**UNITED STATES**

**SECURITIES 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 June 30,2003**

 

**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 Equipment Services, Inc.**

**(Debtor-in-Possession as of June 27, 2003)**

(Exact name ofregistrant as specified in its charter)

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

 

**8770 W. Bryn Mawr, 4th Floor**

**Chicago, Illinois 60631**

(Address of principal executive offices)

 

**(773) 695-3999**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court. Yes ýNo o

 

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes oNo ý

 

There were 21,151,163 shares of Common Stock ($.01 par value)outstanding as of August 14, 2003.

 

#### **Explanatory Note**

National Equipment Services, Inc., (“NES”) is filing this Quarterly Reporton Form 10-Q for the period ended June 30, 2003.  NES and its domestic subsidiaries filed voluntary petitions underChapter 11 of the U.S. Bankruptcy Code on June 27, 2003.  At the time of filing for bankruptcyprotection, NES owed a substantial amount to its independent auditors at thetime, PricewaterhouseCoopers LLP (“PwC”). As a result, PwC did not perform the limited review of the quarterlyfinancial statements included in this Report as required by Rule 10-01(d) ofRegulation S-X under the U.S. securities laws. On November 12, 2003, NES notified PwC of its intent to replace them asindependent auditor.  NES subsequentlyretained KPMG LLP as its independent auditor. Except as specifically noted herein, this Form 10-Q does not containupdates to reflect any events occurring after June 30, 2003, which was the endof the period covered by this Form 10-Q. Please see the discussion in Note 2 for information about emergence frombankruptcy protection on February 11, 2004. All information contained in this Form 10-Q is subject to updating andsupplementing as provided in the reports filed with the Securities and ExchangeCommission for periods subsequent to the end of the original period for thisForm 10-Q.

 

 

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**National Equipment Services, Inc. andSubsidiaries**

**(Debtor-in-Possession as of June 27, 2003)**

**QUARTERLY REPORT ON FORM 10-Q**

**For the quarter ended**

**June 30, 2003**

**INDEX**

 

 
| PART I.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |
| Item 1.                             | Financial  Statements |
|                                |   |
|                                | Consolidated Balance Sheets at June 30, 2003 (Unaudited) and December  31, 2002 |
|                                |   |
|                                | Consolidated Statements of Operations for  the three and six months ended June 30, 2003 and 2002 (Unaudited) |
|                                |   |
|                                | Consolidated Statements of Cash Flows for  the six months ended June 30, 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; Use of Proceeds and Issuer Purchases of Equity 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                   |

 

2

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**ForwardLooking Statements**

 

                                                Note: This report contains forward-lookingstatements as encouraged by the Private Securities Litigation Reform Act of1995. All statements contained in this document, other than historicalinformation, are forward-looking statements. These statements representmanagement’s current judgment on what the future holds. A variety of factorscould cause business conditions and the Company’s actual results to differmaterially from those expected by the Company or expressed in the Company’sforward-looking statements. These factors include, without limitation,the Company’s ability to successfully integrate acquired businesses; changes inmarket price or market demand; loss of business from customers; generaldeclines in rental rates in the market; pricing pressure from competitors;inability to fund required capital expenditures; the Company’s bankruptcyreorganization; unanticipated expenses; changes in financial markets; theCompany’s substantial leverage; potential defaults in the Company’sindebtedness; inability to make scheduled principal amortization payments onindebtedness; and other factors discussed in the Company’s filings with theSecurities and Exchange Commission.

 

                                                Our annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and amendments to these reports areavailable on our internet website free of charge.  These reports are available as soon as practicable after weelectronically file these reports with the Securities and ExchangeCommission.  Our website address iswww.nesrentals.com.

 

**PART I****. FINANCIALINFORMATION**

 

**ITEM 1****. FINANCIALSTATEMENTS**

 

**National Equipment Services, Inc. andSubsidiaries**

**(Debtor-in-Possession as of June 27, 2003)**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

 
|                                                                                                  |   | **June 30,  2003** |    | **December  31, 2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                  |   | **(Unaudited)**    |    |                   |   |
|                                                                                                  |   |               |    |                   |   |
| **Assets**                                                                                            |   |               |    |                   |   |
| Cash and cash equivalents                                                                             |   | $                  | 19,692  |                   | $      | 15,184 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $4,764 and $5,477, respectively |   | 131,225            |    | 123,094                |   |
| Inventory, net                                                                                        |   | 16,586             |    | 18,186                 |   |
| Loan origination costs, net                                                                           |   | 2,154              |    | 6,791                  |   |
| Prepaid expenses and other assets                                                                     |   | 29,774             |    | 20,811                 |   |
| Rental equipment, net                                                                                 |   | 450,176            |    | 492,775                |   |
| Property and equipment, net                                                                           |   | 40,675             |    | 45,803                 |   |
| Intangible assets, net                                                                                |   | 1,370              |    | 139,978                |   |
| Total assets                                                                                          |   | $                  | 691,652 |                   | $      | 862,622 |   |
|                                                                                                  |   |               |    |                   |   |
| **Liabilities**                                                                                       |   |               |    |                   |   |
| Liabilities  not subject to compromise                                                                |   |               |    |                   |   |
| Book overdraft                                                                                        |   | $                  | 9,605   |                   | $      | 490 |   |
| Trade accounts payable                                                                                |   | —             |    | 28,965                 |   |
| Accrued interest                                                                                      |   | —             |    | 8,592                  |   |
| Accrued expenses and other liabilities                                                                |   | 41,673             |    | 51,715                 |   |
| Debt                                                                                                  |   | 2,420              |    | 763,276                |   |
| Liabilities subject to compromise                                                                     |   | 810,922            |    | —                 |   |
| Total liabilities                                                                                     |   | 864,620            |    | 853,038                |   |
| Commitments and contingencies                                                                         |   | —             |    | —                 |   |
| Senior mandatorily redeemable convertible  preferred stock                                            |   | 97,046             |    | 96,796                 |   |
| **Stockholders’ deficit:**                                                                       |   |               |    |                   |   |
| Common stock, $0.01 par, 100,000 shares  authorized; 24,170 shares issued, 21,151 shares outstanding  |   | 241                |    | 241                    |   |
| Additional paid-in capital                                                                            |   | 123,887            |    | 123,887                |   |
| Accumulated deficit                                                                                   |   | (376,310           | )       | (187,589               | )      |
| Stock subscriptions receivable                                                                        |   | —             |    | (80                    | )      |
| Treasury stock at cost, 3,019 shares                                                                  |   | (19,062            | )       | (19,062                | )      |
| Accumulated other comprehensive income  (loss)                                                        |   | 1,230              |    | (4,609                 | )      |
| Total stockholders’ deficit                                                                      |   | (270,014           | )       | (87,212                | )      |
| Total liabilities and stockholders’ deficit                                                      |   | $                  | 691,652 |                   | $      | 862,622 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**National Equipment Services, Inc. andSubsidiaries**

