SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2002

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

Commission File Number. 333-64745

PENHALL INTERNATIONAL CORP.

(Exact Name of registrant as specified in its charter)

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

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

CLASS AND TITLE OF	SHARES OUTSTANDING AS OF
CAPITAL STOCK	May 14, 2002
Common Stock, $.01 Par Value		986,331

TABLE OF CONTENTS

Part I — Financial Information
	Item 1. Financial Information
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II — Other Information
	Items 1-5 are not applicable
	Item 6. Exhibits and Reports on Form 8-K.

PENHALL INTERNATIONAL CORP.
 
INDEX

		Page No.
Part I — Financial Information
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2001 and March 31, 2002		3
	Condensed Consolidated Statements of Operations for the three and nine month periods ended March 31, 2001 and 2002		4
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended March 31, 2001 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Part II — Other Information
Items 1-5 are not applicable
Item 6. Exhibits and Reports on Form 8-K			24
	a)      Reports on Form 8-K
	None

2

Item 1. Financial Information

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

					June 30,		March 31,
					2001		2002
				ASSETS
Current assets:
	Cash and cash equivalents				$	1,030,000	$	3,117,000
	Receivables:
		Contract and trade receivables				35,257,000		26,320,000
		Contract retentions due upon completion and acceptance of the work				5,328,000		4,805,000
		Income taxes				1,084,000		1,962,000
						41,669,000		33,087,000
		Less allowance for doubtful receivables				1,763,000		1,360,000
			Net receivables			39,906,000		31,727,000
	Costs and estimated earnings in excess of billings on uncompleted contracts					1,856,000		1,869,000
	Deferred tax assets					2,329,000		2,329,000
	Inventories					2,273,000		1,874,000
	Prepaid expenses and other current assets					1,417,000		1,939,000
			Total current assets			48,811,000		42,855,000
Property, plant and equipment, at cost:
	Land					5,004,000		5,004,000
	Buildings and leasehold improvements					9,417,000		8,819,000
	Construction and other equipment					115,670,000		121,788,000
						130,091,000		135,611,000
	Less accumulated depreciation and amortization					63,888,000		67,609,000
			Net property, plant and equipment			66,203,000		68,002,000
Goodwill, net of accumulated amortization						7,263,000		9,149,000
Debt issuance costs, net of accumulated amortization						4,062,000		3,398,000
Other assets, net						623,000		1,503,000
					$	126,962,000	$	124,907,000
				LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Current installments of long-term debt				$	6,436,000	$	9,212,000
	Trade accounts payable					9,976,000		5,817,000
	Accrued liabilities					15,061,000		12,708,000
	Billings in excess of costs and estimated earnings on uncompleted contracts					1,688,000		582,000
			Total current liabilities			33,161,000		28,319,000
Long-term debt, excluding current installments						18,772,000		19,722,000
Senior notes						100,000,000		100,000,000
Deferred tax liabilities						7,312,000		9,271,000
Senior Exchangeable Preferred Stock, redemption value $13,573,000 and $14,685,000 at June 30, 2001 and March 31, 2002, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2001 and March 31, 2002						13,573,000		14,685,000
Series A Preferred Stock, redemption value $15,219,000 and $16,781,000 at June 30, 2001 and March 31, 2002, respectively Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2001 and March 31, 2002						15,219,000		16,781,000

			June 30,			March 31,
			2001			2002
Stockholders’ deficit:
	Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,701 shares at June 30, 2001 and 18,796 shares at March 31, 2002			27,273,000			30,215,000
	Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,017,480 at June 30, 2001 and 1,021,127 shares at March 31, 2002, including 34,173 and 34,617 shares held in treasury at June 30, 2001 and March 31, 2002, respectively			10,000			10,000
	Additional paid-in capital			1,831,000			2,044,000
	Treasury stock, at cost, 34,173 common shares at June 30, 2001 and 34,617 common shares at March 31, 2002			(288,000	)		(309,000	)
	Accumulated deficit			(89,901,000	)		(95,831,000	)
		Total stockholders’ deficit		(61,075,000	)		(63,871,000	)
	Commitments and contingencies
			$	126,962,000		$	124,907,000

