**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                          |
| **For the quarterly period ended  June 30, 2004** |
|                                                   |       |                                                                                                |
| **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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**NES Rentals Holdings, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **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, includingarea code)

 

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

 

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

 

There were 18,931,000 shares of Common Stock ($.01 par value)outstanding as of August 4, 2004.

 

 

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

**QUARTERLY REPORT ON FORM 10-Q**

**For the Quarter Ended**

**June 30, 2004**

**INDEX**

 
| PART I. FINANCIAL INFORMATION |                                                                                        |
|-------------------------------|---------------------------------------------------------------------------------------------|
|                          |                                                                                        |   |
| Item 1.                       | Financial Statements                                                                        |   |
|                          |                                                                                        |   |
|                          | Report of Independent Registered Public  Accounting Firm                               |   |
|                          |                                                                                        |   |
|                          | Consolidated Balance Sheets (Unaudited)                                                |   |
|                          |                                                                                        |   |
|                          | Consolidated Statements of Operations  (Unaudited)                                          |   |
|                          |                                                                                        |   |
|                          | Consolidated Statements of Cash Flows  (Unaudited)                                          |   |
|                          |                                                                                        |   |
|                          | Notes to Consolidated Financial Statements  (Unaudited)                                     |   |
|                          |                                                                                        |   |
| Item 2.                       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                          |                                                                                        |   |
| Item 3.                       | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|                          |                                                                                        |   |
| Item 4.                       | Controls and Procedures                                                                     |   |
|                          |                                                                                        |   |
| PART II. OTHER INFORMATION    |                                                                                        |
|                          |                                                                                        |   |
| Item 1.                       | Legal Proceedings                                                                           |   |
|                          |                                                                                        |   |
| Item  2.                      | Changes  in Securities; Use of Proceeds and Issuer Purchase of Equity Securities            |   |
|                          |                                                                                        |   |
| Item 3.                       | Defaults upon Senior Securities                                                             |   |
|                          |                                                                                        |   |
| Item 4.                       | Submission of Matters to a Vote of Security  Holders                                        |   |
|                          |                                                                                        |   |
| Item 5.                       | Other Information                                                                           |   |
|                          |                                                                                        |   |
| Item 6.                       | Exhibits and Reports on Form 8-K                                                            |   |
|                          |                                                                                        |
| SIGNATURE                     |                                                                                        |
|                          |                                                                                        |
| Index of Exhibits             |                                                                                        |

 

2

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**Report****of Independent Registered Public Accounting Firm**

The Board of Directors

NES Rentals Holdings, Inc.:

We have reviewed the consolidated balance sheet of NES RentalsHoldings, Inc. and subsidiaries (the Company or the Successor) as ofJune 30, 2004, the related consolidated statements of operations for thethree- and five-month periods ended June 30, 2004 and the relatedconsolidated statement of cash flows for the five-month period endedJune 30, 2004 and the related consolidated statements of operations andcash flows of National Equipment Services, Inc. (the Predecessor) for theone-month period ended January 31, 2004.  These consolidated financial statementsare the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures and making inquiries ofpersons 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 review, we are not aware of any material modificationsthat should be made to the consolidated financial statements referred to abovefor them to be in conformity with U.S. generally accepted accountingprinciples.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedbalance sheet of the Predecessor and subsidiaries as of December 31, 2003,and the related consolidated statements of operations and comprehensive loss,stockholders’ equity (deficit) and cash flows for the year then ended (notpresented herein); and in our report dated March 29, 2004, we expressed anunqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying consolidated balance sheet as of December 31, 2003, isfairly stated, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

 
|                 | (signed)  KPMG LLP |
|----------------------|-------------------------|
|                 |
|                 |
| Chicago, IL          |
| August 12, 2004 |

 

3

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**Forward Looking Statements**

 

Note: This report contains forward-looking statements as encouraged bythe Private Securities Litigation Reform Act of 1995. All statements containedin this document, other than historical information, are forward-lookingstatements. These statements represent management’s current judgment on whatthe future holds. A variety of factors could cause business conditions and theCompany’s actual results to differ materially from those expected by theCompany or expressed in the Company’s forward-looking statements. These factorsinclude, without limitation, changes in market price or market demand; loss ofbusiness from customers; general declines in rental rates in the market;pricing pressure from competitors; ability to fund and the timing of deliveryof desired capital expenditures; the Company’s reorganization; the Company’sability to attract and retain senior management; unanticipated expenses;changes in financial markets; the Company’s substantial leverage; potentialdefaults in the Company’s indebtedness; ability to make scheduled principalamortization payments on indebtedness; and other factors discussed in theCompany’s filings with the Securities and Exchange Commission.

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to these reports are available on ourinternet website free of charge.  Thesereports are available as soon as practicable after we electronically file thesereports with the Securities and Exchange Commission.  Our website address is www.nesrentals.com.

 

**PART I.FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

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

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                       | ** ** | **Successor**          | ** ** | **Predecessor**            | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                       | ** ** | **June 30, 2004** | ** ** | **December 31, 2003** | ** ** |
| ** **                                                                                                       | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| **Assets**                                                                                                       |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                        |       | $                      | 8,597      |                       | $          | 50,251 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $5,175 and $5,689, respectively            |       | 130,955                |       | 126,775                    |       |
| Inventory, net                                                                                                   |       | 16,612                 |       | 13,928                     |       |
| Prepaid expenses and other assets                                                                                |       | 46,230                 |       | 38,109                     |       |
| Rental equipment, net                                                                                            |       | 424,873                |       | 407,362                    |       |
| Property and equipment, net                                                                                      |       | 38,061                 |       | 35,728                     |       |
| Unamortized debt issuance costs                                                                                  |       | 5,631                  |       | —                     |       |
| Unamortized intangible assets                                                                                    |       | 12,484                 |       | 1,010                      |       |
| Total assets                                                                                                     |       | $                      | 683,443    |                       | $          | 673,163 |   |
| **Liabilities**                                                                                                  |       |                   |       |                       |       |
| Liabilities not subject to compromise:                                                                           |       |                   |       |                       |       |
| Book overdraft (checks yet to clear)                                                                             |       | $                      | 9,194      |                       | $          | 17,487 |   |
| Trade accounts payable                                                                                           |       | 43,673                 |       | 4,846                      |       |
| Accrued expenses and other liabilities                                                                           |       | 45,981                 |       | 36,915                     |       |
| Debt                                                                                                             |       | 458,674                |       | 1,714                      |       |
| Liabilities subject to compromise                                                                                |       | —                 |       | 897,380                    |       |
| Total liabilities                                                                                                |       | 557,522                |       | 958,342                    |       |
| Commitments and contingencies                                                                                    |       | —                 |       | —                     |       |
| **Stockholders’  equity (deficit)**                                                                         |       |                   |       |                       |       |
| Successor common stock, $0.01 par, 25,000  shares authorized; 18,931 shares issued, 18,931 shares outstanding    |       | 189                    |       | —                     |       |
| Predecessor common stock, $0.01 par,  100,000 shares authorized; 24,170 shares issued, 21,151 shares outstanding |       | —                 |       | 241                        |       |
| Successor additional paid-in capital                                                                             |       | 151,642                |       | —                     |       |
| Predecessor additional paid-in capital                                                                           |       | —                 |       | 123,887                    |       |
| Accumulated deficit                                                                                              |       | (25,596                | )          | (391,896                   | )          |
| Predecessor treasury stock at cost, 3,019  shares                                                                |       | —                 |       | (19,062                    | )          |
| Accumulated other comprehensive income  (loss)                                                                   |       | (314                   | )          | 1,651                      |       |
| Total stockholders’ equity (deficit)                                                                        |       | 125,921                |       | (285,179                   | )          |
| Total liabilities and stockholders’ equity  (deficit)                                                       |       | $                      | 683,443    |                       | $          | 673,163 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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

**CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

**(in thousands)**

 
| ** **                                                                                            | ** ** | **Successor**                                       | ** ** | **Predecessor**                                     | ** ** | **Successor**                                      | ** ** | **Predecessor**                                     | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **For the three  months ended  June 30, 2004** | ** ** | **For the three  months ended  June 30, 2003** | ** ** | **For the five  months ended  June 30, 2004** | ** ** | **For the one  month ended  January 31, 2004** | ** ** | **For the six  months ended  June 30, 2003** | ** ** |
|                                                                                                  |       |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| **Revenues**                                                                                          | ** ** |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| Rental and service revenues                                                                           |       | $                                                   | 123,308    |                                                | $          | 126,692                                            |       | $                                                   | 189,195    |   | $ | 33,068 |   | $ | 233,304 |   |
| New equipment sales                                                                                   |       | 7,820                                               |       | 9,722                                               |       | 12,849                                             |       | 3,318                                               |       | 18,512 |   |
| Rental equipment sales                                                                                |       | 10,736                                              |       | 9,125                                               |       | 16,976                                             |       | 2,120                                               |       | 17,470 |   |
| Other revenues                                                                                        |       | 5,515                                               |       | 5,052                                               |       | 8,421                                              |       | 1,424                                               |       | 10,923 |   |
| Total revenues                                                                                        |       | 147,379                                             |       | 150,591                                             |       | 227,441                                            |       | 39,930                                              |       | 280,209 |   |
| **Cost of  revenues**                                                                                 | ** ** |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| Cost of rental and service revenues                                                                   |       | 64,813                                              |       | 65,093                                              |       | 100,810                                            |       | 17,454                                              |       | 119,985 |   |
| Rental equipment depreciation                                                                         |       | 32,179                                              |       | 27,308                                              |       | 50,021                                             |       | 8,138                                               |       | 53,554 |   |
| Cost of new equipment sales                                                                           |       | 6,310                                               |       | 8,407                                               |       | 10,362                                             |       | 2,802                                               |       | 15,881 |   |
| Cost of rental equipment sales                                                                        |       | 7,753                                               |       | 6,578                                               |       | 12,162                                             |       | 1,328                                               |       | 12,015 |   |
| Other operating expenses                                                                              |       | 5,278                                               |       | 5,471                                               |       | 8,198                                              |       | 1,498                                               |       | 11,123 |   |
| Total cost of revenues                                                                                |       | 116,333                                             |       | 112,857                                             |       | 181,553                                            |       | 31,220                                              |       | 212,558 |   |
|                                                                                                  |       |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| Gross profit                                                                                          |       | 31,046                                              |       | 37,734                                              |       | 45,888                                             |       | 8,710                                               |       | 67,651 |   |
| Selling, general and administrative  expenses                                                         |       | 30,518                                              |       | 36,919                                              |       | 51,343                                             |       | 9,670                                               |       | 71,992 |   |
| Reorganization expenses                                                                               |       | —                                              |       | —                                              |       | —                                             |       | 1,973                                               |       | — |   |
| Fresh start accounting adjustments                                                                    |       | —                                              |       | —                                              |       | —                                             |       | (50,667                                             | )          | — |   |
| Goodwill impairment                                                                                   |       | —                                              |       | 138,115                                             |       | —                                             |       | —                                              |       | 138,115 |   |
| Non-rental depreciation and amortization                                                              |       | 4,479                                               |       | 1,519                                               |       | 7,907                                              |       | 858                                                 |       | 3,452 |   |
| Operating (loss) income                                                                               |       | (3,951                                              | )          | (138,819                                            | )          | (13,362                                            | )          | 46,876                                              |       | (145,908 | ) |
| Other (expense) income, net                                                                           |       | (44                                                 | )          | 277                                                 |       | 134                                                |       | 80                                                  |       | 399 |   |
| Gain on discharge of debt                                                                             |       | —                                              |       | —                                              |       | —                                             |       | 241,128                                             |       | — |   |
| Interest expense, net (contractual interest of $4,921 for the  one month ended January 31, 2004) |       | 6,948                                               |       | 19,820                                              |       | 12,368                                             |       | 2,629                                               |       | 42,467 |   |
| (Loss) income from continuing operations  before income taxes                                         |       | (10,943                                             | )          | (158,362                                            | )          | (25,596                                            | )          | 285,455                                             |       | (187,976 | ) |
| Income tax expense                                                                                    |       | —                                              |       | —                                              |       | —                                             |       | —                                              |       | — |   |
| (Loss) income from continuing operations                                                              |       | (10,943                                             | )          | (158,362                                            | )          | (25,596                                            | )          | 285,455                                             |       | (187,976 | ) |
| Loss from discontinued operations, net of  tax                                                        |       | —                                              |       | (518                                                | )          | —                                             |       | —                                              |       | (518 | ) |
| Net (loss) income                                                                                     |       | (10,943                                             | )          | (158,880                                            | )          | (25,596                                            | )          | 285,455                                             |       | (188,494 | ) |
| Other comprehensive (loss) income                                                                     |       | (258                                                | )          | 1,933                                               |       | (314                                               | )          | (279                                                | )          | 5,838 |   |
| Comprehensive (loss) income                                                                           |       | $                                                   | (11,201    | )                                                   | $          | (156,947                                           | )          | $                                                   | (25,910    | ) | $ | 285,176 |   | $ | (182,656 | ) |
|                                                                                                  |       |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| Basic loss per common share                                                                           |       | $                                                   | (0.58      | )                                                   |       |                                               | $          | (1.35                                               | )          |   |   |   |   |
| Diluted loss per common share                                                                         |       | $                                                   | (0.58      | )                                                   |       |                                               | $          | (1.35                                               | )          |   |   |   |   |
| Weighted average shares outstanding:                                                                  |       |                                                |       |                                                |       |                                               |       |                                                |       |   |   |
| Basic calculation                                                                                     |       | 18,931                                              |       |                                                |       | 18,931                                             |       |                                                |       |   |   |
| Diluted calculation                                                                                   |       | 18,931                                              |       |                                                |       | 18,931                                             |       |                                                |       |   |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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

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

**(in thousands)**

 
| ** **                                                                                | ** ** | **Successor**                                      | ** ** | **Predecessor**                                     | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **For the five  months ended  June 30, 2004** | ** ** | **For the one  month ended  January 31, 2004** | ** ** | **For the six  months ended  June 30, 2003** | ** ** |
|                                                                                      |       |                                               |       |                                                |       |   |   |
| **Cash  flows from operating activities:**                                                |       |                                               |       |                                                |       |   |   |
| Net (loss) income                                                                         |       | $                                                  | (25,596    | )                                                   | $          | 285,455 |   | $ | (188,494 | ) |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |                                               |       |                                                |       |   |   |
| Depreciation and amortization                                                             |       | 57,928                                             |       | 8,996                                               |       | 57,006 |   |
| Goodwill impairment                                                                       |       | —                                             |       | —                                              |       | 138,115 |   |
| Amortization of debt issuance costs and  debt discount                                    |       | 733                                                |       | —                                              |       | 5,035 |   |
| Gain on sale of equipment                                                                 |       | (4,926                                             | )          | (861                                                | )          | (5,620 | ) |
| Changes in operating assets and  liabilities:                                             |       |                                               |       |                                                |       |   |   |
| Trade accounts receivable                                                                 |       | (6,967                                             | )          | 2,787                                               |       | (8,131 | ) |
| Inventory                                                                                 |       | (2,198                                             | )          | (61                                                 | )          | 1,600 |   |
| Prepaid expenses and other assets                                                         |       | (4,990                                             | )          | (2,745                                              | )          | (8,967 | ) |
| Trade accounts payable                                                                    |       | 18,127                                             |       | (583                                                | )          | (4,500 | ) |
| Accrued expenses and other liabilities                                                    |       | 5,627                                              |       | 1,857                                               |       | 13,536 |   |
| Chapter 11 items:                                                                         |       |                                               |       |                                                |       |   |   |
| Fresh start accounting adjustments                                                        |       | —                                             |       | (50,667                                             | )          | — |   |
| Gain on debt discharge                                                                    |       | —                                             |       | (241,128                                            | )          | — |   |
| Net cash flows provided by (used in)  operating activities                                |       | 37,738                                             |       | 3,050                                               |       | (420 | ) |
|                                                                                      |       |                                               |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                                |       |                                               |       |                                                |       |   |   |
| Purchases of rental equipment                                                             |       | (53,382                                            | )          | (4,362                                              | )          | (17,878 | ) |
| Proceeds from sale of rental equipment                                                    |       | 16,976                                             |       | 2,120                                               |       | 17,470 |   |
| Purchases of property and equipment                                                       |       | (7,651                                             | )          | (819                                                | )          | (3,910 | ) |
| Proceeds from sale of property and  equipment                                             |       | 4,412                                              |       | 111                                                 |       | 1,156 |   |
| Net cash flows used in investing activities                                               |       | (39,645                                            | )          | (2,950                                              | )          | (3,162 | ) |
|                                                                                      |       |                                               |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                                |       |                                               |       |                                                |       |   |   |
| Proceeds from debt                                                                        |       | —                                             |       | 481,172                                             |       | — |   |
| Payments on debt                                                                          |       | (8,829                                             | )          | (482,363                                            | )          | (550 | ) |
| Net payments under revolving credit  facility                                             |       | (15,170                                            | )          | —                                              |       | (475 | ) |
| Payments of debt issuance costs                                                           |       | (86                                                | )          | (6,278                                              | )          | — |   |
| (Decrease) increase in book overdraft  (checks yet to clear)                              |       | (6,973                                             | )          | (1,320                                              | )          | 9,115 |   |
| Net cash (used in) provided by financing  activities                                      |       | (31,058                                            | )          | (8,789                                              | )          | 8,090 |   |
| Net (decrease) increase in cash and cash  equivalents                                     |       | (32,965                                            | )          | (8,689                                              | )          | 4,508 |   |
| Cash and cash equivalents at beginning of period                                          |       | 41,562                                             |       | 50,251                                              |       | 15,184 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                  | 8,597      |                                                | $          | 41,562 |   | $ | 19,692 |   |
|                                                                                      |       |                                               |       |                                                |       |   |   |
| **Supplemental  Cash Flow Information:**                                                  |       |                                               |       |                                                |       |   |   |
| Cash paid for interest                                                                    |       | $                                                  | 10,323     |                                                | $          | 2,663 |   | $ | 26,043 |   |
| Cash paid for income taxes                                                                |       | 116                                                |       | 49                                                  |       | 502 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