**(Debtor-in-Possession as of June 27, 2003)**

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

**(in thousands)**

** **
|                                                                        |   | **For the  Three Months  Ended  June 30,** |     | **For the  Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------------------------|----------|-----------------------------------------------|--------|
|                                                                        |   | **2003**                                        |     | **2002**                                      |   | **2003** |   | **2002** |   |
|                                                                        |   |                                            |     |                                          |   |   |   |   |   |
| **Revenues**                                                                |   |                                            |     |                                          |   |   |   |   |   |
| Rental and service revenues                                                 |   | $                                               | 126,692  |                                          | $      | 132,348 |   | $ | 233,304 |   | $ | 248,108 |   |
| New equipment sales                                                         |   | 9,722                                           |     | 11,633                                        |   | 18,512 |   | 21,095 |   |
| Rental equipment sales                                                      |   | 9,125                                           |     | 10,537                                        |   | 17,470 |   | 17,045 |   |
| Other revenues                                                              |   | 5,052                                           |     | 7,131                                         |   | 10,923 |   | 13,851 |   |
| Total revenues                                                              |   | 150,591                                         |     | 161,649                                       |   | 280,209 |   | 300,099 |   |
| **Cost of revenues**                                                        |   |                                            |     |                                          |   |   |   |   |   |
| Cost of rental and service revenues                                         |   | 65,093                                          |     | 62,690                                        |   | 119,985 |   | 119,859 |   |
| Rental equipment depreciation                                               |   | 27,308                                          |     | 28,539                                        |   | 53,554 |   | 56,085 |   |
| Cost of new equipment sales                                                 |   | 8,407                                           |     | 9,294                                         |   | 15,881 |   | 16,638 |   |
| Cost of rental equipment sales                                              |   | 6,578                                           |     | 6,345                                         |   | 12,015 |   | 11,005 |   |
| Other operating expenses                                                    |   | 5,471                                           |     | 6,988                                         |   | 11,123 |   | 13,695 |   |
| Total cost of revenues                                                      |   | 112,857                                         |     | 113,856                                       |   | 212,558 |   | 217,282 |   |
|                                                                        |   |                                            |     |                                          |   |   |   |   |   |
| Gross profit                                                                |   | 37,734                                          |     | 47,793                                        |   | 67,651 |   | 82,817 |   |
| Selling, general and administrative  expenses                               |   | 36,919                                          |     | 32,425                                        |   | 71,992 |   | 63,650 |   |
| Goodwill impairment                                                         |   | 138,115                                         |     | —                                        |   | 138,115 |   | — |   |
| Non-rental depreciation and amortization                                    |   | 1,519                                           |     | 2,447                                         |   | 3,452 |   | 4,886 |   |
| Operating (loss) income                                                     |   | (138,819                                        | )        | 12,921                                        |   | (145,908 | ) | 14,281 |   |
| Other income, net                                                           |   | 277                                             |     | 333                                           |   | 399 |   | 779 |   |
| Interest expense, net                                                       |   | 19,820                                          |     | 17,543                                        |   | 42,467 |   | 34,227 |   |
| Loss from continuing operations before  income taxes                        |   | (158,362                                        | )        | (4,289                                        | )      | (187,976 | ) | (19,167 | ) |
| Income tax expense                                                          |   | —                                          |     | —                                        |   | — |   | — |   |
| Loss from continuing operations                                             |   | (158,362                                        | )        | (4,289                                        | )      | (187,976 | ) | (19,167 | ) |
| Discontinued operations                                                     |   |                                            |     |                                          |   |   |   |   |   |
| Loss from discontinued operations, net of  tax                              |   | (518                                            | )        | (1,779                                        | )      | (518 | ) | (3,409 | ) |
| Gain on disposal of discontinued  operations, net of tax                    |   | —                                          |     | 6,981                                         |   | — |   | 6,981 |   |
| Income (loss) before cumulative effect of a  change in accounting principle |   | (158,880                                        | )        | 913                                           |   | (188,494 | ) | (15,595 | ) |
| Cumulative effect of a change in accounting  principle, net of tax          |   | —                                          |     | —                                        |   | — |   | (129,505 | ) |
| Net income (loss)                                                           |   | $                                               | (158,880 | )                                             | $      | 913 |   | $ | (188,494 | ) | $ | (145,100 | ) |
| Other comprehensive income (loss)                                           |   | 1,933                                           |     | (1,498                                        | )      | 5,838 |   | 2,170 |   |
| Comprehensive loss                                                          |   | $                                               | (156,947 | )                                             | $      | (585 | ) | $ | (182,656 | ) | $ | (142,930 | ) |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**National Equipment Services, Inc. andSubsidiaries**

**(Debtor-in-Possession as of June 27, 2003)**

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

**(in thousands)**

 
|                                                                             |   | **For the  Six Months Ended June 30,** |     |
|----------------------------------------------------------------------------------|--------|----------------------------------------|----------|
|                                                                             |   | **2003**                               |     | **2002** |   |
|                                                                             |   |                                   |     |   |   |
| **Cash flows from operating activities:**                                        |   |                                   |     |   |   |
| Net loss                                                                         |   | $                                      | (188,494 | ) | $ | (145,100 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                   |     |   |   |
| Depreciation and amortization                                                    |   | 57,006                                 |     | 60,970 |   |
| Goodwill impairment                                                              |   | 138,115                                |     | — |   |
| Cumulative effect of a change in accounting  principle, net of tax               |   | —                                 |     | 129,505 |   |
| Amortization of deferred finance costs and  debt discount                        |   | 5,035                                  |     | 3,059 |   |
| Gain on sale of equipment                                                        |   | (5,620                                 | )        | (6,213 | ) |
| Gain on sale of discontinued operations                                          |   | —                                 |     | (6,981 | ) |
| Changes in operating assets and liabilities                                      |   |                                   |     |   |   |
| Trade accounts receivable                                                        |   | (8,131                                 | )        | (26,669 | ) |
| Inventory                                                                        |   | 1,600                                  |     | (743 | ) |
| Prepaid expenses and other assets                                                |   | (8,967                                 | )        | 456 |   |
| Trade accounts payable                                                           |   | (4,500                                 | )        | 9,024 |   |
| Accrued expenses and other liabilities                                           |   | 13,536                                 |     | (1,303 | ) |
| Net cash flows (used in) provided by  continuing operating activities            |   | (420                                   | )        | 16,005 |   |
| Net cash flows provided by discontinued  operating activities                    |   | —                                 |     | 5,171 |   |
| Net cash flows (used in) provided by  operating activities                       |   | (420                                   | )        | 21,176 |   |
|                                                                             |   |                                   |     |   |   |
| **Cash flows from investing activities:**                                        |   |                                   |     |   |   |
| Proceeds received from the sale of  discontinued operations                      |   | —                                 |     | 108,890 |   |
| Purchases of rental equipment                                                    |   | (17,878                                | )        | (33,455 | ) |
| Proceeds from sale of rental equipment                                           |   | 17,470                                 |     | 17,045 |   |
| Purchases of property and equipment                                              |   | (3,910                                 | )        | (3,499 | ) |
| Proceeds from sale of property and  equipment                                    |   | 1,156                                  |     | 519 |   |
| Net cash (used in) provided by investing  activities                             |   | (3,162                                 | )        | 89,500 |   |
|                                                                             |   |                                   |     |   |   |
| **Cash flows from financing activities:**                                        |   |                                   |     |   |   |
| Proceeds from long-term debt                                                     |   | —                                 |     | 27,000 |   |
| Payments on long-term debt                                                       |   | (1,025                                 | )        | (136,346 | ) |
| Increase (decrease) in book overdraft                                            |   | 9,115                                  |     | (1,826 | ) |
| Net cash provided by (used in) financing  activities                             |   | 8,090                                  |     | (111,172 | ) |
| Net increase (decrease) in cash and cash  equivalents                            |   | 4,508                                  |     | (496 | ) |
| Cash and cash equivalents at beginning of  period                                |   | 15,184                                 |     | 4,199 |   |
| Cash and cash equivalents at end of period                                       |   | $                                      | 19,692   |   | $ | 3,703 |   |
|                                                                             |   |                                   |     |   |   |
| **Supplemental Cash Flow Information:**                                          |   |                                   |     |   |   |
| Cash paid for interest                                                           |   | $                                      | 26,043   |   | $ | 33,542 |   |
| Cash paid for income taxes                                                       |   | 502                                    |     | 631 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**National Equipment Services, Inc. andSubsidiaries**

**(Debtor-in-Possession as of June 27, 2003)**

**NOTES TO CONSOLIDATED FINANCIAL****STATEMENTS**

**(Amounts in thousands)**

 

**1.  Organization**

 

National Equipment Services, Inc. (the “Company”) is principally aholding company organized under the laws of Delaware. The Company conducts itsoperations through its wholly owned subsidiaries acquired or formed since thedate of inception. The Company owns and operates equipment rental, sales andservice facilities primarily located throughout the United States of America.The Company rents various types of equipment to a diverse customer base,including construction, automotive and other industrial users. The Company alsosells new equipment and used equipment out of its rental fleet, sells relatedparts and provides other services. The nature of the Company’s business is suchthat short-term obligations are met typically by cash flow generated fromlong-term assets. Consequently, consistent with industry practice, theaccompanying consolidated balance sheets are presented on an unclassifiedbasis.

 

**2. Bankruptcy; Subsequent Event**

 

On June 27, 2003, the Company and its U.S. subsidiaries(collectively, the “Debtors”) filed for voluntary reorganization under Chapter11 (the “Filing”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in theNorthern District of Illinois (“Bankruptcy Court”).  The Company’s subsidiary located in Canada, which represents lessthan 2% of total revenues and total assets was not included in thepetition.   Due to the size of theCompany’s Canadian subsidiary, the consolidated financial statements of theCompany presented herein are essentially equivalent to the consolidatedfinancial statements of the Debtors.  Asof June 30, 2003, the Debtors were operating their businesses as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code.