See accompanying notes to condensed consolidated financial statements

3

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

		THREE MONTH PERIODS						NINE MONTH PERIODS
		ENDED MARCH 31,						ENDED MARCH 31,
		2001			2002			2001			2002
Revenues		$	33,619,000		$	30,010,000		$	128,530,000		$	116,841,000
Cost of revenues			24,904,000			23,965,000			90,818,000			86,286,000
	Gross profit		8,715,000			6,045,000			37,712,000			30,555,000
General and administrative expenses			6,013,000			6,606,000			20,887,000			21,555,000
Other operating income, net			213,000			423,000			1,000,000			979,000
	Earnings (loss) before interest expense and income taxes		2,915,000			(138,000	)		17,825,000			9,979,000
Interest expense			3,700,000			3,440,000			11,378,000			10,747,000
	Earnings (loss) before income taxes		(785,000	)		(3,578,000	)		6,447,000			(768,000	)
Income tax expense (benefit)			(322,000	)		(1,465,000	)		2,644,000			(315,000	)
Net earnings (loss)			(463,000	)		(2,113,000	)		3,803,000			(453,000	)
Accretion of preferred stock to redemption value			(803,000	)		(905,000	)		(2,373,000	)		(2,674,000	)
Accrual of cumulative dividends on preferred stock			(739,000	)		(953,000	)		(2,395,000	)		(2,803,000	)
Net loss available to common stockholders		$	(2,005,000)	)	$	(3,971,000	)	$	(965,000	)	$	(5,930,000	)
Loss per share basic and diluted		$	(1.97	)	$	(4.02	)	$	(.95	)	$	(6.02	)
Weighted average number of shares outstanding basic and diluted			1,017,480			986,657			1,015,450			984,998

See accompanying notes to condensed consolidated financial statements

4

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

					NINE MONTH PERIODS
					ENDED MARCH 31,
					2001			2002
Cash flows provided by operating activities:
	Net earnings (loss)				$	3,803,000		$	(453,000	)
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
			Depreciation and amortization			12,046,000			12,752,000
			Amortization of debt issuance costs			663,000			664,000
			Provision for doubtful accounts			14,000			(5,000	)
			Gain on sale of assets			(282,000	)		(129,000	)
			Changes in operating assets and liabilities, net of effects of acquisitions:
				Receivables		5,607,000			6,873,000
				Inventories, prepaid expenses and other assets		(358,000	)		(123,000	)
				Costs and estimated earnings in excess of billings on uncompleted contracts		2,582,000			(13,000	)
				Trade accounts payable and accrued liabilities		(10,933,000	)		(8,368,000	)
				Billings in excess of costs and estimated earnings on uncompleted contracts		(1,431,000	)		(1,106,000	)
				Net cash provided by operating activities		11,711,000			10,092,000
Cash flows from investing activities:
	Proceeds from sale of assets					795,000			320,000
	Capital expenditures					(13,298,000	)		(7,235,000	)
	Acquisition of assets					(520,000	)		(3,507,000	)
				Net cash used in investing activities		(13,023,000	)		(10,422,000	)
Cash flows from financing activities:
	Borrowings under long-term debt					45,961,000			62,641,000
	Repayments of long-term debt					(46,924,000	)		(62,480,000	)
	Book overdraft					1,444,000			1,925,000
	Proceeds from issuance of common stock					309,000			213,000
	Repurchase of common stock and Series B preferred stock					(501,000	)		(40,000	)
	Issuance of Series B preferred stock					187,000			158,000
				Net cash provided by financing activities		476,000			2,417,000
				Net change in cash and cash equivalents		(836,000	)		2,087,000
Cash and cash equivalents at beginning of period						2,109,000			1,030,000
Cash and cash equivalents at end of period					$	1,273,000		$	3,117,000
Supplemental disclosure of cash flow information:
		Cash paid during the period for:
				Income taxes	$	3,847,000		$	791,000
				Interest	$	13,586,000		$	13,084,000
Supplemental disclosure of noncash investing and financing activities:
		Accrued liabilities related to the acquisition of assets			$	480,000		$	3,400,000
		Borrowings related to the acquisition of assets			$	675,000		$	3,265,000
		Borrowings related to capital leases and equipment financing agreements			$	1,130,000		$	300,000
		Accretion of preferred stock to redemption value			$	2,373,000		$	2,674,000
		Accrual of cumulative dividends on preferred stock			$	2,395,000		$	2,803,000

See accompanying notes to condensed consolidated financial statements

5

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002
(Unaudited)

(1) Basis Of Presentation

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

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

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

         Results of operations for the nine month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended June 30, 2001.

Loss Per Share

         Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential dilutive securities. There were 9,340 options issued during the nine month period ended March 31, 2002. For the three and nine month periods ended March 31, 2002 these options had no potential dilutive effect on diluted loss per share. There were no potential dilutive securities for the three and nine month periods ended March 31, 2001.

         On October 7, 1999, the Board of Directors of Penhall adopted the Penhall International Corp. Stock Incentive Plan.

