**UNITEDSTATESSECURITIES 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**

 

**CommissionFile Number. 333-64745**

 

**PENHALLINTERNATIONAL CORP.**

(Exact Name of registrant as specified in its charter)

 
| **ARIZONA**                                                     |   | **86-0634394**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (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 ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
| **CLASS AND TITLE OF CAPITAL  STOCK** | ** ** | **SHARES OUTSTANDING AS********OF NOVEMBER 22, 2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|
|                                  |       |                                                  |       |
| Common  Stock, $.01 Par Value         |       | 986,552                                               |       |

 

Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.   Yes  ý  No  o

 

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

 

 

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**PART I –FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**PENHALL INTERNATIONAL CORP.AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **(RESTATED)  June 30, 2004** | ** ** | **September 30, 2004** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | ** **                    | ** ** | ** **             | ** ** |
| ASSETS                                                                       | ** ** | ** **                    | ** ** | ** **             | ** ** |
| ** **                                                                   | ** ** | ** **                    | ** ** | ** **             | ** ** |
| Current Assets:                                                              |       |                          |       |                   |       |
| Cash and cash equivalents                                                    |       | $                             | 1,076,000  |                   | $          | 38,000 |   |
| Receivables:                                                                 |       |                          |       |                   |       |
| Contract and trade receivables                                               |       | 30,386,000                    |       | 37,591,000             |       |
| Contract retentions due upon completion and acceptance of work               |       | 4,361,000                     |       | 4,595,000              |       |
|                                                                         |       | 34,747,000                    |       | 42,186,000             |       |
| Less allowance for doubtful receivables                                      |       | 1,317,000                     |       | 1,276,000              |       |
| Net receivables                                                              |       | 33,430,000                    |       | 40,910,000             |       |
|                                                                         |       |                          |       |                   |       |
| Costs and estimated earnings in excess of billings on uncompleted  contracts |       | 2,957,000                     |       | 2,531,000              |       |
| Deferred tax assets                                                          |       | 2,034,000                     |       | 2,034,000              |       |
| Inventories                                                                  |       | 2,171,000                     |       | 1,860,000              |       |
| Prepaid expenses and other current assets                                    |       | 2,198,000                     |       | 2,549,000              |       |
| Total current assets                                                         |       | 43,866,000                    |       | 49,922,000             |       |
|                                                                         |       |                          |       |                   |       |
| Plant and equipment, at cost:                                                |       |                          |       |                   |       |
| Leasehold improvements                                                       |       | 1,302,000                     |       | 1,303,000              |       |
| Construction and other equipment                                             |       | 115,998,000                   |       | 117,629,000            |       |
|                                                                         |       | 117,300,000                   |       | 118,932,000            |       |
| Less accumulated depreciation                                                |       | 81,260,000                    |       | 83,724,000             |       |
| Net plant and equipment                                                      |       | 36,040,000                    |       | 35,208,000             |       |
|                                                                         |       |                          |       |                   |       |
| Goodwill                                                                     |       | 6,371,000                     |       | 6,371,000              |       |
| Debt issuance costs, net of accumulated amortization                         |       | 2,313,000                     |       | 2,022,000              |       |
| Other assets, net                                                            |       | 817,000                       |       | 739,000                |       |
|                                                                         |       | $                             | 89,407,000 |                   | $          | 94,262,000 |   |

 

See accompanying notes to the unaudited condensedconsolidated financial statements.

 

1

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**PENHALL INTERNATIONAL CORP.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                           | ** ** | **(RESTATED)  June 30, 2004** | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                       | ** ** | ** **                    | ** ** | ** **             | ** ** |
| ** **                                                                                                                                                                                                                           |       |                          |       |                   |       |
| Current liabilities:                                                                                                                                                                                                                 |       |                          |       |                   |       |
| Current installments of long-term debt                                                                                                                                                                                               |       | $                             | 882,000    |                   | $          | 431,000 |   |
| Borrowings under revolving credit facility                                                                                                                                                                                           |       | —                        |       | 1,724,000              |       |
| Trade accounts payable                                                                                                                                                                                                               |       | 5,664,000                     |       | 8,564,000              |       |
| Accrued liabilities and taxes payable                                                                                                                                                                                                |       | 12,857,000                    |       | 12,188,000             |       |
| Current portion of insurance reserves                                                                                                                                                                                                |       | 2,698,000                     |       | 2,798,000              |       |
| Current portion of deferred gain - sale-leaseback                                                                                                                                                                                    |       | 109,000                       |       | 109,000                |       |
| Billing in excess of costs and estimated earnings on uncompleted  contracts                                                                                                                                                          |       | 1,526,000                     |       | 1,189,000              |       |
| Total current liabilities                                                                                                                                                                                                            |       | 23,736,000                    |       | 27,006,000             |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| Long-term debt, excluding current installments                                                                                                                                                                                       |       | 113,000                       |       | 89,000                 |       |
| Long-term portion of deferred gain - sale-leaseback                                                                                                                                                                                  |       | 2,015,000                     |       | 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                                                                                                                                                                                                             |       | 3,771,000                     |       | 3,771,000              |       |
| 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    |       | 18,602,000                    |       | 19,101,000             |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| 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 |       | 22,484,000                    |       | 23,233,000             |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| Series B Preferred stock subject to put option, 7,688 shares  outstanding at June 30,  2004  and September 30, 2004 (Note 4)                                                                                                    |       | 7,688,000                     |       | 7,688,000              |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| 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)                                                                                      |       | 325,000                       |       | 325,000                |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| Stockholders’ deficit:                                                                                                                                                                                                          |       |                          |       |                   |       |
| 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)                                                          |       | 11,282,000                    |       | 11,282,000             |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| 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)                                                                         |       | 7,000                         |       | 7,000                  |       |
| Additional paid-in capital (Note 4)                                                                                                                                                                                                  |       | 1,760,000                     |       | 1,760,000              |       |
|                                                                                                                                                                                                                                 |       |                          |       |                   |       |
| Treasury stock, at cost, 35,318 common shares at June 30, 2004 and  September 30,  2004                                                                                                                                         |       | (336,000                      | )          | (336,000               | )          |
| Accumulated deficit (Note 4)                                                                                                                                                                                                         |       | (106,918,000                  | )          | (106,529,000           | )          |
| Total stockholders’ deficit                                                                                                                                                                                                     |       | (94,205,000                   | )          | (93,816,000            | )          |
| Commitments and contingencies                                                                                                                                                                                                        |       |                          |       |                   |       |
|                                                                                                                                                                                                                                 |       | $                             | 89,407,000 |                   | $          | 94,262,000 |   |

