**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|------------|-----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                          | ** ** |
|       | **For the quarterly period ended March 31,  2005**                                             |
|       |
|       | **OR**                                                                                              |
| ** ** | ** **                                                                                          | ** ** |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

** **

**Commission File No. 1280191**

 

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**NESRentals Holdings, Inc.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **20-0664255**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**8770 W. Bryn Mawr, 4th FloorChicago, Illinois 60631**(Address of principal executive offices)

 

**(773) 695-3999**

(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 duringthe preceding 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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). Yes o No ý

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmedby a court. Yes ý No o

 

Therewere 19,028,964 shares of Common Stock, par value $0.01 per share, outstandingas of May 4, 2005.

 

** **

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**NES RENTALS HOLDINGS, INC.**

**FORM 10-Q INDEX**

 
| PART I. FINANCIAL  INFORMATION |                                                                                        |
|--------------------------------|---------------------------------------------------------------------------------------------|
|                           |                                                                                        |   |
| Item 1.                        | Financial Statements                                                                        |   |
|                           |                                                                                        |   |
| 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.                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|                           |                                                                                        |   |
| Item 3.                        | Defaults upon  Senior Securities                                                            |   |
|                           |                                                                                        |   |
| Item  4.                       | Submission  of Matters to a Vote of Security Holders                                        |   |
|                           |                                                                                        |   |
| Item 5.                        | Other Information                                                                           |   |
|                           |                                                                                        |   |
| Item 6.                        | Exhibits                                                                                    |   |
|                           |                                                                                        |   |
| SIGNATURE                      |                                                                                        |
|                           |                                                                                        |   |
| Index  of Exhibits             |                                                                                        |

 

 

 

2

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**Reportof Independent Registered Public Accounting Firm**

 

The Board of Directors

NES Rentals Holdings, Inc.:

 

We have reviewed the consolidated balancesheet of NES Rentals Holdings, Inc. and subsidiaries (the Company or theSuccessor) as of March 31, 2005 and the related consolidated statements ofoperations and comprehensive income (loss) and cash flows for the three-monthperiod ended March 31, 2005 and for the two-month period ended March 31,2004.  These consolidated financialstatements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance withstandards of the Public Company Accounting Oversight Board (UnitedStates).  A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, we are not aware of anymaterial modifications that should be made to the consolidated financialstatements referred to above for them to be in conformity with U.S. generallyaccepted accounting principles.

 

We have previously audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheet of the Company as of December 31, 2004,and the related consolidated statements of operations and comprehensive income(loss), stockholders’ equity (deficit) and cash flows for the eleven-monthperiod then ended (not presented herein), and the consolidated statements ofoperations and comprehensive income (loss), stockholders’ equity (deficit) andcash flows of National Equipment Services, Inc. (the Predecessor) for theone-month period ended January 31, 2004; and in our report dated March 31,2005, we expressed an unqualified opinion on those consolidated financialstatements.

 

 
|          | (signed)  KPMG LLP |
|---------------|--------------------|
|          |               |
| Chicago,  IL  |               |
| May  12, 2005 |               |

 

3

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**Forward Looking Statements**

Note: This quarterly 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, changesin market price or market demand for rental equipment; loss of business fromcustomers; general declines in rental rates in the market; pricing pressurefrom competitors; unanticipated expenses; changes in financial markets; theCompany’s substantial leverage; and other factors discussed in the Company’sfilings with the Securities and Exchange Commission.

Our annual report on Form 10-K, quarterly reports onForm 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 aspracticable after we electronically file these reports with the Securities andExchange Commission.  Our website addressis www.nesrentals.com.

**PART I**

**FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

**NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per shareinformation)**
| ** **                                                                                                                                                             | ** ** | **March 31, 2005** | ** **  | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(Unaudited)**         | ** **  | ** **                 | ** ** |
| **Assets**                                                                                                                                                             |       |                    |        |                       |       |
| Cash and cash equivalents                                                                                                                                              |       | $                       | 5,676       |                       | $          | 39,050 |   |
| Trade accounts receivable, net of allowance for doubtful accounts of  $5,187 and $5,532, respectively                                                                  |       | 111,281                 |        | 129,826                    |       |
| Inventory, net of reserves                                                                                                                                             |       | 14,005                  |        | 14,863                     |       |
| Prepaid expenses and other assets                                                                                                                                      |       | 26,660                  |        | 22,852                     |       |
| Rental equipment, net of depreciation                                                                                                                                  |       | 380,555                 |        | 383,934                    |       |
| Property and equipment, net of depreciation                                                                                                                            |       | 25,906                  |        | 26,969                     |       |
| Unamortized debt issuance costs                                                                                                                                        |       | 12,611                  |        | 13,323                     |       |
| Unamortized intangible assets                                                                                                                                          |       | 8,811                   |        | 9,421                      |       |
| **Total assets**                                                                                                                                                       | ** ** | **$**                   | **585,505** | ** **                 | **$**      | **640,238** | ** ** |
| **Liabilities**                                                                                                                                                        |       |                    |        |                       |       |
| Trade accounts payable                                                                                                                                                 |       | $                       | 21,284      |                       | $          | 29,419 |   |
| Accrued expenses and other liabilities                                                                                                                                 |       | 42,450                  |        | 45,750                     |       |
| Debt                                                                                                                                                                   |       | 448,113                 |        | 474,640                    |       |
| **Total liabilities**                                                                                                                                                  | ** ** | **511,847**             | ** **  | **549,809**                | ** ** |
| Commitments and contingencies                                                                                                                                          |       | —                  |        | —                     |       |
| **Stockholders’ equity:**                                                                                                                                         |       |                    |        |                       |       |
| Common stock, $0.01 par, 25,000 shares authorized; 19,029 shares  issued and outstanding at March 31, 2005; 19,004 shares issued and  outstanding at December 31, 2004 |       | 190                     |        | 190                        |       |
| Additional paid-in capital                                                                                                                                             |       | 151,642                 |        | 151,642                    |       |
| Accumulated deficit                                                                                                                                                    |       | (78,970                 | )           | (62,248                    | )          |
| Accumulated other comprehensive income                                                                                                                                 |       | 796                     |        | 845                        |       |
| **Total stockholders’ equity**                                                                                                                                    | ** ** | **73,658**              | ** **  | **90,429**                 | ** ** |
| **Total liabilities and stockholders’ equity**                                                                                                                    | ** ** | **$**                   | **585,505** | ** **                 | **$**      | **640,238** | ** ** |

See accompanying notes to consolidatedfinancial statements and review report of KPMG LLP.

 

4

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**NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