Critical Accounting Policies and Estimates

         The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and

6

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition on Long-Term Construction Contracts

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

(2) Acquisition

         In March 2002, Penhall Company, a California corporation and a wholly-owned subsidiary of Penhall, purchased 100% of the stock of Bob Mack Company, Inc (“Bob Mack”) and selected assets of Bobbie Mack Grinding, Inc (“Grinding”). Bob Mack and Grinding were related parties prior to the purchase. Total consideration for the purchase of Bob Mack stock was approximately $6.0 million, $3.0 million in cash and the remainder payable in equal installments in March 2003 and 2004. Total consideration for the purchase of selected assets from Grinding was $800,000, $400,000 in cash and the remainder payable in equal installments in March 2003 and 2004. In addition, the shareholders of Bob Mack signed 5 year non-compete agreements with Penhall which restrict the former shareholders of Bob Mack from competing with the acquired business and requires Penhall to pay the former shareholders $1.4 million in 5 equal payments over a four year period. The acquisition was accounted for in accordance with SFAS 141, “Business Combinations.” The results of operations for the month of March 2002 of Bob Mack are included in the consolidated financial statements as of March 31, 2002. Approximately $2.4 million of goodwill was recorded related to this transaction. Based in Visalia, California, Bob Mack primarily operates in central California and is a provider of asphalt removal, grinding and milling services. The acquisition of Bob Mack expands the range of services offered by Penhall.

(3) Commitments and Contingencies

Litigation

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

7

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

(4) Condensed Consolidating Financial Information

         The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries, (Penhall Rental Corp. and Penhall Company). Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not provide additional information that is material to investors.

         The condensed consolidating financial information presents condensed financial statements as of June 30, 2001 and March 31, 2002 and for the three and nine month periods ended March 31, 2002 and 2001 of:

         a)      Penhall International Corp. on a parent company only basis (“Parent”) (carrying its investments in the subsidiaries under the equity method),

         b)      the Guarantor Subsidiaries (Penhall Rental Corp. and Penhall Company)

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

         d)      the Company on a consolidated basis.

8

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

				JUNE 30, 2001
				Penhall			Penhall
				International			Rental			Penhall
				Corp.			Corp.			Company		Eliminations			Consolidated
Assets
	Current assets:
		Receivables, net		$	1,082,000		$	—		$	38,824,000	$	—		$	39,906,000
		Inventories			—			—			2,273,000		—			2,273,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			—			1,856,000		—			1,856,000
		Intercompany assets			29,006,000			—			—		(29,006,000	)		—
		Other current assets			112,000			966,000			3,698,000		—			4,776,000
			Total current assets		30,200,000			966,000			46,651,000		(29,006,000	)		48,811,000
	Intercompany assets				10,000,000			—			—		(10,000,000	)		—
	Net property, plant and equipment				—			9,424,000			56,779,000		—			66,203,000
	Other assets, net				4,062,000			—			7,886,000		—			11,948,000
	Investment in parent				—			4,001,000			—		(4,001,000	)		—
	Investment in subsidiaries				55,992,000			—			—		(55,992,000	)		—
				$	100,254,000		$	14,391,000		$	111,316,000	$	(98,999,000	)	$	126,962,000
Liabilities and Stockholders’ Equity (Deficit)
	Current installments of long-term debt			$	5,173,000		$	10,000		$	1,253,000	$	—		$	6,436,000
	Trade accounts payable				3,000			—			9,973,000		—			9,976,000
	Accrued liabilities				5,295,000			(20,000	)		9,786,000		—			15,061,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			—			1,688,000		—			1,688,000
	Intercompany liabilities				—			28,346,000			660,000		(29,006,000	)		—
		Total current liabilities			10,471,000			28,336,000			23,360,000		(29,006,000	)		33,161,000
	Intercompany liabilities				—			—			10,000,000		(10,000,000	)		—
	Long-term debt, excluding current installments				18,066,000			186,000			520,000		—			18,772,000
	Senior notes				100,000,000			—			—		—			100,000,000
	Deferred tax liabilities				—			(143,000	)		7,455,000		—			7,312,000
	Senior Exchangeable Preferred stock				13,573,000			—			—		—			13,573,000
	Series A Preferred stock				15,219,000			—			—		—			15,219,000
	Stockholders’ equity (deficit)				(57,075,000	)		(13,988,000	)		69,981,000		(59,993,000	)		(61,075,000	)
				$	100,254,000		$	14,391,000		$	111,316,000	$	(98,999,000	)	$	126,962,000