 

See accompanying notes to the unaudited condensedconsolidated financial statements.

 

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**PENHALL INTERNATIONAL CORP.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                       | ** ** | **THREE MONTH PERIODS ENDED  SEPTEMBER 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                       | ** ** | **2003**                                     | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Revenues                                                         |       | $                                            | 47,524,000 |   | $ | 52,819,000 |   |
| Cost of revenues                                                 |       | 36,379,000                                   |       | 38,591,000 |   |
| Gross profit                                                     |       | 11,145,000                                   |       | 14,228,000 |   |
|                                                             |       |                                         |       |   |   |
| General and administrative expenses                              |       | 6,951,000                                    |       | 8,115,000 |   |
| Other operating income, net                                      |       | 189,000                                      |       | 57,000 |   |
| Earnings from operations, net                                    |       | 4,383,000                                    |       | 6,170,000 |   |
|                                                             |       |                                         |       |   |   |
| Interest expense                                                 |       | 3,579,000                                    |       | 3,468,000 |   |
| Interest expense - preferred stock                               |       | —                                       |       | 1,248,000 |   |
| Other income                                                     |       | —                                       |       | 27,000 |   |
|                                                             |       |                                         |       |   |   |
| Earnings before income taxes                                     |       | 804,000                                      |       | 1,481,000 |   |
| Income tax expense                                               |       | 306,000                                      |       | 1,092,000 |   |
|                                                             |       |                                         |       |   |   |
| Net earnings                                                     |       | 498,000                                      |       | 389,000 |   |
| Accretion of preferred stock to redemption value                 |       | (1,106,000                                   | )          | — |   |
| Accrual of cumulative dividends on preferred stock               |       | (1,179,000                                   | )          | (1,348,000 | ) |
|                                                             |       |                                         |       |   |   |
| Net loss applicable to common stockholders                       |       | $                                            | (1,787,000 | ) | $ | (959,000 | ) |
|                                                             |       |                                         |       |   |   |
| Loss per share basic and diluted                                 |       | $                                            | (1.81      | ) | $ | (0.97 | ) |
| Weighted average number of shares outstanding: Basic and diluted |       | 986,552                                      |       | 986,552 |   |

 

See accompanying notes to the unaudited condensedconsolidated financial statements.

 

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**PENHALL INTERNATIONAL CORP.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                      | ** ** | **THREE MONTH PERIODS ENDED  SEPTEMBER 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                           | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Net earnings                                                                                    |       | $                                            | 498,000    |   | $ | 389,000 |   |
| Adjustments to reconcile net earnings to net cash used in operating  activities                 |       |                                         |       |   |   |
| Depreciation and amortization                                                                   |       | 3,926,000                                    |       | 3,165,000 |   |
| Interest on preferred stock                                                                     |       | —                                       |       | 1,248,000 |   |
| Amortization of debt issuance costs                                                             |       | 289,000                                      |       | 291,000 |   |
| Provision for doubtful receivables                                                              |       | —                                       |       | 63,000 |   |
| Gains on sale of assets, net                                                                    |       | (58,000                                      | )          | (40,000 | ) |
| Amortization of deferred gain on sale-leaseback                                                 |       | —                                       |       | (28,000 | ) |
| Changes in operating assets and liabilities:                                                    |       |                                         |       |   |   |
| Receivables                                                                                     |       | (4,633,000                                   | )          | (7,543,000 | ) |
| Inventories, prepaid expenses, other assets and income taxes  receivable                        |       | 1,365,000                                    |       | (40,000 | ) |
| Costs and estimated earnings in excess of billings on uncompleted  contracts                    |       | (394,000                                     | )          | 426,000 |   |
| Trade accounts payable, accrued liabilities, insurance reserves and  income taxes  payable |       | (3,414,000                                   | )          | 301,000 |   |
| Billings in excess of costs and estimated earnings on uncompleted  contracts                    |       | 231,000                                      |       | (337,000 | ) |
| Net cash used in operating activities                                                           |       | (2,190,000                                   | )          | (2,105,000 | ) |
|                                                                                            |       |                                         |       |   |   |
| Cash flows from investing activities:                                                           |       |                                         |       |   |   |
| Proceeds from sale of assets                                                                    |       | 116,000                                      |       | 113,000 |   |
| Capital expenditures                                                                            |       | (1,387,000                                   | )          | (2,328,000 | ) |
| Net cash used in investing activities                                                           |       | (1,271,000                                   | )          | (2,215,000 | ) |
|                                                                                            |       |                                         |       |   |   |
| Cash flows from financing activities:                                                           |       |                                         |       |   |   |
| Borrowings under long-term debt                                                                 |       | 14,000                                       |       | — |   |
| Repayments of long-term debt                                                                    |       | (109,000                                     | )          | (475,000 | ) |
| Borrowings under revolving credit facility                                                      |       | 69,664,000                                   |       | 50,534,000 |   |
| Repayments of revolving credit facility                                                         |       | (67,941,000                                  | )          | (48,810,000 | ) |
| Debt issuance costs                                                                             |       | (149,000                                     | )          | — |   |
| Book overdraft                                                                                  |       | 1,848,000                                    |       | 2,033,000 |   |
| Net cash provided by financing activities                                                       |       | 3,327,000                                    |       | 3,282,000 |   |
|                                                                                            |       |                                         |       |   |   |
| Net change in cash and cash equivalents                                                         |       | (134,000                                     | )          | (1,038,000 | ) |
| Cash and cash equivalents at beginning of period                                                |       | 184,000                                      |       | 1,076,000 |   |
| Cash and cash equivalents at end of period                                                      |       | $                                            | 50,000     |   | $ | 38,000 |   |
| Supplemental disclosures of cash flow information:                                              |       |                                         |       |   |   |
| Cash paid during the period for                                                                 |       |                                         |       |   |   |
| Income taxes                                                                                    |       | $                                            | 33,000     |   | $ | 5,000 |   |
| Interest                                                                                        |       | $                                            | 6,248,000  |   | $ | 6,076,000 |   |
| Supplemental disclosures of non cash investing and financing  information:                      |       |                                         |       |   |   |
| Accretion of preferred stock to redemption value                                                |       | $                                            | 1,106,000  |   | $ | — |   |
| Accrual of cumulative dividends on preferred stock                                              |       | $                                            | 1,179,000  |   | $ | 1,348,000 |   |

