**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý**                                              | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                    |                                                                                          |
| **For the  quarterly period ended March 31, 2003** |
|                                                    |                                                                                          |
| **OR**                                                  |
|                                                    |                                                                                          |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                    |                                                                                          |
| **Commission  File No. 001-14163**                 |

 

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**National EquipmentServices, Inc.**

(Exact name of registrantas specified in its charter)

 

| **DELAWARE**                                                  |   | **36-4087016**                        |
|---------------------------------------------------------------|--------|---------------------------------------|
| (State or other Jurisdiction ofIncorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                          |   |                                  |
| **1603 Orrington  Avenue, Suite 1600, Evanston, Illinois**    |   | **60201**                             |
| (Address of principal executive offices)                      |   | (Zip code)                            |
|                                                          |   |                                  |
| **(847) 733-1000**                                            |
| (Registrant’s telephone number, including area code)     |

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

There were 21,151,163 shares of Common Stock ($.01 par value)outstanding as of May 7, 2003.

 

 

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**NATIONAL EQUIPMENT SERVICES, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

**For the Quarter ended**

**March 31, 2003**

**INDEX**

 
| PART I.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |
| Item 1.                             | Financial Statements |
|                                |   |
|                                | Consolidated Balance Sheets  at March 31, 2003 (Unaudited) and December 31, 2002 |
|                                |   |
|                                | Consolidated Statements of  Operations and Comprehensive Loss for the three months ended March 31, 2003  and 2002 (Unaudited) |
|                                |   |
|                                | Consolidated  Statements of Cash Flows for the three months ended March 31, 2003 and 2002  (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 |
|                                |   |
| Item 4.                             | Controls and Procedures |
|                                |   |
| 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                  |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**NATIONAL EQUIPMENT SERVICES, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share data)**

 
|                                                                                                  |   | **March 31, 2003** |    | **December 31, 2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------|--------|
|                                                                                                  |   | **(Unaudited)**    |    |                  |   |
|                                                                                                  |   |               |    |                  |   |
| **Assets**                                                                                            |   |               |    |                  |   |
| Cash and cash equivalents                                                                             |   | $                  | 7,112   |                  | $      | 15,184 |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of $4,166 and $5,477, respectively |   | 115,390            |    | 123,094               |   |
| Inventory, net                                                                                        |   | 16,549             |    | 18,186                |   |
| Rental equipment, net                                                                                 |   | 470,230            |    | 492,775               |   |
| Property and equipment, net                                                                           |   | 43,557             |    | 45,803                |   |
| Intangible assets, net                                                                                |   | 139,664            |    | 139,978               |   |
| Loan origination costs, net                                                                           |   | 4,361              |    | 6,791                 |   |
| Prepaid expenses and other assets, net                                                                |   | 24,654             |    | 20,811                |   |
| Total assets                                                                                          |   | $                  | 821,517 |                  | $      | 862,622 |   |
|                                                                                                  |   |               |    |                  |   |
| **Liabilities**                                                                                       |   |               |    |                  |   |
| Book overdraft                                                                                        |   | $                  | —  |                  | $      | 490 |   |
| Trade accounts payable                                                                                |   | 12,698             |    | 28,965                |   |
| Accrued interest                                                                                      |   | 10,836             |    | 8,592                 |   |
| Accrued expenses and other liabilities                                                                |   | 50,869             |    | 51,715                |   |
| Debt                                                                                                  |   | 763,176            |    | 763,276               |   |
| Total liabilities                                                                                     |   | 837,579            |    | 853,038               |   |
| Senior redeemable convertible preferred stock                                                         |   | 96,921             |    | 96,796                |   |
| Commitments and contingencies                                                                         |   | —             |    | —                |   |
| **Stockholders’ equity (deficit):**                                                              |   |               |    |                  |   |
| 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 (accumulated deficit)                                                               |   | (217,329           | )       | (187,589              | )      |
| Stock subscriptions receivable                                                                        |   | (16                | )       | (80                   | )      |
| Treasury stock at cost, 3,019 shares                                                                  |   | (19,062            | )       | (19,062               | )      |
| Accumulated other comprehensive loss                                                                  |   | (704               | )       | (4,609                | )      |
| Total stockholders’ equity (deficit)                                                             |   | (112,983           | )       | (87,212               | )      |
| Total liabilities and stockholders’ equity (deficit)                                             |   | $                  | 821,517 |                  | $      | 862,622 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

2

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**NATIONAL EQUIPMENT SERVICES, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVELOSS (UNAUDITED)**

