UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
Commission File Number. 333-64745
PENHALL INTERNATIONAL CORP.
(Exact Name of registrant as specified in its charter)
ARIZONA |
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86-0634394 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrants telephone number, including area code)
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
CLASS AND TITLE OF CAPITAL STOCK |
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SHARES OUTSTANDING AS |
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Common Stock, $.01 Par Value |
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986,552 |
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Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(RESTATED) |
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September 30, 2004 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,076,000 |
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$ |
38,000 |
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Receivables: |
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|
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Contract and trade receivables |
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30,386,000 |
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37,591,000 |
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Contract retentions due upon completion and acceptance of work |
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4,361,000 |
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4,595,000 |
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||
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34,747,000 |
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42,186,000 |
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Less allowance for doubtful receivables |
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1,317,000 |
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1,276,000 |
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Net receivables |
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33,430,000 |
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40,910,000 |
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||
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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2,957,000 |
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2,531,000 |
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Deferred tax assets |
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2,034,000 |
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2,034,000 |
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Inventories |
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2,171,000 |
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1,860,000 |
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Prepaid expenses and other current assets |
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2,198,000 |
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2,549,000 |
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Total current assets |
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43,866,000 |
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49,922,000 |
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Plant and equipment, at cost: |
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Leasehold improvements |
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1,302,000 |
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1,303,000 |
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Construction and other equipment |
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115,998,000 |
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117,629,000 |
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117,300,000 |
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118,932,000 |
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Less accumulated depreciation |
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81,260,000 |
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83,724,000 |
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Net plant and equipment |
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36,040,000 |
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35,208,000 |
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Goodwill |
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6,371,000 |
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6,371,000 |
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Debt issuance costs, net of accumulated amortization |
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2,313,000 |
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2,022,000 |
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Other assets, net |
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817,000 |
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739,000 |
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$ |
89,407,000 |
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$ |
94,262,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
1
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(RESTATED) |
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September 30, 2004 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Current installments of long-term debt |
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$ |
882,000 |
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$ |
431,000 |
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Borrowings under revolving credit facility |
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1,724,000 |
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Trade accounts payable |
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5,664,000 |
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8,564,000 |
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Accrued liabilities and taxes payable |
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12,857,000 |
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12,188,000 |
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Current portion of insurance reserves |
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2,698,000 |
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2,798,000 |
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Current portion of deferred gain - sale-leaseback |
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109,000 |
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109,000 |
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Billing in excess of costs and estimated earnings on uncompleted contracts |
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1,526,000 |
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1,189,000 |
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Total current liabilities |
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23,736,000 |
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27,006,000 |
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Long-term debt, excluding current installments |
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113,000 |
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89,000 |
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Long-term portion of deferred gain - sale-leaseback |
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2,015,000 |
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1,987,000 |
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Long-term portion of insurance reserves |
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4,878,000 |
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4,878,000 |
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Senior notes |
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100,000,000 |
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100,000,000 |
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Deferred tax liabilities |
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3,771,000 |
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3,771,000 |
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Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $18,602,000 and $19,101,000 at June 30, 2004 and September 30, 2004, respectively. Authorized, issued and outstanding 10,000 shares |
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18,602,000 |
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19,101,000 |
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Series A Preferred stock, par value $.01 per share, redemption value $22,484,000 and $23,233,000 at June 30, 2004 and September 30, 2004, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares |
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22,484,000 |
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23,233,000 |
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Series B Preferred stock subject to put option, 7,688 shares outstanding at June 30, 2004 and September 30, 2004 (Note 4) |
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7,688,000 |
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7,688,000 |
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Common stock and additional paid-in capital subject to put option, 324,858 shares outstanding at June 30, 2004 and September 30, 2004 (Note 4) |
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325,000 |
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325,000 |
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Stockholders deficit: |
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Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 11,110 shares at June 30, 2004 and September 30, 2004 (Note 4) |
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11,282,000 |
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11,282,000 |
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Common stock, par value $.01 per share. Authorized 5,000,000 shares; issued and outstanding 697,012 at June 30, 2004 and September 30, 2004 (Note 4) |
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7,000 |
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7,000 |
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Additional paid-in capital (Note 4) |
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1,760,000 |
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1,760,000 |
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Treasury stock, at cost, 35,318 common shares at June 30, 2004 and September 30, 2004 |
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(336,000 |
) |
(336,000 |
) |
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Accumulated deficit (Note 4) |
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(106,918,000 |
) |
(106,529,000 |
) |
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Total stockholders deficit |
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(94,205,000 |
) |
(93,816,000 |
) |
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Commitments and contingencies |
