##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q/A




x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2003

o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number. 333-64745

PENHALL INTERNATIONAL CORP.

(Exact Name of registrant as specified in its charter)


ARIZONA (State or other jurisdiction of incorporation or organization)
    
    86-0634394 (I.R.S. Employer Identification Number)


1801 PENHALL WAY, ANAHEIM, CA 92803

(Address of principal executive offices) (Zip Code)


(714) 772-6450

(Registrants telephone number, including area code)


Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

CLASS AND TITLE OF CAPITAL STOCK
    
    SHARES OUTSTANDING AS OF NOVEMBER 12, 2003Common Stock, $.01 Par Value
    
    986,552


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x





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Explanatory Note

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the period
ended September 30, 2003, as originally filed on November 12, 2003, is being
filed to amend and reflect the restatement of our Consolidated Balance Sheets
as of June 30, 2003 and September 30, 2003. During the second quarter of Fiscal
2004, we re-examined the provisions of our revolving credit facility (the New
Credit). The Company reviewed the New Credit and determined that the
associated lock-box agreement satisfied 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). Further, 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
Statement of Financial Accounting Standard No. 78 (FAS 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 that there were any subjective acceleration clauses that fit
directly into the definition provided in FAS 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. As a
result, the Company has reclassified borrowings under the New Credit facility
as a short-term obligation. Each item of the Quarterly Report on Form 10-Q as
filed on November 12, 2003 that was affected by the restatement has been
amended and restated. Additionally, the Company has reclassified
certain June 30, 2003 balances (accrued liabilities and current
portion of insurance reserves) to conform with presentation used for
September 30, 2003. No attempt has been made in this Form 10-Q/A to modify
or update other disclosures as presented in the original Form 10-Q except as
required to reflect the effects of the restatement.




1



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Part I. Financial Information









Item 1. Financial Statements




PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)




June 30,
    
    September 30,2003
    
    2003(RESTATED,
see Note 4)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    184,000
    
    
    $
    50,000Receivables:Contract and trade receivables
    
    
    29,105,000
    
    
    
    34,087,000Contract retentions due upon completion and acceptance of work
    
    
    4,105,000
    
    
    
    4,448,000Income taxes
    
    
    2,648,000
    
    
    
    1,926,00035,858,000
    
    
    
    40,461,000Less allowance for doubtful receivables
    
    
    1,592,000
    
    
    
    1,562,000Net receivables
    
    
    34,266,000
    
    
    
    38,899,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    1,704,000
    
    
    
    2,098,000Deferred tax assets
    
    
    3,363,000
    
    
    
    3,363,000Inventories
    
    
    2,362,000
    
    
    
    2,498,000Prepaid expenses and other current assets
    
    
    3,638,000
    
    
    
    2,127,000Total current assets
    
    
    45,517,000
    
    
    
    49,035,000Property, plant and equipment, at cost:Land
    
    
    5,004,000
    
    
    
    5,004,000Buildings and leasehold improvements
    
    
    8,793,000
    
    
    
    8,801,000Construction and other equipment
    
    
    117,860,000
    
    
    
    118,235,000131,657,000
    
    
    
    132,040,000Less accumulated depreciation and amortization
    
    
    78,256,000
    
    
    
    81,132,000Net property, plant and equipment
    
    
    53,401,000
    
    
    
    50,908,000Goodwill, net of accumulated amortization
    
    
    9,053,000
    
    
    
    9,053,000Debt issuance costs, net of accumulated amortization
    
    
    3,316,000
    
    
    
    3,176,000Other assets, net
    
    
    1,186,000
    
    
    
    1,092,000112,473,000
    
    
    
    113,264,000





See accompanying notes to condensed consolidated financial statements

2



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##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)




June 30,
    
    September 30,2003
    
    2003(RESTATED,
see Note 4)LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current installments of long-term debt
    
    $
    2,551,000
    
    
    $
    2,487,000Borrowings
under revolving credit facility (Note 4)
    
    
    14,485,000
    
    
    
    16,208,000Trade accounts payable
    
    
    7,953,000
    
    
    
    7,901,000Accrued liabilities
    
    
    10,809,000
    
    
    
    8,910,000Short-term
portion of insurance reserves
    
    
    1,569,000
    
    
    
    1,954,000Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    831,000
    
    
    
    1,062,000Total current liabilities
    
    
    38,198,000
    
    
    
    38,522,000Long-term debt, excluding current installments
    
    
    359,000
    
    
    
    328,000Long-term portion of insurance reserve
    
    
    5,158,000
    
    
    
    5,158,000Senior Notes
    
    
    100,000,000
    
    
    
    100,000,000Deferred tax liabilities
    
    
    8,221,000
    
    
    
    8,221,000Senior Exchangeable Preferred Stock, redemption value $16,744,000 and $17,193,000 at June 30, 2003 and
September 30, 2003, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2003 and
September 30, 2003
    
    
    16,744,000
    
    
    
    17,193,000Series A Preferred Stock, redemption value $19,737,000 and $20,394,000 at June 30, 2003 and September 30,
2003, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2003 and
September 30, 2003
    
    
    19,737,000
    
    
    
    20,394,000Stockholders 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 September 30, 2003
    
    
    35,546,000
    
    
    
    36,725,000Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,870 at June 30, 2003
and September 30, 2003
    
    
    10,000
    
    
    
    10,000Additional paid-in capital
    
    
    2,082,000
    
    
    
    2,082,000Treasury stock, at cost, 35,318 common shares at June 30, 2003 and September 30, 2003
    
