** **

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

** **

 

### **FORM 10-Q**

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

** **

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

 

**OR**

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

**Commission File No.001-14163**

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

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

** **

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

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

 

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

             Therewere 21,151,163 shares of Common Stock ($.01 par value) outstanding as ofNovember 9, 2001.

 

 

**NATIONAL EQUIPMENT SERVICES,INC.**

**QUARTERLY REPORT ON FORM 10-Q**

**For the Quarter endedSeptember 30, 2001**

**INDEX**

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

** **

**PART I. FINANCIAL INFORMATION**

**ITEM****1.FINANCIAL STATEMENTS**

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

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

 
|                                                                      | **September 30, 2001**                                                                           |       | **December 31, 2000** |       |
|---------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                      |                                                                                                  |       |                  |       |
|                                                                      | **(Unaudited)**                                                                                       |       |                  |       |
| **Assets**                                                                |                                                                                                  | ** ** |                  | ** ** |
|                                                                      | Cash  and cash equivalents                                                                            | $          | 986                   |       | $ | 3,162 |   |
|                                                                      | Accounts  receivable, net of allowance for doubtful accounts of $6,502 and  $5,484, respectively | 133,136    |                  | 138,459    |   |
|                                                                      | Inventory,  net                                                                                       | 33,870     |                  | 33,267     |   |
|                                                                      | Rental  equipment, net                                                                                | 549,835    |                  | 616,212    |   |
|                                                                      | Property  and equipment, net                                                                          | 58,818     |                  | 62,784     |   |
|                                                                      | Intangible assets, net                                                                                | 360,361    |                  | 365,819    |   |
|                                                                      | Loan  origination costs, net                                                                          | 6,967      |                  | 9,109      |   |
|                                                                      | Deferred  income taxes                                                                                | 8,459      |                  | 4,644      |   |
|                                                                      | Prepaid  expenses and other assets, net                                                               | 12,643     |                  | 15,480     |   |
|                                                                      |                                                                                                  |       |                  |       |   |
|                                                                      | Total  assets                                                                                         | $          | 1,165,075             |       | $ | 1,248,936 |   |
|                                                                      |                                                                                                  |       |                  |       |   |
| **Liabilities**                                                           |                                                                                                  | ** ** |                  | ** ** |
|                                                                      | Book  overdraft                                                                                       | $          | 5,667                 |       | $ | 3,237 |   |
|                                                                      | Accounts  payable                                                                                     | 21,905     |                  | 38,867     |   |
|                                                                      | Accrued  interest                                                                                     | 15,725     |                  | 12,544     |   |
|                                                                      | Deferred  income taxes, net                                                                           | 49,872     |                  | 49,872     |   |
|                                                                      | Accrued  expenses and other liabilities                                                               | 41,767     |                  | 27,115     |   |
|                                                                      | Debt                                                                                                  | 804,016    |                  | 872,072    |   |
|                                                                      |                                                                                                  |       |                  |       |   |
|                                                                      | Total  liabilities                                                                                    | 938,952    |                  | 1,003,707  |   |
|                                                                      |                                                                                                  |       |                  |       |   |
|                                                                      |                                                                                                  |       |                  |       |
|                                                                      | Convertible  preferred stock                                                                          | 96,172     |                  | 95,797     |   |
|                                                                      | Commitments  and contingencies                                                                        | —     |                  | —     |   |
| **Stockholders’  equity:**                                           |                                                                                                  | ** ** |                  | ** ** |
| Common  stock, $0.01 par, 100,000 shares authorized; 24,170 shares issued | 241                                                                                                   |       | 241                   |       |
| Additional  paid-in capital                                               | 123,887                                                                                               |       | 123,887               |       |
| Retained  earnings                                                        | 35,780                                                                                                |       | 44,468                |       |
| Accumulated  other comprehensive loss                                     | (10,793                                                                                               | )          | —                |       |
| Stock  subscriptions receivable                                           | (102                                                                                                  | )          | (102                  | )          |
| Treasury  stock at cost, 3,019 shares                                     | (19,062                                                                                               | )          | (19,062               | )          |
|                                                                      |                                                                                                  |       |                  |       |
|                                                                      | Total  stockholders’ equity                                                                      | 129,951    |                  | 149,432    |   |
|                                                                      |                                                                                                  |       |                  |       |   |
|                                                                      | Total  liabilities and stockholders’ equity                                                      | $          | 1,165,075             |       | $ | 1,248,936 |   |
|                                                                      |                                                                                                  |       |                  |       |   |
|                                                                           |                                                                                                       |            |                       |            |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**NATIONALEQUIPMENT SERVICES, INC.AND SUBSIDIARIES**