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$ |
89,407,000 |
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$ |
94,262,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
2
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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THREE MONTH PERIODS ENDED |
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2003 |
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2004 |
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Revenues |
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$ |
47,524,000 |
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$ |
52,819,000 |
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Cost of revenues |
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36,379,000 |
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38,591,000 |
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Gross profit |
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11,145,000 |
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14,228,000 |
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General and administrative expenses |
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6,951,000 |
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8,115,000 |
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Other operating income, net |
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189,000 |
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57,000 |
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Earnings from operations, net |
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4,383,000 |
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6,170,000 |
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Interest expense |
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3,579,000 |
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3,468,000 |
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Interest expense - preferred stock |
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1,248,000 |
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Other income |
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27,000 |
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Earnings before income taxes |
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804,000 |
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1,481,000 |
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Income tax expense |
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306,000 |
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1,092,000 |
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Net earnings |
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498,000 |
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389,000 |
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Accretion of preferred stock to redemption value |
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(1,106,000 |
) |
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Accrual of cumulative dividends on preferred stock |
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(1,179,000 |
) |
(1,348,000 |
) |
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Net loss applicable to common stockholders |
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$ |
(1,787,000 |
) |
$ |
(959,000 |
) |
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Loss per share basic and diluted |
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$ |
(1.81 |
) |
$ |
(0.97 |
) |
Weighted average number of shares outstanding: Basic and diluted |
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986,552 |
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986,552 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
3
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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THREE MONTH PERIODS ENDED |
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2003 |
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2004 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
498,000 |
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$ |
389,000 |
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Adjustments to reconcile net earnings to net cash used in operating activities |
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Depreciation and amortization |
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3,926,000 |
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3,165,000 |
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Interest on preferred stock |
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1,248,000 |
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Amortization of debt issuance costs |
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289,000 |
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291,000 |
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Provision for doubtful receivables |
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63,000 |
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Gains on sale of assets, net |
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(58,000 |
) |
(40,000 |
) |
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Amortization of deferred gain on sale-leaseback |
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(28,000 |
) |
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Changes in operating assets and liabilities: |
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Receivables |
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(4,633,000 |
) |
(7,543,000 |
) |
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Inventories, prepaid expenses, other assets and income taxes receivable |
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1,365,000 |
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(40,000 |
) |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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(394,000 |
) |
426,000 |
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Trade accounts payable, accrued liabilities, insurance reserves and income taxes payable |
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(3,414,000 |
) |
301,000 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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231,000 |
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(337,000 |
) |
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Net cash used in operating activities |
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(2,190,000 |
) |
(2,105,000 |
) |
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Cash flows from investing activities: |
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Proceeds from sale of assets |
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116,000 |
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113,000 |
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Capital expenditures |
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(1,387,000 |
) |
(2,328,000 |
) |
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Net cash used in investing activities |
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(1,271,000 |
) |
(2,215,000 |
) |
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Cash flows from financing activities: |
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Borrowings under long-term debt |
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14,000 |
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Repayments of long-term debt |
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(109,000 |
) |
(475,000 |
) |
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Borrowings under revolving credit facility |
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69,664,000 |
|
50,534,000 |
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Repayments of revolving credit facility |
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(67,941,000 |
) |
(48,810,000 |
) |
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Debt issuance costs |
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(149,000 |
) |
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Book overdraft |
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1,848,000 |
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2,033,000 |
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Net cash provided by financing activities |
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3,327,000 |
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3,282,000 |
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||
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Net change in cash and cash equivalents |
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(134,000 |
) |
(1,038,000 |
) |
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Cash and cash equivalents at beginning of period |
|
184,000 |
|
1,076,000 |
|
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Cash and cash equivalents at end of period |
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$ |
50,000 |
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$ |
38,000 |
|
Supplemental disclosures of cash flow information: |
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Cash paid during the period for |
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Income taxes |
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$ |
33,000 |
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$ |
5,000 |
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Interest |
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$ |
6,248,000 |
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$ |
6,076,000 |
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Supplemental disclosures of non cash investing and financing information: |
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Accretion of preferred stock to redemption value |
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$ |
1,106,000 |
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$ |
|
|
Accrual of cumulative dividends on preferred stock |
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$ |
1,179,000 |
|
$ |
1,348,000 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated balance sheet as of September 30, 2004, the condensed consolidated statements of operations for the three months ended September 30, 2003 and 2004, and the condensed consolidated statements of cash flows for the three months ended September 2003 and 2004 are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods condensed consolidated financial statements to conform to the current period presentation. The results of operations for these interim periods are not necessarily indicative of results for the full year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto including on Form 10-K of Penhall International Corp. (together with its subsidiaries, the Company) for the year ended June 30, 2004 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.
