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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

** **

**FORM10-Q**

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

**For the quarterly period endedJune 30, 2001**

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

**Commission File No. 001-14163**

**NationalEquipment Services, Inc.******(Exact name of registrant as specified inits charter)

 
| **DELAWARE**                     | **36-4087016**      |
|----------------------------------|---------------------|
| (State or other  Jurisdiction of | (I.R.S. Employer    |
| Incorporation or  Organization)  | Identification No.) |

**1603 Orrington Avenue, Suite1600Evanston, Illinois 60201**(Address of principal executive offices)(Zip code)

| **(847) 733-1000**                                         |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |

             Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x    No o

             Therewere 21,151,163 shares of Common Stock ($.01 par value) outstanding as ofAugust 10, 2001.

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**NATIONAL EQUIPMENT SERVICES,INC.**

**QUARTERLY REPORT ON FORM 10-Q**

**For the Quarter endedJune 30, 2001**

**INDEX**

 

| PART I. FINANCIAL  INFORMATION |                                                                                                          |
|--------------------------------|---------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                          |
| Item 1.                        | Financial Statements                                                                                          |
|                           | Consolidated Balance Sheets at June 30, 2001 (Unaudited) and December 31, 2000                           |
|                           | Consolidated  Statements of Operations for the three and six months ended June 30, 2001 and  2000 (Unaudited) |
|                           | Consolidated  Statements of Cash Flows for the six months ended June 30, 2001 and 2000 (Unaudited)            |
|                           | Notes  to Consolidated Financial Statements (Unaudited)                                                       |
|                           |                                                                                                          |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |
|                           |                                                                                                          |
| Item  3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                   |
|                           |                                                                                                          |
| PART II. OTHER INFORMATION     |                                                                                                          |
|                           |                                                                                                          |
| Item 1.                        | Legal Proceedings                                                                                             |
|                           |                                                                                                          |
| Item 2.                        | Changes in Securities                                                                                         |
|                           |                                                                                                          |
| Item 3.                        | Defaults upon  Senior Securities                                                                              |
|                           |                                                                                                          |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                                          |
|                           |                                                                                                          |
| Item 5.                        | Other Information                                                                                             |
|                           |                                                                                                          |
| Item 6.                        | Exhibits and  Reports on Form 8-K                                                                             |
|                           |                                                                                                          |
| SIGNATURE                      |                                                                                                          |
|                           |                                                                                                          |
|                           |                                                                                                          |
| Index of  Exhibits             |                                                                                                          |
|                                |                                                                                                               |  |

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**NATIONAL EQUIPMENT SERVICES,INC.AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS****(in thousands, except per share data)**

 

