10-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the year ended June 30, 2003

OR

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

For the transition period from                  to                 .

Commission File Number 333-64745

PENHALL INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

ARIZONA	86-0634394
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)

(714) 772-6450
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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

CLASS AND TITLE OF CAPITAL STOCK	SHARES OUTSTANDING AS OF SEPTEMBER 29, 2003
Common Stock, $.01 Par Value	986,552

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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

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

DOCUMENTS INCORPORATED BY REFERENCE:
None

Explanatory Note

     This Amendment No. 1 to our Annual Report on Form 10-K for the year ended June 30, 2003, as originally filed on September 29, 2003, is being filed to amend and reflect the restatement of our Consolidated Balance Sheet as of June 30, 2003. During the second quarter of Fiscal 2004, we re-examined the provisions of our revolving credit facility (the “New Credit”). The Company reviewed the New Credit and determined that the associated lock-box agreement satisfied the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). Further, we have reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in Statement of Financial Accounting Standards No. 78 (“FAS 78”), “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear that there were any subjective acceleration clauses that fit directly into the definition provided in FAS 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. As a result, the Company has reclassified borrowings under the New Credit facility as a short-term obligation. Each item of the Annual Report on Form 10-K as filed on September 29, 2003 that was affected by the restatement has been amended and restated. Additionally, the Company has reclassified certain June 30, 2003 and June 30, 2002 balances (accrued liabilities and current portion of insurance reserves) to conform with presentation used in Fiscal 2004. No attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the original Form 10-K except as required to reflect the effects of the restatement.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     The following discussion of the results of operations and financial condition of Penhall should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Part II of this report.

GENERAL

     Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 38 locations in 17 states, with a presence in some of the fastest growing states in terms of construction spending and population growth.

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

1.	HSI, a Minnesota-based firm acquired in April 1998,
2.	Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,
3.	Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,
4.	Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,

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5.	Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000,
6.	H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2002,
7.	Bob Mack Company, California based company acquired in March 2002, and
8.	Arizona Curb Cut Company, an Arizona based company acquired in April 2002.

     During the same period, Penhall established operations in six new markets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno, and Seattle.

     Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are provided primarily under hourly rentals, which are complemented by long-term fixed-price contracts. The following table shows the breakdown of the components of revenue for the periods indicated:

	FISCAL YEAR ENDED JUNE 30,
	2001					2002					2003
			% OF					% OF					% OF
	$		TOTAL			$		TOTAL			$		TOTAL
	(DOLLARS IN THOUSANDS)
Hourly Service Rentals	$	126,068		71.7	%	$	118,058		73.2	%	$	115,844		72.6	%
Long Term Service Contracts (1)		49,701		28.3	%		43,184		26.8	%		43,773		27.4	%
Total Revenue	$	175,769		100.0	%	$	161,242		100.0	%	$	159,617		100.0	%

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

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

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

     Penhall invests in and maintains a large and versatile fleet of rental equipment ranging from relatively small items such as diamond abrasive saws and coring units to larger equipment, including backhoes, excavators, water trucks and concrete grinders. Used equipment is sometimes sold in the ordinary course of business, and gains on sales of assets, net are recognized in “Other Operating Income” in Penhall’s consolidated statements of operations. In fiscal 2001, 2002 and 2003, gains on sales of assets from such equipment sales were $422,000, $300,000 and $485,000, respectively.

     The following table shows the number of units in Penhall’s operated equipment rental fleet for the following periods:

	FISCAL YEAR ENDED JUNE 30,
	2001			2002			2003
Beginning of Period		664			747			761
# Units Purchased		135			60			12
# Units Disposed		(52	)		(46	)		(63	)
End of Period		747			761			710

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition on Long-Term Construction Contracts

     Income from construction operations is recorded using the percentage-of-completion method of accounting. The 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 incurred 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.

Valuation of Long-Lived Assets and Goodwill

     Goodwill represents the excess of purchase price over fair value of net assets acquired. Prior to 2003, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assessed recoverability by determining whether the amortization of the goodwill balance over its remaining life would be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. The assessment of the recoverability of goodwill would be impacted if estimated future operating cash flows were not achieved. Amortization expense related to goodwill amounted to approximately $687,000 and $609,000 for the years ended June 30, 2001 and 2002, respectively.

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. The Company has adopted these accounting standards effective July 1, 2002, and accordingly, no amortization of goodwill was recorded in 2003. As a result of the transitional and annual goodwill impairment tests that were completed during fiscal 2003, it was determined there was no impairment of goodwill. The Company’s annual test will be performed in May of each year. There were no adjustments to identifiable intangible assets’ useful lives or recorded balances as a result of the adoption of SFAS No. 142.

     We assess the impairment of identifiable intangibles, long-lived assets and related goodwill annually as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include:

• Significant underperformance relative to expected historical or projected future operating results;

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

• Significant negative industry or economic trends;

• Unanticipated competition; and

• EBITDA relative to net book value

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RESULTS OF OPERATIONS

Results of Operations

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

     Revenues. Revenues for Fiscal 2003 were $159.6 million compared to $161.2 million for the prior year, a decrease of $1.6 million or 1.0%. A $0.6 million increase in contract revenue (1.4% increase) was offset by a $2.2 million decrease in service revenues (a 1.9% decrease). The lower revenues is a reflection of the significant slowdown in private non-residential construction activity, which declined 16% in 2002 according to Department of Commerce data as well as significantly lower state highway and bridge spending due to deficits in many state budgets.

     Penhall operated through 38 locations in 17 states at June 30, 2002 and 2003. At June 30, 2003, Penhall’s operated rental fleet consisted of 710 units compared to 761 units at June 30, 2002, a decrease of 6.7%. A majority of the unit disposals in fiscal 2003 occurred during the later part of the fiscal year.

     Gross Profit. Gross profit totaled $31.6 million in Fiscal 2003, a decrease of $7.3 million or 18.7% from Fiscal 2002. Gross profit as a percentage of revenues decreased from 24.1% in Fiscal 2002 to 19.8% in Fiscal 2003. The decrease in gross profit from Fiscal 2002 to Fiscal 2003 is primarily attributable to increased competition, cost overruns on some contracts, and an increase of $1.7 million in insurance costs during Fiscal 2003. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs, decrease in equipment utilization, and a change in the mix of work. Although the amount of Contract Revenue only increased $0.6 million during Fiscal 2003, the amount of subcontracted work and materials associated with the Contract Revenue increased by $5.9 million. Typically, the markup on subcontracted work and materials is significantly less than the markup on self performed work.

     General and Administrative Expenses. General and administrative expenses were $27.9 million in Fiscal 2003 compared to $28.4 million in Fiscal 2002. As a percent of revenues, general and administrative expenses were 17.5% in Fiscal 2003 compared to 17.6% in Fiscal 2002. The small decrease in general and administrative expenses as a percentage of revenues during Fiscal 2003 is primarily attributable to decreases of $0.4 million in incentive compensation, $0.5 million in payroll and related expenses, and $0.6 million in goodwill amortization partially offset by a $0.7 million increase in insurance costs and a $0.4 million increase in bad debt expense.

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     Interest Expense. Interest expense was $14.4 million in Fiscal 2003 compared to interest expense of $14.3 million in Fiscal 2002. The increase in interest expense is attributable to a write-off of $0.3 million of debt issuance costs associated with the Credit Facility replaced by the The New Credit (as defined below) offset by lower interest rates and decreased borrowings during Fiscal 2003.

     Income Tax Benefit. The Company recorded an income tax benefit of $3.4 million, or 36.8% of loss before income taxes in Fiscal 2003, compared to an income tax benefit of $0.9 million, or 34.6% of loss before income taxes in Fiscal 2002. The increase in the income tax benefit is attributable to a higher loss before income tax in Fiscal 2003.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

     Revenues. Revenues for fiscal 2002 were $161.2 million, compared to revenues of $175.8 million for the prior year, a decrease of $14.5 million or 8.3%. Lower revenues in 2002 were primarily a result of a weaker economy, a significant downturn in commercial building construction, and increased competition.

     Penhall operated through 38 locations in 17 states at June 30, 2002, compared to 37 locations in 17 states at June 30, 2001. At June 30, 2002, Penhall’s operated rental fleet consisted of 761 units compared to 747 units at June 30, 2001, an increase of 1.9%. A majority of the additional units in fiscal 2002 were acquired during the later part of the fiscal year as part of the Bob Mack Company and Arizona Curb Cut acquisitions.

     Gross Profit. For fiscal year 2002, gross profit was $38.8 million compared to gross profit of $51.4 million for fiscal year 2001, a decrease of $12.5 million, or 24.4%. As a percent of revenue, gross profit was 24.1% in fiscal year 2002 compared to 29.2% in fiscal year 2001. The decrease in gross profit in 2002 was due primarily to the decrease in utilization of the equipment rental fleet in fiscal 2002 and an increase of $3.6 million in the cost of insurance. Utilization rates were lower due to the softening of the commercial construction market and increased competition in most of the Company’s markets. The increased cost of insurance in 2002 is a result of Penhall renewing its insurance near the end of fiscal 2001 in an adverse insurance market after emerging from a three year policy which was purchased during a favorable insurance market.

     General and Administrative Expenses. General and administrative expenses were $28.4 million in fiscal year 2002 compared to $28.3 million in fiscal year 2001, an increase of $0.1 million or 0%, which is primarily attributable to a $1.1 million decrease in wages, primarily incentive compensation, offset by operating increases mainly attributable to a full year of costs associated with new offices and additional partial year operating costs associated with the Bob Mack Company and Arizona Curb Cut acquisitions. As a percentage of revenues, general and administrative expenses were 17.6% in fiscal 2002 compared to 16.1% in fiscal 2001. The increase in general and administrative expenses as a percent of revenues occurred because many of these types of expenses remain somewhat constant, and do not increase or decrease in proportion to the increases or decreases in revenues.

     Other Operating Income. Other operating income, consists primarily of gains and losses on the sale of fixed assets, interest income, and discounts earned. Other operating income in both fiscal 2002 and 2001 was $1.4 million.

     Interest Expense. Interest expense was $14.3 million in fiscal 2002 compared to $15.3 million in fiscal 2001, a decrease of 6.4%. The decrease is attributable to the lower borrowings and lower interest rates during fiscal 2002.

     Income Tax Expense (Benefit). The Company recorded an income tax benefit of $0.9 million, or 34.6% of losses before taxes in fiscal 2002 as compared to an income tax expense of $3.9 million, or 42.6% of earnings before income taxes in fiscal 2001. The lower effective tax rate on the loss in fiscal 2002 is due to unconsolidated state tax liabilities of Penhall Company and a 45% reduction of the California net operating loss.

LIQUIDITY AND CAPITAL RESOURCES

     It is anticipated that the Company’s principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company’s strategy of pursuing strategic acquisitions and expanding through internal growth. The Company’s principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility (“The New Credit”). The New Credit is a $50 million, three year asset based borrowing facility, consisting of a revolving credit facility (“New Revolver”) of up to $50 million with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the

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appraised forced liquidation value of the Company’s owned real estate.

     The provisions of the New Credit facility include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The Company reviewed the New Credit and determined that the associated lock-box agreement satisfied the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). Further, we have reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in FAS 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear that there were any subjective acceleration clauses that fit directly into the definition provided in FAS 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. Management’s understanding of this provision after consultation with the lender, is that the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. As a result, the Company has reclassified borrowings under the New Credit facility as a short-term obligation (refer to Note 17 in the consolidated financial statements included in Item 8). In addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2003, the Company had outstanding borrowings under the New Credit of $14.5 million and unused and available amounts under The New Credit of $20.1 million.