(2) 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 an d 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 Companys 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 Companys stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the 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 Companys basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:
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Three Months Ended September 30, |
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2003 |
|
2004 |
|
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Net loss applicable to common stockholders as reported |
|
$ |
(1,787,000 |
) |
$ |
(959,000 |
) |
Add: Stock-based compensation expense included in reported net loss available to common stockholders, net of related tax effects |
|
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|
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Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects |
|
(4,000 |
) |
(3,000 |
) |
||
Pro forma net loss available to common stockholders |
|
$ |
(1,791,000 |
) |
$ |
(962,000 |
) |
|
|
|
|
|
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Basic and diluted loss per share as reported |
|
$ |
(1.81 |
) |
$ |
(0.97 |
) |
|
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|
|
|
|
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Pro forma basic and diluted loss per share |
|
$ |
(1.82 |
) |
$ |
(0.98 |
) |
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.
5
(3) 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. For the three month periods ended September 30, 2003 and 2004 diluted loss per share is the same as basic loss per share as options to purchase 9,125 and 8,060 shares of common stock were not included in the computation of diluted loss per share for the three month periods ended September 30, 2003 and 2004, respectively, as the effect would have been anti-dilutive.
(4) Restatement
The Company has restated its consolidated balance sheets as of June 30, 2004 and certain prior periods to reclassify the portions of our common stock and Series B Preferred stock which contain redemption provisions that are outside the control of the Company under the 1998 security holders agreement (the Stockholders Agreement). The Stockholders Agreement was entered into in connection with the 1998 leveraged-recap transaction and contains provisions that grant the option to certain management stockholders upon the death, disability or termination of the management stockholder to require the Company to repurchase these securities at specified amounts (effectively a put option). In addition, the Company was granted a corresponding right to purchase such securities at the Companys option under identical terms. EITF Topic D-98 Classification and Measurement of Redeemable Securities and ASR No. 268, Presentation in Financial Statements of Redeemable Preferred Stocks provide the guidance regarding classification of the shares subject to a put option. In addition, the Stockholders Agreement and the Companys Indenture place certain limits on the dollar amount and number of shares that may be repurchased. The Company has reclassified the carrying value of the shares that are subject to the put option from permanent stockholders equity into the mezzanine equity section of the accompanying consolidated balance sheets. This revised presentation does not affect our consolidated results of operations or cash flows. As of June 30, 2004 and September 30, 2004, the Company had 7,688 shares of Series B Preferred and 324,858 shares of common stock subject to the put option provision.
The Company has also restated its consolidated balance sheets and statement of stockholders deficit for the year ended June 30, 2004 and certain prior periods to reverse the accrual of 13% cumulative dividends, which have not been declared by the board of directors, which historically were recorded as an increase in the carrying value of the Series B Preferred stock and accumulated deficit.
|
|
June 30, 2004 |
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|
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As Previously |
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As Restated |
|
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Mezzanine Equity |
|
|
|
|
|
||
Series B Preferred stock subject to put option |
|
$ |
|
|
$ |
7,688,000 |
|
Common stock and additional paid-in capital subject to put option |
|
|
|
325,000 |
|
||
|
|
|
|
|
|
||
Permanent Stockholders Equity |
|
|
|
|
|
||
Series B Preferred stock |
|
40,490,000 |
|
11,282,000 |
|
||
Common stock |
|
10,000 |
|
7,000 |
|
||
Additional paid-in capital |
|
2,082,000 |
|
1,760,000 |
|
||
Accumulated deficit |
|
(128,438,000 |
) |
(106,918,000 |
) |
||
Following discussions among members of the Companys audit committee and the Companys independent public accountants, on November 22, 2004 the Company concluded that it will amend the Companys Annual Report on Form 10-K for the year ended June 30, 2004 to reflect the restatements described above; accordingly, the consolidated balance sheets and statements of stockholders deficits contained therein should no longer be relied upon.
6
(5) Related Party
The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) of $450,000 as of September 30, 2004. The balance due at June 30, 2004 was $375,000.
(6) Change in Accounting Principle
In May 2003, 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 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 certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Companys fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004. As a result of the adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock is treated as interest expense in the Companys consolidated statements of operations.
(7) Commitments and Contingencies
The Company has an employment related legal matter which was tentatively settled and approved by the court in September 2004. The Company estimates that reserves as of September 30, 2004 are sufficient based on the proposed settlement. As of September 30, 2004, the Company has accrued $250,000 related to this matter.
There are various additional lawsuites and claims pending and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is managements 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 Companys consolidated financial statements taken as a whole.
(8) Condensed Consolidating 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, 2004 and September 30, 2004 and for the three month periods ended September 30, 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.
