**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                    |   | **22-0664255**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (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 May 10, 2004.

 

 

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**NESRENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**QUARTERLYREPORT ON FORM 10-Q**

**Forthe Quarter ended**

**March 31,2004**

**INDEX**

 
| PART I. FINANCIAL INFORMATION |                                                                                        |
|-------------------------------|---------------------------------------------------------------------------------------------|
|                          |                                                                                        |   |
| Item 1.                       | Financial Statements                                                                        |   |
|                          |                                                                                        |   |
|                          | Independent Accountants’ Review Report                                                 |   |
|                          |                                                                                        |   |
|                          | Consolidated Balance Sheets                                                                 |   |
|                          |                                                                                        |   |
|                          | Consolidated Statements of Operations                                                       |   |
|                          |                                                                                        |   |
|                          | Consolidated Statements of Cash Flows                                                       |   |
|                          |                                                                                        |   |
|                          | Notes to Consolidated Financial Statements                                                  |   |
|                          |                                                                                        |   |
| Item 2.                       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                          |                                                                                        |   |
| Item 3.                       | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|                          |                                                                                        |   |
| Item 4.                       | Controls and Procedures                                                                     |   |
|                          |                                                                                        |   |
| PART II. OTHER INFORMATION    |                                                                                        |
|                          |                                                                                        |   |
| Item 1.                       | Legal Proceedings                                                                           |   |
|                          |                                                                                        |   |
| Item  2.                      | 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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**Independent Accountants’ Review Report**

 

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 ofMarch 31, 2004, the related consolidated statements of operations and cashflows for the two-month period ended March 31, 2004, and the relatedconsolidated statements of operations and cash flows of National EquipmentServices, Inc. (the Predecessor) for the one-month period endedJanuary 31, 2004.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.

 

We conducted our review in accordance with standards established by theAmerican Institute of Certified Public Accountants.  A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters.  It issubstantially less in scope than an audit conducted in accordance withgenerally accepted auditing standards, the objective of which is the expressionof an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

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 accounting principles generally accepted inthe United States of America.

 

We have previously audited, in accordance with auditing standardsgenerally accepted in the United States of America, the consolidated balancesheet of the Predecessor and subsidiaries as of December 31, 2003, and therelated consolidated statements of operations and comprehensive loss, stockholders’equity (deficit) and cash flows for the year then ended (not presented herein);and in our report dated March 29, 2004, we expressed an unqualifiedopinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanyingconsolidated balance sheet as of December 31, 2003, is fairly stated, inall material respects, in relation to the consolidated balance sheet from whichit has been derived.

 
|         | (signed)  KPMG LLP |
|--------------|-------------------------|
|         |
|         |
| Chicago, IL  |
| May 17, 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**

 

**NESRENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(inthousands)**

 
|                                                                                                             |   | **Successor**            |    | **Predecessor**             |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                             |   | **March 31,  2004** |    | **December 31,  2003** |   |
|                                                                                                             |   | **(Unaudited)**          |    |                        |   |
| **Assets**                                                                                                       |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                        |   | $                        | 25,102  |                        | $      | 50,251 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $5,693 and $5,689, respectively            |   | 120,875                  |    | 126,775                     |   |
| Inventory, net                                                                                                   |   | 16,130                   |    | 13,928                      |   |
| Unamortized debt issuance costs                                                                                  |   | 6,121                    |    | —                      |   |
| Prepaid expenses and other assets                                                                                |   | 46,831                   |    | 38,109                      |   |
| Rental equipment, net                                                                                            |   | 434,483                  |    | 407,362                     |   |
| Property and equipment, net                                                                                      |   | 38,756                   |    | 35,728                      |   |
| Unamortized intangible assets                                                                                    |   | 14,028                   |    | 1,010                       |   |
| Total assets                                                                                                     |   | $                        | 702,326 |                        | $      | 673,163 |   |
| **Liabilities**                                                                                                  |   |                     |    |                        |   |
| Liabilities not subject to compromise:                                                                           |   |                     |    |                        |   |
| Book overdraft                                                                                                   |   | $                        | 27,141  |                        | $      | 17,487 |   |
| Trade accounts payable                                                                                           |   | 32,511                   |    | 4,846                       |   |
| Accrued interest                                                                                                 |   | 1,661                    |    | 174                         |   |
| Accrued expenses and other liabilities                                                                           |   | 45,191                   |    | 36,741                      |   |
| Debt                                                                                                             |   | 458,700                  |    | 1,714                       |   |
| Liabilities subject to compromise                                                                                |   | —                   |    | 897,380                     |   |
| Total liabilities                                                                                                |   | 565,204                  |    | 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; 24,140 shares issued, 21,151 shares outstanding |   | —                   |    | 241                         |   |
| Successor additional paid-in capital                                                                             |   | 151,642                  |    | —                      |   |
| Predecessor additional paid-in capital                                                                           |   | —                   |    | 123,887                     |   |
| Accumulated deficit                                                                                              |   | (14,653                  | )       | (391,896                    | )      |
| Predecessor treasury stock at cost, 3,019  shares                                                                |   | —                   |    | (19,062                     | )      |
| Accumulated other comprehensive income  (loss)                                                                   |   | (56                      | )       | 1,651                       |   |
| Total stockholders’ equity (deficit)                                                                        |   | 137,122                  |    | (285,179                    | )      |
| Total liabilities and stockholders’ equity  (deficit)                                                       |   | $                        | 702,326 |                        | $      | 673,163 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**NESRENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