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

 
|                                                         | **For the Three Months  Ended****September  30,** |       | **For the Nine Months Ended****September  30,** |       |
|--------------------------------------------------------------|--------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                         |                                                   |       |                                            |       |
|                                                         | **2001**                                               |       | **2000**                                        |       | **2001** |   | **2000** |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| **Revenues**                                                 |                                                   | ** ** |                                            | ** ** |   | ** ** |   | ** ** |
|                                                         | Rental revenues                                        | $          | 121,674                                         |       | $ | 127,630 |   | $ | 347,987 |   | $ | 345,011 |   |
|                                                         | New  equipment sales                                   | 13,669     |                                            | 13,976     |   | 41,936 |   | 39,871 |   |
|                                                         | Rental  equipment sales                                | 6,469      |                                            | 5,585      |   | 23,255 |   | 20,714 |   |
|                                                         | Parts,  service and other                              | 21,828     |                                            | 20,322     |   | 54,089 |   | 54,927 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |   |
|                                                         | Total  revenues                                        | $          | 163,640                                         |       | $ | 167,513 |   | $ | 467,267 |   | $ | 460,523 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| **Cost  of revenues**                                        |                                                   | ** ** |                                            | ** ** |   | ** ** |   | ** ** |
|                                                         | Rental  equipment depreciation                         | 23,662     |                                            | 23,923     |   | 72,069 |   | 67,872 |   |
|                                                         | Cost  of new equipment sales                           | 9,865      |                                            | 10,127     |   | 30,990 |   | 29,758 |   |
|                                                         | Cost  of rental equipment sales                        | 5,287      |                                            | 3,505      |   | 16,568 |   | 13,468 |   |
|                                                         | Other  operating expenses                              | 62,475     |                                            | 57,353     |   | 174,548 |   | 155,520 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |   |
|                                                         | Total  cost of revenues                                | 101,289    |                                            | 94,908     |   | 294,175 |   | 266,618 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |   |
| Gross  profit                                                | 62,351                                                 |       | 72,605                                          |       | 173,092 |   | 193,905 |   |
| Selling,  general and administrative expenses                | 37,121                                                 |       | 33,340                                          |       | 105,936 |   | 94,395 |   |
| Non-rental  depreciation and amortization                    | 7,296                                                  |       | 6,985                                           |       | 21,727 |   | 20,564 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Operating  income                                            | 17,934                                                 |       | 32,280                                          |       | 45,429 |   | 78,946 |   |
| Other  income, net                                           | 265                                                    |       | 86                                              |       | 629 |   | 280 |   |
| Interest  expense, net                                       | (17,955                                                | )          | (21,628                                         | )          | (57,793 | ) | (61,740 | ) |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Income  (loss) before income taxes                           | 244                                                    |       | 10,738                                          |       | (11,735 | ) | 17,486 |   |
| Income  tax expense (benefit)                                | 632                                                    |       | 4,977                                           |       | (3,422 | ) | 7,710 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Net  income (loss)                                           | $                                                      | (388       | )                                               | $          | 5,761 |   | $ | (8,313 | ) | $ | 9,776 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Basic  income (loss) per common share                        | $                                                      | (0.02      | )                                               | $          | 0.27 |   | $ | (0.42 | ) | $ | 0.44 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Average  number of common shares used in basic calculation   | 20,989                                                 |       | 20,696                                          |       | 20,924 |   | 21,251 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Diluted  income (loss) per common share                      | $                                                      | (0.02      | )                                               | $          | 0.20 |   | $ | (0.42 | ) | $ | 0.32 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
| Average  number of common shares used in diluted calculation | 20,989                                                 |       | 28,811                                          |       | 20,924 |   | 29,430 |   |
|                                                         |                                                   |       |                                            |       |   |   |   |   |
|                                                              |                                                        |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands)**

 
|                                                                             | **For the Nine Months Ended**