7
Condensed Consolidating Balance Sheet
|
|
(RESTATED) |
|
||||||||||
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
||||
Current assets: |
|
|
|
|
|
|
|
|
|
||||
Receivables, net |
|
$ |
|
|
$ |
33,430,000 |
|
$ |
|
|
$ |
33,430,000 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
|
2,957,000 |
|
|
|
2,957,000 |
|
||||
Inventories |
|
|
|
2,171,000 |
|
|
|
2,171,000 |
|
||||
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 |
|
||||
Series B Preferred stock subject to put option (Note 4) |
|
7,688,000 |
|
|
|
|
|
7,688,000 |
|
||||
Common stock and additional paid-in capital subject to put option (Note 4) |
|
325,000 |
|
|
|
|
|
325,000 |
|
||||
Stockholders equity (deficit) (Note 4) |
|
(94,205,000 |
) |
60,171,000 |
|
(60,171,000 |
) |
(94,205,000 |
) |
||||
|
|
$ |
61,696,000 |
|
$ |
87,882,000 |
|
$ |
(60,171,000 |
) |
$ |
89,407,000 |
|
8
Condensed Consolidating Balance Sheet
|
|
SEPTEMBER 30, 2004 |
|
||||||||||
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
||||
Current assets: |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Receivables, net |
|
$ |
|
|
$ |
40,910,000 |
|
$ |
|
|
$ |
40,910,000 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
|
2,531,000 |
|
|
|
2,531,000 |
|
||||
Inventories |
|
|
|
1,860,000 |
|
|
|
1,860,000 |
|
||||
Other current assets |
|
94,000 |
|
4,527,000 |
|
|
|
4,621,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total current assets |
|
94,000 |
|
49,828,000 |
|
|
|
49,922,000 |
|
||||
Net property, plant and equipment |
|
14,000 |
|
35,194,000 |
|
|
|
35,208,000 |
|
||||
Other assets, net |
|
1,222,000 |
|
7,910,000 |
|
|
|
9,132,000 |
|
||||
Investment in subsidiaries |
|
60,226,000 |
|
|
|
(60,226,000 |
) |
|
|
||||
|
|
$ |
61,556,000 |
|
$ |
92,932,000 |
|
$ |
(60,226,000 |
) |
$ |
94,262,000 |
|
Liabilities and Stockholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Current installments of long-term debt |
|
$ |
|
|
$ |
431,000 |
|
$ |
|
|
$ |
431,000 |
|
Borrowings under revolving credit facility |
|
|
|
1,724,000 |
|
|
|
1,724,000 |
|
||||
Trade accounts payable |
|
|
|
8,564,000 |
|
|
|
8,564,000 |
|
||||
Accrued liabilities and taxes payable |
|
3,499,000 |
|
8,212,000 |
|
|
|
12,191,000 |
|
||||
Current portion of insurance reserves |
|
|
|
2,798,000 |
|
|
|
2,798,000 |
|
||||
Current portion of deferred gain-sale-leaseback |
|
109,000 |
|
|
|
|
|
109,000 |
|
||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
|
1,189,000 |
|
|
|
1,189,000 |
|
||||
Total current liabilities |
|
4,088,000 |
|
22,918,000 |
|
|
|
27,006,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Long-term debt, excluding current installments |
|
|
|
89,000 |
|
|
|
89,000 |
|
||||
Long-term portion of deferred gain sale-leaseback |
|
1,987,000 |
|
|
|
|
|
1,987,000 |
|
||||
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 |
|
19,101,000 |
|
|
|
|
|
19,101,000 |
|
||||
Series A Preferred stock |
|
23,233,000 |
|
|
|
|
|
23,233,000 |
|
||||
Series B Preferred stock subject to put option |
|
7,688,000 |
|
|
|
|
|
7,688,000 |
|
||||
Common stock and additional paid-in capital subject to put option |
|
325,000 |
|
|
|
|
|
325,000 |
|
||||
Stockholders equity (deficit) |
|
(93,816,000 |
) |
60,226,000 |
|
(60,226,000 |
) |
(93,816,000 |
) |
||||
|
|
$ |
61,556,000 |
|
$ |
92,932,000 |
|
$ |
(60,226,000 |
) |
$ |
94,262,000 |
|
9
Condensed Consolidating Statement of Operations
|
|
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003 |
|
||||||||||
|
|
Penhall |
|
Penhall |
|
Eliminations |
|
Consolidated |
|
||||
Revenues |
|
$ |
1,460,000 |
|
$ |
47,524,000 |
|
$ |
(1,460,000 |
) |
$ |
47,524,000 |
|
Cost of revenues |
|
|
|
36,379,000 |
|
|
|
36,379,000 |
|
||||
Gross profit |
|
1,460,000 |
|
11,145,000 |
|
(1,460,000 |
) |
11,145,000 |
|
||||
General and administrative expenses |
|
192,000 |
|
7,154,000 |
|
(395,000 |
) |
6,951,000 |
|
||||
Royalties |
|
|
|
1,065,000 |
|
(1,065,000 |
) |
|
|
||||
Other operating income, net |
|
|
|
189,000 |
|
|
|
189,000 |
|
||||
Equity in earnings of subsidiary |
|
1,747,000 |
|
|
|
(1,747,000 |
) |
|
|
||||
Earnings before interest expense and income taxes |
|
3,015,000 |
|
3,115,000 |
|
(1,747,000 |
) |
4,383,000 |
|
||||
Interest expense |
|
3,194,000 |
|
385,000 |
|
|
|
3,579,000 |
|
||||
Earnings (loss) before income taxes |
|
(179,000 |
) |
2,730,000 |
|
(1,747,000 |
) |
804,000 |
|
||||
Income tax expense (benefit) |
|
(677,000 |
) |
983,000 |
|
|
|
306,000 |
|
||||
Net earnings |
|
$ |
498,000 |
|
$ |
1,747,000 |
|
$ |
(1,747,000 |
) |
$ |
498,000 |