9

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

				MARCH 31, 2002
				Penhall			Penhall
				International			Rental			Penhall
				Corp.			Corp.			Company		Eliminations			Consolidated
Assets
	Current assets:
		Receivables, net		$	2,189,000		$	—		$	29,538,000	$	—		$	31,727,000
		Inventories			—			—			1,874,000		—			1,874,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			—			1,869,000		—			1,869,000
		Intercompany assets			25,206,000			—			—		(25,206,000	)		—
		Other current assets			126,000			2,943,000			4,316,000		—			7,385,000
			Total current assets		27,521,000			2,943,000			37,597,000		(25,206,000	)		42,855,000
	Intercompany assets				2,309,000			—			—		(2,309,000	)		—
	Net property, plant and equipment				—			9,147,000			58,855,000		—			68,002,000
	Other assets, net				3,398,000			—			10,652,000		—			14,050,000
	Investment in parent				—			4,001,000			—		(4,001,000	)		—
	Investment in subsidiaries				61,979,000			—			—		(61,979,000	)		—
				$	95,207,000		$	16,091,000		$	107,104,000	$	(93,495,000	)	$	124,907,000
Liabilities and Stockholders’ Equity (Deficit)
	Current installments of long-term debt			$	5,858,000		$	3,000		$	3,351,000	$	—		$	9,212,000
	Trade accounts payable				4,000			—			5,814,000		(1,000	)		5,817,000
	Accrued liabilities				2,249,000			25,000			10,434,000		—			12,708,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			—			582,000		—			582,000
	Intercompany liabilities				—			25,206,000			—		(25,206,000	)		—
		Total current liabilities			8,111,000			25,234,000			20,181,000		(25,207,000	)		28,319,000
	Intercompany liabilities				—			—			2,309,000		(2,309,000	)		—
	Long-term debt, excluding current installments				15,500,000			184,000			4,038,000		—			19,722,000
	Senior notes				100,000,000			—			—		—			100,000,000
	Deferred tax liabilities				—			(143,000	)		9,414,000		—			9,271,000
	Senior Exchangeable Preferred stock				14,685,000			—			—		—			14,685,000
	Series A Preferred stock				16,781,000			—			—		—			16,781,000
	Stockholders’ equity (deficit)				(59,870,000	)		(9,184,000	)		71,162,000		(65,979,000	)		(63,871,000	)
				$	95,207,000		$	16,091,000		$	107,104,000	$	(93,495,000	)	$	124,907,000

10

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		THREE MONTH PERIOD ENDED MARCH 31, 2001
		Penhall			Penhall
		International			Rental		Penhall
		Corp.			Corp.		Company		Eliminations			Consolidated
Revenues		$	—		$	371,000	$	33,619,000	$	(371,000	)	$	33,619,000
Cost of revenues			—			—		24,904,000		—			24,904,000
	Gross profit		—			371,000		8,715,000		(371,000	)		8,715,000
General and administrative expenses			94,000			120,000		6,170,000		(371,000	)		6,013,000
Other operating income, net			2,000			—		211,000		—			213,000
Equity earnings in subsidiaries			1,765,000			—		—		(1,765,000	)		—
	Earnings before interest expense and income taxes		1,673,000			251,000		2,756,000		(1,765,000	)		2,915,000
Interest expense			3,685,000			1,000		14,000		—			3,700,000
	Earnings (loss) before income taxes		(2,012,000	)		250,000		2,742,000		(1,765,000	)		(785,000	)
Income tax expense (benefit)			(1,549,000	)		103,000		1,124,000		—			(322,000	)
Net earnings (loss)		$	(463,000	)	$	147,000	$	1,618,000	$	(1,765,000	)	$	(463,000	)

11

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

			THREE MONTH PERIOD ENDED MARCH 31, 2002
			Penhall			Penhall
			International			Rental		Penhall
			Corp.			Corp.		Company			Eliminations			Consolidated
Revenues			$	—		$	2,163,000	$	31,433,000		$	(3,586,000	)	$	30,010,000
Cost of revenues				—			—		24,062,000			(97,000	)		23,965,000
		Gross profit		—			2,163,000		7,371,000			(3,489,000	)		6,045,000
General and administrative expenses				97,000			77,000		8,042,000			(1,610,000	)		6,606,000
Royalties				—			—		1,880,000			(1,880,000	)		—
Other operating income, net				1,000			—		422,000			—			423,000
Equity earnings in subsidiaries				(47,000	)		—		—			47,000			—
	Earnings (loss) before interest expense and income taxes			(143,000	)		2,086,000		(2,129,000	)		48,000			(138,000	)
Interest expense				3,403,000			4,000		33,000			—			3,440,000
		Earnings (loss) before income Taxes		(3,546,000	)		2,082,000		(2,162,000	)		48,000			(3,578,000	)
Income tax expense (benefit)				(1,433,000	)		854,000		(886,000	)		—			(1,465,000	)
Net earnings (loss)			$	(2,113,000	)	$	1,228,000	$	(1,276,000	)	$	48,000		$	(2,113,000	)

