnings (loss) |
|
5,950 |
|
5,259 |
|
(1,617 |
) |
(5,920 |
) |
(5,643 |
) |
|||||
|
Accretion of preferred stock to redemption value |
|
(2,854 |
) |
(3,207 |
) |
(3,615 |
) |
(4,074 |
) |
(4,605 |
) |
|||||
|
Accrual of cumulative dividends on preferred stock |
|
(2,946 |
) |
(3,263 |
) |
(3,794 |
) |
(4,325 |
) |
(4,944 |
) |
|||||
|
Net earnings (loss) available to common stockholders |
|
$ |
150 |
|
$ |
(1,211 |
) |
$ |
(9,026 |
) |
$ |
(14,319 |
) |
$ |
(15,192 |
) |
|
EARNINGS (LOSS) PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Basic and diluted |
|
.15 |
|
(1.22 |
) |
(9.16 |
) |
(14.52 |
) |
(15.40 |
) |
|||||
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Basic and diluted |
|
1,000,953 |
|
995,747 |
|
985,345 |
|
986,406 |
|
986,552 |
|
|||||
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Adjusted EBITDA (1) |
|
40,481 |
|
40,676 |
|
29,005 |
|
21,727 |
|
22,073 |
|
|||||
|
Adjusted EBITDA margin (2) |
|
23.4 |
% |
23.1 |
% |
18.0 |
% |
13.6 |
% |
14.1 |
% |
|||||
|
Net cash provided by operating activities |
|
20,282 |
|
15,732 |
|
17,609 |
|
12,649 |
|
11,118 |
|
|||||
|
Net cash provided by (used in) investing activities |
|
(17,228 |
) |
(17,697 |
) |
(12,482 |
) |
(2,958 |
) |
6,848 |
|
|||||
|
Net cash provided by (used in) financing activities |
|
(4,030 |
) |
886 |
|
48 |
|
(15,712 |
) |
(17,074 |
) |
|||||
|
Depreciation and amortization |
|
14,521 |
|
16,254 |
|
17,185 |
|
16,733 |
|
14,355 |
|
|||||
|
Capital expenditures |
|
18,093 |
|
18,469 |
|
9,495 |
|
4,222 |
|
6,442 |
|
|||||
|
Units of operated equipment rentals at end of period |
|
664 |
|
747 |
|
761 |
|
710 |
|
696 |
|
|||||
|
Number of locations at end of period |
|
31 |
|
37 |
|
38 |
|
38 |
|
37 |
|
|||||
|
Ratio of earnings to fixed charges (3) |
|
1.6 |
x |
1.6 |
x |
— |
|
— |
|
— |
|
|||||
|
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
122,162 |
|
126,962 |
|
132,915 |
|
112,601 |
|
89,407 |
|
|||||
|
Long-term obligations, including current maturities |
|
125,235 |
|
125,208 |
|
128,970 |
|
117,395 |
|
100,995 |
|
|||||
|
Stockholders’ deficit |
|
(62,787 |
) |
(61,075 |
) |
(65,990 |
) |
(75,944 |
) |
(86,192 |
) |
|||||
8
The following chart depicts the reconciliation of net cash provided by (used) in operating activities to Adjusted EBITDA:
|
|
|
FISCAL YEAR ENDED JUNE 30, |
|
|||||||||||||
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|||||
|
Net cash provided by (used in) operating activities |
|
$ |
20,282 |
|
$ |
15,732 |
|
$ |
17,609 |
|
$ |
12,649 |
|
$ |
11,118 |
|
|
Interest expense less debt amortization of debt issuance costs |
|
14,706 |
|
14,379 |
|
13,408 |
|
13,042 |
|
12,717 |
|
|||||
|
Current tax (expense) benefit |
|
1,979 |
|
2,644 |
|
(120 |
) |
(2,093 |
) |
779 |
|
|||||
|
Provision for doubtful receivables |
|
(340 |
) |
(146 |
) |
(340 |
) |
(767 |
) |
(427 |
) |
|||||
|
Gain on sale of assets |
|
305 |
|
422 |
|
300 |
|
485 |
|
1,285 |
|
|||||
|
Amoritzation of deferred gain sale-leaseback |
|
— |
|
— |
|
— |
|
— |
|
64 |
|
|||||
|
Change in operating assets and liabilities net of acquisitions |
|
3,506 |
|
7,645 |
|
(1,852 |
) |
(1,589 |
) |
(2,604 |
) |
|||||
|
Reorganization costs |
|
43 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Other income |
|
— |
|
— |
|
— |
|
— |
|
(859 |
) |
|||||
|
Adjusted EBITDA |
|
$ |
40,481 |
|
$ |
40,676 |
|
$ |
29,005 |
|
21,727 |
|
$ |
22,073 |
|
|
(1) Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude stock-related compensation expense, reorganization costs, other compensation, goodwill impairment and other income. The Company ignores the effect of non-recurring events not related to the core business operations to arrive at EBITDA. Adjusted EBITDA is presented because Management believes it provides useful information regarding a company’s ability to incur and/or service debt. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America or as a measure of a company’s profitability or liquidity.
(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. Earnings were insufficient to cover fixed charges by $2,473,000, $9,361,000 and $7,985,000 for 2002, 2003, and 2004 respectively.
9
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.
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 California-based company acquired in September 2000,
6. H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2002,
7. Bob Mack Company, California based company acquired in March 2002, and
8. Arizona Curb Cut Company, an Arizona based company acquired in April 2002.
During the same period, Penhall established operations in six new markets by opening offices in 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.
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
10
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 three to eight 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 or loss on sales of assets, net are recognized in “Other Operating Income” in Penhall’s consolidated statements of operations. In fiscal 2002, 2003 and 2004, net gains on sales of assets from such equipment sales were $300,000, $485,000 and $493,000, respectively.
Decisions to dispose of assets in its operated equipment rental fleet (“revenue units”) and add revenue units, are primarily decided at each location. Revenue units are typically kept for their full economic life. In an effort to try to maximize fleet utilization, transfers of revenue units between locations are common. Overall, the Company tends to increase its fleet as total company utilization exceeds 72%. The following table shows the number of units in Penhall’s operated equipment rental fleet for the following periods:
|
|
|
FISCAL YEAR ENDED JUNE 30, |
|
||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
Beginning of Period |
|
747 |
|
761 |
|
710 |
|
|
# Units Purchased |
|
60 |
|
12 |
|
19 |
|
|
# Units Disposed |
|
(46 |
) |
(63 |
) |
(33 |
) |
|
End of Period |
|
761 |
|
710 |
|
696 |
|
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 affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition on Long-Term Construction Contracts
Income from construction operations is recorded using the percentage-of-completion method of accounting. The majority of our long-term fixed price contracts with our customers are either “fixed unit price” or “fixed price”. Under fixed unit price contracts, the Company is committed to provide materials or services required by a project at fixed unit prices. The fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by the Company unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount. All state and federal government contracts and many of our other contracts provide for termination of the contract for the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.
We use the percentage-of-completion accounting method for construction contracts in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue and earnings on construction contracts are recognized on the percentage-of-completion method in the ratio of costs incurred to estimated final costs. Provisions are
11
recognized in the statement of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue.
Contract cost consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, blades, fuel, maintenance and repairs). Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known.
The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of our estimates of the cost to complete each project which are completed by our project managers. However, projects can be complex and in most cases the profit margin estimates for a project will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have many projects of varying levels of complexity and size in process at any given time (during 2004 we worked on over 1,000 projects) these changes in estimates typically offset each other without materially impacting our overall profitability. However, large changes in cost estimates in the larger projects, can have a more significant effect on profitability.
Valuation of Long-Lived Assets
Through June 30, 2002, the Company accounted for long-lived assets under SFAS No. 121, “Accounting for the Impairment of Ling-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Deteriorating market conditions could potentially impact valuation of long-lived assets. In markets where adverse market conditions exist, the Company will consider reallocation of long-lived assets to markets where those assets will produce cash flow. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Goodwill
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 No. 141 requires 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 adopted these accounting standards effective July 1, 2002. We perform our annual impairment analysis at June 30 of each year. We will perform an earlier impairment analysis if a triggering event occurs that warrants such analysis.
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
As a result of industry conditions, we determined that there were indicators of impairment to the carrying value of goodwill. Accordingly, we performed a review of the value of our goodwill in accordance with SFAS No. 142. Based on our review, we recorded a charge of $2,682,000 to write-off the value of goodwill for two reporting units. Substantially all of the remaining $6,371,000 of goodwill relates to one reporting unit. Continued deterioration in the markets where Penhall operates could result in further impairment. As of June 30, 2004, the Company notes that there is no indication of additional goodwill impairment for the reporting units where the goodwill resides.
12
RESULTS OF OPERATIONS
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
Revenues. Revenues for Fiscal 2004 were $157.0 million compared to $159.6 million for the prior year, a decrease of $2.6 million or 1.6%. A $2.8 million increase in contract revenue (a 6.4% increase) was offset by a $5.4 million decrease in service revenues (a 4.7% decrease). The lower service revenues is a reflection of the slowdown in private, non-residential construction activity, which declined 16% in 2003 according to Department of Commerce data, and continued into 2004. Additionally there was significantly lower state highway and bridge spending due to deficits in many state budgets and lack of a replacement program at the federal level for the Transportation Equity Act for the 21st Century, “TEA-21” which expired in 2003.
Penhall operated through 37 locations in 17 states at June 30, 2003 and 2004. At June 30, 2004, Penhall’s operated rental fleet consisted of 696 units compared to 710 units at June 30, 2003, a decrease of 2.0%. The smaller fleet of revenue units is attributable to the Company not replacing all of the disposed units since revenue unit utilization rates remain below 72%.
Gross Profit. Gross profit totaled $35.2 million in Fiscal 2004, an increase of $3.2 million or 10.1% from Fiscal 2003. Gross profit as a percentage of revenues increased from 20.0% in Fiscal 2003 to 22.4% in Fiscal 2004. The increase in gross profit from Fiscal 2003 to Fiscal 2004 is primarily attributable to significant profits from a major project, the successful settlement of an outstanding claim and a $1.9 million decrease in depreciation expense. The decrease in depreciation expense is the result of low capital expenditures during 2002, 2003, and 2004
General and Administrative Expenses. General and administrative expenses were $28.3 million in Fiscal 2004 compared to $27.9 million in Fiscal 2003. As a percent of revenues, general and administrative expenses were 18.0% in Fiscal 2004 compared to 17.5% in Fiscal 2003. The small increase in general and administrative expenses as a percentage of revenues during Fiscal 2004 is primarily attributable to increases in rent expense of $0.8 million associated with the sale/leaseback of Company properties, incentive compensation of $1.3 million, and legal expense of $0.3 million offset by decreases $0.6 million in payroll and related expenses, $0.5 million in depreciation expense and $0.3 million in bad debt expense.
Goodwill Impairment. Total goodwill impairment of $2,682,000 has been recorded for the year ended June 30, 2004. This expense is the result of impairment testing on all reporting units which had associated goodwill. A continuing decline in the California market resulted in two California reporting units writing off all associated goodwill.
Other income. During fiscal 2004, the Company sold one of its FCC licenses and also completed a sale - leaseback of its 11 owned properties, which result in a total gain of $0.9 million.
Interest Expense. Interest expense was $13.9 million in Fiscal 2004 compared to interest expense of $14.4 million in Fiscal 2003. The decrease in interest expense is attributable to lower borrowings in Fiscal 2004 primarily resulting from the proceeds on the sale-leaseback of the Company owned properties, which was used to reduce the borrowings under the revolving credit facility, partially offset by higher costs for letters of credit.
Income Tax Benefit. The Company recorded an income tax benefit of $2.3 million, or 29.3% of loss before income taxes in Fiscal 2004, compared to an income tax benefit of $3.4 million, or 36.8% of loss before income taxes in Fiscal 2003. The decrease in the effective tax rate in fiscal 2004 is primarily due to non-deductible expenses related to goodwill impairment.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
Revenues. Revenues for Fiscal 2003 were $159.6 million compared to $161.2 million for the prior year, a decrease of $1.6 million or 1.0%. A $0.6 million increase in contract revenue (1.4% increase) was offset by a $2.2 million decrease in service revenues (a 1.9% decrease). The lower revenues is a reflection of the significant slowdown in private non-residential construction activity, which declined 16% in 2002 according to Department of Commerce data as well as significantly lower state highway and bridge spending due to deficits in many state budgets.
Penhall operated through 38 locations in 17 states at June 30, 2002 and 2003. At June 30, 2003, Penhall’s operated rental fleet consisted of 710 units compared to 761 units at June 30, 2002, a decrease of 6.7%. A majority of the unit disposals in fiscal 2003 occurred during the later part of the fiscal year.