|
10
Condensed Consolidating Statement of Operations
|
|
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004 |
|
||||||||||
|
|
Penhall |
|
Penhall |
|
Eliminations |
|
Consolidated |
|
||||
Revenues |
|
$ |
1,579,000 |
|
$ |
52,819,000 |
|
$ |
(1,579,000 |
) |
$ |
52,819,000 |
|
Cost of revenues |
|
|
|
38,591,000 |
|
|
|
38,591,000 |
|
||||
Gross profit |
|
1,579,000 |
|
14,228,000 |
|
(1,579,000 |
) |
14,228,000 |
|
||||
General and administrative expenses |
|
408,000 |
|
8,103,000 |
|
(396,000 |
) |
8,115,000 |
|
||||
Royalties |
|
|
|
1,183,000 |
|
(1,183,000 |
) |
|
|
||||
Other operating income, net |
|
|
|
57,000 |
|
|
|
57,000 |
|
||||
Equity in earnings of subsidiary |
|
2,870,000 |
|
|
|
(2,870,000 |
) |
|
|
||||
Earnings before interest expense and income taxes |
|
4,041,000 |
|
4,999,000 |
|
(2,870,000 |
) |
6,170,000 |
|
||||
Interest expense |
|
3,252,000 |
|
216,000 |
|
|
|
3,468,000 |
|
||||
Interest expense - preferred stock |
|
1,248,000 |
|
|
|
|
|
1,248,000 |
|
||||
Other income |
|
27,000 |
|
|
|
|
|
27,000 |
|
||||
Earnings (loss) before income taxes |
|
(432,000 |
) |
4,783,000 |
|
(2,870,000 |
) |
1,481,000 |
|
||||
Income tax expense (benefit) |
|
(821,000 |
) |
1,913,000 |
|
|
|
1,092,000 |
|
||||
Net earnings |
|
$ |
389,000 |
|
$ |
2,870,000 |
|
$ |
(2,870,000 |
) |
$ |
389,000 |
|
11
Condensed Consolidating Statement of Cash Flows
|
|
THREE MONTH PERIOD ENDED SEPTEBER 30, 2003 |
|
||||||||||
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash provided by (used in) operating activities |
|
$ |
(2,895,000 |
) |
$ |
705,000 |
|
$ |
|
|
$ |
(2,190,000 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds from sale of assets |
|
|
|
116,000 |
|
|
|
116,000 |
|
||||
Capital expenditures |
|
|
|
(1,387,000 |
) |
|
|
(1,387,000 |
) |
||||
Net cash used in investing activities |
|
|
|
(1,271,000 |
) |
|
|
(1,271,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
||||
Due to (from) affiliates |
|
2,924,000 |
|
(2,924,000 |
) |
|
|
|
|
||||
Borrowings under long-term debt |
|
|
|
14,000 |
|
|
|
14,000 |
|
||||
Repayments of long-term debt |
|
(1,000 |
) |
(108,000 |
) |
|
|
(109,000 |
) |
||||
Borrowings under revolving credit facility |
|
|
|
69,664,000 |
|
|
|
69,664,000 |
|
||||
Repayments of revolving credit facility |
|
|
|
(67,941,000 |
) |
|
|
(67,941,000 |
) |
||||
Debt issuance costs |
|
|
|
(149,000 |
) |
|
|
(149,000 |
) |
||||
Book overdraft |
|
(152,000 |
) |
1,848,000 |
|
152,000 |
|
1,848,000 |
|
||||
Net cash provided by financing activities |
|
2,771,000 |
|
404,000 |
|
152,000 |
|
3,327,000 |
|
||||
Net change in cash and cash equivalents |
|
(124,000 |
) |
(162,000 |
) |
152,000 |
|
(134,000 |
) |
||||
Cash and cash equivalents at beginning of period |
|
152,000 |
|
184,000 |
|
(152,000 |
) |
184,000 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
28,000 |
|
$ |
22,000 |
|
$ |
|
|
$ |
50,000 |
|
12
Condensed Consolidating Statement of Cash Flows
|
|
THREE MONTH PERIOD ENDED SEPTEBER 30, 2004 |
|
||||||||||
|
|
PENHALL |
|
PENHALL |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net cash provided by (used in) operating activities |
|
$ |
(2,817,000 |
) |
$ |
712,000 |
|
$ |
|
|
$ |
(2,105,000 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds from sale of assets |
|
|
|
113,000 |
|
|
|
113,000 |
|
||||
Capital expenditures |
|
|
|
(2,328,000 |
) |
|
|
(2,328,000 |
) |
||||
Net cash used in investing activities |
|
|
|
(2,215,000 |
) |
|
|
(2,215,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
||||
Due to (from) affiliates |
|
2,815,000 |
|
(2,815,000 |
) |
|
|
|
|
||||
Repayments of long-term debt |
|
|
|
(475,000 |
) |
|
|
(475,000 |
) |
||||
Borrowings under revolving credit facility |
|
|
|
50,534,000 |
|
|
|
50,534,000 |
|
||||
Repayments of revolving credit facility |
|
|
|
(48,810,000 |
) |
|
|
(48,810,000 |
) |
||||
Book overdraft |
|
|
|
2,033,000 |
|
|
|
2,033,000 |
|
||||
Net cash provided by financing activities |
|
2,815,000 |
|
467,000 |
|
|
|
3,282,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net change in cash and cash equivalents |
|
(2,000 |
) |
(1,036,000 |
) |
|
|
(1,038,000 |
) |
||||
Cash and cash equivalents at beginning of period |
|
8,000 |
|
1,068,000 |
|
|
|
1,076,000 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
6,000 |
|
$ |
32,000 |
|
$ |
|
|
$ |
38,000 |
|
13
ITEM 2. Managements Discussion and Analysis of Finanical Condition and Results of Operations.