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

 
| ** **                                                                                  | ** ** | **Successor**                                        | ** **  | **Predecessor**                                    | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|----------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **For the three  months ended  March 31, 2005** | ** **  | **For the two  months ended  March 31, 2004** | ** ** | **For the one month  ended January 31,  2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**                                      | ** **  | **(Unaudited)**                                    | ** ** | ** ** | ** ** |
| **Revenues**                                                                                |       |                                                 |        |                                               |       |   |   |
| Rental and service revenues                                                                 |       | $                                                    | 103,671     |                                               | $          | 65,887 |   | $ | 33,068 |   |
| New equipment sales                                                                         |       | 5,462                                                |        | 5,029                                              |       | 3,318 |   |
| Rental equipment sales                                                                      |       | 6,277                                                |        | 6,240                                              |       | 2,120 |   |
| Other revenues                                                                              |       | 4,237                                                |        | 2,906                                              |       | 1,424 |   |
| **Total revenues**                                                                          | ** ** | **119,647**                                          | ** **  | **80,062**                                         | ** ** | **39,930** | ** ** |
| **Cost of revenues**                                                                        |       |                                                 |        |                                               |       |   |   |
| Cost of rental and service revenues                                                         |       | 55,000                                               |        | 35,997                                             |       | 17,454 |   |
| Rental equipment depreciation                                                               |       | 27,894                                               |        | 17,842                                             |       | 8,138 |   |
| Cost of new equipment sales                                                                 |       | 4,588                                                |        | 4,052                                              |       | 2,802 |   |
| Cost of rental equipment sales                                                              |       | 3,615                                                |        | 4,409                                              |       | 1,328 |   |
| Other operating expenses                                                                    |       | 4,378                                                |        | 2,920                                              |       | 1,498 |   |
| **Total cost of revenues**                                                                  | ** ** | **95,475**                                           | ** **  | **65,220**                                         | ** ** | **31,220** | ** ** |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| **Gross profit**                                                                            | ** ** | **24,172**                                           | ** **  | **14,842**                                         | ** ** | **8,710** | ** ** |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| Selling, general and administrative expenses                                                |       | 30,136                                               |        | 20,825                                             |       | 9,670 |   |
| Reorganization expenses                                                                     |       | —                                               |        | —                                             |       | 1,973 |   |
| Fresh start accounting adjustments                                                          |       | —                                               |        | —                                             |       | (50,667 | ) |
| Non-rental depreciation and amortization                                                    |       | 1,626                                                |        | 3,428                                              |       | 858 |   |
| **Operating income (loss)**                                                                 | ** ** | **(7,590**                                           | **)**       | **(9,411**                                         | **)**      | **46,876** | ** ** |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| Other income, net                                                                           |       | 187                                                  |        | 178                                                |       | 80 |   |
| Gain on discharge of debt                                                                   |       | —                                               |        | —                                             |       | 241,128 |   |
| Interest expense (contractual interest of $4,921 for the one month  ended January 31, 2004) |       | 9,319                                                |        | 5,420                                              |       | 2,629 |   |
| Income (loss) from continuing operations before income taxes                                |       | (16,722                                              | )           | (14,653                                            | )          | 285,455 |   |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| Income tax expense                                                                          |       | —                                               |        | —                                             |       | — |   |
| **Net income (loss)**                                                                       | ** ** | **(16,722**                                          | **)**       | **(14,653**                                        | **)**      | **285,455** | ** ** |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| Other comprehensive loss                                                                    |       | (49                                                  | )           | (56                                                | )          | (279 | ) |
| **Comprehensive income (loss)**                                                             | ** ** | **$**                                                | **(16,771** | **)**                                              | **$**      | **(14,709** | **)** | **$** | **285,176** | ** ** |
|                                                                                        |       |                                                 |        |                                               |       |   |   |
| **Basic loss per common share**                                                             | ** ** | **$**                                                | **(0.88**   | **)**                                              | **$**      | **(0.77** | **)** | ** ** | ** ** |
| **Diluted loss per common share**                                                           | ** ** | **$**                                                | **(0.88**   | **)**                                              | **$**      | **(0.77** | **)** | ** ** | ** ** |
| Weighted average shares outstanding:                                                        |       |                                                 |        |                                               |       |   |   |
| Basic calculation                                                                           |       | 19,029                                               |        | 18,931                                             |       |   |   |
| Diluted calculation                                                                         |       | 19,029                                               |        | 18,931                                             |       |   |   |

 

See accompanying notes to consolidated financial statements and reviewreport of KPMG LLP.

 

5

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**NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                                | ** ** | **Successor**                                        | ** ** | **Predecessor**                                    | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **For the three  months ended  March 31, 2005** | ** ** | **For the two  months ended  March 31, 2004** | ** ** | **For the one  month ended  January 31, 2004** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                    | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                                 |       |                                               |       |   |   |
| Net income (loss)                                                                         |       | $                                                    | (16,722    | )                                                  | $          | (14,653 | ) | $ | 285,455 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |                                                 |       |                                               |       |   |   |
| Depreciation and amortization                                                             |       | 29,520                                               |       | 21,270                                             |       | 8,996 |   |
| Amortization of debt issuance costs                                                       |       | 712                                                  |       | 154                                                |       | — |   |
| Gain on sale of equipment                                                                 |       | (2,752                                               | )          | (1,989                                             | )          | (861 | ) |
| Changes in operating assets and liabilities:                                              |       |                                                 |       |                                               |       |   |   |
| Trade accounts receivable                                                                 |       | 18,545                                               |       | 3,113                                              |       | 2,787 |   |
| Inventory                                                                                 |       | 858                                                  |       | (1,716                                             | )          | (61 | ) |
| Prepaid expenses and other assets                                                         |       | (3,808                                               | )          | (5,591                                             | )          | (2,745 | ) |
| Trade accounts payable                                                                    |       | (8,135                                               | )          | 5,980                                              |       | (583 | ) |
| Accrued expenses and other liabilities                                                    |       | (3,349                                               | )          | 7,748                                              |       | 1,857 |   |
| Chapter 11 items:                                                                         |       |                                                 |       |                                               |       |   |   |
| Fresh start accounting adjustments                                                        |       | —                                               |       | —                                             |       | (50,667 | ) |
| Gain on discharge of debt                                                                 |       | —                                               |       | —                                             |       | (241,128 | ) |
| Net cash flows provided by operating activities                                           |       | 14,869                                               |       | 14,316                                             |       | 3,050 |   |
|                                                                                      |       |                                                 |       |                                               |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                                 |       |                                               |       |   |   |
| Purchases of rental equipment                                                             |       | (26,268                                              | )          | (27,295                                            | )          | (4,362 | ) |
| Proceeds from sale of rental equipment                                                    |       | 6,277                                                |       | 6,240                                              |       | 2,120 |   |
| Purchases of property and equipment                                                       |       | (1,885                                               | )          | (987                                               | )          | (819 | ) |
| Proceeds from sale of property and equipment                                              |       | 160                                                  |       | 4,265                                              |       | 111 |   |
| Net cash flows used in investing activities                                               |       | (21,716                                              | )          | (17,777                                            | )          | (2,950 | ) |
|                                                                                      |       |                                                 |       |                                               |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                                 |       |                                               |       |   |   |
| Proceeds from debt                                                                        |       | —                                               |       | —                                             |       | 481,172 |   |
| Payments on long-term debt                                                                |       | (26,381                                              | )          | (4,703                                             | )          | (482,363 | ) |
| Net proceeds under revolving credit facility                                              |       | (146                                                 | )          | (19,270                                            | )          | — |   |
| Payments of debt issuance costs                                                           |       | —                                               |       | —                                             |       | (6,278 | ) |
| Increase (decrease) in book overdraft (checks yet to clear)                               |       | —                                               |       | 10,974                                             |       | (1,320 | ) |
| Net cash used in financing activities                                                     |       | (26,527                                              | )          | (12,999                                            | )          | (8,789 | ) |
| Net decrease in cash and cash equivalents                                                 |       | (33,374                                              | )          | (16,460                                            | )          | (8,689 | ) |
| Cash and cash equivalents at beginning of period                                          |       | 39,050                                               |       | 41,562                                             |       | 50,251 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                    | 5,676      |                                               | $          | 25,102 |   | $ | 41,562 |   |
|                                                                                      |       |                                                 |       |                                               |       |   |   |
| **Supplemental Cash Flow Information:**                                                   |       |                                                 |       |                                               |       |   |   |
| Cash paid for interest                                                                    |       | $                                                    | 5,860      |                                               | $          | 3,810 |   | $ | 2,663 |   |
| Cash paid for income taxes                                                                |       | 260                                                  |       | 31                                                 |       | 49 |   |
|                                                                                           |            |                                                      |            |                                                    |            |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements and reviewreport of KPMG LLP.

 

6

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**NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES**

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

 

**1.  Organization**

 

NESRentals Holdings, Inc. (the “Company” or the “Successor”) is principally aholding company organized under the laws of Delaware. The Company conducts itsoperations through its wholly-owned subsidiaries. The Company operatesequipment rental, sales and service facilities primarily located throughout theUnited States of America. The Company rents various types of equipment to adiverse customer base, including construction, automotive and other industrialusers. The Company also sells new equipment and used equipment from its rentalfleet, sells related parts and provides other services. The nature of theCompany’s business is such that short-term obligations are met typically bycash flow generated from long-term assets. Consequently, consistent withindustry practice, the accompanying consolidated balance sheets are presentedon an unclassified basis.