|                                                                      | **June  30, 2001**                                                                               |       | **December  31, 2000** |       |
|---------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                      | ****                                                                                                  |       | ****                   |       |
|                                                                      | **(Unaudited)**                                                                                       |       |                   |       |
| **Assets**                                                                |                                                                                                  | ** ** |                   | ** ** |
|                                                                      | Cash and cash  equivalents                                                                            | $          | 4,968                  |       | $ | 3,162 |   |
|                                                                      | Accounts receivable,  net of allowance for doubtful accounts of $6,557 and  $5,484, respectively | 132,785    |                   | 138,459    |   |
|                                                                      | Inventory, net                                                                                        | 34,654     |                   | 33,267     |   |
|                                                                      | Rental equipment, net                                                                                 | 573,263    |                   | 616,212    |   |
|                                                                      | Property and  equipment, net                                                                          | 62,523     |                   | 62,784     |   |
|                                                                      | Intangible assets, net                                                                                | 363,290    |                   | 365,819    |   |
|                                                                      | Loan origination  costs, net                                                                          | 7,672      |                   | 9,109      |   |
|                                                                      | Deferred income taxes                                                                                 | 9,368      |                   | 4,644      |   |
|                                                                      | Prepaid expenses and  other assets, net                                                               | 10,709     |                   | 15,480     |   |
|                                                                      |                                                                                                  |            |                   |            |   |
|                                                                      | Total assets                                                                                          | $          | 1,199,232              |       | $ | 1,248,936 |   |
|                                                                      |                                                                                                  |            |                   |            |   |
| **Liabilities**                                                           |                                                                                                  | ** ** |                   | ** ** |
|                                                                      | Book overdraft                                                                                        | $          | 1,440                  |       | $ | 3,237 |   |
|                                                                      | Accounts payable                                                                                      | 31,649     |                   | 38,867     |   |
|                                                                      | Accrued interest                                                                                      | 9,891      |                   | 12,544     |   |
|                                                                      | Deferred income taxes,  net                                                                           | 49,872     |                   | 49,872     |   |
|                                                                      | Accrued expenses and  other liabilities                                                               | 28,380     |                   | 27,115     |   |
|                                                                      | Debt                                                                                                  | 841,618    |                   | 872,072    |   |
|                                                                      |                                                                                                  |            |                   |            |   |
|                                                                      | Total liabilities                                                                                     | 962,850    |                   | 1,003,707  |   |
|                                                                      |                                                                                                  |            |                   |            |   |
|                                                                      |                                                                                                  |       |                   |       |
|                                                                      | Convertible preferred  stock                                                                          | 96,047     |                   | 95,797     |   |
|                                                                      | Commitments and  contingencies                                                                        | —     |                   | —     |   |
| **Stockholders’ equity:**                                            |                                                                                                  | ** ** |                   | ** ** |
| Common stock, $0.01  par, 100,000 shares authorized; 24,170 shares issued | 241                                                                                                   |       | 241                    |       |
| Additional paid-in  capital                                               | 123,887                                                                                               |       | 123,887                |       |
| Retained earnings                                                         | 36,293                                                                                                |       | 44,468                 |       |
| Accumulated other  comprehensive loss                                     | (922                                                                                                  | )          | —                 |       |
| Stock subscriptions  receivable                                           | (102                                                                                                  | )          | (102                   | )          |
| Treasury stock at  cost, 3,019 shares                                     | (19,062                                                                                               | )          | (19,062                | )          |
|                                                                      |                                                                                                       |       |                        |       |
|                                                                      | Total stockholders’  equity                                                                      | 140,335    |                   | 149,432    |   |
|                                                                      |                                                                                                  |            |                   |            |   |
|                                                                      | Total liabilities and  stockholders’ equity                                                      | $          | 1,199,232              |       | $ | 1,248,936 |   |
|                                                                      |                                                                                                  |            |                   |            |   |
|                                                                           |                                                                                                       |            |                        |            |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**NATIONAL EQUIPMENT SERVICES,INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)****(in thousands, except per share data)**

 