6

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

# **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**(Amounts in thousands)**

 

**1.  Organization**

 

NES Rentals Holdings, Inc. (the “Company” or the “Successor”) isprincipally a holding company organized under the laws of Delaware. The Companyconducts its operations through its wholly-owned subsidiaries. The Company ownsand operates equipment rental, sales and service facilities primarily locatedthroughout the United States of America. The Company rents various types ofequipment to a diverse customer base, including construction, automotive andother industrial users. The Company also sells new equipment and used equipmentfrom its rental fleet, sells related parts and provides other services. Thenature of the Company’s business is such that short-term obligations are mettypically by cash flow generated from long-term assets. Consequently, consistentwith industry practice, the accompanying consolidated balance sheets arepresented on an unclassified basis.

 

**2. Reorganization**

 

On June 27, 2003, National Equipment Services, Inc. (the“Predecessor Company”) and its U.S. subsidiaries (collectively, the “Debtors”)filed for voluntary reorganization under Chapter 11 (the “Reorganization”) ofthe U.S. Bankruptcy Code (the “Bankruptcy Code”) in the Northern District ofIllinois (“Bankruptcy Court”).  TheCanadian subsidiary, which represents less than 2% of total revenues and totalassets of the Predecessor Company, was not included in the petition.  Due to the size of the Canadian subsidiary,the consolidated financial statements of the Predecessor Company presented hereinare essentially equivalent to the consolidated financial statements of theDebtors.

 

The initial joint plan of reorganization was filed on October 17,2003.  On January 23, 2004, theDebtors filed a fourth amended joint plan of reorganization (the “Plan ofReorganization”), which received the requisite support from the creditorsauthorized to vote thereon.  The Plan ofReorganization was confirmed by the Bankruptcy Court on January 23, 2004,and the Debtors emerged from bankruptcy on February 11, 2004 (the“Effective Date”).

 

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

 

From June 27, 2003 through February 11, 2004, the Debtorscontinued to operate as debtors-in-possession pursuant to Sections 1107 and1108 of the Bankruptcy Code.  Shortlyafter filing for bankruptcy, the Debtors began notifying all known or potentialcreditors for the purposes of identifying all pre-petition claims against theDebtors.  Any creditor actions to obtainpossession of property from the Debtors or to create, perfect or enforce anylien against the property of the Debtors were stayed.  As a result, the creditors of the Debtorswere precluded from collecting pre-petition debts without the approval of the BankruptcyCourt.  Certain pre-petition liabilitieswere paid after obtaining the approval of the Bankruptcy Court, includingcertain wages and benefits of employees and insurance costs.

 

National Equipment Services, Inc. obtained Debtor-in-Possessionfinancing which provided up to $30,000 of availability to fund operationsduring the bankruptcy period.  TheDebtors did not borrow any funds from this financing source during the periodit was in place.

 

The Plan of Reorganization provided for the cancellation of all of theissued and outstanding shares of common stock, par value $0.01 per share, ofthe Predecessor Company (the “Old Common Stock”), all of the issued andoutstanding shares of preferred stock of the Predecessor Company, and all otheroutstanding securities of the Predecessor Company, including common stockoptions as of the Effective Date.

 

On the Effective Date, National Equipment Services, Inc. merged intoNES Rentals, Inc.  NES Rentals, Inc. was the surviving company in themerger and was renamed National Equipment Services, Inc.  NES Rentals,Inc. is a subsidiary of both NES IT Services, Inc. and NES Real EstateManagement, Inc., which are subsidiaries of the newly formed NES RentalsHoldings, Inc., which is the successor to National Equipment Services, Inc.  The Company is the new public company parentof National Equipment Services, Inc. and has 25,000 authorized shares of commonstock (the “New Common Stock”).

 

In accordance with the Plan of Reorganization, (i) holders of generalunsecured claims, including the holders of the Company’s Senior SubordinatedNotes due 2004, Series B (the “Series B Notes”) and Senior Subordinated Notesdue 2004, Series D (the “Series D Notes”), received 97.5% of the New CommonStock of the Company, (ii) the holders of the Company’s preferred stock

 

7

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received 2.0% of the New Common Stock of the Company, and (iii) theholders of the Company’s Old Common Stock received 0.5% of the New Common Stockof the Company.

 

**3.  Basis of Presentation**

 

As a result of the Company’s Reorganizationas described in Note 2, the Company has applied fresh start reporting pursuantto the American Institute of Certified Public Accountants’ Statementof Position 90-7, “Financial Reporting by Entities in Reorganization Under the BankruptcyCode” (“SOP 90-7”) as of January 31, 2004. As a result of the application of fresh start reporting onJanuary 31, 2004, the post-emergence financial results of the Company forthe three- and five-month periods ended June 30, 2004 are presented as theresults of the “Successor” and the pre-emergence financial results for themonth ended January 31, 2004 and the three- and six-month periods endedJune 30, 2003 are presented as the results of the “Predecessor.”  Per share and share information for thePredecessor Company for all periods 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 financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialstatements and with the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.  Accordingly, they do not includeall of the information and disclosures required by accounting principlesgenerally accepted in the United States of America for annual financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation,consisting only of normal recurring adjustments, except as described in Note 4related to the application of fresh start reporting, have been included.  For further information, refer to theconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K of the Predecessor Company for the year endedDecember 31, 2003.

 

Results of operations for the interim periodsare not necessarily indicative of the results that may be expected for a fullyear.  Due to the seasonality that impactsa significant portion of the Company’s locations, the second and third quartersare typically the most active quarters for the Company.  The consolidated financialstatements include the accounts of the Company and its subsidiaries. Allsignificant intercompany transactions and balances have been eliminated.

 

The consolidated financial statements have been prepared on a goingconcern basis, which contemplates continuity of operations, realization ofassets, and payment of liabilities in the ordinary course of business, and donot reflect adjustments that might result if the Company is unable to continueas a going concern.  The Company’shistory of significant losses and the Reorganization discussed herein raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Continuing as a going concernis dependent upon, among other things, the success of future businessoperations and the generation of sufficient cash from operations and financingsources to meet the Company’s obligations as they become due.

 

**Book overdraft (checks yet to clear)**—The book overdraft consists of checks issued but not yet presented to banks forpayment.  

 

**Change in estimate**—In conjunction with the application of fresh start accounting in the first quarter(see Note 4), certain depreciable assets were revalued.  In the second quarter, the Company reassessedthe depreciable lives of these assets and determined that the useful livesshould be decreased.  The impact was toincrease depreciation expense for the three- and five-month periods endedJune 30, 2004 by approximately $4,700.

 

**Comprehensive Income (Loss)**—Unrealized foreign currency translation gains (losses) are included in othercomprehensive income (loss) for the periods presented herein.  In addition, the change in the fair value ofa derivative instrument of $1,257 and $4,609 was included in the othercomprehensive income for the three- and six-month periods ended June 30,2003, respectively.

 

**4.  Fresh Start Accounting**

 

Pursuant to SOP 90-7, the accounting for the effects of the Company’sreorganization occurred once the Plan of Reorganization was confirmed by theBankruptcy Court and there were no remaining contingencies material tocompleting the implementation of the Plan of Reorganization.  As discussed in Note 2, the Company’s Plan ofReorganization was approved on January 23, 2004, and the Company emergedfrom bankruptcy on February 11, 2004. For financial reporting purposes, fresh start reporting was applied onJanuary 31, 2004.