 

See accompanying notes to the unaudited condensedconsolidated financial statements.

 

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**PENHALL INTERNATIONAL CORP.AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2004**

**(Unaudited)**

 

**(1)****        ****Basis ofPresentation**

 

The accompanying condensed consolidated balancesheet as of September 30, 2004, the condensed consolidated statements of operationsfor the three months ended September 30, 2003 and 2004, and the condensedconsolidated statements of cash flows for the three months ended September 2003and 2004 are unaudited and in the opinion of management include all adjustmentsnecessary to present fairly the information set forth therein, which consistsolely of normal recurring adjustments. All significant intercompany transactions have been eliminated andcertain reclassifications have been made to prior periods’ condensedconsolidated financial statements to conform to the current periodpresentation.  The results of operationsfor these interim periods are not necessarily indicative of results for thefull year.  The consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto including on Form 10-K of Penhall InternationalCorp. (together with its subsidiaries, the “Company”) for the year ended June30, 2004 as certain disclosures which would substantially duplicate thosecontained in such audited financial statements have been omitted from thisreport.

 

**(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 and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized on options granted to employees. SFAS No. 123 requires that the Company provide pro forma information regarding net loss and net loss per common share as if compensation cost for the Company’s stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the disclosure portion of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring quarterly SFAS No. 123 pro forma disclosure.

 

Had the Companydetermined compensation cost based on the fair value at the grant date for itsstock options under SFAS No. 123, the Company’s basic and diluted net lossavailable to common stockholders per share would have been adjusted to the pro formaamounts as indicated below:

 
| ** **                                                                                                                        | ** ** | **Three Months Ended September  30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| 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 |       | —                                |       | — |   |
| 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 | ) |
|                                                                                                                              |       |                                  |       |   |   |   |   |
| Basic and diluted loss per share as reported                                                                                      |       | $                                     | (1.81      | ) | $ | (0.97 | ) |
|                                                                                                                              |       |                                  |       |   |   |   |   |
| 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 theBlack-Scholes option pricing model with the following assumptions used forcalculation: risk-free interest rate of 4.7%, volatility of 3.01%, dividendrate of 0% and an expected life of 10 years.

 

5

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**(3)****        ****Loss Per Share**

 

Basicloss per share is computed by dividing net loss available to commonstockholders by the weighted average number of common shares outstanding duringthe period. Diluted loss per share is calculated by dividing netloss available to common stockholders by the weighted average number ofcommon shares outstanding during the period plus the impact of assumedpotentially dilutive securities. The dilutive effect of outstanding options isreflected in diluted per share by application of the treasury stock method. Forthe three month periods ended September 30, 2003 and 2004 diluted loss pershare is the same as basic loss per share as options to purchase 9,125 and8,060 shares of common stock were not included in the computation of dilutedloss per share for the three month periods ended September 30, 2003 and2004, respectively, as the effect would have been anti-dilutive.

 

**(4)****        ****Restatement**

 

The Company has restated its consolidated balancesheets as of June 30, 2004 and certain prior periods to reclassify the portionsof our common stock and Series B Preferred stock which contain redemptionprovisions that are outside the control of the Company under the 1998 securityholders agreement (the “Stockholders Agreement”).  The Stockholders Agreement was entered intoin connection with the 1998 leveraged-recap transaction and contains provisionsthat grant the option to certain management stockholders upon the death, disabilityor termination of the management stockholder to require the Company torepurchase these securities at specified amounts (effectively a put option). Inaddition, the Company was granted a corresponding right to purchase suchsecurities at the Company’s 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” providethe guidance regarding classification of the shares subject to a put option.  In addition, the Stockholders Agreement andthe Company’s Indenture place certain limits on the dollar amount and number ofshares that may be repurchased.  TheCompany has reclassified the carrying value of the shares that are subject tothe put option from permanent stockholders’ equity into the mezzanine equitysection of the accompanying consolidated balance sheets.  This revised presentation does not affect ourconsolidated 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 commonstock subject to the put option provision.

 

The Company has also restated its consolidated balancesheets and statement of stockholders’ deficit for the year ended June 30, 2004and certain prior periods to reverse the accrual of 13% cumulative dividends,which have not been declared by the board of directors, which historically wererecorded as an increase in the carrying value of the Series B Preferred stockand accumulated deficit.

 
| ** **                                                        | ** ** | **June 30, 2004**           | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                        | ** ** | **As Previously  Reported** | ** ** | **As Restated** | ** ** |
| **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 Stockholder’s 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 discussionsamong members of the Company’s audit committee and the Company’s independentpublic accountants, on November 22, 2004 the Company concluded that it willamend the Company’s Annual Report on Form 10-K for the year ended June 30,2004 to reflect the restatements described above; accordingly, the consolidatedbalance sheets and statements of stockholder’s deficits contained thereinshould no longer be relied upon.