    
    (336,000
    )
    
    
    (336,000
    )Accumulated deficit
    
    
    (113,246,000
    )
    
    
    (115,033,000
    )Total stockholders deficit
    
    
    (75,944,000
    )
    
    
    (76,552,000
    )Commitments and contingencies$
    112,473,000
    
    
    $
    113,264,000





See accompanying notes to condensed consolidated financial statements

3



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##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

THREE MONTH PERIODSENDED SEPTEMBER 30,2002
    
    2003Revenues
    
    $
    46,576,000
    
    
    $
    47,524,000Cost of revenues
    
    
    36,095,000
    
    
    
    36,379,000Gross profit
    
    
    10,481,000
    
    
    
    11,145,000General and administrative expenses
    
    
    7,278,000
    
    
    
    6,951,000Other operating income
    
    
    492,000
    
    
    
    189,000Earnings before interest expense and income taxes
    
    
    3,695,000
    
    
    
    4,383,000Interest expense
    
    
    3,598,000
    
    
    
    3,579,000Earnings before income taxes
    
    
    97,000
    
    
    
    804,000Income tax expense
    
    
    35,000
    
    
    
    306,000Net earnings
    
    
    62,000
    
    
    
    498,000Accretion of preferred stock to redemption value
    
    
    (980,000
    )
    
    
    (1,106,000
    )Accrual of cumulative dividends on preferred stock
    
    
    (1,038,000
    )
    
    
    (1,179,000
    )Net loss available to common stockholders
    
    $
    (1,956,000
    )
    
    $
    (1,787,000
    )Loss per share basic and diluted
    
    $
    (1.98
    )
    
    $
    (1.81
    )Weighted average number of shares outstanding basic and diluted
    
    
    986,156
    
    
    
    986,552


See accompanying notes to condensed consolidated financial statements

4



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##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)




THREE MONTH PERIODSENDED SEPTEMBER 30,2002
    
    2003Cash flows from operating activities:Net earnings
    
    $
    62,000
    
    
    $
    498,000Adjustments to reconcile net earnings to net cash used in operating activities:Depreciation and amortization
    
    
    4,343,000
    
    
    
    3,926,000Amortization of debt issuance costs
    
    
    234,000
    
    
    
    289,000Provision for doubtful accounts
    
    
    126,000
    
    
    
    Gain on sale of assets
    
    
    (60,000
    )
    
    
    (58,000
    )Changes in operating assets and liabilities:Receivables
    
    
    (2,758,000
    )
    
    
    (4,633,000
    )Inventories, prepaid expenses and other assets
    
    
    (202,000
    )
    
    
    1,365,000Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    (382,000
    )
    
    
    (394,000
    )Trade accounts payable and accrued liabilities
    
    
    (4,196,000
    )
    
    
    (3,414,000
    )Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    518,000
    
    
    
    231,000Net cash used in operating activities
    
    
    (2,315,000
    )
    
    
    (2,190,000
    )Cash flows from investing activities:Proceeds from sale of assets
    
    
    135,000
    
    
    
    116,000Capital expenditures
    
    
    (1,975,000
    )
    
    
    (1,387,000
    )Net cash used in investing activities
    
    
    (1,840,000
    )
    
    
    (1,271,000
    )Cash flows from financing activities:Borrowings under long-term debt
    
    
    18,830,000
    
    
    
    14,000Repayments of long-term debt
    
    
    (19,561,000
    )
    
    
    (109,000
    )Borrowings
under revolving credit facility
    
    
    
    
    
    
    69,664,000Repayments
of revolving credit facility
    
    
    
    
    
    
    (67,941,000
    )Debt issuance costs
    
    
    (113,000
    )
    
    
    (149,000
    )Book overdraft
    
    
    902,000
    
    
    
    1,848,000Repurchase of common stock and Series B preferred stock
    
    
    (24,000
    )
    
    
    Net cash provided by financing activities
    
    
    34,000
    
    
    
    3,327,000Net change in cash and cash equivalents
    
    
    (4,121,000
    )
    
    
    (134,000
    )Cash and cash equivalents at beginning of period
    
    
    6,205,000
    
    
    
    184,000Cash and cash equivalents at end of period
    
    $
    2,084,000
    
    
    $
    50,000Supplemental disclosure of cash flow information:Cash
paid during the period for:Income
taxes
    
    $
    7,000
    
    
    $
    33,000Interest
    
    $
    6,280,000
    
    
    $
    6,248,000Supplemental disclosure of noncash investing and financing activities:Accretion of preferred stock to redemption value
    
    $
    980,000
    
    
    $
    1,106,000Accrual of cumulative dividends on preferred stock
    
    $
    1,038,000
    
    
    $
    1,179,000





See accompanying notes to condensed consolidated financial statements

5



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##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)

(1) Basis Of Presentation

Penhall International, Inc. (PII) was founded in 1957 and was
incorporated in the state of California on April 19, 1988. On August 4, 1998,
$100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall
Acquisition Corp., an Arizona corporation formed by an unrelated third party
(the Third Party) to effect the recapitalization of PII. As part of the
recapitalization, a series of mergers (the Recapitalization Mergers) were
consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned
subsidiary of PII, became the corporate parent of PII, the Third Party acquired
a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete
Cutting, Inc. became the successor obligor of the Senior Notes. Following the
consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc.
changed its name to Penhall International Corp., and PII changed its name to
Penhall Rental Corp. Penhall Rental Corp. was dissolved and merged into Penhall
International Corp. effective July 1, 2002.