 

In accordance with SOP 90-7, the results of operations for the monthended January 31, 2004 include a pre-emergence gain of $241,128 resultingfrom the discharge of debt and other liabilities under the Plan ofReorganization and a pre-emergence gain of $50,667 resulting from the aggregateremaining changes to the net carrying value of the Company’s pre-emergenceassets and liabilities to reflect the fair values under fresh startreporting.  The Company’s estimatedreorganization value at January 31, 2004, which approximates the amount awilling buyer would pay for the assets of the Company immediately after theReorganization, was $716,252.  TheCompany estimated the reorganization value for purposes of fresh startreporting utilizing the estimated value of the

 

8

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Company on an enterprise basis (the “Enterprise Value”), adjusting toexclude known liabilities other than the New Credit Facility atJanuary 31, 2004.

 

The Enterprise Value was determined by valuation specialists using thefollowing three methodologies:  (a) theapplication of public market valuation multiples to the Predecessor Company’srecent historical 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 (14%).  The financialprojections utilized in the DCF analysis were developed by management and arebased on estimates and assumptions, which include, but are not limited to,estimates and assumptions with respect to pricing by market, capital spendingand working capital levels, and the development of a discount rate that isutilized to convert future projected cash flows to their estimated presentvalue.  The estimated projections andassumptions, while considered reasonable by management, may not be realized andare inherently subject to uncertainties and contingencies, which couldsignificantly affect the measurement of the Enterprise Value and thereorganization value.  Based on the abovemethodologies, the Enterprise Value was determined to be $633,000.

 

Under fresh start reporting, the estimated reorganization value hasbeen allocated to the Company’s assets based on their respective fair values inconformity with the purchase method of accounting for business combinations inaccordance with Statement of Financial Accounting Standards No. 141, “BusinessCombinations.”  Valuations performed byvaluation specialists were required to determine the fair value of certain ofthe Company’s assets as presented below. The consolidated balance sheet presented below gives effect to the Planof 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                               |       |
| New 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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Adjustments reflected in the consolidated balance sheet are as follows:

 

----

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

(b)         Represents recognition of debt issuance costs consisting of fees andexpenses of the New 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 New CreditFacility which were used to repay the existing indebtedness under the OldCredit Facility.

(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 New 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 PredecessorCompany common 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 increasein the fair value of capitalized software development costs under fresh startreporting based on the results of valuation procedures performed by valuationspecialists.

(i)             Represents adjustment to reflect rentalequipment and property and equipment at fair values under fresh start reportingbased on the results of valuation procedures performed by valuationspecialists.

(j)             Represents adjustment to reflect the fairvalue of identified intangible assets under fresh start reporting based onresults of valuation procedures performed by valuation specialists.  See Note 6 for additional information.

(k)          Represents the elimination of pre-emergenceequity accounts under fresh start reporting.

 

**5.  Prepaid Expenses and Other Assets**

 

Prepaid expenses and other assets consist of the following:

 
| ** **        | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|              |       |                    |       |                        |       |
| Deposits          |       | $                       | 35,712     |                        | $          | 26,845 |   |
| Prepaid expenses  |       | 8,527                   |       | 6,260                       |       |
| Other assets      |       | —                  |       | 3,286                       |       |
| Other receivables |       | 1,991                   |       | 1,718                       |       |
|              |       | $                       | 46,230     |                        | $          | 38,109 |   |

 

Deposits consist primarily of cash collateralrelated to insurance and performance bonding requirements.  Other assets at December 31, 2003consist primarily of unamortized software development costs.  These assets were transferred into serviceduring 2004 and are now reflected in property and equipment.

 

10

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**6.  Intangible Assets**

 

Intangible assets, net of accumulated amortization consist of thefollowing:

 
| ** **               | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|                     |       |                    |       |                        |       |
| Non-compete agreements   |       | $                       | 7,536      |                        | $          | 8,491 |   |
| Customer relationships   |       | 10,927                  |       | —                      |       |
| Backlog                  |       | 4,293                   |       | —                      |       |
|                     |       | $                       | 22,756     |                        | $          | 8,491 |   |
| Accumulated amortization |       | 10,272                  |       | 7,481                       |       |
|                     |       | $                       | 12,484     |                        | $          | 1,010 |   |

 

Non-compete agreements and customer relationships are amortized on astraight-line basis over five years. Backlog is amortized on a straight-line basis over one year.

 

**7. Accrued Expenses and Other Liabilities**

 

Accrued expenses and other liabilities consist of the following:

 
| ** **                         | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|                               |       |                    |       |                        |       |
| Accrued compensation and benefits  |       | $                       | 7,469      |                        | $          | 7,835 |   |
| Accrued self-insurance liabilities |       | 8,377                   |       | 6,328                       |       |
| Accrued property and sales taxes   |       | 7,481                   |       | 7,093                       |       |
| Accrued restructuring expenses     |       | —                  |       | 1,622                       |       |
| Accrued payables                   |       | 12,432                  |       | 6,017                       |       |
| Other accrued expenses             |       | 10,222                  |       | 8,020                       |       |
|                               |       | $                       | 45,981     |                        | $          | 36,915 |   |

** **

**8. Liabilities Subject to Compromise**

 

Liabilities subject to compromise consist of the following as ofDecember 31, 2003:

 
|                                           |   |    |    |
|------------------------------------------------|--------|---------|---------|
| Accounts payable                               |   | $       | 21,437  |   |
| Accrued interest                               |   | 15,448  |    |
| Accrued expenses                               |   | 6,299   |    |
| Debt                                           |   | 757,150 |    |
| Senior mandatorily redeemable preferred  stock |   | 97,046  |    |
|                                           |   | $       | 897,380 |   |

 

As a result of the Reorganization, no principal or interest paymentswere made after November 2002 on the Company’s Series B Notes and Series DNotes.  As a result, interest on theSeries B Notes and the Series D Notes was not accrued or recorded afterJune 27, 2003.

 

**9.  Debt and Liquidity**

 

In connection with the Company’s emergence from bankruptcy onFebruary 11, 2004, the Company entered into a new senior secured creditfacility (the “New Credit Facility”). The New Credit Facility consists of $285,000 of term loan facilities anda $205,000 revolving credit facility. Proceeds under the New Credit Facility were used to repay the balanceoutstanding under the Old Credit Facility. The Company has scheduled principal repayments quarterly on the termloan facilities through the May 15, 2007 maturity date of the New CreditFacility.  Scheduled principal paymentsare as follows:  $55,000 in 2004, $20,000in 2005, $20,000 in 2006 and the balance is due upon expiration in 2007.  As of June 30, 2004, the Company hasremitted $7,500 of the scheduled principal payments due in 2004.  The average interest rate on the new creditfacility is base rate plus 3% or LIBOR plus 4.25%.

 

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

 

11

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certain other securities and 4) make acquisitions unless certainfinancial conditions are satisfied. The New Credit Facility is collateralizedby substantially all of the Company’s assets. The Company is currently in compliance with all covenants governing theNew Credit Facility.

 

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

 

In 1998, the Company entered into a credit facility with variousfinancial institutions (as amended, the “Old Credit Facility”). This providedfor a secured credit facility, including a term loan of $100,000 and arevolving credit facility loan of $300,000. During 1999, the Company amended its Credit Facility to increase theavailable borrowings from $400,000 up to a maximum amount of $750,000. In 2001,the Company amended its Credit Facility to decrease the maximum availableborrowings to $650,000. In 2002, the Company amended its credit facility todecrease the maximum available borrowings to $550,000.

 

As of December 31, 2002, the Company was in default under thefinancial covenants governing the credit facility.  As of January 23, 2003, the Company andthe lenders under the credit facility entered in a forbearance agreement withan initial expiration of March 14, 2003. As of March 14, 2003, the Company and the lenders under the creditfacility entered into a second forbearance agreement which extended theforbearance period until May 14, 2003, subject to earlier expiration upon theoccurrence of certain circumstances. This forbearance period was subsequently extended to June 15, 2003.

 

The Company also had $100,000 of Senior Subordinated Notes due 2004(the “Series B Notes”) and $175,000 of Senior Subordinated Notes due 2004 (the“Series D Notes”) outstanding prior to the Reorganization.  In accordance with the Plan ofReorganization, the holders of the Company’s Series B Notes and Series D Notesreceived 97.5% of the new common stock of the Company created upon emergencefrom bankruptcy.  The Company ceasedaccruing interest on the Series B Notes and the Series D Notes upon filing forbankruptcy protection.