|                                                         | **For  the Three Months Ended****June  30,** |       | **For  the Six Months Ended****June  30,** |       |
|--------------------------------------------------------------|---------------------------------------------------|------------|--------------------------------------------|------------|
|                                                         | ****                                              |       | ****                                       |       |
|                                                         | **2001**                                          |       | **2000**                                   |       | **2001** |   | **2000** |   |
|                                                         | ****                                              |       | ****                                       |       | **** |   | **** |   |
| **Revenues**                                                 |                                              | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
|                                                         | Rental revenues                                   | $          | 118,985                                    |       | $ | 117,860 |   | $ | 226,313 |   | $ | 217,380 |   |
|                                                         | New equipment sales                               | 15,894     |                                       | 13,882     |   | 28,267 |   | 25,895 |   |
|                                                         | Rental equipment sales                            | 9,683      |                                       | 8,181      |   | 16,787 |   | 15,129 |   |
|                                                         | Parts, service and  other                         | 20,283     |                                       | 18,789     |   | 32,260 |   | 34,606 |   |
|                                                         |                                              |            |                                       |            |   |  |   |  |   |
|                                                         | Total revenues                                    | $          | 164,845                                    |       | $ | 158,712 |   | $ | 303,627 |   | $ | 293,010 |   |
|                                                         |                                              |            |                                       |            |   |  |   |  |   |
|                                                         |                                              |       |                                       |       |   |   |   |   |
| **Cost of revenues**                                         |                                              | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
|                                                         | Rental equipment  depreciation                    | 24,150     |                                       | 22,990     |   | 48,407 |   | 43,949 |   |
|                                                         | Cost of new equipment  sales                      | 11,870     |                                       | 10,674     |   | 21,125 |   | 19,631 |   |
|                                                         | Cost of rental  equipment sales                   | 6,370      |                                       | 5,514      |   | 11,282 |   | 9,963 |   |
|                                                         | Other operating  expenses                         | 60,543     |                                       | 51,569     |   | 112,073 |   | 98,167 |   |
|                                                         |                                              |            |                                       |            |   |  |   |  |   |
|                                                         | Total cost of revenues                            | 102,933    |                                       | 90,747     |   | 192,887 |   | 171,710 |   |
|                                                         |                                              |            |                                       |            |   |  |   |  |   |
| Gross profit                                                 | 61,912                                            |       | 67,965                                     |       | 110,740 |   | 121,300 |   |
| Selling, general and  administrative expenses                | 34,266                                            |       | 30,879                                     |       | 68,815 |   | 61,055 |   |
| Non-rental  depreciation and amortization                    | 7,421                                             |       | 6,733                                      |       | 14,430 |   | 13,579 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Operating income                                             | 20,225                                            |       | 30,353                                     |       | 27,495 |   | 46,666 |   |
| Other income, net                                            | 166                                               |       | 85                                         |       | 364 |   | 194 |   |
| Interest expense, net                                        | (19,327                                           | )          | (20,630                                    | )          | (39,837 | ) | (40,112 | ) |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Income (loss) before  income taxes                           | 1,064                                             |       | 9,808                                      |       | (11,978 | ) | 6,748 |   |
| Income tax expense  (benefit)                                | 1,685                                             |       | 3,972                                      |       | (4,053 | ) | 2,733 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Net income (loss)                                            | $                                                 | (621       | )                                          | $          | 5,836 |   | $ | (7,925 | ) | $ | 4,015 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Basic income (loss)  per common share                        | $                                                 | (0.04      | )                                          | $          | 0.27 |   | $ | (0.39 | ) | $ | 0.17 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Average number of  common shares used in basic calculation   | 20,924                                            |       | 20,936                                     |       | 20,891 |   | 21,532 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Diluted income (loss)  per common share                      | $                                                 | (0.04      | )                                          | $          | 0.20 |   | $ | (0.39 | ) | $ | 0.13 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
| Average number of  common shares used in diluted calculation | 20,924                                            |       | 29,115                                     |       | 20,891 |   | 29,744 |   |
|                                                         |                                                   |       |                                            |       |  |   |  |   |
|                                                              |                                                   |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**NATIONAL EQUIPMENT SERVICES,INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)****(in thousands)**

 

|                                                                             | **For  the Six Months Ended June 30,**        |       |
|----------------------------------------------------------------------------------|-----------------------------------------------|------------|
|                                                                             | ****                                          |       |
|                                                                             | **2001**                                      |       | **2000** |   |
|                                                                             | ****                                          |       | **** |   |
| **Operating Activities:**                                                        |                                          | ** ** |   | ** ** |
| Net income (loss)                                                                | $                                             | (7,925     | ) | $ | 4,015 |   |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |                                          |       |   |   |
|                                                                             | Depreciation and  amortization                | 64,685     |   | 59,565 |   |
|                                                                             | Gain on sale of  equipment                    | (5,574     | ) | (5,086 | ) |
|                                                                             | Deferred income taxes                         | (4,724     | ) | — |   |
|                                                                             | Changes in operating  assets and liabilities: |       |   |   |   |
|                                                                             | Accounts receivable                           | 5,674      |   | (12,887 | ) |
|                                                                             | Inventory                                     | (4,288     | ) | (5,058 | ) |
|                                                                             | Prepaid expenses and  other assets            | (1,147     | ) | (702 | ) |
|                                                                             | Accounts payable                              | (7,218     | ) | (2,546 | ) |
|                                                                             | Accrued expenses and  other liabilities       | (2,310     | ) | 1,833 |   |
|                                                                             |                                          |            |   |  |   |
| Net cash provided by  operating activities                                       | 37,173                                        |       | 39,134 |   |
|                                                                             |                                               |       |  |   |
|                                                                             |                                          |       |   |   |
| **Investing Activities:**                                                        |                                          | ** ** |   | ** ** |
| Acquisitions, net of  cash received                                              | —                                        |       | (11,692 | ) |
| Cash received in  connection with business combination                           | —                                        |       | 18,000 |   |
| Purchases of rental  equipment                                                   | (13,839                                       | )          | (120,188 | ) |
| Proceeds from sale of  rental equipment                                          | 16,787                                        |       | 15,129 |   |
| Purchases of property  and equipment                                             | (6,202                                        | )          | (10,462 | ) |
| Proceeds from sale of  property and equipment                                    | 535                                           |       | 754 |   |
|                                                                             |                                               |       |  |   |
| Net cash used in  investing activities                                           | (2,719                                        | )          | (108,459 | ) |
|                                                                             |                                               |       |  |   |
|                                                                             |                                          |       |   |   |
| **Financing Activities:**                                                        |                                          | ** ** |   | ** ** |
| Proceeds from  long-term debt                                                    | 38,001                                        |       | 91,000 |   |
| Payments on long-term  debt and capital leases                                   | (68,852                                       | )          | (41,631 | ) |
| Book overdrafts                                                                  | (1,797                                        | )          | — |   |
| Repurchase of treasury  stock                                                    | —                                        |       | (12,118 | ) |
| Payments of loan  origination costs                                              | —                                        |       | (224 | ) |
|                                                                             |                                               |       |  |   |
| Net cash (used)  provided by financing activities                                | (32,648                                       | )          | 37,027 |   |
|                                                                             |                                               |       |  |   |
| Net increase  (decrease) in cash and cash equivalents                            | 1,806                                         |       | (32,298 | ) |
| Cash and cash  equivalents at beginning of period                                | 3,162                                         |       | 33,530 |   |
|                                                                             |                                               |       |  |   |
| Cash and cash  equivalents at end of period                                      | $                                             | 4,968      |   | $ | 1,232 |   |
|                                                                             |                                               |       |  |   |
|                                                                                  |                                               |            |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**NATIONAL EQUIPMENT SERVICES,INC.AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(in thousands, except per share data)**