Summary Cash Flow Data (000’s) for the periods ending June 30,
		2001			2002			2003
Cash and cash equivalents		$	1,030		$	6,205		$	184
Net cash provided by (used in):
	Operating activities	$	15,732		$	17,609		$	12,649
	Investing activities	$	(17,697	)	$	(12,482	)	$	(2,958	)
	Financing activities	$	886		$	48		$	(15,712	)
Capital expenditures		$	18,469		$	9,495		$	4,222

     In fiscal 2003, the Company’s net loss plus add backs of depreciation and amortization, amortization of debt issuance costs, provision for doubtful receivables and the gains on sales of assets, plus decreases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts, accounts payable, and accrued liabilities and the increase in insurance reserves were partially offset by increases in inventories and deferred taxes which resulted in net cash provided by operating activities of $12.6 million.

     In fiscal 2002, the Company’s net loss plus depreciation and amortization, a decrease in receivables and an increase in accounts payable and accrued liabilities was partially offset by a decrease in billings in excess of costs and estimated earnings on uncompleted contracts and an increase in deferred taxes which resulted in net cash provided by operating activities of $17.6 million.

     In fiscal 2001, the Company’s net earnings plus depreciation, amortization and provision for deferred income tax and decreases in cost and estimated earnings in excess of billings on uncompleted contracts were partially offset by increases in receivables and inventories, prepaid expenses and other assets and decreases in accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts which resulted in net cash provided by operating activities of $15.7 million.

     Management estimates that Penhall’s annual capital expenditures will be approximately $8.0 million for fiscal 2004, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property improvements.

     Net cash used in investing activities during fiscal 2001, 2002 and 2003 was $17.7 million, $12.5 million and $3.0 million, respectively. Such cash was primarily used for capital expenditures of $18.5 million in fiscal 2001, $9.5 million in fiscal 2002, and $4.2 million in fiscal 2003. In fiscal 2001, $0.5 million was used for the acquisition of Advance Concrete Sawing & Drilling, Inc. and H&P Sawing & Drilling. In fiscal 2002, $3.8 million was used for the acquisition of Bob Mack Company and Arizona Curb Cut. The Company had no acquisitions in fiscal 2003.

     Net cash provided by (used in) financing activities during fiscal 2001, 2002 and 2003 was $0.9 million, $0.0 million and ($15.7) million respectively.

     Historically, Penhall has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the Transactions, however, the Company has substantial indebtedness and debt service obligations. As of June 30, 2003, the Company and its subsidiaries had $117.4 million of total indebtedness outstanding (including the Notes) and a stockholders’ deficit of $75.9 million. As of June 30, 2003 approximately $20.1 million of additional borrowing was available under The New Credit.

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     From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.

NEW ACCOUNTING PRONOUNCEMENTS

     On August 16, 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. The statement requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company adopted this statement July 1, 2002. The adoption of SFAS No. 143 has not had a material impact on the Company’s financial position or results from operations.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” which supercedes SFAS No. 121 and certain sections of APB Opinion No. 30. SFAS No. 144 classifies long-lived assets as either (1) to be held and used, (2) to be disposed of by other than sale, or (3) to be disposed of by sale. This standard introduces a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows. The Company adopted this statement July 1, 2002. This standard has not had a material impact on the Company’s financial position or results of operations.

     In April 2002, the Financial Accounting Standards Board, (“FASB”), issued Statement of Financial Accounting Standards No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which among other things provides guidance in reporting gains and losses from extinguishments of debt and accounting for leases. The Company adopted this statement July 1, 2002 . This standard has not had a material impact on its financial position or its results of operations.

     On July 30, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. Adoption of SFAS 146 has not had a material impact on the Company’s financial position or results from operations.

     In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company did not have any guarantees subject to FIN 45 at June 30, 2003, and has applied the provisions of FIN No. 45 prospectively to guarantees subject to FIN 45 made after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. The Company has complied with the disclosure requirements under SFAS No. 148.

8

     In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies when variable interest entities are consolidated by business enterprises where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or, where equity investors lack certain characteristics of a controlling financial interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not have any investments in any variable interest entities at June 30, 2003 and has applied the provisions of FIN No. 46 prospectively to investments in variable interest entities made after February 1, 2003.

     In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning December 15, 2003, the Company’s fiscal 2005. At this time, the Company is unable to determine the impact that adoption of this pronouncement will have on our financial position, results of its operations or liquidity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

     There are no derivative transactions during the years ended June 30, 2002 and 2003.

At June 30, 2003, the annual maturities of long-term debt, revolving credit facility and senior notes are as follows:

	YEARS ENDING JUNE 30,
											THERE
	2004		2005		2006		2007		2008		AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)
Fixed rate debt	$	2,551	$	176	$	12	$	100,005	$	5	$	161	$	102,910		$	80,910	(3)
Average interest rate														11.75	%
Variable rate LIBOR debt (1)(2)		0		0		14,485		0		0		0		14,485			14,485
Weighted average current interest rate (2)														4.84	%

At June 30, 2002, the annual maturities of long-term debt and senior notes are as follows:

	YEARS ENDING JUNE 30,
											THERE
	2003		2004		2005		2006		2007		AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)
Fixed rate debt	$	3,217	$	2,518	$	739	$	1,035	$	100,005	$	166	$	107,680		$	102,680	(3)
Average interest rate														11.30	%
Variable rate LIBOR debt (2)		6,000		15,290		0		0		0		0		21,290			21,290
Weighted average current interest rate (2)														4.11	%

(1)	The revolving credit facility is classified as a short-term obligation in the consolidated balance sheet, however, the credit facility matures in 2006. See Note 17 to the consolidated financial statements.
(2)	The Company has different interest rate options for its variable rate debt. See note 5 in the consolidated financial statements for additional information.
(3)	The fair value of fixed rate debt was determined based on current rates offered for the debt instrument.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The Consolidated Financial Statements of the Company filed as part of this report on Form 10-K are listed in Item 14(a).

9

INDEPENDENT AUDITORS’ REPORT

The Board of Directors
Penhall International Corp. and Subsidiaries:

     We have audited the accompanying consolidated balance sheets of Penhall International Corp. and subsidiaries (“the Company”) as of June 30, 2002 and 2003, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended June 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penhall International Corp. and subsidiaries as of June 30, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 17, the Company’s consolidated balance sheet as of June 30, 2003 has been restated to classify certain debt as current.

/s/ KPMG LLP KPMG LLP

Orange County, California
September 12, 2003, except for Note 17, which is as of February 6, 2004.

10

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,

				2002		2003
						(RESTATED)
ASSETS (note 5)
Current assets:
	Cash and cash equivalents			$	6,205,000	$	184,000
	Receivables:
		Contract and trade receivables			31,361,000		29,105,000
		Contract retentions, due upon completion and acceptance of work (note 2)			4,756,000		4,105,000
		Income taxes			1,990,000		2,648,000
					38,107,000		35,858,000
		Less allowance for doubtful receivables (note 2)			1,421,000		1,592,000
			Net receivables		36,686,000		34,266,000
	Costs and estimated earnings in excess of billings on uncompleted contracts (note 11)				2,514,000		1,704,000
	Deferred tax assets (note 6)				3,133,000		3,363,000
	Inventories				1,895,000		2,362,000
	Prepaid expenses and other current assets				2,375,000		3,638,000
			Total current assets		52,808,000		45,517,000
Property, plant and equipment, at cost:
	Land				5,004,000		5,004,000
	Buildings and leasehold improvements				8,822,000		8,793,000
	Construction and other equipment				121,890,000		117,860,000
					135,716,000		131,657,000
	Less accumulated depreciation and amortization				69,449,000		78,256,000
			Net property, plant and equipment		66,267,000		53,401,000
Goodwill					9,053,000		9,053,000
Debt issuance costs net of accumulated amortization of $3,465,000 and $4,778,000, respectively (note 5)					3,177,000		3,316,000
Other assets, net (note 3)					1,610,000		1,186,000
				$	132,915,000	$	112,473,000

See accompanying notes to consolidated financial statements.

11

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30,

			2002			2003
						(RESTATED)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Current installments of long-term debt (note 5)		$	9,217,000		$	2,551,000
	Borrowings under revolving credit facility (note 17)			—			14,485,000
	Trade accounts payable			9,726,000			7,953,000
	Accrued liabilities (note 4)			12,712,000			10,809,000
	Current portion of insurance reserves			1,274,000			1,569,000
	Billings in excess of costs and estimated earnings on uncompleted contracts (note 11)			680,000			831,000
		Total current liabilities		33,609,000			38,198,000
Long-term debt, excluding current installments (note 5)				19,753,000			359,000
Long-term portion of insurance reserve				3,797,000			5,158,000
Senior Notes (note 5)				100,000,000			100,000,000
Deferred tax liabilities (note 6)				9,339,000			8,221,000
Senior Exchangeable Preferred stock, redemption value $15,075,000 and $16,744,000 at June 30, 2002 and 2003, respectively. Authorized, issued and outstanding 10,000 shares (note 9)				15,075,000			16,744,000
Series A Preferred stock, redemption value $17,332,000 and $19,737,000 at June 30, 2002 and 2003, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares (note 9)				17,332,000			19,737,000
Stockholders’ deficit:
Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,791 and 18,798 shares at June 30, 2002 and June 30, 2003, respectively (note 9)				31,200,000			35,546,000
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,127 and 1,021,870 at June 30, 2002 and June 30, 2003, respectively				10,000			10,000
Additional paid-in capital				2,044,000			2,082,000
Treasury stock, at cost, 34,796 and 35,318 common shares at June 30, 2002 and June 30, 2003, respectively				(317,000	)		(336,000	)
Accumulated deficit				(98,927,000	)		(113,246,000	)
		Total stockholders’ deficit		(65,990,000	)		(75,944,000	)
Commitments and contingencies (notes 7, 8 and 10)
			$	132,915,000		$	112,473,000

See accompanying notes to consolidated financial statements.

12

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,

	2001			2002			2003
Revenues	$	175,769,000		$	161,242,000		$	159,617,000
Cost of revenues		124,408,000			122,418,000			128,048,000
Gross profit		51,361,000			38,824,000			31,569,000
General and administrative expenses (note 8)		28,347,000			28,364,000			27,935,000
Other operating income		1,408,000			1,360,000			1,360,000
Earnings before interest expense and income taxes		24,422,000			11,820,000			4,994,000
Interest expense		15,263,000			14,293,000			14,355,000
Earnings (loss) before income taxes		9,159,000			(2,473.000	)		(9,361,000	)
Income tax expense (benefit) (note 6)		3,900,000			(856,000	)		(3,441,000	)
Net earnings (loss)		5,259,000			(1,617,000	)		(5,920,000	)
Accretion of preferred stock to redemption value		(3,207,000	)		(3,615,000	)		(4,074,000	)
Accrual of cumulative dividends on preferred stock		(3,263,000	)		(3,794,000	)		(4,325,000	)
Net loss available to common stockholders	$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
Loss per share basic and diluted	$	(1.22	)	$	(9.16	)	$	(14.52	)
Weighted average number of shares outstanding basic and diluted		995,747			985,345			986,406

See accompanying notes to consolidated financial statements.