Under accounting principles generally accepted in the United States of
America, the Recapitalization Mergers were accounted for as a leveraged
recapitalization transaction in a manner similar to a pooling-of-interests.
Under this method, the transfer of controlling interest in PII to the
Third-Party did not change the accounting basis of the assets and liabilities
in PIIs separate stand-alone financial statements.

The accompanying unaudited condensed consolidated financial statements of
Penhall International Corp. (Penhall or the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.




Results of operations for the three month period ended September 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2004. The unaudited condensed consolidated financial statements
included herein should be read in conjunction with the Companys audited
consolidated financial statements and footnotes thereto included in the Form
10-K for the year ended June 30, 2003. The June
30, 2003 and September 30, 2003 consolidated financial statements
have been restated, see Note 4. Certain June 30, 2003
balances (accrued liabilities and current portion of insurance
reserves) have been reclassified to conform to the presentation used
for September 30, 2003.




Loss Per Share

Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is calculated by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period plus the impact of assumed potential dilutive
securities. The dilutive effect of outstanding options is reflected in diluted
loss per share by application of the treasury stock method. For the three month
period ended September 30, 2002 diluted loss per share is the same as basic
loss per share as options to purchase 9,160 shares of common stock were not
included in the computation of diluted loss per share for the three month
period ended September 30, 2002 as the effect would have been anti-dilutive.
During the three month period ended September 30, 2003, diluted loss per share
is the same as basic loss per share as options to purchase 9,125 shares of
common stock were not included in the computation of diluted loss per share for
the three month period ended September 30, 2003 as the effect would have been
anti-dilutive.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to long-term construction contracts, accounts
receivable, goodwill, long-lived assets, self-insurance, contingencies and
litigation. The Company bases its estimates on current information, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the
recognition of revenue that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies
affects its more significant judgments and estimates used in the preparation of
its consolidated financial statements:







6



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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

Revenue Recognition on Long-Term Construction Contracts

Revenue from construction operations is recorded using the
percentage-of-completion method of accounting. The Company has two types of
contracts. The first type of contract is fixed unit in which the percentage of
completion is determined based on the units completed as a percentage of
estimated total units. The second type of contract is lump sum in which
percentage of completion is determined based on costs to date as compared to
total estimated costs at completion. If estimated total costs on any contract
indicate a loss, the Company provides currently for the total loss anticipated
on the contract. For long-term contracts, which extend beyond fiscal year ends,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which facts requiring the revision become
known. All remaining revenue and costs are recognized as work is performed.

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 earnings and net
earnings 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 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:

Three Months EndedSeptember 30,2002
    
    2003Net loss available to common stockholders as reported
    
    $
    (1,956,000
    )
    
    $
    (1,787,000
    )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
    
    $
    (6,000
    )
    
    $
    (4,000
    )Pro forma net loss available to common stockholders
    
    $
    (1,962,000
    )
    
    $
    (1,791,000
    )Basic and diluted loss per share as reported
    
    $
    (1.98
    )
    
    $
    (1.81
    )Pro forma basic and diluted loss per share
    
    $
    (1.99
    )
    
    $
    (1.82
    )


At the 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 3.1%, dividend rate of 0% and an expected life of 10 years.

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 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. As of December 31, 2002, we
completed the transitional impairment analysis under SFAS No. 142, no indicated
impairment of goodwill was identified. We performed our annual impairment
test as of June 30, 2003, no indicated impairment was identified. There were
no adjustments to identifiable intangible assets useful lives or recorded
balances as a result of the adoption of SFAS No. 142. We will perform an
annual impairment test as of each June 30, thereafter. We will perform an
earlier impairment analysis if a triggering event occurs that warrants such
analysis. No goodwill expense was recorded during the three month periods ended
September 30, 2002 and 2003.

7



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##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

New Accounting Pronouncement




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 a
nonpublic entity for which this statement is effective for fiscal periods
beginning December 15, 2003, (the Companys fiscal 2005).
At this time, the Company is unable to determine the impact that
adoption of this pronouncement will have on our financial
position, results of its operations or liquidity.




(2) Related Party

The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc.
(BRS) of $150,000 as of September 30, 2003. The balance due as of June 30,
2003 was $75,000.

(3) Commitments and Contingencies

Litigation

There are various lawsuits and claims pending against and claims being
pursued by the Company and its subsidiaries arising out of the normal course of
business. It is managements present opinion, based in part upon the advice of
legal counsel, that the outcome of these proceedings will not have a material
effect on the Companys consolidated financial statements taken as a whole.




(4) Restatement

We have restated our condensed consolidated financial statements for the
year ended June 30, 2003 and the period ended September 30, 2003 to properly
classify our revolving credit facility with General Electric Capital
Corporation as a current liability in accordance with 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).