 

The initial joint plan of reorganization was filed on October 17,2003.  On January 23, 2004, the Debtors fileda fourth amended joint plan of reorganization (the “Plan of Reorganization”),which received the requisite support from the creditors authorized to votethereon.  The Plan of Reorganization wasconfirmed by the bankruptcy court on January 23, 2004, and the Company emergedfrom bankruptcy on February 11, 2004 (the “Effective Date”).

 

From June 27, 2003 through February 11, 2004, the Debtors continued tooperate as debtors-in-possession pursuant to Sections 1107 and 1108 of theBankruptcy Code.  Shortly after theFiling, the Debtors began notifying all known or potential creditors about theFiling for the purposes of identifying all pre-petition claims against theDebtors.  Any creditor actions to obtainpossession of property from the Debtors or to create, perfect or enforce anylien against the property of the Debtors were stayed.  As a result, the creditors of the Debtors were precluded fromcollecting pre-petition debts without the approval of the Bankruptcy Court.  Certain pre-petition liabilities have beenpaid after obtaining the approval of the Bankruptcy Court, including certainwages and benefits of

 

6

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employees and insurance costs.

 

The Company obtained Debtor-in-Possession financing which provided upto $30 million of availability to the Company to fund operations during thebankruptcy period.  The Company did notborrow any funds from this financing source during the period it was in place.

 

The Plan of Reorganization provides for the cancellation of all of theissued and outstanding shares of common stock, par value $0.01 per share, ofthe Company (the “Old Common Stock”), all of the issued and outstanding sharesof preferred stock of the Company, and all other outstanding securities of theCompany, including common stock options as of the Effective Date.

 

On the Effective Date, National Equipment Services, Inc. merged intoNES Rentals, Inc.   NES Rentals, Inc. was the surviving company inthe merger and was renamed National Equipment Services, Inc.  NES Rentals,Inc. is a subsidiary of both NES IT Services, Inc. and NES Real EstateManagement, Inc., which are subsidiaries of the newly formed NES RentalsHoldings, Inc. (“NESR”), which is the successor to National Equipment Services,Inc.  NESR is the new public companyparent of National Equipment Services, Inc. NESR has 25,000 authorized shares of common stock, of which 21,400 willbe issued (the “New Common Stock”).

 

In accordance with the Plan of Reorganization, (i) holders of generalunsecured claims, including the holders of the Company’s Senior SubordinatedNotes due 2004, Series B (the “Series B Notes”) and Senior Subordinated Notesdue 2004, Series D (the “Series D Notes”), are to receive 97.5% (20,865 shares)of the New Common Stock of the Company, (ii) the holders of the Company’spreferred stock are to receive 2.0% (428 shares) of the New Common Stock of theCompany, and (iii) the holders of the Company’s Old Common Stock are to receive0.5% (107 shares) of the New Common Stock of the Company.

 

On the Effective Date, NESR entered into a new senior secured creditfacility (the “New Credit Facility”). The New Credit Facility consists of $285,000 of term loan facilities anda $205,000 revolving credit facility. There are quarterly scheduled principal repayments on the term loanfacilities through the May 15, 2007 maturity date of the New Credit Facility.

 

As a result of the emergence from bankruptcy, the Company is to adoptfresh-start reporting in accordance with Statement of Position 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP90-7”).  SOP 90-7 requires the Companyto allocate the reorganization value of the reorganized company to its assetsand to state liabilities existing at the Plan of Reorganization confirmationdate at present values of amounts to be paid determined at appropriate currentinterest rates.  For financial reportingpurposes, the effective date of the emergence from bankruptcy is the close ofbusiness on January 31, 2004.  Accordingly,the effects of the adjustments on the reported amounts of individual assets andliabilities resulting from the adoption of fresh-start reporting will berecorded in the Company’s consolidated financial statements prior to emergence.  As a result of the reorganization and theexpected adoption of fresh-start reporting, the Company’s results of operationsafter January 31, 2004 will not be comparable to results reported in priorperiods.

 

**3.  Basis of Presentation**

 

The accompanying unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial statements and with the instructions to Form10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosuresrequired by accounting principles generally accepted in the United States ofAmerica for annual financial statements. In the opinion of management, all adjustments considered necessary for afair presentation, consisting only of normal recurring adjustments, except asdescribed in the following sentence, have been included.  The consolidated financial statements gaveeffect to the following adjustments that are not of a normal recurring nature:(a) the reclassification of liabilities subject to compromise described in Note7 and (b) the impairment of goodwill described in Note 5.  For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.  The balance sheet at December 31, 2002 hasbeen derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.

 

As noted in Note 2, noadjustments have been made to the consolidated financial statements to reflectthe reorganization resulting from the Filing. Results of operations for the interim periods are not necessarilyindicative of the results that may be expected for a full year.** **Dueto the seasonality that impacts a significant portion of the Company’slocations, the second and third quarters are typically the most active quartersfor the Company.

 

As all of theCompany’s Old Common Stock was cancelled in accordance with the terms of thePlan of Reorganization, stock-based compensation, per share and shareinformation for all periods presented on the consolidated statement ofoperations have been omitted as such information is deemed to be notmeaningful.

 

The consolidated financial statements includethe accounts of the Company and its subsidiaries. All significant intercompanytransactions and balances have been eliminated.

 

The consolidated financial statements havebeen prepared on a going concern basis, which contemplates continuity ofoperations, realization of assets, and payment of liabilities in the ordinarycourse of business, and do not reflect adjustments that might result if theCompany is unable to continue as a going concern.  The Company’s history of significant losses, the stockholders’deficit, and the Filing discussed herein raise substantial doubt about theCompany’s ability to continue as a going concern.  Continuing as a going concern is dependent upon, among other things,the success of future business operations and the generation of sufficient cashfrom operations and financing sources to meet the Company’s obligations.

 

The consolidated financial statements havebeen prepared in accordance with  AICPAStatement of Position 90-7, “Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code” (“SOP 90-7”). Under SOP 90-7, revenues and expenses, realized gains and losses andprovisions for losses resulting from the reorganization of the business are tobe reported in the consolidated statements of operations separately asreorganization expense.  Professionalfees are expensed as incurred.  Interestexpense is reported only to the extent that it will be paid during thebankruptcy or that it is probable that it will be an allowed claim.  The consolidated financial statements do notreflect the effect of any changes to the Company’s capital structure or in theCompany’s business operations as the result of the Plan of Reorganization.

 

**HedgingInstruments**—Statement of Financial AccountingStandards (“SFAS”) No. 133, “Accounting for Derivative

 

7

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Instrumentsand Hedging Activities”, and its related amendment, SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities”(collectively referred to as “SFAS No. 133”) require that all derivativefinancial instruments be recorded on the consolidated balance sheet at theirfair value as either assets or liabilities. Changes in the fair value ofderivatives are recorded each period as charges or credits to operations oraccumulated other comprehensive loss, depending on whether a derivative isdesignated and effective as part of a hedge transaction and, if it is, the typeof hedge transaction.   The interestrate swap agreement expired on April 17, 2003.

 

**ComprehensiveIncome**—Included in other comprehensive income for thethree-month period ending June 30, 2003 is a change in the fair value of aderivative instrument, totaling $1,257 of income and unrealized foreigncurrency translation gains totaling $676.

 

**Reclassifications**—Certainreclassifications of prior year financial statement amounts have been made toconform to current year reporting.

 

**4.  Dispositions**

 

On June 30, 2002, the Company sold itsunderground trench shoring business. The proceeds of $108,890 from the salewere used to repay existing indebtedness under the Credit Facility. Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” the results of operations of this business are presentedas discontinued operations.  Assets andliabilities associated with discontinued operations are not consideredsignificant for separate disclosure in the periods presented herein.

 

8

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**5.  Intangible Assets**

 

At December 31, 2002, the Company had $139,978 of goodwill andnon-compete agreements related to acquisitions recorded on our balancesheet.  In accordance with SFAS No. 142,“Goodwill and Other Intangible Assets,” goodwill is subject to annualimpairment test on a reporting unit level. As a result of the Company’sbankruptcy filing on June 27, 2003 and the resulting reorganization, theCompany determined that its remaining goodwill was fully impaired and recordeda non-cash impairment charge of approximately $138,115, which reflected theimpairment of the remaining goodwill of the Company.