13

PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2001, 2002 AND 2003

	SERIES B PREFERRED STOCK						COMMON STOCK
											ADDITIONAL
	SHARES						SHARES				PAID-IN
	OUTSTANDING			AMOUNT			OUTSTANDING		AMOUNT		CAPITAL
Balance at June 30, 2000		19,052		$	24,385,000			1,012,513	$	10,000	$	1,522,000
Shares issued		146			186,000			4,967		—		309,000
Accretion of redeemable preferred stock		—			—			—		—		—
Accrual of cumulative dividends		—			3,263,000			—		—		—
Repurchase of shares		(497	)		(561,000	)		—		—		—
Net earnings		—						—		—		—
Balance at June 30, 2001		18,701		$	27,273,000			1,017,480	$	10,000	$	1,831,000
Shares issued		108			158,000			3,647		—		213,000
Accretion of redeemable preferred stock		—			—			—		—		—
Accrual of cumulative dividends		—			3,794,000			—		—		—
Repurchase of shares		(18	)		(25,000	)		—		—		—
Net loss		—			—			—		—		—
Balance at June 30, 2002		18,791		$	31,200,000			1,021,127	$	10,000	$	2,044,000
Shares issued		22			37,000			743		—		38,000
Accretion of redeemable preferred stock		—			—			—		—		—
Accrual of cumulative dividends		—			4,325,000			—		—		—
Repurchase of shares		(15	)		(16,000	)		—		—		—
Net loss		—			—			—		—		—
Balance at June 30, 2003		18,798		$	35,546,000			1,021,870	$	10,000	$	2,082,000

[Additional columns below]

[Continued from above table, first column(s) repeated]

	TREASURY STOCK
										TOTAL
	SHARES						ACCUMULATED			STOCKHOLDERS'
	OUTSTANDING			AMOUNT			DEFICIT			DEFICIT
Balance at June 30, 2000		(6,014	)		(14,000	)	$	(88,690,000	)		(62,787,000	)
Shares issued		—			—			—			495,000
Accretion of redeemable preferred stock		—			—			(3,207,000	)		(3,207,000	)
Accrual of cumulative dividends		—			—			(3,263,000	)		—
Repurchase of shares		(28,159	)		(274,000	)		—			(835,000	)
Net earnings		—			—			5,259,000			5,259,000
Balance at June 30, 2001		(34,173	)		(288,000	)	$	(89,901,000	)		(61,075,000	)
Shares issued		—			—			—			371,000
Accretion of redeemable preferred stock		—			—			(3,615,000	)		(3,615,000	)
Accrual of cumulative dividends		—			—			(3,794,000	)		—
Repurchase of shares		(623	)		(29,000	)		—			(54,000	)
Net loss		—			—			(1,617,000	)		(1,617,000	)
Balance at June 30, 2002		(34,796	)		(317,000	)	$	(98,927,000	)		(65,990,000	)
Shares issued		—			—			—			75,000
Accretion of redeemable preferred stock		—			—			(4,074,000	)		(4,074,000	)
Accrual of cumulative dividends		—			—			(4,325,000	)		—
Repurchase of shares		(522	)		(19,000	)		—			(35,000	)
Net loss		—			—			(5,920,000	)		(5,920,000	)
Balance at June 30, 2003		(35,318	)	$	(336,000	)	$	(113,246,000	)	$	(75,944,000	)

See accompanying notes to consolidated financial statements.

14

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30,

				2001			2002			2003
Cash flows from operating activities:
Net earnings (loss)				$	5,259,000		$	(1,617,000	)	$	(5,920,000	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
	Depreciation and amortization				16,254,000			17,185,000			16,733,000
	Amortization of debt issuance costs				884,000			885,000			1,313,000
	Provision for doubtful receivables				146,000			340,000			767,000
	Provision for (benefit from) deferred income taxes				1,256,000			(736,000	)		(1,348,000	)
	Gains on sale of assets, net				(422,000	)		(300,000	)		(485,000	)
	Changes in operating assets and liabilities, net of effects of acquisitions:
		Receivables			(4,111,000	)		2,880,000			1,653,000
		Inventories, prepaid expenses and current assets			(1,074,000	)		(372,000	)		(1,730,000	)
		Costs and estimated earnings in excess of billings on uncompleted contracts			2,270,000			(658,000	)		810,000
		Trade accounts payable, accrued liabilities and insurance reserves			(3,783,000	)		1,010,000			705,000
		Billings in excess of costs and estimated earnings on uncompleted contracts			(947,000	)		(1,008,000	)		151,000
			Net cash provided by operating activities		15,732,000			17,609,000			12,649,000
Cash flows from investing activities:
	Proceeds from sale of assets				1,292,000			832,000			1,264,000
	Capital expenditures				(18,469,000	)		(9,495,000	)		(4,222,000	)
	Acquisition of companies, net of cash acquired				(520,000	)		(3,819,000	)		—
			Net cash used in investing activities		(17,697,000	)		(12,482,000	)		(2,958,000	)
Cash flows from financing activities:
	Borrowings under long-term debt				71,824,000			85,823,000			63,161,000
	Repayments of long-term debt				(73,803,000	)		(86,288,000	)		(89,221,000	)
	Borrowings under revolving credit facility				—			—			42,159,000
	Repayments of revolving credit facility				—			—			(27,674,000	)
	Book overdraft				2,891,000			196,000			(2,725,000	)
	Debt issuance costs				—			—			(1,452,000	)
	Proceeds from issuance of common stock				309,000			213,000			38,000
	Repurchase of common stock and Series B preferred stock				(521,000	)		(54,000	)		(35,000	)
	Issuance of Series B preferred stock				186,000			158,000			37,000
			Net cash provided by (used in) financing activities		886,000			48,000			(15,712,000	)
			Net change in cash and cash equivalents		(1,079,000	)		5,175,000			(6,021,000	)
Cash and cash equivalents at beginning of year					2,109,000			1,030,000			6,205,000
Cash and cash equivalents at end of year				$	1,030,000		$	6,205,000		$	184,000

See note 15 for supplementary cash flow information.

See accompanying notes to consolidated financial statements.

15

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY’S ACTIVITIES AND OPERATING CYCLE

     Penhall International, Inc. (“PII”) was founded in 1957 and was incorporated in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to effect the recapitalization of PII. As part of the recapitalization, a series of mergers (the Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor of the Senior Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall International Corp., and PII changed its name to Penhall Rental Corp. Under accounting principles generally accepted in the United States of America, the recapitalization mergers were accounted for as a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to a new investor did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.

     Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental Corp. and Penhall Company (collectively, “the Company” or “Penhall”) serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company’s revenues are generated through equipment rentals, both short-term and longer term under fixed price agreements. The length of the fixed price agreements (contracts) varies, but typically range from one to twelve months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company’s base of operations includes among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc., the Company’s operations were expanded to include the mid-western states of the United States and some provinces of Canada. The Company’s operations are primarily conducted through Penhall International Corp. and its wholly owned subsidiary, Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.

BASIS OF CONSOLIDATION

     The consolidated financial statements include the accounts of Penhall International Corp. and its wholly owned subsidiaries: Penhall Rental Corp. and Penhall Company. Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Penhall Leasing, a California single member limited liability company and Bob Mack Company, Inc. a California Corporation. All significant intercompany transactions have been eliminated in consolidation.

REVENUE RECOGNITION ON LONG-TERM CONSTRUCTION CONTRACTS

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

     Contract costs include all direct material, equipment rentals, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools, supplies, repairs and depreciation. General and administrative costs are charged to expense as incurred.

16

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     Income from claims for additional contract compensation is recorded upon settlement of the disputed amount. The asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of June 30, 2002 and 2003, cash equivalents were $4.7 million and $0, respectively. Included in the cash balance at June 30, 2003 is $0.2 million that is restricted.

INVENTORIES

     Inventories, which consist primarily of diamond cutting blades and fuel, are stated at cost. Cost is determined using the purchase price of the assets and is expensed based on usage.

PROPERTY, PLANT AND EQUIPMENT

     The Company and its subsidiaries provide for depreciation of property, plant and equipment based on the following estimated useful lives of the assets, using the straight-line method and a residual value of approximately 10%:

Buildings and leasehold improvements 15 to 39 years
Construction and other equipment 3 to 8 years

     Leasehold improvements are amortized over the lesser of the life of the lease or useful life of the asset.

     The cost and accumulated depreciation applicable to assets sold or otherwise disposed of are eliminated from the asset and accumulated depreciation accounts. Gain or loss on disposition is reflected in other operating income.

GOODWILL

     Goodwill represents the excess of purchase price over fair value of net assets acquired. Prior to 2003, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assessed recoverability by determining whether the amortization of the goodwill balance over its remaining life would be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. The assessment of the recoverability of goodwill would be impacted if estimated future operating cash flows were not achieved. Amortization expense related to goodwill amounted to approximately $687,000 and $609,000 for the years ended June 30, 2001 and 2002, respectively.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. The Company has adopted these accounting standards effective July 1, 2002, and accordingly, no amortization of goodwill was recorded in 2003. As a result of the transitional and annual goodwill impairment tests that were completed during fiscal 2003, it was determined there was no impairment of goodwill. The Company’s annual test will be performed in May of each year. There were no adjustments to identifiable intangible assets’ useful lives or recorded balances as a result of the adoption of SFAS No. 142.

17

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     The following is a reconciliation of net loss and loss per share between the amounts reported for the years ended June 30, 2001, 2002 and 2003 and the adjusted amounts reflecting these new accounting rules:

	2001			2002			2003
Net loss:
Reported loss available to common stockholders	$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
Add back: Goodwill amortization (net of income taxes)		394,000			399,000			—
Adjusted net loss available to common stockholders		(817,000	)		(8,627,000	)		(14,319,000	)
Basic and diluted loss per share:
Reported basic and diluted loss per share		(1.22	)		(9.16	)		(14.52	)
Add back: Goodwill amortization (net of income taxes)		.40			.40			—
Adjusted basic and diluted loss per share		(0.82	)		(8.76	)		(14.52	)

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

INCOME TAXES

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ENVIRONMENTAL REMEDIATION COSTS

     Losses associated with environmental remediation obligations are accrued for when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.

SELF-INSURANCE

     Effective May 2001, the Company increased its third-party insurance deductible to $250,000 per occurrence. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general and vehicle liability. Losses are accrued based upon the accumulation of estimates for reported losses and includes a provision, based on past experience and using actuarial assumptions, for losses incurred but not reported. The method of determining such estimates and establishing the resulting reserves is continually reviewed and updated. Any adjustments resulting therefrom are reflected in current operations. As of June 30, 2002 and June 30, 2003, the Company had recorded a discounted accrued liability for self-insurance of $5,071,000 and $6,726,000, of which $1,274,000 and $1,569,000 are current and included in accrued expenses at June 30, 2002 and 2003, respectively. The discount rate utilized was 5% and 4% for the years ended June 30, 2002 and 2003, respectively. The accrued liability on an undiscounted basis was $5,675,000 and $7,339,000 at June 30, 2002 and 2003, respectively. Management believes that the accrual is adequate to cover the losses incurred to date; however, this accrual is based on estimates and the ultimate liability may be more or less than the amount provided.

18

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

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 provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring annual and quarterly SFAS No. 123 pro forma disclosure.

Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:

				Years ended June 30,
	2001			2002			2003
Net loss available to common stockholders as reported	$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
Add:
Stock-based compensation expense included in reported net income available to common stockholders, net of related tax effects	$	—		$	—		$	—
Deduct:
Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects	$	—		$	(16,000	)	$	(20,000	)
Proforma net loss available to common stockholders	$	(1,211,000	)	$	(9,042,000	)	$	(14,339,000	)
Basic and diluted loss per share as reported	$	(1.22	)	$	(9.16	)	$	(14.52	)
Proforma basic and diluted loss per share	$	(1.22	)	$	(9.18	)	$	(14.54	)

At the grant date, the weighted average fair value of options granted was $58.51, this was determined using the Black-Scholes option pricing model with the following assumptions used for calculation: risk-free interest rate of 4.7%, volatility of 3.1%, dividend rate of 0% and an expected life of 10 years.