 

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**(5)****        ****Related Party**

 

The Company has abalance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) of $450,000 asof September 30, 2004.  The balance dueat June 30, 2004 was $375,000.

 

**(6)****        ****Change in Accounting Principle**

 

InMay 2003, the FASB issued Statement 150, “*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.*”Statement 150 establishes standards for classifying and measuring certainfinancial instruments with characteristics of both liabilities and equity.Statement No. 150 requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances) becausethat financial instrument embodies an obligation of the issuer. Statement No.150 is effective for financial instruments entered into or modified after May31, 2003, and otherwise is effective for the first interim period beginningafter June 15, 2003, except for mandatory redeemable financial instrumentsof certain entities, including the Company, for which this statement iseffective for fiscal periods beginning after December 15, 2003 (theCompany’s fiscal 2005). The Company has adopted Statement 150 effective July 1,2004.  As a result of the adoption ofStatement 150, accretion related to the Senior Exchangeable Preferred Stock andthe Series A Preferred Stock is treated as interest expense in the Company’sconsolidated statements of operations.

 

**(7)****        ****Commitments and Contingencies**

 

The Company has anemployment related legal matter which was tentatively settled and approved bythe court in September 2004.  The Companyestimates that reserves as of September 30, 2004 are sufficient based on the proposedsettlement.  As of September 30, 2004,the Company has accrued $250,000 related to this matter.

 

There are various additionallawsuites and claims pending and claims being pursued by the Company and itssubsidiaries arising out of the normal course of business.  It is management’s present opinion, based inpart upon the advice of legal counsel, that the outcome of these proceedingswill not have a material effect on the Company’s consolidated financialstatements taken as a whole.

 

**(8)****        ****CondensedConsolidating Financial Information**

 

The following consolidatingfinancial information is presented for purposes of complying with the reportingrequirements of the Guarantor Subsidiaries. The Guarantor Subsidiaries,(Penhall Rental Corp. (through dissolution effective July 1, 2002) and PenhallCompany and subsidiaries), guarantee certain obligations of the Company,including the Senior Notes.  Separatefinancial statements and other disclosures with respect to the GuarantorSubsidiaries are not presented because the Company believes that such financialstatements and other information would not provide additional information thatis material to investors.

 

The condensed consolidatingfinancial 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 companyonly basis (“Parent”) (carrying its investments in the subsidiaries under theequity method),

 

b.                                      the Guarantor Subsidiaries (Penhall RentalCorp. (through dissolution effective July 1, 2002) and Penhall Company andsubsidiaries),

 

c.                                       elimination entries necessary to consolidate theparent company and its subsidiaries,

 

d.                                      the Company on a consolidated basis.

 

7

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**CondensedConsolidating Balance Sheet**

 
| ** **                                                                   | ** ** | **(RESTATED)  JUNE 30, 2004** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **PENHALL  INTERNATIONAL  CORP.**  | ** ** | **PENHALL  COMPANY** | ** ** | **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

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** **

**CondensedConsolidating Balance Sheet**

 
| ** **                                                                   | ** ** | **SEPTEMBER 30, 2004**       | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **PENHALL  INTERNATIONAL  CORP.** | ** ** | **PENHALL  COMPANY** | ** ** | **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

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**Condensed Consolidating Statement of Operations**

 
| ** **                                         | ** ** | **THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **Penhall  International  Corp.**               | ** ** | **Penhall  Company** | ** ** | **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

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**Condensed Consolidating Statement of Operations**

 
| ** **                                         | ** ** | **THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **Penhall  International  Corp.**               | ** ** | **Penhall  Company** | ** ** | **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

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**Condensed Consolidating Statement of Cash Flows**

** **
| ** **                                           | ** ** | **THREE MONTH PERIOD ENDED SEPTEBER 30, 2003** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                           | ** ** | **PENHALL  INTERNATIONAL  CORP.**              | ** ** | **PENHALL  COMPANY** | ** ** | **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

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**Condensed Consolidating Statement of Cash Flows**

** **
| ** **                                           | ** ** | **THREE MONTH PERIOD ENDED SEPTEBER 30, 2004** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                           | ** ** | **PENHALL  INTERNATIONAL  CORP.**              | ** ** | **PENHALL  COMPANY** | ** ** | **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

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**ITEM 2.  Management’s Discussionand Analysis of Finanical Condition and Results of Operations.**

 

The following discussion of the results of operations and financialcondition of Penhall International Corp. and subsidiaries (Penhall or theCompany)  should be read in conjunctionwith the unaudited condensed consolidated financial statements of and footnotesthere to included in this quarterly report on Form 10-Q and the Company’saudited consolidated financial statements and footnotes thereto included in theannual report on Form 10-K, filed with the Securities and Exchange Commission.

 

***GENERAL***

 

Penhall was founded in 1957 in Anaheim, California with one piece ofequipment, and today is one of the largest operated equipment rental servicescompanies in the United States. Penhall differentiates itself from otherequipment rental companies by providing specialized services in connection withinfrastructure projects through renting equipment along with skilled operatorsto serve customers in the construction, industrial, manufacturing, governmentaland residential markets. In addition, Penhall complements its OperatedEquipment Rental Services with fixed-price contracts, which serve to market itsOperated Equipment Rental Services business and increase utilization of itsoperated equipment rental fleet. Penhall provides its services from 37locations in 17 states, with a presence in some of the fastest growing statesin terms of construction spending and population growth.