**1. Organization**

             NationalEquipment Services, Inc. (the “Company”) is principally a holding companyorganized on June 4, 1996 (date of inception) under the laws of Delaware. TheCompany conducts its operations through its wholly owned subsidiaries acquiredsince the date of inception. The Company owns and operates equipment rental,sales and service facilities primarily located throughout the United States.The Company rents various types of equipment to a diverse customer base,including construction, petro-chemical and other industrial users. The Companyalso sells new and used rental equipment and related parts, and provides otherservices. The nature of the Company’s business is such that short-termobligations are typically met by cash flow generated from long-term assets.Consequently, consistent with industry practice, the accompanying balancesheets are presented on an unclassified basis.

**2. Basis of presentation**

             General— The accompanying unaudited financial statements as of and for the quartersended June 30, 2001 and 2000 have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. The December 31,2000 consolidated balance sheet was derived from audited financial statementsbut does not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments considered necessary for a fairpresentation, consisting only of normal recurring adjustments, have beenincluded. Results of operations for the interim periods are not necessarilyindicative of the results that may be expected for a full year.  Due to the seasonality which impacts asignificant portion of the Company's locations, the second and third quartersof the year are typically the most active quarters for the Company.

             ComprehensiveIncome – Statement of Financial Accounting Standards (“SFAS”) No. 130,“Reporting Comprehensive Income”, which requires comprehensive income and itscomponents to be disclosed in the financial statements for all periodspresented became effective in 1999.  Theonly item of other comprehensive income applicable to the Company is a changein the fair value of a derivative instrument, totaling $922 of expense duringthe period ending June 30, 2001.

             RecentlyIssued Accounting Standards — Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities”, as amended, became effective as of January 1, 2001.  Currently, the Company's only derivative isan interest rate swap used to hedge a portion of the Company's debt and isdesignated as a cash flow hedging instrument. The Company's objective for holding the derivative is to minimizeinterest rate risks and stabilize cash flows. The derivative is required to be recorded as an asset or liability onthe consolidated balance sheet at fair value, with an offset to othercomprehensive income to the extent the hedge is effective.  Any ineffectiveness in the hedge will berecorded as an adjustment to earnings. As of June 30, 2001, the derivative liability totaled $922 on theconsolidated balance sheet.  Hedgeineffectiveness, determined in accordance with SFAS No. 133, had no impact onearnings for the three months ended June 30, 2001.

             Reclassifications— Certain reclassifications of prior year financial statement amounts have beenmade to conform with the current year reporting.