The following table reflects the impact of the reclassification:

|                                               |  |                        |            |                    |  |                        |            |             |  |  |            |  |  |  |            | 
|---------------------------------------------- |  | ---------------------- | ---------- | ------------------ |  | ---------------------- | ---------- | ----------- |  |  | ---------- |  |  |  | ---------- | 
|                                               |  | JUNE 30, 2003          |            | SEPTEMBER
30, 2003
|                                               |  |                        |            |                   
|                                               |  | As Previously Reported |            | As Restated        |  | As Previously Reported |            | As Restated
|                                               |  |                        |            |                    |  |                        |            |            
|Borrowings under revolving credit facility     |  |                        |           |                    |  |                        | 14,485,000 |             |  |  |           |  |  |  | 16,208,000 | 
|Current liabilities                            |  |                        | 23,713,000 |                    |  |                        | 38,198,000 |             |  |  | 22,314,000 |  |  |  | 38,522,000 | 
|Long-term
debt, excluding current installments |  |                        | 14,844,000 |                    |  |                        | 359,000    |             |  |  | 16,536,000 |  |  |  | 328,000    | 

(5) Condensed Consolidating Financial Information




The following consolidating financial information is presented for
purposes of complying with the reporting requirements of the Guarantor
Subsidiaries, (Penhall Rental Corp. and Penhall Company). Effective July 1,
2002, Penhall Rental was merged into Penhall International Corp. 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 September 30, 2003 and for the
three month periods ended September 30, 2002 and 2003 of:



| | (a) |  | Penhall International Corp. on a parent company only basis (Parent)
(carrying its investments in the subsidiaries under the equity method),
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | the Guarantor Subsidiaries
| | --- |  | --------------------------



| | (c) |  | elimination entries necessary to consolidate the parent company and its subsidiaries, and
| | --- |  | -----------------------------------------------------------------------------------------



| | (d) |  | the Company on a consolidated basis.
| | --- |  | ------------------------------------

8



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET




JUNE 30,
2003
(RESTATED, see Note 4)PENHALLINTERNATIONAL
    
    PENHALLCORP.
    
    COMPANY
    
    ELIMINATIONS
    
    CONSOLIDATEDAssetsCurrent assets:Receivables, net
    
    $
    2,648,000
    
    
    $
    31,618,000
    
    
    $
    
    
    
    $
    34,266,000Inventories
    
    
    
    
    
    
    2,362,000
    
    
    
    
    
    
    
    2,362,000Costs and estimated earnings in excess of
billings on uncompleted contracts
    
    
    
    
    
    
    1,704,000
    
    
    
    
    
    
    
    1,704,000Other current assets
    
    
    271,000
    
    
    
    7,066,000
    
    
    
    (152,000
    )
    
    
    7,185,000Total current assets
    
    
    2,919,000
    
    
    
    42,750,000
    
    
    
    (152,000
    )
    
    
    45,517,000Net property, plant and equipment
    
    
    8,798,000
    
    
    
    44,603,000
    
    
    
    
    
    
    
    53,401,000Intercompany assets
    
    
    
    
    
    
    19,398,000
    
    
    
    (19,398,000
    )
    
    
    Other assets, net
    
    
    2,051,000
    
    
    
    11,504,000
    
    
    
    
    
    
    
    13,555,000Investment in subsidiaries
    
    
    70,399,000
    
    
    
    
    
    
    
    (70,399,000
    )
    
    
    $
    84,167,000
    
    
    $
    118,255,000
    
    
    $
    (89,949,000
    )
    
    $
    112,473,000Liabilities and Stockholders Equity (Deficit):Current installments of long-term debt
    
    $
    3,000
    
    
    $
    2,548,000
    
    
    $
    
    
    
    $
    2,551,000Borrowings
under revolving credit facility
    
    
    
    
    
    
    14,485,000
    
    
    
    
    
    
    
    14,485,000Trade accounts payable
    
    
    9,000
    
    
    
    8,096,000
    
    
    
    (152,000
    )
    
    
    7,953,000Accrued liabilities
    
    
    4,931,000
    
    
    
    5,878,000
    
    
    
    
    
    
    
    10,809,000Current
portion of insurance reserves
    
    
    
    
    
    
    1,569,000
    
    
    
    
    
    
    
    1,569,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    
    
    
    
    831,000
    
    
    
    
    
    
    
    831,000Intercompany liabilities
    
    
    19,398,000
    
    
    
    
    
    
    
    (19,398,000
    )
    
    
    Total current liabilities
    
    
    24,341,000
    
    
    
    33,407,000
    
    
    
    (19,550,000
    )
    
    
    38,198,000Long-term debt, excluding current installments
    
    
    180,000
    
    
    
    179,000
    
    
    
    
    
    
    
    359,000Long-term portion of insurance reserves
    
    
    
    
    
    
    5,158,000
    
    
    
    
    
    
    
    5,158,000Senior notes
    
    
    100,000,000
    
    
    
    
    
    
    
    
    
    
    
    100,000,000Deferred tax liabilities
    
    
    (891,000
    )
    
    
    9,112,000
    
    
    
    
    
    
    
    8,221,000Senior Exchangeable Preferred Stock
    
    
    16,744,000
    
    
    
    
    
    
    
    
    
    
    
    16,744,000Series A Preferred Stock
    
    
    19,737,000
    
    
    
    
    
    
    
    
    
    
    
    19,737,000Stockholders equity (deficit)
    
    
    (75,944,000
    )
    
    
    70,399,000
    
    
    
    (70,399,000
    )
    
    
    (75,944,000
    )$
    84,167,000
    
    
    $
    118,255,000
    
    
    $
    (89,949,000
    )
    
    $
    112,473,000





9



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET




SEPTEMBER 30, 2003
(RESTATED, see Note 4)PENHALLINTERNATIONAL
    
    PENHALLCORP.
    