Gross Profit. Gross profit totaled $31.9 million in Fiscal 2003, a decrease of $7.4 million or 18.7% from Fiscal 2002. Gross profit as a percentage of revenues decreased from 24.4% in Fiscal 2002 to 20.0% in Fiscal 2003. The
13
decrease in gross profit from Fiscal 2002 to Fiscal 2003 is primarily attributable to increased competition, cost overruns on certain contracts, and an increase of $1.7 million in insurance costs during Fiscal 2003. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs, decrease in equipment utilization, and a change in the mix of work. Although the amount of Contract Revenue only increased $0.6 million during Fiscal 2003, the amount of subcontracted work and materials associated with the Contract Revenue increased by $5.9 million. Typically, the markup on subcontracted work and materials is significantly less than the markup on self performed work.
General and Administrative Expenses. General and administrative expenses were $27.9 million in Fiscal 2003 compared to $28.4 million in Fiscal 2002. As a percent of revenues, general and administrative expenses were 17.5% in Fiscal 2003 compared to 17.6% in Fiscal 2002. The small decrease in general and administrative expenses as a percentage of revenues during Fiscal 2003 is primarily attributable to decreases of $0.4 million in incentive compensation, $0.5 million in payroll and related expenses, and $0.6 million in goodwill amortization partially offset by a $0.7 million increase in insurance costs and a $0.4 million increase in bad debt expense.
Interest Expense. Interest expense was $14.4 million in Fiscal 2003 compared to interest expense of $14.3 million in Fiscal 2002. The increase in interest expense is attributable to a write-off of $0.3 million of debt issuance costs associated with the Credit Facility replaced by the New Credit (as defined below) offset by lower interest rates and decreased borrowings during Fiscal 2003.
Income Tax Benefit. The Company recorded an income tax benefit of $3.4 million, or 36.8% of loss before income taxes in Fiscal 2003, compared to an income tax benefit of $0.9 million, or 34.6% of loss before income taxes in Fiscal 2002. The increase in the income tax benefit is attributable to a higher loss before income tax in Fiscal 2003.
Contractual Obligations
The following is a summary of the Company’s contractual obligations as of June 30, 2004:
|
|
|
Fiscal Year Ending June 30, |
|
|||||||||||||||||||
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Operating lease obligations |
|
$ |
2,752,000 |
|
$ |
2,559,000 |
|
$ |
2,215,000 |
|
$ |
1,985,000 |
|
$ |
1,883,000 |
|
$ |
21,321,000 |
|
$ |
32,715,000 |
|
|
Long-term debt |
|
|
|
882,000 |
|
113,000 |
|
|
|
|
|
|
|
995,000 |
|
|||||||
|
Senior notes |
|
— |
|
— |
|
100,000,000 |
|
— |
|
— |
|
— |
|
100,000,000 |
|
|||||||
|
Senior exchangeable preferred stock |
|
— |
|
— |
|
24,420,000 |
|
— |
|
— |
|
— |
|
24,420,000 |
|
|||||||
|
Series A Preferred stock |
|
— |
|
— |
|
— |
|
33,587,000 |
|
— |
|
— |
|
33,587,000 |
|
|||||||
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”) secured in May 2003. The New Credit is a $50 million, three year asset based borrowing facility, consisting of a revolving credit facility (“New Revolver”) of up to $50 million with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.
The provisions of the New Credit facility include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The New Credit and the associated lock-box agreement satisfy the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). We reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in SFAS No. 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear there were any subjective acceleration clauses that fit directly into the definition provided in SFAS No. 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. More specifically, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. As a result, the Company classifies borrowings under the New Credit facility as a short-term obligation. In addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of The Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2004, the Company had no outstanding borrowings, $15.6 million of outstanding letters of credit, borrowing base limitations of $8.0 million and borrowings unused and available under The New Credit of $26.4 million.
14
|
Summary Cash Flow Data (000’s) for the periods ending June 30, |
|
|||||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Cash and cash equivalents |
|
$ |
6,205 |
|
$ |
184 |
|
$ |
1,076 |
|
|
|
|
|
|
|
|
|
|
|||
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|||
|
Operating activities |
|
$ |
17,609 |
|
$ |
12,649 |
|
$ |
11,118 |
|
|
Investing activities |
|
$ |
(12,482 |
) |
$ |
(2,958 |
) |
$ |
6,848 |
|
|
Financing activities |
|
$ |
48 |
|
$ |
(15,712 |
) |
$ |
(17,074 |
) |
|
Capital expenditures |
|
$ |
9,495 |
|
$ |
4,222 |
|
$ |
6,442 |
|
The Company’s cash and cash equivalents totaled $1.1 million at the June 30, 2004. We believe that our current cash and cash equivalents, cash generated from operations, and the amount available under our existing credit facility will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with our existing operations through the next 12 months.
Cash provided by operating activities decreased from $12.6 million in fiscal 2003 to $11.1 million in fiscal 2004. This decrease is primarily attributable to higher receivables and costs and estimated earnings in excess of billings on uncompleted contracts offset by lower prepaid expenses. The lower prepaid expenses in fiscal 2004 is primarily associated with the timing of insurance payments compared to fiscal 2003.
Cash provided by investing activities in fiscal 2004 of $6.8 million represents a $9.8 million increase from the amount used in investing activities in 2003. The increase was due to the $11.3 million cash received from the sale and leaseback of 11 sites and $0.8 million received from the sale of an FCC license partially offset by a $2.2 million increase in capital expenditures. The Company had no acquisitions in fiscal 2004.
Cash used by financing activities in fiscal 2004 increased to $17.1 million compared to $15.7 million in fiscal 2003. In fiscal 2003 and 2004, net long-term and short-term debt was reduced by $11.6 million and $16.4 million, respectively.
The Company had standby letters of credit totaling $15.6 million at June 30, 2004, all of which are automatically renewable unless participating parties notify the other party thirty days prior to cancellation. The letters of credit are provided as collateral for our surety and for our insurance programs. In addition, we are generally required to provide surety bonds that provide an additional measure of security under certain public and private sector contracts. Most of the Company’s surety bonds are performance bonds which do not have a stated expiration date; instead the bonds are generally released when each contract is accepted by our customer.
In fiscal 2003, the Company’s net loss plus add backs of depreciation and amortization, amortization of debt issuance costs, provision for doubtful receivables and the gains on sales of assets, plus decreases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts and the increase in accounts payable, accrued liabilities and insurance reserves were partially offset by increases in inventories and deferred taxes which resulted in net cash provided by operating activities of $12.6 million. Net cash used for investing activities in Fiscal 2003 was $3.0 million, which included $4.2 million in capital expenditures. The Company had no acquisitions in Fiscal 2003.
In fiscal 2002, the Company’s net loss plus depreciation and amortization, a decrease in receivables and an increase in accounts payable and accrued liabilities was partially offset by it’s net loss, a decrease in billings in excess of costs and estimated earnings on uncompleted contracts and an increase in deferred taxes which resulted in net cash provided by operating activities of $17.6 million. Net cash used for investing activities in fiscal 2002 totaled $12.5 million; $3.8 million was used for the acquisition of Bob Mack Company and Arizona Curb Cut and $9.5 million for capital expenditures.
Management estimates that Penhall’s annual capital expenditures will be approximately $12.0 million for fiscal 2005, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property improvements.
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, 2004, the Company and its subsidiaries had $101.0 million of total indebtedness outstanding (including the Senior Notes) and a stockholders’ deficit of $86.2 million. As of June 30, 2004 approximately $26.4 million of additional borrowing was available under The New Credit.
15
As of June 30, 2004, the Company has the following obligations subject to redemption or maturity in fiscal 2006 and 2007:
|
|
|
Due date |
|
Balance
at |
|
|
|
Senior Notes |
|
08/01/06 |
|
$ |
100,000,000 |
|
|
Senior Exchangeable Preferred Stock |
|
02/01/07 |
|
$ |
18,602,000 |
|
|
Preferred Series A |
|
08/01/07 |
|
$ |
22,484,000 |
|
The accretion of preferred stock will increase the total obligation through the dates of redemption. The Company anticipates extending or refinancing these obligations. No assurance can be given that such financing will be available to the Company or, if available that it may be obtained on terms and conditions that are satisfactory to the Company. As long as the uncertainty associated with the resolution of these obligations remain, the Company could be subject to adverse consequences including:
• Making it more difficult to obtain surety support;
• Increasing our vulnerability to general adverse economic and industry conditions;
• Limiting our ability to extend or replace the Company’s existing credit facility;
• Limiting our ability to extend or replace the Company’s existing Senior Notes:
• Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. The Trustee has indicated that it considers the infraction minor and will not pursue written notice of default to the Company. In the event that the Company receives written notice specifying the default and demanding that such default be remedied from either the Trustee or from Holders of at least 25% of the outstanding principal amount of the Notes, then the Company will arrange for a third party to repurchase Company stock in the aggregate consideration of $35,000 to remedy the default.
The Company’s bonding capacity has been reduced due to both Penhall’s poor results over the past 3 years, as well as reduced bonding capacity in the market. Further, the Company’s current surety has indicated that another year of operating losses could result in the discontinuation of their surety support. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“Revised Interpretations”) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. VIEs created after January 1, 2004, must be accounted for under the Revised Interpretations. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions. Non-SPEs created prior to February 1, 2003, should be accounted for under the Revised Interpretation’s provisions. The Revised Interpretations are effective for periods after June 15, 2003 for VIEs in which the Company holds a variable interest it acquired before February 1, 2003. For entities acquired or created before February 1, 2003, the Revised Interpretations are effective no later than the end of the first reporting period that ends after March 15, 2004, except for those VIEs that are considered to be SPEs, for which the effective date is no later than the end of the first reporting period that ends after December 31, 2003. The adoption of FIN 46 and the Revised Interpretations has not and is not expected to have a material impact on our financial position or results from operations.
In May 2004, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a
16
financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Company’s fiscal 2005). The Company has determined that upon adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock will be treated as interest expense in the Company’s consolidated statements of operations.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition.” SAB 104 supersedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company’s financial statements.
On March 31, 2004, the FASB issued its exposure draft, “Share-Based Payment,” which is a proposed amendment to SFAS No. 123. The exposure draft would require all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized as expenses in the statement of operations based on their fair values and vesting periods. The FASB expects to issue a final standard late in 2004 that would be effective for public companies for fiscal years beginning after December 15, 2004. We have not yet assessed the impact of adopting this new standard.
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 New Revolver and Senior Notes 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 New Revolver. The Company does not enter into derivative or interest rate transactions for speculative purposes.
There
are no derivative transactions during the years ended June 30, 2003 and
2004.
At June 30, 2004, the annual maturities of long-term debt and senior notes are as follows:
|
|
|
YEARS ENDING JUNE 30, |
|
||||||||||||||||||||||
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
THERE- |
|
TOTAL |
|
FAIR |
|
||||||||
|
|
|
(IN THOUSANDS) |
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Fixed rate debt |
|
$ |
882 |
|
$ |
113 |
|
$ |
100,000 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
100,995 |
|
$ |
95,495 |
(3) |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
11.89 |
% |
|
|
||||||||
|
Variable rate LIBOR debt (1) (2) |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
||||||||
|
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At June 30, 2003, the annual maturities of long-term debt and senior notes are as follows:
|
|
|
YEARS ENDING JUNE 30, |
|
||||||||||||||||||||||
|
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
THERE- |
|
TOTAL |
|
FAIR |
|
||||||||
|
|
|
(IN THOUSANDS) |
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Fixed rate debt |
|
$ |
2,551 |
|
$ |
176 |
|
$ |
12 |
|
$ |
100,005 |
|
$ |
5 |
|
$ |
161 |
|
$ |
102,910 |
|
$ |
80,910 |
(3) |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
11.75 |
% |
|
|
||||||||
|
Variable rate LIBOR debt (1) (2) |
|
0 |
|
0 |
|
14,485 |
|
0 |
|
0 |
|
0 |
|
14,485 |
|
14,485 |
|
||||||||
|
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.84 |
% |
|
|
||||||||
(1) The revolving credit facility is classified as a short-term obligation in the consolidated balance sheet; however, the credit facility matures in 2006. This is a $50 million revolving credit facility with the interest based upon LIBOR plus 350 basis points. The total borrowing unused and available under the facility was $26.4 million at June 30, 2004. See Note 6 to the consolidated financial statements.
17
(2) The Company has different interest rate options for its variable rate debt. See note 6 in the consolidated financial statements for additional information.
(3) The fair value of fixed rate debt was determined based on quoted market price for the debt instrument.
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 15(a).