 

**3. Earnings per share**

             TheCompany’s earnings per share for the three and six months ended June 30, 2001and 2000 are calculated as follows:

|                                                | **For  the Three Months Ended June 30,** |       | **For  the Six Months Ended June 30,** |       |
|-----------------------------------------------------|------------------------------------------|------------|----------------------------------------|------------|
|                                                | ****                                     |       | ****                                   |       | **** |   | **** |   |
|                                                | **2001**                                 |       | **2000**                               |       | **2001** |   | **2000** |   |
|                                                | ****                                     | ** ** | ****                                   | ** ** | **** | ** ** | **** | ** ** |
| Net income (loss)                                   | $                                        | (621       | )                                      | $          | 5,836 |   | $ | (7,925 | ) | $ | 4,015 |   |
| Less accretion on  preferred stock                  | (125                                     | )          | (125                                   | )          | (250 | ) | (250 | ) |
|                                                |                                          |       |                                        |       |  |   |  |   |
| Net income (loss)  available to common stockholders | $                                        | (746       | )                                      | $          | 5,711 |   | $ | (8,175 | ) | $ | 3,765 |   |
|                                                |                                     |       |                                   |       |   |   |   |   |
| Weighted average  shares                            | 21,151                                   |       | 21,423                                 |       | 21,151 |   | 22,052 |   |
|                                                | Less unvested stock                      | (227       | )                                      | (487       | ) | (260 | ) | (520 | ) |
|                                                |                                          |       |                                        |       |  |   |  |   |
| Basic weighted average  shares                      | 20,924                                   |       | 20,936                                 |       | 20,891 |   | 21,532 |   |
|                                                |                                     |       |                                   |       |   |   |   |   |
| Effect of dilutive  securities                      |                                     |       |                                   |       |   |   |   |   |
|                                                | Unvested stock                           | —     |                                   | 487        |   | — |   | 520 |   |
|                                                | Convertible preferred  stock             | —     |                                   | 7,692      |   | — |   | 7,692 |   |
|                                                |                                          |       |                                        |       |  |   |  |   |
|                                                |                                     |       |                                   |       |   |   |   |   |
| Diluted weighted  average shares                    | 20,924                                   |       | 29,115                                 |       | 20,891 |   | 29,744 |   |
|                                                |                                     |       |                                   |       |   |   |   |   |
| Basic income (loss)  per share                      | $                                        | (0.04      | )                                      | $          | 0.27 |   | $ | (0.39 | ) | $ | 0.17 |   |
|                                                |                                     |       |                                   |       |   |   |   |   |
| Diluted income (loss)  per share                    | $                                        | (0.04      | )                                      | $          | 0.20 |   | $ | (0.39 | ) | $ | 0.13 |   |

             Ifthe effect of the Company’s unvested stock, convertible preferred stock, anddilutive options were included in the above calculations for the three monthsand six months ended June 30, 2001, the diluted weighted average sharesoutstanding would have been 28,844 for both periods, resulting in a dilutedloss per share of ($0.03) and ($0.28), respectively.

**4. Inventory**

             Inventory,net consists of the following, at:

|                                        | **June  30, 2001** |   | **December  31, 2000** |   |
|---------------------------------------------|--------------------|--------|------------------------|--------|
|                                        | ****               |   | ****                   |   |
| New equipment                               | $                  | 11,583 |                   | $      | 11,812 |   |
| Used equipment                              | 4,930              |   | 4,801                  |   |
| Contractor supplies                         | 5,853              |   | 4,910                  |   |
| Parts                                       | 15,106             |   | 13,860                 |   |
| Reserves for excess  and obsolete inventory | (2,818             | )      | (2,116                 | )      |
|                                        |                    |   |                        |   |
|                                        | $                  | 34,654 |                   | $      | 33,267 |   |
|                                        |                    |   |                        |   |

**5. Debt**

             Duringthe first quarter of 2001, the Company reduced the committed amount under itsCredit Facility with First Union National Bank, as the agent, and certain otherfinancial institutions from $750,000 down to a maximum amount of $650,000(subject to availability based on certain financial tests including a borrowingbase).  Based upon the availableborrowing base at June 30, 2001, the Company had $77,984 available on therevolving credit facility.

             TheCompany’s Credit Facility and indentures contain a number of covenants that,among other things, set certain limitations on the granting of liens, assetsales, additional indebtedness, transactions with affiliates, restrictedpayments, investments and issuances of stock. In addition, the Company’s Credit Facility contains certain covenantsthat require the Company to maintain certain financial ratios.  The Company is currently in compliance withall covenants of the Credit Facility and the indentures.  While the Company expects to be incompliance with the covenants and satisfy the financial ratios and testsrelated to the Credit Facility and the indentures in the future, there can beno assurance that the Company will meet such financial ratios and tests.