12

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		NINE MONTH PERIOD ENDED MARCH 31, 2001
		Penhall			Penhall
		International			Rental		Penhall
		Corp.			Corp.		Company		Eliminations			Consolidated
Revenues		$	—		$	1,138,000	$	128,530,000	$	(1,138,000	)	$	128,530,000
Cost of revenues			—			—		90,818,000		—			90,818,000
	Gross profit		—			1,138,000		37,712,000		(1,138,000	)		37,712,000
General and administrative expenses			303,000			358,000		21,364,000		(1,138,000	)		20,887,000
Other operating income, net			7,000			—		993,000		—			1,000,000
Equity earnings in subsidiaries			10,618,000			—		—		(10,618,000	)		—
	Earnings before interest expense and income taxes		10,322,000			780,000		17,341,000		(10,618,000	)		17,825,000
Interest expense			11,255,000			1,000		122,000		—			11,378,000
	Earnings (loss) before income taxes		(933,000	)		779,000		17,219,000		(10,618,000	)		6,447,000
Income tax expense (benefit)			(4,736,000	)		320,000		7,060,000		—			2,644,000
Net earnings		$	3,803,000		$	459,000	$	10,159,000	$	(10,618,000	)	$	3,803,000

13

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		NINE MONTH PERIOD ENDED MARCH 31, 2002
		Penhall			Penhall
		International			Rental		Penhall
		Corp.			Corp.		Company		Eliminations			Consolidated
Revenues		$	—		$	8,427,000	$	121,578,000	$	(13,164,000	)	$	116,841,000
Cost of revenues			—			—		86,616,000		(330,000	)		86,286,000
	Gross profit		—			8,427,000		34,962,000		(12,834,000	)		30,555,000
General and administrative expenses			285,000			268,000		26,549,000		(5,547,000	)		21,555,000
	Royalties		—			—		7,288,000		(7,288,000	)		—
Other operating income, net			3,000			—		976,000		—			979,000
Equity earnings in subsidiaries			5,987,000			—		—		(5,987,000	)		—
	Earnings before interest expense and income taxes		5,705,000			8,159,000		2,101,000		(5,986,000	)		9,979,000
Interest expense			10,634,000			14,000		99,000		—			10,747,000
	Earnings (loss) before income taxes		(4,929,000	)		8,145,000		2,002,000		(5,986,000	)		(768,000	)
Income tax expense (benefit)			(4,476,000	)		3,340,000		821,000		-—			(315,000	)
Net earnings (loss)		$	(453,000	)	$	4,805,000	$	1,181,000	$	(5,986,000	)	$	(453,000	)

14

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

			NINE MONTH PERIOD ENDED MARCH 31, 2001
			Penhall			Penhall
			International			Rental			Penhall
			Corp.			Corp.			Company			Eliminations		Consolidated
Net cash provided by (used in) operating activities			$	(9,030,000	)	$	385,000		$	20,356,000		$	—	$	11,711,000
Cash flows from investing activities:
	Proceeds from sale of assets			—			—			795,000			—		795,000
	Capital expenditures			—			(1,175,000	)		(12,123,000	)		—		(13,298,000	)
	Acquisition of assets			—			—			(520,000	)		—		(520,000	)
		Net cash used in investing activities		—			(1,175,000	)		(11,848,000	)		—		(13,023,000	)
Cash flows from financing activities:
	Due to (from) affiliates			8,514,000			594,000			(9,108,000	)		—		—
	Borrowings under long-term debt			45,961,000			—			—			—		45,961,000
	Repayments of long-term debt			(45,540,000	)		(9,000	)		(1,375,000	)		—		(46,924,000	)
	Book overdraft			—			—			1,444,000			—		1,444,000
	Proceeds from issuance of common stock			309,000			—			—			—		309,000
	Repurchase of common stock and Series B preferred stock			(501,000	)		—			—			—		(501,000	)
	Issuance of Series B preferred stock			187,000			—			—			—		187,000
		Net cash provided by (used in) financing activities		8,930,000			585,000			(9,039,000	)		—		476,000
		Net change in cash and cash equivalents		(100,000	)		(205,000	)		(531,000	)		—		(836,000	)
Cash and cash equivalents at beginning of period				100,000			1,370,000			639,000			—		2,109,000
Cash and cash equivalents at end of period			$	—		$	1,165,000		$	108,000		$	—	$	1,273,000

15

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

			NINE MONTH PERIOD ENDED MARCH 31, 2002
			Penhall			Penhall
			International			Rental			Penhall
			Corp.			Corp.			Company			Eliminations			Consolidated
Net cash provided by (used in) operating activities			$	(3,955,000	)	$	4,953,000		$	15,080,000		$	(5,986,000	)	$	10,092,000
Cash flows from investing activities:
	Proceeds from sale of assets			—			—			320,000			—			320,000
	Capital expenditures			—			30,000			(7,265,000	)		—			(7,235,000	)
	Acquisition of assets			—			—			(3,507,000	)		—			(3,507,000	)
		Net cash provided by (used in) investing activities		—			30,000			(10,452,000	)		—			(10,422,000	)
Cash flows from financing activities:
	Due to (from) affiliates			5,505,000			(3,140,000	)		(8,351,000	)		5,986,000			—
	Borrowings under long-term debt			59,760,000			—			2,881,000			—			62,641,000
	Repayments of long-term debt			(61,641,000	)		(9,000	)		(830,000	)		—			(62,480,000	)
	Book overdraft			—			—			1,925,000			—			1,925,000
	Proceeds from issuance of common stock			213,000			—			—			—			213,000
	Repurchase of common stock and Series B preferred stock			(40,000	)		—			—			—			(40,000	)
	Issuance of Series B preferred stock			158,000			—			—			—			158,000
		Net cash provided by (used in) financing activities		3,955,000			(3,149,000	)		(4,375,000	)		5,986,000			2,417,000
		Net change in cash and cash equivalents		—			1,834,000			253,000			—			2,087,000
Cash and cash equivalents at beginning of period				—			921,000			109,000			—			1,030,000
Cash and cash equivalents at end of period			$	—		$	2,755,000		$	362,000		$	—		$	3,117,000