**(inthousands)**

 
|                                                                |   | **Successor**                                       |    | **Predecessor**                                      |   |
|---------------------------------------------------------------------|--------|-----------------------------------------------------|---------|------------------------------------------------------|--------|
|                                                                |   | **For the  two  months ended  March 31, 2004** |    | **For the  one  month ended  January 31, 2004** |   | **For the  three  months ended  March 31, 2003** |   |
|                                                                |   |                                                |    |                                                 |   |   |   |
| **Revenues**                                                        |   |                                                |    |                                                 |   |   |   |
| Rental and service revenues                                         |   | $                                                   | 65,887  |                                                 | $      | 33,068 |   | $ | 106,612 |   |
| New equipment sales                                                 |   | 5,029                                               |    | 3,318                                                |   | 8,790 |   |
| Rental equipment sales                                              |   | 6,240                                               |    | 2,120                                                |   | 8,345 |   |
| Other revenues                                                      |   | 2,906                                               |    | 1,424                                                |   | 5,871 |   |
| Total revenues                                                      |   | 80,062                                              |    | 39,930                                               |   | 129,618 |   |
| **Cost of revenues**                                                |   |                                                |    |                                                 |   |   |   |
| Cost of rental and service revenues                                 |   | 35,997                                              |    | 17,454                                               |   | 54,890 |   |
| Rental equipment depreciation                                       |   | 17,842                                              |    | 8,138                                                |   | 26,247 |   |
| Cost of new equipment sales                                         |   | 4,052                                               |    | 2,802                                                |   | 7,474 |   |
| Cost of rental equipment sales                                      |   | 4,409                                               |    | 1,328                                                |   | 5,437 |   |
| Other operating expenses                                            |   | 2,920                                               |    | 1,498                                                |   | 5,653 |   |
| Total cost of revenues                                              |   | 65,220                                              |    | 31,220                                               |   | 99,701 |   |
|                                                                |   |                                                |    |                                                 |   |   |   |
| Gross profit                                                        |   | 14,842                                              |    | 8,710                                                |   | 29,917 |   |
| Selling, general and administrative  expenses                       |   | 20,825                                              |    | 9,670                                                |   | 35,073 |   |
| Reorganization expenses                                             |   | —                                              |    | 1,973                                                |   | — |   |
| Fresh start accounting adjustments                                  |   | —                                              |    | (50,667                                              | )      | — |   |
| Non-rental depreciation and amortization                            |   | 3,428                                               |    | 858                                                  |   | 1,933 |   |
| Operating income (loss)                                             |   | (9,411                                              | )       | 46,876                                               |   | (7,089 | ) |
| Other income, net                                                   |   | 178                                                 |    | 80                                                   |   | 122 |   |
| Gain on discharge of debt                                           |   | —                                              |    | 241,128                                              |   | — |   |
| Interest expense (contractual interest  $5,420, $4,921 and $22,647) |   | 5,420                                               |    | 2,629                                                |   | 22,647 |   |
| Income (loss) from continuing operations  before income taxes       |   | (14,653                                             | )       | 285,455                                              |   | (29,614 | ) |
| Income tax expense                                                  |   | —                                              |    | —                                               |   | — |   |
| Net income (loss)                                                   |   | (14,653                                             | )       | 285,455                                              |   | (29,614 | ) |
| Other comprehensive income (loss)                                   |   | (56                                                 | )       | (279                                                 | )      | 3,905 |   |
| Comprehensive income (loss)                                         |   | $                                                   | (14,709 | )                                                    | $      | 285,176 |   | $ | (25,709 | ) |
|                                                                |   |                                                |    |                                                 |   |   |   |
| Basic loss per common share                                         |   | $                                                   | (0.77   | )                                                    |   |   |   |   |
| Diluted loss per common share                                       |   | $                                                   | (0.77   | )                                                    |   |   |   |   |
| Weighted average shares outstanding:                                |   |                                                |    |                                                 |   |   |   |
| Basic calculation                                                   |   | 18,931                                              |    |                                                 |   |   |   |
| Diluted calculation                                                 |   | 18,931                                              |    |                                                 |   |   |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**NESRENTALS HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**(inthousands)**