 
**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands)**

             Thefollowing table shows information derived from the Company’s historicalconsolidated statements of operations as a percentage of total revenues. 
 **Three  Months Ended****June  30,** **Six  Months Ended  June 30,** **** **** **2001** **2000** **2001** **2000**  **** **** **** **** Rental revenues72.2%74.3%74.6%74.2%New equipment sales9.6 8.7 9.3 8.8 Rental equipment sales5.9 5.2 5.5 5.2 Parts, service and  other12.3 11.8 10.6 11.8      Total revenues100.0 100.0 100.0 100.0 Cost of revenues62.4 57.2 63.5 58.6      Gross margin37.6 42.8 36.5 41.4 Selling, general and  administrative expenses20.8 19.5 22.7 20.8 Non-rental  depreciation and amortization4.5 4.2 4.7 4.6      Operating income12.3 19.1 9.1 16.0 Other income, net0.0 0.0 0.1 0.0 Interest expense, net11.7 12.9 13.1 13.7      Income (loss) before  income taxes0.6 6.2 (3.9)2.3 Income tax expense  (benefit)1.0 2.5 (1.3)0.9      Net income (loss)(0.4)%3.7%(2.6)%1.4%
**Results of Operations**

*Results of Operations for the Three and Six Months EndedJune 30, 2001, and 2000*

             *Revenues.*Totalrevenues increased to $164,845 for the three months ended June 30, 2001 from$158,712 for the three months ended June 30, 2000 and to $303,627 for the sixmonths ended June 30, 2001 from $293,010 for the six months ended June 30, 2000.  Rental revenues increased to $118,985 forthe three months ended June 30, 2001 from $117,860 for the three months endedJune 30, 2000.  The increase in rentalrevenues was primarily the result of the increased size of the rentalfleet.  New equipment sales for thesecond quarter increased 14.5% from $13,882 in 2000 to $15,894 in 2001, dueprimarily to large projects in the Northeast. Rental fleet equipment sales for the second quarter increased 18.4% from$8,181 in 2000 to $9,683 in 2001, due primarily to opportunities in the Centraland Gulf Coast regions.

*             GrossProfit.*Gross profit decreasedto $61,912 for the three months ended June 30, 2001 from $67,965 for the threemonths ended June 30, 2000 and to $110,740 for the six months ended June 30,2001 from $121,300 for the six months ended June 30, 2000. Gross marginsdecreased to 37.6% from 42.8% and to 36.5% from 41.4% during these respectiveperiods.  The decreases in gross marginsare primarily due to overall lower physical utilization rates of the rentalfleet resulting from decreased activity among industrial customers primarily inthe Central United States.  In addition,the Company experienced an increase in the direct costs of equipment rental dueto additional labor and infrastructure necessary to support the increased sizeof the rental fleet.

             *Selling,General and Administrative Expenses.*Selling, general andadministrative expenses increased to $34,266 for the three months ended June30, 2001 from $30,879 for the three months ended June 30, 2000 and to $68,815for the six months ended June 30, 2001 from $61,055 for the six months endedJune 30, 2000.  As a percentage of totalrevenues, selling, general and administrative expenses increased to 20.8% from 19.5%and to 22.7% from 20.8% during these respective periods.  These increases are primarily the result ofadditional investments in personnel and systems to support the Company'sgrowth.

             *Non-rentalDepreciation and Amortization.*Non-rentaldepreciation and amortization increased to $7,421 for the three months endedJune 30, 2001 from $6,733 for the three months ended June 30, 2000 and to$14,430 for the six months ended June 30, 2001 from $13,579 for the six monthsended June 30, 2000.  These increases weredue primarily to additions of non-fleet capital items such as vehicles and shopequipment.

             *InterestExpense, Net.*Interest expense, net, decreased to $19,327 for thethree months ended June 30, 2001 from $ 20,630 for the three months ended June30, 2000 and to $39,837 for the six months ended June 30, 2001 from $40,112 forthe six months ended June 30, 2000. These decreases were due primarily to lower interest rates on theCompany's variable rate debt in the second quarter of 2001.  In addition, the Company maintained a loweraverage debt level in the second quarter of 2001 compared with the secondquarter of 2000.

             *Income TaxRate.*Due to permanent timing differences of non-deductiblegoodwill, income tax expense was higher than pre-tax income in the secondquarter of 2001.  The effective tax ratewas 40.5% for the second quarter of 2000.