 

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

 

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

 

2.             DaleyConcrete Cutting, a South Carolina-based division of U.S. Rentals acquired inOctober 1998,

 

3.             LipscombConcrete Cutting, a North Carolina-based company acquired inNovember 1998,

 

4.             ProspectDrilling and Sawing, a Minnesota-based company acquired in June 1999,

 

5.             AdvanceConcrete Sawing and Drilling, Inc., a California-based company acquired inSeptember 2000,

 

6.             H&PSawing and Drilling, a Kansas City, Missouri-based company acquired inMarch 2002.  Effective October 1,2004, the Kansas City location was closed. The assets have been transferred to other locations,

 

7.             BobMack Company, California-based company acquired in March 2002,

 

8.             ArizonaCurb Cut Company, an Arizona-based company acquired in April 2002.

 

During the same period, Penhall established operations in six newmarkets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno, andSeattle. Penhall derives its revenues primarily from services provided forinfrastructure related jobs. Penhall’s Operated Equipment Rental Services areprovided primarily under hourly rentals, which are complemented by fixed-price contracts.

 

Fixed–pricecontracts are obtained primarily through competitive bidding in response toadvertisements by federal, state and local agencies and private parties and toa lesser extent through negotiation with private parties. Our bidding activityis affected by such factors as backlog, current utilization of equipment andother resources, our ability to obtain necessary surety bonds and competitiveconsiderations. Bidding activity, backlog and revenue resulting from the awardof new contracts may vary significantly from period to period.

 

The two primary economic drivers of our businessare (1) federal, state and local public funding levels for transportationand other infrastructure projects and (2) the overall health of theeconomy, nationally and locally, particularly as it affects privatenon-residential construction. The level of demand for our services will have adirect correlation to these drivers. For example, a weak economy will generallyresult in a reduced demand for construction in the private sector. This reduceddemand increases competition for fewer private sector projects and willultimately also increase competition in the public sector as companies migratefrom bidding on scarce private sector work to projects in the public sector.Greater competition can reduce revenue growth and/or increase pressure on grossprofit margins. A weak economy also tends to produce less tax revenue, therebydecreasing the funds available for spending on public infrastructureimprovements. There are funding sources that have been specifically earmarkedfor infrastructure

 

14

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spending, such as gasoline taxes, which arenot necessarily directly impacted by a weak economy. However, even these fundscan be temporarily at risk as state and local governments struggle to balancetheir budgets. Conversely, higher public funding and/or a robust economy willincrease demand for our services and provide opportunities for revenue growthand margin improvement.

 

Revenue growth is also influenced by infrastructure change, includingnew construction, modification, and regulatory changes. Penhall’s revenues arealso impacted positively after the occurrence of natural disasters, such as the1989 and 1994 earthquakes in Northern and Southern California. Other factorsthat influence Penhall’s operations are demand for operated rental equipment,the amount and quality of equipment available for rent, rental rates andgeneral economic conditions. Historically, revenues have been seasonal, asweather conditions in the spring and summer months result in stronger performancein the first and fourth fiscal quarters than in the second and third fiscalquarters.

 

The principal components of Penhall’s operating costs include the costof labor, equipment rental fleet maintenance costs including parts and service,equipment rental fleet depreciation, insurance and other direct operatingcosts. Given the varied, and in some cases specialized, nature of its rentalequipment, Penhall utilizes a range of periods over which it depreciates itsequipment on a straight-line basis. On average, Penhall depreciates itsequipment 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 theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, the Company evaluatesits estimates, including those related to long-term construction contracts,accounts receivable, goodwill, long-lived assets, self-insurance, contingenciesand litigation. The Company bases its estimates on current information,historical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities and therecognition of revenue that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. The Company believes the following critical accounting policiesaffect its more significant judgments and estimates used in the preparation ofits consolidated financial statements:

 

*Revenue Recognition on Long-Term Construction Contracts*

 

Income from construction operations is recorded using thepercentage-of-completion method of accounting. The majority of our long-termfixed price contracts with our customers are either “fixed unit price” or “fixedprice”. Under fixed unit price contracts, the Company is committed to providematerials or services required by a project at fixed unit prices.  The fixed unit price contract shifts the riskof estimating the quantity of units required for a particular project to thecustomer, any increase in our unit cost over the expected unit cost in the bid,whether due to inflation, inefficiency, faulty estimates or other factors, isborne by the Company unless otherwise provided in the contract. Fixed price contractsare priced on a lump-sum basis under which we bear the risk that we may not beable to perform all the work profitably for the specified contract amount.  All state and federal government contractsand many of our other contracts provide for termination of the contract for theconvenience of the party contracting with us, with provisions to pay us forwork performed through the date of termination.

 

We use the percentage-of-completion accounting method for constructioncontracts in accordance with the American Institute of Certified PublicAccountants Statement of Position 81-1, “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.” Revenue and earningson construction contracts are recognized on the percentage-of-completion methodin the ratio of costs incurred to estimated final costs.  Provisions are recognized in the statement ofoperations for the full amount of estimated losses on uncompleted contractswhenever evidence indicates that the estimated total cost of a contract exceedsits estimated total revenue.

 

Contract cost consists of direct costs on contracts, including laborand materials, amounts payable to subcontractors, direct overhead costs andequipment expense (primarily depreciation, blades, fuel, maintenance andrepairs). Contract cost is recorded as incurred and revisions in contractrevenue and cost estimates are reflected in the accounting period when known.

 

The accuracy of our revenue and profit recognition in a given period isdependent on the accuracy of our estimates of the cost to complete each projectwhich are completed by our project managers. However, projects can be complexand in most cases the profit margin estimates for a project will eitherincrease or decrease to some extent from the amount that was originallyestimated at the time of bid. Because we have many projects of varying levelsof complexity and size in process at any given time (during 2004 we worked onover 1,000 projects) these changes in estimates typically offset eachother without materially impacting our overall profitability. However, largechanges in cost estimates in the larger projects, can have a more significanteffect on profitability.