 
|                                                                                      |   | **Successor**                                       |    | **Predecessor**                                      |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|------------------------------------------------------|--------|
|                                                                                      |   | **For the  two  months ended  March 31, 2004** |    | **For the  one  month ended  January 31, 2004** |   | **For the  three  months ended  March 31, 2003** |   |
|                                                                                      |   |                                                |    |                                                 |   |   |   |
| **Cash flows from operating activities:**                                                 |   |                                                |    |                                                 |   |   |   |
| Net income (loss)                                                                         |   | $                                                   | (14,653 | )                                                    | $      | 285,455 |   | $ | (29,614 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                                                |    |                                                 |   |   |   |
| Depreciation and amortization                                                             |   | 21,270                                              |    | 8,997                                                |   | 28,180 |   |
| Amortization of debt issuance costs and  debt discount                                    |   | 154                                                 |    | —                                               |   | 2,628 |   |
| Gain on sale of equipment                                                                 |   | (1,989                                              | )       | (861                                                 | )      | (3,002 | ) |
| Changes in operating assets and  liabilities:                                             |   |                                                |    |                                                 |   |   |   |
| Trade accounts receivable                                                                 |   | 3,113                                               |    | 2,787                                                |   | 7,704 |   |
| Inventory                                                                                 |   | (1,716                                              | )       | (61                                                  | )      | 1,637 |   |
| Prepaid expenses and other assets                                                         |   | (5,591                                              | )       | (2,745                                               | )      | (4,594 | ) |
| Trade accounts payable                                                                    |   | 5,980                                               |    | (583                                                 | )      | (16,267 | ) |
| Accrued expenses and other liabilities                                                    |   | 7,748                                               |    | 1,856                                                |   | 5,956 |   |
| Chapter 11 items:                                                                         |   |                                                |    |                                                 |   |   |   |
| Fresh start accounting adjustments                                                        |   | —                                              |    | (50,667                                              | )      | — |   |
| Gain on debt discharge                                                                    |   | —                                              |    | (241,128                                             | )      | — |   |
| Net cash flows provided by (used in)  continuing operating activities                     |   | 14,316                                              |    | 3,050                                                |   | (7,372 | ) |
| Net cash flows provided by discontinued  operating activities                             |   | —                                              |    | —                                               |   | 215 |   |
| Net cash flows provided by (used in)  operating activities                                |   | 14,316                                              |    | 3,050                                                |   | (7,157 | ) |
|                                                                                      |   |                                                |    |                                                 |   |   |   |
| **Cash flows from investing activities:**                                                 |   |                                                |    |                                                 |   |   |   |
| Purchases of rental equipment                                                             |   | (27,295                                             | )       | (4,362                                               | )      | (6,560 | ) |
| Proceeds from sale of rental equipment                                                    |   | 6,240                                               |    | 2,120                                                |   | 8,345 |   |
| Purchases of property and equipment                                                       |   | (987                                                | )       | (819                                                 | )      | (2,440 | ) |
| Proceeds from sale of property and  equipment                                             |   | 4,265                                               |    | 111                                                  |   | 529 |   |
| Net cash flows used in investing activities                                               |   | (17,777                                             | )       | (2,950                                               | )      | (126 | ) |
|                                                                                      |   |                                                |    |                                                 |   |   |   |
| **Cash flows from financing activities:**                                                 |   |                                                |    |                                                 |   |   |   |
| Proceeds from long-term debt                                                              |   | —                                              |    | 481,172                                              |   | — |   |
| Payments on long-term debt                                                                |   | (23,973                                             | )       | (482,363                                             | )      | (299 | ) |
| Payments of debt issuance costs                                                           |   | —                                              |    | (6,278                                               | )      | — |   |
| Increase (decrease) in book overdraft                                                     |   | 10,974                                              |    | (1,320                                               | )      | (490 | ) |
| Net cash used in financing activities                                                     |   | (12,999                                             | )       | (8,789                                               | )      | (789 | ) |
| Net decrease in cash and cash equivalents                                                 |   | (16,460                                             | )       | (8,689                                               | )      | (8,072 | ) |
| Cash and cash equivalents at beginning of  period                                         |   | 41,562                                              |    | 50,251                                               |   | 15,184 |   |
| Cash and cash equivalents at end of period                                                |   | $                                                   | 25,102  |                                                 | $      | 41,562 |   | $ | 7,112 |   |
|                                                                                      |   |                                                |    |                                                 |   |   |   |
| **Supplemental Cash Flow Information:**                                                   |   |                                                |    |                                                 |   |   |   |
| Cash paid for interest                                                                    |   | $                                                   | 3,810   |                                                 | $      | 2,663 |   | $ | 17,712 |   |
| Cash paid for income taxes                                                                |   | 31                                                  |    | 49                                                   |   | 46 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

6

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**NESRENTALS HOLDINGS, INC. AND SUBSIDIARIES**

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

**(Amountsin 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,consistent with industry practice, the accompanying consolidated balance sheetsare presented 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 presentedherein are essentially equivalent to the consolidated financial statements ofthe 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 Debtors were precluded fromcollecting 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 provides for the cancellation of all of theissued and outstanding shares of common stock, par value $0.01 per share, of thePredecessor Company (the “Old Common Stock”), all of the issued and outstandingshares of preferred stock of the Predecessor Company, and all other outstandingsecurities of the Predecessor Company, including common stock options as of theEffective 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 publiccompany parent of National Equipment Services, Inc. and has 25,000 authorizedshares of common stock (the “New Common Stock”).

 

7

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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 received2.0% of the New Common Stock of the Company, and (iii) the holders of theCompany’s Old Common Stock received 0.5% of the New Common Stock of theCompany.