 

**2.  Reorganization**

 

OnJune 27, 2003, National Equipment Services, Inc. (the “Predecessor Company”)and its U.S. subsidiaries (collectively, the “Debtors”) filed for voluntaryreorganization under Chapter 11 (the “Reorganization”) of the U.S. BankruptcyCode (the “Bankruptcy Code”) in the Northern District of Illinois (the “BankruptcyCourt”).  From June 27, 2003 throughFebruary 11, 2004, the Debtors continued to operate asdebtors-in-possession pursuant to Sections 1107 and 1108 of the BankruptcyCode. The Debtors’ fourth amended joint plan of reorganization (the “Plan ofReorganization”) was confirmed by the Bankruptcy Court on January 23,2004, and the Debtors emerged from bankruptcy on February 11, 2004 (the “EffectiveDate”).

 

ThePlan of Reorganization provided for the cancellation, as of the Effective Date,of all of the issued and outstanding shares of common stock, par value $0.01per share (the “Old Common Stock”), of the Predecessor Company, all of theissued and outstanding shares of preferred stock of the Predecessor Company,and all other outstanding securities of the Predecessor Company, includingcommon stock options.

 

Onthe Effective Date, National Equipment Services, Inc. merged into NES Rentals,Inc.  NES Rentals, Inc. was the surviving company in the merger andwas renamed National Equipment Services, Inc.  NES Rentals, Inc. is asubsidiary of both NES IT Services, Inc. and NES Real Estate Management, Inc.,which are subsidiaries of NES Rentals Holdings, Inc., which is the successorcompany to National Equipment Services, Inc. The Company has 25,000 authorized shares of common stock, par value$0.01 per share (the “New Common Stock”).

 

 In accordance with the Plan of Reorganization,(i) the holders of general unsecured claims, including the holders of thePredecessor Company’s Senior Subordinated Notes due 2004, Series B and SeniorSubordinated Notes due 2004, Series D, received 97.5% of the New Common Stock,(ii) the holders of the Predecessor Company’s preferred stock received 2.0% ofthe New Common Stock, and (iii) the holders of the Predecessor Company’s OldCommon Stock received 0.5% of the New Common Stock.

 

**3.  Basis of Presentation**

 

As a result of the Company’s Reorganization asdescribed in Note 2, the Company has applied fresh start reporting pursuant tothe American Institute of Certified Public Accountants’ Statement ofPosition 90-7, “Financial Reporting by Entities in Reorganization Under theBankruptcy Code” (“SOP 90-7”) as of January 31, 2004.  As a result of the application of fresh startreporting on January 31, 2004, the pre-emergence financial results for themonth ended January 31, 2004 are presented as the results of the “Predecessor.”  Per share and share information for thePredecessor Company for the period presented herein have been omitted as suchinformation is deemed to be not meaningful. Refer to Note 4 for further discussion regarding the application offresh start reporting.

 

The accompanying unaudited financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial statements and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and disclosures required by accounting principles generallyaccepted in the United States of America for annual financial statements.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation, consisting only of normalrecurring adjustments, except as described in Note 4 related to the applicationof fresh start reporting, have been included. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004.

 

7

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Resultsof operations for any interim period are not necessarily indicative of theresults that may be expected for a full year. Due to the seasonality that impacts a significant portion of the Company’slocations, the second and third quarters are typically the most active quartersfor the Company.  The consolidatedfinancial statements include the accounts of the Company and its subsidiaries.All significant intercompany transactions and balances have been eliminated.

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Significant estimatesinclude, but are not limited to, useful lives and recoverability of long-livedassets, residual values of rental equipment and reserves and allowances fortrade accounts receivable and inventory. Actual results could differ from thoseestimates.

 

**Trade Accounts Receivable**  — Trade accounts receivable represents amounts due from customers on rental andservice contracts and equipment sales. Allowances for doubtful accounts areestimated at each balance sheet date based on the age of the receivables fromthe due date. Accounts are written-off as they are determined to beuncollectible. Bad debt expense totaled $856, $371 and $963 for the threemonths ended March 31, 2005, the two months ended March 31, 2004 and the monthended January 31, 2004, respectively.

 

**Rental equipment**— Rentalequipment is recorded at cost at the date of purchase.  Depreciation of rental equipment is computedusing the straight-line method over one to fifteen year estimated useful lives.

 

**Comprehensive loss**— Unrealized foreigncurrency translation gains (losses) are included in other comprehensive lossfor the periods presented herein.

 

**Stock-Based Compensation**—The Company accounts forits stock-based employee compensation plan, which is described more fully inNote 11, under the recognition and measurement principles of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. In accordance with the intrinsic value method, no compensation expenseis recognized for the Company’s stock option plan.  Had compensation expense been determinedbased on the fair value at the grant date for awards under this plan consistentwith the method of SFAS No. 123, “Accounting for Stock-Based Compensation,”the Company’s net loss and net loss per share would have been as follows forthe three months ended March 31, 2005:

 

| Net loss, as reported                                                                                       |   | $      | (16,722 | ) |
|-------------------------------------------------------------------------------------------------------------|--------|--------|---------|---|
| Deduct: Total stock-based employee compensation expense determined  under the fair value method, net of tax |   | (257   | )       |
| Pro forma net loss                                                                                          |   | $      | (16,979 | ) |
|                                                                                                        |   |   |    |
| Basic loss per share, as reported                                                                           |   | $      | (0.88   | ) |
| Pro forma basic loss per share                                                                              |   | $      | (0.89   | ) |
| Diluted loss per share, as reported                                                                         |   | $      | (0.88   | ) |
| Pro forma diluted loss per share                                                                            |   | $      | (0.89   | ) |
|                                                                                                             |        |        |         |   |  |

 

                Thedetermination of compensation expense for the pro forma information was basedupon the estimated fair value of the options granted on the date of their grantusing the Black-Scholes option pricing model and the following weightedaverage assumptions: 

 

| Risk-free interest rate |   | 3.4      | %      |
|-------------------------|--------|----------|--------|
| Expected life           |   | 5  years |   |
| Expected volatility     |   | 60       | %      |
| Expected dividend yield |   | -        |   |

 

                Theweighted average fair value of options, which were granted during the thirdquarter of 2004, was $3.97. The number of options exercisable at March 31, 2005was 350.

 

 **Reclassifications**—Certain reclassifications of prior yearconsolidated financial statement amounts have been made to conform to thecurrent year presentation.

 

**4.  Fresh Start Accounting**

 

Pursuantto SOP 90-7, the accounting for the effects of the Company’s reorganizationoccurred once the Plan of Reorganization was confirmed by the BankruptcyCourt.  As discussed in Note 2, theCompany’s Plan of Reorganization was

 

8

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approvedon January 23, 2004, and the Company emerged from bankruptcy on February 11,2004.  For financial reporting purposes,fresh start reporting was applied on January 31, 2004.

 

Inaccordance with SOP 90-7, the results of operations for the month endedJanuary 31, 2004 include a pre-emergence gain of $241,128 resulting from thedischarge of debt and other liabilities under the Plan of Reorganization and apre-emergence gain of $50,667 resulting from the aggregate remaining changes tothe net carrying value of the Predecessor Company’s pre-emergence assets andliabilities to reflect the fair values under fresh start reporting. ThePredecessor Company’s estimated reorganization value at January 31, 2004,which approximates the amount a willing buyer would pay for the assets of theCompany immediately after the Reorganization, was $716,252.  The Company estimated the reorganizationvalue for purposes of fresh start reporting utilizing the estimated value ofthe Company on an enterprise basis (the “Enterprise Value”), adjusted toexclude liabilities at January 31, 2004.

 

TheEnterprise Value was determined by valuation specialists using the followingthree methodologies:  (a) the applicationof public market valuation multiples to the Predecessor Company’s recenthistorical financial results, (b) the application of completed merger andacquisition transaction valuation multiples to the Predecessor Company’s recenthistorical financial results, and (c) a calculation of the present value of thedebt-free cash flows on management’s projections, including an assumption for aterminal value (the “DCF Analysis”).  TheDCF Analysis involves deriving the debt-free cash flows that the Company wouldgenerate assuming the projections developed by management are realized.  These cash flows and an estimated value ofthe Company at the end of the projected period (the “Terminal Value”) arediscounted at the Company’s estimated post-Reorganization weighted average costof capital.  The financial projectionsutilized in the DCF analysis were developed by management and are based onestimates and assumptions, which include, but are not limited to, estimates andassumptions with respect to pricing by market, capital spending and workingcapital levels, and the development of a discount rate that is utilized toconvert future projected cash flows to their estimated present value.  The estimated projections and assumptions,while considered reasonable by management, may not be realized and areinherently subject to uncertainties and contingencies, which could significantlyaffect the measurement of the Enterprise Value and the reorganizationvalue.  Based on the above methodologies,the Enterprise Value was determined to be $633,000.