18
Report of Independent Registered Public Accounting Firm
The Board of Directors
Penhall International Corp.:
We have audited the accompanying consolidated balance sheets of Penhall International Corp. and subsidiaries (the Company) as of June 30, 2003 and 2004, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended June 30, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004 in conformity with U.S. generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”, and accordingly, changed its method of accounting for goodwill effective July 1, 2002.
|
/s/ KPMG LLP |
|
|
|
|
|
|
|
|
Costa Mesa, California |
|
|
September 27, 2004 |
|
19
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF JUNE 30,
|
|
|
2003 |
|
2004 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
184,000 |
|
$ |
1,076,000 |
|
|
Receivables: |
|
|
|
|
|
||
|
Contract and trade receivables |
|
29,105,000 |
|
30,386,000 |
|
||
|
Contract retentions, due upon completion and acceptance of work |
|
4,105,000 |
|
4,361,000 |
|
||
|
|
|
33,210,000 |
|
34,747,000 |
|
||
|
Less allowance for doubtful receivables |
|
1,592,000 |
|
1,317,000 |
|
||
|
Net receivables |
|
31,618,000 |
|
33,430,000 |
|
||
|
|
|
|
|
|
|
||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
1,704,000 |
|
2,957,000 |
|
||
|
Deferred tax assets |
|
3,363,000 |
|
2,034,000 |
|
||
|
Income taxes receivable |
|
2,648,000 |
|
— |
|
||
|
Inventories |
|
2,362,000 |
|
2,171,000 |
|
||
|
Prepaid expenses and other current assets |
|
3,766,000 |
|
2,198,000 |
|
||
|
Total current assets |
|
45,645,000 |
|
43,866,000 |
|
||
|
|
|
|
|
|
|
||
|
Property, plant and equipment, at cost: |
|
|
|
|
|
||
|
Land |
|
5,004,000 |
|
— |
|
||
|
Buildings and leasehold improvements |
|
8,793,000 |
|
1,302,000 |
|
||
|
Construction and other equipment |
|
117,860,000 |
|
115,998,000 |
|
||
|
|
|
131,657,000 |
|
117,300,000 |
|
||
|
Less accumulated depreciation and amortization |
|
78,256,000 |
|
81,260,000 |
|
||
|
|
|
|
|
|
|
||
|
Net property, plant and equipment |
|
53,401,000 |
|
36,040,000 |
|
||
|
Goodwill |
|
9,053,000 |
|
6,371,000 |
|
||
|
Debt issuance costs, net of accumulated amortization |
|
3,316,000 |
|
2,313,000 |
|
||
|
Other assets, net |
|
1,186,000 |
|
817,000 |
|
||
|
|
|
$ |
112,601,000 |
|
$ |
89,407,000 |
|
See accompanying notes to consolidated financial statements.
20
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF JUNE 30,
|
|
|
2003 |
|
2004 |
|
||
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Current installments of long-term debt |
|
$ |
2,551,000 |
|
$ |
882,000 |
|
|
Borrowings under revolving credit facility |
|
14,485,000 |
|
— |
|
||
|
Trade accounts payable |
|
7,953,000 |
|
5,664,000 |
|
||
|
Accrued liabilities and taxes payable |
|
10,937,000 |
|
12,857,000 |
|
||
|
Current portion of insurance reserves |
|
1,569,000 |
|
2,698,000 |
|
||
|
Current portion of deferred gain – sale-leaseback |
|
— |
|
109,000 |
|
||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
831,000 |
|
1,526,000 |
|
||
|
Total current liabilities |
|
38,326,000 |
|
23,736,000 |
|
||
|
|
|
|
|
|
|
||
|
Long-term debt, excluding current installments |
|
359,000 |
|
113,000 |
|
||
|
Long-term portion of deferred gain – sale-leaseback |
|
— |
|
2,015,000 |
|
||
|
Long-term portion of insurance reserves |
|
5,158,000 |
|
4,878,000 |
|
||
|
Senior Notes |
|
100,000,000 |
|
100,000,000 |
|
||
|
Deferred tax liabilities |
|
8,221,000 |
|
3,771,000 |
|
||
|
Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $16,744,000 and $18,602,000 at June 30, 2003 and 2004, respectively. Authorized, issued and outstanding 10,000 shares |
|
16,744,000 |
|
18,602,000 |
|
||
|
Series A Preferred stock, par value $.01 per share, redemption value $19,737,000 and $22,484,000 at June 30, 2003 and 2004, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares |
|
19,737,000 |
|
22,484,000 |
|
||
|
Stockholders’ deficit: |
|
|
|
|
|
||
|
Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,798 shares at June 30, 2003 and June 30, 2004 |
|
35,546,000 |
|
40,490,000 |
|
||
|
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,870 at June 30, 2003 and June 30, 2004 |
|
10,000 |
|
10,000 |
|
||
|
Additional paid-in capital |
|
2,082,000 |
|
2,082,000 |
|
||
|
Treasury stock, at cost, 35,318 common shares at June 30, 2003 and June 30, 2004 |
|
(336,000 |
) |
(336,000 |
) |
||
|
Accumulated deficit |
|
(113,246,000 |
) |
(128,438,000 |
) |
||
|
Total stockholders’ deficit |
|
(75,944,000 |
) |
(86,192,000 |
) |
||
|
Commitments and contingencies |
|
|
|
|
|
||
|
|
|
$ |
112,601,000 |
|
$ |
89,407,000 |
|
See accompanying notes to consolidated financial statements.
21
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
AS OF JUNE 30,
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Revenues |
|
$ |
161,242,000 |
|
$ |
159,617,000 |
|
$ |
157,030,000 |
|
|
Cost of revenues |
|
121,897,000 |
|
127,626,000 |
|
121,811,000 |
|
|||
|
Gross profit |
|
39,345,000 |
|
31,991,000 |
|
35,219,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
General and administrative expenses |
|
28,364,000 |
|
27,935,000 |
|
28,328,000 |
|
|||
|
Goodwill impairment |
|
— |
|
— |
|
2,682,000 |
|
|||
|
Other operating income, net |
|
839,000 |
|
938,000 |
|
827,000 |
|
|||
|
Earnings from operations, net |
|
11,820,000 |
|
4,994,000 |
|
5,036,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Interest expense |
|
14,293,000 |
|
14,355,000 |
|
13,880,000 |
|
|||
|
Other income |
|
— |
|
— |
|
859,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Loss before income taxes |
|
(2,473,000 |
) |
(9,361,000 |
) |
(7,985,000 |
) |
|||
|
Income tax benefit |
|
(856,000 |
) |
(3,441,000 |
) |
(2,342,000 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net loss |
|
(1,617,000 |
) |
(5,920,000 |
) |
(5,643,000 |
) |
|||
|
Accretion of preferred stock to redemption value |
|
(3,615,000 |
) |
(4,074,000 |
) |
(4,605,000 |
) |
|||
|
Accrual of cumulative dividends on preferred stock |
|
(3,794,000 |
) |
(4,325,000 |
) |
(4,944,000 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net loss available to common stockholders |
|
$ |
(9,026,000 |
) |
$ |
(14,319,000 |
) |
$ |
(15,192,000 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Loss per share basic and diluted |
|
$ |
(9.16 |
) |
$ |
(14.52 |
) |
$ |
(15.40 |
) |
|
Weighted average number of shares outstanding: Basic and diluted |
|
985,345 |
|
986,406 |
|
986,552 |
|
|||
See accompanying notes to consolidated financial statements.
22
PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2002, 2003 AND 2004
|
|
|
SERIES B PREFERRED STOCK |
|
COMMON STOCK |
|
|
|
TREASURY STOCK |
|
|
|
|
|
||||||||||||
|
|
|
SHARES |
|
AMOUNT |
|
SHARES |
|
AMOUNT |
|
ADDITIONAL |
|
SHARES |
|
AMOUNT |
|
ACCUMULATED |
|
TOTAL |
|
||||||
|
Balance at June 30, 2001 |
|
18,701 |
|
$ |
27,273,000 |
|
1,017,480 |
|
$ |
10,000 |
|
$ |
1,831,000 |
|
(34,173 |
) |
(288,000 |
) |
$ |
(89,901,000 |
) |
(61,075,000 |
) |
||
|
Shares issued |
|
108 |
|
158,000 |
|
3,647 |
|
— |
|
213,000 |
|
— |
|
— |
|
— |
|
371,000 |
|
||||||
|
Accretion of redeemable preferred stock |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(3,615,000 |
) |
(3,615,000 |
) |
||||||
|
Accrual of cumulative dividends |
|
— |
|
3,794,000 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(3,794,000 |
) |
— |
|
||||||
|
Repurchase of shares |
|
(18 |
) |
(25,000 |
) |
— |
|
— |
|
— |
|
(623 |
) |
(29,000 |
) |
— |
|
(54,000 |
) |
||||||
|
Net earnings |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,617,000 |
) |
(1,617,000 |
) |
||||||
|
Balance at June 30, 2002 |
|
18,791 |
|
$ |
31,200,000 |
|
1,021,127 |
|
$ |
10,000 |
|
$ |
2,044,000 |
|
(34,796 |
) |
(317,000 |
) |
$ |
(98,927,000 |
) |
(65,990,000 |
) |
||
|
Shares issued |
|
22 |
|
37,000 |
|
743 |
|
— |
|
38,000 |
|
— |
|
— |
|
— |
|
75,000 |
|
||||||
|
Accretion of redeemable preferred stock |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(4,074,000 |
) |
(4,074,000 |
) |
||||||
|
Accrual of cumulative dividends |
|
— |
|
4,325,000 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(4,325,000 |
) |
— |
|
||||||
|
Repurchase of shares |
|
(15 |
) |
(16,000 |
) |
— |
|
— |
|
— |
|
(522 |
) |
(19,000 |
) |
— |
|
(35,000 |
) |
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(5,920,000 |
) |
(5,920,000 |
) |
||||||
|
Balance at June 30, 2003 |
|
18,798 |
|
$ |
35,546,000 |
|
1,021,870 |
|
$ |
10,000 |
|
$ |
2,082,000 |
|
(35,318 |
) |
$ |
(336,000 |
) |
$ |
(113,246,000 |
) |
$ |
(75,944,000 |
) |
|
Accretion of redeemable preferred stock |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(4,605,000 |
) |
(4,605,000 |
) |
||||||
|
Accrual of cumulative dividends |
|
— |
|
4,944,000 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(4,944,000 |
) |
— |
|
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(5,643,000 |
) |
(5,643,000 |
) |
||||||
|
Balance at June 30, 2004 |
|
18,798 |
|
$ |
40,490,000 |
|
1,021,870 |
|
$ |
10,000 |
|
$ |
2,082,000 |
|
(35,318 |
) |
$ |
(336,000 |
) |
$ |
(128,438,000 |
) |
$ |
(86,192,000 |
) |
See accompanying notes to consolidated financial statements.