 

**3.  Basis of Presentation**

 

As a result of the Company’s Reorganizationas described in Note 2, the Company has applied fresh start reporting pursuantto Statement of Position 90-7, “Financial Reporting by Entitiesin Reorganization Under the Bankruptcy Code” (“SOP 90-7”) as ofJanuary 31, 2004.  As a result ofthe application of fresh start reporting on January 31, 2004, thepost-emergence financial results of the Company for the two-months endedMarch 31, 2004 are presented as the results of the “Successor” and thepre-emergence financial results for the month ended January 31, 2004 arepresented as the results of the “Predecessor.” Per share and share information for the Predecessor Company for allperiods presented herein have been omitted as such information is deemed to benot meaningful.  Refer to Note 4 forfurther discussion regarding the application of fresh 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 of management,all adjustments considered necessary for a fair presentation, consisting onlyof normal recurring adjustments, except as described in Note 4 related to theapplication 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 thatimpacts a significant portion of the Company’s locations, the second and thirdquarters are 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’s historyof significant losses and the Reorganization discussed herein raise substantialdoubt about the Company’s ability to continue as a going concern.  Continuing as a going concern is dependentupon, among other things, the success of future business operations and thegeneration of sufficient cash from operations and financing sources to meet theCompany’s obligations as they become due.

 

**ComprehensiveIncome (Loss)**— Unrealized foreign currencytranslation gains (losses) are included in other comprehensive income (loss)for the periods presented herein.

 

**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 Planof Reorganization was approved on January 23, 2004, and the Companyemerged from bankruptcy on February 11, 2004.  For financial reporting purposes, fresh start reporting wasapplied on January 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 start reporting.

 

The Company’s estimated reorganization value at January 31, 2004,which approximates the amount a willing buyer would pay for the assets of theCompany immediately after the Reorganization, was $716,252.  The Company estimated the reorganizationvalue for purposes of fresh start reporting utilizing the estimated value ofthe Company on an enterprise basis (the “Enterprise Value”), adjusting toexclude known liabilities other than the New Credit Facility atJanuary 31, 2004.

 

8

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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 mergerand acquisition transaction valuation multiples to the Predecessor Company’srecent historical financial results, and (c) a calculation of the present valueof the debt-free cash flows on management’s projections, including an assumptionfor a terminal value (the “DCF Analysis”). The DCF Analysis involves deriving the debt-free cash flows that theCompany would generate assuming the projections developed by management arerealized.  These cash flows and anestimated value of the Company at the end of the projected period (the“Terminal Value”) are discounted at the Company’s estimated post-Reorganizationweighted average cost of capital (14%). The financial projections utilized in the DCF analysis were developed bymanagement and are based on estimates and assumptions, which include, but arenot limited to, estimates and assumptions with respect to pricing by market,capital spending and working capital levels, and the development of a discountrate that is utilized to convert future projected cash flows to their estimatedpresent value.  The estimatedprojections and assumptions, while considered reasonable by management, may notbe realized and are inherently subject to uncertainties and contingencies,which could significantly affect the measurement of the Enterprise Value andthe reorganization value.  Based on theabove methodologies, 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 at January 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 above are asfollows:

 

----

(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**             |   |
|-------------------|--------|--------------------------|--------|-----------------------------|--------|
|              |   | **March 31,  2004** |   | **December 31,  2003** |   |
|              |   |                     |   |                        |   |
| Deposits          |   | $                        | 34,927 |                        | $      | 26,845 |   |
| Prepaid expenses  |   | 5,881                    |   | 6,260                       |   |
| Other assets      |   | 4,146                    |   | 3,286                       |   |
| Other receivables |   | 1,877                    |   | 1,718                       |   |
|              |   | $                        | 46,831 |                        | $      | 38,109 |   |

 

Other assets consist primarily of unamortizedsoftware development costs.

 

10

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**6. Intangible Assets**

 

Intangible assets, net of accumulated amortization consist of thefollowing:

 
|                     |   | **Successor**            |   | **Predecessor**             |   |
|--------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                     |   | **March 31,  2004** |   | **December 31,  2003** |   |
|                     |   |                     |   |                        |   |
| Non-compete agreements   |   | $                        | 7,536  |                        | $      | 8,491 |   |
| Customer relationships   |   | 10,927                   |   | —                      |   |
| Backlog                  |   | 4,293                    |   | —                      |   |
|                     |   | $                        | 22,756 |                        | $      | 8,491 |   |
| Accumulated amortization |   | 8,728                    |   | 7,481                       |   |
|                     |   | $                        | 14,028 |                        | $      | 1,010 |   |

 

**N**on-competeagreements and customer relationships are amortized on a straight-line basisover five years.  Backlog is amortizedon a straight-line basis over one year.