**(in thousands, except per share data)**

 
|                                                               |   | **For the Three Months Ended March 31,** |    |
|--------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                               |   | **2003**                                 |    | **2002** |   |
| ** **                                                         |   |                                     |    |   |   |
| **Revenues**                                                       |   |                                     |    |   |   |
| Rental and service revenues                                        |   | $                                        | 106,612 |   | $ | 115,762 |   |
| New equipment sales                                                |   | 8,790                                    |    | 9,462 |   |
| Rental equipment sales                                             |   | 8,345                                    |    | 6,507 |   |
| Other revenues                                                     |   | 5,871                                    |    | 6,720 |   |
| Total revenues                                                     |   | $                                        | 129,618 |   | $ | 138,451 |   |
| **Cost of revenues**                                               |   |                                     |    |   |   |
| Rental equipment depreciation                                      |   | 26,247                                   |    | 27,546 |   |
| Cost of rental and service revenues                                |   | 54,890                                   |    | 57,170 |   |
| Cost of new equipment sales                                        |   | 7,474                                    |    | 7,344 |   |
| Cost of rental equipment sales                                     |   | 5,437                                    |    | 4,660 |   |
| Other cost of revenues                                             |   | 5,653                                    |    | 6,707 |   |
| Total cost of revenues                                             |   | 99,701                                   |    | 103,427 |   |
| Gross profit                                                       |   | 29,917                                   |    | 35,024 |   |
| Selling, general and administrative expenses                       |   | 35,073                                   |    | 31,225 |   |
| Non-rental depreciation and amortization                           |   | 1,933                                    |    | 2,440 |   |
| Operating (loss) income                                            |   | (7,089                                   | )       | 1,359 |   |
| Other income, net                                                  |   | 122                                      |    | 446 |   |
| Interest expense, net                                              |   | 22,647                                   |    | 16,683 |   |
| Loss from continuing operations before income taxes                |   | (29,614                                  | )       | (14,878 | ) |
| Income tax benefit                                                 |   | —                                   |    | — |   |
| Loss from continuing operations                                    |   | (29,614                                  | )       | (14,878 | ) |
| Discontinued operations                                            |   |                                     |    |   |   |
| Loss from discontinued operations, net of tax                      |   | —                                   |    | (1,631 | ) |
| Loss before cumulative effect of a change in accounting  principle |   | (29,614                                  | )       | (16,509 | ) |
| Cumulative effect of a change in accounting principle,  net of tax |   | —                                   |    | (129,505 | ) |
| Net loss                                                           |   | $                                        | (29,614 | ) | $ | (146,014 | ) |
| Other comprehensive income                                         |   | 3,905                                    |    | 3,668 |   |
| Comprehensive loss                                                 |   | $                                        | (25,709 | ) | $ | (142,346 | ) |
| Basic loss per common share:                                       |   |                                     |    |   |   |
| Continuing operations                                              |   | $                                        | (1.41   | ) | $ | (0.70 | ) |
| Discontinued operations                                            |   | —                                   |    | (0.08 | ) |
| Cumulative effect of a change in accounting principle              |   | —                                   |    | (6.14 | ) |
| Net loss                                                           |   | $                                        | (1.41   | ) | $ | (6.92 | ) |
| Diluted loss per common share:                                     |   |                                     |    |   |   |
| Continuing operations                                              |   | $                                        | (1.41   | ) | $ | (0.70 | ) |
| Discontinued operations                                            |   | —                                   |    | (0.08 | ) |
| Cumulative effect of a change in accounting principle              |   | —                                   |    | (6.14 | ) |
| Net loss                                                           |   | $                                        | (1.41   | ) | $ | (6.92 | ) |
| Weighted average shares outstanding:                               |   |                                     |    |   |   |
| Basic calculation                                                  |   | 21,151                                   |    | 21,119 |   |
| Diluted calculation                                                |   | 21,151                                   |    | 21,119 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

3

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**NATIONAL EQUIPMENT SERVICES, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(in thousands)**

 
|                                                                             |   | **For the Three Months Ended March 31,** |    |
|----------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                             |   | **2003**                                 |    | **2002** |   |
|                                                                             |   |                                     |    |   |   |
| **Operating Activities:**                                                        |   |                                     |    |   |   |
| Net loss                                                                         |   | $                                        | (29,614 | ) | $ | (146,014 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |   |                                     |    |   |   |
| Depreciation and amortization                                                    |   | 28,180                                   |    | 29,986 |   |
| Cumulative effect of a change in accounting principle                            |   | —                                   |    | 129,505 |   |
| Amortization of deferred finance costs and debt  discount                        |   | 2,628                                    |    | 853 |   |
| Gain on sale of equipment                                                        |   | (3,002                                   | )       | (1,919 | ) |
| Changes in operating assets and liabilities, net of  acquisitions:               |   |                                     |    |   |   |
| Trade accounts receivable                                                        |   | 7,704                                    |    | (11,500 | ) |
| Inventory                                                                        |   | 1,637                                    |    | (874 | ) |
| Prepaid expenses and other assets                                                |   | (4,594                                   | )       | (3,155 | ) |
| Trade accounts payable                                                           |   | (16,267                                  | )       | (4,183 | ) |
| Accrued expenses and other liabilities                                           |   | 5,956                                    |    | 10,690 |   |
| Net cash flows (used in) provided by continuing  operating activities            |   | (7,372                                   | )       | 3,389 |   |
| Net cash flows provided by discontinued operating  activities                    |   | 215                                      |    | 2,540 |   |
| Net cash flows (used in) provided by operating  activities                       |   | (7,157                                   | )       | 5,929 |   |
| **Investing Activities:**                                                        |   |                                     |    |   |   |
| Purchases of rental equipment                                                    |   | (6,560                                   | )       | (11,953 | ) |
| Proceeds from sale of rental equipment                                           |   | 8,345                                    |    | 6,507 |   |
| Purchases of property and equipment                                              |   | (2,440                                   | )       | (1,198 | ) |
| Proceeds from sale of property and equipment                                     |   | 529                                      |    | 399 |   |
| Net cash flows used in continuing investing activities                           |   | (126                                     | )       | (6,245 | ) |
| Net cash flows provided by discontinued investing  activities                    |   | —                                   |    | 5 |   |
| Net cash used in investing activities                                            |   | (126                                     | )       | (6,240 | ) |
| **Financing Activities:**                                                        |   |                                     |    |   |   |
| Proceeds from long-term debt                                                     |   | —                                   |    | 27,000 |   |
| Payments on long-term debt                                                       |   | (299                                     | )       | (27,082 | ) |
| Book overdraft                                                                   |   | (490                                     | )       | (3,499 | ) |
| Net cash used in financing activities                                            |   | (789                                     | )       | (3,581 | ) |
| Net decrease in cash and cash equivalents                                        |   | (8,072                                   | )       | (3,892 | ) |
| Cash and cash equivalents at beginning of period                                 |   | 15,184                                   |    | 4,199 |   |
| Cash and cash equivalents at end of period                                       |   | $                                        | 7,112   |   | $ | 307 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

4

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**NATIONAL EQUIPMENT SERVICES, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts in thousands, except per share data)**

 

**1.  Organization**

 

National Equipment Services, Inc. (the “Company”) is principally aholding company organized on June 4, 1996 (date of inception) under thelaws of Delaware. The Company conducts its operations through its wholly ownedsubsidiaries acquired since the date of inception. The Company owns andoperates equipment rental, sales and service facilities primarily locatedthroughout the United States. The Company rents various types of equipment to adiverse customer base, including construction, automotive and other industrialusers. The Company also sells new and used equipment out of its rental fleet,sells related parts and provides other services. The nature of the Company’sbusiness is such that short-term obligations are typically met by cash flowgenerated from long-term assets. Consequently, consistent with industrypractice, the accompanying consolidated balance sheets are presented on anunclassified basis.