23
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|||
|
Net loss |
|
$ |
(1,617,000 |
) |
$ |
(5,920,000 |
) |
$ |
(5,643,000 |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
|
Depreciation and amortization |
|
17,185,000 |
|
16,733,000 |
|
14,355,000 |
|
|||
|
Amortization of debt issuance costs |
|
885,000 |
|
1,313,000 |
|
1,163,000 |
|
|||
|
Provision for doubtful receivables |
|
340,000 |
|
767,000 |
|
427,000 |
|
|||
|
Benefit from deferred income taxes |
|
(736,000 |
) |
(1,348,000 |
) |
(3,121,000 |
) |
|||
|
Gains on sale of assets, net |
|
(300,000 |
) |
(485,000 |
) |
(1,285,000 |
) |
|||
|
Amortization of deferred gain on sale-leaseback |
|
— |
|
— |
|
(64,000 |
) |
|||
|
Goodwill impairment |
|
— |
|
— |
|
2,682,000 |
|
|||
|
Changes in operating assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|||
|
Receivables |
|
2,880,000 |
|
1,653,000 |
|
(2,239,000 |
) |
|||
|
Inventories, prepaid expenses, other assets and income taxes receivable |
|
(372,000 |
) |
(1,858,000 |
) |
4,407,000 |
|
|||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
(658,000 |
) |
810,000 |
|
(1,253,000 |
) |
|||
|
Trade accounts payable, accrued liabilities, insurance reserves and income taxes payable |
|
1,010,000 |
|
833,000 |
|
994,000 |
|
|||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
(1,008,000 |
) |
151,000 |
|
695,000 |
|
|||
|
Net cash provided by operating activities |
|
17,609,000 |
|
12,649,000 |
|
11,118,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|||
|
Proceeds from sale of assets |
|
832,000 |
|
1,264,000 |
|
13,290,000 |
|
|||
|
Capital expenditures |
|
(9,495,000 |
) |
(4,222,000 |
) |
(6,442,000 |
) |
|||
|
Acquisition of companies, net of cash acquired |
|
(3,819,000 |
) |
— |
|
— |
|
|||
|
Net cash provided by (used in) investing activities |
|
(12,482,000 |
) |
(2,958,000 |
) |
6,848,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|||
|
Borrowings under long-term debt |
|
85,823,000 |
|
63,161,000 |
|
592,000 |
|
|||
|
Repayments of long-term debt |
|
(86,288,000 |
) |
(89,221,000 |
) |
(2,507,000 |
) |
|||
|
Borrowings under revolving credit facility |
|
— |
|
42,159,000 |
|
201,781,000 |
|
|||
|
Repayments of revolving credit facility |
|
— |
|
(27,674,000 |
) |
(216,266,000 |
) |
|||
|
Book overdraft |
|
196,000 |
|
(2,725,000 |
) |
(514,000 |
) |
|||
|
Debt issuance costs |
|
— |
|
(1,452,000 |
) |
(160,000 |
) |
|||
|
Proceeds from issuance of common stock |
|
213,000 |
|
38,000 |
|
— |
|
|||
|
Repurchase of common stock and Series B Preferred stock |
|
(54,000 |
) |
(35,000 |
) |
— |
|
|||
|
Issuance of Series B Preferred stock |
|
158,000 |
|
37,000 |
|
— |
|
|||
|
Net cash provided by (used in) financing activities |
|
48,000 |
|
(15,712,000 |
) |
(17,074,000 |
) |
|||
|
Net change in cash and cash equivalents |
|
5,175,000 |
|
(6,021,000 |
) |
892,000 |
|
|||
|
Cash and cash equivalents at beginning of year |
|
1,030,000 |
|
6,205,000 |
|
184,000 |
|
|||
|
Cash and cash equivalents at end of year |
|
$ |
6,205,000 |
|
$ |
184,000 |
|
$ |
1,076,000 |
|
See notes 14 and 16 for supplementary cash flow information.
See accompanying notes to consolidated financial statements.
24
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(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.
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 twelve 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. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Penhall International Corp. and its wholly owned subsidiary Penhall Company (collectively, “the Company” or “Penhall”). Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Penhall Leasing, a California single member limited liability company and Bob Mack Company, Inc. a California Corporation. 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 the 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.
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.
Income from claims for additional contract compensation is recorded upon settlement of the disputed amount. 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Included in the cash balance at June 30, 2003 and 2004 is $0.2 million and $0 million that is restricted, respectively.
25
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
INVENTORIES
Inventories, which consist primarily of diamond cutting blades and 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 provides for depreciation of property, plant and equipment based on the following estimated useful lives of the assets, using the straight-line method and a residual value ranging from 7.5% to 10%:
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
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 No. 141 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 adopted these accounting standards effective July 1, 2002. We perform our annual impairment analysis at June 30 of each year. We will perform an earlier impairment analysis if a triggering event occurs that warrants such analysis.
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
The following is a reconciliation of net loss and loss per share between the amounts reported for the years ended June 30, 2002, 2003 and 2004 and the adjusted amounts reflecting these new accounting rules:
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Net loss: |
|
|
|
|
|
|
|
|||
|
Reported loss available to common stockholders |
|
$ |
(9,026,000 |
) |
$ |
(14,319,000 |
) |
$ |
(15,192,000 |
) |
|
Add back: Goodwill amortization (net of income taxes) |
|
399,000 |
|
— |
|
— |
|
|||
|
Adjusted net loss available to common stockholders |
|
$ |
(8,627,000 |
) |
$ |
(14,319,000 |
) |
$ |
(15,192,000 |
) |
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|||
|
Reported basic and diluted loss per share |
|
$ |
(9.16 |
) |
$ |
(14.52 |
) |
$ |
(15.40 |
) |
|
Add back: Goodwill amortization (net of income taxes) |
|
.40 |
|
— |
|
— |
|
|||
|
Adjusted basic and diluted loss per share |
|
$ |
(8.76 |
) |
$ |
(14.52 |
) |
$ |
(15.40 |
) |
26
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Through June 30, 2002, the Company accounted for long-lived assets under SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. 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. The Company has not historically experienced significant exposure related to environmental remediation costs.
SELF-INSURANCE
Effective May 2001, the Company increased its third-party insurance deductible to $250,000 per occurrence effectively creating self-insurance for the retained risk to the Company. 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 accumulation of estimates for reported losses and includes a provision, based on past experience and using actuarial assumptions, for losses incurred but not reported. The method of determining such estimates and establishing the resulting reserves is continually reviewed and updated. Any adjustments resulting therefrom are reflected in current operations. As of June 30, 2003 and June 30, 2004, the Company had recorded a discounted accrued liability for self-insurance of $6,727,000 and $7,576,000, of which $1,569,000 and $2,698,000 are current at June 30, 2003 and 2004, respectively. The discount rate utilized was 4% for the years ended June 30, 2003 and 2004. The accrued liability on an undiscounted basis was $7,339,000 and $8,253,000 at June 30, 2003 and 2004, respectively. Management believes that the accrual is adequate to cover the losses incurred to date; however, this accrual is based on estimates and the ultimate liability may be more or less than the amount provided.
STOCK-BASED COMPENSATION
The Company observes the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) by continuing to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company applies the intrinsic value method as outlined in APB No. 25 and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized on options granted to employees. SFAS No. 123 requires that the Company provide pro forma information regarding net loss and net loss per common share as if compensation cost for the Company’s stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the
27
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
disclosure portion of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring quarterly SFAS No. 123 pro forma disclosure.
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:
|
|
|
Year ended June 30, |
|
|||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Net loss available to common stockholders as reported |
|
$ |
(9,026,000 |
) |
$ |
(14,319,000 |
) |
$ |
(15,192,000 |
) |
|
Add: Stock-based compensation expense included in reported net loss 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 |
|
(16,000 |
) |
(20,000 |
) |
(10,000 |
) |
|||
|
Pro forma net loss available to common stockholders |
|
$ |
(9,042,000 |
) |
$ |
(14,339,000 |
) |
$ |
(15,202,000 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Basic and diluted loss per share as reported |
|
$ |
(9.16 |
) |
$ |
(14.52 |
) |
$ |
(15.40 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Pro forma basic and diluted loss per share |
|
$ |
(9.18 |
) |
$ |
(14.54 |
) |
$ |
(15.41 |
) |
As of November 2001 (grant date), the weighted average fair value of options granted was $58.51. This was determined using the Black-Scholes option pricing model with the following assumptions used for calculation: risk-free interest rate of 4.7%, volatility of 3.01%, dividend rate of 0% and an expected life of 10 years.
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 potentially dilutive securities. The dilutive effect of outstanding options is reflected in diluted per share by application of the treasury stock method. During the years ended June 30, 2002, 2003 and 2004, diluted loss per share is the same as basic loss per share as options to purchase 9,260, 9,125, and 8,060 shares of common stock were not included in the computation of diluted loss per share for the years ended June 2002, 2003 and 2004, respectively, as the effect would have been anti-dilutive.
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.
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 and on a longer-term, fixed price basis. The Company does not account for, or manage, the hourly or fixed-price rentals in a separate manner.
28
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
COMPREHENSIVE INCOME (LOSS)
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 (loss) equals net income (loss) for each of the years in the three-year period ended June 30, 2004.
RECLASSIFICATIONS
Certain 2002 and 2003 balances have been reclassified to conform to the presentation used in 2004.
(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:
|
|
|
YEAR ENDED JUNE 30, |
|
||||
|
|
|
2003 |
|
2004 |
|
||
|
Years ending June 30: |
|
|
|
|
|
||
|
2004 |
|
$ |
3,284,000 |
|
$ |
— |
|
|
2005 |
|
513,000 |
|
3,489,000 |
|
||
|
2006 |
|
308,000 |
|
545,000 |
|
||
|
2007 |
|
— |
|
327,000 |
|
||
|
|
|
$ |
4,105,000 |
|
$ |
4,361,000 |
|
Transactions in the allowance for doubtful receivables are summarized as follows:
|
|
|
YEAR ENDED JUNE 30, |
|
|||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance, beginning of year |
|
$ |
1,763,000 |
|
$ |
1,421,000 |
|
$ |
1,592,000 |
|
|
Provision for doubtful accounts |
|
340,000 |
|
767,000 |
|
427,000 |
|
|||
|
Accounts (charged off) collected |
|
(682,000 |
) |
(596,000 |
) |
(702,000 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance, end of year |
|
$ |
1,421,000 |
|
$ |
1,592,000 |
|
$ |
1,317,000 |
|
(3) OTHER ASSETS:
Other assets consist of the following:
|
|
|
JUNE 30, |
|
JUNE 30, |
|
||
|
|
|
|
|
|
|
||
|
Covenants not to compete |
|
$ |
1,887,000 |
|
$ |
1,887,000 |
|
|
Accumulated amortization |
|
(701,000 |
) |
(1,070,000 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
$ |
1,186,000 |
|
$ |
817,000 |
|
The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $286,000, $376,000, and $369,000 for the years ended June 30, 2002, 2003 and 2004, respectively. The Company expects amortization expense for these assets of $315,000 and $305,000 and $197,000, in 2005, 2006, and 2007, respectively.
29
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
4) GOODWILL IMPAIRMENT
As part of its quarterly review of financial results in the third quarter of fiscal 2004, the Company determined that the continued decline in market conditions within the Company’s industry was a triggering event possibly indicating goodwill impairment. Accordingly, the Company evaluated the recoverability of its goodwill in accordance with SFAS No. 142.
Under the first step of the SFAS No. 142 test, we determined the fair value of the reporting unit based on cash flow utilizing a multiple of earnings before interest, depreciation, taxes and amortization (EBIDTA). The multiple was determined based on prior tansactions conducted by the company and by others in comparible market sectors to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. As such, the Company was required to perform the second step analysis on the reporting unit that failed the first step in order to determine the amount of the impairment loss. The Company then performed a preliminary second step analysis in connection with the impairment and determined that an impairment charge of $353,000 was necessary for the reporting unit. The charge of $353,000 represents all of the goodwill for this reporting unit.
The Company performed the annual impairment test as of June 30, 2004 utilizing a multiple of EBITDA to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. The Company performed the second step analysis on the reporting unit to determine the impairment loss. The Company utilized a third party valuation specialist to assist in the calculation of the impairment on the reporting unit. In the second step analysis, we assigned fair market values to intangible assets that include assembled workforce, non-compete agreements, tradename, and backlog to determine the remaining fair value of the goodwill. As a result of the second step analysis we determined that an impairment charge of $2,329,000 was necessary for the reporting unit. This represents all of the goodwill for this reporting unit.
Total goodwill impairment of $2,682,000 has been included in loss from operations for the year ended June 30, 2004. Substantially all of the remaining goodwill resides in one reporting unit. Goodwill as of June 30, 2003 and 2004 was $9,053,000 and $6,371,000, respectively.
5) ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
|
|
|
JUNE 30, |
|
JUNE 30, |
|
||
|
|
|
|
|
|
|
||
|
Union benefits |
|
$ |
657,000 |
|
$ |
936,000 |
|
|
Accrued bonuses |
|
423,000 |
|
990,000 |
|
||
|
Accrued interest |
|
4,972,000 |
|
5,020,000 |
|
||
|
Accrued insurance |
|
776,000 |
|
1,157,000 |
|
||
|
Accrued vacation |
|
531,000 |
|
446,000 |
|
||
|
Accrued payroll |
|
2,026,000 |
|
2,167,000 |
|
||
|
Non-compete agreements |
|
909,000 |
|
585,000 |
|
||
|
Due to BRS |
|
75,000 |
|
375,000 |
|
||
|
Other |
|
568,000 |
|
1,181,000 |
|
||
|
|
|
$ |
10,937,000 |
|
$ |
12,857,000 |
|
30
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(6) LONG-TERM DEBT, REVOLVING CREDIT FACILITY AND SENIOR NOTES
Long-term Debt
Long-term debt consists of the following:
|
|
|
JUNE 30, |
|
JUNE 30, |
|
||
|
|
|
|
|
|
|
||
|
Note payable secured by certain equipment, interest of 0%, imputed interest at 3.9% per annum which resulted in a discount of $24,000; annual payments of $123,000 due December 31, 2003 and 2004 |
|
$ |
237,000 |
|
$ |
121,000 |
|
|
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest of $200,000 paid in March 2004 |
|
196,000 |
|
— |
|
||
|
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest of $1,500,000 paid in March 2004 |
|
1,473,000 |
|
— |
|
||
|
Various capital leases and equipment financing agreements due through October 2005 with interest ranging from 0% to 9.6% per annum |
|
821,000 |
|
874,000 |
|
||
|
|
|
|
|
|
|
||
|
Other |
|
183,000 |
|
— |
|
||
|
|
|
2,910,000 |
|
995,000 |
|
||
|
Less current installments of long-term debt |
|
2,551,000 |
|
882,000 |
|
||
|
|
|
|
|
|
|
||
|
Long-term debt, excluding current installments |
|
$ |
359,000 |
|
$ |
113,000 |
|
Annual maturities of long-term debt for the next five years are as follows:
|
|
|
JUNE 30 |
|
|
|
2005 |
|
$ |
882,000 |
|
|
2006 |
|
113,000 |
|
|
|
2007 |
|
— |
|
|
|
2008 |
|
— |
|
|
|
2009 |
|
— |
|
|
|
Thereafter |
|
— |
|
|
|
|
|
|
|
|
|
|
|
$ |
995,000 |
|
Revolving Credit Facility
As of May 22, 2003, the Company entered into a new credit facility (“The New Credit”). The interest rate on The New Credit is calculated based upon LIBOR plus 350 basis points. In addition the Company is also required to pay the lender a commitment fee equal to 0.5% per annum in respect of undrawn commitments under The New Credit. The New Credit is a $50 million, three year asset based borrowing facility, consisting of a $50 million revolving credit facility, the (“New Revolver”), with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit is limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.