**Liquidity and Capital Resources**

             TheCompany’s primary capital requirements are for the purchasing of new rentalequipment.  The Company’s other capitalexpenditures include buying vehicles used for delivery and maintenance, and forproperty and equipment. The Company purchases rental equipment throughout theyear to replace equipment that has been sold as well as to maintain adequatelevels of equipment to meet existing and new customer needs. Rental fleetpurchases for the Company were $13,839 and $120,188 in the first six months of2001 and 2000, respectively. The Company’s expenditures for rental fleet areexpected to be approximately $22,000 in 2001 compared to $165,000 in 2000. TheCompany expects to minimize capital expenditures until such time as thebusiness environment improves.

             Forthe six months ended June 30, 2001 and 2000, the Company’s net cash provided byoperations was $37,173 and $39,134, respectively. The decrease in 2001 was dueprimarily to decreased net income and timing of payments for currentliabilities offset in part by collections on outstanding accountsreceivable.  For the six months endedJune 30, 2001 and 2000, the Company’s net cash used in investing activities was$2,719 and $108,459, respectively.  Netcash used for investing activities consists primarily of business acquisitionsand purchases of rental equipment and property and equipment. The decrease in2001 was due primarily to reduced purchases of rental equipment and loweracquisition activity.  For the sixmonths ended June 30, 2001 and 2000, the Company’s net cash provided byfinancing activities was ($32,648) and $37,027, respectively. Net cash providedby financing activities consists primarily of borrowings under the Company’scredit facility and was lower in 2001 due to reduced rental fleet purchasingand the reduction of indebtedness under the Company's credit facility.  The Company intends to continue to reducethe amount of its indebtedness under its credit facility.

             TheCompany’s credit facility provides for a $100 million term loan and a revolvingcredit facility up to a maximum of $550 million (subject to availability basedon certain financial tests including a borrowing base) to meet acquisitionneeds, as well as seasonal working capital and general corporate requirements.In March 2001 the Company reduced the committed amount under its revolvingcredit facility to $550 million from $650 million.  As of June 30, 2001, $567,000 was outstanding under the credit facility.Based upon the available borrowing base at June 30, 2001, the Company had$77,984 available on the revolving credit facility loan.  The credit facility contains certaincovenants that require the Company to, among other things, satisfy certain financialtests relating to 1) the ratio of senior debt to EBITDA, 2) minimum interestcoverage ratio and 3) the ratio of funded debt to EBITDA.  The agreements governing the credit facilityalso contain various other covenants that restrict the Company’s ability to,among other things, 1) incur additional indebtedness, 2) permit liens to attachto its assets, 3) pay dividends or make other restricted payments on its commonstock and certain other securities and 4) make acquisitions unless certainfinancial conditions are satisfied.  The Company is currently in compliance with all covenants governing thecredit facility.  While the Companyexpects to be in compliance with the covenants and satisfy the financial ratiosand tests related to the credit facility in the future, there can be noassurance that the Company will meet such financial ratios and tests.

             During1997, the Company issued $100,000 of Senior Subordinated Notes due 2004 (the“Series A Notes”) at a discount netting proceeds of $98,767.  During 1998, the Company completed itsexchange of $100,000 of Senior Subordinated Notes due 2004, Series B (the“Series B Notes”), which have been registered for public trading, for theSeries A Notes.

             Alsoduring 1998, the Company issued $125,000 of Senior Subordinated Notes due 2004,Series C (the “Series C Notes”) at a discount netting proceeds of$122,288.  During 1999, the Companyissued $50,000 of additional Series C Notes, at a discount netting proceeds of$49,000.  Later during 1999, the Companycompleted its exchange of $175,000 of Senior Subordinated Notes due 2004,Series D (the “Series D Notes”), which have been registered for public trading,for the Series C Notes.

             TheCompany accretes the original issue discount of the Series B Notes and Series DNotes over the term of the notes using the effective interest rate method.  The indentures for the Series B and Series DNotes contain a number of covenants that, among other things, set certainlimitations on the granting of liens, asset sales, additional indebtedness,transactions with affiliates, restricted payments, investments, issuances ofstock and payment of dividends.  TheCompany is currently in compliance with all such covenants under theindentures.