 

**7. Accrued Expenses and Other Liabilities**

 

Accrued expenses and other liabilities consist of the following:

 
|                               |   | **Successor**            |   | **Predecessor**             |   |
|------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                               |   | **March 31,  2004** |   | **December 31,  2003** |   |
|                               |   |                     |   |                        |   |
| Accrued compensation and benefits  |   | $                        | 10,166 |                        | $      | 7,835 |   |
| Accrued self-insurance liabilities |   | 7,738                    |   | 6,328                       |   |
| Accrued property and sales taxes   |   | 6,606                    |   | 7,093                       |   |
| Accrued restructuring expenses     |   | —                   |   | 1,622                       |   |
| Other accrued expenses             |   | 20,681                   |   | 13,863                      |   |
|                               |   | $                        | 45,191 |                        | $      | 36,741 |   |

 

**8. Liabilities Subject to Compromise**

 

Liabilities subject to compromise consisted of the following atDecember 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 on the Company’s Series B Notes and Series D Notes.  As a result, interest on the Series B Notesand the Series D Notes was not accrued or recorded after June 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,$20,000 in 2005, $20,000 in 2006 and the balance is due upon expiration in2007.  The average interest rate on thenew credit facility 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 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.

 

11

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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 a revolvingcredit 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 and the lenders underthe credit facility entered in a forbearance agreement with an initialexpiration of March 14, 2003.  As ofMarch 14, 2003, the Company and the lenders under the credit facilityentered into a second forbearance agreement which extended the forbearanceperiod until May 14, 2003, subject to earlier expiration upon the occurrence ofcertain circumstances.  This forbearanceperiod 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”) outstandingprior to the Reorganization.  Inaccordance with the Plan of Reorganization, the holders of the Company’s SeriesB Notes and Series D Notes received 97.5% of the new common stock of theCompany created upon emergence from bankruptcy.  The Company ceased accruing interest on the Series B Notes andthe Series D Notes upon filing for bankruptcy 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’s ability to obtainfunds from its subsidiaries by dividend or loan.  The separate financial statements of each of these wholly-ownedsubsidiaries are not presented as management believes that separate financialstatements and other disclosures concerning these subsidiaries are notindividually meaningful for presentation or material to investors. In addition,the Company has pledged the stock of each of its subsidiaries as furthersecurity for the Company’s obligations under the New Credit 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 of professionalfees incurred for financial advisors, legal counsel and consultants during theReorganization.  These professional feeswere cash charges.

 

**11.  Segment information**

 

All operations are managed on a branch basis. The Company has tworeporting segments: Traffic Safety and General Rental and Other. 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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|                                                       |   | **Traffic  Safety** |   | **General  Rental  and  Other** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|--------|---------------------------------|--------|------------------|--------|
| **Two Months Ended March 31, 2004  (Successor):**     |   |                |   |                            |   |             |   |
| Rental and service revenues                                |   | $                   | 8,985  |                            | $      | 56,902           |   | $ | 65,887 |   |
| New equipment sales                                        |   | 419                 |   | 4,610                           |   | 5,029            |   |
| Rental equipment sales                                     |   | 2                   |   | 6,238                           |   | 6,240            |   |
| Other revenues                                             |   | 556                 |   | 2,350                           |   | 2,906            |   |
| Total revenues                                             |   | 9,962               |   | 70,100                          |   | 80,062           |   |
| Operating loss                                             |   | (2,530              | )      | (6,881                          | )      | (9,411           | )      |
| Net loss                                                   |   | (2,489              | )      | (12,164                         | )      | (14,653          | )      |
| Identifiable assets                                        |   | 79,006              |   | 623,320                         |   | 702,326          |   |
| Depreciation and amortization                              |   | 3,006               |   | 18,264                          |   | 21,270           |   |
| Capital expenditures                                       |   | 577                 |   | 27,705                          |   | 28,282           |   |
| **One Month Ended January 31, 2004  (Predecessor):**  |   |                |   |                            |   |             |   |
| Rental and service revenues                                |   | $                   | 3,882  |                            | $      | 29,186           |   | $ | 33,068 |   |
| New equipment sales                                        |   | 42                  |   | 3,276                           |   | 3,318            |   |
| Rental equipment sales                                     |   | 30                  |   | 2,090                           |   | 2,120            |   |
| Other revenues                                             |   | 253                 |   | 1,171                           |   | 1,424            |   |
| Total revenues                                             |   | 4,207               |   | 35,723                          |   | 39,930           |   |
| Operating income (loss) (a)                                |   | (1,600              | )      | 48,476                          |   | 46,876           |   |
| Net income (loss) (b)                                      |   | (1,574              | )      | 287,029                         |   | 285,455          |   |
| Identifiable assets                                        |   | 82,785              |   | 633,467                         |   | 716,252          |   |
| Depreciation and amortization                              |   | 910                 |   | 8,086                           |   | 8,996            |   |
| Capital expenditures                                       |   | 629                 |   | 4,552                           |   | 5,181            |   |
| **Three Months Ended March 31, 2003  (Predecessor):** |   |                |   |                            |   |             |   |
| Rental and service revenues                                |   | $                   | 14,977 |                            | $      | 91,635           |   | $ | 106,612 |   |
| New equipment sales                                        |   | 459                 |   | 8,331                           |   | 8,790            |   |
| Rental equipment sales                                     |   | 18                  |   | 8,327                           |   | 8,345            |   |
| Other revenues                                             |   | 751                 |   | 5,120                           |   | 5,871            |   |
| Total revenues                                             |   | 16,205              |   | 113,413                         |   | 129,618          |   |
| Operating loss                                             |   | (3,206              | )      | (3,883                          | )      | (7,089           | )      |
| Net loss                                                   |   | (3,178              | )      | (26,436                         | )      | (29,614          | )      |
| Identifiable assets                                        |   | 101,741             |   | 719,776                         |   | 821,517          |   |
| Depreciation and amortization                              |   | 3,035               |   | 25,145                          |   | 28,180           |   |
| Capital expenditures                                       |   | 1,402               |   | 7,598                           |   | 9,000            |   |