 

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*Valuation of Long-LivedAssets*

 

Weperiodically review the carrying value of long-lived assets (excludinggoodwill) for potential impairment.  Ourreview considers a combination of appraised value, anticipated futureundiscounted cash flows and location of the asset for each line of equipment.  Deteriorating market conditions couldpotentially impact valuation of long-lived assets.  In markets where adverse market conditionsexist, the Company will consider reallocation of long-lived assets to marketswhere those assets will produce cash flow. Assets to be disposed of are reported at the lower of the carryingamount or fair value, less costs to sell.

 

*Goodwill*

 

Weuse estimates in order to determine if goodwill has been impaired. Animpairment loss may be recognized if the carrying amount of a reporting unit’snet book value exceeds the estimated fair value of the reporting unit. Wearrive at the estimated fair value of a reporting unit based on cash flowutilizing a multiple of earnings before interest, depreciation, taxes and amortization(EBIDTA).  This multiple is determinedbased on prior tansactions conducted by the company and by others in compariblemarket sectors to calculate the fair value. We will perform our valuation analysis at least annually or sooner if anevent occurs or circumstances change that would indicate the carrying amount ofgoodwill may be impaired. If our estimates or assumptions change from thoseused in our current valuation, we may be required to recognize an impairmentloss in future periods. The Company evaluates goodwill for impairment atJune 30 of each year.

 

Factors we consider important which couldtrigger an impairment review include:

 

•      Significant underperformance relative toexpected historical or projected future operating results;

 

•      Significant changes in the manner of ouruse of the acquired assets or the strategy for our overall business;

 

•      Significant negative industry or economictrends;

 

•      Unanticipated competition; and

 

•      EBITDA relative to net book value

 

***RESULTS OF OPERATIONS***

 

***Three Months Ended September 30, 2004Compared to Three Months Ended September 30, 2003***

 

Revenues.  Revenues for the threemonths ended September 30, 2004  (“Interim 2005”) were $52.8 million anincrease 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% ascompared to Interim 2004.  The increasein revenues is primarily attributable to increases in non residentialcontruction nationwide and particularly in California as well as the increasein 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, Penhall’s operatedrental fleet consisted of 693 units compared to 706 units at September 30,2003, a decrease of 1.8%.  The smallerfleet of revenue units is attributable to the Company not replacing all of thedisposed 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 2004to 26.9% in Interim 2005. The increase in gross profit from Interim 2004 toInterim 2005 is primarily attributable to higher market demand for operatedequipment which increased demand for the Company’s services and enabled theCompany to increase rental rates during Interim 2005.  Another factor increasing gross profit wasthe $0.6 million decrease in depreciation expense, which is the result of lowcapital expenditures during 2003, 2004, and 2005

 

General and Administrative Expenses. General and administrative expenses were $8.1 million in Interim2005 compared to $7.0 million in Interim 2004. As a percent of revenues,general and administrative expenses were 15.4% in Interim 2005 compared to14.6% in Interim 2004. The increase in general and administrative expenses as apercentage of revenues during Interim 2005 is primarily attributable toincreases in rent expense of $0.3 million associated with the sale/leaseback ofCompany properties and increases in incentive compensation of $0.7 million.

 

Interest Expense*.*Interestexpense was $3.5 million in Interim 2005 compared to interest expense of$3.6 million in Interim 2004. The decrease in interest expense isattributable to lower borrowings in Interim 2005 primarily resulting from theproceeds on the sale-leaseback of the Company owned properties, which was usedto reduce the borrowings under the revolving credit facility, partially offsetby higher costs for letters of credit .

 

Interest Expense - PreferredStock – In Interim 2005, the Company adopted SFAS No. 150 and required theCompany to present separately as interest expense $1.2 million of accretionrelated to mandatorily redemable instruments.

 

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Income Tax Benefit*.*TheCompany recorded an income tax expense of $1.1 million, or 73.7% ofearnings before income taxes in Interim 2005, compared to an income tax expenseof $0.3 million, or 38.1% of loss before income taxes in Interim 2004.   The higher effective tax rate for Interim2005 is primarily attributable to non-deductible interest related to theadoption of SFAS No. 150.

 

***LIQUIDITY AND CAPITAL RESOURCES***

 

Itis anticipated that the Company’s principal uses of liquidity will be to fundworking capital, meet debt service requirements and finance the Company’sstrategy of pursuing strategic acquisitions and expanding through internalgrowth. The Company’s principal sources of liquidity are expected to be cashflow from operations and borrowings under the New Credit Facility (“The NewCredit”) secured in May 2003. The New Credit is a $50 million, three yearasset based borrowing facility, consisting of a revolving credit facility (“NewRevolver”) of up to $50 million with a $25 million sub-facility forletters of credit. Availability under the revolver portion of The New Creditwould be limited to a borrowing base consisting of (i) up to 85% of thenet amount of the Company’s eligible trade accounts receivable, (ii) up tothe lesser of (a) 100% of the net book value of the Company’s eligibleinventory and eligible equipment or (b) 85% of the appraised net orderlyliquidation value of Company’s eligible inventory and equipment, and(iii) up to 50% of the appraised forced liquidation value of the Company’sowned real estate.