 

**6. Liabilities Not Subject to Compromise**

 

Liabilities which are not subject tocompromise consist of the following:

 
|                   |   | **June 30,  2003** |   | **December  31,  2002** |   |
|------------------------|--------|--------------------|--------|-------------------------|--------|
|                   |   |               |   |                    |   |
| Book overdraft         |   | $                  | 9,605  |                    | $      | 490 |   |
| Accounts payable       |   | —             |   | 28,965                  |   |
| Accrued interest       |   | —             |   | 8,592                   |   |
| Other accrued expenses |   | 41,673             |   | 51,715                  |   |
| Debt                   |   | 2,420              |   | 763,276                 |   |
|                   |   |               |   |                    |   |
|                   |   | $                  | 53,698 |                    | $      | 853,038 |   |

 

**7. Liabilities Subject to Compromise**

 

Liabilities subject to compromise consist of the following at June 30,2003:

 
| Accounts payable |   | $       | 24,465  |   |
|------------------|--------|---------|---------|--------|
| Accrued interest |   | 19,929  |    |
| Accrued expenses |   | 6,299   |    |
| Debt             |   | 760,229 |    |
|             |   | $       | 810,922 |   |

 

All amounts above may be subject to adjustment depending on further developmentswith respect to disputed claims, the completion of the reconciliation of claimsfiled with the Bankruptcy Court to amounts included in the Company’s records orother events.  Additional pre-petitionclaims may arise from the rejection of executory contracts or unexpired leases.

 

**8.  Debt and Liquidity**

 

In 1998, the Company entered into a credit facility with variousfinancial institutions (as amended, the “Credit Facility”). This provided for asecured credit facility, including a term loan of $100,000 and a revolvingcredit facility loan of

 

9

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$300,000.Proceeds from the Credit Facility were used to repay approximately $59,513 ofindebtedness under the Company’s previous credit facility. During 1999, theCompany amended its Credit Facility to increase the available borrowings from$400,000 up to a maximum amount of $750,000. In 2001, the Company amended itsCredit Facility to decrease the maximum available borrowings to $650,000. In2002, the Company amended its credit facility to decrease the maximum availableborrowings to $550,000.

 

As of December 31, 2002, the Company was in default under the financialcovenants governing the credit facility.  As of January 23, 2003, the Company and the lenders under the creditfacility entered in a forbearance agreement with an initial expiration of March14, 2003.  As of March 14, 2003, theCompany and the lenders under the credit facility entered into a second forbearanceagreement which extended the forbearance period until May 14, 2003, subject toearlier expiration upon the occurrence of certain circumstances.  This forbearance period was subsequentlyextended to June 15, 2003.

 

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”), whichhave been registered for public trading, for the Series A Notes. During1998, 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 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 forpublic trading, for the Series C Notes.

 

The Series B Notes and the Series D Notes contained a cross-defaultprovision whereby the Company’s default on its Credit Facility resulted in adefault on the Series B Notes and the Series D Notes.  In accordance with the Plan of Reorganization, the holders of theCompany’s Series B Notes and Series D Notes are to receive 97.5% of the newcommon stock of the Company created upon emergence from bankruptcy.  The Company ceased accruing interest on theSeries B and Series D Notes upon the Filing.

 

The Company is a holding company with no independent operations, andthe Company’s assets (excluding the intercompany receivables and common stockof its 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 the Company’s ability to obtain funds fromits subsidiaries by dividend or loan.

 

The separate financial statements of each of these wholly-ownedsubsidiaries are not presented as management believes that separate financialstatements and other disclosures concerning these subsidiaries are notindividually meaningful for presentation or material to investors. In addition,the Company has pledged the stock of each of its subsidiaries as furthersecurity for the Company’s obligations under the Credit Facility.

 

Prior to seeking protection in bankruptcy on June 27, 2003, the Companyobtained Debtor-in-Possession financing which provided up to $30,000 ofavailability to the Company to fund operations during the bankruptcyperiod.  The financing required that theCompany meet certain financial tests monthly during the period that thefacility was in place.  The Company didnot borrow any funds from this financing source during the period it was inplace.  The fees associated with thisfinancing were expensed during 2003.

 

In connection with the Company’s emergence from bankruptcy on February11, 2004, NESR entered into a new senior secured credit facility (the “NewCredit Facility”).  The New CreditFacility consists of $285,000 of term loan facilities and a $205,000 revolvingcredit facility.  Proceeds under the NewCredit Facility were used to repay the balance outstanding under the CreditFacility.  NESR has scheduled principalrepayments quarterly on the term loan facilities through the May 15, 2007maturity date of the New Credit Facility. Scheduled principal payments are as follows:  $55,000 in 2004, $20,000 in 2005, $20,000 in 2006 and the balanceof $369,000 is due upon expiration in 2007. The average interest rate on the new credit facility is base rate plus3% or LIBOR plus 4.25%.

 

The New Credit Facility contains certaincovenants that require the Company to, among other things, satisfy certainfinancial tests relating to 1) adjusted EBITDA levels, 2) fixed chargecoverage ratios, 3) debt leverage ratios and 4) capital expenditurelevels.  The credit facility alsocontains various other covenants that restrict the Company’s ability to, amongother things, 1) incur additional indebtedness, 2) permit liens toattach to its assets, 3) pay dividends or make other restricted paymentson its common stock and certain other securities and 4) make acquisitionsunless certain financial conditions are satisfied. The New Credit Facility iscollateralized by substantially all of the Company’s assets.

 

**9.  Segment information**

 

All operations are managed on a branch basis. The Company has tworeporting segments: Traffic Safety and General Rental and Other. The GeneralRental operations are primarily involved in the rental and sale of varioustypes of lift and specialty equipment to construction, automotive and otherindustrial users. The Traffic Safety operations are primarily involved in therental of traffic safety equipment and providing the related services to managetraffic flow during construction.  TheTraffic Safety operations have different

 

10

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contractual,regulatory and capital requirements than the General Rental operations. Theaccounting policies for these segments are the same as those described inNote 3.

 

The Company’s operations in Canada represent less than 2% of totalrevenues and total assets of the Company. Due to the size of the Company’s Canadian operations, these operationsare considered insignificant for separate geographical segment reporting.

 

The Company has no single customer that represents greater than 10% ofthe Company’s consolidated revenues. Identifiable assets are those used in theCompany’s operations in each segment. Intersegment revenues are not material.

 

The following table presents the information for the reporting segmentsfor the quarters ended June 30:

 
|                          |   | **Traffic  Safety** |   | **General Rental  and  Other** |   | **Discontinued  Operations** |   | **Consolidated** |     |
|-------------------------------|--------|---------------------|--------|--------------------------------|--------|------------------------------|--------|------------------|----------|
| **2003:**                     |   |                |   |                           |   |                         |   |             |     |
| Rental and service revenues   |   | $                   | 27,957 |                           | $      | 98,735                       |   |             |     | $ | 126,692 |   |
| New equipment sales           |   | 1,469               |   | 8,253                          |   |                         |   | 9,722            |     |
| Rental equipment sales        |   | 56                  |   | 9,069                          |   |                         |   | 9,125            |     |
| Other revenues                |   | 417                 |   | 4,635                          |   |                         |   | 5,052            |     |
| Total revenues                |   | 29,899              |   | 120,692                        |   |                         |   | 150,591          |     |
| Operating loss(a)             |   | (36,385             | )      | (102,434                       | )      |                         |   | (138,819         | )        |
| Net loss(a)                   |   | (36,277             | )      | (122,085                       | )      | $                            | (518   | )                | (158,880 | ) |
| Identifiable assets           |   | 72,885              |   | 618,767                        |   |                         |   | 691,652          |     |
| Goodwill impairment           |   | 39,644              |   | 98,471                         |   |                         |   | 138,115          |     |
| Depreciation and amortization |   | 2,949               |   | 25,878                         |   |                         |   | 28,827           |     |
| Capital expenditures          |   | 2,468               |   | 10,320                         |   |                         |   | 12,788           |     |
| **2002:**                     |   |                |   |                           |   |                         |   |             |     |
| Rental and service revenues   |   | $                   | 28,162 |                           | $      | 104,186                      |   |             |     | $ | 132,348 |   |
| New equipment sales           |   | 1,965               |   | 9,668                          |   |                         |   | 11,633           |     |
| Rental equipment sales        |   | 108                 |   | 10,429                         |   |                         |   | 10,537           |     |
| Other revenues                |   | 763                 |   | 6,368                          |   |                         |   | 7,131            |     |
| Total revenues                |   | 30,998              |   | 130,651                        |   |                         |   | 161,649          |     |
| Operating income              |   | 4,910               |   | 8,011                          |   |                         |   | 12,921           |     |
| Net income (loss)             |   | 3,261               |   | (7,550                         | )      | $                            | 5,202  |             | 913      |   |
| Identifiable assets           |   | 112,798             |   | 910,042                        |   | 13,227                       |   | 1,036,067        |     |
| Depreciation and amortization |   | 2,942               |   | 28,044                         |   |                         |   | 30,986           |     |
| Capital expenditures          |   | 1,983               |   | 21,820                         |   |                         |   | 23,803           |     |