 

The consolidated financial statements include accounts of the Companyand its subsidiaries.  All significantintercompany transactions and balances have been eliminated.

 

**2.  Going concern**

 

The Company’s financial performance has been negatively affected overthe last two years due to lower activity levels in the economy, decreasingrental rates and higher operating costs. The resulting decrease in earnings combined with existing cash needs forworking capital significantly affected the Company’s cash flows from operationsin 2002.  These trends have continued inthe first quarter of 2003.  In responseto this environment, management initiated several actions during 2002 includingactions to reduce its operating expense through personnel reductions andconsolidations of branch and support operations, as well as asset sales toreduce its debt, including the sale of the Trench Shoring business.  Although these actions resulted in reduceddebt levels from 2001 to 2002 of approximately $105,700, the Company’sliquidity is strained.  Additionally, asignificant portion of the Company’s debt matures in July 2003.

 

During January 2003, the Company notified the senior bank lenders(“Senior Lenders”) under its Amended and Restated Credit Agreement dated as ofAugust 6, 1999, as amended (the “credit facility”), that it was in defaultunder the credit facility.  As ofDecember 31, 2002, the Company and the Senior Lenders entered into AmendmentNo. 8 to the credit facility, which, among other things, amended the definitionof “Borrowing Base.”  As of January 23,2003, the Company and the Senior Lenders entered into an agreement (the“Forbearance Agreement”), pursuant to which the Senior Lenders agreed to aforbearance period during which they agreed not to exercise certain remediesavailable to them as a result of the existing defaults under the Company’scredit facility.  The initialforbearance period ended on March 14, 2003.

 

As of March 14, 2003, the Company and the Senior Lenders entered intothe Second Forbearance Agreement and Amendment No. 9 to the creditfacility  (the “Second ForbearanceAgreement”), which extended the forbearance period.  The forbearance period, which is currently scheduled to end onMay 14, 2003, will end sooner upon the occurrence of certain events such as anevent of default under the credit facility (other than an Acknowledged Event ofDefault (as defined)), or in the event the Company fails to complete certainactions leading to a financial restructuring. The Company is currently in discussions with its Senior Lendersregarding an extension of the Second Forbearance Agreement.

 

Under the terms of the Second Forbearance Agreement, the likelihood isremote that the Company would be able to access any additional funds from itscredit facility.  The Company iscurrently in discussions with its Senior Lenders about the possible terms of afinancial restructuring.  The Company isalso in discussions with an *Ad Hoc* Committee representing holders (“Noteholders”)of the Company’s outstanding Senior Subordinated Notes due November 2004.  The significant terms and conditions of afinancial restructuring being negotiated include negotiations about:  extension of debt maturities and repaymentschedules, debt forgiveness, conversion of debt to equity or other equity-likeinstruments, additional equity investments, further asset sales, interest ratesand other yield matters, as well as the covenants associated with therenegotiated capital instruments.

 

The next scheduled interest payment due on the Senior Subordinated Notesis on May 30, 2003.  Under the creditfacility, the Senior Lenders have the ability to issue a notice to the Companypreventing the Company from paying such interest if the Company is in defaultunder the credit facility.  The failureby the Company to pay interest on the Senior Subordinated Notes when due, ifnot cured within 30 days, would be an event of default under the SeniorSubordinated Notes.  In the event theCompany is unable to reach agreement with the Senior Lenders and Noteholders onacceptable terms and conditions, the Company would be forced to seek toreorganize its business under Chapter 11 of the U.S. bankruptcy laws.

 

While management continues to execute the Company’s cost savingsinitiatives and to manage its working capital, there are no assurances thatthese or future efforts will be successful in improving the Company’s financialperformance or liquidity.  Management is

 

5

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alsounable to predict the timing or outcome of the negotiations discussedabove.  Until such time as thenegotiations are completed or the Company seeks to reorganize its businessunder Chapter 11 of the U.S. bankruptcy laws, which could happen as soon as thesecond quarter, it is not possible to estimate the effect on the Company’srecorded values of its assets and liabilities. There is a high likelihood these adjustments will be material to thefinancial statements, but no adjustments have been made as of March 31, 2003due to the uncertainty associated with future events and resulting accountingconsequences.  The deterioration of theCompany’s financial performance and resulting defaults under the credit facilityalso raise substantial doubt about the ability of the Company to continue as agoing concern.

 

**3.  Basis of presentation**

 

**General**—The accompanying unaudited financial statementsas of and for the quarters ended March 31, 2003 and 2002 have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. The December 31, 2002 consolidatedbalance sheet was derived from audited financial statements but does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments considered necessary for a fair presentation,consisting only of normal recurring adjustments, have been included. As notedin Note 2, no adjustments have been made to reflect the possibility of afinancial restructuring due to the uncertainty associated with such arestructuring. Results of operations for the interim periods are notnecessarily indicative of the results that may be expected for a fullyear.  Due to the seasonality thatimpacts a significant portion of the Company’s locations, the second and thirdquarters are typically the most active quarters for the Company.

 

**DerivativeInstrument**—Statement ofFinancial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities”, as amended, became effective asof January 1, 2001. The Company’s only derivative was an interest rateswap used to hedge a portion of the Company’s debt and was designated as a cashflow hedging instrument. The derivative was recorded as an asset or liabilityon the consolidated balance sheet at fair value, with any changes in the fairvalue of the derivative recorded in other comprehensive income.  As of March 31, 2003, the derivativeliability totaled $1,257 and was recorded as an accrued liability on theconsolidated balance sheet.  It wasextinguished upon the expiration of the interest rate swap agreement on April17, 2003.

 

**ComprehensiveIncome**—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. Included in other comprehensive income is achange in the fair value of a derivative instrument, totaling $3,352 of incomeduring the three-month period ending March 31, 2003 and unrealized foreigncurrency translation gains totaling $553.