 

The Company is a holding company with no independent operations, andthe Company’s assets (excluding the intercompany receivables and common stockof its subsidiaries) are insignificant. All of the Company’s subsidiaries aredirectly or indirectly wholly owned by the Company.  There are no restrictions on the Company’sability to obtain funds from its subsidiaries by dividend or loan.  The separate financial statements of each ofthese wholly owned subsidiaries are not presented as management believes thatseparate financial statements and other disclosures concerning thesesubsidiaries are not individually meaningful for presentation or material toinvestors. In addition, the Company has pledged the stock of each of itssubsidiaries as further security for the Company’s obligations under the NewCredit Facility.

 

**10. Reorganization Expenses**

 

Expenses incurred as a result of the Reorganization have beensegregated from normal operations and are disclosed separately.  These expenses consist primarily ofprofessional fees incurred for financial advisors, legal counsel andconsultants during the Reorganization. These professional fees were cash charges.

 

**11.  Segment information**

 

All operations are managed on a branch basis. The Company has tworeporting segments: General Rental and Other and Traffic Safety. The GeneralRental and Other operations are primarily involved in the rental and sale ofvarious types of lift and specialty equipment to construction, automotive andother industrial users. The Traffic Safety operations are primarily involved inthe rental of traffic safety equipment and providing the related services tomanage traffic flow during construction. The Traffic Safety operations have different contractual, regulatory andcapital requirements than the General Rental and Other operations. Theaccounting policies for these segments are the same as those described inNote 3.

 

The Company’s operations in Canada represent less than 2% of totalrevenues and total assets of the Company. Due to the size of the Company’s Canadian operations, these operationsare considered insignificant for separate geographical segment reporting.  The Company has no single customer thatrepresents greater than 10% of the Company’s consolidated revenues.Identifiable assets are those used in the Company’s operations in eachsegment.  Inter-segment revenues are notmaterial.

 

The following table presents financial information for the reportingsegments:

 

12

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| ** **                                                | ** ** | **General Rental  and Other** | ** ** | **Traffic  Safety** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------|------------|------------------|------------|
| **Three  Months Ended June 30, 2004 (Successor):**   |       |                          |       |                |       |             |       |
| Rental and service revenues                               |       | $                             | 94,439     |                | $          | 28,869           |       | $ | 123,308 |   |
| New equipment sales                                       |       | 6,546                         |       | 1,274               |       | 7,820            |       |
| Rental equipment sales                                    |       | 10,713                        |       | 23                  |       | 10,736           |       |
| Other revenues                                            |       | 3,413                         |       | 2,102               |       | 5,515            |       |
| Total revenues                                            |       | 115,111                       |       | 32,268              |       | 147,379          |       |
| Operating loss                                            |       | (3,133                        | )          | (818                | )          | (3,951           | )          |
| Net loss                                                  |       | (10,180                       | )          | (763                | )          | (10,943          | )          |
| Identifiable assets                                       |       | 592,600                       |       | 90,843              |       | 683,443          |       |
| Depreciation and amortization                             |       | 30,185                        |       | 6,473               |       | 36,658           |       |
| Capital expenditures                                      |       | 27,605                        |       | 5,146               |       | 32,751           |       |
| **Three  Months Ended June 30, 2003 (Predecessor):** |       |                          |       |                |       |             |       |
| Rental and service revenues                               |       | $                             | 98,735     |                | $          | 27,957           |       | $ | 126,692 |   |
| New equipment sales                                       |       | 8,253                         |       | 1,469               |       | 9,722            |       |
| Rental equipment sales                                    |       | 9,069                         |       | 56                  |       | 9,125            |       |
| Other revenues                                            |       | 4,635                         |       | 417                 |       | 5,052            |       |
| Total revenues                                            |       | 120,692                       |       | 29,899              |       | 150,591          |       |
| Operating loss (a)                                        |       | (102,434                      | )          | (36,385             | )          | (138,819         | )          |
| Net loss (a)                                              |       | (122,603                      | )          | (36,277             | )          | (158,880         | )          |
| Identifiable assets                                       |       | 618,767                       |       | 72,885              |       | 691,652          |       |
| Goodwill impairment                                       |       | 98,471                        |       | 39,644              |       | 138,115          |       |
| Depreciation and amortization                             |       | 25,878                        |       | 2,949               |       | 28,827           |       |
| Capital expenditures                                      |       | 10,320                        |       | 2,468               |       | 12,788           |       |
| **Five  Months Ended June 30, 2004 (Successor):**    |       |                          |       |                |       |             |       |
| Rental and service revenues                               |       | $                             | 151,341    |                | $          | 37,854           |       | $ | 189,195 |   |
| New equipment sales                                       |       | 11,156                        |       | 1,693               |       | 12,849           |       |
| Rental equipment sales                                    |       | 16,951                        |       | 25                  |       | 16,976           |       |
| Other revenues                                            |       | 5,763                         |       | 2,658               |       | 8,421            |       |
| Total revenues                                            |       | 185,211                       |       | 42,230              |       | 227,441          |       |
| Operating loss                                            |       | (8,857                        | )          | (4,505              | )          | (13,362          | )          |
| Net loss                                                  |       | (21,187                       | )          | (4,409              | )          | (25,596          | )          |
| Identifiable assets                                       |       | 592,600                       |       | 90,843              |       | 683,443          |       |
| Depreciation and amortization                             |       | 48,449                        |       | 9,479               |       | 57,928           |       |
| Capital expenditures                                      |       | 55,310                        |       | 5,723               |       | 61,033           |       |
| **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 (loss) (b)                               |       | 48,476                        |       | (1,600              | )          | 46,876           |       |
| Net income (loss) (c)                                     |       | 287,029                       |       | (1,574              | )          | 285,455          |       |
| Identifiable assets                                       |       | 633,467                       |       | 82,785              |       | 716,252          |       |
| Depreciation and amortization                             |       | 8,086                         |       | 910                 |       | 8,996            |       |
| Capital expenditures                                      |       | 4,552                         |       | 629                 |       | 5,181            |       |
| **Six  Months Ended June 30, 2003 (Predecessor):**   |       |                          |       |                |       |             |       |
| Rental and service revenues                               |       | $                             | 190,370    |                | $          | 42,934           |       | $ | 233,304 |   |
| New equipment sales                                       |       | 16,584                        |       | 1,928               |       | 18,512           |       |
| Rental equipment sales                                    |       | 17,396                        |       | 74                  |       | 17,470           |       |
| Other revenues                                            |       | 9,755                         |       | 1,168               |       | 10,923           |       |
| Total revenues                                            |       | 234,105                       |       | 46,104              |       | 280,209          |       |
| Operating loss (a)                                        |       | (106,318                      | )          | (39,590             | )          | (145,908         | )          |
| Net loss (a)                                              |       | (149,039                      | )          | (39,455             | )          | (188,494         | )          |
| Identifiable assets                                       |       | 618,767                       |       | 72,885              |       | 691,652          |       |
| Goodwill impairment                                       |       | 98,471                        |       | 39,644              |       | 138,115          |       |
| Depreciation and amortization                             |       | 51,023                        |       | 5,983               |       | 57,006           |       |
| Capital expenditures                                      |       | 17,919                        |       | 3,869               |       | 21,788           |       |
|                                                           |            |                               |            |                     |            |                  |            |  |  |  |  |

 

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(a)          Includes goodwill impairment charges of$39,644 and $98,471 for Traffic Safety and General Rental and Other operations,respectively.

(b)         Includes $50,667 of fresh start accountingadjustments.

(c)          Includes $50,667 of fresh start accountingadjustments and a $241,128 gain on the discharge of debt.

 

**12. Recent Developments**

 

The Company is currently in discussions with financial institutions torefinance its New Credit Facility. Although the discussions are underway, there can be no assurance thatthe refinancing will occur.

 

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

 

This discussion should be read in conjunction with the Annual Report onForm 10-K of National Equipment Services, Inc. (the “Predecessor Company”) forthe year-ended December 31, 2003 as filed with the Securities and ExchangeCommission and other information included herein. All dollar amounts are inthousands.

 

**General**

 

The Predecessor Company was founded in June 1996 to acquire andintegrate businesses that focus on the rental of general and specialtyequipment to industrial and construction end-users. Since inception, thePredecessor Company acquired 42 businesses in separate transactions. Allacquisitions were accounted for using the purchase method of accounting. Theresults of operations of the businesses acquired are included in the financialstatements only from their respective dates of acquisition.

 

On February 11, 2004, the Predecessor Company merged into NESRentals, Inc.  NES Rentals, Inc. was the surviving company in themerger and was renamed National Equipment Services, Inc.  NES Rentals,Inc. is a subsidiary of both NES IT Services, Inc. and NES Real EstateManagement, Inc., which are subsidiaries of the newly formed NES RentalsHoldings, Inc. (the “Company”), which is the successor to National EquipmentServices, Inc.  The Company is the newpublic company parent of National Equipment Services, Inc.