The following discussion of the results of operations and financial condition of Penhall International Corp. and subsidiaries (Penhall or the Company) should be read in conjunction with the unaudited condensed consolidated financial statements of and footnotes there to included in this quarterly report on Form 10-Q and the Companys audited consolidated financial statements and footnotes thereto included in the annual report on Form 10-K, filed with the Securities and Exchange Commission.
GENERAL
Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest operated equipment rental services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 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. Effective October 1, 2004, the Kansas City location was closed. The assets have been transferred to other locations,
7. Bob Mack Company, California-based company acquired in March 2002,
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. Penhalls Operated Equipment Rental Services are provided primarily under hourly rentals, which are complemented by fixed-price contracts.
Fixedprice contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
The two primary economic drivers of our business are (1) federal, state and local public funding levels for transportation and other infrastructure projects and (2) the overall health of the economy, nationally and locally, particularly as it affects private non-residential construction. The level of demand for our services will have a direct correlation to these drivers. For example, a weak economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for fewer private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce revenue growth and/or increase pressure on gross profit margins. A weak economy also tends to produce less tax revenue, thereby decreasing the funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure
14
spending, such as gasoline taxes, which are not necessarily directly impacted by a weak economy. However, even these funds can be temporarily at risk as state and local governments struggle to balance their budgets. Conversely, higher public funding and/or a robust economy will increase demand for our services and provide opportunities for revenue growth and margin improvement.
Revenue growth is also influenced by infrastructure change, including new construction, modification, and regulatory changes. Penhalls 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 Penhalls operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters.
The principal components of Penhalls 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.
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 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.
15
Valuation of Long-Lived Assets
We periodically review the carrying value of long-lived assets (excluding goodwill) for potential impairment. Our review considers a combination of appraised value, anticipated future undiscounted cash flows and location of the asset for each line of equipment. 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Goodwill
We use estimates in order to determine if goodwill has been impaired. An impairment loss may be recognized if the carrying amount of a reporting units net book value exceeds the estimated fair value of the reporting unit. We arrive at the estimated fair value of a reporting unit based on cash flow utilizing a multiple of earnings before interest, depreciation, taxes and amortization (EBIDTA). This multiple is determined based on prior tansactions conducted by the company and by others in comparible market sectors to calculate the fair value. We will perform our valuation analysis at least annually or sooner if an event occurs or circumstances change that would indicate the carrying amount of goodwill may be impaired. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss in future periods. The Company evaluates goodwill for impairment at June 30 of each year.
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
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
Revenues. Revenues for the three months ended September 30, 2004 (Interim 2005) were $52.8 million an increase of $5.3 million or 11.1% from the three months ended September 30, 2003 (Interim 2004). In Interim 2005, service revenues increased $1.8 million or 5.6% and contract revenues increased $3.5 million or 22.6% as compared to Interim 2004. The increase in revenues is primarily attributable to increases in non residential contruction nationwide and particularly in California as well as the increase in concrete restoration projects undertaken by many of the states.