 

**Stock-Based Compensation**–The Company accounts for its stock-basedemployee compensation plan under the recognition and measurement principles ofAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  In accordance with the intrinsic value method, no compensationexpense is recognized for the Company’s stock option plan.  Had compensation expense been determinedbased on the fair value at the assumed grant date for awards under this planconsistent with the method of SFAS No. 123, “Accounting for Stock-BasedCompensation,” the Company’s net loss and net loss per share would have been asfollows for the quarters ended March 31:

 
|                                                                                                        |   | **2003** |    | **2002** |   |
|-------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                        |   |     |    |     |   |
| Net loss, as reported                                                                                       |   | $        | (29,614 | )        | $      | (146,014 | ) |
| Deduct: Total stock-based employee compensation expense  determined under the fair value method, net of tax |   | (3       | )       | (296     | )      |
| Pro forma net loss                                                                                          |   | $        | (29,617 | )        | $      | (146,310 | ) |
|                                                                                                        |   |     |    |     |   |
| Basic loss per share, as reported                                                                           |   | $        | (1.41   | )        | $      | (6.92 | ) |
| Pro forma basic loss per share                                                                              |   | $        | (1.41   | )        | $      | (6.93 | ) |
| Diluted loss per share, as reported                                                                         |   | $        | (1.41   | )        | $      | (6.92 | ) |
| Pro forma diluted loss per share                                                                            |   | $        | (1.41   | )        | $      | (6.93 | ) |

 

 

6

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**Recently IssuedAccounting Standards**–InMay 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145,“Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13 and Technical Corrections.”  ThisStatement rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishmentof Debt,” and an amendment to that Statement, SFAS No. 64, “Extinguishment ofDebt Made to Satisfy Sinking-Fund Requirements.”  This Statement amends SFAS No. 13, “Accounting for Leases,” toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions.  The Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions.  The provisions of this Statement related tothe recission of SFAS No. 4 are effective beginning in 2003.  All other provisions are effective after May15, 2002.   As discussed in Note 2, itis possible the Company will restructure its debt.  If a restructuring should occur, the related gain will beaccounted for pursuant to SFAS No.145. It is not possible to estimate the impact of this new pronouncementgiven the uncertainties surrounding the potential outcomes of any suchrestructuring.

 

On July 30, 2002, the FASB issued Statement of Financial AccountingStandards No. 146 (SFAS 146), “Accounting for Costs Associated with Exit orDisposal Activities.”  SFAS 146 requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than as of the date of a commitment to an exit ordisposal plan.  Examples of costscovered by SAFS 146 included lease termination costs and certain employeeseverance costs that are associated with a restructuring, discontinuedoperation, plant closing or other exit or disposal activity.  SFAS 146 also supercedes, in its entirety,previous accounting guidance that was provided by Emerging Issues Task ForceIssue No. 94-3, “Liability Recognition for Certain Employee TerminationsBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002. The effects of this new standard were immaterial in the first quarter.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure”.  This standard provides alternative methods of transition to thefair value method of accounting for stock-based employee compensation underSFAS No. 123, “Accounting for Stock-Based Compensation,” but does not requirethe Company to use the fair value method. This standard also amends certain disclosure requirements related tostock-based employee compensation.  TheCompany adopted the disclosure portion of this standard as of December 31,2002.

 

**Reclassifications**—Certain reclassifications of prior year financialstatement amounts have been made to conform to current year reporting.

 

**4.  Dispositions**

 

On June 30, 2002, the Company sold its underground trench shoringbusiness. The proceeds of $108,890 from the sale were used to repay existingindebtedness under the Credit Facility. In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” the financialcondition and results of operations of this business are reflected herein asdiscontinued operations.

 

**5.  (Loss) earnings per share**

 

The Company’s (loss) earnings per share for the three months ended March 31,2003 and 2002 are calculated as follows:

 
|                                                              |   | **2003** |    | **2002** |   |
|-------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                              |   |     |    |     |   |
| Loss from continuing operations                                   |   | $        | (29,614 | )        | $      | (14,878 | ) |
| Less accretion on preferred stock                                 |   | (125     | )       | (125     | )      |
| Loss from continuing operations available to common  stockholders |   | $        | (29,739 | )        | $      | (15,003 | ) |
| Weighted average shares                                           |   | 21,151   |    | 21,119   |   |
| Less unvested stock                                               |   | —   |    | —   |   |
| Basic weighted average shares                                     |   | 21,151   |    | 21,119   |   |
| Effect of dilutive securities                                     |   |     |    |     |   |
| Unvested stock                                                    |   | —   |    | —   |   |
| Convertible preferred stock                                       |   | —   |    | —   |   |
| Diluted weighted average shares                                   |   | 21,151   |    | 21,119   |   |
| Basic loss per share from continuing operations                   |   | $        | (1.41   | )        | $      | (0.70 | ) |
| Diluted loss per share from continuing operations                 |   | $        | (1.41   | )        | $      | (0.70 | ) |

 

The effect of dilutive securities is omitted from the computation ofdiluted (loss) earnings per share during periods of net loss because inclusionwould be anti-dilutive by reducing the loss per share. At March 31, 2003 and2002, stock options totaling approximately 2,111 and 2,602, respectively, 

7

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andconvertible preferred stock shares of 7,692 in each quarter were excluded fromthe computation of the diluted (loss) earnings per share because the exerciseprices were greater than the average market price of the common shares.

 

**6.  Inventory**

 

Inventory, net consists of the following, at:

 
|                                       |   | **March 31,****2003** |   | **December 31,****2002** |   |
|--------------------------------------------|--------|-----------------------|--------|-------------------------------|--------|
|                                       |   |                  |   |                          |   |
| New equipment                              |   | $                     | 3,084  |                          | $      | 4,007 |   |
| Used equipment                             |   | 327                   |   | 1,136                         |   |
| Supplies                                   |   | 5,051                 |   | 4,735                         |   |
| Parts                                      |   | 12,313                |   | 13,732                        |   |
|                                       |   | 20,775                |   | 23,610                        |   |
| Reserves for excess and obsolete inventory |   | (4,226                | )      | (5,424                        | )      |
|                                       |   | $                     | 16,549 |                          | $      | 18,186 |   |

 

**7.  Debt**

 

The Company’s Credit Facility provides for a term loan of $70,000 and arevolving loan of $480,000. Based upon the available borrowing base (which isbased on inventory, accounts receivable and rental equipment levels) at March31, 2003, the Company had no availability on the revolving Credit Facilityloan. The Credit Facility is collateralized by substantially all of theCompany’s assets.