**September 30,** |       |
|----------------------------------------------------------------------------------|--------------------------------------------------|------------|
|                                                                             |                                             |       |
|                                                                             | **2001**                                         |       | **2000** |   |
|                                                                             |                                             |       |   |   |
| **Operating  Activities:**                                                       |                                             | ** ** |   | ** ** |
| Net  income (loss)                                                               | $                                                | (8,313     | ) | $ | 9,776 |   |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |                                             |       |   |   |
|                                                                             | Depreciation  and amortization                   | 96,545     |   | 90,165 |   |
|                                                                             | Gain  on sale of equipment                       | (6,878     | ) | (7,162 | ) |
|                                                                             | Deferred  income taxes                           | (3,815     | ) | — |   |
|                                                                             | Changes  in operating assets and liabilities:    |       |   |   |   |
|                                                                             | Accounts  receivable                             | 5,323      |   | (23,399 | ) |
|                                                                             | Inventory                                        | (603       | ) | (1,748 | ) |
|                                                                             | Prepaid  expenses and other assets               | (8,273     | ) | (3,290 | ) |
|                                                                             | Accounts  payable                                | (16,962    | ) | (7,114 | ) |
|                                                                             | Accrued  expenses and other liabilities          | 7,040      |   | 17,794 |   |
|                                                                             |                                             |       |   |   |   |
| Net  cash provided by operating activities                                       | 64,064                                           |       | 75,022 |   |
|                                                                             |                                             |       |   |   |
|                                                                             |                                             |       |   |   |
| **Investing  Activities:**                                                       |                                             | ** ** |   | ** ** |
| Acquisitions,  net of cash received                                              | —                                           |       | (14,427 | ) |
| Cash  received in connection with business combination                           | —                                           |       | 18,000 |   |
| Purchases  of rental equipment                                                   | (17,418                                          | )          | (157,676 | ) |
| Proceeds  from sale of rental equipment                                          | 23,255                                           |       | 20,714 |   |
| Purchases  of property and equipment                                             | (6,860                                           | )          | (16,699 | ) |
| Proceeds  from sale of property and equipment                                    | 1,004                                            |       | 1,787 |   |
|                                                                             |                                             |       |   |   |
| Net  cash used in investing activities                                           | (19                                              | )          | (148,301 | ) |
|                                                                             |                                             |       |   |   |
|                                                                             |                                             |       |   |   |
| **Financing  Activities:**                                                       |                                             | ** ** |   | ** ** |
| Proceeds  from long-term debt                                                    | 41,001                                           |       | 100,000 |   |
| Payments  on long-term debt and capital leases                                   | (109,652                                         | )          | (41,472 | ) |
| Book  overdrafts                                                                 | 2,430                                            |       | — |   |
| Repurchase  of treasury stock                                                    | —                                           |       | (12,836 | ) |
| Payments  of loan origination costs                                              | —                                           |       | 324 |   |
|                                                                             |                                             |       |   |   |
| Net  cash (used) provided by financing activities                                | (66,221                                          | )          | 46,016 |   |
|                                                                             |                                             |       |   |   |
| Net  decrease in cash and cash equivalents                                       | (2,176                                           | )          | (27,263 | ) |
| Cash  and cash equivalents at beginning of period                                | 3,162                                            |       | 33,530 |   |
|                                                                             |                                             |       |   |   |
| Cash  and cash equivalents at end of period                                      | $                                                | 986        |   | $ | 6,267 |   |
|                                                                             |                                             |       |   |   |
|                                                                                  |                                                  |            |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**NATIONALEQUIPMENT SERVICES, INC.AND SUBSIDIARIES**