The provisions of the New Credit facility include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The New Credit and the associated lock-box agreement satisfy the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). We have reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in SFAS No. 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear there were any subjective acceleration clauses that fit directly into the definition provided in SFAS No. 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. More specifically, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. As a result, the Company classifies borrowings under the New Credit facility as a short-term obligation. In addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2004, the Company had no outstanding borrowings, $15.6 million of outstanding letters of credit, borrowing base limitations of $8.0 million and borrowings unused and available under The New Credit of $26.4 million.
31
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
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 anticipates extending or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.
From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.
(7) INCOME TAXES
The Company’s pre-tax loss for the years ended June 30, 2002, 2003 and 2004 was generated from domestic operations. Income tax expense (benefit) is comprised of the following components for each fiscal year ended June 30:
|
|
|
YEAR ENDED JUNE 30, |
|
|||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Current tax expense (benefit): |
|
|
|
|
|
|
|
|||
|
Federal |
|
$ |
(180,000 |
) |
$ |
(2,131,000 |
) |
$ |
594,000 |
|
|
State |
|
60,000 |
|
38,000 |
|
185,000 |
|
|||
|
|
|
(120,000 |
) |
(2,093,000 |
) |
779,000 |
|
|||
|
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|||
|
Federal |
|
(589,000 |
) |
(910,000 |
) |
(2,570,000 |
) |
|||
|
State |
|
(147,000 |
) |
(438,000 |
) |
(551,000 |
) |
|||
|
|
|
(736,000 |
) |
(1,348,000 |
) |
(3,121,000 |
) |
|||
|
|
|
$ |
(856,000 |
) |
$ |
(3,441,000 |
) |
$ |
(2,342,000 |
) |
As of June 30, 2003 and 2004, the Company has a current net deferred tax asset of $3,363,000 and $2,034,000, respectively, and a net non-current deferred tax liability of $8,221,000 and $3,771,000, respectively.
32
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
Significant components of the Company’s deferred income tax assets and liabilities are as follows:
|
|
|
JUNE 30, |
|
JUNE 30, |
|
||
|
Deferred tax assets: |
|
|
|
|
|
||
|
Allowance for doubtful receivables |
|
$ |
640,000 |
|
$ |
529,000 |
|
|
Accruals not currently deductible and other |
|
2,723,000 |
|
3,696,000 |
|
||
|
Net operating loss carryforwards |
|
726,000 |
|
45,000 |
|
||
|
Total deferred tax assets |
|
4,089,000 |
|
4,270,000 |
|
||
|
Deferred tax liabilities — depreciation and amortization |
|
(8,947,000 |
) |
(6,007,000 |
) |
||
|
Net deferred tax liability |
|
$ |
(4,858,000 |
) |
$ |
(1,737,000 |
) |
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, therefore no valuation allowance has been recorded by the Company.
As of June 30, 2004, we had net operating loss carryforwards (after carrybacks) for state income tax purposes of approximately $876,000. The state carryforwards have varying expiration dates beginning in 2014. As of June 30, 2004 the Company had federal AMT credits totaling $176,000 that have no expiration date.
Deferred income tax benefit consists of the following:
|
|
|
YEAR ENDED JUNE 30 |
|
|||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Allowance for doubtful receivables |
|
$ |
138,000 |
|
$ |
(69,000 |
) |
$ |
111,000 |
|
|
Accruals not currently deductible and other |
|
(916,000 |
) |
(187,000 |
) |
(973,000 |
) |
|||
|
Depreciation and amortization |
|
68,000 |
|
(392,000 |
) |
(2,940,000 |
) |
|||
|
Net operating loss carryforwards |
|
(26,000 |
) |
(700,000 |
) |
681,000 |
|
|||
|
|
|
$ |
(736,000 |
) |
$ |
(1,348,000 |
) |
$ |
(3,121,000 |
) |
Income tax benefit for each fiscal year ended June 30 differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to loss before income taxes as follows:
|
|
|
YEAR ENDED JUNE 30 |
|
|||||||
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
Computed “expected” tax benefit |
|
$ |
(865,000 |
) |
$ |
(3,276,000 |
) |
$ |
(2,795,000 |
) |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|||
|
State income taxes, net of Federal benefit |
|
(57,000 |
) |
(264,000 |
) |
(238,000 |
) |
|||
|
Non-deductible goodwill impairment charge |
|
— |
|
— |
|
815,000 |
|
|||
|
Other, net |
|
66,000 |
|
99,000 |
|
(124,000 |
) |
|||
|
|
|
$ |
(856,000 |
) |
$ |
(3,441,000 |
) |
$ |
(2,342,000 |
) |
33
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(8) 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 2002, 2003 and 2004 aggregated $2,589,000, $2,726,000 and $2,878,000, 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. Company contributions expensed under the plan were $515,000, $335,000 and $174,000 for the years ended June 30, 2002, 2003 and 2004, respectively.
(9) STOCK COMPENSATION PLANS
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. On November 16, 2001, the Company issued 3,647 shares of common stock for an aggregate purchase price of $213,000 and 108 shares of Series B Preferred Stock for an aggregate purchase price of $158,000 to Eligible Participants under the Plan.
On November 16, 2001, 9,420 stock options were granted to Eligible Participants under the Plan at an exercise price of $58.51. These options vest ratably over 5 years and are exercisable up to ten years from date of grant. On November 1, 2002, the Company issued 743 shares of common stock for an aggregate purchase price of $38,000 and 22 shares of Series B Preferred Stock for an aggregate purchase price of $37,000 to Eligible Participants under the Plan.
34
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
Stock option activity during the periods indicated is as follows:
|
|
|
Number of shares |
|
Weighted-average |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2002 |
|
9,260 |
|
$ |
58.51 |
|
|
Granted |
|
— |
|
$ |
— |
|
|
Forfeited |
|
(135 |
) |
58.51 |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2003 |
|
9,125 |
|
58.51 |
|
|
|
Granted |
|
— |
|
— |
|
|
|
Forfeited |
|
(1,065 |
) |
58.51 |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004 |
|
8,060 |
|
$ |
58.51 |
|
At June 30, 2004 there were 2,149 exercisable options. The weighted average price and the weighted average remaining life of outstanding options was $58.51 and 7.3 years, respectively.
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.
Shares outstanding that are subject to the buy-out provisions of the Stockholders Agreement are 346,011 and 334,512 shares of common stock and 8,323 and 7,970 shares of Series B Preferred stock at June 30, 2003 and 2004, respectively
35
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(10) REDEEMABLE PREFERRED STOCK
Senior Exchangeable Preferred Stock
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. On February 1, 2007, the Senior Exchangeable Preferred Stock plus accretion will be valued at approximately $24.4 million. The Company anticipates extending or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.
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.
36
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
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. On August 1, 2007, the Series A Preferred Stock plus accretion will be valued at $33.6 million. The Company anticipates extending or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.
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.
(11) 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 October 2005. At June 30, 2003 and 2004, the cost of construction equipment and the related depreciation recorded for equipment under capital leases were as follows:
|
|
|
2003 |
|
2004 |
|
||
|
Construction Equipment |
|
$ |
340,000 |
|
$ |
340,000 |
|
|
Less accumulated depreciation |
|
192,000 |
|
292,000 |
|
||
|
|
|
$ |
148,000 |
|
$ |
48,000 |
|
37
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
The present value of the minimum lease payments as of June 30, 2004 is $54,000 (note 6). Amortization of assets held under capital leases is included in depreciation expense.
(b) Operating Leases
The Company and its subsidiaries lease various properties and equipment under long-term agreements, which expire at varying dates through December 2023. Certain of these leases provide for renegotiation of annual rentals at specified dates. Rent expense was $1,513,000, $1,573,000 and $2,549,000 for the years ended June 30, 2002, 2003 and 2004, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2004 are as follows:
|
YEARS ENDING JUNE 30: |
|
|
|
|
|
2005 |
|
$ |
2,752,000 |
|
|
2006 |
|
2,559,000 |
|
|
|
2007 |
|
2,215,000 |
|
|
|
2008 |
|
1,985,000 |
|
|
|
2009 |
|
1,883,000 |
|
|
|
Thereafter |
|
21,321,000 |
|
|
|
|
|
$ |
32,715,000 |
|
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. At June 30, 2003 and 2004, the Company had approximately $175,000 and $975,000 respectively, on deposit at one financial institution.
There were no customers that accounted for more than 5% of consolidated revenues or outstanding accounts receivable as of June 30, 2002, 2003 or 2004.
Risks and Uncertainties
The Company is required to meet certain financial and operating criteria as established by respective Department of Transportation agencies 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.
Letters of Credit
As of June 30, 2004, the Company had outstanding standby letters of credit of $15,612,000 with a financial institution for the benefit of the Company’s insurers (note 6). The standby letters of credit reduce the amount of borrowings available under the Company’s New Credit. The standby letters of credit are automatically renewable unless participating parties notify the other party thirty days prior to cancellation.
38
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
Surety Bonds
As is customary in the construction business, the Company is required to provide surety bonds to secure our performance under construction contracts. The Company’s ability to obtain surety bonds primarily depends upon capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of the backlog and their underwriting standards, which may change from time to time. Since 2001, the surety industry has undergone significant changes with several companies withdrawing completely from the industry or significantly reducing their bonding commitment. In addition, certain re-insurers of surety risk have limited their participation in this market. Further, the Company’s current surety has indicated that another fiscal year of operating losses by the Company could result in the discontinuation of their surety support. Therefore, the Company may be unable to obtain surety bonds, which could have a material adverse effect on our business.
Litigation
The Company has an employment related legal matter which was settled and approved by the court subsequent to year end. The Company estimates that reserves as of June 30, 2004 are sufficient based on the settlement. As of June 30, 2004, the Company has accrued $250,000 related to this matter.
There are various additional 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 advice of legal counsel, that the outcome of these preoceedings 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 – Related Party
Upon consummation of the Recapitalization Mergers, the Company entered into a management services agreement (the “Management Agreement”) with Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) pursuant to which BRS 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 fees payable pursuant to the Management Agreement were negotiated on an arm’s-length basis by representatives of BRS 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. The amount owed to BRS as of June 30, 2003 and 2004 was $75,000 and $375,000, respectively, and is recorded in accrued liabilities. During the years ended June 30, 2002, 2003 and 2004, the Company recorded $300,000, respectively, under the arrangement which has been recorded in general and administrative expenses in the statement of operations.
(12) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings on uncompleted contracts consists of the following:
|
|
|
JUNE 30, |
|
JUNE 30, |
|
||
|
Costs incurred on uncompleted contracts |
|
$ |
45,511,000 |
|
$ |
50,785,000 |
|
|
Estimated earnings to date |
|
3,108,000 |
|
7,232,000 |
|
||
|
|
|
48,619,000 |
|
58,017,000 |
|
||
|
Less billings to date |
|
47,746,000 |
|
56,586,000 |
|
||
|
|
|
$ |
873,000 |
|
$ |
1,431,000 |
|
|
Included in accompanying consolidated balance sheets under the following captions: |
|
|
|
|
|
||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
1,704,000 |
|
$ |
2,957,000 |
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
(831,000 |
) |
(1,526,000 |
) |
||
|
|
|
$ |
873,000 |
|
$ |
1,431,000 |
|
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized 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.