 

During 1997, the Company issued $100,000 of Senior Subordinated Notesdue 2004 (the “Series A Notes”) at a discount netting proceeds of $99,000.During 1998, the Company completed its exchange of $100,000 of SeniorSubordinated Notes due 2004, Series B (the “Series B Notes”), which havebeen registered for public trading, for the Series A Notes. During 1998,the Company issued $125,000 of Senior Subordinated Notes due 2004,Series C (the “Series C Notes”) at a discount netting proceeds of$122,000. During 1999, the Company issued $50,000 of additional Series CNotes, at a discount netting proceeds of $49,000. Later during 1999, theCompany completed its exchange of $175,000 of Senior Subordinated Notes due2004, Series D (the “Series D Notes”), which have been registered forpublic trading, for the Series C Notes.

 

The Company is a holding company with no independent operations, and theCompany’s assets (excluding the intercompany receivables and common stock ofits subsidiaries) are insignificant. All of the Company’s subsidiaries makefull, unconditional, joint and several guarantees of the Series B Notesand the Series D Notes, and all of these subsidiaries are directly orindirectly wholly-owned by the Company. There are no restrictions on theability of the Company to obtain funds from these subsidiaries by dividend orloan.  The separate financial statementsof each of these wholly-owned subsidiaries are not presented as managementbelieves that separate financial statements and other disclosures concerningthese subsidiaries are not individually meaningful for presentation or materialto investors.

 

The credit facility contains certain covenants that require the Companyto, among other things, satisfy certain financial tests relating to 1) theratio of senior debt to EBITDA, 2) minimum interest coverage ratio and3) the ratio of funded debt to EBITDA. The credit facility also containsvarious other covenants that restrict the Company’s ability to, among otherthings, 1) incur additional indebtedness, 2) permit liens to attachto its assets, 3) pay dividends or make other restricted payments on itscommon stock and certain other securities and 4) make acquisitions unlesscertain financial conditions are satisfied. As of December 31, 2002, theCompany was in default under the financial covenants governing the creditfacility.   As of January 23, 2003, theCompany and the lenders under the credit facility entered in a forbearanceagreement with an initial expiration of March 14, 2003.  As of March 14, 2003, the Company and thelenders under the credit facility entered into a second forbearance agreementwhich extended the forbearance period until May 14, 2003, subject to earlierexpiration upon the occurrence of certain circumstances.  The Company is currently in discussions withits lenders under the credit facility regarding an extension of the secondforbearance agreement.

 

As a result of the covenant defaults and issues with the borrowing base,the Company does not believe that it has sufficient liquidity and capitalresources to finance its operations and pursue its business strategy. TheCompany will need to refinance its credit facility and its Series B Notesand Series D Notes since the Credit Facility becomes due and payable inJuly 2003 and its Series B Notes and Series D Notes become due andpayable in November 2004. There can be no assurance that the Company willbe able to raise the necessary capital on favorable terms, which could have amaterial effect on the Company’s future financial condition and results ofoperations.  Refer to Note 2 for furtherdiscussion.

 

8

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**8.  Segment information**

 

All operations aremanaged at the branch level.  Seniormanagement makes decisions regarding investments and capital allocations on aregional basis.  The Company’ssignificant operating segments include Traffic Safety, East, Southwest andCentral.  The Company has two reportingsegments, Traffic Safety and General Rental and Other. The Traffic Safetyoperations have different contractual, regulatory and capital requirements thanthe General Rental operations. Intersegment revenues are not material and theoperating earnings (losses) of the segments do not include interest expense(income). The Company has no single customer that represents greater than 10%of the Company’s consolidated revenues. Identifiable assets are those used inthe Company’s operations in each segment.

 

9

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The following table presents the information for the reported segments forthe quarters ended March 31:

 
|                          |   | **Traffic  Safety** |   | **General Rental and****Other** |   | **Discontinued****Operations** |   | **Consolidated** |     |
|-------------------------------|--------|---------------------|--------|---------------------------------|--------|--------------------------------|--------|------------------|----------|
| **2003:**                     |   |                |   |                            |   |                           |   |             |     |
| Rental and service revenues   |   | $                   | 14,977 |                            | $      | 91,635                         |   |             |     | $ | 106,612 |   |
| New equipment sales           |   | 459                 |   | 8,331                           |   |                           |   | 8,790            |     |
| Rental equipment sales        |   | 18                  |   | 8,327                           |   |                           |   | 8,345            |     |
| Other revenues                |   | 751                 |   | 5,120                           |   |                           |   | 5,871            |     |
| Total revenues                |   | 16,205              |   | 113,413                         |   |                           |   | 129,618          |     |
| Operating loss                |   | (3,206              | )      | (3,883                          | )      |                           |   | (7,089           | )        |
| Net loss                      |   | (3,178              | )      | (26,436                         | )      |                           |   | (29,614          | )        |
| Identifiable assets           |   | 101,741             |   | 719,408                         |   | $                              | 368    |             | 821,517  |   |
| Depreciation and amortization |   | 3,035               |   | 25,145                          |   |                           |   | 28,180           |     |
| Capital expenditures          |   | 1,402               |   | 7,598                           |   |                           |   | 9,000            |     |
| **2002:**                     |   |                |   |                            |   |                           |   |             |     |
| Rental and service revenues   |   | $                   | 13,153 |                            | $      | 102,609                        |   |             |     | $ | 115,762 |   |
| New equipment sales           |   | 1,101               |   | 8,361                           |   |                           |   | 9,462            |     |
| Rental equipment sales        |   | 17                  |   | 6,490                           |   |                           |   | 6,507            |     |
| Other revenues                |   | 214                 |   | 6,506                           |   |                           |   | 6,720            |     |
| Total revenues                |   | 14,485              |   | 123,966                         |   |                           |   | 138,451          |     |
| Operating income (loss)       |   | (3,767              | )      | 5,126                           |   |                           |   | 1,359            |     |
| Net loss(a)                   |   | (5,359              | )      | (139,024                        | )      | $                              | (1,631 | )                | (146,014 | ) |
| Identifiable assets           |   | 104,836             |   | 809,839                         |   | 109,694                        |   | 1,024,369        |     |
| Depreciation and amortization |   | 2,971               |   | 27,015                          |   |                           |   | 29,986           |     |
| Capital expenditures          |   | 780                 |   | 12,371                          |   |                           |   | 13,151           |     |

 

----

(a) Net loss amount for General Rental and Other operations includes a$129,505 goodwill impairment charge recorded as a cumulative effect of a changein accounting principle charge, in accordance with SFAS No. 142.