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

**1. Organization**

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

**2. Basis of presentation**

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

             DerivativeInstrument — Statement of Financial Accounting Standards (“SFAS”) No. 133,“Accounting for Derivative Instruments and Hedging Activities”, as amended,became effective as of January 1, 2001. Currently, the Company's only derivative is an interest rate swap usedto hedge a portion of the Company's debt and is designated as a cash flowhedging instrument.  The Company'sobjective for holding the derivative is to minimize interest rate risks andstabilize cash flows.  The derivative isrequired to be recorded as an asset or liability on the consolidated balancesheet at fair value, with an offset to other comprehensive income to the extentthe hedge is effective.  Anyineffectiveness in the hedge will be recorded as an adjustment toearnings.  As of September 30, 2001, thederivative liability totaled $10,793 and was recorded as an accrued liabilityon the consolidated balance sheet.

ComprehensiveIncome – Statement of Financial Accounting Standards (“SFAS”) No. 130,“Reporting Comprehensive Income”, which requires comprehensive income and itscomponents to be disclosed in the financial statements for all periodspresented became effective in 1999.  Theonly item of other comprehensive income applicable to the Company is a changein the fair value of a derivative instrument, totaling $9,871 and $10,793 ofexpense during the three and nine-month periods ending September 30, 2001.

             RecentlyIssued Accounting Standards — In June 2001, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142,“Goodwill and Other Intangible Assets” that supersede Accounting PrinciplesBoard (“APB”) Opinion No. 16, “Business Combinations,” and APB Opinion No. 17,“Intangible Assets.”  The two statementsmodify the method of accounting for business combinations and address theaccounting and reporting for goodwill and intangible assets.  SFAS No. 141 is effective for all businesscombinations initiated after June 30, 2001 and all business combinationsaccounted for by the purchase method for which the date of acquisition is afterJune 30, 2001.  SFAS No. 142 iseffective for fiscal years beginning after December 15, 2001.  Beginning in fiscal year 2002, the Companywill no longer amortize goodwill, but will, however, evaluate goodwill forimpairment annually.  The Company iscurrently reviewing these statements to determine their effect on the Company’sfinancial statements.  However, the fairvalue of the Company’s debt and equity at September 30, 2001 is significantlybelow the book value of the Company’s assets.

InJune 2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations” which amends FASB No. 19, “Financial Accounting andReporting by Oil and Gas Producing Companies”, and is effective for allcompanies.  This statement addresses thefinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  SFAS No. 143 is effective forfiscal years beginning after June 15, 2002. The Company is currently reviewing this statement to determine itseffect on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” whichsupersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed of” and the accounting and reportingprovisions of APB No. 30, “Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently occurring Events and Transactions.”  This statement addresses financial accounting and reporting forthe impairment or disposal of long-lived assets.  SFAS No. 144 is effective for fiscal years beginning afterDecember 15, 2001, and interim periods within those fiscal years. The Companyis currently reviewing this statement to determine its effect on the Company’sfinancial statements.