    COMPANY
    
    ELIMINATIONS
    
    CONSOLIDATEDAssetsCurrent assets:Receivables, net
    
    $
    1,926,000
    
    
    $
    36,973,000
    
    
    $
    
    
    
    $
    38,899,000Inventories
    
    
    
    
    
    
    2,498,000
    
    
    
    
    
    
    
    2,498,000Costs and estimated earnings in excess of
billings on uncompleted contracts
    
    
    
    
    
    
    2,098,000
    
    
    
    
    
    
    
    2,098,000Other current assets
    
    
    60,000
    
    
    
    5,480,000
    
    
    
    
    
    
    
    5,540,000Total current assets
    
    
    1,986,000
    
    
    
    47,049,000
    
    
    
    
    
    
    
    49,035,000Net property, plant and equipment
    
    
    8,735,000
    
    
    
    42,173,000
    
    
    
    
    
    
    
    50,908,000Intercompany assets
    
    
    
    
    
    
    22,322,000
    
    
    
    (22,322,000
    )
    
    
    Other assets, net
    
    
    1,886,000
    
    
    
    11,435,000
    
    
    
    
    
    
    
    13,321,000Investment in subsidiaries
    
    
    72,146,000
    
    
    
    
    
    
    
    (72,146,000
    )
    
    
    $
    84,753,000
    
    
    $
    122,979,000
    
    
    $
    (94,468,000
    )
    
    $
    113,264,000Liabilities and Stockholders Equity (Deficit):Current installments of long-term debt
    
    $
    4,000
    
    
    $
    2,483,000
    
    
    $
    
    
    
    $
    2,487,000Trade accounts payable
    
    
    
    
    
    
    7,901,000
    
    
    
    
    
    
    
    7,901,000Accrued liabilities
    
    
    2,105,000
    
    
    
    6,805,000
    
    
    
    
    
    
    
    8,910,000Current
portion of insurance reserves
    
    
    
    
    
    
    1,954,000
    
    
    
    
    
    
    
    1,954,000Borrowings
under revolving credit facility
    
    
    
    
    
    
    16,208,000
    
    
    
    
    
    
    
    16,208,000Billings in excess of costs and estimated earnings
on uncompleted contracts
    
    
    
    
    
    
    1,062,000
    
    
    
    
    
    
    
    1,062,000Intercompany liabilities
    
    
    22,322,000
    
    
    
    
    
    
    
    (22,322,000
    )
    
    
    Total current liabilities
    
    
    24,431,000
    
    
    
    36,413,000
    
    
    
    (22,322,000
    )
    
    
    38,522,000Long-term debt, excluding current installments
    
    
    178,000
    
    
    
    150,000
    
    
    
    
    
    
    
    328,000Long-term portion of insurance reserves
    
    
    
    
    
    
    5,158,000
    
    
    
    
    
    
    
    5,158,000Senior notes
    
    
    100,000,000
    
    
    
    
    
    
    
    
    
    
    
    100,000,000Deferred tax liabilities
    
    
    (891,000
    )
    
    
    9,112,000
    
    
    
    
    
    
    
    8,221,000Senior Exchangeable Preferred Stock
    
    
    17,193,000
    
    
    
    
    
    
    
    
    
    
    
    17,193,000Series A Preferred Stock
    
    
    20,394,000
    
    
    
    
    
    
    
    
    
    
    
    20,394,000Stockholders equity (deficit)
    
    
    (76,552,000
    )
    
    
    72,146,000
    
    
    
    (72,146,000
    )
    
    
    (76,552,000
    )$
    84,753,000
    
    
    $
    122,979,000
    
    
    $
    (94,468,000
    )
    
    $
    113,264,000





10



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2002PenhallInternational
    
    PenhallCorp.
    
    Company
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    3,193,000
    
    
    $
    46,576,000
    
    
    $
    (3,193,000
    )
    
    $
    46,576,000Cost of revenues
    
    
    
    
    
    
    36,095,000
    
    
    
    
    
    
    
    36,095,000Gross profit
    
    
    3,193,000
    
    
    
    10,481,000
    
    
    
    (3,193,000
    )
    
    
    10,481,000General and administrative expenses
    
    
    191,000
    
    
    
    7,480,000
    
    
    
    (393,000
    )
    
    
    7,278,000Royalties
    
    
    
    
    
    
    2,800,000
    
    
    
    (2,800,000
    )
    
    
    Other operating income, net
    
    
    8,000
    
    
    
    484,000
    
    
    
    
    
    
    
    492,000Equity in earnings of subsidiary
    
    
    365,000
    
    
    
    
    
    
    
    (365,000
    )
    
    
    Earnings before interest expense and
income taxes
    
    
    3,375,000
    
    
    
    685,000
    
    
    
    (365,000
    )
    
    
    3,695,000Interest expense
    
    
    3,521,000
    
    
    
    77,000
    
    
    
    
    
    
    
    3,598,000Earnings (loss) before income taxes
    
    
    (146,000
    )
    
    
    608,000
    
    
    
    (365,000
    )
    
    
    97,000Income tax expense (benefit)
    
    
    (208,000
    )
    
    
    243,000
    
    
    
    
    
    
    
    35,000Net earnings
    
    $
    62,000
    
    
    $
    365,000
    
    
    $
    (365,000
    )
    
    $
    62,000


11



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003PenhallInternational
    
    PenhallCorp.
    