 

The following table presents the information for the reporting segmentsfor the six month periods ended June 30:

 
|                          |   | **Traffic  Safety** |   | **General  Rental and  Other** |   | **Discontinued  Operations** |   | **Consolidated** |   |
|-------------------------------|--------|---------------------|--------|--------------------------------|--------|------------------------------|--------|------------------|--------|
| **2003:**                     |   |                |   |                           |   |                         |   |             |   |
| Rental and service revenues   |   | 42,934              |   | 190,370                        |   |                         |   | 233,304          |   |
| New equipment sales           |   | 1,928               |   | 16,584                         |   |                         |   | 18,512           |   |
| Rental equipment sales        |   | 74                  |   | 17,396                         |   |                         |   | 17,470           |   |
| Other revenues                |   | 1,168               |   | 9,755                          |   |                         |   | 10,923           |   |
| Total revenues                |   | 46,104              |   | 234,105                        |   |                         |   | 280,209          |   |
| Operating loss(a)             |   | (39,590             | )      | (106,318                       | )      |                         |   | (145,908         | )      |
| Net loss(a)                   |   | (39,455             | )      | (148,521                       | )      | (518                         | )      | (188,494         | )      |
| Identifiable assets           |   | 72,885              |   | 618,767                        |   |                         |   | 691,652          |   |
| Goodwill impairment           |   | 39,644              |   | 98,471                         |   |                         |   | 138,115          |   |
| Depreciation and amortization |   | 5,983               |   | 51,023                         |   |                         |   | 57,006           |   |
| Capital expenditures          |   | 3,869               |   | 17,919                         |   |                         |   | 21,788           |   |
| **2002:**                     |   |                |   |                           |   |                         |   |             |   |
| Rental and service revenues   |   | 41,315              |   | 206,793                        |   |                         |   | 248,108          |   |
| New equipment sales           |   | 3,065               |   | 18,030                         |   |                         |   | 21,095           |   |
| Rental equipment sales        |   | 125                 |   | 16,920                         |   |                         |   | 17,045           |   |
| Other revenues                |   | 978                 |   | 12,873                         |   |                         |   | 13,851           |   |
| Total revenues                |   | 45,483              |   | 254,616                        |   |                         |   | 300,099          |   |
| Operating income              |   | 1,143               |   | 13,138                         |   |                         |   | 14,281           |   |
| Net loss (b)                  |   | (2,099              | )      | (146,573                       | )      | 3,572                        |   | (145,100         | )      |
| Identifiable assets           |   | 112,798             |   | 910,042                        |   | 13,227                       |   | 1,036,067        |   |
| Depreciation and amortization |   | 5,912               |   | 55,059                         |   |                         |   | 60,971           |   |
| Capital expenditures          |   | 2,763               |   | 34,191                         |   |                         |   | 36,954           |   |

 

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(a)          Operating loss and net loss for Traffic Safetyand for General Rental and Other operations include goodwill impairment chargesof $39,644 and $98,471, respectively.

 

(b)         Net loss for the General Rental and othersegment includes a goodwill impairment charge of $129,505 recorded as thecumulative effect of a change in accounting principle as a result of theinitial adoption of SFAS No. 142.

 

11

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**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This discussion should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year-ended December 31, 2002 as filed with theSecurities and Exchange Commission and other information included herein.  All dollar amounts are in thousands.

 

**General**

 

The Company was founded inJune 1996 to acquire and integrate businesses that focus on the rental ofgeneral and specialty equipment to industrial and construction end-users. Sinceinception, the Company acquired 42 businesses in separate transactions. Allacquisitions were accounted for using the purchase method of accounting. Theresults of operations of the businesses acquired are included in the Company’sfinancial statements only from their respective dates of acquisition.

 

The Company derives its revenuesfrom four sources: 1) equipment rental and service, 2) new equipmentsales, 3) rental equipment sales and 4) sales of complementary partsand merchandise. The Company’s primary source of revenue is the rental and serviceof equipment to industrial and construction end-users. The growth of rentalrevenues depends on several factors, including demand for rental equipment, theamount and quality of equipment available for rent, rental rates and generaleconomic conditions. Revenues generated from the sale of new equipment areaffected by price and general economic conditions. Revenues generated from thesale of used rental equipment are affected by price, general economicconditions and the Company’s fleet management program. Revenues from the saleof complementary parts and services are primarily affected by equipment rentaland sales volume.

 

Cost of revenues consistsprimarily of rental equipment depreciation, the cost of rental and servicerevenue, the cost of new equipment, the net book value of rental equipment soldand other direct operating costs. Given the varied, and in some casesspecialized, nature of its rental equipment, the Company uses a range ofperiods from two to fifteen years over which it depreciates its equipment on astraight-line basis.

 

**Critical AccountingPolicies**

 

We prepare our consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America, which requires our management to makeestimates and general assumptions about the effects of matters that areinherently uncertain. We have summarized our significant accounting policies inNote 3 to our consolidated financial statements, as presented in ourAnnual Report on Form 10-K for the year ended December 31, 2002. Of theseaccounting policies, we believe the following may involve a higher degree ofjudgment and complexity.

 

*Application of SOP 90-7*

The consolidated financialstatements have been prepared in accordance with SOP 90-7.  Under SOP 90-7, revenues and expenses,realized gains and losses and provisions for losses resulting from thereorganization of the business are to be reported in the consolidatedstatements of operations separately as reorganization items.  Professional fees are expensed asincurred.  Interest expense is reportedonly to the extent that it will be paid during the bankruptcy or that it isprobable that it will be an allowed claim. The application of SOP 90-7 also requires that the Company estimate theexpected amount of allowed claims with respect to pre-petition liabilities inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 5,“Accounting for Contingencies.”

 

### ***Allowancefor Doubtful Accounts***

At June 30, 2003, we had anallowance for doubtful accounts totaling $4,764, which we have established inthe event that we are unable to collect certain receivables. This allowancerepresents our estimate of the total receivables recorded as of June 30,2003 that we will be unable to collect. Future general events, such as changesin the economy, and specific events, such as changes in the economic conditionof our customers, could significantly impact our ability to collect on thesereceivables, and therefore, cause us to change our allowance estimate.

 

### ***UsefulLives of Rental Equipment and Property and Equipment***

At June 30, 2003, we had$450,176 of net rental equipment and $40,675 of net property and equipmentrecorded on our balance sheet. Rental equipment is depreciated using thestraight-line method over two to fifteen years. Property and equipment isdepreciated over three to thirty years, depending on the type of asset.Our depreciable lives are based on our estimates of the useful lives of therespective assets over which they will generate revenues. These estimates mayrequire adjustment based on changing circumstances in the marketplace. Changesto these estimates could result in us having to recognize an increase to ordecrease in depreciation expense.

 

### ***Impairmentof Long-Lived Assets***

In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-lived Assets,” we testlong-lived assets or asset groups for recoverability whenever events or changesin circumstances indicate that its carrying amount may not be recoverable.  When such events occur, we compare the sumof the undiscounted cash flows expected to result from the use and eventualdisposition of the asset or asset group to the carrying amount of thelong-lived asset or asset group.  Ifthis comparison indicates that an impairment exists, the amount of theimpairment is measured by comparing the carrying value to the fair market valueof the asset.  Fair market value istypically based on the discounted expected future cash flows.  The discount rate applied to these cash flowsis based on our weighted-average cost of capital, which represents the blendedafter-tax costs of debt and equity.