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

**3. Earnings per share**

             TheCompany’s earnings per share for the three and nine months ended September 30,2001 and 2000 are calculated as follows:
|                                                | **For the Three Months  Ended September 30,** |       | **For the Nine Months  Ended September 30,** |       |
|-----------------------------------------------------|-----------------------------------------------|------------|----------------------------------------------|------------|
|                                                |                                          |       |                                         |       |   |   |   |   |
|                                                | **2001  **                          |       | **2000**                                     |       | **2001** |   | **2000** |   |
|                                                |                                          | ** ** |                                         | ** ** |   | ** ** |   | ** ** |
| Net  income (loss)                                  | $                                             | (388       | )                                            | $          | 5,761 |   | $ | (8,313 | ) | $ | 9,776 |   |
| Less  accretion on preferred stock                  | (125                                          | )          | (125                                         | )          | (375 | ) | (375 | ) |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Net  income (loss) available to common stockholders | $                                             | (513       | )                                            | $          | 5,636 |   | $ | (8,688 | ) | $ | 9,401 |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Weighted  average shares                            | 21,151                                        |       | 21,119                                       |       | 21,151 |   | 21,738 |   |
|                                                | Less  unvested stock                          | (162       | )                                            | (423       | ) | (227 | ) | (487 | ) |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Basic  weighted average shares                      | 20,989                                        |       | 20,696                                       |       | 20,924 |   | 21,251 |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Effect  of dilutive securities                      |                                          |       |                                         |       |   |   |   |   |
|                                                | Unvested  stock                               | -          |                                         | 423        |   | - |   | 487 |   |
|                                                | Convertible  preferred stock                  | -          |                                         | 7,692      |   | - |   | 7,692 |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Diluted  weighted average shares                    | 20,989                                        |       | 28,811                                       |       | 20,924 |   | 29,430 |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Basic  income (loss) per share                      | $                                             | (0.02      | )                                            | $          | 0.27 |   | $ | (0.42 | ) | $ | 0.44 |   |
|                                                |                                          |       |                                         |       |   |   |   |   |
| Diluted  income (loss) per share                    | $                                             | (0.02      | )                                            | $          | 0.20 |   | $ | (0.42 | ) | $ | 0.32 |   |

             Ifthe effect of the Company’s unvested stock, convertible preferred stock, anddilutive options were included in the above calculations for the three monthsand nine months ended September 30, 2001, the diluted weighted average sharesoutstanding would have been 28,843 for both periods, resulting in a dilutedloss per share of ($0.02) and ($0.30), respectively.

**4. Inventory**

             Inventory,net consists of the following, at:
|                                        | **September 30,   2001** |   | **December 31,  2000** |   |
|---------------------------------------------|--------------------------|--------|------------------------|--------|
|                                        |                     |   |                   |   |
| New  equipment                              | $                        | 10,395 |                   | $      | 11,812 |   |
| Used  equipment                             | 5,478                    |   | 4,801                  |   |
| Contractor  supplies                        | 4,928                    |   | 4,910                  |   |
| Parts                                       | 15,809                   |   | 13,860                 |   |
| Reserves  for excess and obsolete inventory | (2,740                   | )      | (2,116                 | )      |
|                                        |                     |   |                   |   |
|                                        | $                        | 33,870 |                   | $      | 33,267 |   |
|                                        |                     |   |                   |   |

**5. Debt**

             Duringthe first quarter of 2001, the Company reduced the committed amount under itscredit facility with First Union National Bank, as the agent, and certain otherfinancial institutions from $750,000 down to a maximum amount of $650,000(subject to availability based on certain financial tests including a borrowingbase).  Based upon the availableborrowing base at September 30, 2001, the Company had $107,655 available on therevolving credit facility.

             TheCompany’s credit facility and indentures contain a number of covenants that,among other things, set certain limitations on the granting of liens, assetsales, additional indebtedness, transactions with affiliates, restrictedpayments, investments and issuances of stock. In addition, the Company’s credit facility contains certain covenantsthat require the Company to maintain certain financial ratios.  The Company is currently in compliance withall covenants under its credit facility and indentures.  However, based on current operating projections,the Company expects that it will violate the leverage ratio covenant under itscredit facility at the end of the fourth quarter of 2001.  A failure by the Company to comply with thiscovenant could result in an event of default under the credit facility, whichcould have a material adverse effect on the Company.  The Company is currently in discussions with its lenders to amendits credit facility to increase the leverage ratio covenant, which would givethe Company additional financial flexibility. The Company expects to finalize the amendment to its credit facilityduring the fourth quarter.