Penhall operated through 37 locations in 17 states at September 30, 2004 and through 38 locations in 17 states at September 30, 2003. At September 30, 2004, Penhalls operated rental fleet consisted of 693 units compared to 706 units at September 30, 2003, a decrease of 1.8%. 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 $14.2 million in Interim 2005, an increase of $3.1 million or 27.7% from Interim 2004. Gross profit as a percentage of revenues increased from 23.5% in Interim 2004 to 26.9% in Interim 2005. The increase in gross profit from Interim 2004 to Interim 2005 is primarily attributable to higher market demand for operated equipment which increased demand for the Companys services and enabled the Company to increase rental rates during Interim 2005. Another factor increasing gross profit was the $0.6 million decrease in depreciation expense, which is the result of low capital expenditures during 2003, 2004, and 2005
General and Administrative Expenses. General and administrative expenses were $8.1 million in Interim 2005 compared to $7.0 million in Interim 2004. As a percent of revenues, general and administrative expenses were 15.4% in Interim 2005 compared to 14.6% in Interim 2004. The increase in general and administrative expenses as a percentage of revenues during Interim 2005 is primarily attributable to increases in rent expense of $0.3 million associated with the sale/leaseback of Company properties and increases in incentive compensation of $0.7 million.
Interest Expense. Interest expense was $3.5 million in Interim 2005 compared to interest expense of $3.6 million in Interim 2004. The decrease in interest expense is attributable to lower borrowings in Interim 2005 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 .
Interest Expense - Preferred Stock In Interim 2005, the Company adopted SFAS No. 150 and required the Company to present separately as interest expense $1.2 million of accretion related to mandatorily redemable instruments.
16
Income Tax Benefit. The Company recorded an income tax expense of $1.1 million, or 73.7% of earnings before income taxes in Interim 2005, compared to an income tax expense of $0.3 million, or 38.1% of loss before income taxes in Interim 2004. The higher effective tax rate for Interim 2005 is primarily attributable to non-deductible interest related to the adoption of SFAS No. 150.
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the Companys principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Companys strategy of pursuing strategic acquisitions and expanding through internal growth. The Companys 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 Companys eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Companys eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Companys eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Companys 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 Companys 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 September 30, 2004, the Company had $1.7 million in outstanding borrowings, $18.6 million of outstanding letters of credit, borrowing base limitations of $5.7 million and borrowings unused and available under The New Credit of $23.9 million.
Summary Cash Flow Data (000s)
for the three months |
|
2003 |
|
2004 |
|
||
Cash and cash equivalents |
|
$ |
50 |
|
$ |
38 |
|
|
|
|
|
|
|
||
Net cash provided by (used in): |
|
|
|
|
|
||
Operating activities |
|
$ |
(2,190 |
) |
$ |
(2,105 |
) |
Investing activities |
|
$ |
(1,271 |
) |
$ |
(2,215 |
) |
Financing activities |
|
$ |
3,327 |
|
$ |
3,282 |
|
Capital expenditures |
|
$ |
(1,387 |
) |
$ |
(2,328 |
) |
The Companys cash and cash equivalents totaled $0.04 million at September 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 used by operating activities decreased slightly from $2.2 million in Interim 2004 to $2.1 million in Interim 2005. This is primarily due to higher growth in receivables that was offset by lower accounts payable, accrued liabilties and income taxes payable in Interim 2005. The higher receivables are attributable to increased revenues in Interim 2005 compared to Interim 2004. The decrease from Interim 2004 to Interim 2005 in accounts payable, accrued liabilities, and income tax payable is largely attributable to a decrease in the accounts payable balance related to long-term contracts at June 30, 2003 that was paid during Interim 2004.
17
Cash used by investing activities in Interim 2005 of $2.2 million represents a $0.9 million increase from the amount used in investing activities in Interim 2004. The increase was due to the the higher level of capital expenditures in Interim 2005. The Company had no acquisitions in Interim 2004 or 2005.
Cash provided by financing activities were $3.3 million in both Interim 2004 and 2005.
The Company had standby letters of credit totaling $18.6 million at September 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 Companys 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.
Management estimates that Penhalls 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 funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. However, in 1998, a series of transactions occurred similar to a leveraged buyout. As a result of these transactions the Company has substantial indebtedness and debt service obligations. As of September 30, 2004, the Company and its subsidiaries had $102.2 million of indebtedness related to borrowings, $42.3 million of indebtedness related to mandatorily redeemable preferred stock and a stockholders deficit of $103.2 million. As of September 30, 2004 approximately $23.9 million of additional borrowing was available under The New Credit.