    Company
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    1,460,000
    
    
    $
    47,524,000
    
    
    $
    (1,460,000
    )
    
    $
    47,524,000Cost of revenues
    
    
    
    
    
    
    36,379,000
    
    
    
    
    
    
    
    36,379,000Gross profit
    
    
    1,460,000
    
    
    
    11,145,000
    
    
    
    (1,460,000
    )
    
    
    11,145,000General and administrative expenses
    
    
    192,000
    
    
    
    7,154,000
    
    
    
    (395,000
    )
    
    
    6,951,000Royalties
    
    
    
    
    
    
    1,065,000
    
    
    
    (1,065,000
    )
    
    
    Other operating income, net
    
    
    
    
    
    
    189,000
    
    
    
    
    
    
    
    189,000Equity 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
    )
    
    
    4,383,000Interest expense
    
    
    3,194,000
    
    
    
    385,000
    
    
    
    
    
    
    
    3,579,000Earnings (loss) before income taxes
    
    
    (179,000
    )
    
    
    2,730,000
    
    
    
    (1,747,000
    )
    
    
    804,000Income tax expense (benefit)
    
    
    (677,000
    )
    
    
    983,000
    
    
    
    
    
    
    
    306,000Net earnings
    
    $
    498,000
    
    
    $
    1,747,000
    
    
    $
    (1,747,000
    )
    
    $
    498,000


12



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2002Penhall
    
    PenhallInternational
    
    Rental
    
    PenhallCorp.
    
    Corp.
    
    Company
    
    Eliminations
    
    ConsolidatedNet cash used in operating activities
    
    $
    (1,475,000
    )
    
    $
    
    
    
    $
    (840,000
    )
    
    $
    
    
    
    $
    (2,315,000
    )Cash flows from investing activities:Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    135,000
    
    
    
    
    
    
    
    135,000Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (1,975,000
    )
    
    
    
    
    
    
    (1,975,000
    )Cash acquired from Penhall Rental
    
    
    6,143,000
    
    
    
    (6,143,000
    )
    
    
    
    
    
    
    
    
    
    
    Net cash provided
by (used in)
investing
activities
    
    
    6,143,000
    
    
    
    (6,143,000
    )
    
    
    (1,840,000
    )
    
    
    
    
    
    
    (1,840,000
    )Cash flows from financing activities:Due to (from) affiliates
    
    
    (1,347,000
    )
    
    
    
    
    
    
    1,347,000
    
    
    
    
    
    
    
    Borrowings under long-term debt
    
    
    17,820,000
    
    
    
    
    
    
    
    1,010,000
    
    
    
    
    
    
    
    18,830,000Repayments of long-term debt
    
    
    (18,996,000
    )
    
    
    
    
    
    
    (565,000
    )
    
    
    
    
    
    
    (19,561,000
    )Debt issuance costs
    
    
    (104,000
    )
    
    
    
    
    
    
    (9,000
    )
    
    
    
    
    
    
    (113,000
    )Book overdraft
    
    
    
    
    
    
    
    
    
    
    902,000
    
    
    
    
    
    
    
    902,000Repurchase of common stock and Series B
preferred stock
    
    
    (24,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,000
    )Net cash provided
by (used in)
financing
activities
    
    
    (2,651,000
    )
    
    
    
    
    
    
    2,685,000
    
    
    
    
    
    
    
    34,000Net change in cash
and cashequivalents
    
    
    2,017,000
    
    
    
    (6,143,000
    )
    
    
    5,000
    
    
    
    
    
    
    
    (4,121,000
    )Cash and cash equivalents at beginning of
period
    
    
    
    
    
    
    6,143,000
    
    
    
    62,000
    
    
    
    
    
    
    
    6,205,000Cash and cash equivalents at end of period
    
    $
    2,017,000
    
    
    $
    
    
    
    $
    67,000
    
    
    $
    
    
    
    $
    2,084,000


13



---



##### 



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW




THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003PenhallInternational
    
    PenhallCorp.
    
    Company
    
    Eliminations
    
    ConsolidatedNet 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
    
    
    
    
    
    
    
    116,000Capital 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
    
    
    
    
    
    
    
    14,000Repayments of long-term debt
    
    
    (1,000
    )
    
    
    (108,000
    )
    
    
    
    
    
    
    (109,000
    )Borrowings
under revolving credit facility
    
    
    
    
    
    
    69,664,000
    
    
    
    
    
    
    
    69,664,000Repayments
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
    
    
    
    1,848,000Net cash provided by financing activities
    
    
    2,771,000
    
    
    
    404,000
    
    
    
    152,000
    
    
    
    3,327,000Net 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
    )
    
    
    184,000Cash and cash equivalents at end of period
    
    $
    28,000
    
    
    $
    22,000
    
    
    $
    
    
    
    $
    50,000





14



---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the results of operations and financial
condition of Penhall International Corp. (Penhall) should be read in
conjunction with the unaudited condensed consolidated financial statements and
footnotes thereto included in this quarterly report on Form 10-Q and the
Companys audited consolidated financial statements and footnotes thereto
included in the annual report on Form 10-K, filed with the Securities and
Exchange Commission.

General

Penhall was founded in 1957 in Anaheim, California with one piece of
equipment, and today is one of the largest Operated Equipment Rental Services
companies in the United States. Penhall differentiates itself from other
equipment rental companies by providing specialized services in connection with
infrastructure projects through renting equipment along with skilled operators
to serve customers in the construction, industrial, manufacturing, governmental
and residential markets. In addition, Penhall complements its Operated
Equipment Rental Services with fixed-price contracts, which serve to market its
operated equipment rental services business and increase utilization of its
operated equipment rental fleet. Penhall provides its services from thirty
eight locations in seventeen states, with a presence in some of the fastest
growing states in terms of construction spending and population growth.