 ****

**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (inthousands)**

             Thefollowing table shows information derived from the Company’s historicalconsolidated statements of operations as a percentage of total revenues. 
|                                          |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                          |   |                                  |   |                                 |   |   |   |   |   |
|                                          |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Rental  revenues                              |   | 74.4                                  | %      | 76.2                                 | %      | 74.4 | % | 74.9 | % |
| New  equipment sales                          |   | 8.4                                   |   | 8.3                                  |   | 9.0 |   | 8.7 |   |
| Rental  equipment sales                       |   | 3.9                                   |   | 3.3                                  |   | 5.0 |   | 4.5 |   |
| Parts,  service and other                     |   | 13.3                                  |   | 12.2                                 |   | 11.6 |   | 11.9 |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Total  revenues                               |   | 100.0                                 |   | 100.0                                |   | 100.0 |   | 100.0 |   |
| Cost  of revenues                             |   | 61.9                                  |   | 56.7                                 |   | 63.0 |   | 57.9 |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Gross  margin                                 |   | 38.1                                  |   | 43.3                                 |   | 37.0 |   | 42.1 |   |
| Selling,  general and administrative expenses |   | 22.7                                  |   | 19.9                                 |   | 22.7 |   | 20.5 |   |
| Non-rental  depreciation and amortization     |   | 4.4                                   |   | 4.2                                  |   | 4.6 |   | 4.5 |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Operating  income                             |   | 11.0                                  |   | 19.2                                 |   | 9.7 |   | 17.1 |   |
| Other  income, net                            |   | 0.2                                   |   | 0.1                                  |   | 0.1 |   | 0.1 |   |
| Interest  expense, net                        |   | 11.0                                  |   | 12.9                                 |   | 12.3 |   | 13.4 |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Income  (loss) before income taxes            |   | 0.2                                   |   | 6.4                                  |   | (2.5 | ) | 3.8 |   |
| Income  tax expense (benefit)                 |   | 0.4                                   |   | 3.0                                  |   | (0.7 | ) | 1.7 |   |
|                                          |   |                                  |   |                                 |   |   |   |   |   |
| Net  income (loss)                            |   | (0.2                                  | )%     | 3.4                                  | %      | (1.8 | )% | 2.1 | % |

**Results of Operations**

*Results of Operations for the Three and Nine Months EndedSeptember 30, 2001, and 2000*

             *Revenues.*Totalrevenues decreased to $163,640 for the three months ended September 30, 2001from $167,513 for the three months ended September 30, 2000 and increased to$467,267 for the nine months ended September 30, 2001 from $460,523 for thenine months ended September 30, 2000. Rental revenues decreased to $121,674 for the three months endedSeptember 30, 2001 from $127,630 for the three months ended September 30, 2000and increased to $347,987 for the nine months ended September 30, 2001 from$345,011 for the nine months ended September 30, 2000.  The decrease in rental revenue in the thirdquarter was primarily the result of a decrease in the physical utilization rateof the Company’s equipment, particularly in the Central United States. New equipment sales for the third quarter decreased 2.2% from$13,976 in 2000 to $13,669 in 2001 and increased 5.2% from $39,871 to $41,936for the nine months ended September 30, 2000 and September 30, 2001respectively.  Rental fleet equipmentsales for the third quarter increased 15.8% from $5,585 in 2000 to $6,469 in2001 and increased 12.3% from $20,714 for the period ended September 30, 2000to $23,255 for the period ended September 30, 2001, as the Company increasedthe sale of underperforming assets through its continuous management of therental equipment fleet.

*             GrossProfit.*Gross profit decreasedto $62,351 for the three months ended September 30, 2001 from $72,605 for thethree months ended September 30, 2000 and to $173,092 for the nine months endedSeptember 30, 2001 from $193,905 for the nine months ended September 30, 2000.Gross margins decreased to 38.1% from 43.3% and to 37.0% from 42.1% duringthese respective periods.  The decreasesin gross margins are primarily due to overall lower physical utilization ratesof the rental fleet resulting from decreased activity among industrialcustomers, primarily in the Central United States.  In addition, the Company experienced a decrease in rental fleetsales margin, in response to a general softening in the market for usedequipment.

             *Selling,General and Administrative Expenses.*Selling, general andadministrative expenses increased to $37,121 for the three months endedSeptember 30, 2001 from $33,340 for the three months ended September 30, 2000and to $105,936 for the nine months ended September 30, 2001 from $94,395 forthe nine months ended September 30, 2000. As a percentage of total revenues, selling, general and administrativeexpenses increased to 22.7% from 19.9% and to 22.7% from 20.5% during theserespective periods.  These increases areprimarily the result of additional investments in management and systemsinfrastructure necessary to support the Company.