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 diluted securities. The dilutive effect of outstanding options is reflected in diluted per share by application of the treasury stock method. For the year ended June 30, 2001 diluted loss per share is the same as basic loss per share as there are no assumed potential dilutive securities. During the years ended June 30, 2002 and 2003, diluted loss per share is the same as basic loss per share as options to purchase 9,260 and 9,125 shares of common stock were not included in the computation of diluted loss per share for the years ended June 2002 and 2003, respectively, as the effect would have been anti-dilutive.

MANAGEMENT’S ESTIMATES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

19

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

COMPREHENSIVE INCOME (LOSS)

     In 1999, the Company adopted SFAS No. 130, “Reporting Comprehensive Income”, which established new rules for the reporting and display of comprehensive income and its components. Comprehensive income (loss) equals net income (loss) for each of the years in the three-year period ended June 30, 2003.

SEGMENT INFORMATION

     The Company’s only line of business is the rental of operator assisted equipment for use in infrastructure projects. This equipment is rented on an hourly basis (Services) and on a longer-term, fixed price basis (Contracts). In fiscal 2001, 2002, and 2003, approximately 72% to 73% of revenues were generated from Services, and approximately 28% to 27% of revenues were generated from Contracts. The Company does not account for, or manage, the hourly or fixed-price rentals in a separate manner. Over the past 3 fiscal years, approximately 28% to 27% of Services revenues have been generated from Contracts.

The Company has a non-operated assisted rental business (Bare Rentals). Bare Rentals were insignificant to the consolidated operations for each of the fiscal years ended June 30, 2001, 2002 and 2003.

RECLASSIFICATIONS

     Certain 2002 balances have been reclassified to conform to the presentation used in 2003.

(2) RECEIVABLES

     Contract receivables represent those amounts, which actually have been billed. Contract retentions are collectible upon completion or other milestones of contract performance. Based upon anticipated contract completion dates, these retainages are expected to be collected as follows:

		YEARS ENDED JUNE 30,
		2002		2003
Years ending June 30:
	2003	$	3,805,000	$	—
	2004		594,000		3,284,000
	2005		357,000		513,000
	2006		—		308,000
		$	4,756,000	$	4,105,000

Transactions in the allowance for doubtful receivables are summarized as follows:

	YEARS ENDED JUNE 30,
	2001		2002			2003
Balance, beginning of year	$	1,617,000	$	1,763,000		$	1,421,000
Provision for doubtful accounts		84,000		340,000			767,000
Accounts (charged off) collected		62,000		(682,000	)		(596,000	)
Balance, end of year	$	1,763,000	$	1,421,000		$	1,592,000

20

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(3) OTHER ASSETS:

     Other assets consist of the following:

	JUNE 30,			JUNE 30,
	2002			2003
Covenants not to compete	$	2,947,000		$	1,887,000
Accumulated amortization		(1,382,000	)		(701,000	)
Other		45,000			—
	$	1,610,000		$	1,186,000

     The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $418,000, $286,000, and $376,000 for the years ended June 30, 2001, 2002 and 2003, respectively.

4) ACCRUED LIABILITIES:

     Accrued liabilities consist of the following:

	JUNE 30,		JUNE 30,
	2002		2003
Union benefits	$	675,000	$	657,000
Accrued bonuses		1,577,000		423,000
Accrued interest		5,179,000		4,972,000
Accrued insurance		708,000		776,000
Accrued vacation		531,000		531,000
Accrued payroll		2,134,000		2,026,000
Non-compete agreements		1,284,000		909,000
Other		624,000		515,000
	$	12,712,000	$	10,809,000

21

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(5) REVOLVING CREDIT FACILITY, LONG-TERM DEBT AND SENIOR NOTES

Long-term Debt

     Long-term Debt consists of the following:

	JUNE 30,		JUNE 30,
	2002		2003
Note payable to former officer and shareholder, bearing interest at 8.0% per annum; principal and interest paid monthly until October 2002;	$	61,000	$	—
Note payable secured by certain equipment, stated interest of 0%, imputed interest at 10.0% per annum which resulted in a discount of $61,000; $300,000 due and paid September 30, 2002;		295,000		—
Note payable secured by certain equipment, stated interest of 0%, imputed interest at 9.0% per annum which resulted in a discount of $51,000; payable $193,000 due and paid March 31, 2003;		181,000		—
Note payable secured by certain equipment, interest of 0%, imputed interest at 3.9% per annum which resulted in a discount of $24,000; payable $123,000 due December 31, 2003 and 2004;		346,000		237,000
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest payable $200,000 due March 1, 2004;		388,000		196,000
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest payable $1,500,000 due March 1, 2004;		2,908,000		1,473,000
Revolving Loan in the maximum credit amount of $30,000,000 secured by certain assets of the Company. The Company was able to elect to maintain the Revolving Loan as a Base Rate Loan, which accrued interest quarterly at 1.25% to 2.00% (as defined) plus the higher of the Federal Funds Effective Rate (as defined) or the then current prime rate and was payable quarterly, and/or convert into a Eurodollar Loan, which accrued interest at 2.25% to 3.00% (as defined) plus the Eurodollar Rate (as defined) and was payable on the last day of each elected interest period, which ranged from one to six months, as elected by the Company. The effective interest rate at June 30, 2002 was 4.59%. All unpaid principal and interest was paid in May 2003.		9,290,000		—
$20,000,000 Term Loan secured by certain assets of the Company; principal payments of $750,000 per quarter commencing September 15, 2000 through June 15, 2001, $1,250,000 per quarter through June 15, 2002, and $1,500,000 per quarter through June 15, 2004. The Company was able to elect to maintain the Term Loan as a Base Rate Loan, which accrued interest quarterly at 1.25% to 2.00% (as defined) plus the higher of the Federal Funds Effective Rate (as defined) or the current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrued interest at 2.25% to 3.00% (as defined) plus the Eurodollar Rate (as defined) and was payable on the last day of each elected interest period, which ranged from one to six months, as elected by the Company. The effective interest rate at June 30, 2002 was 3.67%. All unpaid principal and interest was paid in May 2003.		12,000,000		—
Various capital leases and equipment financing agreements due through October 2005 with interest ranging from 0% to 9.6% per annum;		3,315,000		821,000
Other		186,000		183,000
		28,970,000		2,910,000
Less current installments of long-term debt and revolving credit facility		9,217,000		2,551,000
Long-term debt, excluding current installments	$	19,753,000	$	359,000

22

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     The Term Loan, Revolving Loan, and Swingline Loan (the “Credit Facility”) contained certain financial and non-financial covenants, including working capital, net worth, and debt to equity ratios. The Company was also required to make defined prepayments in the event cash flows from operations exceed specified amounts, as defined. The Company was required to be in compliance with certain covenants and ratios or to request a waiver if not in compliance. The Company received a waiver for each of the following covenants and/or ratios as of June 30, 2002 and March 31, 2003: (1) Interest Coverage Ratio, (2) Leverage Ratio and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the Credit Facility Agreement). No prepayments were required during the year 2002 or 2003. Additionally, under the terms of the Credit Facility, the Company had pledged all of the assets of its wholly owned subsidiaries as collateral. As part of the Revolving Loan, the Company had a Swingline Loan in the maximum credit amount of $2,500,000 secured by certain assets of the Company; interest accrued quarterly at 1.25% and 2.00% plus the higher of the Federal Funds Effective Rate (as defined) or then current prime rate and was payable in quarterly installments.

     Annual maturities of long-term debt for the next five years are as follows:

	JUNE 30
2004	$	2,551,000
2005		176,000
2006		12,000
2007		5,000
2008		5,000
Thereafter		161,000
	$	2,910,000

     Revolving Credit Facility

     As of May 22, 2003, the Company replaced the Credit Facility with a new credit facility (“The New Credit”). The New Credit is a $50 million, three year asset based borrowing facility, consisting of a $50 million revolving credit facility, with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate. The provisions of the New Credit facility include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. Management’s understanding of this provision after consultation with the lender, is that the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. The Company has reclassified borrowings under the New Credit facility as a short-term obligation in the consolidated balance sheet, however, The New Credit matures in 2006, see Note 17. In addition, borrowings under The New Credit are subject to certain covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The Company was in compliance with these covenants as of June 30, 2003. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts receivable, equipment, fixtures, cash, and other assets of the Company.

     As of June 30, 2003, the Company had outstanding borrowings under the New Credit of $14.5 million and unused and available amounts under The New Credit of $20.1 million.

     Senior Notes

     On August 4, 1998, in connection with the Recapitalization Mergers, the Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company’s option, in whole at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes contain certain financial and non-financial covenants. From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000.

From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to or incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.

23

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(6) INCOME TAXES

     Income tax expense (benefit) is comprised of the following components for each fiscal year ended June 30:

		YEAR ENDED JUNE 30,
		2001		2002			2003
Current tax expense (benefit):
	Federal	$	2,345,000	$	(180,000	)	$	(2,131,000	)
	State		299,000		60,000			38,000
			2,644,000		(120,000	)		(2,093,000	)
Deferred tax expense (benefit):
	Federal		490,000		(589,000	)		(910,000	)
	State		766,000		(147,000	)		(438,000	)
			1,256,000		(736,000	)		(1,348,000	)
		$	3,900,000	$	(856,000	)	$	(3,441,000	)

     As of June 30, 2002 and 2003, the Company has a current net deferred tax asset of $3,133,000 and $3,363,000, respectively, and a net non-current deferred tax liability of $9,339,000 and $8,221,000, respectively.

     Significant components of the Company’s deferred income tax assets and liabilities are as follows:

			JUNE 30,			JUNE 30,
			2002			2003
Deferred tax assets:
	Allowance for doubtful receivables		$	571,000		$	640,000
	Accruals not currently deductible			2,536,000			2,723,000
	Net operating loss carryforwards			26,000			726,000
		Total deferred tax assets		3,133,000			4,089,000
Deferred tax liabilities — Depreciation and amortization				(9,339,000	)		(8,947,000	)
		Net deferred tax liability	$	(6,206,000	)	$	(4,858,000	)

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, therefore no valuation allowance has been recorded by the Company.

As of June 30, 2003, we had net operating loss carryforwards (after carrybacks) for federal and state income tax purposes of approximately $869,000 and $4,700,000, respectively. The federal carryfowards expire in 20 years beginning 2023, while the state carryforwards have varying expiration dates beginning in 2013. As of June 30, 2003 the Company had federal AMT credits totaling $176,000 that have no expiration date.

24

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     Deferred income tax expense (benefit) consists of the following:

	YEARS ENDED JUNE 30
	2001			2002			2003
Allowance for doubtful receivables	$	(103,000	)	$	138,000		$	(69,000	)
Accruals not currently deductible and other		(166,000	)		(916,000	)		(187,000	)
Depreciation and amortization		1,193,000			68,000			(392,000	)
Net operating loss carryforwards		—			(26,000	)		(700,000	)
	$	1,256,000		$	(736,000	)	$	(1,348,000	)

     Income tax expense (benefit) for each fiscal year ended June 30 differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to earnings (loss) before income taxes as follows:

	YEARS ENDED JUNE 30
	2001		2002			2003
Computed “expected” tax expense (benefit)	$	3,206,000	$	(865,000	)	$	(3,276,000	)
Increase (decrease) in taxes resulting from:
State income tax expense (benefit), net of Federal income tax benefit		692,000		(57,000	)		(264,000	)
Other, net		2,000		66,000			99,000
	$	3,900,000	$	(856,000	)	$	(3,441,000	)

(7) EMPLOYEE RETIREMENT PLANS

     The Company and its subsidiaries contribute to multi-employer pension plans, primarily defined benefit plans, as required by collective bargaining agreements. Contributions to such plans are determined in accordance with the provisions of negotiated labor contracts and are generally based on the number of hours worked. Amounts contributed to these plans in fiscal 2001, 2002 and 2003 aggregated $3,035,000, $2,589,000 and $2,726,000 respectively. In the event of the Company’s partial or total withdrawal from such plans, it may be liable for its share of any unfunded vested benefits thereunder. The Company may also be assessed for its share of any unfunded vested benefits resulting from partial or total withdrawal from such plans and any non-payment by other employer participants. Less than 10% of the Company’s employees are covered by a collective bargaining agreement that will expire within one year.