 

Underfresh start reporting, the estimated reorganization value has been allocated tothe Company’s assets based on their respective fair values in conformity withthe purchase method of accounting for business combinations in accordance withStatement of Financial Accounting Standards No. 141, “Business Combinations.”  Valuations performed by valuation specialistswere required to determine the fair value of certain of the Company’s assets aspresented below. The consolidated balance sheet presented below gives effect tothe Plan of Reorganization and the application of fresh start reporting atJanuary 31, 2004.

 
| ** **                                                | ** ** | **Predecessor  January 31, 2004** | ** ** | **Discharge  of  Debt and Exit  Financing** | ** ** | **Cancellation  of Old Equity** | ** ** | **Fresh  Start  Adjustments** | ** ** | **Successor  January 31, 2004** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|--------------------------------------|------------|
| **Assets**                                                |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| Cash and cash equivalents                                 |       | $                                      | 47,840     |                                        | $          | (6,278                          | )(a)       | $                             | —     |                                 | $          | — |   | $ | 41,562 |   |
| Trade accounts receivable                                 |       | 123,988                                |       | —                                      |       | —                          |       | —                        |       | 123,988                              |       |
| Inventory                                                 |       | 13,989                                 |       | —                                      |       | —                          |       | 425                           | (g)        | 14,414                               |       |
| Unamortized debt issuance costs                           |       | —                                 |       | 6,278                                       | (b)        | —                          |       | —                        |       | 6,278                                |       |
| Prepaid expenses and other assets                         |       | 40,854                                 |       | —                                      |       | —                          |       | 386                           | (h)        | 41,240                               |       |
| Rental equipment                                          |       | 402,911                                |       | —                                      |       | —                          |       | 25,306                        | (i)        | 428,217                              |       |
| Property and equipment                                    |       | 35,050                                 |       | —                                      |       | —                          |       | 9,330                         | (i)        | 44,380                               |       |
| Unamortized intangible assets                             |       | 953                                    |       | —                                      |       | —                          |       | 15,220                        | (j)        | 16,173                               |       |
| Total assets                                              |       | $                                      | 665,585    |                                        | $          | —                          |       | $                             | —     |                                 | $          | 50,667 |   | $ | 716,252 |   |
|                                                      |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| **Liabilities**                                           |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| Liabilities not subject to compromise                     |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| Book overdraft                                            |       | $                                      | 16,167     |                                        | $          | —                          |       | $                             | —     |                                 | $          | — |   | $ | 16,167 |   |
| Trade accounts payable                                    |       | 4,263                                  |       | 22,268                                      | (c)        | —                          |       | —                        |       | 26,531                               |       |
| Accrued interest                                          |       | 184                                    |       | —                                      |       | —                          |       | —                        |       | 184                                  |       |
| Accrued expenses and other liabilities                    |       | 38,866                                 |       | —                                      |       | —                          |       | —                        |       | 38,866                               |       |
| Exit Credit Facility                                      |       | —                                 |       | 481,172                                     | (d)        | —                          |       | —                        |       | 481,172                              |       |
| Capital leases                                            |       | 1,501                                  |       | —                                      |       | —                          |       | —                        |       | 1,501                                |       |
| Liabilities subject to compromise                         |       | 896,399                                |       | (896,399                                    | )(e)       | —                          |       | —                        |       | —                               |       |
| Total liabilities                                         |       | 957,380                                |       | (392,959                                    | )          | —                          |       | —                        |       | 564,421                              |       |
|                                                      |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| **Stockholders’ equity (deficit):**                  |       |                                   |       |                                        |       |                            |       |                          |       |                                 |       |
| Successor common stock                                    |       | —                                 |       | 189                                         | (e)        | —                          |       | —                        |       | 189                                  |       |
| Predecessor common stock                                  |       | 241                                    |       | —                                      |       | (241                            | )(f)       | —                        |       | —                               |       |
| Successor additional paid-in capital                      |       | —                                 |       | 151,642                                     | (e)        | —                          |       | —                        |       | 151,642                              |       |
| Predecessor additional paid-in capital                    |       | 123,887                                |       | —                                      |       | (123,887                        | )(f)       | —                        |       | —                               |       |
| Accumulated deficit                                       |       | (398,233                               | )          | 241,128                                     | (e)        | 105,066                         | (f)        | 52,039                        | (k)        | —                               |       |
| Predecessor treasury stock                                |       | (19,062                                | )          | —                                      |       | 19,062                          | (f)        | —                        |       | —                               |       |
| Accumulated other comprehensive income                    |       | 1,372                                  |       | —                                      |       | —                          |       | (1,372                        | )(k)       | —                               |       |
| Total stockholders’ equity (deficit)                 |       | (291,795                               | )          | 392,959                                     |       | —                          |       | 50,667                        |       | 151,831                              |       |
| Total liabilities and stockholders’ equity (deficit) |       | $                                      | 665,585    |                                        | $          | —                          |       | $                             | —     |                                 | $          | 50,667 |   | $ | 716,252 |   |

 

9

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Adjustmentsreflected in the consolidated balance sheet are as follows:

 

(a)          Represents payment of debt issuance costs for the Exit Credit Facility.

(b)         Represents recognition of debt issuance costs consisting of fees andexpenses of the Exit Credit Facility.

(c)          Representsthe accrual of liabilities upon emergence under the Plan of Reorganizationrelated to priority, administrative and vendor claims.

(d)         Represents the proceeds under the Exit CreditFacility which were used to repay the existing indebtedness.

(e)          Represents the elimination of pre-petitionliabilities discharged under the Plan of Reorganization as follows:

 

| Liabilities subject to compromise                                                                                                        |   | $        | 896,399 |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|--------|
|                                                                                                                                     |   |     |    |
| Form of settlement:                                                                                                                      |   |     |    |
| Issuance of New Common Stock                                                                                                             |   | (151,831 | )       |
| Issuance of Exit Credit Facility                                                                                                         |   | (481,172 | )       |
| Amounts reclassified to accounts payable for certain estimated cure  payments with respect to priority, administrative and vendor claims |   | (22,268  | )       |
|                                                                                                                                     |   |     |    |
| Gain on discharge of debt                                                                                                                |   | $        | 241,128 |   |

 

(f)            Represents cancellation of Predecessor Companycommon stock under fresh start reporting.

(g)         Represents adjustment to reflect the Company’sestimated fair value of inventory held for sale to third parties under freshstart reporting.

(h)         Represents adjustment to reflect the increase in thefair value of capitalized software development costs under fresh startreporting based on the results of valuation procedures performed by valuationspecialists.

(i)             Represents adjustment to reflect rental equipmentand property and equipment at fair values under fresh start reporting based onthe results of valuation procedures performed by valuation specialists.

(j)             Represents adjustment to reflect the fair value ofidentified intangible assets under fresh start reporting based on results ofvaluation procedures performed by valuation specialists.

(k)          Represents the elimination of pre-emergence equityaccounts under fresh start reporting.

 

**5. Inventory**

 

                Inventory,net of reserves consisted of the following:

 

| ** **                                 | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| New equipment                              |       | $                  | 2,414      |                  | $          | 3,221 |   |
| Used equipment                             |       | 217                |       | 781                   |       |
| Supplies                                   |       | 5,384              |       | 4,605                 |       |
| Parts                                      |       | 7,708              |       | 8,280                 |       |
|                                       |       | $                  | 15,723     |                  | $          | 16,887 |   |
| Reserves for excess and obsolete inventory |       | (1,718             | )          | (2,024                | )          |
| ** **                                 | ** ** | **$**              | **14,005** | ** **            | **$**      | **14,863** | ** ** |
|                                            |            |                    |            |                       |            |  |  |  |  |

 

**6.  Prepaid Expensesand Other Assets**

 

Prepaidexpenses and other assets consisted of the following:

 
| ** **       | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|--------------------------|------------|-----------------------------|------------|
| Deposits         |       | $                        | 13,962     |                        | $          | 14,070 |   |
| Prepaid expenses |       | 10,815                   |       | 6,598                       |       |
| Other assets     |       | 1,883                    |       | 2,184                       |       |
| ** **       | ** ** | ** **               | **$**      | **26,660**                  | ** ** | **$** | ** 22,852** | ** ** |
|                  |            |                          |            |                             |            |  |  |  |  |  |

 

10

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**7.  IntangibleAssets**

Intangible assets, net of accumulated amortizationconsisted of the following:
| ** **               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Customer relationships   |       | $                        | 10,927     |                        | $          | 10,927 |   |
| Non-compete agreements   |       | 1,221                    |       | 1,483                       |       |
|                     |       | $                        | 12,148     |                        | $          | 12,410 |   |
| Accumulated amortization |       | (3,337                   | )          | (2,989                      | )          |
| ** **               | ** ** | **$**                    | **8,811**  | ** **                  | **$**      | **9,421** | ** ** |

Non-competeagreements and customer relationships are amortized on a straight-line basisover five years.