             *Non-rentalDepreciation and Amortization.*Non-rental depreciation andamortization increased to $7,296 for the three months ended September 30, 2001from $6,985 for the three months ended September 30, 2000 and to $21,727 forthe nine months ended September 30, 2001 from $20,564 for the nine months endedSeptember 30, 2000.  These increaseswere due primarily to additions of non-fleet capital items such as vehicles andshop equipment.

             *InterestExpense, Net.*Interest expense, net, decreased to $17,955 for thethree months ended September 30, 2001 from $21,628 for the three months endedSeptember 30, 2000 and to $57,793 for the nine months ended September 30, 2001from $61,740 for the nine months ended September 30, 2000.  These decreases were due primarily to lowerinterest rates on the Company's variable rate debt in the third quarter of2001.  In addition, the Companymaintained a lower average debt level in the third quarter of 2001 comparedwith the third quarter of 2000.

             *Income TaxRate.*Due to permanent differences between book and tax treatment ofnon-deductible goodwill, income tax expense was higher than pre-tax income inthe third quarter of 2001.  Theeffective tax rate was 46.3% for the third quarter of 2000.

**Liquidity and Capital Resources**

             TheCompany’s primary capital requirements are for the purchasing of new rentalequipment.  The Company’s other capitalexpenditures include buying vehicles used for delivery and maintenance, and forproperty and equipment. The Company purchases rental equipment throughout theyear to replace equipment that has been sold as well as to maintain adequatelevels of equipment to meet existing and new customer needs. Rental fleet purchasesfor the Company were $17,418 and $157,676 in the first nine months of 2001 and2000, respectively. The Company’s expenditures for rental fleet are expected tobe approximately $25,000 in 2001 compared to $165,000 in 2000. The Companyexpects to minimize capital expenditures until such time as the businessenvironment improves.

             Forthe nine months ended September 30, 2001 and 2000, the Company’s net cashprovided by operations was $64,064 and $75,022, respectively. The decrease in2001 was due primarily to decreased net income and timing of payments foraccounts payable and other current liabilities, offset by collections onoutstanding accounts receivable.  Forthe nine months ended September 30, 2001 and 2000, the Company’s net cash usedin investing activities was $19 and $148,301, respectively.  Net cash used for investing activitiesconsists primarily of business acquisitions and purchases of rental equipmentand property and equipment. The decrease in 2001 was due primarily to reducedpurchases of rental equipment and lower acquisition activity.  For the nine months ended September 30, 2001and 2000, the Company’s net cash provided by financing activities was ($66,221)and $46,016, respectively. Net cash provided by financing activities consists primarilyof borrowings under the Company’s credit facility and was lower in 2001 due toreduced rental fleet purchasing and the reduction of indebtedness under theCompany's credit facility.  The Companyintends to continue to reduce the amount of its indebtedness under its creditfacility.

             TheCompany’s credit facility provides for a $100,000 term loan and a revolvingcredit facility up to a maximum of $550,000 (subject to availability based oncertain financial tests including a borrowing base) to meet acquisition needs,as well as seasonal working capital and general corporate requirements. InMarch 2001 the Company reduced the committed amount under its revolving creditfacility to $550,000 from $650,000.  Asof September 30, 2001, $530,000 was outstanding under the credit facility.Based upon the available borrowing base at September 30, 2001, the Company had$107,655 available on the revolving credit facility loan.  The credit facility contains certaincovenants that require the Company to, among other things, satisfy certainfinancial tests relating to 1) the ratio of senior debt to EBITDA, 2) minimuminterest coverage ratio and 3) the ratio of funded debt to EBITDA.  The agreements governing the credit facilityalso contain various other covenants that restrict the Company’s ability to,among other things, 1) incur additional indebtedness, 2) permit liens to attachto its assets, 3) pay dividends or make other restricted payments on its commonstock and certain other securities and 4) make acquisitions unless certainfinancial conditions are satisfied.  TheCompany is currently in compliance with all covenants under its creditfacility.  However, based on currentoperating projections, the Company expects that it will violate the leverageratio covenant under its credit facility at the end of the fourth quarter of2001.  A failure by the Company tocomply with this covenant could result in an event of default under the creditfacility, which could have a material adverse effect on the Company.  The Company is currently in discussions withits lenders to amend its credit facility to increase the leverage ratiocovenant, which would give the Company additional financial flexibility.  The Company expects to finalize theamendment to its credit facility during the fourth quarter.