 

----

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

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

 

13

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF 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 Estate Management,Inc., which are subsidiaries of the newly formed NES Rentals Holdings, Inc.(the “Company”), which is the successor to National Equipment Services,Inc.  The Company is the new publiccompany 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 itdepreciates its equipment on a straight-line basis.

 

**Reorganization**

 

On June 27, 2003, National Equipment Services, Inc. and its U.S.subsidiaries (collectively, the “Debtors”) filed for voluntary reorganizationunder Chapter 11 (the “Reorganization”) of the U.S. Bankruptcy Code (the “BankruptcyCode”) 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, the Debtorsfiled 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 Debtors were precluded fromcollecting 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.

 

14

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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 provides 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 higher degree of judgment andcomplexity.

 

*Allowance for Doubtful Accounts*

At March 31, 2004, we had an allowance for doubtful accountstotaling $5,693, 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 March 31, 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 March 31, 2004, we had $434,483 of net rental equipment and$38,756 of net property and equipment recorded on our balance sheet. Rentalequipment is depreciated using the straight-line method over one to fifteenyears. Property and equipment is depreciated over three to thirty years,depending on the type of asset. Our depreciable lives are based on ourestimates of the useful lives of the respective assets over which they willgenerate revenues. These estimates may require adjustment based on changingcircumstances in the marketplace. Changes to these estimates could result inour having to recognize an 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 March 31, 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 afull valuation allowance.

 

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**Results of Operations**

 

The Company’s financial performance has been negatively affectedrecently due to lower activity levels in the economy, a slowdown innon-residential construction, competitive pricing pressure due to over-capacityof rental equipment in the industry and lower demand.  Additionally, the Company’s Reorganization has generated concernamong the Company’s customers and vendors and disrupted business.

 

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

 

Over the last two years, the Company closed and consolidated branchlocations and centralized administrative functions in an effort to reducecosts.  For several months leading tothe bankruptcy filing in June 2003, the Company entered into a series ofdiscussions with its debt and equity holders to evaluate various restructuringalternatives.  It was determined that itwas in the best interest of the Company’s creditors and other constituents toseek protection through voluntary petitions under Chapter 11 of the U.S.Bankruptcy Code.  As a result ofdefaults under its credit facilities, the Company operated with limited capitalresources due to its inability to borrow under its senior credit facility untilits emergence from bankruptcy on February 11, 2004.

 

### ***Three Months EndedMarch 31, 2004, Compared with the Three Months Ended March 31, 2003***

 

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

 
|                                          |   | **Successor**                              |   | **Predecessor**                             |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------------|--------|
|                                          |   | **Two Months  Ended  March 31, 2004** |   | **One Month  Ended  January 31, 2004** |   | **Three  Months  Ended  March 31, 2003** |   |
|                                          |   |                                       |   |                                        |   |   |   |
| Rental and service revenues                   |   | 82.3                                       | %      | 82.8                                        | %      | 82.3 | % |
| New equipment sales                           |   | 6.3                                        |   | 8.3                                         |   | 6.8 |   |
| Rental equipment sales                        |   | 7.8                                        |   | 5.3                                         |   | 6.4 |   |
| Other revenues                                |   | 3.6                                        |   | 3.6                                         |   | 4.5 |   |
| Total revenues                                |   | 100.0                                      |   | 100.0                                       |   | 100.0 |   |
| Cost of revenues                              |   | 81.5                                       |   | 78.2                                        |   | 76.9 |   |
| Gross margin                                  |   | 18.5                                       |   | 21.8                                        |   | 23.1 |   |
| Selling, general and administrative  expenses |   | 26.0                                       |   | 24.2                                        |   | 27.1 |   |
| Reorganization expenses                       |   | —                                     |   | 4.9                                         |   | — |   |
| Fresh start accounting adjustments            |   | —                                     |   | (126.9                                      | )      | — |   |
| Non-rental depreciation and amortization      |   | 4.3                                        |   | 2.1                                         |   | 1.5 |   |
| Operating income (loss)                       |   | (11.8                                      | )      | 117.5                                       |   | (5.5 | ) |
| Other income, net                             |   | 0.2                                        |   | 0.2                                         |   | 0.1 |   |
| Gain on discharge of debt                     |   | —                                     |   | 603.9                                       |   | — |   |
| Interest expense, net                         |   | 6.7                                        |   | 6.6                                         |   | 17.5 |   |
| Income (loss) before income taxes             |   | (18.3                                      | )      | 715.0                                       |   | (22.9 | ) |
| Income tax expense                            |   | —                                     |   | —                                      |   | — |   |
| Net income (loss)                             |   | (18.3                                      | )%     | 715.0                                       | %      | (22.9 | )% |

 

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 two months ended March 31, 2004 are presented asthe results of the “Successor” and the pre-emergence financial results for themonth ended January 31, 2004 are presented as the results of the“Predecessor”.  Comparative financialstatements do not straddle the emergence date because in effect the Successorrepresents a new entity.  As a result ofapplying fresh start reporting, the Successor has increased depreciation andamortization expense 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 two months ended March 31, 2004 arecombined.