     The Company sponsors a defined contribution 401(k) plan. Subject to certain terms and conditions of the plan, substantially all of the Company’s non-union employees are eligible to participate in the plan. The Company may, but is not required to, make matching contributions to the plan each year, which are allocated to each participant’s account in proportion to the amount that he or she has contributed to the plan during the applicable plan year. All Company and employee contributions to the plan plus the earnings thereon are 100% vested. Costs incurred under the plan were $376,000, $515,000 and $335,000 related to the plan for the years ended June 30, 2001, 2002 and 2003, respectively.

(8) STOCK COMPENSATION PLANS

     Stock Incentive Plan

     On October 7, 1999, the Company’s Board of Directors approved a stock incentive plan (the “Plan”) under which employees, officers, directors or consultants (“Eligible Participants”) may be granted stock options and restricted stock awards. The Board authorized the issuance of up to 50,000 shares of common stock and 2,500 shares of Series B Preferred Stock under the Plan. The Plan is administered by the Board of Directors or an appointed committee (Administrator). The exercise price for stock options or restricted stock awards shall not be less than the Fair Market Value (as defined) of the stock on the grant date subject to restrictions and conditions, including the Company’s option to repurchase, as determined by the Administrator at the time of the grant. The term of each stock option shall be fixed, and not exceeding 10 years from the grant date of the stock option. In addition, stock options may be subject to specific vesting and acceleration provisions as determined by the Administrator at or after the grant date. On November 12, 1999, the Company issued 17,513 shares of common stock for an aggregate purchase price of $537,000 and 511 shares of Series B Preferred Stock for an aggregate purchase price of $574,000 to Eligible Participants under the Plan. On October 20, 2000, the Company issued 4,967 shares of common stock for an aggregate purchase price of $309,000 and 146 shares of Series B Preferred Stock for an aggregate purchase price of $186,000 to Eligible Participants under the

25

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

plan. On November 16, 2001, the Company issued 3,647 shares of common stock for an aggregate purchase price of $213,000 and 108 shares of Series B Preferred Stock for an aggregate purchase price of $158,000 to Eligible Participants under the Plan. On November 16, 2001, 9,420 stock options were granted to Eligible Participants under the Plan at an exercise price of $58.51. These options vest ratably over 5 years and are exercisable up to ten years from date of grant. On November 1, 2002, the Company issued 743 shares of common stock for an aggregate purchase price of $38,000 and 22 shares of Series B Preferred Stock for an aggregate purchase price of $37,000 to Eligible Participants under the Plan.

     Stock option activity during the periods indicated is as follows:

		Number of shares			Weighted-average
		underlying options			exercise price
Balance at June 30, 2001			—
	Granted		9,420		$	58.51
	Forfeited		(160	)		58.51
Balance at June 30, 2002			9,260			58.51
	Granted		—			—
	Forfeited		(135	)		58.51
Balance at June 30, 2003			9,125		$	58.51

     At June 30, 2003 there were no exercisable options. The weighted average price and the weighted average remaining life of outstanding options was $58.51 and 8.4 years, respectively.

26

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     Stockholders Agreement

     Upon consummation of the Recapitalization Mergers, an affiliate, the management stockholders and Penhall International Corp. entered into a Securities Holders Agreement (the “Stockholders Agreement”) containing certain agreements among such stockholders with respect to the capital stock and corporate governance of the Company and its subsidiaries.

The Stockholders Agreement contains certain provisions, which, with certain exceptions, restrict the ability of the management stockholders from transferring any common stock or Series B preferred stock except pursuant to the terms of the Stockholders Agreement. If the Board of Directors of Penhall International Corp. and holders of at least a majority of the common stock of Penhall International Corp. then outstanding shall approve the sale of Penhall International Corp. or any of its subsidiaries to an unaffiliated third person (an “Approved Sale”), each stockholder of the Company shall consent to, vote for and raise no objections against, and waive dissenters and appraisal rights (if any) with respect to, the Approved Sale and, if such sale shall include the sale of capital stock, each stockholder shall sell such stockholder’s capital stock on the terms and conditions approved by the Board of Directors of Penhall International Corp. and the holders of a majority of the common stock of Penhall International Corp. then outstanding. The Stockholders Agreement also provides for certain additional restrictions on transfer of Penhall International Corp.’s common stock and Series B preferred stock by the management stockholders, including the right of Penhall International Corp. to purchase certain common stock and Series B preferred stock of Penhall International Corp. held by a management stockholder upon termination of such management stockholder’s employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering (as defined below), at its original issuance price, and the grant of a right of first refusal in favor of Penhall International Corp. in the event a management stockholder elects to transfer such common stock or Series B preferred stock. Under the Stockholders Agreement, a management stockholder has the right, subject to the restrictions set forth in agreements relating to indebtedness of the Company, to require Penhall International Corp. to purchase certain common stock and Series B preferred stock of the Company held by such management stockholder upon termination of such management stockholder’s employment on or prior to the later of the fifth anniversary of the consummation of the Recapitalization Mergers and the 180th day following an Initial Public Offering, at its original issuance price. “Initial Public Offering” means the sale by the Company in an underwritten public offering made pursuant to an effective registration statement under the Securities Act of common stock for gross offering proceeds of at least $30 million. The Stockholders Agreement also contains certain provisions that provide the management stockholders with a termination benefit upon termination of employment without cause, death or disability. The amount of the termination benefit is based upon the book value of the common stock and Series B preferred stock, as defined in the Stockholders Agreement. However, if Penhall International Corp. does not meet certain EBITDA growth criteria, the amount that a management stockholder will receive for outstanding common stock or Series B preferred stock under any form of termination is the lower of the original issuance price or book value.

     Shares outstanding that are subject to the buy-out provisions of the Stockholders Agreement are 359,840 and 336,228 shares of common stock and 8,729 and 8,038 shares of Series B preferred stock at June 30, 2002 and 2003, respectively.

(9) REDEEMABLE PREFERRED STOCK

     Senior Exchangeable Preferred Stock

     Penhall International Corp. is authorized to issue up to 250,000 shares of preferred stock, par value $.01 per share (“Preferred stock”), of which 10,000 shares have been designated as Senior Exchangeable Preferred stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Senior Exchangeable Preferred stock ranks senior to the Common stock, the Series A preferred stock and the Series B Preferred stock. Holders of Senior Exchangeable Preferred stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Senior Exchangeable Preferred stock at a rate per annum equal to 10.5% of the Senior Exchangeable Preferred Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Senior Exchangeable Preferred stock (“Senior

27

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

Exchangeable Junior Stock”) with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. “Senior Exchangeable Preferred Liquidation Preference” means, on any specific date, with respect to each share of Senior Exchangeable Preferred stock, the sum of (i) $1,000 per share plus (ii) the accumulated unpaid dividends with respect to such share.

     Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefore, in whole or in part, any or all of the shares of Senior Exchangeable Preferred stock, at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On February 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefore, all of the then outstanding shares of Senior Exchangeable Preferred stock at a redemption price per share equal to 100% of the then effective Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date.

     The Senior Exchangeable Preferred stock is exchangeable by Penhall International Corp. at any time and from time to time for junior subordinated notes (the “Junior Subordinated Notes”) in an amount equal to the Senior Exchangeable Preferred Liquidation Preference plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the exchange date to the exchange date. The Junior Subordinated Notes will pay interest from the date of exchange at the rate of 10.5% per annum in cash; provided, however, that Penhall International Corp. shall be prohibited from paying interest on the Junior Subordinated Notes in cash for so long as the such notes shall remain outstanding. In such event, interest shall be deemed to be paid by such amount being added to the outstanding principal amount of the Junior Subordinated Notes and shall accrue interest as a portion of the principal amount of the Junior Subordinated Notes to the maximum extent permitted by law. If issued, the Junior Subordinated Notes will mature on February 1, 2007.

     In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Senior Exchangeable preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Senior Exchangeable Preferred Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of Senior Exchangeable Junior Stock. If such available assets are insufficient to pay the holders of the outstanding shares of Senior Exchangeable preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Senior Exchangeable preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders.

     Series A Preferred Stock

     Penhall International Corp. has designated 25,000 shares of preferred stock as Series A preferred stock. With respect to dividend rights and rights on liquidation, winding up and dissolution of Penhall International Corp., the Series A preferred stock ranks senior to the common stock and on a parity with the Series B preferred stock. Holders of Series A preferred stock are entitled to receive, when, as and if declared by the Board of Directors of Penhall International Corp., out of funds legally available for payment thereof, cash dividends on each share of Series A preferred stock at a rate per annum equal to 13% of the Liquidation Preference (as defined below) of such share before any dividends are declared and paid, or set apart for payment, on any shares of capital stock junior to the Series A preferred stock (“Junior Stock”) with respect to the same dividend period. All dividends shall be cumulative without interest, whether or not earned or declared. “Liquidation Preference” means, on any specific date, with respect to each share of Series A preferred stock, the sum of (i) $1,000 per share plus (ii) the accumulated dividends with respect to such share.

     Penhall International Corp. may, at its option, redeem at any time, from any source of funds legally available therefore, in whole or in part, any or all of the shares of Series A preferred stock, at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date. On August 1, 2007, Penhall International Corp. shall redeem, from any source of funds legally available therefore, all of the then outstanding shares of Series A preferred stock at a redemption price per share equal to 100% of the then effective Liquidation Preference per share, plus an amount equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date.

28

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

     In the event of a voluntary or involuntary liquidation, dissolution or winding up of Penhall International Corp., holders of Series A preferred stock shall be entitled to be paid out of the assets of Penhall International Corp. available for distribution to its stockholders an amount in cash equal to the Liquidation Preference per share, plus an amount equal to a prorated dividend from the last dividend payment date to the date fixed for liquidation, dissolution or winding up, before any distribution is made on any shares of junior stock. If such available assets are insufficient to pay the holders of the outstanding shares of Series A preferred stock in full, such assets, or the proceeds thereof, shall be distributed ratably among such holders. Except as otherwise required by law, the holders of Series A preferred stock have no voting rights and are not entitled to any notice of meeting of stockholders.

Series B Preferred Stock

     The Company has designated 50,000 shares of preferred stock as Series B preferred stock. The preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions (including, without limitation, dividend rights and rights on liquidation, winding up and dissolution of the Company) of the Series B preferred stock are identical to those of the Series A preferred stock, except that the Series B preferred stock is not subject to any mandatory or optional redemption by the Company.

(10) COMMITMENTS AND CONTINGENCIES

     Leases

     (a)  Capital Leases

     The Company is obligated under various capital leases for certain construction equipment that expire at various dates through October 2005. At June 30, 2002 and 2003, the cost of construction equipment and the related depreciation recorded for equipment under capital leases were as follows:

	2002		2003
Construction Equipment	$	340,000	$	340,000
Less accumulated depreciation		67,000		192,000
	$	273,000	$	148,000

     The present value of the minimum lease payments as of June 30, 2003 is 179,000 (note 5).