39
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2003 and 2004.
|
|
|
2003 |
|
2004 |
|
||||||||
|
|
|
CARRYING |
|
FAIR |
|
CARRYING |
|
FAIR |
|
||||
|
Financial assets: |
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
184,000 |
|
$ |
184,000 |
|
$ |
1,076,000 |
|
$ |
1,076,000 |
|
|
Net receivables |
|
31,618,000 |
|
31,618,000 |
|
33,430,000 |
|
33,430,000 |
|
||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
1,704,000 |
|
1,704,000 |
|
2,957,000 |
|
2,957,000 |
|
||||
|
Taxes receivable |
|
2,648,000 |
|
2,648,000 |
|
— |
|
— |
|
||||
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
||||
|
Current installments of long-term debt |
|
2,551,000 |
|
2,551,000 |
|
882,000 |
|
882,000 |
|
||||
|
Borrowings under revolving credit facility |
|
14,485,000 |
|
14,485,000 |
|
— |
|
— |
|
||||
|
Trade accounts payable |
|
7,953,000 |
|
7,953,000 |
|
5,664,000 |
|
5,664,000 |
|
||||
|
Accrued liabilities, short-term portion of insurance reserves, and taxes payable |
|
12,506,000 |
|
12,506,000 |
|
15,555,000 |
|
15,555,000 |
|
||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
831,000 |
|
831,000 |
|
1,526,000 |
|
1,526,000 |
|
||||
|
Long-term debt, excluding current installments |
|
359,000 |
|
359,000 |
|
113,000 |
|
113,000 |
|
||||
|
Long-term portion of insurance reserves |
|
5,158,000 |
|
5,158,000 |
|
4,878,000 |
|
4,878,000 |
|
||||
|
Senior Notes |
|
100,000,000 |
|
78,000,000 |
|
100,000,000 |
|
94,500,000 |
|
||||
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, costs and estimated earnings in excess of billings on uncompleted contracts, taxes receivable, current installments of long-term debt, trade accounts payables, accrued liabilities, short-term portion of insurance reserves and and taxes payable, and billings in excess of costs and estimated earnings on uncompleted contracts: The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-term debt, excluding current installments, revolving credit facility, and Senior Notes: The fair value of the Company’s long-term debt and revolving credit facility 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. The fair value of the Senior Notes is the quoted market price as of June 30, 2004.
Long-term portion of insurance reserves: The fair value of the Company’s long-term portion of insurance reserves has been calculated utilizing a 4% discount rate for the years ended June 30, 2003 and 2004. These rates are consistent with market discount rates for determining the present value of future liabilities.
(14) SALE-LEASEBACK
On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of our 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has four 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.2 million will be amortized over the initial term of the leases of 20 years. Through June 30, 2004, the Company has amortized $64,000 of the gain and recorded $709,000 of rent expense under the leaseback.
40
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(15) GUARANTORS AND FINANCIAL INFORMATION
The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The Guarantor Subsidiaries, (Penhall Rental Corp. (through dissolution effective July 1, 2002) and Penhall Company and subsidiaries), guarantee certain obligations of the Company, including the Senior Notes. 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, 2003 and 2004 and for the years ended June 30, 2002, 2003 and 2004 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,
d. the Company on a consolidated basis.
41
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
|
JUNE 30, 2003 |
|
||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
||||
|
Current assets: |
|
|
|
|
|
|
|
|
|
||||
|
Receivables, net |
|
$ |
— |
|
$ |
31,618,000 |
|
$ |
— |
|
$ |
31,618,000 |
|
|
Inventories |
|
— |
|
2,362,000 |
|
— |
|
2,362,000 |
|
||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
— |
|
1,704,000 |
|
— |
|
1,704,000 |
|
||||
|
Other current assets |
|
2,994,000 |
|
7,119,000 |
|
(152,000 |
) |
9,961,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total current assets |
|
2,994,000 |
|
42,803,000 |
|
(152,000 |
) |
45,645,000 |
|
||||
|
Net property, plant and equipment |
|
8,798,000 |
|
44,603,000 |
|
— |
|
53,401,000 |
|
||||
|
Intercompany assets |
|
— |
|
19,398,000 |
|
(19,398,000 |
) |
— |
|
||||
|
Other assets, net |
|
2,051,000 |
|
11,504,000 |
|
— |
|
13,555,000 |
|
||||
|
Investment in subsidiaries |
|
70,399,000 |
|
— |
|
(70,399,000 |
) |
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
$ |
84,242,000 |
|
$ |
118,308,000 |
|
$ |
(89,949,000 |
) |
$ |
112,601,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Liabilities and Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Current installments of long-term debt |
|
$ |
3,000 |
|
$ |
2,548,000 |
|
$ |
— |
|
$ |
2,551,000 |
|
|
Borrowings under revolving credit facility |
|
— |
|
14,485,000 |
|
— |
|
14,485,000 |
|
||||
|
Trade accounts payable |
|
9,000 |
|
8,096,000 |
|
(152,000 |
) |
7,953,000 |
|
||||
|
Accrued liabilities |
|
5,006,000 |
|
5,931,000 |
|
— |
|
10,937,000 |
|
||||
|
Current portion of insurance reserves |
|
— |
|
1,569,000 |
|
— |
|
1,569,000 |
|
||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
— |
|
831,000 |
|
— |
|
831,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total current liabilities |
|
5,018,000 |
|
33,460,000 |
|
(152,000 |
) |
38,326,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Long-term debt, excluding current installments |
|
180,000 |
|
179,000 |
|
— |
|
359,000 |
|
||||
|
Long-term portion of insurance reserves |
|
— |
|
5,158,000 |
|
— |
|
5,158,000 |
|
||||
|
Intercompany liabilities |
|
19,398,000 |
|
— |
|
(19,398,000 |
) |
— |
|
||||
|
Senior notes |
|
100,000,000 |
|
— |
|
— |
|
100,000,000 |
|
||||
|
Deferred tax liabilities |
|
(891,000 |
) |
9,112,000 |
|
— |
|
8,221,000 |
|
||||
|
Senior Exchangeable Preferred stock |
|
16,744,000 |
|
— |
|
— |
|
16,744,000 |
|
||||
|
Series A Preferred stock |
|
19,737,000 |
|
— |
|
— |
|
19,737,000 |
|
||||
|
Stockholders’ equity (deficit) |
|
(75,944,000 |
) |
70,399,000 |
|
(70,399,000 |
) |
(75,944,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
$ |
84,242,000 |
|
$ |
118,308,000 |
|
$ |
(89,949,000 |
) |
$ |
112,601,000 |
|
42
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
|
|
|
JUNE 30, 2004 |
|
||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
||||
|
Current assets: |
|
|
|
|
|
|
|
|
|
||||
|
Receivables, net |
|
$ |
— |
|
$ |
33,430,000 |
|
$ |
— |
|
$ |
33,430,000 |
|
|
Inventories |
|
— |
|
2,171,000 |
|
— |
|
2,171,000 |
|
||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
— |
|
2,957,000 |
|
— |
|
2,957,000 |
|
||||
|
Other current assets |
|
114,000 |
|
5,194,000 |
|
— |
|
5,308,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total current assets |
|
114,000 |
|
43,752,000 |
|
— |
|
43,866,000 |
|
||||
|
Net property, plant and equipment |
|
23,000 |
|
36,017,000 |
|
— |
|
36,040,000 |
|
||||
|
Other assets, net |
|
1,388,000 |
|
8,113,000 |
|
— |
|
9,501,000 |
|
||||
|
Investment in subsidiaries |
|
60,171,000 |
|
— |
|
(60,171,000 |
) |
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
$ |
61,696,000 |
|
$ |
87,882,000 |
|
$ |
(60,171,000 |
) |
$ |
89,407,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Liabilities and Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Current installments of long-term debt |
|
$ |
— |
|
$ |
882,000 |
|
$ |
— |
|
$ |
882,000 |
|
|
Trade accounts payable |
|
3,000 |
|
5,661,000 |
|
— |
|
5,664,000 |
|
||||
|
Accrued liabilities and taxes payable |
|
5,725,000 |
|
7,132,000 |
|
— |
|
12,857,000 |
|
||||
|
Current portion of insurance reserves |
|
— |
|
2,698,000 |
|
— |
|
2,698,000 |
|
||||
|
Current portion of deferred gain–sale-leaseback |
|
109,000 |
|
— |
|
— |
|
109,000 |
|
||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
— |
|
1,526,000 |
|
— |
|
1,526,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total current liabilities |
|
5,837,000 |
|
17,899,000 |
|
— |
|
23,736,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Long-term debt, excluding current installments |
|
— |
|
113,000 |
|
— |
|
113,000 |
|
||||
|
Long-term portion of deferred gain – sale-leaseback |
|
2,015,000 |
|
— |
|
— |
|
2,015,000 |
|
||||
|
Long-term portion of insurance reserves |
|
— |
|
4,878,000 |
|
— |
|
4,878,000 |
|
||||
|
Senior notes |
|
100,000,000 |
|
— |
|
— |
|
100,000,000 |
|
||||
|
Deferred tax liabilities |
|
(1,050,000 |
) |
4,821,000 |
|
— |
|
3,771,000 |
|
||||
|
Senior Exchangeable Preferred stock |
|
18,602,000 |
|
— |
|
— |
|
18,602,000 |
|
||||
|
Series A Preferred stock |
|
22,484,000 |
|
— |
|
— |
|
22,484,000 |
|
||||
|
Stockholders’ equity (deficit) |
|
(86,192,000 |
) |
60,171,000 |
|
(60,171,000 |
) |
(86,192,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
$ |
61,696,000 |
|
$ |
87,882,000 |
|
$ |
(60,171,000 |
) |
$ |
89,407,000 |
|
43
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
YEAR ENDED JUNE 30, 2002 |
|
|||||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenues |
|
$ |
— |
|
$ |
11,664,000 |
|
$ |
161,242,000 |
|
$ |
(11,664,000 |
) |
$ |
161,242,000 |
|
|
Cost of revenues |
|
— |
|
— |
|
132,043,000 |
|
(10,146,000 |
) |
121,897,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit |
|
— |
|
11,664,000 |
|
29,199,000 |
|
(1,518,000 |
) |
39,345,000 |
|
|||||
|
General and administrative expenses |
|
411,000 |
|
352,000 |
|
29,119,000 |
|
(1,518,000 |
) |
28,364,000 |
|
|||||
|
Other operating income, net |
|
81,000 |
|
45,000 |
|
713,000 |
|
— |
|
839,000 |
|
|||||
|
Equity in earnings of subsidiaries |
|
7,247,000 |
|
— |
|
— |
|
(7,247,000 |
) |
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Earnings from operations |
|
6,917,000 |
|
11,357,000 |
|
793,000 |
|
(7,247,000 |
) |
11,820,000 |
|
|||||
|
Interest expense |
|
14,062,000 |
|
19,000 |
|
212,000 |
|
— |
|
14,293,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Earnings (loss) before income taxes |
|
(7,145,000 |
) |
11,338,000 |
|
581,000 |
|
(7,247,000 |
) |
(2,473,000 |
) |
|||||
|
Income tax expense (benefit) |
|
(5,528,000 |
) |
4,403,000 |
|
269,000 |
|
— |
|
(856,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings (loss) |
|
$ |
(1,617,000 |
) |
$ |
6,935,000 |
|
$ |
312,000 |
|
$ |
(7,247,000 |
) |
$ |
(1,617,000 |
) |
44
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
|
|
|
YEAR ENDED JUNE 30, 2003 |
|
||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenues |
|
$ |
5,174,000 |
|
$ |
159,617,000 |
|
$ |
(5,174,000 |
) |
$ |
159,617,000 |
|
|
Cost of revenues |
|
— |
|
131,217,000 |
|
(3,591,000 |
) |
127,626,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit |
|
5,174,000 |
|
28,400,000 |
|
(1,583,000 |
) |
31,991,000 |
|
||||
|
General and administrative expenses |
|
829,000 |
|
28,689,000 |
|
(1,583,000 |
) |
27,935,000 |
|
||||
|
Other operating income, net |
|
11,000 |
|
927,000 |
|
— |
|
938,000 |
|
||||
|
Equity in earnings of subsidiaries |
|
106,000 |
|
— |
|
(106,000 |
) |
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) from operations |
|
4,462,000 |
|
638,000 |
|
(106,000 |
) |
4,994,000 |
|
||||
|
Interest expense |
|
13,918,000 |
|
437,000 |
|
— |
|
14,355,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) before income taxes |
|
(9,456,000 |
) |
201,000 |
|
(106,000 |
) |
(9,361,000 |
) |
||||
|
Income tax expense (benefit) |
|
(3,536,000 |
) |
95,000 |
|
— |
|
(3,441,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net earnings (loss) |
|
$ |
(5,920,000 |
) |
$ |
106,000 |
|
$ |
(106,000 |
) |
$ |
(5,920,000 |
) |
45
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
|
|
|
YEAR ENDED JUNE 30, 2004 |
|
||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenues |
|
$ |
5,102,000 |
|
$ |
157,030,000 |
|
$ |
(5,102,000 |
) |
$ |
157,030,000 |
|
|
Cost of revenues |