 

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*Revenues*

Total revenues decreased to $119,992 for the three months endedMarch 31, 2004 from $129,618 for the three months ended March 31,2003.  Rental and service revenuesdeclined 7% to $98,955 for the three months ended March 31, 2004 from$106,612 for the same period in 2003. This decrease is primarily the result of continued pressure on rentalrates, as well as a reduction in the Company’s fleet size as compared to thesame period in the prior year.  Newequipment sales were down slightly from the prior year’s levels, and rentalequipment sales of $8,360 were consistent with 2003.   Other revenues were down $1,541 on lower sales of partsyear-over-year.

 

Revenues were down in both of the Company’s operating segments.  Total revenues within the General Rental andOther segment were down, decreasing to $105,823 for the three months endedMarch 31, 2004 from $113,413 for the three months ended March 31,2003.  Rental and service revenuesdecreased $5,547.  Total revenues withinthe Company’s Traffic Safety operations also declined $2,036 to $14,169 for thefirst quarter of 2004, as compared to $16,205 during the same period in2003.  Decreases in state funding arecontributing to increased competition within this segment.

 

*Gross Profit*

Gross profit decreased to $23,552 for the three months endedMarch 31, 2004 from $29,917 for the three months ended March 31,2003.  Gross margins declined to 20%from 23% as a result of the shift in revenue from higher-margin rental andservice activity to the lower margin equipment sales.  Gross profit within the Traffic Safety operations decreased to$(494) for the three months ended March 31, 2004 from $562 for the threemonths ended March 31, 2003. Decreased state funding of highway and road construction projectsresulted in more competitive bidding for projects during the first quarter of2004.

 

*Selling, General andAdministrative Expenses*

Selling, general and administrative expenses decreased to $30,495 forthe three months ended March 31, 2004 from $35,073 for the three monthsended March 31, 2003.  Selling,general and administrative expenses for the General Rental and Other operationswere down $4,405 to $27,173 for the three months ended March 31, 2004 ascompared to $31,578 for the three months ended March 31, 2003.  This decrease is partially attributable tothe cost savings achieved in conjunction with the Company’s back officeconsolidation initiative.  Selling,general and administrative expenses for the Traffic Safety operations haveremained a relatively consistent $3,322 for the three months endedMarch 31, 2004 and $3,495 for the three months ended March 31, 2003.

 

*Reorganization Expenses*

The Company incurred $1,973 of charges related to the reorganizationduring the month of January 2004. These expenses related primarily to professional fees incurred and thepayment of retention bonuses to key members of management in accordance with acourt-approved program.

 

*Non-rental Depreciation and Amortization*

Non-rental depreciation and amortization increased to $4,286 for thefirst quarter of 2004 as compared to $1,933 for the same period in 2003.  This increase is the result of amortizationof the intangible assets identified in conjunction with the application offresh start reporting.

 

*Interest Expense,Net*

Interest expense, net, decreased to $8,049 for the three months endedMarch 31, 2004 from $22,647 for the three months ended March 31,2003.  This decrease is the result of alower average debt balance during the first quarter of 2004 as compared to thesame period in 2003 as the Company’s Senior Subordinated Notes, Series B andSeries D were converted to equity upon the emergence of bankruptcy.  In addition, the Company incurred interestexpense in conjunction with an interest rate swap arrangement during the firstquarter of 2003.  This arrangementexpired in April 2003.

 

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**Liquidity, FinancialCondition 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.  TheCompany’s history of significant losses and the Reorganization discussed hereinraise substantial 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. The Company continuously considers alternatives to provide other sourcesof cash flow outside of ordinary operations. These alternatives include refinancing, fleet sales and other assetdispositions.

 

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 $31,657 and $6,560 in the first quarter of 2004 and 2003,respectively. The Company’s principal sources of cash are cash generated fromoperations and borrowings available under its credit facility.  In the last two years, however, as a resultof the Company’s financial position, the Company has had limited capitalavailable for capital expenditures due to more immediate funding requirementsassociated with debt service, insurance bonds and performance deposits.

 

For the three months ended March 31, 2004 and 2003, the Company’snet cash provided by (used in) operations was $17,366 and $(7,157),respectively.  The use of cash in 2003relates primarily to a reduction in trade accounts payable due to timing ofpayments.  For the three months endedMarch 31, 2004 and 2003, the Company’s net cash used in investingactivities was $20,727 and $126, respectively. Net cash used in investing activities consists primarily of purchases ofrental equipment and property and equipment. For the three months ended March 31, 2004 and 2003, the Company’snet cash used in financing activities was $21,788 and $789, respectively. Netcash used in financing activities consists primarily of repayments under theCompany’s credit facility.