     (b)  Operating Leases

     The Company and its subsidiaries lease various properties and equipment under long-term agreements, which expire at varying dates through October 2008. Certain of these leases provide for renegotiation of annual rentals at specified dates. Rent expense was $1,203,000, $1,513,000 and $1,573,000 for the years ended June 30, 2001, 2002 and 2003, respectively.

     Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2003 are as follows:

YEARS ENDING JUNE 30:
	2004	$	1,689,000
	2005		1,390,000
	2006		890,000
	2007		600,000
	2008		475,000
	Thereafter		1,267,000
		$	6,311,000

29

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

Concentration of Credit Risk

     Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalent accounts, and contract and trade receivables.

     The California Department of Transportation accounted for approximately 6% of consolidated revenues of the Company for the year ended June 30, 2001, less than 1% for the year ended June 30, 2002 and approximately 3% for the year ended June 30, 2003. No other customer accounted for 5% or more of consolidated revenues for the years ended June 30, 2001, 2002 or 2003. No customers accounted for over 5% of outstanding accounts receivable as of June 30, 2002 or 2003.

Risks and Uncertainties

     The Company is required to meet certain financial and operating criteria as established by respective Department of Transportation agencies to bid and work in certain states. There is no assurance that state regulatory agencies will not change the established criteria or that the Company will continue to comply with the established criteria. Should the Company lose its ability to bid and work in certain states, the operations and the financial position of the Company could be adversely effected.

Cash and Cash Equivalents

     At June 30, 2002 and 2003, the Company had approximately $1,472,000 and $175,000 respectively, on deposit at one financial institution. At June 30, 2002, the Company also had approximately $4,700,000 on deposit at a second financial institution.

Letters of Credit

     As of June 30, 2003, the Company had outstanding standby letters of credit of $11,837,000 with a financial institution for the benefit of the Company’s insurers and bankers (note 5). The standby letters of credit reduce the amount of borrowings available under the Company’s New Credit with $10,636,500 expiring on July 6, 2004 and $1,200,000 expiring on July 1, 2004.

Litigation

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

Certain Fees Payable to BRS; BRS Management Agreement

     Upon consummation of the Recapitalization Mergers (note 1), the Company entered into a management services agreement (the “Management Agreement”) with the Third Party pursuant to which the Third Party will be paid $300,000 per year for certain management, business and organizational strategy, and merchant and investment banking services rendered to the Company. The fees payable pursuant to the Management Agreement were negotiated on an arm’s-length basis by representatives of the Third Party and the Company. The amount of the annual management fee may be increased under certain circumstances based upon performance or other criteria to be established by the Board of Directors of the Company.

30

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(11)  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

     Cost and estimated earnings on uncompleted contracts consists of the following:

			JUNE 30,			JUNE 30,
			2002			2003
Costs incurred on uncompleted contracts			$	87,013,000		$	45,511,000
Estimated earnings to date				14,039,000			3,108,000
				101,052,000			48,619,000
Less billings to date				99,218,000			47,746,000
			$	1,834,000		$	873,000
	Included in accompanying consolidated balance sheets under the following captions:
		Costs and estimated earnings in excess of billings on uncompleted contracts		2,514,000			1,704,000
		Billings in excess of costs and estimated earnings on uncompleted contracts		(680,000	)		(831,000	)
			$	1,834,000		$	873,000

(12)  FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2002 and 2003.

		2002				2003
		CARRYING		FAIR		CARRYING		FAIR
		AMOUNT		VALUE		AMOUNT		VALUE
Financial assets:
	Cash and cash equivalents	$	6,205,000	$	6,205,000	$	184,000	$	184,000
	Net receivables		36,686,000		36,686,000		34,266,000		34,266,000
	Costs and estimated earnings in excess of billings on uncompleted contracts		2,514,000		2,514,000		1,704,000		1,704,000
Financial liabilities:
	Current installments of long-term debt		9,217,000		9,217,000		2,551,000		2,551,000
	Borrowings under revolving credit facility		—		—		14,485,000		14,485,000
	Trade accounts payable		9,726,000		9,726,000		7,953,000		7,953,000
	Accrued liabilities		12,712,000		12,712,000		10,809,000		10,809,000
	Current portion of insurance reserves		1,274,000		1,274,000		1,569,000		1,569,000
	Billings in excess of costs and estimated earnings on uncompleted contracts		680,000		680,000		831,000		831,000
	Long-term debt, excluding current installments		19,753,000		19,753,000		359,000		359,000
	Long-term portion of insurance reserves		3,797,000		3,797,000		5,158,000		5,158,000
	Senior Notes		100,000,000		95,000,000		100,000,000		78,000,000

     The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

     Cash and cash equivalents, net receivables, costs and estimated earnings in excess of billings on uncompleted contracts, current installments of long-term debt, borrowings under revolving credit facility, trade accounts payables, accrued liabilities, current portion of insurance reserves, and billings in excess of costs and estimated earnings on uncompleted contracts: The carrying amounts approximate fair value because of the short maturity of these instruments.

     Long-term debt, excluding current installments, and Senior Notes: The fair value of the Company’s long-term debt and Senior Notes is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company as of the date of the consolidated balance sheets for similar debt instruments with similar terms by the Company’s bankers.

31

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

Long-term portion of insurance reserves: The fair value of the Company’s long-term portion of insurance reserves has been calculated utilizing 5% and 4% discount rates for the years ended June 30, 2002 and 2003, respectively. These rates are consistent with market discount rates for determining the present value of future liabilities.

(13)  ACQUISITIONS

     There were no acquisitions during fiscal 2003.

     The Company completed the following acquisitions during fiscal 2002 which were accounted for as purchases:

     In March 2002, the Company 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 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 expanded the range of services offered by Penhall. Results of operations from March 2002 and thereafter are included in the consolidated results of the Company.

     In April 2002, Penhall Company, purchased selected assets of Arizona Curb Cut for $553,000. The purchase price included a $73,000 loan assumption, a $69,000 lease assumption, $50,000 covenant not to compete, and a seller unsecured carryback note of $346,000 at 3.9% imputed interest, payable in installments of $123,000. The Company recorded approximately $56,000 of goodwill related to this transaction. Arizona Curb Cut is based in Arizona and expanded the services provided by the Company. Results of operations from April 2002 and thereafter are included in the consolidated results of the Company.

     Pro forma information has not been presented since the results of these operations did not have a significant effect on Penhall’s consolidated operations.

(14)  GUARANTORS AND FINANCIAL INFORMATION

     The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. 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, 2002 and 2003 and for the years ended June 30, 2001, 2002 and 2003 of:

a.	Penhall International Corp. on a parent company only basis (“Parent”) (carrying its investments in the subsidiaries under the equity method),
b.	the Guarantor Subsidiaries (Penhall Rental Corp. (through dissolution effective July 1, 2002) and Penhall Company and subsidiaries),
c.	elimination entries necessary to consolidate the parent company and its subsidiaries,
d.	the Company on a consolidated basis.

32

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING BALANCE SHEET

				JUNE 30, 2002
				PENHALL			PENHALL
				INTERNATIONAL			RENTAL			PENHALL
				CORP.			CORP.			COMPANY		ELIMINATIONS			CONSOLIDATED
Assets
	Current assets:
		Receivables, net		$	1,990,000		$	—		$	34,696,000	$	—		$	36,686,000
		Inventories			—			—			1,895,000		—			1,895,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			—			2,514,000		—			2,514,000
		Intercompany assets			28,303,000			—			—		(28,303,000	)		—
		Other current assets			242,000			6,143,000			5,328,000		—			11,713,000
			Total current assets		30,535,000			6,143,000			44,433,000		(28,303,000	)		52,808,000
	Net property, plant and equipment				—			9,078,000			57,189,000		—			66,267,000
	Other assets, net				3,177,000			—			10,663,000		—			13,840,000
	Investment in parent				—			4,001,000			—		(4,001,000	)		—
	Investment in subsidiaries				63,239,000			—			—		(63,239,000	)		—
				$	96,951,000		$	19,222,000		$	112,285,000	$	(95,543,000	)	$	132,915,000
Liabilities and Stockholders’ Equity (Deficit):
	Current installments of long-term debt			$	6,061,000		$	3,000		$	3,153,000	$	—		$	9,217,000
	Trade accounts payable				4,000			—			9,722,000		—			9,726,000
	Accrued liabilities				5,178,000			2,000			7,532,000		—			12,712,000
	Current portion of insurance reserves				—			—			1,274,000		—			1,274,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			—			680,000		—			680,000
	Intercompany liabilities				—			26,245,000			2,058,000		(28,303,000	)		—
			Total current liabilities		11,243,000			26,250,000			24,419,000		(28,303,000	)		33,609,000
	Long-term debt, excluding current installments				15,290,000			183,000			4,280,000		—			19,753,000
	Long-term portion of insurance reserves				—			—			3,797,000		—			3,797,000
	Senior notes				100,000,000			—			—		—			100,000,000
	Deferred tax liabilities				—			(157,000	)		9,496,000		—			9,339,000
	Senior Exchangeable Preferred stock				15,075,000			—			—		—			15,075,000
	Series A Preferred stock				17,332,000			—			—		—			17,332,000
	Stockholders’ equity (deficit)				(61,989,000	)		(7,054,000	)		70,293,000		(67,240,000	)		(65,990,000	)
				$	96,951,000		$	19,222,000		$	112,285,000	$	(95,543,000	)	$	132,915,000

33

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING BALANCE SHEET

				JUNE 30, 2003 (RESTATED, see Note 17)
				PENHALL
				INTERNATIONAL			PENHALL
				CORP.			COMPANY		ELIMINATIONS			CONSOLIDATED
Assets
	Current assets:
		Receivables, net		$	2,648,000		$	31,618,000	$	—		$	34,266,000
		Inventories			—			2,362,000		—			2,362,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			1,704,000		—			1,704,000
		Other current assets			271,000			7,066,000		(152,000	)		7,185,000
			Total current assets		2,919,000			42,750,000		(152,000	)		45,517,000
	Net property, plant and equipment				8,798,000			44,603,000		—			53,401,000
	Intercompany assets				—			19,398,000		(19,398,000	)		—
	Other assets, net				2,051,000			11,504,000		—			13,555,000
	Investment in subsidiaries				70,399,000			—		(70,399,000	)		—
				$	84,167,000		$	118,255,000	$	(89,949,000	)	$	112,473,000
Liabilities and Stockholders’ Equity (Deficit):
	Current installments of long-term debt			$	3,000		$	2,548,000	$	—		$	2,551,000
	Borrowings under revolving credit facility				—			14,485,000		—			14,485,000
	Trade accounts payable				9,000			8,096,000		(152,000	)		7,953,000
	Accrued liabilities				4,931,000			5,878,000		—			10,809,000
	Current portion of insurance reserves				—			1,569,000		—			1,569,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			831,000		—			831,000
	Intercompany liabilities				19,398,000			—		(19,398,000	)		—
			Total current liabilities		24,341,000			33,407,000		(19,550,000	)		38,198,000
	Long-term debt, excluding current installments				180,000			179,000		—			359,000
	Long-term portion of insurance reserves				—			5,158,000		—			5,158,000
	Senior notes				100,000,000			—		—			100,000,000
	Deferred tax liabilities				(891,000	)		9,112,000		—			8,221,000
	Senior Exchangeable Preferred stock				16,744,000			—		—			16,744,000
	Series A Preferred stock				19,737,000			—		—			19,737,000
	Stockholders’ equity (deficit)				(75,944,000	)		70,399,000		(70,399,000	)		(75,944,000	)
				$	84,167,000		$	118,255,000	$	(89,949,000	)	$	112,473,000