 

10

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (dollar amounts in thousands)**

 

The following table shows information derived from the Company’shistorical consolidated statements of operations as a percentage of totalrevenues.

 
|                                                               |   | **Three Months Ended March 31,** |   |
|--------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                               |   | **2003**                         |   | **2002** |   |
|                                                               |   |                             |   |   |   |
| Rental and service revenues                                        |   | 82.3                             | %      | 83.6 | % |
| New equipment sales                                                |   | 6.8                              |   | 6.8 |   |
| Rental equipment sales                                             |   | 6.4                              |   | 4.7 |   |
| Other revenues                                                     |   | 4.5                              |   | 4.9 |   |
| Total revenues                                                     |   | 100.0                            |   | 100.0 |   |
| Cost of revenues                                                   |   | 76.9                             |   | 74.7 |   |
| Gross margin                                                       |   | 23.1                             |   | 25.3 |   |
| Selling, general and administrative expenses                       |   | 27.1                             |   | 22.5 |   |
| Non-rental depreciation and amortization                           |   | 1.5                              |   | 1.8 |   |
| Operating (loss) income                                            |   | (5.5                             | )      | 1.0 |   |
| Other income, net                                                  |   | 0.1                              |   | 0.3 |   |
| Interest expense, net                                              |   | 17.5                             |   | 12.0 |   |
| Loss before income taxes                                           |   | (22.9                            | )      | (10.7 | ) |
| Income tax benefit                                                 |   | —                           |   | — |   |
| Loss from continuing operations                                    |   | (22.9                            | )      | (10.7 | ) |
| Loss from discontinued operations, net of tax                      |   | —                           |   | (1.2 | ) |
| Cumulative effect of a change in accounting principle,  net of tax |   | —                           |   | (93.6 | ) |
| Net loss                                                           |   | (22.9                            | )%     | (105.5 | )% |

 

**Results ofOperations**

 

*Quarter EndedMarch 31, 2003, Compared with the Quarter Ended March 31, 2002*

 

*Revenues*

Total revenues decreased to $129,618 for the threemonths ended March 31, 2003 from $138,451 for the three months ended March 31,2002.  Rental and service revenuesdeclined to $106,612 for the three months ended March 31, 2003 from $115,762for the same period in 2002.  Thisdecrease is primarily the result of pressure on rental rates, brought about bythe continued slowness in the economy. Rental equipment sales were up $1,838 for the three- month period in2003 as compared to the same period in 2002, primarily as a result of anequipment auction in which the Company participated in February.  For the most recent quarter, new equipment salesand other revenues declined 7% and 13%, respectively.  Total revenues within the Company’s General Rental and Otheroperations decreased to $113,413 for the three months ended March 31, 2003 from$123,966 for the three months ended March 31, 2002.  Rental and service revenues decreased $10,974.  Total revenues within the Company’s TrafficSafety operations increased to $16,205 for the three months ended March 31,2003 from $14,485 for the three months ended March 31, 2002 as a result ofincreased activity.  Rental and servicerevenues increased $1,824.

 

*GrossProfit*

Gross profit decreased to $29,917 for the three monthsended March 31, 2003 from $35,024 for the three months ended March 31, 2002.Gross margins decreased to 23% from 25%. Within the General Rental and Other operations, gross profit decreasedto $29,355 for the three months ended March 31, 2003 from $34,500 for the threemonths ended March 31, 2002.  Thedecrease is a result of the continuing pressure on rental rates describedabove.  Gross margins on rental andservice revenues declined to 49% during the first quarter of 2003 as comparedto 54% during the same period in 2002. Gross profit within the Traffic Safety operations increased to $562 forthe three months ended March 31, 2003 from $524 for the three months endedMarch 31, 2002.  The 7.3% increase isthe result of more rental activity within this segment during 2003, asdescribed above.

 

*Selling,General and Administrative Expenses*

Selling, general and administrative expenses increasedto $35,073 for the three months ended March 31, 2003 from $31,225 for the threemonths ended March 31, 2002.  Theincrease was primarily the result of professional and consulting fees paid inconjunction with the Company’s financial restructuring.  As a percentage of total revenues, selling,general and administrative

 

11

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expenses increased to 27% from 23% during these periods.  Selling, general and administrative expensesfor the General Rental and Other operations have increased to $31,578 for thethree months ended March 31, 2003 from $27,197 for the three months ended March31, 2002.  Selling, general andadministrative expenses for the Traffic Safety operations have declined to$3,495 for the three months ended March 31, 2003 from $4,028 for the threemonths ended March 31, 2002.  Thesedecreases are the result of various cost-savings initiatives implemented during2002 within the Traffic Safety operations.

 

*Interest Expense, Net*

Interest expense,net, increased to $22,647 for the three months ended March 31, 2003 from$16,683 for the three months ended March 31, 2002.  The increase in the current quarter is the result of higherinterest rates on the Company’s senior debt as a result of the default in thecredit facility and resulting forbearance agreements.

 

*Loss fromDiscontinued Operations*

On June 30, 2002, the Company sold its underground trench shoringbusiness. The proceeds from the sale were used to repay existing indebtednessunder the Credit Facility. In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” the financial conditionand results of operations of this business are reflected herein as discontinuedoperations.

 

*CumulativeEffect of a Change in Accounting Principle*

The cumulative effect of a change in accounting principle reflects thecharge recognized in conjunction with the adoption of SFAS No. 142,“Goodwill and Other Intangible Assets”, effective January 1, 2002.