 

Theprovisions of the New Credit facility include a lock-box agreement and alsoallow the lender, in its reasonable credit judgment, to assess additionalreserves against the borrowing base calculation. The New Credit and theassociated lock-box agreement satisfy the requirements for consideration ofEITF Issue No. 95-22, “Balance Sheet Classification of BorrowingsOutstanding under Revolving Credit Agreements that include both a SubjectiveAcceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”).  We reviewed the terms and conditions of theNew Credit with the intention of determining whether there are any subjectiveacceleration clauses as defined in SFAS No. 78, “Classification of Obligationsthat are Callable by the Creditor.” In reading the agreement and discussing theterms and conditions with our lender, it did not appear there were anysubjective acceleration clauses that fit directly into the definition providedin 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 asubjective acceleration clause. More specifically, the lender, in itsreasonable credit judgment, can assess additional reserves to the borrowingbase calculation to account for changes in the nature of the Company’s businessthat alters the underlying value of the collateral.  The reserve requirements may result in anoveradvance borrowing position that could require an accelerated repayment ofthe overadvance portion. Since the inception of this New Credit facility, thelender has not applied any additional reserves to the borrowing basecalculation.  The Company does notanticipate any changes in its business practices that would result in any materialadjustments to the borrowing base calculation. However, management cannot becertain that additional reserves will not be assessed by the bank to theborrowing base calculation. As a result, the Company classifies borrowingsunder the New Credit facility as a short-term obligation. In addition,borrowings under The New Credit are subject to certain financial covenants thatinclude capital expenditure limits, utilization rate ratio, minimum interestcoverage ratio, maximum leverage ratio and a minimum borrowing availabilitylimit. The indebtedness of The Company under The New Credit is secured by afirst 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 Companyhad $1.7 million in outstanding borrowings, $18.6 million of outstandingletters of credit, borrowing base limitations of $5.7 million and borrowingsunused and available under The New Credit of $23.9 million.

 
| **Summary Cash Flow Data (000’s)  for the three months  ended September 30,** | ** ** | **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 | ) |

 

TheCompany’s cash and cash equivalents totaled $0.04 million at September 30,2004.  We believe that our current cashand cash equivalents, cash generated from operations, and the amount availableunder our existing credit facility will be sufficient to meet our expectedworking capital needs, capital expenditures, financial commitments and otherliquidity requirements associated with our existing operations through the next12 months.

 

Cash used by operatingactivities decreased slightly from $2.2 million in Interim 2004 to $2.1 millionin Interim 2005.  This is primarily dueto 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 toincreased revenues in Interim 2005 compared to Interim 2004.  The decrease from Interim 2004 to Interim2005 in accounts payable, accrued liabilities, and income tax payable islargely attributable to a decrease in the accounts payable balance related tolong-term contracts at June 30, 2003 that was paid during Interim 2004.

 

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Cashused by investing activities in Interim 2005 of $2.2 million represents a $0.9million increase from the amount used in investing activities in Interim2004.  The increase was due to the thehigher level of capital expenditures in Interim 2005.  The Company had no acquisitions in Interim2004 or 2005.

 

Cashprovided by financing activities were $3.3 million in both Interim 2004 and2005.

 

TheCompany had standby letters of credit totaling $18.6 million at September 30,2004, all of which are automatically renewable unless participating partiesnotify the other party thirty days prior to cancellation.  The letters of credit are provided ascollateral for our surety and for our insurance programs.  In addition, we are generally required toprovide surety bonds that provide an additional measure of security undercertain public and private sector contracts. Most of the Company’s surety bondsare performance bonds which do not have a stated expiration date; instead thebonds are generally released when each contract is accepted by our customer.

 

Management estimates that Penhall’s annual capital expenditures will beapproximately $12.0 million for fiscal 2005, including replacement andmaintenance of equipment, purchases of new equipment, and purchases of realproperty improvements.

 

Historically, Penhall funded its working capital requirements, capitalexpenditures and other needs principally from operating cash flows. However, in1998, a series of transactions occurred similar to a leveraged buyout.  As a result of these transactions the Companyhas substantial indebtedness and debt service obligations. As ofSeptember 30, 2004, the Company and its subsidiaries had $102.2 million ofindebtedness related to borrowings, $42.3 million of indebtedness related tomandatorily redeemable preferred stock and a stockholders’ deficit of $103.2million.  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 obligationssubject to redemption or maturity in fiscal 2007 and 2008:

 
| ** **                          | ** ** | **Due date** | ** ** | **Balance at  September 30,  2004** | ** **  |
|-------------------------------------|------------|--------------|------------|------------------------------------------|-------------|
| 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  |   |

 

Theaccretion of preferred stock will increase the total obligation through thedates of redemption.  The Companyanticipates extending or refinancing these obligations.  No assurance can be given that such financingwill be available to the Company or, if available that it may be obtained onterms and conditions that are satisfactory to the Company.   As long as the uncertainty associated withthe resolution of these obligations remain, the Company could be subject toadverse consequences including:

 

•      Making it more difficult to obtain suretysupport;

 

•      Increasing our vulnerability to generaladverse economic and industry conditions;

 

•      Limiting our ability to extend or replace theCompany’s existing credit facility;

 

•      Limiting our ability to extend or replace theCompany’s existing Senior Notes:

 

•      Limiting our flexibility in planning for, orreacting to, changes in our business and the industry in which we operate.

 

The Company also has certain common stock andSeries B Preferred stock that are subject to the terms and conditions of aSecurities Holders Agreement.  TheCompany may be required to repurchase these shares if certain conditions aremet.  As of June 30, 2004 and September30, 2004, the Company has recorded these shares at historical cost of$7,688,000, as temporary equity in the condensed consolidated balancesheet.  The Series B Preferred stocksubject to the terms and conditions of the Stockholders Agreement and theremaining Series B Preferred stock include provisions for cumulative dividendsof 13% which have not been recorded as the dividends have not been declared.  Such dividends approximate $23,266,000 as ofSeptember 30, 2004.  The Company believesthat the likelihood of the conditions allowing redemption by the stockholderoccurring is remote.