(5) Subsequent Event

         In April 2002, Penhall Company, a California corporation and a wholly-owned subsidiary of Penhall, purchased selected assets of Arizona Curb Cut for approximately $540,000 in total consideration.

16

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

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

General

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

         The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1995, Penhall has effected ten strategic acquisitions, including:

1.	Concrete Coring Company, an Austin-based company acquired in 1995,
2.	Zig Zag Company, a Denver-based firm acquired in 1996,
3.	Metro Concrete Cutting, an Atlanta-based company acquired in 1996,
4.	HSI, a Minnesota-based firm acquired in April 1998,
5.	Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,
6.	Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,
7.	Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,
8.	Advance Concrete Sawing and Drilling, Inc., a Bakersfield, California-based company acquired in September 2000
9.	H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2001 and
10.	Bob Mack Company, a Visalia, California-based company acquired in March 2002.

         During the same period, Penhall established operations in ten new markets by opening offices in Las Vegas, Salt Lake City, Portland, Dallas, Richmond, Fresno, Buffalo, Reno, Seattle and Cleveland.

         In March 2002, Penhall Company, a California corporation and a wholly-owned subsidiary of Penhall, purchased 100% of the stock of Bob Mack Company, Inc (“Bob Mack”) and selected assets of Bobbie Mack Grinding, Inc (“Grinding”). Bob Mack and Grinding were related parties prior to the purchase. Total consideration

17

for the purchase of Bob Mack stock was approximately $6.0 million, $3.0 million in cash and the remainder payable in equal installments in March 2003 and 2004. Total consideration for the purchase of selected assets from Grinding was $800,000, $400,000 in cash and the remainder payable in equal installments in March 2003 and 2004. In addition, the shareholders of Bob Mack signed 5 year non-compete agreements with Penhall which restrict the former shareholders of Bob Mack from competing with the acquired business and requires Penhall to pay the former shareholders $1.4 million in 5 equal payments over a four year period. The acquisition was accounted for in accordance with SFAS 141, “Business Combinations.” The results of operations for the month of March 2002 of Bob Mack are included in the consolidated financial statements as of March 31, 2002. The Company recorded approximately $2.4 million of goodwill related to this transaction. Based in Visalia, California, Bob Mack primarily operates in central California and is a provider of asphalt removal, grinding and milling services. The acquisition of Bob Mack expands the range of services offered by Penhall.

         Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are complemented by long-term fixed-price contracts. Penhall’s revenues are derived from highway-related projects, building-related projects, airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated:

		THREE MONTH PERIODS ENDED MARCH 31,										NINE MONTH PERIODS ENDED MARCH 31,
		2002					2001					2002					2001
				% of					% of					% of					% of
		$		Total			$		Total			$		Total			$		Total
		(Dollars in Thousands)										(Dollars in Thousands)
Operated Equipment Rental Services		$	23,743		79.1	%	$	25,744		76.6	%	$	87,422		74.8	%	$	93,182		72.5	%
Contract Services (1)			6,267		20.9	%		7,875		23.4	%		29,419		25.2	%		35,348		27.5	%
	Total Revenues	$	30,010		100.0	%	$	33,619		100.0	%	$	116,841		100.0	%	$	128,530		100.0	%

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

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

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

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the

18

recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition on Long-Term Construction Contracts

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

The Company is not a party to any off-balance sheet arrangements, and does not engage in trading activities involving non-exchange traded contracts, and is not a party to any transactions with any persons or activities that derive benefits from their non-independent relations with the Company.

Results of Operations

         Nine Months Ended March 31, 2002 Compared to Nine months Ended March 31, 2001

         Revenues. Revenues for the nine months ended March 31, 2002 (“Interim 2002”) were $116.8 million, a decrease of $11.7 million or 9.1% over the nine months ended March 31, 2001 (“Interim 2001”). Lower revenues in Interim 2002 were primarily a result of a weaker economy and increased competition.