 

### ***Impairmentof Goodwill***

Effective January 1, 2002, weadopted SFAS No. 142, “Goodwill and Other Intangible Assets” issued by theFinancial Accounting Standards Board (FASB). Under this standard, goodwill is no longer amortized but is subject toannual impairment tests on a reporting unit level.  We completed our initial impairment analysis in the secondquarter of 2002 and recorded a non-cash impairment charge of approximately$155,102 ($129,505, net of tax benefit), as a cumulative effect of a change inaccounting principle retroactive to January 1, 2002, on the consolidatedstatement of operations and comprehensive loss.  We completed a subsequent analysis at the end of 2002 and did notidentify any goodwill impairment.  Inthe most recent analysis performed as of June 30, 2003, we recorded a non-cashimpairment charge of approximately $138,115, which reflects the impairment ofthe remaining goodwill of the Company.

 

We evaluated the recoverability of goodwillby estimating the future discounted cash flows of the businesses to which thegoodwill related. The rate used in determining discounted cash flows is a ratecorresponding to our cost of capital, risk adjusted where necessary. Estimatedcash flows were then determined by disaggregating our business segments to areporting level for which meaningful identifiable cash flows could bedetermined. As the estimated future discounted cash flows were less than thecarrying value of the net assets (tangible and identifiable intangibles) andrelated goodwill, an impairment loss was recognized. The impairment losses,limited to the carrying value of goodwill, represented the excess of the sum ofthe carrying value of the net assets (tangible and identifiable intangible) andgoodwill over the discounted cash flows of the business being evaluated. Indetermining the estimated future cash flows, we considered current andprojected future levels of income as well as business trends, prospects andmarket and economic conditions.

 

### ***ValuationAllowance on Net Deferred Tax Assets***

At June 30, 2003, we provided afull valuation allowance on our net deferred tax assets.  Realization of net deferred income tax assetsis dependent upon generating sufficient future taxable income in the periods inwhich the underlying temporary differences reverse, or prior to the dates thatnet operating loss carryforwards expire. We must assess the likelihood that our net deferred tax assets will berecovered in the future.  Because webelieve that recovery is not likely, we have established a full valuationallowance.

 

**Results of Operations**

 

The following table shows information derivedfrom the Company’s historical consolidated statements of operations as apercentage of total revenues.

 
|                                                               |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                               |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                               |   |                              |   |                            |   |   |   |   |   |
| Rental and service revenues                                        |   | 84.1                              | %      | 81.9                            | %      | 83.3 | % | 82.7 | % |
| New equipment sales                                                |   | 6.5                               |   | 7.2                             |   | 6.6 |   | 7.0 |   |
| Rental equipment sales                                             |   | 6.1                               |   | 6.5                             |   | 6.2 |   | 5.7 |   |
| Other revenues                                                     |   | 3.3                               |   | 4.4                             |   | 3.9 |   | 4.6 |   |
| Total revenues                                                     |   | 100.0                             |   | 100.0                           |   | 100.0 |   | 100.0 |   |
| Cost of revenues                                                   |   | 74.9                              |   | 70.4                            |   | 75.9 |   | 72.4 |   |
| Gross margin                                                       |   | 25.1                              |   | 29.6                            |   | 24.1 |   | 27.6 |   |
| Selling, general and administrative  expenses                      |   | 24.5                              |   | 20.1                            |   | 25.7 |   | 21.2 |   |
| Goodwill impairment                                                |   | 91.7                              |   | —                          |   | 49.3 |   | — |   |
| Non-rental depreciation and amortization                           |   | 1.0                               |   | 1.5                             |   | 1.2 |   | 1.6 |   |
| Operating income (loss)                                            |   | (92.1                             | )      | 8.0                             |   | (52.1 | ) | 4.8 |   |
| Other income, net                                                  |   | 0.2                               |   | 0.2                             |   | 0.1 |   | 0.2 |   |
| Interest expense, net                                              |   | 13.2                              |   | 10.9                            |   | 15.2 |   | 11.4 |   |
| Loss before income taxes                                           |   | (105.1                            | )      | (2.7                            | )      | (67.2 | ) | (6.4 | ) |
| Income tax expense                                                 |   | —                            |   | —                          |   | — |   | — |   |
| Loss from continuing operations                                    |   | (105.1                            | )      | (2.7                            | )      | (67.2 | ) | (6.4 | ) |
| Loss from discontinued operations, net of  tax                     |   | (0.3                              | )      | (1.1                            | )      | (0.2 | ) | (1.1 | ) |
| Gain on disposal of discontinued  operations, net of tax           |   | —                            |   | 4.3                             |   | — |   | 2.3 |   |
| Cumulative effect of a change in accounting  principle, net of tax |   | —                            |   | —                          |   | — |   | (43.2 | ) |
| Net income (loss)                                                  |   | (105.4                            | )%     | 0.5                             | %      | (67.4 | )% | (48.4 | )% |

 

 

The Company’s financial performance has been negatively affected overthe last two years due to lower activity levels in the economy, a slowdown innon-residential construction, competitive pricing pressure due to over-capacityof rental equipment in the industry and lower demand.  Additionally, the Company’s Filing on June 27, 2003 has generatedconcern among the Company’s customers and vendors and disrupted business for aperiod of time.

 

The resulting decrease in earnings negatively impacted the Company’scash flows from operations during this period, limiting the Company’s abilityto invest in its rental fleet. Management initiated several actions in response to these circumstances,including actions to reduce its operating expenses through personnel reductionsand consolidation of branch and support operations, as well as asset sales toreduce its debt.  Although these actionsreduced debt levels by more than $100,000 in 2002 and 2003, the Company’s liquidityhas remained strained.

 

Over the last two years, the Company closed and consolidated branchlocations and centralized administrative functions in an effort to reducecosts.  For several months leading tothe bankruptcy filing in June 2003, the Company entered into a series ofdiscussions with its debt and equity holders to evaluate various restructuringalternatives.  It was determined that itwas in the best interest of the Company’s creditors and other constituents toseek protection through voluntary petitions under Chapter 11 of the U.S. BankruptcyCode.  As a result of defaults under itscredit facilities, the Company has operated with limited capital resources dueto its inability to borrow under its senior credit facility.

 

### ***Threeand Six Months Ended June 30, 2003, Compared with the Three and Six MonthsEnded June 30, 2002***

 

*Revenues*

Total revenues decreased to $150,591 for the three months ended June30, 2003 from $161,649 for the three months ended

 

12

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June 30, 2002.  Revenues were down in all major categoriesin the current quarter as compared to the same period in the previousyear.  Rental and service revenuesdeclined to $126,692 for the three months ended June 30, 2003 from $132,348 forthe same period in 2002.  This decreaseis primarily the result of continued pressure on rental rates, brought about bythe continued slowness in the economy. New equipment sales of $9,722 were down $1,911 from the prior year, andrental equipment sales of $9,125 were down $1,412 or 13% from 2002 levels.

 

The majority of the decline in revenues year-over-year is due todeclines within the General Rental segment. Total revenues within this segment decreased to $120,692 for the threemonths ended June 30, 2003 from $130,651 for the three months ended June 30,2002.  Rental and service revenuesdecreased $5,451, and volume in all other revenue categories declined aswell.  Total revenues within theCompany’s Traffic Safety operations declined only slightly to $29,899 for thesecond quarter of 2003, as compared to $30,998 during the same period in 2002.

 

Similarly,total revenues for the six months ended June 30, 2003 were $280,209, down$19,890 or 7% as compared to the same period in 2002.  Rental revenues comprise $14,804 of this shortfall, as ratescontinue to trend downward.  Revenuesare also down year-over-year for new equipment sales and other revenues.  Rental equipment sales were up slightly from2002, primarily as the result of an auction in which the Company participatedin February.   The current year declinesresulted primarily from the Company’s General Rental operations, as 2003revenue levels within the Traffic Safety segment are consistent with those of2002.

 

*Gross Profit*

Gross profit decreased to $37,734 for the three months ended June 30, 2003from $47,793 for the three months ended June 30, 2002. Gross margins decreasedto 25% from 30%.  Profitability was downin both of the Company’s operating segments, as gross margins on rental andservice revenues declined to 49% for the current quarter as compared to 53%during the same quarter in 2002.  Withinthe General Rental and Other operations, gross profit decreased to $30,340 forthe three months ended June 30, 2003 from $38,535 for the three months endedJune 30, 2002.  The decrease is a resultof the continuing pressure on rental rates described above. Gross profit withinthe Traffic Safety operations decreased to $7,394 for the three months endedJune 30, 2003 from $9,258 for the three months ended June 30, 2002.  Decreased state funding of highway and roadconstruction projects resulted in more competitive bidding for fewer projects.