 

**8.  AccruedExpenses and Other Liabilities**

Accrued expenses and other liabilities consisted ofthe following:
| ** **                        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued compensation and benefits |       | $                        | 9,001      |                        | $          | 13,286 |   |
| Insurance reserves                |       | 11,109                   |       | 12,020                      |       |
| Accrued property and sales taxes  |       | 4,069                    |       | 4,190                       |       |
| Accrued interest                  |       | 5,017                    |       | 2,760                       |       |
| Other accrued expenses            |       | 13,254                   |       | 13,494                      |       |
| ** **                        | ** ** | **$**                    | **42,450** | ** **                  | **$**      | **45,750** | ** ** |

 

**9.  Debt and Liquidity**

Inconnection with the Company’s emergence from bankruptcy on February 11,2004, the Company entered into a senior secured credit facility (the “ExitCredit Facility”).  The Exit CreditFacility consisted of $285,000 of term loan facilities and a $205,000 revolvingcredit facility. On August 17, 2004, the Company entered into a new seniorsecured credit facility (the “2004 Credit Facility”).  The 2004 Credit Facility consists of a$300,000 first lien credit facility, comprised of a $200,000 term loan and a$100,000 revolving loan, and a $275,000 second lien term loan.  Proceeds under the 2004 Credit Facility wereused to repay the balance outstanding under the Exit Credit Facility.  The Company has scheduled principalrepayments of $500 quarterly on the first lien credit facility through theAugust 17, 2009 maturity date.  Theinterest rate on the first lien debt averages base rate plus 0.5% or LIBOR plus2.5%.  The second lien term loan expireson August 17, 2010, and the interest rate is base plus 5% or LIBOR plus6%.  The Company has scheduled principalrepayments of $688 quarterly on the second lien term loan through the maturitydate.  The Company recognized a loss onthe discharge of the debt related to the write-off of $5,468 of unamortizeddebt issuance costs associated with the Exit Credit Facility. As of March 31,2005, the average LIBOR-based interest rates on the first and second lien termloans were 5.5% and 8.0%, respectively.

 

The2004 Credit Facility contains certain covenants that require the Company to,among other things, satisfy certain financial tests relating to fixed chargecoverage ratios and debt leverage ratios. The credit facility also contains various other covenants that restrictthe Company’s ability to, among other things, 1) incur additionalindebtedness 2) permit liens to attach to its assets and 3) paydividends or make other restricted payments on its common stock and certainother securities unless certain financial conditions are satisfied. The 2004Credit Facility is collateralized by substantially all of the Company’sassets.  The Company is currently incompliance with all covenants governing the 2004 Credit Facility.

 

TheCompany is a holding company with no independent operations, and the Company’sassets (excluding the intercompany receivables and common stock of itssubsidiaries) are insignificant. All of the Company’s subsidiaries are directlyor indirectly 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 further securityfor the Company’s obligations under the 2004 Credit Facility.

 

**10.  ReorganizationExpenses**

 

Expensesincurred as a result of the Reorganization have been segregated from normaloperations and are disclosed separately. These expenses consist primarily of professional fees incurred forfinancial advisors, legal counsel, consulting and other costs related toprofessional services received during the Reorganization, as well as employeeretention expenses.  These Reorganizationexpenses were cash charges.

 

11

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** **

**11. Stock Option Plan**

 

                During2004, the Company established a plan in which options to purchase shares of NewCommon Stock can be granted to directors, officers and key employees of theCompany, and other individuals. Up to 1,400 shares of New Common Stock may beissued under this plan. During the third quarter of 2004, 1,400 options weregranted under the plan at an exercise price of $7.80. These options vest overthree years from the grant date and expire seven years from the grant date. AtMarch 31, 2005, 350 stock options are exercisable. The Company’s stock optionswere excluded from the computation of diluted loss per share in the periodspresented herein because inclusion would be anti-dilutive by reducing the lossper share.

 

**12. Director’s Deferred Compensation Plan**

 

                During2004, the Company established a plan in which each director received 20deferred compensation units, with each unit equivalent to one share of NewCommon Stock. The deferred compensation units vest over five years. In theevent of a “change of control” (as defined in the plan) of the Company, thedeferred compensation units will immediately vest in full, and any payment tothe new directors, in respect of their units, will be equal to the per shareamount received by holders of New Common Stock. If the change in control occurs prior to April 1, 2006, the minimumpayment to each director will equal $250. The Company accrues the value of theaward over the vesting period.

 

**13.  Segment Information**

 

TheCompany has two reporting segments: Traffic Safety and General Rental andOther. The General Rental and Other operations are primarily involved in therental and sale of various types of lift and specialty equipment to construction,automotive and other industrial users. The Traffic Safety operations areprimarily involved in the rental of traffic safety equipment and providing therelated services to manage traffic flow during construction. The Traffic Safetyoperations have different contractual, regulatory and capital requirements thanthe General Rental and Other operations. The accounting policies for thesesegments are the same as those described in Note 3 to the consolidatedfinancial statements, as presented in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

TheCompany’s operations in Canada represent less than 2% of total revenues andtotal assets of the Company.  Due to thesize of the Company’s Canadian operations, these operations are consideredinsignificant for separate geographical segment reporting.  The Company has no single customer thatrepresents greater than 2% of the Company’s consolidated revenues. Identifiableassets are those used in the Company’s operations in each segment.Inter-segment revenues are not material. The following table presents financialinformation for the reporting segments for the periods presented:

 
| ** **                                               | ** ** | **General Rental  and Other** | ** ** | **Traffic  Safety** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|------------|---------------------|------------|------------------|------------|
| **Three Months Ended March 31, 2005  (Successor):** |       |                          |       |                |       |             |       |
| Rental and service revenues                              |       | $                             | 88,754     |                | $          | 14,917           |       | $ | 103,671 |   |
| New equipment sales                                      |       | 5,252                         |       | 210                 |       | 5,462            |       |
| Rental equipment sales                                   |       | 6,231                         |       | 46                  |       | 6,277            |       |
| Other revenues                                           |       | 3,200                         |       | 1,037               |       | 4,237            |       |
| Total revenues                                           |       | 103,437                       |       | 16,210              |       | 119,647          |       |
| Operating loss                                           |       | (2,835                        | )          | (4,755              | )          | (7,590           | )          |
| Net loss                                                 |       | (12,028                       | )          | (4,694              | )          | (16,722          | )          |
| Identifiable assets                                      |       | 509,606                       |       | 75,899              |       | 585,505          |       |
| Depreciation and amortization                            |       | 26,197                        |       | 3,323               |       | 29,520           |       |
| Capital expenditures                                     |       | 27,362                        |       | 791                 |       | 28,153           |       |
| **Two Months Ended March 31, 2004  (Successor):**   |       |                          |       |                |       |             |       |
| Rental and service revenues                              |       | $                             | 56,902     |                | $          | 8,985            |       | $ | 65,887 |   |
| New equipment sales                                      |       | 4,610                         |       | 419                 |       | 5,029            |       |
| Rental equipment sales                                   |       | 6,238                         |       | 2                   |       | 6,240            |       |
| Other revenues                                           |       | 2,350                         |       | 556                 |       | 2,906            |       |
| Total revenues                                           |       | 70,100                        |       | 9,962               |       | 80,062           |       |
| Operating loss                                           |       | (6,881                        | )          | (2,530              | )          | (9,411           | )          |
| Net loss                                                 |       | (12,164                       | )          | (2,489              | )          | (14,653          | )          |
| Identifiable assets                                      |       | 624,722                       |       | 77,604              |       | 702,326          |       |
| Depreciation and amortization                            |       | 18,264                        |       | 3,006               |       | 21,270           |       |
| Capital expenditures                                     |       | 27,705                        |       | 577                 |       | 28,282           |       |
|                                                          |            |                               |            |                     |            |                  |            |  |  |  |  |  |