34

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		YEAR ENDED JUNE 30, 2001
		PENHALL
		INTER-			PENHALL
		NATIONAL			RENTAL		PENHALL
		CORP.			CORP.		COMPANY		ELIMINATIONS			CONSOLIDATED
Revenues		$	—		$	12,005,000	$	176,893,000	$	(13,129,000	)	$	175,769,000
Cost of revenues			—			—		124,408,000		—			124,408,000
	Gross profit		—			12,005,000		52,485,000		(13,129,000	)		51,361,000
General and administrative expenses			397,000			454,000		30,011,000		(2,515,000	)		28,347,000
Royalties			—			—		10,614,000		(10,614,000	)		—
Other operating income			8,000			53,000		1,347,000		—			1,408,000
Equity in earnings of subsidiaries			14,770,000			—		—		(14,770,000	)		—
	Earnings before interest expense and income taxes		14,381,000			11,604,000		13,207,000		(14,770,000	)		24,422,000
Interest expense			15,095,000			5,000		163,000		—			15,263,000
	Earnings (loss) before income taxes		(714,000	)		11,599,000		13,044,000		(14,770,000	)		9,159,000
Income tax expense (benefit)			(5,974,000	)		4,510,000		5,364,000		—			3,900,000
Net earnings		$	5,260,000		$	7,089,000	$	7,680,000	$	(14,770,000	)	$	5,259,000

35

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS

		YEAR ENDED JUNE 30, 2002
		PENHALL
		INTER-			PENHALL
		NATIONAL			RENTAL		PENHALL
		CORP.			CORP.		COMPANY		ELIMINATIONS			CONSOLIDATED
Revenues		$	—		$	11,664,000	$	161,242,000	$	(11,664,000	)	$	161,242,000
Cost of revenues			—			—		122,418,000		—			122,418,000
	Gross profit		—			11,664,000		38,824,000		(11,664,000	)		38,824,000
General and administrative expenses			411,000			352,000		29,119,000		(1,518,000	)		28,364,000
Royalties			—			—		10,146,000		(10,146,000	)		—
Other operating income			81,000			45,000		1,234,000		—			1,360,000
Equity in earnings of subsidiaries			7,247,000			—		—		(7,247,000	)		—
	Earnings before interest expense and income taxes		6,917,000			11,357,000		793,000		(7,247,000	)		11,820,000
Interest expense			14,062,000			19,000		212,000		—			14,293,000
	Earnings (loss) before income taxes		(7,145,000	)		11,338,000		581,000		(7,247,000	)		(2,473,000	)
Income tax expense (benefit)			(5,528,000	)		4,403,000		269,000		—			(856,000	)
Net earnings (loss)		$	(1,617,000	)	$	6,935,000	$	312,000	$	(7,247,000	)	$	(1,617,000	)

36

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

		YEAR ENDED JUNE 30, 2003
		PENHALL
		INTERNATIONAL			PENHALL
		CORP.			COMPANY		ELIMINATIONS			CONSOLIDATED
Revenues		$	5,174,000		$	159,617,000	$	(5,174,000	)	$	159,617,000
Cost of revenues			—			128,048,000		—			128,048,000
	Gross profit		5,174,000			31,569,000		(5,174,000	)		31,569,000
General and administrative expenses			829,000			28,689,000		(1,583,000	)		27,935,000
Royalties			—			3,591,000		(3,591,000	)		—
Other operating income			11,000			1,349,000		—			1,360,000
Equity in earnings of subsidiaries			106,000			—		(106,000	)		—
	Earnings before interest expense and income taxes		4,462,000			638,000		(106,000	)		4,994,000
Interest expense			13,918,000			437,000		—			14,355,000
	Earnings (loss) before income taxes		(9,456,000	)		201,000		(106,000	)		(9,361,000	)
Income tax expense (benefit)			(3,536,000	)		95,000		—			(3,441,000	)
Net earnings (loss)		$	(5,920,000	)	$	106,000	$	(106,000	)	$	(5,920,000	)

37

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

			YEAR ENDED JUNE 30, 2001
			PENHALL			PENHALL
			INTERNATIONAL			RENTAL			PENHALL
			CORP.			CORP.			COMPANY			ELIMINATIONS			CONSOLIDATED
Net cash provided by (used in) operating activities			$	(9,922,000	)	$	12,256,000		$	17,957,000		$	(4,559,000	)	$	15,732,000
Cash flows from investing activities:
	Proceeds from sale of assets			—			278,000			1,014,000			—			1,292,000
	Capital expenditures			—			(1,175,000	)		(17,294,000	)		—			(18,469,000	)
	Acquisition of companies, net of cash acquired			—			—			(520,000	)		—			(520,000	)
		Net cash used in investing activities		—			(897,000	)		(16,800,000	)		—			(17,697,000	)
Cash flows from financing activities:
	Due to (from) affiliates			9,773,000			(11,798,000	)		(2,534,000	)		4,559,000			—
	Borrowings under long-term debt			71,824,000			—			—			—			71,824,000
	Repayments of long-term debt			(71,749,000	)		(10,000	)		(2,044,000	)		—			(73,803,000	)
	Book overdraft			—			—			2,891,000			—			2,891,000
	Proceeds from issuance of common stock			309,000			—			—			—			309,000
	Repurchase of common stock and Series B preferred stock			(521,000	)		—			—			—			(521,000	)
	Issuance of Series B preferred stock			186,000			—			—			—			186,000
		Net cash provided by (used in) financing activities		9,822,000			(11,808,000	)		(1,687,000	)		4,559,000			886,000
		Net change in cash and cash equivalents		(100,000	)		(449,000	)		(530,000	)		—			(1,079,000	)
Cash and cash equivalents at beginning of year				100,000			1,370,000			639,000			—			2,109,000
Cash and cash equivalents at end of year			$	—		$	921,000		$	109,000			—		$	1,030,000

38

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

			YEAR ENDED JUNE 30, 2002
			PENHALL
			INTER-			PENHALL
			INTERNATIONAL			RENTAL			PENHALL
			CORP.			CORP.			COMPANY			ELIMINATIONS			CONSOLIDATED
Net cash provided by (used in) operating activities			$	(1,886,000	)	$	7,308,000		$	19,434,000		$	(7,247,000	)	$	17,609,000
Cash flows from investing activities:
	Proceeds from sale of assets			—			—			832,000			—			832,000
	Capital expenditures			—			26,000			(9,521,000	)		—			(9,495,000	)
	Acquisition of companies, net of cash acquired			—			—			(3,819,000	)		—			(3,819,000	)
		Net cash provided by (used) in investing activities		—			26,000			(12,508,000	)		—			(12,482,000	)
Cash flows from financing activities:
	Due to (from) affiliates			3,456,000			(2,101,000	)		(8,602,000	)		7,247,000			—
	Borrowings under long-term debt			82,900,000			—			2,923,000			—			85,823,000
	Repayments of long-term debt			(84,787,000	)		(11,000	)		(1,490,000	)		—			(86,288,000	)
	Book overdraft			—			—			196,000			—			196,000
	Proceeds from issuance of common stock			213,000			—			—			—			213,000
	Repurchase of common stock and Series B preferred stock			(54,000	)		—			—			—			(54,000	)
	Issuance of Series B preferred stock			158,000			—			—			—			158,000
		Net cash provided by (used in) financing activities		1,886,000			(2,112,000	)		(6,973,000	)		7,247,000			48,000
		Net change in cash and cash equivalents		—			5,222,000			(47,000	)		—			5,175,000
Cash and cash equivalents at beginning of year				—			921,000			109,000			—			1,030,000
Cash and cash equivalents at end of year			$	—		$	6,143,000		$	62,000			—		$	6,205,000

39

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

			YEAR ENDED JUNE 30, 2003
			PENHALL			PENHALL
			INTERNATIONAL			RENTAL			PENHALL
			CORP.			CORP.			COMPANY			ELIMINATIONS			CONSOLIDATED
Net cash provided by (used in) operating activities			$	(6,029,000	)	$	—		$	18,678,000		$	—		$	12,649,000
Cash flows from investing activities:
	Proceeds from sale of assets			—			—			1,264,000			—			1,264,000
	Capital expenditures			—			—			(4,222,000	)		—			(4,222,000	)
	Cash from Penhall Rental merger			6,143,000			(6,143,000	)		—			—			—
		Net cash provided by (used) in investing activities		6,143,000			(6,143,000	)		(2,958,000	)		—			(2,958,000	)
Cash flows from financing activities:
	Due to (from) affiliates			21,456,000			—			(21,456,000	)		—			—
	Borrowings under long-term debt			61,520,000			—			1,641,000			—			63,161,000
	Repayments of long-term debt			(82,874,000	)		—			(6,347,000	)		—			(89,221,000	)
	Borrowings under revolving credit facility			—			—			42,159,000			—			42,159,000
	Repayments of revolving credit facility			—			—			(27,674,000	)		—			(27,674,000	)
	Book overdraft			—			—			(2,573,000	)		(152,000	)		(2,725,000	)
	Debt issuance costs			(104,000	)		—			(1,348,000	)		—			(1,452,000	)
	Proceeds from issuance of common stock			38,000			—			—			—			38,000
	Repurchase of common stock and Series B preferred stock			(35,000	)		—			—			—			(35,000	)
	Issuance of Series B preferred stock			37,000			—			—			—			37,000
		Net cash provided by (used in) financing activities		38,000			—			(15,598,000	)		(152,000	)		(15,712,000	)
		Net change in cash and cash equivalents		152,000			(6,143,000	)		122,000			(152,000	)		(6,021,000	)
Cash and cash equivalents at beginning of year				—			6,143,000			62,000			—			6,205,000
Cash and cash equivalents at end of year			$	152,000		$	—		$	184,000			(152,000	)	$	184,000

40

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2003

(15)  SUPPLEMENTARY CASH FLOW INFORMATION

     The following supplemental cash flow information is provided with respect to interest and tax payments as well as certain non-cash investing and financing activities for the years ended June 30:

			2001		2002		2003
Cash paid during the year for:
	Income taxes		$	4,604,000	$	787,000	$	448,000
	Interest			14,105,000		13,427,000		13,227,000
Noncash investing and financing activities -
		Borrowings related to the acquisition of assets	$	963,000	$	547,000	$	—
		Borrowings related to the repurchase of common stock and Series B preferred		314,000		—		—
		Accretion of preferred stock to redemption value		3,207,000		3,615,000		4,074,000
		Accrual of cumulative dividends on preferred stock		3,263,000		3,794,000		4,325,000

The following table details the fiscal 2002 acquisitions:

	2002
Inventory	$	6,000
Property, plant and equipment		6,859,000
Goodwill		2,385,000
Other assets		1,474,000
Accrued liabilities		1,266,000
Income taxes payable		227,000
Deferred tax liability		1,959,000
Long-term debt		3,680,000

(16)  SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

     The following is unaudited supplementary financial information for 2002 and 2003:

	FOR THE QUARTERS ENDED 2002
	SEPTEMBER 30,		DECEMBER 31,			MARCH 31,			JUNE 30,
Revenue	$	49,157,000	$	37,674,000		$	30,010,000		$	44,401,000
Gross profit		14,604,000		9,906,000			6,045,000			8,269,000
Earnings (loss) before income taxes		3,104,000		(294,000	)		(3,578,000	)		(1,705,000	)
Net earnings (loss)		1,831,000		(171,000	)		(2,113,000	)		(1,164,000	)
Net earnings (loss) available to common stockholders		51,000		(2,010,000	)		(3,971,000	)		(3,096,000	)
Basic and diluted earnings (loss) per share		.05		(2.04	)		(4.02	)		(3.14	)

	FOR THE QUARTERS ENDED 2003
	SEPTEMBER 30,			DECEMBER 31,			MARCH 31,			JUNE 30,
Revenue	$	46,576,000		$	42,044,000		$	29,850,000		$	41,147,000
Gross profit		10,481,000			9,249,000			4,434,000			7,405,000
Earnings (loss) before income taxes		97,000			(633,000	)		(5,413,000	)		(3,412,000	)
Net earnings (loss)		62,000			(405,000	)		(3,464,000	)		(2,113,000	)
Net loss available to common stockholders		(1,957,000	)		(2,481,000	)		(5,571,000	)		(4,310,000	)
Basic and diluted loss per share		(1.98	)		(2.52	)		(5.65	)		(4.37	)

41

(17) RESTATEMENT

     We have restated our consolidated financial statements for the year ended June 30, 2003 to properly classify our revolving credit facility with General Electric Capital Corporation as a current liability in accordance with EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”).