 

Year-to-date,gross profit of $67,651 is down 18% from the $82,817 recognized during thefirst six months of 2002.  Gross profitwithin the General Rental segment declined 18% to $59,695, while gross profitwithin the Traffic Safety operations declined 19% to $7,956.  Overall, gross margins declined to 24% forthe six months ended June 30, 2003, as compared to 28% for the six months endedJune 30, 2002.

 

*Selling, General andAdministrative Expenses*

Selling, general and administrative expenses increased to $36,919 forthe three months ended June 30, 2003 from $32,425 for the three months endedJune 30, 2002.  Selling, general andadministrative expenses for the General Rental and Other operations were$33,116 for the three months ended June 30, 2003, up slightly from the $28,139recognized for the three months ended June 30, 2002 due to increases inconsulting and professional fees related to bankruptcy filing.  Selling, general and administrative expensesfor the Traffic Safety operations have declined to $3,803 for the three monthsended June 30, 2003 from $4,286 for the three months ended June 30, 2002.  These decreases are the result of variouscost-savings initiatives implemented during 2002 within the Traffic Safetyoperations.  For the six months endedJune 30, 2003, selling, general and administrative expenses increased to$71,992 as compared to $63,650 for the same period in 2002.

 

*Goodwill Impairment*

As a result of the Company’s bankruptcy filing on June 27, 2003, theCompany completed an impairment analysis of goodwill as of June 30, 2003.  Based on the results of this analysis, theCompany recorded a non-cash impairment charge of $138,115 during the secondquarter of the year, which reflected the impairment of the remaining goodwillof the Company.

 

*Non-rental Depreciation and Amortization*

Non-rental depreciation and amortization declined slightly to $1,519for the second quarter of 2003 as compared to $2,447 for the same period in2002.  This decline is primarily due tothe expiration of a portion of the Company’s non-compete agreements.  For the six months ended June 30, 2003, non-rentaldepreciation and amortization was down $1,434 to $3,452.

 

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*Interest Expense, Net*

Interest expense, net, increased to $19,820 for the three months endedJune 30, 2003 from $17,543 for the three months ended June 30, 2002.  The increase in the current quarter is theresult of higher interest rates on the Company’s senior debt as a result of thedefault in the credit facility and resulting forbearance agreements.  Year-to-date, net interest expense is upsimilarly.

 

*Loss from Discontinued 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 results of operationsof this business are presented as discontinued operations.

 

*Cumulative Effect 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,Financial Condition and Capital Resources**

 

The Company’s consolidated financial statements have been prepared on agoing concern basis, which contemplates continuity of operations, realizationof assets, and payment of liabilities in the ordinary course of business, anddo not reflect adjustments that might result if the Company is unable tocontinue as a going concern.  The Company’shistory of significant losses, the stockholders’ deficit, and the Chapter 11bankruptcy filing discussed herein raise substantial doubt about the Company’sability to continue as a going concern. Continuing as a going concern is dependent upon, among other things, thesuccess of future business operations and the generation of sufficient cashfrom operations and financing sources to meet the Company’s obligations.  The Company is presently considering avariety of alternatives to provide other sources of cash flow outside ofordinary operations.  These alternativesinclude refinancing, fleet sales and other asset dispositions.

 

The consolidated financial statements do not reflect the effect of anychanges to the Company’s capital structure or in the Company’s businessoperations as the result of the Plan of Reorganization.

 

The Company’s primary capital requirements are for purchasing newrental equipment. The Company purchases rental equipment throughout the year toreplace equipment that has been sold as well as to maintain adequate levels ofequipment to meet existing and new customer needs. Rental fleet purchases forthe Company were $17,878 and $33,455 in the first six months of 2003 and 2002,respectively. The Company’s principal sources of cash are cash generated fromoperations and borrowings available under its credit facility.  In the last two years, however, as a resultof the Company’s financial position, the Company has had limited capitalavailable for capital expenditures due to more immediate funding requirementsassociated with debt service, insurance bonds and performance deposits.

 

For the six months ended June 30, 2003 and 2002, the Company’s netcash (used in) provided by operations was $(420) and $20,976,respectively.  For the six months endedJune 30, 2003 and 2002, the Company’s net cash (used in) provided by investingactivities was $(3,162) and $89,500, respectively. Net cash used in investingactivities consists primarily of purchases of rental equipment and property andequipment. In 2002, this includes the proceeds from the sale of the trenchshoring business.  For the six monthsended June 30, 2003 and 2002, the Company’s net cash provided by (used in)financing activities was $8,090 and $(110,972), respectively. Net cash used infinancing activities consists primarily of repayments under the Company’scredit facility.  In 2002, the proceedsfrom the sale of the trench shoring business were used to repay existingindebtedness under the credit facility.

 

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”), whichwere registered for public trading, for the Series A Notes. Also during1998, 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 were registered forpublic trading, for the Series C Notes. In accordance with the Plan of Reorganization, the holders of theCompany’s Series B Notes and Series D Notes received 97.5% of the New CommonStock of the Company.

 

##### **New CreditFacility**

 

In connectionwith the Company’s emergence from Chapter 11 on February 11, 2004, the Companyentered into a new senior secured credit facility (the “New CreditFacility”).  The New Credit Facilityconsists of $285,000 of term loan facilities and a $205,000 revolving creditfacility, subject to availability based on certain financial tests that includea borrowing base.  As ofFebruary 11, 2004, the Company had $464,000 outstanding under the NewCredit Facility, and $26,000 of additional availability on the revolving creditfacility.  The borrowing base isdetermined by the Company’s eligible inventory, accounts receivable and rental

 

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equipment and is recomputedmonthly.  In the event that the bookvalue of the Company’s inventory or accounts receivable or the appraised valueof the Company’s rental equipment declines without a corresponding increase inone of the other categories, the available borrowing base will be temporarilyreduced accordingly.

 

The New Credit Facility contains certain covenants that require theCompany to, among other things, satisfy certain financial tests relating to1) adjusted EBITDA levels, 2) fixed charge coverage ratios, 3) debtleverage ratios and 4) capital expenditure levels.  The credit facility also contains variousother covenants that restrict the Company’s ability to, among other things,1) incur additional indebtedness, 2) permit liens to attach to itsassets, 3) pay dividends or make other restricted payments on its commonstock and certain other securities and 4) make acquisitions unless certainfinancial conditions are satisfied.

 

**FactorsThat May Influence Future Results**

 

*Filing*

 

The Company’s Filing on June 27, 2003 generated concern among theCompany’s customers and suppliers and disrupted business for a period of timeduring 2003.  Disclosure of the terms ofthe Company’s Plan of Reorganization to employees, customers and vendors, aswell as the subsequent emergence from bankruptcy protection in February 2004,have reduced the distractions caused by the Filing.  However, the ultimate impact of the Filing on future results isnot known.

 

*Unfavorable Economic Conditions*

 

Our end-users consist of construction and industrial customers.  Weaknesses in these markets may lead to adecrease in demand for our equipment and services.  Recent declines in the non-residential construction industry, aswell as reduced funding at the federal and state levels on infrastructure, haveadversely affected our results of operations. The future impact of potential continued declines in these areas is notknown.

 

*Seasonality*

 

The Company’s revenues and operating results fluctuate significantlyfrom quarter to quarter due to the seasonal nature of the markets in which theCompany operates.  The Company’spresence both in the traffic safety and control industry and in the generalrental market in the Northeast and Midwest are both highly seasonal in nature,with activity tending to be lower in the winter.

 

*Indebtedness*

* *

The Company’s substantial indebtedness could adversely affect theCompany’s operations in the future in one or more of the following ways:

 

•                                          Significantcash required for debt service could limit the Company’s ability to invest inits rental fleet and grow operations,

 

•                                          Increasesin interest rates could result in increased interest expense and increased cashfor debt service,

 

•                                          TheCompany’s ability to obtain additional financing could be limited asessentially all of the assets of the Company secure the existing indebtednessand

 

•                                          Failureto comply with covenants associated with the existing indebtedness could resultin the creditors’ ability to require repayment of outstanding indebtednessthereunder.