 

12

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| ** **                                                | ** ** | **General Rental  and Other** | ** ** | **Traffic  Safety** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------|------------|------------------|------------|
| **One Month Ended January 31, 2004  (Predecessor):** |       |                          |       |                |       |             |       |
| Rental and service revenues                               |       | $                             | 29,186     |                | $          | 3,882            |       | $ | 33,068 |   |
| New equipment sales                                       |       | 3,276                         |       | 42                  |       | 3,318            |       |
| Rental equipment sales                                    |       | 2,090                         |       | 30                  |       | 2,120            |       |
| Other revenues                                            |       | 1,171                         |       | 253                 |       | 1,424            |       |
| Total revenues                                            |       | 35,723                        |       | 4,207               |       | 39,930           |       |
| Operating income (a)                                      |       | 32,438                        |       | 14,438              |       | 46,876           |       |
| Net income (b)                                            |       | 256,750                       |       | 28,705              |       | 285,455          |       |
| Identifiable assets                                       |       | 634,340                       |       | 81,912              |       | 716,252          |       |
| Depreciation and amortization                             |       | 8,086                         |       | 910                 |       | 8,996            |       |
| Capital expenditures                                      |       | 4,552                         |       | 629                 |       | 5,181            |       |
|                                                           |            |                               |            |                     |            |                  |            |  |  |  |

 

(a)          Operating income for General Rental and Other andTraffic Safety includes $34,629 and $16,038 of fresh start accountingadjustments, respectively.

(b)         Net income for General Rental and Other and TrafficSafety includes $34,629 and $16,038 of fresh start accounting adjustments,respectively, and gains of $226,887 and $14,241, respectively, on the dischargeof debt.

 

13

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Thisdiscussion should be read in conjunction with the Annual Report on Form 10-K ofNES Rentals Holdings, Inc. (the “Company”) for the year-ended December 31,2004 as filed with the Securities and Exchange Commission and other informationincluded herein. All dollar amounts presented are in thousands.

 

**General**

 

                TheCompany is a leading participant in the equipment rental industry, rentinggeneral, specialty and traffic safety equipment to industrial and constructionend-users. The Company rents over 750 different types of machinery andequipment and sells new equipment for nationally recognized original equipmentmanufacturers. The Company also sells used equipment as well as complementaryparts, supplies and merchandise and provides repair and maintenance services toits customers. The Company is geographically diversified, with 130 locationsacross 34 states and Canada and is a leading competitor in many of thegeographic markets it serves.

 

                The Company derives its revenues from foursources: (1) equipment rental and service, (2) new equipment sales, (3) rentalequipment sales and (4) sales of complementary parts and merchandise.  The Company’s primary source of revenues isthe rental and service of equipment to industrial and construction end-users.The growth of rental revenues depends on several factors, including demand forrental equipment, the amount and quality of equipment available for rent,rental rates and general economic conditions. Revenues generated from the saleof new equipment are affected by price and general economic conditions.Revenues generated from the sale of used rental equipment are affected byprice, general economic conditions and the Company’s fleet management program.Revenues from the sale of complementary parts and services are primarilyaffected by equipment rental and sales volume.

 

Costof revenues consists primarily of the cost of rental and service revenues, thecost of new equipment, the net book value of rental equipment sold, rentalequipment depreciation and other direct operating costs. Given the varied, andin some cases specialized, nature of its rental equipment, the Company uses arange of periods from one to fifteen years over which it depreciates itsequipment on a straight-line basis.

 

**Reorganization**

 

OnJune 27, 2003, National Equipment Services, Inc. (the “Predecessor Company”)and its U.S. subsidiaries (collectively, the “Debtors”) filed for voluntaryreorganization under Chapter 11 (the “Reorganization”) of the U.S. BankruptcyCode (the “Bankruptcy Code”) in the Northern District of Illinois (the “BankruptcyCourt”).  From June 27, 2003 throughFebruary 11, 2004, the Debtors continued to operate asdebtors-in-possession pursuant to Sections 1107 and 1108 of the BankruptcyCode. The Debtors’ fourth amended joint plan of reorganization (the “Plan ofReorganization”) was confirmed by the Bankruptcy Court on January 23, 2004,and the Debtors emerged from bankruptcy on February 11, 2004 (the “EffectiveDate”).

 

ThePlan of Reorganization provided for the cancellation, as of the Effective Date,of all of the issued and outstanding shares of common stock, par value $0.01per share (the “Old Common Stock”), of the Predecessor Company, all of theissued and outstanding shares of preferred stock of the Predecessor Company,and all other outstanding securities of the Predecessor Company, includingcommon stock options.

 

Onthe Effective Date, National Equipment Services, Inc. merged into NES Rentals,Inc.  NES Rentals, Inc. was the surviving company in the merger andwas renamed National Equipment Services, Inc.  NES Rentals, Inc. is asubsidiary of both NES IT Services, Inc. and NES Real Estate Management, Inc.,which are subsidiaries of NES Rentals Holdings, Inc., which is the successorcompany to National Equipment Services, Inc. The Company has 25,000 authorized shares of common stock, par value$0.01 per share (the “New Common Stock”).

 

 In accordance with the Plan of Reorganization,(i) the holders of general unsecured claims, including the holders of thePredecessor Company’s Senior Subordinated Notes due 2004, Series B and SeniorSubordinated Notes due 2004, Series D, received 97.5% of the New Common Stock,(ii) the holders of the Predecessor Company’s preferred stock received 2.0% ofthe New Common Stock, and (iii) the holders of the Predecessor Company’s OldCommon Stock received 0.5% of the New Common Stock.

 

 

 

14

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**Critical Accounting Policies**

 

Weprepare our consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America, which requireour management to make estimates and general assumptions about the effects ofmatters that are inherently uncertain. We have summarized our significantaccounting policies in Note 3 to our consolidated financial statements, aspresented in our Annual Report on Form 10-K for the year endedDecember 31, 2004. Of these accounting policies, we believe the followingmay involve a higher degree of judgment and complexity.

 

*Allowance for Doubtful Accounts*

 

                AtMarch 31, 2005, we had an allowance for doubtful accounts totaling $5,187which we have established in the event that we are unable to collect certainreceivables. This allowance represents our estimate of the total receivablesrecorded as of March 31, 2005 that we will be unable to collect. Future generalevents, such as changes in the economy, and specific events, such as changes inthe economic condition of our customers, could significantly impact our abilityto collect on these receivables and, therefore, cause us to change ourallowance estimate.

 

*Useful Lives of Rental Equipment and Propertyand Equipment*

 

                AtMarch 31, 2005, we had $380,555 of net rental equipment and $25,906 of netproperty and equipment recorded on our balance sheet. Rental equipment isdepreciated using the straight-line method over a period of up to fifteenyears. Property and equipment is depreciated over three to thirty years,depending on the type of asset. Our depreciable lives are based on ourestimates of the useful lives of the respective assets over which they willgenerate revenues. These estimates may require adjustment based on changingcircumstances in the marketplace. Changes to these estimates could result in ushaving to recognize an increase to, or decrease in, depreciation expense.

 

*Impairment of Long-Lived Assets*

 

                Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-lived Assets,” we test long-lived assets or asset groups forrecoverability whenever events or changes in circumstances indicate thatcarrying amounts may not be recoverable. When such events occur, we compare thesum of 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. If this comparison indicates that animpairment exists, the amount of the impairment is measured by comparing thecarrying value to the fair market value of the asset.