     The following table reflects the impact of the reclassification as of June 30:

	JUNE 30, 2003,
	As Previously Reported		As Restated
Borrowings under revolving credit facility		—		14,485,000
Current liabilities		23,713,000		38,198,000
Long-term debt, excluding current installments		14,844,000		359,000

42

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) LIST OF FINANCIAL STATEMENTS.

     The following Consolidated Financial Statements of the Company and the Report of Independent Auditors set forth on pages 18 through 49 are incorporated by reference into this item 14 of Form 10-K by item 8 hereof:

• Independent Auditors’ Report

• Consolidated Balance Sheets as of June 30, 2002 and 2003.

• Consolidated Statements of Operations for the Years Ended June 30, 2001, 2002 and 2003.

• Consolidated Statements of Stockholders’ Deficit for the years ended June 30, 2001, 2002 and 2003.

• Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2002 and 2003

• Notes to Consolidated Financial Statements.

(a)(2) FINANCIAL STATEMENT SCHEDULE.

No financial statement schedules have been filed herewith since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes.

43

(a)(3) EXHIBITS.

EXHIBIT NO.	DESCRIPTION
2	Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)
3.1	Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.2	Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.3	Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.4	Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.5	Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.6	Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.1	Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.2	First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.3	Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.4	Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.5	Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.7	Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-3, registration number 333-64745)
5	Opinion of Dechert Price & Rhoads (incorporated herein by this reference to Exhibit 5 to the registrant’s registration statement of Form S-3, registration number 333-64745-02)
10.1	Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.2	Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.3	Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.4	Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.5	Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.6	Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.7	Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.8	Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.9	Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)
10.10	Form of Penhall International Corp. 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.10 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)

44

10.11	Credit Agreement dated August 4, 1998, by and among the Company, Penhall Acquisition Corp., Bankers Trust Company, as administrative agent, Credit Suisse First Boston, as syndication agent, and various lending institutions named therein (incorporated herein by this reference to Exhibit 4.6 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.12	Amendment #1 to Credit Agreement dated November 10, 1999 (filed as exhibit 10.12 to the FY2002 Form 10-K)
10.13	Amendment #2 to Credit Agreement dated May 8, 2000 (filed as exhibit 10.13 to the FY2002 Form 10-K)
10.14	Amendment #3 to Credit Agreement dated February 15, 2002 (filed as exhibit 10.14 to the FY2002 Form 10-K)
10.15	Amendment #4 to Credit Agreement dated July 19, 2002 (filed as exhibit 10.15 to the FY2002 Form 10-K)
10.20	Note and Security Agreement between Banc of America Leasing & Capital and Penhall Company for Agreement Number 02973-00701 (filed as exhibit 10.20 to the FY2002 Form 10-K)
10.21	Guarantee related to Banc of America Note and Security Agreement Number 02973-00701 (filed as exhibit 10.21 to the FY2002 Form 10-K)
10.22	Amendment #1 to Banc of America Note and Security Agreement (filed as exhibit 10.22 to the FY2002 Form 10-K)
10.40	Credit Agreement dates as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (filed as exhibit 10.40 to the May 30, 2003 Form 8-K)
10.41	Security Agreement dates as of May 22, 2003 by and among Penhall International corp., Penhall Company, Penhall Leasing, L.L.C., Bob Mack Co., Inc., Penhall Investments., and General Electric Capital Corporation, as Agent (filed as exhibit 10.40 to the May 30, 2003 Form 8-K)
12	Statement of Ratio of Earnings to Fixed Charges *
21	Subsidiaries of the Company (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
23.1	Consent of Dechert Price & Rhoads (included in Exhibit 5) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
23.2	Consent of KPMG Peat Marwick LLP (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-02)
23.3	Consent of Moss Adams LLP (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-02)
23.4	Consent of John A. Knutson & Co. PLLP (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-02)
24	Power of Attorney (included on signature page) (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
25	Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as Trustee under the Indenture filed as Exhibit 4.1 (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)*
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)*
32	Certification of Chief Executive Officer and Chief Financial Officer of Periodic Financial Reports pursuant to Section 906 of the Sarbanes — Oxley Act of 2002, 18 U.S.C. § 1350*
99.1	Form of Letter of Transmittal (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)
99.2	Form of Notice of Guaranteed Delivery (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)
*	Filed herewith.

(b)  REPORTS ON FORM 8-K

A Form 8-K was filed on May 30, 2003 announcing the Company’s new credit agreement.

45

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PENHALL INTERNATIONAL CORP.
By:	/s/ JOHN T. SAWYER
	John T. Sawyer
	Chairman of the Board, President
	and Chief Executive Officer

March 3, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 29, 2003.

SIGNATURE	TITLE
/s/ JOHN T. SAWYER	Chairman of the Board, President and Chief
John T. Sawyer	Executive Officer (Principal Executive Officer)
/s/ JEFFREY E. PLATT	Vice President-Finance and Chief Financial
Jeffrey E. Platt	Officer (Principal Accounting Officer)

46

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
2	Agreement and Plan of Merger, dated as of June 30, 1998 (as amended pursuant to letter agreements executed in connection therewith), by and among Penhall International, Inc., the stockholders of Penhall International, Inc., Phoenix Concrete Cutting, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and Penhall Acquisition Corp. (incorporated herein by this reference to Exhibit 2 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)
3.1	Amended and Restated Articles of Incorporation of the Company (formerly known as Phoenix Concrete Cutting, Inc.) (incorporated herein by this reference to Exhibit 3.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.2	Bylaws of the Company (incorporated herein by this reference to Exhibit 3.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.3	Restated Articles of Incorporation of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.4	Bylaws of Penhall Rental Corp. (formerly known as Penhall International, Inc.) (incorporated herein by this reference to Exhibit 3.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.5	Articles of Incorporation of Penhall Company (incorporated herein by this reference to Exhibit 3.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
3.6	Bylaws of Penhall Company (incorporated herein by this reference to Exhibit 3.6 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.1	Indenture dated as of August 1, 1998, between Penhall Acquisition Corp. and United States Trust Company of New York, as Trustee (incorporated herein by this reference to Exhibit 4.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.2	First Supplemental Indenture dated as of August 4, 1998, by and among the Company, Penhall Rental Corp., Penhall Company and United States Trust Company of New York (incorporated herein by this reference to Exhibit 4.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.3	Assumption Agreement dated as of August 4, 1998 among the Company, Penhall Rental Corp. and Penhall Company (incorporated herein by this reference to Exhibit 4.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.4	Registration Rights Agreement dated as of August 4, 1998, by and among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation (incorporated herein by this reference to Exhibit 4.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.5	Form of the Company’s 12% Senior Notes due 2006 (included in Exhibit 4.1) (incorporated herein by this reference to Exhibit 4.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
4.7	Securities Holders Agreement dated August 4, 1998, by and among the Company, Bruckmann, Rosser, Sherrill & Co., L.P. and the Management Stockholders named therein (incorporated herein by this reference to Exhibit 4.7 to the registrant’s registration statement of Form S-3, registration number 333-64745)
5	Opinion of Dechert Price & Rhoads (incorporated herein by this reference to Exhibit 5 to the registrant’s registration statement of Form S-3, registration number 333-64745-02)
10.1	Purchase Agreement dated July 28, 1998, among Penhall Acquisition Corp., BT Alex. Brown Incorporated and Credit Suisse First Boston Corporation with respect to the 12% Senior Notes due 2006 (incorporated herein by this reference to Exhibit 10.1 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.2	Management Agreement dated August 4, 1998, by and between the Company and Bruckmann, Rosser, Sherrill & Co., Inc. (incorporated herein by this reference to Exhibit 10.2 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.3	Employment Agreement dated as of August 4, 1998, by and between the Company and C. George Bush (incorporated herein by this reference to Exhibit 10.3 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.4	Employment Agreement dated as of August 4, 1998, by and between the Company and Bruce Varney (incorporated herein by this reference to Exhibit 10.4 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.5	Employment Agreement dated as of August 4, 1998, by and between the Company and Scott E. Campbell (incorporated herein by this reference to Exhibit 10.5 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.6	Employment Agreement dated as of August 4, 1998, by and between the Company and Jack S. Hobbs (incorporated herein by this reference to Exhibit 10.6 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.7	Employment Agreement dated as of August 4, 1998, by and between the Company and Vincent M. Gutierrez (incorporated herein by this reference to Exhibit 10.7 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.8	Employment Agreement dated as of August 4, 1998, by and between the Company and Leif McAfee (incorporated herein by this reference to Exhibit 10.8 to the registrant’s registration statement of Form S-3, registration number 333-64745)
10.9	Penhall International, Inc. and Affiliated Companies Employees’ Profit Sharing (401(k)) Plan (incorporated herein by this reference to Exhibit 10.9 to the registrant’s registration statement of Form S-3, registration number 333-64745-01)

EX-31.1 3 a96618a1exv31w1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION of Chief Executive Officer of Penhall International Corp.

I, John T. Sawyer, certify that:

(1) I have reviewed this annual report on Form 10-K/A of Penhall International Corp. (the “Company”)

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e for the Company and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

March 3, 2004

/s/ JOHN T. SAWYER

John T. Sawyer
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

  EX-31.2 4 a96618a1exv31w2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION of Chief Financial Officer of Penhall International Corp.

I, Jeffrey E. Platt, certify that:

(1) I have reviewed this annual report on Form 10-K/A of Penhall International Corp. (the “Company”)

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e for the Company and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

March 3, 2004

/s/ JEFFREY E. PLATT

Jeffrey E. Platt
Vice President-Finance and Chief Financial Officer (Principal Financial Officer)

  EX-32.1 5 a96618a1exv32w1.htm EXHIBIT 32.1

Exhibit 32.1

John T. Sawyer, CERTIFICATION

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES OXLEY ACT OF 2002

     In connection with the Annual Report of Penhall International Corp. (the “Company”) on Form 10-K/A for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Sawyer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.

/s/ John T. Sawyer

John T. Sawyer
Chief Executive Officer
March 3, 2004

     The foregoing certification is furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

  EX-32.2 6 a96618a1exv32w2.htm EXHIBIT 32.2

Exhibit 32.2

Jeffrey E. Platt, CERTIFICATION

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES OXLEY ACT OF 2002

     In connection with the Annual Report of Penhall International Corp. (the “Company”) on Form 10-K/A for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey E. Platt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.

/s/ Jeffrey E. Platt

Jeffrey E. Platt
Chief Financial Officer
March 3, 2004

     The foregoing certification is furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

  -----END PRIVACY-ENHANCED MESSAGE-----

EX-31.1

Exhibit 31.1

EX-31.2

Exhibit 31.2

EX-32.1

Exhibit 32.1

EX-32.2

Exhibit 32.2