 

FromAugust 1, 2002 through October 25, 2002, the Company repurchasedcapital stock of the Company from four former employees for aggregateconsideration of $35,000.  The Company’sIndenture dated as of August 1, 1998 (the “Indenture”) with United StatesTrust Company, as Trustee (the “Trustee”), permits repurchases of capital stockfrom former employees in annual amounts up to $1,000,000 and up to $5,000,000in aggregate over the life of the Indenture; provided that, at the time of anysuch repurchase, the Company must be able to incur additional indebtednessunder the Indenture’s fixed charge coverage ratio.  At the time of the repurchases describedabove, the Company was not able to

 

18

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incuradditional indebtedness under the Indenture’s fixed charge coverage ratio, andaccordingly such repurchases were not permitted by the Indenture.  The Company has informed the Trustee of suchrepurchases.  The Trustee has indicatedthat it considers the infraction minor and will not pursue written notice ofdefault to the Company.  In the eventthat the Company receives written notice specifying the default and demandingthat such default be remedied from either the Trustee or from Holders of atleast 25% of the outstanding principal amount of the Notes, then the Companywill arrange for a third party to repurchase Company stock in the aggregateconsideration of $35,000 to remedy the default.

 

The Company’s bonding capacity has been restricted due to bothPenhall’s poor operating results over the past three fiscal years, as well asthe reduced bonding capacity in the market. Further, one of the Company’s current surety has indicated that anotheryear of operating losses could result in the discontinuation of their suretysupport.  The Company has obtainedadditional surety support from a secondary source.  Our inability to obtain surety bonds in thefuture would significantly impact our ability to obtain new contracts, whichcould have a material adverse effect on our business.

 

***CHANGE IN ACCOUNTING PRINCIPLE***

 

InMay 2003, the FASB issued Statement 150, “*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.*”Statement 150 establishes standards for classifying and measuring certainfinancial instruments with characteristics of both liabilities and equity. StatementNo. 150 requires that an issuer classify a financial instrument that is withinits scope as a liability (or an asset in some circumstances) because thatfinancial instrument embodies an obligation of the issuer. Statement No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective for the first interim period beginning afterJune 15, 2003, except for mandatory redeemable financial instruments ofcertain entities, including the Company, for which this statement is effectivefor fiscal periods beginning after December 15, 2003 (the Company’s fiscal2005). 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 APreferred Stock is treated as interest expense in the Company’s consolidatedstatements of operations.

 

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

The Company is exposed to interest rate changes primarily as a resultof its notes payable, including New Revolver and Senior Notes which are used tomaintain liquidity and fund capital expenditures and expansion of the Company’soperations. The Company’s interest rate risk management objective is to limitthe impact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs. To achieve its objectives the Company borrowsprimarily at fixed rates and has the ability to choose interest rates under theCompany’s credit facility.  The Companydoes not enter into derivative or interest rate transactions for speculativepurposes.

 

The table below presents the principal amounts of debt, weightedaverage interest rates, fair values and other items required by the year ofexpected maturity to evaluate the expected cash flows and sensitivity tointerest rate changes as of September 30, 2004.

 
| ** **                                 | ** ** | **YEARS ENDING JUNE 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **THERE-  AFTER** | ** ** | **TOTAL** | ** ** | **FAIR  VALUE** | ** ** |
| ** **                                 | ** ** | **(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 | % |   |   |
|                                            |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Therevolving credit facility is classified as a short-term obligation in theconsolidated balance sheet; however, the credit facility matures in 2006.  This is a $50 million revolving creditfacility with the interest based upon LIBOR plus 350 basis points.  The total borrowing unused and availableunder the facility was $25.6 million at September 30, 2004.

 

(2)   TheCompany has different interest rate options for its variable rate debt.

 

(3)   The fairvalue of fixed rate debt was determined based on quoted market price for thedebt instrument.

 

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**Item 4.Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures*.  We carried out an evaluation, under thesupervision and with the participation of our management, including ourpresident and chief executive officer and our chief financial officer, of theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisreport. Based on this evaluation, our president and chief executive officer andchief financial officer have concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this report inthat they were reasonably designed to ensure that information required to bedisclosed by our company in the reports we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the SEC. It should be noted that any systemof controls, however well designed and operated, is based in part upon certainassumptions and can provide only reasonable, and not absolute, assurance thatthe objectives of the system are met.

 

*Changes in Internal Control OverFinancial Reporting*.  There was no change in our internal controlover financial reporting that occurred during the period covered by this reportthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. In connection with the adoption of Financial Accounting Standards BoardStatement No. 150, we recently evaluated the financial statement presentationof our equity securities under ASR 268 and EITF Topic D-98.  As noted in Note 4, the Company has restatedits consolidated balance sheets and statement of stockholder’s deficit as ofand for the year ended June 30, 2004 and certain prior periods to reclassifythe portions of our common stock and Series B Preferred stock which containredemption provisions that are outside the control of the Company under the1998 security holders agreement (the “Stockholders Agreement”).   The Company has also restated the consolidatedbalance sheets and statement of stockholder’s deficit as of and for the yearended June 30, 2004 to reverse the recognition of the accrual of cummulativedividends that had historically been recorded as an increase of the carryingvalue of the Series B Preferred stock and accumulated deficit.

 

In response to these reclassifications, seniormanagement has made certain recommendations for the enhancement of our controlprocesses and procedures, including enhanced analysis and support for thefinancial statement presentation of our redeemable securities.  With the assistance of our advisors, wecontinue to consider further actions to improve the effectiveness of ourcontrol processes and procedures.

 

**Part IIOther Information**

 

Items 1 – 5 are notapplicable

 

Item 6. Exhibits

 

a.     Exhibits

 
| **EXHIBIT  NO.** | ** ** | **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. |
|---|--------|-----------------|

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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      |      |   |   |
|               |                      |           |  |  |  |

 

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| **EXHIBIT  NO.** | ** ** | **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* |

 

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| * |   | Filed herewith. |
|---|--------|-----------------|

 

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