         Gross Profit. Gross profit totaled $30.6 million in Interim 2002, a decrease of $7.2 million or 18.9% from Interim 2001. Gross profit as a percentage of revenues decreased from 29.3% in Interim 2001 to 26.1% in Interim 2002. The decrease in gross profit from Interim 2001 to Interim 2002 is primarily attributable to decreased revenue, increased competition, and an increase of $1.0 million in insurance costs during Interim 2002. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs and a decrease in equipment utilization.

         General and Administrative Expenses. General and administrative expenses were $21.6 million in Interim 2002 compared to $20.9 million in Interim 2001. As a percent of revenues, general and administrative expenses were 18.4% in Interim 2002 compared to 16.2% in Interim 2001. The increase in general and administrative expenses as a percentage of revenues during Interim 2002 is attributable to the fixed nature of these types of expenses and an increase in salaries and related expenses for new offices that was offset by a general decrease in salaries in all divisions due to staff reductions in response to the weakening economy.

         Interest Expense. Interest expense was $10.7 million in Interim 2002 compared to interest expense of $11.4 million in Interim 2001. The decrease in interest expense is attributable to lower interest rates and lower borrowings by the Company in Interim 2002.

         Income Tax Expense (Benefit). The Company recorded an income tax benefit of $0.3 million, or 41% of loss before income taxes in Interim 2002, compared to an income tax provision of $2.6 million, or 41% of earnings before income taxes in Interim 2001. The income tax benefit is attributable to a loss before income tax in Interim 2002.

19

         Three months Ended March 31, 2002 Compared to Three months Ended March 31, 2001

         Revenues. Revenues for the three months ended March 31, 2002 (“Interim 2002”) were $30.0 million, a decrease of $3.6 million or 10.7% over the three months ended March 31, 2001 (“Interim 2001”). Lower revenues in Interim 2002 were primarily a result of a weaker economy and increased competition.

         Gross Profit. Gross profit totaled $6.0 million in Interim 2002, a decrease of $2.7 million or 30.6% from Interim 2001. Gross profit as a percentage of revenues decreased to 20.1% in Interim 2002 from 25.9% in Interim 2001. The decrease in gross profit is primarily attributable to decreased revenue and an increase in competition and increased insurance costs. The decrease in gross profit as a percentage of revenues was due primarily to increased competition and a decrease in utilization, particularly the Company’s grinding and excavating equipment.

         General and Administrative Expenses. General and administrative expenses were $6.6 million in Interim 2002 compared to $6.0 million in Interim 2001, an increase of $0.6 million. As a percent of revenues, general and administrative expenses were 22.0% in Interim 2002 compared to 17.9% in Interim 2001. The increase in general and administrative expenses as a percentage of revenues is primarily due to the fixed nature of these expenses and includes an increase in health insurance expense of $0.1 million, as well as an increase in salaries and related expenses for new offices that was offset by a general decrease in salaries in all divisions due to staff reductions in response to the weakening economy.

         Interest Expense. Interest expense was $3.4 million in Interim 2002 compared to interest expense of $3.7 million in Interim 2001. The decrease in interest expense is attributable to lower interest rates and lower borrowings in Interim 2002.

         Income Tax Expense (Benefit). The Company recorded an income tax benefit of $1.5 million, or 41% of loss before income taxes in Interim 2002 compared to an income tax benefit of $0.3 million, or 41% of loss before income taxes in Interim 2001. The tax benefit is attributable to a higher loss before income tax in Interim 2002.

Liquidity and Capital Resources

         It is anticipated that the Company’s principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company’s strategy of pursuing strategic acquisitions and expanding through internal growth. The Company’s principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility (originated in 1998). The New Credit Facility consists of two facilities: (i) a six-year senior secured term loan facility in an aggregate principal amount equal to $20.0 million (the “Term Loan Facility”); and (ii) a six-year revolving credit facility in an aggregate principal amount not to exceed $30.0 million (the “Revolving Credit Facility”). The Company drew $20.0 million of loans under the Term Loan Facility (“Term Loans”) on the closing date of the New Credit Facility in connection with the Recapitalization. The Term Loans amortize on a quarterly basis and are payable in installments under a schedule set forth in the New Credit Facility. Advances made under the Revolving Credit Facility (“Revolving Loans”) are due and payable in full on June 15, 2004. The Term Loans and the Revolving Loans are subject to mandatory prepayments and reductions in the event of certain extraordinary transactions or issuances of debt and equity by the Company or any subsidiary of the Company that guarantees amounts under the New Credit Facility. Such loans are also required to be prepaid with 75% of the Excess Cash Flow (as such term is defined in the New Credit Facility) of the Company or, if the Company’s Leverage Ratio (as such term is defined in the New Credit Facility) is less than 5.25 to 1.0, 50% of such Excess Cash Flow.