 

The Company derives its revenues from four sources: 1) equipment rentaland service, 2) new equipment sales, 3) rental equipment sales and 4) sales ofcomplementary parts and merchandise. The Company’s primary source of revenue 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.

 

Cost of revenues consists primarily of rental equipment depreciation,the cost of rental and service revenue, the cost of new equipment, the net bookvalue of rental equipment sold and other direct operating costs. Given thevaried, and in some cases specialized, nature of its rental equipment, theCompany uses a range of periods from one to fifteen years over which it depreciatesits equipment on a straight-line basis.

 

**Reorganization**

 

On June 27, 2003, the Predecessor and its U.S. subsidiaries(collectively, the “Debtors”) filed for voluntary reorganization under Chapter11 (the “Reorganization”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”)in the Northern District of Illinois (“Bankruptcy Court”).  The Canadian subsidiary, which representsless than 2% of total revenues and total assets, was not included in thepetition.  Due to the size of theCanadian subsidiary, the consolidated financial statements of the PredecessorCompany presented herein are essentially equivalent to the consolidatedfinancial statements of the Debtors.

 

The initial joint plan of reorganization was filed on October 17,2003.  On January 23, 2004, theDebtors filed a fourth amended joint plan of reorganization (the “Plan ofReorganization”), which received the requisite support from the creditorsauthorized to vote thereon.  The Plan ofReorganization was confirmed by the Bankruptcy Court on January 23, 2004,and the Debtors emerged from bankruptcy on February 11, 2004 (the“Effective Date”).

 

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

 

From June 27, 2003 through February 11, 2004, the Debtorscontinued to operate as debtors-in-possession pursuant to Sections 1107 and1108 of the Bankruptcy Code.  Shortlyafter filing for bankruptcy, the Debtors began notifying all known or potentialcreditors for the purposes of identifying all pre-petition claims against theDebtors.  Any creditor actions to obtainpossession of property from the Debtors or to create, perfect or enforce anylien against the property of the Debtors were stayed.  As a result, the creditors of the Debtorswere precluded from collecting pre-petition debts without the approval of theBankruptcy Court.  Certain pre-petitionliabilities were paid after obtaining the approval of the Bankruptcy Court,including certain wages and benefits of employees and insurance costs.

 

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The Predecessor Company obtained Debtor-in-Possession financing whichprovided up to $30,000 of availability to fund operations during the bankruptcyperiod.  The Debtors did not borrow anyfunds from this financing source during the period it was in place.

 

The Plan of Reorganization provided for the cancellation of all of theissued and outstanding shares of common stock, par value $0.01 per share, ofthe Predecessor Company (the “Old Common Stock”), all of the issued andoutstanding shares of preferred stock of the Predecessor Company, and all otheroutstanding securities of the Predecessor Company, including common stockoptions as of the Effective Date.

 

In accordance with the Plan of Reorganization, (i) holders of generalunsecured claims, including the holders of the Company’s Senior SubordinatedNotes due 2004, Series B (the “Series B Notes”) and Senior Subordinated Notesdue 2004, Series D (the “Series D Notes”), received 97.5% of the New CommonStock of the Company, (ii) the holders of the Company’s preferred stockreceived 2.0% of the New Common Stock of the Company, and (iii) the holders ofthe Company’s Old Common Stock received 0.5% of the New Common Stock of theCompany.

 

**Critical Accounting Policies**

 

We prepare our consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America, whichrequires our management to make estimates and general assumptions about theeffects of matters that are inherently uncertain. We have summarized oursignificant accounting policies in Note 3 to our consolidated financialstatements, as presented in the Annual Report on Form 10-K of the PredecessorCompany for the year ended December 31, 2003. Of these accountingpolicies, we believe the following may involve a significant degree of judgmentand complexity.

 

*Allowance for Doubtful Accounts*

At June 30, 2004, we had an allowance for doubtful accountstotaling $5,175, which we have established in the event that we are unable tocollect certain receivables. This allowance represents our estimate of thetotal receivables recorded as of June 30, 2004 that we will be unable tocollect based on historical collection experience. Future general events, suchas changes in the economy, and specific events, such as changes in the economiccondition of our customers, could significantly impact our ability to collecton these receivables, and therefore, cause us to change our allowance estimate.

 

*Useful Lives of Rental Equipment and Propertyand Equipment*

At June 30, 2004, we had $424,873 of net rental equipment and$38,061 of net property and equipment recorded on our balance sheet. Rentalequipment is depreciated using the straight-line method over one to fifteen years.Property and equipment is depreciated over three to thirty years, depending onthe type of asset. Our depreciable lives are based on our estimates of theuseful lives of the respective assets over which they will generate revenues.These estimates may require adjustment based on changing circumstances in themarketplace. Changes to these estimates could result in our having to recognizean increase to or decrease in depreciation expense.

 

*Impairment of Long-Lived Assets*

In accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-lived Assets,” we test long-lived assets or asset groups forrecoverability whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cashflows expected to result from the use and eventual disposition of the asset orasset group to the carrying amount of the long-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*

At June 30, 2004, we provided a full valuation allowance on ournet deferred tax assets.  Realization ofnet deferred income tax assets is dependent upon generating sufficient futuretaxable income in the periods in which the underlying temporary differencesreverse, or prior to the dates that net operating loss carry-forwards expire.  We must assess the likelihood that our netdeferred tax assets will be recovered in the future.  Because of our history of operating losses,we have established a full valuation allowance.

 

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**Results of Operations**

 

During 2002 and 2003, the Company’s financial performance wasnegatively affected by lower activity levels in the economy, a slowdown innon-residential construction, competitive pricing pressure due to over-capacityof rental equipment in the industry and lower demand.  The resulting decrease in earnings negativelyimpacted the Company’s cash flows from operations during this period, limitingthe Company’s ability to invest in its rental fleet.  Management initiated several actions inresponse to these circumstances, including actions to reduce its operatingexpenses through personnel reductions and consolidation of branch and supportoperations, as well as asset sales to reduce its debt.  Although these actions reduced debt levels bymore than $100,000 in 2002 and 2003, the Company’s liquidity remained strained.

 

Beginning in late 2002, the Company entered into a series ofdiscussions with its debt and equity holders to evaluate various restructuringalternatives.  In June 2003, it wasdetermined that it was in the best interest of the Company’s creditors andother constituents to seek protection through voluntary petitions under Chapter11 of the U.S. Bankruptcy Code.  As aresult of defaults under its credit facilities, the Company operated withlimited capital resources due to its inability to borrow under its seniorcredit facility until its emergence from bankruptcy on February 11, 2004.

 

Subsequent to emergence from bankruptcy and with the flexibilityprovided under the New Credit Facility, the Company has invested significantlyin its fleet.  In addition, the Companynow has permanent leadership in place, with the appointment of an independentboard of directors and the hiring of a President and CEO.  Following emergence, management has been ableto substantially reduce the time and resources devoted to restructuringactivities, resulting in an improved focus on ongoing operations.  In addition, the Company has experiencedimproved rental rates in a more stable economy and realized cost savingsassociated with the Company’s prior restructuring activities as the Companyenters its peak season of the year.