 

*Valuation Allowance on Net Deferred TaxAssets*

 

                AtMarch 31, 2005, we provided a full valuation allowance on our net deferred taxassets. Realization of net deferred income tax assets is dependent upongenerating sufficient future taxable income in the periods in which theunderlying temporary differences reverse, or prior to the dates that netoperating loss carry-forwards expire. We must assess the likelihood that ournet deferred tax assets will be recovered in the future. Because of our historyof operating losses, we are required to maintain a full valuation allowance.

 

 

 

 

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**Resultsof Operations**

 

During2004 and the first quarter of 2005, the Company has invested over $126,000 inits rental fleet.  In addition, theindustry is experiencing improving rental rates as non-residentialconstruction, industrial and traffic safety activity continues to increase.  These improving market conditions, combinedwith the realization of cost-savings initiatives implemented in conjunctionwith the Company’s restructuring, resulted in improved results from operationsduring the first quarter of 2005.  Thefollowing table shows information derived from the Company’s consolidatedstatements of operations and comprehensive income (loss) as a percentage oftotal revenues:

 
| ** **                                   | ** ** | **Successor**                                | ** ** | **Predecessor**                            | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Two Months  Ended  March 31, 2004** | ** ** | **One Month  Ended  January 31, 2004** | ** ** |
|                                         |       |                                         |       |                                       |       |   |   |
| Rental and service revenues                  |       | 86.7                                         | %          | 82.3                                       | %          | 82.8 | % |
| New equipment sales                          |       | 4.6                                          |       | 6.3                                        |       | 8.3 |   |
| Rental equipment sales                       |       | 5.2                                          |       | 7.8                                        |       | 5.3 |   |
| Other revenues                               |       | 3.5                                          |       | 3.6                                        |       | 3.6 |   |
| **Total revenues**                           | ** ** | **100.0**                                    | ** ** | **100.0**                                  | ** ** | **100.0** | ** ** |
| Cost of revenues                             |       | 79.8                                         |       | 81.5                                       |       | 78.2 |   |
| **Gross margin**                             | ** ** | **20.2**                                     | ** ** | **18.5**                                   | ** ** | **21.8** | ** ** |
| Selling, general and administrative expenses |       | 25.2                                         |       | 26.0                                       |       | 24.2 |   |
| Reorganization expenses                      |       | —                                       |       | —                                     |       | 4.9 |   |
| Fresh start accounting adjustments           |       | —                                       |       | —                                     |       | (126.9 | ) |
| Non-rental depreciation and amortization     |       | 1.4                                          |       | 4.3                                        |       | 2.1 |   |
| **Operating income (loss)**                  | ** ** | **(6.4**                                     | **)**      | **(11.8**                                  | **)**      | **117.5** | ** ** |
| Other income, net                            |       | 0.2                                          |       | 0.2                                        |       | 0.2 |   |
| Gain on discharge of debt                    |       | —                                       |       | —                                     |       | 603.9 |   |
| Interest expense, net                        |       | 7.8                                          |       | 6.7                                        |       | 6.6 |   |
| Income (loss) before income taxes            |       | (14.0                                        | )          | (18.3                                      | )          | 715.0 |   |
| Income tax expense                           |       | —                                       |       | —                                     |       | — |   |
| **Net income (loss)**                        | ** ** | **(14.0**                                    | **)%**     | **(18.3**                                  | **)%**     | **715.0** | **%** |

 

Asa result of the application of fresh start reporting on January 31, 2004,and in accordance with SOP 90-7, the post-emergence financial results for thetwo-month period ended March 31, 2004 are presented as the results of the “Successor,”and the pre-emergence financial results for the month ended January 31,2004 are presented as the results of the “Predecessor.”  Comparative financial statements do not straddlethe emergence date because in effect the Successor represents a newentity.  As a result of applying freshstart reporting, the Successor has higher levels of depreciation andamortization expense in comparison to the Predecessor.  For purposes of discussion herein, theresults of operations for the Predecessor for the month ended January 31,2004 and the results of operations for the Successor for the two months endedMarch 31, 2004 are combined.

 

***Comparison of the Three Months Ended March 31, 2005 and 2004***

 

*Revenues*

 

Rentaland service revenues increased 5% to $103,671 for the first quarter of 2005from $98,955 for the same period in 2004. Rental and service revenues for General Rental and Other improved$2,666, or 3%, in the first quarter of 2005, as rental rates on the Company’sthree largest equipment categories were up more than 10% in the first quarterof 2005 as compared to the same period in 2004, offsetting year-over-yeardeclines in utilization and fleet size. Rental and service revenues for the Company’s Traffic Safety segmentwere up $2,050, or 16%, for the first quarter of 2005 as compared to the sameperiod in the prior year as a result of increased activity in existing marketsand expansion into new markets.

 

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Improvingeconomic conditions in the non-residential construction and industrial marketsled to increased emphasis by management on rental and service revenues duringthe first quarter of 2005.  As a result,rental and service revenues comprised 87% of total revenues for the firstquarter of 2005, as compared to only 82% in the first quarter of 2004.  Fleet sales were down $2,083 from the sameperiod in the prior year due to increased activity in 2004 in an effort toimprove the rental equipment mix.  Newequipment sales were down $2,885 as a result of the greater emphasis on rentaland service activity.  Other revenues,primarily parts and supplies sales, were down year-over-year, as well.  These declines, offset by increases in thehigher margin rental and service revenue, resulted in total revenues of$119,647 for the three months ended March 31, 2005, consistent with the$119,992 recognized during the same period in 2004.

 

*GrossProfit*

 

Grossprofit increased to $24,172 for the three months ended March 31, 2005 ascompared to $23,552 for the three months ended March 31, 2004. Excludingdepreciation expense, which was up 7% in the first quarter of 2005 as comparedto the same period in 2004 due primarily to incremental depreciation expenseassociated with fresh start accounting, gross profit improved 3% for the threemonths March 31, 2005 as compared to the same period in 2004. This improvementwas primarily the result of the increases in rental rates year-over-year, aswell as the shift in revenues toward higher-margin rental and service activityfrom the lower margin equipment sales.

 

*Selling,General and Administrative Expenses*

 

Selling,general and administrative expenses decreased 1% to $30,136 for the threemonths ended March 31, 2005 as compared to $30,495 for the three months endedMarch 31, 2004.  Decreases inprofessional fees incurred outside of the period of bankruptcy as well as lowerproperty tax expense, were offset by increasing insurance and payroll-relatedcosts.

 

*Reorganization Expenses*

 

TheCompany incurred $1,973 of charges related to the reorganization during themonth of January 2004.  Theseexpenses related primarily to professional fees incurred and the payment ofretention bonuses to key members of management in accordance with acourt-approved program.

 

*Fresh Start Accounting Adjustments*

 

                As aresult of the Company’s bankruptcy filing on June 27, 2003, the Companyrecognized a pre-emergence gain of $50,667 for the three months ended March 31,2004, resulting from the aggregate remaining changes to the net carrying valueof the Company’s pre-emergence assets and liabilities to reflect the fairvalues under fresh start reporting.

 

*Non-rental Depreciation and Amortization*

 

Non-rentaldepreciation and amortization decreased to $1,626 for the first quarter of 2005as compared to $4,286 for the first quarter of 2004, due primarily to certainintangible assets that were identified in conjunction with the adoption offresh start reporting which were fully amortized during 2004.

 

*Gain on Discharge of Debt*

 

                In connection with the Company’semergence from bankruptcy, for the three months ended March 31, 2004, theCompany recognized a $241,128 gain associated with the elimination ofpre-petition liabilities discharged under the Plan of Reorganization.

 

*InterestExpense*

 

Interestexpense increased to $9,319 for the three months ended March 31, 2005 ascompared to $8,049 for the three months ended March 31, 2004.  This increase was primarily attributable tohigher interest rates for the Company’s LIBOR-based borrowings and increasedamortization expense associated with the Company’s debt issuance costs.

 

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**Liquidity,Financial Condition and Capital Resources**

 

TheCompany’s primary capital requirements are for purchasing new rental equipment.The Company purchases rental equipment throughout the year to replace equipmentthat has been sold or retired as well as to maintain adequate levels ofequipment to meet existing and new customer needs. Rental fleet purchases forthe Company were $26,268 and $31,657 in the first quarters of 2005 and 2004,respectively. The Company’s principal sources of cash are cash generated fromoperations and borrowings available under its credit facility.  At March 31, 2005, the Company hadapproximately $70,000 of availability under its credit facility.