 

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) incuradditional indebtedness, 2) permit liens to attach to its assets,3) pay dividends or make other restricted payments on its common stock andcertain other securities and 4) make acquisitions unless certain financialconditions are satisfied.

 

**Factors That May Influence Future Results**

 

*Reorganization*

 

The Company’s Reorganization generated concern among the Company’scustomers and suppliers and disrupted business for a period of time.  Disclosure of the terms of the Company’sPlan of Reorganization to employees, customers and vendors, as well as thesubsequent emergence from bankruptcy protection in February 2004, havereduced 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.  Recent declines in the non-residentialconstruction industry, as well as reduced funding at the federal and state levelson infrastructure, have adversely affected our results of operations.  The future impact of changes in thesemarkets on the Company’s operations is uncertain.

 

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*Seasonality*

 

The Company’s revenues and operating results fluctuate significantlyfrom quarter to quarter due to the seasonal nature of the markets in which theCompany operates.  The Company’spresence both in the traffic safety and control industry and in the generalrental market in the Northeast and Midwest are both highly seasonal in nature,with activity tending to be lower in the winter 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 and multi-regionaloperators to small, independent businesses with a limited number oflocations.  Management believes thatparticipants in the equipment rental industry compete on the basis ofavailability and quality of equipment, service, delivery time and price.  Recent economic pressures have reducedmarket demand and forced industry participants to lower rental rates, adverselyimpacting the Company’s results of operations. The future impact of potential continued economic declines is unknown.

 

*Legal Proceedings*

 

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

 

*Environmental*

 

The Company’s facilities are subject to federal, state and localenvironmental requirements relating to discharges to air, water and land; thehandling and disposal of solid and hazardous waste; and the cleanup of propertiesaffected by hazardous substances.  Basedon environmental assessments conducted in connection with the Company’sacquisitions, the Company believes that its facilities are in substantialcompliance with environmental requirements, and that the Company has nomaterial liabilities arising under environmental requirements.  However, some risk of environmentalliability is inherent in the nature of the Company’s business, and in thefuture the Company may incur material costs to meet current or more stringentcompliance, cleanup or other obligations under environmental laws.

 

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

 

The New Credit Facility consists of $285 million of term loanfacilities and a $205 million revolving credit facility, subject toavailability based on certain financial tests that include a borrowingbase.  Borrowings under the creditfacility bear interest, at the Company’s option, at a specified base rate orLIBOR rate plus the applicable borrowing margin. At May 10, 2004, the Companyhad total 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**

 

**Evaluationof disclosure controls and procedures** - Afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as ofMarch 31, 2004 (the “Evaluation Date”), the Company’s chief executiveofficer and chief financial officer have concluded that, as of the EvaluationDate, the Company’s disclosure controls and procedures were adequate andeffective to ensure that material information relating to the Company and itssubsidiaries would be made known to them by others within those entities,particularly during the period in which this quarterly report was beingprepared.

 

**Changesin internal controls** – The Company has taken steps tostrengthen its control and operating environment, information systems andprocedures, including the establishment of Company wide policies, proceduresand internal control standards and the establishment of a consolidated servicecenter to centralize transaction processing, accounting and reportingfunctions.

 

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**PART II. OTHERINFORMATION**

 

**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 each violationof the Exchange Act committed by the Company. As of the date hereof, the SEC has not taken any formal action on theOffer or the Order.  The Company iscontinuing its efforts to resolve this matter with the SEC.

 

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

 

Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

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

 

Not applicable.

 

**ITEM 5. OTHER INFORMATION**

 

On April 6, 2004, the existing directors of the Company electedseven new directors.  The new directorselected were Mr. Douglas Ball, Mr. Scott Meadow, Mr. John Neafsey, Mr. WalterSchuetze, Mr. Michael Scott, Mr. Michael Watchorn and Mr. Barry Uber.  Messrs. Meyercord and Booth resigned fromthe Board of Directors following the election of the new directors.

 

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

 

See Index of Exhibits on page 23. The Company did not file any Current Reports on Form 8-K.  National Equipment Services, Inc. filed aCurrent Report on Form 8-K on February 18, 2004 to announce its emergencefrom bankruptcy.

 

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**SIGNATURE**

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on May 17, 2004.**

 
|                                                       | NATIONAL EQUIPMENT SERVICES, INC. |
|------------------------------------------------------------|-----------------------------------|
|                                                       |                              |   |
|                                                       |                              |   |
|                                                       | By:                               | /s/ MICHAEL D. MILLIGAN |   |
|                                                       |                              | Michael D. Milligan |   |
|                                                       |                              | *Chief Financial Officer* |   |
| Form 10-Q: For the quarter ended March 31, 2004. |                              |   |

 

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**INDEX OF EXHIBITS**

 
| **Exhibit  Number** |   | **Description  of Document**                                                                                                                                                                        |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                |
| 11.1                |   | Statement re Computation of Per Share Earnings. Not required because  the relevant computations can be clearly determined from the material  contained in the financial statements included herein. |
| 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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