 

### ***Three and SixMonths Ended June 30, 2004, Compared with the Three and Six Months EndedJune 30, 2003***

 

The following table shows information derived from the historicalconsolidated statements of operations as a percentage of total revenues.

 
| ** **                                    | ** ** | **Successor**                               | ** ** | **Predecessor**                             | ** ** | **Successor**                              | ** ** | **Predecessor**                             | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Three Months  Ended  June 30, 2003** | ** ** | **Five Months  Ended  June 30, 2004** | ** ** | **One Month  Ended  January 31, 2004** | ** ** | **Six Months  Ended  June 30, 2003** | ** ** |
|                                          |       |                                        |       |                                        |       |                                       |       |                                        |       |   |   |
| Rental and service revenues                   |       | 83.7                                        | %          | 84.1                                        | %          | 83.2                                       | %          | 82.8                                        | %          | 83.3 | % |
| New equipment sales                           |       | 5.3                                         |       | 6.5                                         |       | 5.6                                        |       | 8.3                                         |       | 6.6 |   |
| Rental equipment sales                        |       | 7.3                                         |       | 6.1                                         |       | 7.5                                        |       | 5.3                                         |       | 6.2 |   |
| Other revenues                                |       | 3.7                                         |       | 3.3                                         |       | 3.7                                        |       | 3.6                                         |       | 3.9 |   |
| Total revenues                                |       | 100.0                                       |       | 100.0                                       |       | 100.0                                      |       | 100.0                                       |       | 100.0 |   |
| Cost of revenues                              |       | 78.9                                        |       | 74.9                                        |       | 79.8                                       |       | 78.2                                        |       | 75.9 |   |
| Gross margin                                  |       | 21.1                                        |       | 25.1                                        |       | 20.2                                       |       | 21.8                                        |       | 24.1 |   |
| Selling, general and administrative  expenses |       | 20.7                                        |       | 24.5                                        |       | 22.6                                       |       | 24.2                                        |       | 25.7 |   |
| Reorganization expenses                       |       | —                                      |       | —                                      |       | —                                     |       | 4.9                                         |       | — |   |
| Fresh start accounting adjustments            |       | —                                      |       | —                                      |       | —                                     |       | (126.9                                      | )          | — |   |
| Goodwill impairment                           |       | —                                      |       | 91.7                                        |       | —                                     |       | —                                      |       | 49.3 |   |
| Non-rental depreciation and amortization      |       | 3.0                                         |       | 1.0                                         |       | 3.5                                        |       | 2.1                                         |       | 1.2 |   |
| Operating income (loss)                       |       | (2.6                                        | )          | (92.1                                       | )     | (5.9                                       | )          | 117.5                                       |       | (52.1 | )  |
| Other income, net                             |       | —                                      |       | 0.2                                         |       | —                                     |       | 0.2                                         |       | 0.1 |   |
| Gain on discharge of debt                     |       | —                                      |       | —                                      |       | —                                     |       | 603.9                                       |       | — |   |
| Interest expense, net                         |       | 4.7                                         |       | 13.2                                        |       | 5.4                                        |       | 6.6                                         |       | 15.2 |   |
| Income (loss) before income taxes             |       | (7.3                                        | )          | (105.1                                      | )     | (11.3                                      | )          | 715.0                                       |       | (67.2 | )  |
| Income tax expense                            |       | —                                      |       | —                                      |       | —                                     |       | —                                      |       | — |   |
| Loss from continuing operations               |       | (7.3                                        | )          | (105.1                                      | )          | (11.3                                      | )          | 715.0                                       |       | (67.2 | ) |
| Loss on discontinued operations, net of tax   |       | —                                      |       | (0.3                                        | )          | —                                     |       | —                                      |       | (0.2 | ) |
| Net income (loss)                             |       | (7.3                                        | )%         | (105.4                                      | )%         | (11.3                                      | )%         | 715.0                                       | %          | (67.4 | )% |

 

As a result of the application of fresh start reporting onJanuary 31, 2004, and in accordance with SOP 90-7, the post-emergencefinancial results for the three- and five-month periods ended June 30,2004 are presented as the results of the “Successor” and the pre-emergencefinancial results for the month ended January 31, 2004 and the three- andsix-month periods ended June 30, 

 

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2003 are presented as the results of the “Predecessor”.  Comparative financial statements do notstraddle the emergence date because in effect the Successor represents a newentity.  As a result of applying freshstart reporting, the Successor has increased depreciation and amortizationexpense in comparison to the Predecessor. For purposes of discussion herein, the results of operations for thePredecessor for the month ended January 31, 2004 and the results ofoperations for the Successor for the five months ended June 30, 2004 arecombined. 

 

*Revenues*

Total revenues of $147,379 for the three months ended June 30,2004 were down slightly from the $150,591 recognized during the second quarterof 2003.  The Company experienced 6-8%improvement in rental rates year-over-year on the largest category classes offleet.  This improvement partially offsetan 8% decline in fleet size in 2004 as compared to 2003, resulting in rentaland service revenues that were down $3,384 or 3% in the current year.  A $1,611 increase in rental equipment saleswas offset by a $1,902 decline in new equipment sales.  Other revenues were consistentyear-over-year.  

 

Total revenues within the General Rental and Other segment decreased to$115,111 for the three months ended June 30, 2004 from $120,692 for thethree months ended June 30, 2003. Rental and service revenues decreased $4,296, primarily as a result ofthe smaller fleet, offset by the rate improvement noted above.  Total revenues within the Company’s TrafficSafety operations increased 8% to $32,268 for the second quarter of 2004 from$29,899 recognized during the second quarter of 2003.  After a slow start earlier in the year,activity has increased in recent months in many of the markets in which theCompany’s Traffic Safety segment operates. 

 

Total revenues for the six months ended June 30, 2004 were $267,371,down $12,838 or 5% as compared to the same period in 2003.  Rental and service revenues, particularlywithin the Company’s General Rental segment, comprise $11,041 of thisshortfall.  Revenues are downyear-over-year in all categories excluding rental equipment sales, whereactivity is up $1,626 in 2004 as compared to the first half of 2003 asmanagement continues its efforts to improve fleet mix.  2004 revenue levels within the Traffic Safetysegment are consistent with those of 2003.

 

*Gross Profit*

Gross profit decreased to $31,046 for the three months endedJune 30, 2004 from $37,734 for the three months ended June 30, 2003.Gross margins decreased to 21% from 25%, with $4,871 of this decline in grossprofit attributable to increased depreciation expense primarily associated withthe write-up of fleet in conjunction with the Company’s adoption of fresh startaccounting.  Gross margins on rental andservice revenues remained a more consistent 47% and 49% for the second quartersof 2004 and 2003, respectively, on the lower rental and service revenues.  Within the General Rental segment, grossmargins on new equipment and fleet sales were at or above margins achievedduring the second quarter of 2003 on higher volume, due to improving marketconditions.  

 

Year-to-date, gross profit of $54,598 is down 19% from the $67,651recognized during the first half of 2003. Gross profit within the General Rental segment declined to $52,357 from$59,695, while gross profit within the Traffic Safety operations declined to$2,241, with both declines primarily attributable to increased fleetdepreciation expense.  Overall, grossmargins declined to 20% for the six months ended June 30, 2004, ascompared to 24% for the six months ended June 30, 2003.     

 

*Selling, General and Administrative Expenses*

Selling, general and administrative expenses decreased $6,401 to$30,518 for the three months ended June 30, 2004 from $36,919 for thethree months ended June 30, 2003. Selling, general and administrative expenses for the General Rental andOther operations were $27,417 for the three months ended June 30, 2004,down significantly from the $33,116 recognized for the three months endedJune 30, 2003 due to decreases in consulting and professional fees, aswell as cost savings realized from the consolidation of the General Rental backoffice functions in late 2003.  Selling,general and administrative expenses for the Traffic Safety operations havedeclined $702 to $3,101 for the three months ended June 30, 2004,primarily as a result of similar consolidation efforts.  For the six months ended June 30, 2004,selling, general and administrative expenses decreased similarly to $61,013 ascompared to $71,992 for the same period in 2003.  

 

*Reorganization Expenses.*

In connection with the bankruptcy filing, theCompany incurred $1,973 of charges related to the reorganization prior to theemergence from bankruptcy on February 11, 2004.  These expenses related to professional feesincurred, amortization of loan origination fees of the Old Credit Facility andemployee retention-related expenses.  Anycontinuing expenses incurred related to the bankruptcy are reporting inSelling, General and Administrative expenses. 

 

*Goodwill Impairment. *

As a result of the Company’s bankruptcyfiling on June 27, 2003, the Company completed an impairment analysis ofgoodwill as of June 30, 2003.  Basedon the results of this analysis, the Company recorded a non-cash impairmentcharge of $138,115 during the second quarter of 2003, which reflected the impairmentof the remaining goodwill of the Company. 

 

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*Non-rental Depreciation and Amortization.*

Non-rental depreciation and amortizationincreased to $4,479 for the second quarter of 2004 as compared to $1,519 forthe same period in 2003.  This increaseis primarily the result of additional depreciation expense resulting from awrite-up of property and 

equipment in conjunction with the adoption of fresh startaccounting.  Additionally, amortizationexpense resulting from the other

intangible assets identified in conjunction with fresh start accountingcontributed to this increase.  For thesix months ended June 30, 2004, non-rental depreciation and amortizationwas up similarly to $8,765 from $3,452 for the six months ended June 30,2003.

 

*Interest Expense, Net*

Interest expense, net, decreased to $6,948for the three months ended June 30, 2004, as compared to $19,820 for thethree months ended June 30, 2003. The decrease in the current quarter is the result of lower interestrates on the Company’s senior debt during the current quarter under the NewCredit Facility as compared to the default interest rates incurred during thesame period of 2003 when the Company was operating under forbearanceagreements.  In addition, the Companyincurred interest expense of $13,750 on its Senior Subordinated Notes duringthe first half of 2003.  Year-to-date,net interest expense is down similarly to $14,997 from $42,467.