|
— |
|
125,328,000 |
|
(3,517,000 |
) |
121,811,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit |
|
5,102,000 |
|
31,702,000 |
|
(1,585,000 |
) |
35,219,000 |
|
||||
|
General and administrative expenses |
|
1,276,000 |
|
28,637,000 |
|
(1,585,000 |
) |
28,328,000 |
|
||||
|
Goodwill impairment |
|
— |
|
2,682,000 |
|
— |
|
2,682,000 |
|
||||
|
Other operating income, net |
|
— |
|
827,000 |
|
— |
|
827,000 |
|
||||
|
Equity in loss of subsidiaries |
|
(465,000 |
) |
— |
|
465,000 |
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings from operations |
|
3,361,000 |
|
1,210,000 |
|
465,000 |
|
5,036,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
12,720,000 |
|
1,160,000 |
|
— |
|
13,880,000 |
|
||||
|
Other income |
|
64,000 |
|
795,000 |
|
— |
|
859,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) before income taxes |
|
(9,295,000 |
) |
845,000 |
|
465,000 |
|
(7,985,000 |
) |
||||
|
Income tax expense (benefit) |
|
(3,652,000 |
) |
1,310,000 |
|
— |
|
(2,342,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net earnings (loss) |
|
$ |
(5,643,000 |
) |
$ |
(465,000 |
) |
$ |
465,000 |
|
$ |
(5,643,000 |
) |
46
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
YEAR ENDED JUNE 30, 2002 |
|
|||||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by (used in) operating activities |
|
$ |
(1,886,000 |
) |
$ |
7,308,000 |
|
$ |
19,434,000 |
|
$ |
(7,247,000 |
) |
$ |
17,609,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Proceeds from sale of assets |
|
— |
|
— |
|
832,000 |
|
— |
|
832,000 |
|
|||||
|
Capital expenditures |
|
— |
|
26,000 |
|
(9,521,000 |
) |
— |
|
(9,495,000 |
|
|||||
|
Acquisition of companies, net of cash acquired |
|
— |
|
— |
|
(3,819,000 |
) |
— |
|
(3,819,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by (used) in investing activities |
|
— |
|
26,000 |
|
(12,508,000 |
) |
— |
|
(12,482,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Due to (from) affiliates |
|
3,456,000 |
|
(2,101,000 |
) |
(8,602,000 |
) |
7,247,000 |
|
— |
|
|||||
|
Borrowings under long-term debt |
|
82,900,000 |
|
— |
|
2,923,000 |
|
— |
|
85,823,000 |
|
|||||
|
Repayments of long-term debt |
|
(84,787,000 |
) |
(11,000 |
) |
(1,490,000 |
) |
— |
|
(86,288,000 |
) |
|||||
|
Book overdraft |
|
— |
|
— |
|
196,000 |
|
— |
|
196,000 |
|
|||||
|
Proceeds from issuance of common stock |
|
213,000 |
|
— |
|
— |
|
— |
|
213,000 |
|
|||||
|
Repurchase of common stock and Series B Preferred stock |
|
(54,000 |
) |
— |
|
— |
|
— |
|
(54,000 |
) |
|||||
|
Issuance of Series B Preferred stock |
|
158,000 |
|
— |
|
— |
|
— |
|
158,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by (used in) financing activities |
|
1,886,000 |
|
(2,112,000 |
) |
(6,973,000 |
) |
7,247,000 |
|
48,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net change in cash and cash equivalents |
|
— |
|
5,222,000 |
|
(47,000 |
) |
— |
|
5,175,000 |
|
|||||
|
Cash and cash equivalents at beginning of year |
|
— |
|
921,000 |
|
109,000 |
|
— |
|
1,030,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents at end of year |
|
$ |
— |
|
$ |
6,143,000 |
|
$ |
62,000 |
|
$ |
— |
|
$ |
6,205,000 |
|
47
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
|
|
|
YEAR ENDED JUNE 30, 2003 |
|
|||||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by (used in) operating activities |
|
$ |
(6,029,000 |
) |
$ |
— |
|
$ |
18,678,000 |
|
$ |
— |
|
$ |
12,649,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Proceeds from sale of assets |
|
— |
|
— |
|
1,264,000 |
|
— |
|
1,264,000 |
|
|||||
|
Capital expenditures |
|
— |
|
— |
|
(4,222,000 |
) |
— |
|
(4,222,000 |
) |
|||||
|
Cash from Penhall Rental merger |
|
6,143,000 |
|
(6,143,000 |
) |
— |
|
— |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by (used) in investing activities |
|
6,143,000 |
|
(6,143,000 |
) |
(2,958,000 |
) |
— |
|
(2,958,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Due to (from) affiliates |
|
21,456,000 |
|
— |
|
(21,456,000 |
) |
— |
|
— |
|
|||||
|
Borrowings under long-term debt |
|
61,520,000 |
|
— |
|
1,641,000 |
|
— |
|
63,161,000 |
|
|||||
|
Repayments of long-term debt |
|
(82,874,000 |
) |
— |
|
(6,347,000 |
) |
— |
|
(89,221,000 |
) |
|||||
|
Borrowings under revolving credit facility |
|
— |
|
— |
|
42,159,000 |
|
— |
|
42,159,000 |
|
|||||
|
Repayments of revolving credit facility |
|
— |
|
— |
|
(27,674,000 |
) |
— |
|
(27,674,000 |
) |
|||||
|
Book overdraft |
|
— |
|
— |
|
(2,573,000 |
) |
(152,000 |
) |
(2,725,000 |
) |
|||||
|
Debt issuance costs |
|
(104,000 |
) |
— |
|
(1,348,000 |
) |
— |
|
(1,452,000 |
) |
|||||
|
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 |
|
38,000 |
|
— |
|
(15,598,000 |
) |
(152,000 |
) |
(15,712,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net change in cash and cash equivalents |
|
152,000 |
|
(6,143,000 |
) |
122,000 |
|
(152,000 |
) |
(6,021,000 |
) |
|||||
|
Cash and cash equivalents at beginning of year |
|
— |
|
6,143,000 |
|
62,000 |
|
— |
|
6,205,000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents at end of year |
|
$ |
152,000 |
|
$ |
— |
|
$ |
184,000 |
|
$ |
(152,000 |
) |
$ |
184,000 |
|
48
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
|
|
|
YEAR ENDED JUNE 30, 2004 |
|
||||||||||
|
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash provided by (used in) operating activities |
|
$ |
(1,012,000 |
) |
$ |
12,130,000 |
|
$ |
— |
|
$ |
11,118,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Proceeds from sale of assets |
|
11,312,000 |
|
1,978,000 |
|
— |
|
13,290,000 |
|
||||
|
Capital expenditures |
|
— |
|
(6,442,000 |
) |
— |
|
(6,442,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash provided by (used) in investing activities |
|
11,312,000 |
|
(4,464,000 |
) |
— |
|
6,848,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Due to (from) affiliates |
|
(10,109,000 |
) |
10,109,000 |
|
— |
|
— |
|
||||
|
Borrowings under long-term debt |
|
— |
|
592,000 |
|
— |
|
592,000 |
|
||||
|
Repayments of long-term debt |
|
(183,000 |
) |
(2,324,000 |
) |
— |
|
(2,507,000 |
) |
||||
|
Borrowings under revolving credit facility |
|
— |
|
201,781,000 |
|
— |
|
201,781,000 |
|
||||
|
Repayments of revolving credit facility |
|
— |
|
(216,266,000 |
) |
— |
|
(216,266,000 |
) |
||||
|
Book overdraft |
|
(152,000 |
) |
(514,000 |
) |
152,000 |
|
(514,000 |
) |
||||
|
Debt issuance costs |
|
— |
|
(160,000 |
) |
— |
|
(160,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash provided by (used in) financing activities |
|
(10,444,000 |
) |
(6,782,000 |
) |
152,000 |
|
(17,074,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net change in cash and cash equivalents |
|
(144,000 |
) |
884,000 |
|
152,000 |
|
892,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents at beginning of year |
|
152,000 |
|
184,000 |
|
(152,000 |
) |
184,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents at end of year |
|
$ |
8,000 |
|
$ |
1,068,000 |
|
$ |
— |
|
$ |
1,076,000 |
|
49
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
50
PENHALL
INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004
(16) 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:
|
|
|
2002 |
|
2003 |
|
2004 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|||
|
Income taxes |
|
$ |
787,000 |
|
$ |
— |
|
$ |
— |
|
|
Interest |
|
13,427,000 |
|
13,227,000 |
|
12,666,000 |
|
|||
|
Noncash investing and financing activities - |
|
|
|
|
|
|
|
|||
|
Borrowings related to the acquisition of assets |
|
$ |
547,000 |
|
$ |
— |
|
$ |
— |
|
|
Accretion of preferred stock to redemption value |
|
3,615,000 |
|
4,074,000 |
|
4,605,000 |
|
|||
|
Accrual of cumulative dividends on preferred stock |
|
3,794,000 |
|
4,325,000 |
|
4,944,000 |
|
|||
The following table details the assets acquired and liabilities assumed as part of the fiscal 2002 acquisitions. There were no acquisitions in 2003 or 2004:
|
|
|
2002 |
|
|
|
Inventory |
|
$ |
6,000 |
|
|
Property, plant and equipment |
|
6,859,000 |
|
|
|
Goodwill |
|
2,385,000 |
|
|
|
Other assets |
|
1,474,000 |
|
|
|
Accrued liabilities |
|
1,266,000 |
|
|
|
Income taxes payable |
|
227,000 |
|
|
|
Deferred tax liability |
|
1,959,000 |
|
|
|
Long-term debt |
|
3,680,000 |
|
|
51
(17) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following is unaudited supplementary financial information for 2003 and 2004:
|
|
|
FOR THE QUARTERS ENDED 2003 |
|
||||||||||
|
|
|
SEPTEMBER 30, |
|
DECEMBER 31, |
|
MARCH 31, |
|
JUNE 30, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenue |
|
$ |
46,576,000 |
|
$ |
42,044,000 |
|
$ |
29,850,000 |
|
$ |
41,147,000 |
|
|
Gross profit |
|
10,291,000 |
|
9,098,000 |
|
4,351,000 |
|
8,251,000 |
|
||||
|
Earnings (loss) before income taxes |
|
97,000 |
|
(633,000 |
) |
(5,413,000 |
) |
(3,412,000 |
) |
||||
|
Net earnings (loss) |
|
62,000 |
|
(405,000 |
) |
(3,464,000 |
) |
(2,113,000 |
) |
||||
|
Net loss available to common stockholders |
|
(1,957,000 |
) |
(2,481,000 |
) |
(5,571,000 |
) |
(4,310,000 |
) |
||||
|
Basic and diluted loss per share |
|
(1.98 |
) |
(2.52 |
) |
(5.65 |
) |
(4.37 |
) |
||||
|
|
|
FOR THE QUARTERS ENDED 2004 |
|
||||||||||
|
|
|
SEPTEMBER 30, |
|
DECEMBER 31, |
|
MARCH 31, |
|
JUNE 30, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenue |
|
$ |
47,524,000 |
|
$ |
37,875,000 |
|
$ |
31,368,000 |
|
$ |
40,263,000 |
|
|
Gross profit |
|
11,020,000 |
|
9,713,000 |
|
5,125,000 |
|
9,361,000 |
|
||||
|
Earnings (loss) before income taxes |
|
804,000 |
|
77,000 |
|
(5,538,000 |
) |
(3,328,000 |
) |
||||
|
Net earnings (loss) |
|
498,000 |
|
48,000 |
|
(3,456,000 |
) |
(2,733,000 |
) |
||||
|
Net loss available to common stockholders |
|
(1,787,000 |
) |
(2,316,000 |
) |
(5,868,000 |
) |
(5,221,000 |
) |
||||
|
Basic and diluted loss per share |
|
(1.81 |
) |
(2.35 |
) |
(5.95 |
) |
(5.29 |
) |
||||
During the quarter ended June 30, 2004 the Company recorded a goodwill impairment charge of $2,329,000.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We carried out an evaluation, under the supervision and with the participation of our management including our president and chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
(b) Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On May 27, 2004, Bruce C. Bruckmann resigned from the Company’s Board of Directors citing other commitments as his reason for leaving. On August 17, 2004, Rice Edmonds, a principle at BRS, was elected to the Company’s Board of Director. Mr. Edmonds joined BRS in 1996. Previously, he worked in the high yield finance group of Bankers Trust. Mr. Edmonds received his BS from the University of Virginia McIntire School of Commerce and his MBA from The Wharton School of the University of Pennsylvania. Mr. Edmonds is a director of H&E Equipment Services, L.L.C., Real Mex Restaurants, Inc., II Fornaio (America) Corporation, McCormick & Schmick Restaurant Corporation, Copeland Enterprises, Inc., Town Sports International, Inc., The Sheridan Group, Inc., Penhall International, Inc. and Lazy Days’ RV Center, Inc.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the directors and executive officers as of June 30, 2004 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.
|
NAME |
|
AGE |
|
TITLE |
|
John T. Sawyer |
|
60 |
|
Chairman of the Board of Directors, President and Chief Executive Officer |
|
C. George Bush |
|
49 |
|
Vice President and Regional Manager, Southern California Region |
|
Bruce F. Varney |
|
52 |
|
Vice President and Regional Manager, Southwest Region |
|
Jeffrey E. Platt |
|
53 |
|
Vice President-Finance and Chief Financial Officer |
|
Gary Aamold |
|
54 |
|
Vice President and Regional Manager, Highway Services Division |
|
Harold O. Rosser II |
|
55 |
|
Director |
|
Paul N. Arnold |
|
58 |
|
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 the Company since 1989.