             TheCompany believes that its credit facility, together with funds generated byoperations, will provide the Company with sufficient liquidity and capitalresources in the near-term to finance its operations and pursue its businessstrategy.  Over the long term, theCompany will need to refinance its credit facility, its Series B Notes and itsSeries D Notes since the credit facility becomes due and payable in July 2003and its Series B Notes and Series D Notes in November 2004.

**General Economic Conditions, Inflation and Seasonality**

             TheCompany’s operating results may be adversely affected by 1) changes in generaleconomic conditions, including changes in construction and industrial activity,or increases in interest rates, or 2) adverse weather conditions that maytemporarily decrease construction and industrial activity in a particulargeographic area. Although the Company cannot accurately anticipate the effectof inflation on its operations, management believes that inflation has not hada material impact on the Company’s results of operations and is not likely toin the foreseeable future.

             TheCompany’s revenues and operating results fluctuate due to the seasonal natureof the industry in which the Company operates (with rental activity tending tobe lower in winter).

**Recently Issued Accounting Pronouncements**

             TheCompany adopted Statement of Financial Accounting Standards ("SFAS")No. 133, "Accounting for Derivative Instruments and HedgingActivities," as amended, effective January 1, 2001.  Due to the interest rate swap effectiveApril 18, 2001, the Company's consolidated balance sheet includes a derivativeliability of $922.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

             TheCompany’s credit facility, as amended, provides the Company with a $100 millionterm loan and permits the Company to borrow up to an additional $550 million ofrevolving loans provided that certain conditions and financial tests are met,subject to a borrowing base. Borrowings under the credit facility bearinterest, at the Company’s option, at a specified base rate or Eurodollar rateplus the applicable borrowing margin. At August 10, 2001, the Company had totalborrowings under the credit facility of $559 million, $159 million of which wassubject to interest rate risk after giving effect to the interest rate swapcontract discussed below.  Each 100basis point increase in interest rates on the variable rate debt would decreasepretax earnings by approximately $1.6 million.

             TheCompany may, from time to time, use interest rate swap contracts to hedge theimpact of interest rate fluctuations on certain variable rate debt.  The Company does not hold or issuederivative financial instruments for trading or speculative purposes.  Effective April 18, 2001 the Company enteredinto an interest rate swap contract, which fixes the interest rate at 4.71% on$400 million of variable rate debt through April 17, 2003.  The interest differential is paid orreceived on a monthly basis and recognized currently as a component of interestexpense.  The counterparty to the swapis a major financial institution and management believes that the risk ofincurring credit losses is remote.

**Forward Looking Statements**

**Note: This document contains forward-looking statements asencouraged by the Private Securities Litigation Reform Act of 1995. Allstatements contained in this document, other than historical information, areforward-looking statements. These statements represent management’s currentjudgment on what the future holds. A variety of factors could cause businessconditions and the Company’s actual results to differ materially from thoseexpected by the Company or expressed in the Company’s forward-lookingstatements. These factors include, without limitation, the Company’s ability tosuccessfully integrate acquired businesses; changes in market price or marketdemand; loss of business from customers; unanticipated expenses; changes infinancial markets; and other factors discussed in the Company’s filings withthe Securities and Exchange Commission.**

 

**PART II. OTHER INFORMATION**

**ITEM1.   LEGAL PROCEEDINGS**

             Notapplicable.

**ITEM 2.   CHANGES INSECURITIES**

             Notapplicable.

**ITEM 3.   DEFAULTSUPON SENIOR SECURITIES**

             Notapplicable.

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

             TheCompany held its annual shareholders meeting on May 31, 2001.  See exhibit 22.1 for a report of the votingon the matters considered at the meeting.

**ITEM5.   OTHER INFORMATION**

             Notapplicable.

**ITEM 6.   EXHIBITS ANDREPORTS ON FORM 8-K**

             SeeIndex of Exhibits on page 13. The Company did not file any Current Reports onForm 8-K for the quarterly period ended June 30, 2001.

 

**SIGNATURE**

             **Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on August 10, 2001.**

 
NATIONAL EQUIPMENT SERVICES, INC.  By:/S/     DENNIS O’CONNOR  Dennis O’Connor *Chief Financial Officer*  
Form 10-Q: For the quarter ended June 30,2001.

 

**INDEX OF EXHIBITS**
**Exhibit  Number** Description of  Document****    11.1 Statement  re Computation of Per Share Earnings. Not required because the relevant  computations can be clearly determined from the material contained in the  financial statements included herein.22.1  Certificate  and Report of Inspector of Election.