 

*Competition*

 

The equipment rental Industry is highly fragmented andcompetitive.  Numerous competitors servemany of the markets in which the Company operates.  These competitors range from national and multi-regionaloperators to small, independent businesses with a limited number oflocations.  Management believes thatparticipants in the equipment rental industry compete on the basis ofavailability and quality of equipment, service, delivery time and price.  Recent economic pressures have reducedmarket demand and forced industry participants to lower rental rates, adverselyimpacting the Company’s results of operations. The future impact of potential continued economic declines is unknown.

 

*Legal Proceedings*

 

From time to time, the Company has been and is involved in variouslegal proceedings, all of which management believes are routine in nature andincidental to the conduct of its business. Although the Company does not believe that an adverse ruling in any ofthese proceedings would have a material adverse impact on the Company’s resultsof operations, the Company’s ultimate legal and financial liability resultingfrom any of these proceedings cannot be estimated with certainty.

 

*Environmental*

 

The Company’s facilities are subject to federal, state and localenvironmental requirements relating to discharges to air, water and land; thehandling and disposal of solid and hazardous waste; and the cleanup ofproperties affected by hazardous substances. Based on environmental assessments conducted in connection with theCompany’s acquisitions, the Company believes that its facilities are insubstantial compliance with environmental requirements, and that the Companyhas no material liabilities arising under environmental requirements.  However, some risk of environmentalliability is inherent in the nature of the Company’s business, and in thefuture the Company may incur material costs to meet current or more stringentcompliance, cleanup or other obligations under environmental laws.

 

**RecentlyIssued Accounting Pronouncements**

 

In May 2003, the Financial Accounting Standards Board issuedStatement No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150requires that certain financial instruments with characteristics of bothliabilities and equity be classified as a liability and the accretion of anyrelated fees be classified as interest expense rather than as a charge toretained earnings.  The Company willadopt SFAS No. 150 on July 1, 2003, and

 

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as a resultthe Company will reclassify $97,046 of senior redeemable preferred stock toliabilities. SFAS No. 150 does not permit the reclassification of the seniorredeemable preferred stock to liabilities in financial statements prior to theeffective date.

 

**ITEM 3****.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The New Credit Facility consists of $285 million of term loanfacilities and a $205 million revolving credit facility, subject toavailability based on certain financial tests that include a borrowingbase.  Borrowings under the creditfacility bear interest, at the Company’s option, at a specified base rate orLIBOR rate plus the applicable borrowing margin. At February 11, 2004, theCompany had total borrowings under the credit facility of $462 million. Each100 basis point increase in interest rates on the variable rate debt woulddecrease pretax earnings by approximately $4.6 million.

 

**ITEM 4****. CONTROLSAND PROCEDURES**

 

**Evaluationof disclosure controls and procedures** - Afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of June30, 2003 (the “Evaluation Date”), the Company’s chief executive officer andchief financial officer have concluded that, as of the Evaluation Date, theCompany’s disclosure controls and procedures were adequate and effective toensure that material information relating to the Company and its subsidiarieswould be made known to them by others within those entities, particularlyduring the period in which this quarterly report was being prepared.

 

**Changesin internal controls** – The Company has taken steps tostrengthen its control and operating environment, information systems andprocedures, including:  theestablishment of Company wide policies, procedures and internal control standards;the establishment of an internal audit function; the integration andconsolidation of information systems into comprehensive operating and financialreporting systems and the establishment of a shared serviced center.

 

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**PARTII****. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Following the Company’s announcement in April 2002 that it wasrestating its prior period financial statements through the filing of its 2002Annual Report on Form 10-K, the Company received a notice of inquiry from theSEC relating to the Company’s restated financial statements.  Following a review of the Company’s responseto the notice of inquiry, the SEC commenced an informal investigation into thismatter.  The informal investigation includedthe production of relevant documents and the taking of testimony from certaincurrent and former Company employees. The Company was informed that the SEC also commenced an investigationwith respect to three individuals (two former NES employees no longerassociated with the Company and one current NES employee).

 

On April 10, 2003, the Company was informed by the staff of the SEC,through receipt of a “Wells Notice,” that the SEC intended to recommend thatthe Commission institute a cease-and-desist proceeding against the Company,alleging that NES violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) and Rules12b-20, 13a-1, and 13a-13 thereunder. Prior to and during the investigation, the Company had voluntarilyupgraded and reinforced significant portions of its financial controlsfunctions.  The Company fully cooperatedwith the Commission throughout the investigation.

 

In August2003, the Company offered to settle the SEC investigation (the “Offer”) byagreeing to certain reporting violations of the Exchange Act and by agreeing toconsent to the entry of an administrative Cease-and-Desist Order (the“Order”).  While the Commission has notindicated at this time that it intends to seek a civil monetary penalty againstthe Company, the Commission has the statutory authority to seek a civil penaltyof up to $500,000 for each violation of the Exchange Act committed by theCompany.  As of the date hereof, the SEChas not taken any formal action on the Offer or the Order.  The Company is continuing its efforts toresolve this matter with the SEC.

 

**ITEM 2. CHANGES INSECURITIES, USE OF PROCEEDS AND ISSUER OF EQUITY SECURITIES**

 

Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

See Note 8 of the Notes to Consolidated Financial Statements for adiscussion of certain defaults under the Company’s Senior Credit Facility andSenior Subordinated Notes.

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

(a)                                  TheCompany held its annual meeting of stockholders on May 29, 2003.

 

(b)                                 Proxiesfor the annual meeting were solicited pursuant to Regulation 14A of theSecurities Exchange Act of 1934, as amended. There was no solicitation in opposition to management’s nominees fordirectors as listed in the definitive proxy statement of the Company dated asof April 14, 2003, and all of such nominees were elected.

 

(c)                                  Brieflydescribed below is each matter voted upon at the annual meeting.  The number of shares of common stock of theCompany issued and outstanding and entitled to 1 vote per share on matterssubmitted at the annual meeting was 21,151,163.  The number of shares of preferred stock of the Company issued andoutstanding and entitled to 76.923077 votes per share on matters submitted atthe annual meeting was 100,000.  Suchshares of common stock and preferred stock were entitled to cast an aggregateof 28,843,471 votes at the annual meeting.

 

(i)                                     Electionof directors of the Company.

 

All proxy nominees for directors as listed in the proxy statement wereelected to serve three-year terms with the following vote:

 
| **Nominee** |   | **For**    |   | **Against** |   | **Abstain** |   |
|-------------|--------|------------|--------|-------------|--------|-------------|--------|
| Daniel Timm |   | 18,934,901 |   | —      |   | 40,759      |   |

 

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(ii)                                  Ratification of theappointment of PricewaterhouseCoopers LLP as independent public accountants forthe fiscal year ending December 31, 2003.

 

The appointment of PricewaterhouseCoopers LLP was ratified with thefollowing vote:

 

| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 18,938,421 |   | 33,950      |   | 3,289       |   |

 

**ITEM 5****. OTHERINFORMATION**

 

Not applicable.

 

**ITEM 6****. EXHIBITSAND REPORTS ON FORM 8-K**

 

See Index of Exhibits on page 20. The Company filed a Current Report on Form 8-K dated May 28, 2003to report the extension of the forbearance period as provided for in the ThirdForbearance Agreement.

 

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**SIGNATURE**

 

**Pursuantto the 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 April 8, 2004.**

 
|                                                      | National Equipment Services, Inc. |
|-----------------------------------------------------------|-----------------------------------|
|                                                      |                              |
|                                                      |                              |
|                                                      | By:                               | /s/ Michael  D. Milligan |
|                                                      |                              | Michael D. Milligan |
|                                                      |                              | *Chief Financial Officer* |
|                                                      |                              |   |
| Form 10-Q: For the quarter ended June 30, 2003. |                              |   |

 

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**INDEXOF EXHIBITS**

** **
| **Exhibit****Number** |   | **Description  of Document**                                                                                                                                                                                                                      |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                                                              |
| 11.1                  |   | Statement re Computation of Per Share Earnings. Not required because  per share earnings (loss) information has not been presented in the  Consolidated Financial Statements due to the cancellation of the previously  outstanding common stock. |
| 31.1                  |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                |
| 31.2                  |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                |
| 32.1                  |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
| 32.2                  |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 |

 

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