SUMMARY CASH FLOW DATA (000's) FOR
THE NINE MONTHS ENDED March 31,		2001			2002
Cash and cash equivalents			1,273			3,117
Net cash provided by (used in):
	Operating activities		11,711			10,092
	Investing activities		(13,023	)		(10,422	)
	Financing activities		476			2,417
Capital expenditures			(13,298	)		(7,235	)

20

         Cash provided by operating activities decreased to $10.1 million in Interim 2002 from $11.7 million in Interim 2001, a decrease of $1.6 million. In Interim 2002, the Company’s net loss and depreciation plus a decrease in receivables less a decrease in trade accounts payable and accrued liabilities resulted in $10.1 million net cash provided by operating activities. In Interim 2001, the Company’s net earnings and depreciation plus a reduction in receivables, offset by a reduction in accounts payable, accrued liabilities and income taxes resulted in $11.7 million net cash provided from operating activities.

         Net cash used in investing activities decreased $2.6 million to $10.4 million in Interim 2002 from $13.0 million in Interim 2001. The reduction in net cash used in investing activities is primarily attributable to a decrease in capital expenditures of $6.1 million, offset by an increase in acquisitions of $3.5 million in Interim 2002 as compared to Interim 2001.

         Management estimates that the Company’s annual capital expenditures will be approximately $11.0 million for fiscal 2002, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property.

         Net cash provided by financing activities in Interim 2002 was $2.4 million as compared to $0.5 million provided by Interim 2001. In Interim 2002, the Company’s financing activities are primarily a result of borrowings and repayments of long-term debt and a book overdraft. In Interim 2001, the Company’s financing activities were primarily the result of borrowings and repayments of long-term debt and a book overdraft.

         Historically, the Company has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of March 31, 2002, the Company and its subsidiaries had approximately $128.9 million of total indebtedness outstanding (including the Notes) plus outstanding letters of credit of $4.5 million and a stockholders’ deficit of approximately $63.9 million. As of March 31, 2002, approximately $17.5 million of additional borrowing was available under the Company’s New Credit Facility.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the FASB issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”

         The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which have been accounted for using the pooling-of-interests method, and Statement 142 effective July 1, 2002. Companies with fiscal year ends beginning after March 15, 2001, who have not yet issued financial statements for their first interim period may early adopt Statement 142. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible

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assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

         Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

         In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of operations.

         And finally, any unamortized negative goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle.

         The Company will adopt Statement 142 in the first quarter of fiscal 2003. The adoption of Statement 142 may have a significant effect on the Company’s results from operations. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these statements on the Company’s consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. The Company anticipates unamortized Goodwill immediately prior to adoption of Statement 142 will be $9.0 million.

         In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets.

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         The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001. Accordingly, the Company will adopt Statement 144 in the first quarter of fiscal 2003. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company’s financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Management does not believe that the adoption of Statement 144 for assets held for sale or other disposal to have a material impact on the Company’s financial statements.

         On July 18, 2001, the SEC issued interpretative guidance relating to the “Classification and Measurement of Redeemable Securities”. This ruling requires, among other things, that preferred shares subject to redemption upon change in control be classified outside of permanent equity. In accordance with the required implementation of this new requirement, the Company has evaluated the impact on the Series B Preferred Stock and determined that there is no impact on the classification of the Series B Preferred Stock.

         In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. SFAS No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset, i.e., the associated asset retirement costs, and to depreciate that cost over the life of the asset. The liability is increased at the end of each period to reflect the passage of time, i.e., accretion expense, and changes in the estimated future cash flows underlying the initial fair value measurement. The Company will adopt SFAS No. 143 in the first quarter of fiscal 2003. This Statement is not expected to have a material impact on the Company’s financial reporting and related disclosures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

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

         The table below presents the principal amounts of debt (excluding capital lease obligations of $3,231,000), weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of March 31, 2002.

	Years Ended June 30,
																						Fair
	2002			2003			2004			2005			2006			Thereafter			Total			Value
	(In thousands)
Fixed rate debt	$	473		$	2,140		$	1,658		$	4		$	100,004		$	171		$	104,450		$	104,450	(2)
Average interest rate		9.14	%		4.36	%		2.70	%		10.00	%		12.00	%		10.00	%		11.68	%		11.68	%
Variable rate LIBOR debt (1)	$	1,250		$	6,000		$	14,000		$	0		$	0		$	0		$	21,250		$	21,250
Weighted average current interest rate (1)																							3.74	%

(1) The Company has different interest rate options for its variable rate debt.

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(2) The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities.

Part II — Other Information

         Items 1-5 are not applicable

         Item 6. Exhibits and Reports on Form 8-K.

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SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Penhall International Corp.
Date:	May 14, 2002	/s/      John T. Sawyer John T. Sawyer Chairman of the Board, President and Chief Executive Officer

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