 

**Liquidity andCapital Resources**

 

The Company’s primary capital requirements are for purchasing new rentalequipment. The Company’s other capital expenditures include buying vehiclesused for delivery and maintenance, and for property, plant and equipment. TheCompany purchases rental equipment throughout the year to replace equipmentthat has been sold as well as to maintain adequate levels of equipment to meetexisting and new customer needs. Rental fleet purchases for the Company were$6,560 and $11,953 in the first three months of 2003 and 2002, respectively.The Company’s expenditures for rental fleet are expected to be approximately$50,000 in 2003. The Company’s principal sources of cash are cash generatedfrom operations.  Prior to the defaultunder its credit facility, the Company also utilized borrowings available underits credit facility.

 

For the three months ended March 31, 2003 and 2002, the Company’snet cash (used in) provided by operations was $(7,157) and $5,929,respectively.  The use of cash in 2003relates primarily to a reduction in trade accounts payable due to timing ofpayments.  For the three months endedMarch 31, 2003 and 2002, the Company’s net cash used in investingactivities was $126 and $6,240, respectively. Net cash used in investingactivities consists primarily of purchases of rental equipment and property andequipment. For the three months ended March 31, 2003 and 2002, theCompany’s net cash used in financing activities was $789 and $3,581,respectively. Net cash used in financing activities consists primarily ofrepayments under the Company’s credit facility.

 

The Company’s credit facility provides for a $70,000 term loan and arevolving credit facility up to a maximum of $480,000 (subject to availabilitybased on certain financial tests including a borrowing base) to meetacquisition needs, as well as seasonal working capital and general corporaterequirements.  As of March 31,2003, $486,856 was outstanding under the credit facility. Based upon the availableborrowing base (which is based on the book value of the Company’s inventory andaccounts receivable and the appraised value of the Company’s rental equipment)at March 31, 2003, the Company had no availability on the revolving CreditFacility loan. The available borrowing base is recomputed monthly.  In the event that the book value of theCompany’s inventory or accounts receivable or the appraised value of theCompany’s rental equipment declines without a corresponding increase in one ofthe other categories, the available borrowing base will be reducedaccordingly.  As a result of thesignificant reduction in the available borrowing base, the Company’s liquidityhas been adversely affected, including its ability to pay interest on theSeries B Notes and the Series D Notes when due.  A failure to pay such interest when due would result in a defaultunder the indentures governing the Series B Notes and the Series D Notes, whichwould have a material adverse effect on the Company.

 

The credit facility contains certain covenants that require the Companyto, among other things, satisfy certain financial tests relating to 1) theratio of senior debt to EBITDA, 2) minimum interest coverage ratio and3) the ratio of funded debt to EBITDA. The credit facility also containsvarious other covenants that restrict the Company’s ability to, among otherthings, 1) incur additional indebtedness, 2) permit liens to attachto its assets, 3) pay dividends or make other restricted payments on itscommon stock and certain other securities and 4) make acquisitions unlesscertain financial conditions are satisfied. As of December 31, 2002, theCompany was in default under the financial covenants governing the creditfacility.   As of January 23, 2003, theCompany and the lenders under the credit facility entered in a forbearanceagreement with an initial expiration of March 14, 2003.  As of March 14, 2003, the Company and thelenders under the credit facility entered into a second forbearance agreementwhich extended the forbearance period until May 14, 2003, subject to earlierexpiration upon the occurrence of certain circumstances.  The Company is currently in discussions withthe lenders under the credit facility regarding an extension of the secondforbearance agreement.

 

During 1997, the Company issued $100,000 of Senior Subordinated Notesdue 2004 (the “Series A Notes”) at a discount netting

 

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proceedsof $99,000. During 1998, the Company completed its exchange of $100,000 ofSenior Subordinated Notes due 2004, Series B (the “Series B Notes”),which have been registered for public trading, for the Series A Notes.

 

Also during 1998, the Company issued $125,000 of Senior SubordinatedNotes due 2004, Series C (the “Series C Notes”) at a discount nettingproceeds of $122,000. During 1999, the Company issued $50,000 of additionalSeries C Notes, at a discount netting proceeds of $49,000. Later during1999, the Company completed its exchange of $175,000 of Senior SubordinatedNotes due 2004, Series D (the “Series D Notes”), which have beenregistered for public trading, for the Series C Notes.

 

The Company accretes the original issue discount of the Series BNotes and the Series D Notes over the term of the notes using theeffective interest rate method. The indentures for the Series B andSeries D Notes contain a number of covenants that, among other things, setcertain limitations on the granting of liens, asset sales, additionalindebtedness, transactions with affiliates, restricted payments, investments,issuances of stock and payment of dividends. The Company is currently incompliance with all such covenants under the indentures.  Under the credit facility, the lenders havethe ability to issue a notice to the Company preventing the Company from payingsuch interest if the Company is in default under the credit facility.  The failure by the Company to pay intereston the Series B Notes and the Series D Notes when due which is not cured withinthirty days would be an event of default under the Series B Notes and Series DNotes.

 

As a result of the covenant defaults and issues with the borrowing base,the Company does not believe that it has sufficient liquidity and capitalresources to finance its operations and pursue its business strategy. TheCompany will need to refinance its credit facility and its Series B Notesand Series D Notes since the Credit Facility becomes due and payable inJuly 2003 and its Series B Notes and Series D Notes become due andpayable in November 2004. There can be no assurance that the Company willbe able to raise the necessary capital on favorable terms, which could have amaterial effect on the Company’s future financial condition and results ofoperations and may require the Company to seek to reorganize its business underChapter 11 of the U.S. bankruptcy laws. As a result, there is substantial doubt about the ability of the Companyto continue as a going concern.

 

As a result of the Company’s financial condition, certain suppliers haverequested alternate payment provisions. To date, such alternate payment provisions have not had significantnegative impact of the Company’s liquidity.

 

**General EconomicConditions, Inflation and Seasonality**

 

The Company’s operating results may be adversely affected by changes ingeneral economic conditions, including changes in construction and industrialactivity, or increases in interest rates, or by adverse weather conditionsthat may temporarily decrease construction and industrial activity in aparticular geographic area. Although the Company cannot accurately anticipatethe effect of inflation on its operations, management believes this 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 are expected to fluctuate due to theseasonal nature of the industry in which the Company operates, with rentalactivity tending to be lower in the winter.