 

Forthe three months ended March 31, 2005 and 2004, the Company’s net cashprovided by operating activities was $14,869 and $17,366, respectively.  The decrease in the first quarter of 2005 wasprimarily the result of changes in working capital. The Company’s net cash usedin investing activities was $21,716 and $20,727 for the three months endedMarch 31, 2005 and 2004, respectively. Net cash used in investing activities consists primarily of purchases ofrental equipment and property and equipment. For the three months ended March 31, 2005 and 2004, the Company’snet cash used in financing activities was $26,527 and $21,788, respectively.Net cash used in financing activities consists primarily of repayments underthe Company’s credit facility.

 

OnAugust 17, 2004, the Company entered into a new senior secured credit facility(the “2004 Credit Facility”).  The 2004Credit Facility consists of a $300,000 first lien credit facility, comprised ofa $200,000 term loan and a $100,000 revolving loan, and a $275,000 second lienterm loan.  Proceeds under the 2004Credit Facility were used to repay the balance outstanding under the creditfacility the Company entered into upon its emergence from bankruptcy onFebruary 11, 2004.  The Company hasscheduled principal repayments of $500 quarterly on the first lien creditfacility through the August 17, 2009 maturity date.  The interest rate on the first lien debt averagesbase rate plus 0.5% or LIBOR plus 2.5%. The Company has scheduled principal repayments of $688 quarterly on thesecond lien term loan through the August 17, 2010 maturity date.  The interest rate on the second lien termloan averages base rate plus 5% or LIBOR plus 6%.

 

The2004 Credit Facility contains certain covenants that require the Company to,among other things, satisfy certain financial tests relating to fixed chargecoverage ratios and debt leverage ratios. The credit facility also contains various other covenants that restrictthe Company’s ability to, among other things, 1) incur additionalindebtedness, 2) permit liens to attach to its assets and 3) paydividends or make other restricted payments on its common stock and certainother securities unless certain financial conditions are satisfied. The 2004Credit Facility is collateralized by substantially all of the Company’sassets.  The Company is currently incompliance with all covenants governing the 2004 Credit Facility.

 

**RecentAccounting Pronouncements**

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 123R, arevision to Statement No. 123, “Accounting for Stock-Based Compensation.”This standard requires the Company to measure the cost of employee servicesreceived in exchange for equity awards based on the grant date fair value ofthe awards. The cost will be recognized as compensation expense over thevesting period of the awards. The Company is required to adopt SFAS 123Rat the beginning of 2006. The standard provides for a prospective application.Under this method, the Company will begin recognizing compensation cost forequity based compensation for all new or modified grants after the date ofadoption. In addition, the Company will recognize the unvested portion of thegrant date fair value of awards issued prior to adoption based on the fairvalues previously calculated for disclosure purposes. At March 31, 2005,the aggregate value of unvested options, as determined using a Black-Scholes optionvaluation model, was $3,500. Upon adoption of SFAS 123R, a majority ofthis amount will be recognized over the remaining vesting period of theseoptions.

 

**Factors That May Influence Future Results**

 

*Economic Conditions*

 

Ourend-users consist of construction and industrial customers.  Changes in these markets may lead toincreased or decreased demand for our equipment and services.  In addition, economic declines generally resultin lower overall rental rates, which generally adversely impact our business.

 

*Seasonality*

 

TheCompany’s revenues and operating results fluctuate from quarter to quarter dueto the seasonal nature of the markets in which the Company operates.  The Company’s presence both in the trafficsafety and control industry and in the general rental market in the Northeastand Midwest are both highly seasonal in nature, with activity tending to belower in the winter as compared to the spring and summer.

 

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*Indebtedness*

 

TheCompany’s substantial indebtedness could adversely affect the Company’soperations in the future in one or more of the following ways:

•                                            Increases ininterest rates could result in increased interest expense and increased cashoutflows for debt service;

•                                            The Company’s abilityto obtain additional financing could be limited as essentially all of theassets of the Company secure the existing indebtedness; and

•                                            Failure tocomply with covenants associated with the existing indebtedness could result inthe creditors’ ability to require accelerated repayment of outstandingindebtedness.

 

*Competition*

 

Theequipment rental industry is highly fragmented and competitive.  Numerous competitors serve many of themarkets in which the Company operates. These competitors range from national and multi-regional operators tosmall, independent businesses with a limited number of locations.  Management believes that participants in theequipment rental industry compete on the basis of availability and quality ofequipment, service, delivery time and price. However, increases in competition from either new or existing industryparticipants could occur, and the potential impact on our existing market shareis unknown.

 

*Legal Proceedings*

 

Fromtime to time, the Company has been and is involved in various legalproceedings, 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*

 

TheCompany’s facilities are subject to federal, state and local environmentalrequirements relating to discharges to air, water and land; the handling anddisposal of solid and hazardous waste; and the cleanup of properties affectedby hazardous substances. The Company believes that its facilities are insubstantial compliance with environmental requirements and that the Company hasno material liabilities arising under environmental requirements.  However, some risk of environmental liabilityis inherent in the nature of the Company’s business, and, in the future, the Companymay incur material costs to meet current or more stringent compliance, cleanupor other obligations under environmental laws. The Company reviews its environmental practices at its various locationsfrom time to time.

 

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

 

The2004 Credit Facility consists of a $300,000 first lien credit facility,comprised of a $200,000 term loan and a $100,000 revolving loan, and a $275,000second lien term loan.  Borrowings underthe 2004 Credit Facility bear interest, at the Company’s option, at a specifiedbase rate or LIBOR rate plus the applicable borrowing margin. At April 30,2005, the Company had total borrowings under the 2004 Credit Facility of$446,000. Each 100 basis point increase in interest rates on the variable ratedebt would decrease annual pretax earnings by approximately $4,460.  In August2004, the Company purchased interest rate cap contracts, which cap the interestrate on substantially all of the LIBOR-based debt through 2008 in the event ofa significant increase in the underlying interest rate.  Because of the interest rate cap levels,management does not believe that these contracts will significantly reduce theCompany’s expected interest costs.

 

**ITEM 4. CONTROLS ANDPROCEDURES**

 

**Evaluation of 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 ofMarch 31, 2005 (the “Evaluation Date”), the Company’s chief executive officerand chief 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.

 

**Changes in internal controls** — There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and procedures duringthe quarter ended March 31, 2005, nor were there any significant deficienciesor material weaknesses in such disclosure controls and procedures requiringcorrective actions.  As a result, nocorrective actions were taken.

 

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**PART II**

**OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Otherthan as reported in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004 under the caption “Item 3. Legal Proceedings,” the Company isnot currently party to any material pending legal proceedings other thanroutine litigation incidental to the business of the Company.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Notapplicable.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 5. OTHER INFORMATION**

 

Notapplicable.

 

**ITEM 6. EXHIBITS**

 

SeeIndex of Exhibits on page 22.

 

 

 

 

 

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**SIGNATURE**

 

**Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.**

 
|                | NES  RENTALS HOLDINGS, INC. |
|---------------------|-----------------------------|
|                |                        |   |
|                |                        |   |
|                | By:                         | /s/ MICHAEL D. MILLIGAN |
|                |                        | Michael D. Milligan |
| * *            | * *                    | *Senior Vice President and Chief Financial Officer* |
| Date:  May 12, 2005 |                        |   |

 

 

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**INDEXOF EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                |
| 3.1                 |       | Certificate of Incorporation of the Company (Incorporated by  reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for  the period ended June 30, 2004)                     |
| 3.2                 |       | By-laws  of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s  Quarterly Report on Form 10-Q for the period ended June 30, 2004)                                          |
| 11.1                |       | Statement re Computation of Per Share Earnings. Not required because  the relevant computations can be clearly determined from the material  contained in the financial statements included herein. |
| 31.1                |       | Certification by CEO Pursuant to Rule 13A-14(a) or 15D-14(a) of the  Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                    |
| 31.2                |       | Certification by CFO Pursuant to Rule 13A-14(a) or 15D-14(a) of the  Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                    |
| 32.1                |       | Certification by CEO Pursuant to 18 U.S.C. Section 1350, As  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                            |
| 32.2                |       | Certification by CFO 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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