C. 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 Penhall 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. He received his BA and MBA from the University of California at Los Angeles. 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.
HAROLD O. ROSSER is a founder and Managing Director of BRS. Previously, he was an officer of CVC from 1987 through 1994. Prior to joining CVC, he spent 12 years with Citicorp/Citibank in various management and corporate finance positions. Mr. Rosser earned his BS from Clarkson University and attended Management Development Programs at Carnegie-Mellon University and the Stanford University Business School. Mr. Rosser is a director of Real Mex Restaurants, Inc., Penhall International, Inc., H&E Equipment Services, L.L.C., O’Sullivan Industries, Il Fornaio (America) Corporation, McCormick & Schmick Restaurant Corporation, and Remington Arms Company, 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.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid or accrued for fiscal 2004 to the Chief Executive Officer of Penhall and to each of the four other most highly compensated executive officers of Penhall.
53
SUMMARY
COMPENSATION TABLE
ANNUAL COMPENSATION
|
NAME AND PRINCIPAL POSITION |
|
SALARY(1) |
|
BONUS |
|
OTHER ANNUAL |
|
ALL OTHER |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
John T. Sawyer |
|
$ |
283,103 |
|
$ |
— |
|
$ |
11,049 |
|
$ |
7,328 |
(4) |
|
Chief Executive Officer and President-Penhall Company |
|
|
|
|
|
|
|
|
|
||||
|
C. George Bush |
|
196,760 |
|
— |
|
6,744 |
|
6,975 |
(5) |
||||
|
Vice President-Penhall |
|
|
|
|
|
|
|
|
|
||||
|
Jeffrey E. Platt |
|
214,789 |
|
9,000 |
|
6,744 |
|
4,661 |
(6) |
||||
|
Vice President-Penhall |
|
|
|
|
|
|
|
|
|
||||
|
Bruce F. Varney |
|
186,672 |
|
20,138 |
|
6,744 |
|
7,022 |
(7) |
||||
|
Vice President-Penhall |
|
|
|
|
|
|
|
|
|
||||
|
Gary L. Aamold |
|
175,000 |
|
24,500 |
|
9,984 |
|
10,587 |
(8) |
||||
|
Vice President-Penhall |
|
|
|
|
|
|
|
|
|
||||
|
(1) |
|
Includes amounts contributed as salary deferral contributions in fiscal 2004 under the Penhall International Corp. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (the “Plan”), as follows: $16,500 for Mr. Sawyer; $10,400 for Mr. Bush; $13,840 for Mr. Platt; $11,610 for Mr. Varney and $11,853 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 insurance, premiums for health care insurance and long-term disability insurance premiums. |
|
|
|
|
|
(4) |
|
Includes $500 of Penhall matching contributions under the Plan, approximately $258 of premiums for group term life insurance, approximately $6,111 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums. |
|
|
|
|
|
(5) |
|
Includes $500 of Penhall matching contributions under the Plan, approximately $90 of premiums for group term life insurance, approximately $5,924 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums. |
|
|
|
|
|
(6) |
|
Includes $500 of Penhall matching contributions under the Plan, approximately $138 of premiums for group term life insurance, approximately $3,569 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums. |
|
|
|
|
|
(7) |
|
Includes $500 of Penhall matching contributions under the Plan, approximately $138 of premiums for group term life insurance, approximately $5,924 of premiums for health care insurance and approximately $454 for long-term disability insurance premiums. |
|
|
|
|
|
(8) |
|
Includes $1,100 of Penhall matching contributions under the Plan, approximately $138 of premium for group term life insurance, approximately $8,403 of premium health care insurance and approximately $454 for disability insurance premiums. |
EMPLOYMENT AGREEMENTS
Upon consummation of the Transactions, the Company entered into a five-year evergreen 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 evergreen employment agreements with Messrs. Bush and Varney pursuant to which each executive 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 cause. In the event employment 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
54
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 $515,000, $335,000 and $174,000 to general and administrative expense related to contributions to and expenses of the Plan for the years ended June 30, 2002, 2003 and 2004, 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. 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. On November 16, 2001, the Company issued 3,647 shares of common stock for an aggregate purchase price of $213,000 and 108 shares of Series B Preferred Stock for an aggregate purchase price of $158,000 to Eligible Participants under the Plan. On November 16, 2001, 9,420 options were granted to Eligible Participants under the Plan. On November 1, 2002, the Company issued 743 shares of common stock for an aggregate purchase price of $38,000 and 22 shares of Series B Preferred Stock for an aggregate purchase price of $37,000 to Eligible Participants under the Plan. No options were granted during the year ended June 30, 2004 and no options have been exercised under the plan as of June 30, 2004.
The following table sets forth certain information with respect to (i) the beneficial ownership of the common stock of the Company by each person or entity who owns five percent or more thereof and (ii) the beneficial ownership of each class of equity securities of the Company by each director of the Company who is a shareholder, the Chief Executive Officer of the Company and the other executive officers named in the “Summary Compensation Table” above who are shareholders, and all directors and officers of the Company as a group. The table also sets forth certain information with respect to the ownership of the Senior Exchangeable Preferred stock, Series A Preferred stock and Series B Preferred stock of the Company by BRS, the Foundation and 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 |
|
|||||||
|
NAME OF BENEFICIAL OWNER |
|
COMMON |
|
SENIOR |
|
SERIES A |
|
SERIES B |
|
|
|
Bruckmann, Rosser, Sherrill & Co., L.P. (2) Two Greenwich Plaza, Suite 100 Greenwich, CT 06830 |
|
582,312/59.02% |
|
— |
|
— |
|
9,333/49.65% |
|
|
|
The National Christian Charitable Foundation Inc. |
|
— |
|
10,000/100.0% |
|
— |
|
— |
|
|
|
John T. Sawyer |
|
110,309/11.18% |
|
— |
|
— |
|
2,471/13.14% |
|
|
|
C. George Bush |
|
41,168/ 4.17% |
|
— |
|
— |
|
896/4.77% |
|
|
|
Bruce F. Varney |
|
36,554/3.71% |
|
— |
|
— |
|
755/4.02% |
|
|
|
Bruce C. Bruckmann (3) |
|
624,915/63.34% |
|
— |
|
10,428/100.0% |
|
10,015/52.28% |
|
|
|
Harold O. Rosser II (3) |
|
624,915/63.34% |
|
— |
|
10,428/100.0% |
|
10,015/52.28% |
|
|
|
All directors and officers as a group (9 persons) |
|
837,915/84.94% |
|
— |
|
10,428/100.0% |
|
14,812/78.79% |
|
|
|
(1) |
|
The Company has granted and 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 |
55
|
|
|
the common stock on a fully-diluted basis. The table does not include any such shares. |
|
|
|
|
|
(2) |
|
Bruckmann, Rosser, Sherrill & Co., L.P. (“BRS”) is a limited partnership, the sole general partner of which is BRS Partners, Limited Partnership (“BRS Partners”) and the manager of which is Bruckmann, Rosser, Sherrill Co., Inc. 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 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
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. Due to a governing covenant in the Indenture Agreement, since March 31, 2003, these fees have been accrued and not paid. The amount owed at June 30, 2004 was $375,000.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table summarizes the aggregate fees billed to us by our independent auditor KPMG LLP:
Principal Accountant Fees and Services
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Audit Fees (a) |
|
$ |
220,000 |
|
$ |
160,500 |
|
|
Tax Fees (b) |
|
83,000 |
|
92,800 |
|
||
|
|
|
|
|
|
|
||
|
Total |
|
$ |
303,000 |
|
$ |
253,300 |
|
(a) Audit Fees include the aggregate fees billed by our auditors, for professional services rendered for the audit of the Company’s annual financial statement, along with fees for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q.
(b) Tax fees include the preparation of federal and state tax returns and quarterly estimates.
The audit committee pre-approves all audit and permissible non-audit services provided to the Company by KPMG LLP.
ITEM 15. 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 are incorporated by reference into this item 15 of Form 10-K by item 8 hereof:
• Independent Auditors’ Report
• Consolidated Balance Sheets as of June 30, 2003 and 2004
• Consolidated Statements of Operations for the Years Ended June 30, 2002, 2003 and 2004
• Consolidated Statements of Stockholders’ Deficit for the years ended June 30, 2002, 2003 and 2004
• Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2003 and 2004
• Notes to Consolidated Financial Statements
(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.
56
(a)(3) EXHIBITS.
|
EXHIBIT |
|
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. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.2 |
|
Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.3 |
|
Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.4 |
|
Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.5 |
|
Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.6 |
|
Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.1 |
|
Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.3 |
|
Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.5 |
|
Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.2 |
|
Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.3 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.4 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.5 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.6 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.7 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.8 |
|
Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.9 |
|
Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
|
|
|
|
10.10 |
|
Form of Penhall International Corp. 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.10 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
57
|
10.40 |
|
Credit Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.40 to the registrants Form 8-K dated May 29, 2003.) |
|
|
|
|
|
10.41 |
|
Security Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.41 to the registrants Form 8-K dated May 29, 2003.) |
|
|
|
|
|
12 |
|
Statement of Ratio of Earnings to Fixed Charges * |
|
|
|
|
|
21 |
|
Subsidiaries of the Company (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
24 |
|
Power of Attorney (included on signature page) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004.* |
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
|
|
|
|
|
99.1 |
|
Form of Letter of Transmittal (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
|
|
|
|
99.2 |
|
Form of Notice of Guaranteed Delivery (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
* |
|
Filed herewith. |
(b) REPORTS ON FORM 8-K
None
58
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 |
October 1, 2004
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 October 1, 2004.
|
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 |
|||||||
|
|
|
|
|||||
|
|
/s/ PAUL N. ARNOLD |
|
|
Director |
|||
|
Paul N. Arnold |
|
|
|||||
|
|
|
|
|||||
|
|
/s/ HAROLD O. ROSSER |
|
|
Director |
|||
|
Harold O. Rosser |
|
|
|||||
|
|
|
|
|||||
|
|
/s/ J. RICE EDMONDS |
|
|
Director |
|||
|
J. Rice Edmonds |
|
|
|||||
59
EXHIBITS.
|
EXHIBIT |
|
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. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.2 |
|
Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.3 |
|
Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.4 |
|
Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.5 |
|
Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
3.6 |
|
Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.1 |
|
Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.3 |
|
Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
4.5 |
|
Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
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 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
|
|
|
|
|
10.2 |
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Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.3 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.4 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.5 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.6 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.7 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.8 |
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Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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10.9 |
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Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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10.10 |
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Form of Penhall International Corp. 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.10 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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10.40 |
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Credit Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.40 to the registrants Form 8-K dated May 29, 2003.) |
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10.41 |
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Security Agreement dated as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (incorporated herein to this reference to Exhibit 10.41 to the registrants Form 8-K dated May 29, 2003.) |
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12 |
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Statement of Ratio of Earnings to Fixed Charges * |
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21 |
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Subsidiaries of the Company (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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24 |
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Power of Attorney (included on signature page) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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25 |
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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 (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745) |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
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32.1 |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004.* |
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32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbannes-Oxley Act of 2002 dated October 1, 2004* |
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99.1 |
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Form of Letter of Transmittal (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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99.2 |
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Form of Notice of Guaranteed Delivery (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-4, registration number 333-64745-01) |
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* |
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Filed herewith. |
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