As of September 30, 2004, the Company has the following obligations subject to redemption or maturity in fiscal 2007 and 2008:
|
|
Due date |
|
Balance at |
|
|
Senior Notes |
|
08/01/06 |
|
$ |
100,000,000 |
|
Senior Exchangeable Preferred Stock |
|
02/01/07 |
|
$ |
19,101,000 |
|
Preferred Series A |
|
08/01/07 |
|
$ |
23,233,000 |
|
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 Companys existing credit facility;
Limiting our ability to extend or replace the Companys existing Senior Notes:
Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
The Company also has certain common stock and Series B Preferred stock that are subject to the terms and conditions of a Securities Holders Agreement. The Company may be required to repurchase these shares if certain conditions are met. As of June 30, 2004 and September 30, 2004, the Company has recorded these shares at historical cost of $7,688,000, as temporary equity in the condensed consolidated balance sheet. The Series B Preferred stock subject to the terms and conditions of the Stockholders Agreement and the remaining Series B Preferred stock include provisions for cumulative dividends of 13% which have not been recorded as the dividends have not been declared. Such dividends approximate $23,266,000 as of September 30, 2004. The Company believes that the likelihood of the conditions allowing redemption by the stockholder occurring is remote.
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 Companys 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 Indentures fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to
18
incur additional indebtedness under the Indentures 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 Companys bonding capacity has been restricted due to both Penhalls poor operating results over the past three fiscal years, as well as the reduced bonding capacity in the market. Further, one of the Companys current surety has indicated that another year of operating losses could result in the discontinuation of their surety support. The Company has obtained additional surety support from a secondary source. 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.
CHANGE IN ACCOUNTING PRINCIPLE
In May 2003, 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 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 certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Companys fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004. As a result of the adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock is treated as interest expense in the Companys consolidated statements of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 Companys operations. The Companys 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 Companys credit facility. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The table below presents the principal amounts of debt, weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2004.
|
|
YEARS ENDING JUNE 30, |
|
||||||||||||||||||||||
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
THERE- |
|
TOTAL |
|
FAIR |
|
||||||||
|
|
(IN THOUSANDS) |
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed rate debt |
|
$ |
407 |
|
$ |
113 |
|
$ |
100,000 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
100,520 |
|
$ |
96,960 |
(3) |
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
11.95 |
% |
|
|
||||||||
Variable rate LIBOR debt (1) (2) |
|
1,724 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
1,724 |
|
0 |
|
||||||||
Weighted average current interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75 |
% |
|
|
||||||||
(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 $25.6 million at September 30, 2004.
(2) The Company has different interest rate options for its variable rate debt.
(3) The fair value of fixed rate debt was determined based on quoted market price for the debt instrument.
19
Item 4. Controls and Procedures
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 our 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 were effective as of the end of the period covered by this report in that they were reasonably designed to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that any system of controls, however well designed and operated, is based in part upon certain assumptions and can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In connection with the adoption of Financial Accounting Standards Board Statement No. 150, we recently evaluated the financial statement presentation of our equity securities under ASR 268 and EITF Topic D-98. As noted in Note 4, the Company has restated its consolidated balance sheets and statement of stockholders deficit as of and for the year ended June 30, 2004 and certain prior periods to reclassify the portions of our common stock and Series B Preferred stock which contain redemption provisions that are outside the control of the Company under the 1998 security holders agreement (the Stockholders Agreement). The Company has also restated the consolidated balance sheets and statement of stockholders deficit as of and for the year ended June 30, 2004 to reverse the recognition of the accrual of cummulative dividends that had historically been recorded as an increase of the carrying value of the Series B Preferred stock and accumulated deficit.
In response to these reclassifications, senior management has made certain recommendations for the enhancement of our control processes and procedures, including enhanced analysis and support for the financial statement presentation of our redeemable securities. With the assistance of our advisors, we continue to consider further actions to improve the effectiveness of our control processes and procedures.
Part II Other Information
Items 1 5 are not applicable
Item 6. Exhibits
a. Exhibits
EXHIBIT |
|
DESCRIPTION |
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
* |
|
Filed herewith. |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 22, 2004
SIGNATURE |
|
TITLE |
|||
|
|
|
|||
|
/s/ JOHN T. SAWYER |
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
John T. Sawyer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JEFFREY E. PLATT |
|
|
Vice President-Finance and Chief Financial Officer (Principal |
|
|
Jeffrey E. Platt |
|
|
Accounting Officer) |
|
|
|
|
|
|
|
|
/s/ PAUL N. ARNOLD |
|
|
Director |
|
|
Paul N. Arnold |
|
|
|
|
|
|
|
|
|
|
|
/s/ HAROLD O. ROSSER |
|
|
Director |
|
|
Harold O. Rosser |
|
|
|
|
|
|
|
|
|
|
|
/s/ J. RICE EDMONDS |
|
|
Director |
|
|
J. Rice Edmonds |
|
|
|
|
21
EXHIBIT |
|
DESCRIPTION |
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 22, 2004* |
* |
|
Filed herewith. |
22