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

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

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

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

**General Economic Conditions, Inflation and Seasonality**

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

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

**Recently Issued Accounting Pronouncements**

             InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.141, “Business Combinations” and SFAS No. 142, “Goodwill and Other IntangibleAssets” that supersede Accounting Principles Board (“APB”) Opinion No. 16,“Business Combinations,” and APB Opinion No. 17, “Intangible Assets.”  The two statements modify the method ofaccounting for business combinations and address the accounting and reportingfor goodwill and intangible assets. SFAS No. 141 is effective for all business combinations initiated afterJune 30, 2001 and all business combinations accounted for by the purchasemethod for which the date of acquisition is after June 30, 2001.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  Beginningin fiscal year 2002, the Company will no longer amortize goodwill, but will,however, evaluate goodwill for impairment annually.  The Company is currently reviewing these statements to determinetheir effect on the Company’s financial statements.  However, the fair value of the Company’s debt and equity atSeptember 30, 2001 is significantly below the book value of the Company’sassets.

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations” which amends FASB No. 19,“Financial Accounting and Reporting by Oil and Gas Producing Companies”, and iseffective for all companies.  Thisstatement addresses the financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  The Company is currently reviewing thisstatement to determine its effect on the Company’s financial statements.

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” which supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of” and theaccounting and reporting provisions of APB No. 30, “Reporting the Results ofOperations – Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently occurring Events andTransactions.”  This statement addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  SFAS No. 144 is effective forfiscal years beginning after December 15, 2001, and interim periods withinthose fiscal years. The Company is currently reviewing this statement todetermine its effect on the Company’s financial statements.

**ITEM 3.   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

             TheCompany’s credit facility, as amended, provides the Company with a $100 millionterm loan and permits the Company to borrow up to an additional $550 million ofrevolving loans provided that certain conditions and financial tests are met,subject to a borrowing base. Borrowings under the credit facility bearinterest, at the Company’s option, at a specified base rate or Eurodollar rateplus the applicable borrowing margin.  At November 9, 2001, theCompany had total borrowings under the credit facility of $518 million, $118million of which was subject to interest rate risk after giving effect to theinterest rate swap contract discussed below. Each 100 basis point increase in interest rates on the variable ratedebt would decrease pretax earnings by approximately $1.2 million.

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

**Forward Looking Statements**

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

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.   LEGAL PROCEEDINGS**

 

             Notapplicable.

 

**ITEM 2.   CHANGES INSECURITIES**

 

             Notapplicable.

 

**ITEM 3.   DEFAULTS UPON SENIORSECURITIES**

 

             Notapplicable.

 

**ITEM 4.   SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

             Notapplicable.

 

**ITEM 5.   OTHER INFORMATION**

 

             Notapplicable.

 

**ITEM 6.   EXHIBITS AND REPORTSON FORM 8-K**

 

             TheCompany did not file any Current Reports on Form 8-K for the quarterly periodended September 30, 2001.

 

**SIGNATURE**

 

             **Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on November 14, 2001.**

 
| NATIONAL EQUIPMENT SERVICES, INC. |
|-----------------------------------|
|                              |   |
| By:                               | /S/     DENNIS O’CONNOR |
|                              |   |
|                              | Dennis O’Connor |
|                              | *Chief Financial Officer* |
|                              |   |
|                              |   |

Form 10-Q: For the quarter endedSeptember 30, 2001.

 

**INDEX OF EXHIBITS**
| **Exhibit  Number** |   | Description of Document |
|---------------------|--------|-------------------------|
|                |   |                    |
|                |   |                    |
|                |   |                    |
|                |   |                    |