 

*Loss from Discontinued Operations*  

On June 30, 2002, the Company sold itsunderground trench shoring business. The proceeds from the sale were used torepay existing indebtedness under the Credit Facility. In accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”the financial condition and results of operations of this business arereflected herein as discontinued operations. 

 

**Liquidity, Financial Condition and Capital Resources**

 

The Company’s consolidated financial statements have been prepared on agoing concern basis, which contemplates continuity of operations, realizationof assets, and payment of liabilities in the ordinary course of business, anddo not reflect adjustments that might result if the Company is unable tocontinue as a going concern.  The Company’shistory of significant losses and the Reorganization, combined with thecurrently scheduled debt amortization payments required by the Company’s NewCredit Facility, raise substantial doubt about the Company’s ability tocontinue as a going concern.  Continuingas a going concern is dependent upon, among other things, the success of futurebusiness operations and the generation of sufficient cash from operations andfinancing sources to meet the Company’s obligations when due.  The Company continuously considersalternatives to provide other sources of cash flow outside of ordinaryoperations.  These alternatives includerefinancing, fleet sales and other asset dispositions.  The Company is currently in discussions withfinancial institutions to refinance its New Credit Facility.  Although the discussions are underway, therecan be no assurance that the refinancing will occur.

 

The Company’s primary capital requirements are for purchasing newrental equipment. The Company purchases rental equipment throughout the year toreplace equipment that has been sold as well as to maintain adequate levels ofequipment to meet existing and new customer needs. Rental fleet purchases forthe Company were $57,744 and $17,878 during the first six months of 2004 and2003, respectively. The Company’s principal sources of cash are cash generatedfrom operations and borrowings available under its credit facility.  

 

For the six months ended June 30, 2004 and 2003, the Company’s netcash provided by (used in) operations was $40,788 and $(420),respectively.  An increase in accountspayable during the first half of 2004 resulted from improved terms from vendorsas a result of the Company’s emergence from bankruptcy.  For the six months ended June 30, 2004and 2003, the Company’s net cash used in investing activities was $42,595 and$3,162, respectively.  Net cash used ininvesting activities consists primarily of purchases of rental equipment andproperty and equipment.  For the sixmonths ended June 30, 2004 and 2003, the Company’s net cash (used in)provided by financing activities was $(39,847) and $8,090, respectively. Duringthe first half of 2004, the Company has repaid $25,190 of debt.  

 

In connection with the Company’s emergence from Chapter 11, the Companyentered into a new senior secured credit facility (the “New CreditFacility”).  The New Credit Facilityconsists of $285,000 of term loan facilities and a $205,000 revolving creditfacility, subject to availability based on certain financial tests that includea borrowing base.  The borrowing base isdetermined by the Company’s eligible inventory, accounts receivable and rentalequipment and is recomputed monthly.  Inthe event that the book value of the Company’s inventory or accounts receivableor the appraised value of the Company’s rental equipment declines without acorresponding increase in one of the other categories, the available borrowingbase will be temporarily reduced accordingly.

 

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

 

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**Factors That May Influence Future Results**

 

*Reorganization*

The Company’s Reorganization in 2003 generated concern among theCompany’s customers and suppliers and disrupted business for a period oftime.  Disclosure of the terms of theCompany’s Plan of Reorganization to employees, customers and vendors, as wellas the subsequent emergence from bankruptcy protection in February 2004,have reduced the distractions caused by the Reorganization.  However, the ultimate impact of theReorganization on future results is not known.

 

*Economic Conditions*

Our end-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 generallyresult in lower overall rental rates, which generally adversely impact ourbusiness.  

 

*Seasonality*

The Company’s revenues and operating results fluctuate significantly fromquarter to quarter due to the seasonal nature of the markets in which theCompany operates.  The Company’s presenceboth in the traffic safety and control industry and in the general rentalmarket in the Northeast and Midwest are both highly seasonal in nature, withactivity tending to be lower in the winter as compared to the spring andsummer.

 

*Indebtedness*

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

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

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

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

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

 

*Competition*

The equipment rental industry is highly fragmented andcompetitive.  Numerous competitors servemany of the markets in which the Company operates.  These competitors range from national andmulti-regional operators to small, independent businesses with a limited numberof locations.  Management believes thatparticipants in the equipment rental industry compete on the basis ofavailability and quality of equipment, service, delivery time and price.  However, increases in competition from eithernew or existing industry participants could occur, and the potential impact onour existing market share is unknown.

 

*Legal Proceedings*

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

 

*Environmental*

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

 

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

 

The New Credit Facility consists of $285 million of term loanfacilities and a $205 million revolving credit facility, subject toavailability based on certain financial tests that include a borrowingbase.  Borrowings under the credit facilitybear interest, at the Company’s option, at a specified base rate or LIBOR rateplus the applicable borrowing margin. At August 4, 2004, the Company hadtotal borrowings under the credit facility of $461 million. Each 100 basispoint increase in interest rates on the variable rate debt would decreaseannual pretax earnings by approximately $4.6 million.

 

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**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluation of disclosure controls andprocedures** - After evaluating the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rules13a-14(c) and 15d-14(c) as of June 30, 2004 (the “Evaluation Date”), theCompany’s chief executive officer and chief financial officer have concluded that,as of the Evaluation Date, the Company’s disclosure controls and procedureswere adequate and effective to ensure that material information relating to theCompany and its subsidiaries would be made known to them by others within thoseentities, particularly during the period in which this quarterly report wasbeing prepared.

 

**Changes in internal controls**– There were no significant changes in the Company’s internal controls or inother factors that could significantly affect the Company’s disclosure controlsand procedures during the quarter ended June 30, 2004, nor were there anysignificant deficiencies or material weaknesses in such disclosure controls andprocedures requiring corrective actions. As a result, no corrective actions were taken.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

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

 

On April 10, 2003, the Company was informed by the staff of theSEC, through receipt of a “Wells Notice,” that the SEC intended to recommendthat the Commission institute a cease-and-desist proceeding against theCompany, alleging that NES violated Sections 13(a), 13(b)(2)(A), and13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) and Rules 12b-20, 13a-1, and 13a-13. Prior to and during the investigation, the Company had voluntarilyupgraded and reinforced significant portions of its financial controlsfunctions.  The Company fully cooperatedwith the Commission throughout the investigation.

 

In August 2003, the Company offered to settle the SECinvestigation (the “Offer”) by agreeing to certain reporting violations of theExchange Act and by agreeing to consent to the entry of an administrativeCease-and-Desist Order (the “Order”). While the Commission has not indicated at this time that it intends toseek a civil monetary penalty against the Company, the Commission has thestatutory authority to seek a civil penalty of up to $500,000 for eachviolation of the Exchange Act committed by the Company.  As of the date hereof, the SEC has not takenany formal action on the Offer or the Order. The Company is continuing its efforts to resolve this matter with theSEC.

 

**ITEM 2.CHANGES****IN SECURITIES, USE OFPROCEEDS AND ISSUER OF EQUITY SECURITIES**

 

Not applicable.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

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

 

Not applicable.

 

**ITEM 5.OTHER INFORMATION**

 

Mr.Andrew P. Studdert was named President and CEO effective June 1, 2004.

 

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

 

See Index of Exhibits on page 23. The Company filed a Current Report on Form 8-K on June 2, 2004 toannounce Mr. Andrew P. Studdert as President and CEO.

 

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**SIGNATURE**

 

**Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized onAugust 12, 2004.**

 
|                                                      | NES Rentals Holdings, Inc. |
|-----------------------------------------------------------|----------------------------|
|                                                      |                       |   |
|                                                      |                       |   |
|                                                      | By:                        | /s/ MICHAEL D. MILLIGAN |   |
|                                                      |                       | Michael D. Milligan |   |
| * *                                                  | * *                   | *Chief Financial Officer* |   |
| Form 10-Q: For the quarter ended June 30, 2004. |                       |   |

 

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**INDEX OF EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                |
| 3.1                 |       | Certificate of Incorporation of NES Rentals Holdings, Inc.                                                                                                                                          |
| 3.2                 |       | By-laws of NES Rentals Holdings, Inc.                                                                                                                                                               |
| 10.1                |       | Employment Letter Agreement dated May 25, 2004, by and between the  Company and Andrew P. Studdert.                                                                                                 |
| 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 Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                   |
| 31.2                |       | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                   |
| 32.1                |       | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                   |
| 32.2                |       | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                   |

 

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