The operated equipment rental industry is a specialized niche of the
highly fragmented United States equipment rental industry, in which there are
approximately 17,000 companies. Penhall has taken advantage of consolidation
opportunities by acquiring small companies in targeted markets as well as by
establishing new offices in those markets. Since 1998, Penhall has effected
eight strategic acquisitions, including:



| | 1. |  | HSI, a Minnesota-based firm acquired in April 1998,
| | -- |  | ---------------------------------------------------



| | 2. |  | Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,
| | -- |  | -------------------------------------------------------------------------------------------------



| | 3. |  | Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,
| | -- |  | ------------------------------------------------------------------------------------



| | 4. |  | Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,
| | -- |  | ------------------------------------------------------------------------------



| | 5. |  | Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000,
| | -- |  | --------------------------------------------------------------------------------------------------



| | 6. |  | H&P Sawing and Drilling, a Missouri-based Company acquired in March 2001,
| | -- |  | -------------------------------------------------------------------------



| | 7. |  | Bob Mack Company, a California-based company acquired in March 2002, and
| | -- |  | ------------------------------------------------------------------------



| | 8. |  | Arizona Curb Cut Company, an Arizona-based company in April 2002.
| | -- |  | -----------------------------------------------------------------

During the same period, Penhall established operations in 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
complemented by long-term fixed-price contracts. Penhalls revenues are derived
from highway-related projects, building-related projects, airport, residential
and other projects. The following table shows the breakdown of the components
of revenue for the periods indicated:

THREE MONTH PERIODS ENDED SEPTEMBER 30,2002
    
    2003% of
    
    
    
    
    
    % of$
    
    Total
    
    $
    
    Total(Dollars in Thousands)Operated Equipment Rental:Services
    
    $
    34,375
    
    
    
    73.8
    %
    
    $
    31,984
    
    
    
    67.3
    %Contract Services (1)
    
    
    12,201
    
    
    
    26.2
    %
    
    
    15,540
    
    
    
    32.7
    %Total Revenues
    
    $
    46,576
    
    
    
    100.0
    %
    
    $
    47,524
    
    
    
    100.0
    %




---

|(1) |  | Contract services revenues exclude services performed by the operated
equipment rental divisions on long-term contracts.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

Revenue growth is influenced by infrastructure change, including new
construction, modification and regulatory changes. Penhalls revenues are also
impacted positively after the occurrence of natural disasters, such as the 1989
and 1994 earthquakes in Northern and Southern California. Other factors that
influence Penhalls operations are demand for operated rental equipment, the
amount and quality of equipment available for rent, rental rates and general
economic conditions. Historically, revenues have been seasonal, as weather
conditions in the spring and summer months result in stronger performance in
the first and fourth fiscal quarters than in the second and third fiscal
quarters.

The principal components of Penhalls operating costs include the cost of
labor, equipment rental fleet maintenance costs including parts and service,
equipment rental fleet depreciation, insurance and other direct operating
costs. Given the varied, and in some cases specialized, nature of its rental
equipment, Penhall utilizes a range of periods over which it depreciates its
equipment on a straight-line basis. On average, Penhall depreciates its
equipment over an estimated useful life of six years with a 10% residual value.

15



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##### 



Results of Operations

Three Months Ended September 30, 2003 Compared to Three months Ended
September 30, 2002




Revenues.Revenues for the Three months ended September 30, 2003 (Interim
2004) were $47.5 million, an increase of $0.9 million or 2.0% from the three
months ended September 30, 2002 (Interim 2003). Increased revenues in Interim
2004 were primarily a result of an increase of $3.3 million or 27.4% in
Contract Services in Interim 2004, offset by a $2.4 million or 7.0% decrease in
Operated Equipment Rental Services. The increase in Contract Services during
Interim 2004 has reduced the Contract Services backlog at Interim
2004 by $3.3 million
compared to Interim 2002. The increase in Contract Services during Interim
2004 is due to timing set by our customers and is not necessarily indicative of
a trend.




Gross Profit.Gross profit totaled $11.1 million in Interim 2004, an
increase of $0.7 million or 6.3% from Interim 2003. Gross profit as a
percentage of revenues increased from 22.5% in Interim 2003 to 23.5% in Interim
2004. The increase in gross profit from Interim 2003 to Interim 2004 is
primarily attributable to significant profits on a large Contract Services
project during Interim 2004 and some losses recognized on projects during
Interim 2003.

Penhall operated through 38 locations in 17 states at both Interim 2004
and 2003. At September 30, 2003, Penhalls operated rental fleet consisted of
706 units compared to 760 at September 30, 2002, a decrease of 7.1%.




General and Administrative Expenses.General and administrative expenses
were $7.0 million in Interim 2004 compared to $7.3 million in Interim 2003. As
a percent of revenues, general and administrative expenses were 14.6% in
Interim 2004 compared to 15.6% in Interim 2003. The decrease in general and
administrative expenses during Interim 2004 is primarily attributable to
decreases of $0.2 million in payroll and related expenses,
$0.1 million decrease in bad
debt expense and $0.1 million in insurance expense.




Interest Expense.Interest expense was $3.6 million in Interim 2004
compared to interest expense of $3.6 million in Interim 2003. The slight
decrease in interest expense is attributable to decreased borrowing during
Interim 2004 offset by an increase in interest rate during Interim 2004.

Income Tax Expense.The Company recorded an income tax expense $0.3
million, or 38% of earnings before income taxes in Interim 2004, compared to an
income tax expense of $0.04 million, or 36% of earnings before income taxes in
Interim 2003. The increase in the income tax expense is attributable to higher
earnings before income tax in Interim 2004.