 

**Recently IssuedAccounting Pronouncements**

 

In May 2002, the Financial Accounting Standards Board (FASB) issued SFASNo. 145, “Recession of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13 and Technical Corrections.” This Statement rescinds SFAS No. 4 “Reporting Gains and Losses fromExtinguishment of Debt,” and an amendment to that Statement, SFAS No. 64,“Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements.”  This Statement amends SFAS No. 13,“Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  TheStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provisions of this Statement related to the recission of SFAS No. 4are effective beginning in 2003.  Allother provisions are effective after May 15, 2002.   As discussed in Note 2, it is possible the Company willrestructure its debt.  If arestructuring should occur, the related gain will be accounted for pursuant toSFAS No.145.  It is not possible toestimate the impact of this new pronouncement given the uncertaintiessurrounding the potential outcomes of any such restructuring.

 

On July 30, 2002, the FASB issued Statement of Financial AccountingStandards No. 146 (SFAS 146), “Accounting for Costs Associated with Exit orDisposal Activities.”  SFAS 146 requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than as of the date of a commitment to an exit ordisposal plan.  Examples of costscovered by SAFS 146 included lease termination costs and certain employeeseverance costs that are associated with a restructuring, discontinuedoperation, plant closing or other exit or disposal activity.  SFAS 146 also supercedes, in its entirety,previous accounting guidance that was provided by Emerging Issues Task ForceIssue No. 94-3, “Liability Recognition for Certain Employee TerminationsBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  The effects of this new standardwere immaterial in the first quarter.

 

13

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In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure”.  This standard provides alternative methods of transition to thefair value method of accounting for stock-based employee compensation underSFAS No. 123, “Accounting for Stock-Based Compensation,” but does not requirethe Company to use the fair value method. This standard also amends certain disclosure requirements related tostock-based employee compensation.  TheCompany adopted the disclosure portion of this standard as of December 31,2002.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company’s credit facility, as amended, provides the Company with a$70,000 term loan and permits the Company to borrow up to an additional$480,000 of revolving loans provided that certain conditions and financialtests are met, subject to a borrowing base. Borrowings under the creditfacility bear interest, at the Company’s option, at a specified base rate orEurodollar rate plus the applicable borrowing margin. Under the SecondForbearance Agreement, the Company is limited in its ability to utilize theEurodollar rate.  At May 7, 2003,the Company had total borrowings under the credit facility of $486,856, $86,856of which was subject to interest rate risk. Each 100 basis point increase ininterest rates on the variable rate debt would decrease pretax earnings byapproximately $869.

 

The Company may, from time to time, use interest rate swap contracts tohedge the impact of interest rate fluctuations on certain variable rate debt.The Company does not hold or issue derivative financial instruments for tradingor speculative purposes. Effective April 18, 2001 the Company entered intoan interest rate swap contract, which fixed the interest rate at 4.71% on$400 million of variable rate debt through April 17, 2003. Theinterest differential was paid or received on a monthly basis and recognized asa component of interest expense. The counter-party to the swap was a majorfinancial institution.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Explanation ofdisclosure controls and procedures** - After evaluating the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14(c) and15d-14(c) as of a date within 90 days of the filing date of this quarterlyreport (the “Evaluation Date”), the Company’s chief executive officer and chieffinancial officer have concluded that, as of the Evaluation Date, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its subsidiaries would be madeknown to them by others within those entities, particularly during the periodin which this quarterly report was being prepared.

 

**Changes ininternal controls** – Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s disclosure controls andprocedures subsequent to the Evaluation Date, nor were there any significantdeficiencies or material weaknesses in such disclosure controls and proceduresrequiring corrective actions.  As aresult, no corrective actions were taken.

 

**Forward LookingStatements**

 

**Note: Thisdocument contains forward-looking statements as encouraged by the PrivateSecurities Litigation Reform Act of 1995. All statements contained in thisdocument, other than historical information, are forward-looking statements.These statements represent management’s current judgment on what the futureholds. A variety of factors could cause business conditions and the Company’sactual results to differ materially from those expected by the Company orexpressed in the Company’s forward-looking statements. These factors include,without limitation, the Company’s ability to successfully integrate acquiredbusinesses; changes in market price or market demand; loss of business fromcustomers; unanticipated expenses; changes in financial markets; and otherfactors discussed in the Company’s filings with the Securities and ExchangeCommission.**

 

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**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Not applicable.

 

**ITEM 2. CHANGES IN SECURITIES**

 

Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

See Note 7 of the Notes to Consolidated Financial Statements for adiscussion of certain defaults under the Company’s Senior Credit Facility.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Not applicable.

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

See Index of Exhibits on page 19. The Company filed a Current Report on Form 8-K dated March 21, 2003to report its notice of default under the credit facility and the subsequentforbearance agreements.

 

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**SIGNATURE**

 

**Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on May 13, 2003.**

 
|   | NATIONAL  EQUIPMENT SERVICES, INC. |
|--------|------------------------------------|
|   |                               |
|   |                               |
|   | By:                                | /s/ MICHAEL D. MILLIGAN |
|   |                               | Michael D. Milligan*Chief Financial Officer* |

 

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Form 10-Q:For the quarter ended March 31, 2003.

 

**CERTIFICATIONS**

 

I,Joseph M. Gullion, certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of National Equipment Services, Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary in order to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a–14 and 15d–14) for theregistrant and we have:

 

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 13, 2003 |
|--------------------------|
|                     |
| /s/  JOSEPH M. GULLION   |   |
|                     |
| Joseph  M. Gullion       |
| Chief Executive Officer  |

 

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I, Michael D.Milligan, certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of National Equipment Services, Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary in order to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a–14 and 15d–14) for theregistrant and we have:

 

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 13, 2003 |
|--------------------------|
|                     |
| /s/  MICHAEL D. MILLIGAN |   |
|                     |
| Michael  D. Milligan     |
| Chief Financial Officer  |

 

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**INDEX OFEXHIBITS**

** **
| **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. |
| 99.1               |   | Certification  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                   |
| 99.2               |   | Certification  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                   |

 

19

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