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). 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 Company reviewed the New
Credit and determined that the associated lock-box agreement satisfied 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). Further, 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 FAS 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 that there were any
subjective acceleration clauses that fit directly into the definition provided
in FAS 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. 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. Managements understanding of this provision after consultation
with the lender, is that 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 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 lender to the borrowing base
calculation. As a result, the Company has reclassified borrowings under the
New Credit facility as a short-term obligation (refer to Note 4
to the condensed consolidated financial statements included in
Item 1). 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, 2003, the Company had outstanding borrowings under
the New Credit of $16.2 million and unused and available amounts
under The New Credit of $20.7 million.




SUMMARY CASH FLOW DATA (000's) FOR THE THREE MONTHS ENDED SEPTEMBER 30,
    
    2002
    
    2003Cash and cash equivalents
    
    $
    2,084
    
    
    $
    50Net cash provided by (used in):Operating activities
    
    
    (2,315
    )
    
    
    (2,190
    )Investing activities
    
    
    (1,840
    )
    
    
    (1,271
    )Financing activities
    
    
    34
    
    
    
    3,327Capital expenditures
    
    
    (1,975
    )
    
    
    (1,387
    )








16



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##### 






Cash used in operating activities decreased to $2.2 million in Interim
2004 from $2.3 million in Interim 2003, a decrease of $ 0.1 million. Net
earnings increased $0.4 million from $0.1 million in Interim 2003 to $0.5
million in Interim 2004. In Interim 2004, the Companys net earnings and
depreciation plus a decrease in inventories, prepaid expenses and other assets
offset by an increase in accounts receivable and a decrease in trade accounts
payable and accrued liabilities resulted in
$2.2 million in net cash used by operating activities. The use of cash in
operating activities during Interim 2003 is primarily the result of the
Companys net earnings plus depreciation less an increase in receivables and
decrease in accounts payable and accrued liabilities.




Net cash used in investing activities decreased $0.6 million to $1.3
million in Interim 2004 from $1.8 million in Interim 2003. The reduction in net
cash used in investing activities is attributable to a decrease in capital
expenditures of $0.6 million.

Management estimates that the Companys annual capital expenditures will
be approximately $7.0 million for fiscal 2004.

Net cash provided by financing activities in Interim 2004 was $3.3 million
as compared to $34,000 in Interim 2003. In Interim 2004 and Interim 2003 the
Companys financing activities are primarily a result of borrowings and
repayments of long-term debt and a book overdraft.

Historically, the Company has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As
a result of the recapitalization in 1998, however, the Company has substantial
indebtedness and debt service obligations. As of September 30, 2003, the
Company and its subsidiaries had approximately $119.0 million of total
indebtedness outstanding (including the Notes) plus outstanding letters of
credit of $13.1 million and a stockholders deficit of approximately $76.5
million. As of September 30, 2003, approximately $20.7 million of additional
borrowing was available under the Companys New Credit Facility.

New Accounting Pronouncement




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 a
nonpublic entity for which this statement is effective for fiscal periods
beginning December 15, 2003, (the Companys fiscal 2005).
At this time, the Company is unable to determine the impact that
adoption of this pronouncement will have on our financial
position, results of its operations or liquidity.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

The Company is exposed to interest rate changes primarily as a result of
its notes payable, including Senior Notes, Term Loan and Revolving Loan used to
maintain liquidity and fund capital expenditures and expansion of the Companys
operations. The Companys interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower
its overall borrowing costs. To achieve its objectives the Company borrows
primarily at fixed rates and has the ability to choose interest rates under the
Term Loan and Revolving Loan. The Company does not enter into derivative or
interest rate transactions for speculative purposes.

The table below presents the principal amounts of debt, weighted average
interest rates, fair values and other items required by the year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes as of September 30, 2003.






Years Ended June 30,Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Value(In thousands)Fixed rate debt
    
    $
    2,465
    
    
    $
    168
    
    
    $
    11
    
    
    $
    100,005
    
    
    $
    5
    
    
    $
    161
    
    
    $
    102,815
    
    
    $
    81,315
    (2)Average interest rate
    
    
    2.63
    %
    
    
    3.42
    %
    
    
    5.75
    %
    
    
    12.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    11.76
    %
    
    
    14.87
    %Variable rate LIBOR debt (1)
    
    $
    0
    
    
    $
    0
    
    
    $
    16,208
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    16,208
    
    
    $
    16,208Weighted average current interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.62
    %







---




|(1) |  | The revolving credit facility is
classified as a short-term obligation in the consolidated balance
sheet, however, the credit facility matures in 2006. See Note 4
to the consolidated financial statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The fair value of fixed rate debt
was determined based on current rates offered for the debt
instrument.                                                                                                    




17



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##### 






Part II  Other Information

Items 1-5 are not applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Number31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 dated March 1, 2004*31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 dated March 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 Sarbanes-Oxley Act of 2002 dated March 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 Sarbanes-Oxley Act of 2002 dated March 1, 2004*




---

|* |  | filed herewith
|- |  | --------------




18



---



##### 









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: March 3, 2004
    
    Penhall International Corp. /s/ John T. SawyerJohn T. Sawyer Chairman of the Board, President andChief Executive Officer/s/ Jeffrey E. PlattJeffrey E. Platt Vice President-Finance and Chief Financial Officer





19



---



##### 



EXHIBIT INDEX

Number31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 dated March 1, 2004*



31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 dated March 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 Sarbanes-Oxley Act of 2002 dated March 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 Sarbanes-Oxley Act of 2002 dated March 1, 2004*




---

|* |  | filed herewith
|- |  | --------------